Getting things straight: about Bill Clinton and asset allocation

One of the principles of a blog is that it’s supposed to be regular and I mostly get that, but phew! the last few weeks. First, there was the college drop off of my dearest beloved child (and the shoveling out of the remains of her room), the usual medical and veterinary crises, and a conference or two, mixed in with just about everyone in Northern Illinois deciding to finally get their financial life in order and call me (which I am definitely NOT complaining about). It’s been a busy few weeks. But in between time I watched the political conventions and now I, like everyone else, think I could do better on policy. At least in one area.

To be honest, I didn’t watch the one (very much) that featured Scarecrow and the Tin Man, but I had to tune in to watch Bill Clinton work that old black magic. He’s getting pretty grey now, but honestly he’s the only man who has ever held the job that I can actually imagine anyone ever wanting to date. Barack looks like excellent husband material, but if you really want to get in trouble on a Saturday night, Bill was certainly the go-to guy. But I digress. What this post is actually about is asset allocation. Lost you right there? Wait!

Because it’s now or not-until-next year for their 401ks, most people who have called me lately want to talk about what investments they actually should have selected instead of that target fund they picked when they couldn’t decipher the other offerings. If all you have is the 401k, the target fund may not be such a bad choice. But no, 99.99% of people I work with have a bigger coin collection.

You’ve probably got a 401k (or two, or three, depending on how many jobs you’ve held). Maybe you taught or worked for a non-profit, so a 403b is lurking around somewhere. In a burst of frugality, I’ll bet you opened (and maybe continued to add to) an IRA, maybe a Roth, and if you had a side gig or self-employment, you probably collected money in a SEP-IRA. If your income increased over the years, you’re probably not allowed to add to some of these any more, and you might also have a plain old mutual fund account or brokerage that our beloved IRS is happy to collect taxes on.  So when I see all the internet advice on “proper asset allocation” and “tax-smart investing”, I realize it’s just about as much a fantasy for most of us as keeping our houses clean, our dresser drawers neat, and our dogs brushed.

I spent about 7.5 hours yesterday trying to sort out a client’s accounts and move around the large collection of investments to a coherent plan they could manage, understand, and withdraw from. If I’d have actually billed them for the amount of time it took, at least one of them would have croaked and I’d be talking to the remaining one about settling the estate. And when I present these things, the client’s eyes just glaze over. Sure you can simplify, dear client, but that probably means cutting down your 15 or 16 accounts to 8. One solution, of course, is that they sign up for professional ongoing management, but they’re trying to be frugal and handle it, and I support that and really want to help. Truth is, it’s hard and it took me a good long time to learn to do asset allocation properly—and I began investing 30 years ago and the books I’ve studied on the topic are bending several shelves in my bookcase.

I have another solution, and it’s political. Why can’t we just have national retirement accounts? You get one—if you have a generous employer, they can match your contribution. If you make under $X, your contributions are deductible, otherwise, no. If you’re self employed, maybe you get to contribute a little more. You choose the investments and where to house the account. There’s a default option (maybe a target fund) and a default deduction (if employed). All these different programs, deductible, non-deductible, different income thresholds, different contribution limits, rollovers—well, it’s just plain crazy. Maybe accountants and financial planners get plenty of business out of this, but it’s crazy making for the investor.

With my idea (which admittedly needs flesh on the bones) many middle to moderately affluent citizens (maybe even the rich guys, though Mitt would find a way to beat it) would end up with one, maybe two accounts: retirement and maybe regular investing/savings/brokerage. So much easier to get reasonable diversity without trying to spread out choices among seven or eight accounts. You might actually be able to see what you have. You wouldn’t lose track of it when you changed jobs, or be tempted to cash in the seemingly small sum (no. no. no.) And when retirement comes, you could have a rational withdrawal plan that would be manageable as you age.

Now, I’m not trying to privatize social security (omigod people can’t even invest decently under the system we have. What a nightmare.) or advocating a flat tax because then I’d probably have gone over to the dark side, er, become a Republican. But isn’t there anyone in at least one of the parties that could think a little bit about coming up with a streamlined way for most of us who want to save for retirement to actually do that without using up most of our precious remaining grey cells?

Until that happens, I’m here to help. It ain’t easy and you’re not dumb if it isn’t crystal clear on the first run-through. Maybe after the dust settles, retirement savings could get some attention? After we get done worrying about where Barack was born.

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Social Security—Take the money and run?

 

English: A bag of money, US dollars, spinning ...

(Photo credit: Wikipedia)

If I had a euro for every time I’ve heard Social Security is going broke, I’d have decamped to Paris by now and wouldn’t be dispensing all this sage financial advice. C’mon guys and gals, if you’re old enough to even think about collecting Social Security (exception being my 18 year old who worries about this stuff), it’s going to be around for you. So then it comes down to—when to collect. Lately several people have posed the idea that they will collect it at 62 or 66 and invest the money instead of spending it. Aside from the fact that I’ll believe it when I see it, here’s a look at whether you’d actually be ahead. Sure, my example is filled with assumptions that you can disagree with, but play along here for a moment.

So let’s say you’re single, 60 years old, have an average annual salary of $100,000, and your full retirement age is 66. (It’s way more complicated for couples, so I’m not even going to get into that here. Call your friendly local financial planner—me!) Using the nifty little free estimator at AARP, your benefit would be $1,911/month at 62 ($22,932/year); $2,548 at 66 ($30,576/year); and $3,363 at 70 ($40,356/year). Okay, we agreed you’re not going to spend one penny of that money you start collecting at age 62, but are going to invest it in a half-way decent portfolio of no-load mutual funds that averages, let’s be generous in today’s market, 8% return. So on the face of it, you’ll have $255,822 more at 70, right? Nice chunk of change, no? Not so fast…

At a safe withdrawal rate from your savings of, oh, 4% a year from 70 onwards, your added portfolio will give you an extra $10,232.88 per year, or about $853 per month. So instead of collecting $3,363 from Social Security at 70, you’ll have an income of $2,764 per month—you’ve cost yourself $599 per month. That buys a lot of cat food.

Let’s say you collect Social Security at 66 instead—four years of saving and the same 8% return. Now your extra cache is $107,685. At that same 4% withdrawal rate, you’ve got $4,307.38 per year, or about $359/month, giving you a total of $2,270 per month, instead of the $2,548 you would have had. Maybe $278 isn’t that much, but multiply it over a 30 year retirement–better die quick.

But wait, it’s even worse. Social Security is adjusted for inflation. Your investments aren’t. So your actual Social Security payment is likely to be more, and the spending power of your savings is  less ($101,014 at 66, $223,629 at 70, assuming 3% inflation). And oh-oh, you have to pay taxes on that Social Security if you’re still working. And taxes on your investment returns, unless they’re in a tax sheltered account. Another big hit. .I don’t think I need to run through any more numbers for you to see why not only do financial planners beg you not to take benefits at 62, but we really like to see you wait until 70, unless you have some serious medical problem that makes a different strategy compelling.

Just. Don’t. Do. It.

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Is Your Home an Investment?

 

Lovely Jumeau Closeup

(Photo credit: mharrsch)

Yup, that’s what we all believed for so many years. But the gyrations in the housing market, and the huge amount of “wealth” lost by so many of us, are making a lot of people question just exactly what home-buying is worth, as well as their own homes. I’d like to propose that we re-consider just what kind of investment a home actually is: IMHO, it’s actually more like a collectible—closer to a coin or doll or maybe even a wine collection. And a lot of people would be happier with their “investment” if they re-cast their thinking along those lines. How so?

Buy a collectible or house only if you’ve taken care of the basics. You shouldn’t be buying either one if you have huge credit card bills, no emergency fund, and no significant retirement savings (appropriate to your age). Otherwise, you really can’t afford either.

Realize you can’t easily convert to cash. Of course, a Jumeau doll, a bottle of Chateau Something, or a stucco four-square in Evanston can eventually be converted to cash. But you might have to wait for the right buyer, and selling costs for the auction premium or the broker’s commission can take a healthy bite out of the proceeds.

You have to be prepared to hold them for a long time to see a profit over purchasing costs, and ride out bad markets and changes in fashion. Beanie Babies, Cabbage Patch dolls and McMansions aren’t really the top of the value heap right now.

You can see the market take surprising dips. The stock-in-trade at Antiques Roadshow is the person gasping at how much their ugly vase or over-wrought china cabinet is worth compared to what they paid. Yes, it’s my favorite show too—everyone would like to pick up a piece of junk at a yard sale and make a cool $100K. In a recent show, they re-priced items that had originally appeared on the show in the 1990s. It was a shocker—many, many items had gone down in value significantly, and many more were static. Even a crummy but diversified portfolio did better than that. I probably don’t need to draw the parallels with the housing market. There’s no investment that can guarantee steady appreciation.

Neither a housing investment nor collectibles pay you any income. I’m excluding rental property here. You can sell either one to raise cash, but you may need to overcome some emotional attachment to something you love. When you retire, at least some of your wealth needs to be generating income. If most of your net worth is tied up in something that produces no income, well, I hope your Social Security is adequate for your needs. Rich on paper doesn’t necessarily mean rich income.

Significant ongoing costs continue throughout ownership. Both cost you insurance. For collectibles, you might need to maintain ideal storage conditions. For your house, there are property taxes, ongoing maintenance, periodic major repairs, and the seemingly endless bills from the phalanx of tradespeople who are my on-going “best friends”.

Part of the fun is continuous upgrading. No, no, no.

And the one good comparison I can think of…

Both collectibles and your home can provide significant enjoyment while you own them.

Normally I don’t advise on collectibles, but for them and for a house, people can have very good reasons to own them. Sinking part of your worth into either requires more thought and less “givens” than most of us considered prior to 2008. My suggested rules of thumb: the equity in your home should constitute no more than 1/3 of your total net worth, and an investment in collectibles no more than 5% (and that’s pretty generous), and only if you actively participate and understand whatever you’re buying. We can argue about those figures, but you’d probably agree that most of your friends have way more house than they can afford. Right?

 

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