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If you want to feel better about your finances today, spend more time thinking about how you’ll pay for tomorrow.

Not Worthless

THE INTERNAL Revenue Code doesn’t authorize much relief for investors when they suffer capital losses that exceed their gains. It allows taxpayers each year to offset the excess against as much as $3,000 of their ordinary income from sources like salaries, pensions and withdrawals from IRAs.
What about the unused losses? The law lets investors carry forward such losses and claim them in an identical way on their tax returns in subsequent years, until they’re used up.

Read more »

Humble Arithmetic

IN THE HISTORY of the investment industry, May 1, 1975, is a date to be celebrated. On that day, the industry took not one, but two, remarkable steps forward.
The first change was an action by the SEC to deregulate stockbrokers. For the first time in more than 100 years, brokers were given the freedom to set their own commission rates on stock trades. The result was a boon for individual investors. Today, instead of paying hundreds of dollars to trade a stock,

Read more »

Repeat for Emphasis

JAMES CLEAR, in his bestselling book Atomic Habits, offers this thought-provoking notion: Suppose a plane takes off from Los Angeles on its way to New York. But after taking off, the pilot turns the nose of the plane by an almost imperceptible 89 inches. Where will the plane end up? The answer: nowhere near New York. As it flies across the country, that 89-inch difference will take it hundreds of miles off course.

Read more »

Newsletter No. 41

LOOKING BACK, our financial choices almost never seem optimal. Why not? When we stared into the future and made those choices, we didn’t know what we were going to get—and that meant the only prudent course was to hedge our bets. I explore this issue in HumbleDollar’s latest newsletter.
While we ought to prepare our finances for a host of possible outcomes, we’re simply not very good at doing so. In the newsletter, I offer a slew of statistics on our prowess when it comes to risk management.

Read more »

Rewriting the Script

WHAT DO YOU believe about money? I’m talking here about money scripts—subconscious beliefs developed since childhood that influence your financial behavior.
These beliefs have been studied extensively by Ted and Brad Klontz, the father-and-son team who founded the Financial Psychology Institute and authored Mind Over Money. Here are some common money scripts:

“Avoid debt at all costs.”
“Money is the root of all evil.”
“We can always make more money.”

While there’s an element of truth to each,

Read more »

Money Guide

Retirement Readiness

WHAT'S THE STATE of America's retirement readiness? Here’s a quick look at some worrisome statistics—as well as at some key notions that should concern both those saving for retirement and those who have already quit the workforce:
  • According to the Employee Benefit Research Institute’s 2018 Retirement Confidence Survey, 26% of workers report having less than $1,000 in savings and another 19% had between $1,000 and $25,000. These figures exclude the value of their home, Social Security and any defined benefit pension plan.
  • What if you include those items? For households approaching retirement age, the typical net worth is $776,000, calculates Boston College’s Center for Retirement Research. That sounds more impressive—but 60% of this figure is represented by the value assigned to Social Security benefits, and another 17% by traditional pension plans, which are fast disappearing.
  • You can get a glimpse of America’s retirement readiness from the Federal Reserve’s 2016 Survey of Consumer Finances. Among households headed by someone age 65 to 74, 79.1% owned their home, but that was down from 85.8% three years earlier. Moreover, 38.8% also had a mortgage, while 70.1% were carrying some form of debt. Meanwhile, just 49.8% of this group had an IRA or similar retirement account.
  • Among households headed by someone age 55 and older, 29% had neither savings in a retirement account, like an IRA or 401(k) plan, nor were they covered by a defined benefit pension plan, according to a 2015 Government Accountability Office study.
  • The National Institute on Retirement Security found that a quarter of households headed by someone age 55 to 64 had a net worth—the value of all assets, including their home, minus all debts—that was less than their annual income. By contrast, experts often suggest amassing a sum equal to 8 to 12 times income by retirement, and that sum doesn't include home equity.
  • Households approaching retirement age had a median $135,000 in their 401(k) and IRA combined as of 2016, up from $111,000 in 2013, according to Boston College's Center for Retirement Research. That’s enough to generate just $600 a month in retirement income.
  • Even if most folks aren’t in good shape for retirement, presumably some are. How many? Each year, Phoenix Marketing International calculates how many U.S. households have $1 million or more in investable assets. Based on a 4% portfolio withdrawal rate, $1 million would give you $40,000 in first-year retirement income, on top of whatever you might receive from Social Security and any pension plans. That should be enough for a comfortable, though hardly lavish, retirement. Phoenix calculates that 5.8% of U.S. households had $1 million or more in investable assets as of 2017. Maryland, New Jersey, Connecticut, Hawaii, Alaska, Massachusetts and New Hampshire had the highest concentration of millionaire households, at more than 7%.
  • According to the Employee Benefit Research Institute’s 2018 Retirement Confidence Survey, workers on average expect to retire at age 65. But it turns out the actual retirement age is typically 62. The study also found that 79% expect to work for pay once they retire, but only 34% of retirees report doing so. Cut expenses instead? Not likely. EBRI found that retirees were far more likely to say expenses in retirement were higher than expected, rather than lower—especially health care expenses.
  • The five best states to retire are South Dakota, Utah, Idaho, New Hampshire and Florida, says Bankrate. The ranking was based on seven factors, including cost of living, crime, quality of health care, taxes and weather. Meanwhile, WalletHub says the best states to retire are Florida, South Dakota and Colorado, while the worst states are Kentucky, Rhode Island and West Virginia. The WalletHub ranking considers affordability, health care and overall quality of life.
  • Social Security benefits provide half or more of the income for 51.8% of folks age 65 and older. For 24.7% of seniors, Social Security accounts for 90% or more of their income. The typical Social Security retirement benefit is $1,370 a month.
  • Inflation, which can be a major headache for retirees, ran at 2.1% in both 2017 and 2016.
Next: Three-Legged Stool Previous: Retirement Blogs: The Other HalfRetirement: 10 Questions to Ask and Ten Commandments
Read more »

Numbers

AN ESTIMATED 86% of U.S. funeral homes are privately owned. The remaining 14% are operated by publicly-traded companies, including 12% by Service Corp. International (SCI), according to the National Funeral Directors Association.

Newsletter

Choosing Our Future

WHEN FOLKS have financial questions, they go hunting for the right answer. But what if there’s no right answer to be found?
To be sure, in retrospect, the correct answer is often crystal clear. Looking back at 2018, we should have owned growth stocks until September and then gone to 100% cash. If our home didn’t burn down and our health was good, we shouldn’t have bothered with homeowner’s and health insurance. If we kept our job and survived the year,

Read More »

Archive

Speculating

AFTER THE WILD ride of the past two weeks, stock investors are in search of reassurance. Will this movie have a happy ending? If we're venturing into the stock market, we should ideally have at least a 15-year time horizon. That gives us 10 years to make money and another five years to look for the exit. Those final five years may prove crucial if the first 10 years don't turn out so well. What return can we reasonably expect over the initial 10 years? We might start by estimating the economy’s growth rate, consider what that would mean for corporate earnings, and then ponder what value investors will put on those earnings. Problem is, with this approach, we begin by making reasonable estimates—and end up engaging in wild speculation. The first step doesn’t seem so tough: estimating the U.S. economy’s 10-year growth rate. If we look back over the past half century, the real (after-inflation) GDP growth rate has averaged 2.8% a year. The worst year was a 2.8% contraction in 2009 and the best was a 7.3% spurt in 1984. Still, 38 of the 50 years were above 0% but below 5%. That’s moderately reassuring: It tells us that, most of the time, GDP growth hasn’t been that far from the 2.8% long-run average. Moreover, nine of the 12 outliers occurred in the first 20 years—and just three in the 30 years since. The not-so-good news: GDP growth has been slowing over the past 50 years. In the 17 years since 2000, it’s averaged just 1.8% a year. Partly, that reflects the Great Recession. But it also reflects slower growth in the labor force—a trend that will continue as the U.S. population ages. Taking that into account, we might assume the economy expands 2% a year faster than inflation over the next 10 years. If inflation is also 2%, that would put nominal GDP growth at 4%. Will corporate earnings also grow at 4%? That question triggers three others. First, will earnings per share grow slower than overall corporate earnings, as companies sell shares to finance growth and issue stock options to employees? Historically, earnings per share have lagged behind overall corporate earnings by two percentage points a year. But over the past 10 years, shareholders haven’t suffered any dilution, as companies use spare cash to buy back stock. Second, will profit margins contract from today’s historically high levels? We can only guess at the answer. Third, will earnings of U.S. multinationals get a boost either because they snag a larger share of foreign markets or because foreign economies grow faster than the U.S.? Both are possibilities, but—once again—we can only guess at the answer. The upshot: We might assume that earnings per share do indeed grow at 4%, but accept that it could easily be somewhat faster or slower over the next decade. Tack on today’s roughly 2% dividend yield, and we would be looking at an estimated 6% annual total return, or four percentage points a year faster than inflation. But this assumes that stock prices climb along with earnings per share. Will they? Share prices today are richly valued relative to corporate earnings, with stocks at 23.9 times reported earnings, versus a 50-year average of 19.2. That is worrisome. But stocks have been richly valued for much of the past quarter century, so maybe investors shouldn’t be concerned. Vanguard Group founder Jack Bogle likes to distinguish between the market’s investment return—corporate earnings growth plus dividends—and its speculative return, which is the change in the value put on earnings, as reflected in the market’s price-earnings ratio. The dilemma: To come up with a prediction for 10-year returns, we need to speculate on how speculative other investors will be. As we were reminded yet again over the past two weeks, investors flit between exuberance and despair with remarkable speed—and that means short-term returns are anybody's guess. But don’t despair: As we lengthen our time horizon, changes in P/E ratios become less important and instead the market’s return is increasingly driven by the combination of earnings growth and dividend yield. In other words, if we have a truly long time horizon, we have a reasonable shot at notching something close to 6% a year, and that 6% should be comfortably ahead of what we could have earned with bonds. Follow Jonathan on Twitter @ClementsMoney and on Facebook. Check out his two earlier blogs about 2018's market decline: The Morning After and Taking Stock. Also listen to his recent podcast with Steve Chen of NewRetirement.com.
Read more »

Truths

NO. 35: WHENEVER YOU buy or sell a stock or bond, somebody’s on the other side of the trade—and she’s likely far better informed. The financial markets attract some of the brightest minds: They’re the investors you’re trying to outwit when you make a trade. Do you know more than they do—or do they know something you don’t?

Act

ADD UP YOUR FIXED living costs. Include mortgage or rent, car payments, property taxes, insurance premiums, utilities and other recurring monthly expenses. How long could you cover these costs if you lost your job? Are these expenses so high that you find it tough to save—and suffer constant financial stress? Our advice: Keep fixed costs below 50% of pretax monthly income.

Think

MORE VS. ENOUGH. We quickly forget our latest purchase or accomplishment, and instead chase after the next goal. When managing money, this constant striving for more can leave us perennially dissatisfied and drive us to take excessive risk. A better strategy: Decide ahead of time how much is enough—and then figure out the most prudent way to get there.

About Jonathan

Jonathan Clements

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.

Home Call to Action

Latest Blogs

Not Worthless

THE INTERNAL Revenue Code doesn’t authorize much relief for investors when they suffer capital losses that exceed their gains. It allows taxpayers each year to offset the excess against as much as $3,000 of their ordinary income from sources like salaries, pensions and withdrawals from IRAs.
What about the unused losses? The law lets investors carry forward such losses and claim them in an identical way on their tax returns in subsequent years, until they’re used up.

Read more »

Humble Arithmetic

IN THE HISTORY of the investment industry, May 1, 1975, is a date to be celebrated. On that day, the industry took not one, but two, remarkable steps forward.
The first change was an action by the SEC to deregulate stockbrokers. For the first time in more than 100 years, brokers were given the freedom to set their own commission rates on stock trades. The result was a boon for individual investors. Today, instead of paying hundreds of dollars to trade a stock,

Read more »

Repeat for Emphasis

JAMES CLEAR, in his bestselling book Atomic Habits, offers this thought-provoking notion: Suppose a plane takes off from Los Angeles on its way to New York. But after taking off, the pilot turns the nose of the plane by an almost imperceptible 89 inches. Where will the plane end up? The answer: nowhere near New York. As it flies across the country, that 89-inch difference will take it hundreds of miles off course.

Read more »

Newsletter No. 41

LOOKING BACK, our financial choices almost never seem optimal. Why not? When we stared into the future and made those choices, we didn’t know what we were going to get—and that meant the only prudent course was to hedge our bets. I explore this issue in HumbleDollar’s latest newsletter.
While we ought to prepare our finances for a host of possible outcomes, we’re simply not very good at doing so. In the newsletter, I offer a slew of statistics on our prowess when it comes to risk management.

Read more »

Rewriting the Script

WHAT DO YOU believe about money? I’m talking here about money scripts—subconscious beliefs developed since childhood that influence your financial behavior.
These beliefs have been studied extensively by Ted and Brad Klontz, the father-and-son team who founded the Financial Psychology Institute and authored Mind Over Money. Here are some common money scripts:

“Avoid debt at all costs.”
“Money is the root of all evil.”
“We can always make more money.”

While there’s an element of truth to each,

Read more »

Numbers

AN ESTIMATED 86% of U.S. funeral homes are privately owned. The remaining 14% are operated by publicly-traded companies, including 12% by Service Corp. International (SCI), according to the National Funeral Directors Association.

Act

ADD UP YOUR FIXED living costs. Include mortgage or rent, car payments, property taxes, insurance premiums, utilities and other recurring monthly expenses. How long could you cover these costs if you lost your job? Are these expenses so high that you find it tough to save—and suffer constant financial stress? Our advice: Keep fixed costs below 50% of pretax monthly income.

Truths

NO. 35: WHENEVER YOU buy or sell a stock or bond, somebody’s on the other side of the trade—and she’s likely far better informed. The financial markets attract some of the brightest minds: They’re the investors you’re trying to outwit when you make a trade. Do you know more than they do—or do they know something you don’t?

Think

MORE VS. ENOUGH. We quickly forget our latest purchase or accomplishment, and instead chase after the next goal. When managing money, this constant striving for more can leave us perennially dissatisfied and drive us to take excessive risk. A better strategy: Decide ahead of time how much is enough—and then figure out the most prudent way to get there.

Home Call to Action

Free Newsletter

Choosing Our Future

WHEN FOLKS have financial questions, they go hunting for the right answer. But what if there’s no right answer to be found?
To be sure, in retrospect, the correct answer is often crystal clear. Looking back at 2018, we should have owned growth stocks until September and then gone to 100% cash. If our home didn’t burn down and our health was good, we shouldn’t have bothered with homeowner’s and health insurance. If we kept our job and survived the year,

Read More »

Money Guide

Start Here

Retirement Readiness

WHAT'S THE STATE of America's retirement readiness? Here’s a quick look at some worrisome statistics—as well as at some key notions that should concern both those saving for retirement and those who have already quit the workforce:
  • According to the Employee Benefit Research Institute’s 2018 Retirement Confidence Survey, 26% of workers report having less than $1,000 in savings and another 19% had between $1,000 and $25,000. These figures exclude the value of their home, Social Security and any defined benefit pension plan.
  • What if you include those items? For households approaching retirement age, the typical net worth is $776,000, calculates Boston College’s Center for Retirement Research. That sounds more impressive—but 60% of this figure is represented by the value assigned to Social Security benefits, and another 17% by traditional pension plans, which are fast disappearing.
  • You can get a glimpse of America’s retirement readiness from the Federal Reserve’s 2016 Survey of Consumer Finances. Among households headed by someone age 65 to 74, 79.1% owned their home, but that was down from 85.8% three years earlier. Moreover, 38.8% also had a mortgage, while 70.1% were carrying some form of debt. Meanwhile, just 49.8% of this group had an IRA or similar retirement account.
  • Among households headed by someone age 55 and older, 29% had neither savings in a retirement account, like an IRA or 401(k) plan, nor were they covered by a defined benefit pension plan, according to a 2015 Government Accountability Office study.
  • The National Institute on Retirement Security found that a quarter of households headed by someone age 55 to 64 had a net worth—the value of all assets, including their home, minus all debts—that was less than their annual income. By contrast, experts often suggest amassing a sum equal to 8 to 12 times income by retirement, and that sum doesn't include home equity.
  • Households approaching retirement age had a median $135,000 in their 401(k) and IRA combined as of 2016, up from $111,000 in 2013, according to Boston College's Center for Retirement Research. That’s enough to generate just $600 a month in retirement income.
  • Even if most folks aren’t in good shape for retirement, presumably some are. How many? Each year, Phoenix Marketing International calculates how many U.S. households have $1 million or more in investable assets. Based on a 4% portfolio withdrawal rate, $1 million would give you $40,000 in first-year retirement income, on top of whatever you might receive from Social Security and any pension plans. That should be enough for a comfortable, though hardly lavish, retirement. Phoenix calculates that 5.8% of U.S. households had $1 million or more in investable assets as of 2017. Maryland, New Jersey, Connecticut, Hawaii, Alaska, Massachusetts and New Hampshire had the highest concentration of millionaire households, at more than 7%.
  • According to the Employee Benefit Research Institute’s 2018 Retirement Confidence Survey, workers on average expect to retire at age 65. But it turns out the actual retirement age is typically 62. The study also found that 79% expect to work for pay once they retire, but only 34% of retirees report doing so. Cut expenses instead? Not likely. EBRI found that retirees were far more likely to say expenses in retirement were higher than expected, rather than lower—especially health care expenses.
  • The five best states to retire are South Dakota, Utah, Idaho, New Hampshire and Florida, says Bankrate. The ranking was based on seven factors, including cost of living, crime, quality of health care, taxes and weather. Meanwhile, WalletHub says the best states to retire are Florida, South Dakota and Colorado, while the worst states are Kentucky, Rhode Island and West Virginia. The WalletHub ranking considers affordability, health care and overall quality of life.
  • Social Security benefits provide half or more of the income for 51.8% of folks age 65 and older. For 24.7% of seniors, Social Security accounts for 90% or more of their income. The typical Social Security retirement benefit is $1,370 a month.
  • Inflation, which can be a major headache for retirees, ran at 2.1% in both 2017 and 2016.
Next: Three-Legged Stool Previous: Retirement Blogs: The Other HalfRetirement: 10 Questions to Ask and Ten Commandments
Read more »

Archive

Speculating

AFTER THE WILD ride of the past two weeks, stock investors are in search of reassurance. Will this movie have a happy ending? If we're venturing into the stock market, we should ideally have at least a 15-year time horizon. That gives us 10 years to make money and another five years to look for the exit. Those final five years may prove crucial if the first 10 years don't turn out so well. What return can we reasonably expect over the initial 10 years? We might start by estimating the economy’s growth rate, consider what that would mean for corporate earnings, and then ponder what value investors will put on those earnings. Problem is, with this approach, we begin by making reasonable estimates—and end up engaging in wild speculation. The first step doesn’t seem so tough: estimating the U.S. economy’s 10-year growth rate. If we look back over the past half century, the real (after-inflation) GDP growth rate has averaged 2.8% a year. The worst year was a 2.8% contraction in 2009 and the best was a 7.3% spurt in 1984. Still, 38 of the 50 years were above 0% but below 5%. That’s moderately reassuring: It tells us that, most of the time, GDP growth hasn’t been that far from the 2.8% long-run average. Moreover, nine of the 12 outliers occurred in the first 20 years—and just three in the 30 years since. The not-so-good news: GDP growth has been slowing over the past 50 years. In the 17 years since 2000, it’s averaged just 1.8% a year. Partly, that reflects the Great Recession. But it also reflects slower growth in the labor force—a trend that will continue as the U.S. population ages. Taking that into account, we might assume the economy expands 2% a year faster than inflation over the next 10 years. If inflation is also 2%, that would put nominal GDP growth at 4%. Will corporate earnings also grow at 4%? That question triggers three others. First, will earnings per share grow slower than overall corporate earnings, as companies sell shares to finance growth and issue stock options to employees? Historically, earnings per share have lagged behind overall corporate earnings by two percentage points a year. But over the past 10 years, shareholders haven’t suffered any dilution, as companies use spare cash to buy back stock. Second, will profit margins contract from today’s historically high levels? We can only guess at the answer. Third, will earnings of U.S. multinationals get a boost either because they snag a larger share of foreign markets or because foreign economies grow faster than the U.S.? Both are possibilities, but—once again—we can only guess at the answer. The upshot: We might assume that earnings per share do indeed grow at 4%, but accept that it could easily be somewhat faster or slower over the next decade. Tack on today’s roughly 2% dividend yield, and we would be looking at an estimated 6% annual total return, or four percentage points a year faster than inflation. But this assumes that stock prices climb along with earnings per share. Will they? Share prices today are richly valued relative to corporate earnings, with stocks at 23.9 times reported earnings, versus a 50-year average of 19.2. That is worrisome. But stocks have been richly valued for much of the past quarter century, so maybe investors shouldn’t be concerned. Vanguard Group founder Jack Bogle likes to distinguish between the market’s investment return—corporate earnings growth plus dividends—and its speculative return, which is the change in the value put on earnings, as reflected in the market’s price-earnings ratio. The dilemma: To come up with a prediction for 10-year returns, we need to speculate on how speculative other investors will be. As we were reminded yet again over the past two weeks, investors flit between exuberance and despair with remarkable speed—and that means short-term returns are anybody's guess. But don’t despair: As we lengthen our time horizon, changes in P/E ratios become less important and instead the market’s return is increasingly driven by the combination of earnings growth and dividend yield. In other words, if we have a truly long time horizon, we have a reasonable shot at notching something close to 6% a year, and that 6% should be comfortably ahead of what we could have earned with bonds. Follow Jonathan on Twitter @ClementsMoney and on Facebook. Check out his two earlier blogs about 2018's market decline: The Morning After and Taking Stock. Also listen to his recent podcast with Steve Chen of NewRetirement.com.
Read more »
Jonathan Clements

About Jonathan

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.