I-Bonds Again May 16, 2002February 21, 2017 David Maymudes: ‘I just noticed that the online bond purchase limit is now $5000, up from $1000.’ ☞ Indeed it is. Which means that to buy the $30,000 annual limit, if you wanted and could afford to, you’d need to visit the web site just six times, not thirty. (Likewise for your spouse.) And, yes, you still get frequent-flyer miles (or whatever your credit card gives) for buying them, because they are considered ‘merchandise’ not a cash advance. The annual $30,000 purchase limit Click here to check them out. But for heaven’s sake don’t buy any if you’d have to pay interest on your credit card for doing so. The interest they pay is still peanuts – inflation-plus-2%. (For a retirement account, you would call your broker and buy TIPS instead, which yield a bit more.) But at least it can be sheltered from tax until withdrawal . . . is never subject to local income tax . . . could be entirely tax-free if used to pay tuition . . . and can never be negative, even if we have deflation. So for more or less complete protection against inflation, deflation and depression, I-Bonds could be a place to park some of your money, especially if you’re older. Remember: Series I Savings Bonds are dated the 1st of the month of purchase, and earn interest from that date (so buying late in the month makes sense — you get three or four weeks’ free ride). They can’t be redeemed until the bonds are six months old. If they are redeemed before they are 5 years old, the last 3 months of interest is lost. But at today’s rates, losing 3 months’ interest is hardly a big deal. They stop earning interest after 30 years. The interest is accrued monthly (compounded semi-annually), and you can, if you wish, elect to pay taxes on the growth without waiting for redemption. That could make sense for bonds in the name of a child in a low tax bracket. Little or no tax would be due each year; and, by satisfying the tax man on a pay-as-you-go basis, no tax would be due at redemption. These are such a terrific deal that the government limits calendar year purchases to $30,000 for each Social Security number. If you’ve got much more to invest, you might want to take another look at TIPS, which are currently promising over 3% plus inflation (but with that rotten tax to pay each year on the inflation adjustment, even though you don’t receive it). A small additional advantage for seniors: Seniors are required to pay taxes on up to 85% of their Social Security benefits if their “provisional income” exceeds certain amounts. Many have learned to their annoyance that tax-exempt municipal bond interest is included in calculating provisional income, and can thus bump up the taxable portion of the Social Security benefit. Savings Bond interest, however, is NOT included in provisional income until you actually redeem the bonds (unless you elected the pay-as-you-go approach mentioned above). A possible advantage for tuition payers: Normally, the tax on Savings Bond interest is deferred as it accrues, taxable in full when you redeem the bonds. But if someone at least 24 years of age buys a Savings Bond and then, years later, spends the proceeds upon redemption for college tuition, fees, and books (personally or for a dependent), the interest can be entirely exempt from taxation. Unfortunately, the exemption is phased out for higher income taxpayers, and there are several confusing restrictions, so you’d better check the rules carefully if you’re really counting on this one. Note that you CANNOT hold the bonds in the name of the child and get this benefit (the owner, remember, must be at least 24 on the date of purchase). By the way, if you redeem savings bonds and put the proceeds into a 529 qualified state tuition plan, that is considered a qualified higher education cost itself and will exempt the interest on the bonds from taxation if the other requirements are satisfied.
More on Financial Planners May 15, 2002February 21, 2017 But first . . . Flynn: ‘The other day I took a ride in a Toyota Prius, a hybrid car. It’s silent when idle at stops – no noise, no guzzling gas. You’ve got to get yourself in one and take a drive. The new technology it delivers is simply wonderful. (Extra plug: check out the Union of Concerned Scientists, whose good work on the subject makes one sit up and take notice.) ☞ I watched in awe on C-SPAN as Republican Minority Leader Trent Lott derided such cars on the floor of the Senate last month. But, yes, fuel-efficient vehicles are clearly the future. And now . . . Eric E. Haas: ‘[With regard to yesterday‘s comment on Vanguard’s $500-or-less financial planning service], I wanted to add that, not only is $3,000 too much for a good financial plan, but 1% is too much for good asset management services. Altruist Financial Advisors does fee-only Comprehensive Financial Plans for $1,450 and outstanding asset management for 0.6% of assets managed. Perhaps most significantly, this company is the only one in the country, to my knowledge, which offers a Complete Satisfaction Money-Back Guarantee on both of those services. On average, each of Altruist’s financial planning clients saves about $5,000 per year based on their advice (i.e., the service usually pays for itself in less than a year). I agree with you that many people can do pretty well following the investment advice found in the minority of good investment books available. However, I agree with the anonymous Vanguard employee that many people could benefit more from competent professional advice, particularly if there is a complete satisfaction money-back guarantee. This recommendation may be self-serving (Altruist Financial Advisors is, well, me), but I believe in it.’ ☞ Studies show that the average net worth of the readers of this column is $17 million, give or take, which accounts for all the upscale advertising you see here everyday from Rolex and BMW and Prada. But the numbers are skewed, because included in the average is Bill Gates, who comes to check the Gates $$$ Clock to see how much money he has. Deleting Bill from the calculation, the average net worth of the readers here is $19,231. (I was this close to getting Walgreen’s to advertise their clothing line, but even that fell through.) And I raise this simply to point out that however good Eric’s counsel may be (and I’m sure he would agree), even $1,450 is a lot for someone with fairly limited investable funds. Even at $100,000, it’s 1.5% of your whole net worth – or a third, say, of what you might earn in municipal bonds. As for a .6% asset management fee, it may be very reasonable, but it nicks your expected return by .6% (which for most people would not be tax-deductible). If you have $100,000 that compounds for 25 years at 5% after tax instead of 5.6%, it grows by $238,000 instead of $290,000. So there’s a lot to be said for keeping your investment expenses low. Our Own Estimable Less Antman: “Although $500 is quite a reasonable price for the portfolio review that Vanguard is calling a financial plan, it must be noted that all this buys you is a list of Vanguard funds and dollar amounts to invest in them (they also suggest which of your current assets to sell in order to buy these Vanguard funds). Those who think that estate planning, insurance needs analysis, tax planning, goal-setting, spending, saving, and debt management are also part of a financial plan might balk at their description of their offering as a financial plan. They do, for another $500, issue a report on the ways to reduce or eliminate estate taxes and probate fees through proper titling of assets and standard will and trust arrangements (you implement without their help), and for another $500 they will do a retirement needs analysis. At this point, you’ve spent $1,500 and have around half of a comprehensive financial plan. So they are offering a fair deal but not an extraordinary one. I’m not panning their offering, but merely the assertion of the Vanguard representative that you have mischaracterized the cost of comprehensive financial planning. A list of funds to buy is not a financial plan.’
Steward! There’s a Financial Planner in My Overhead Compartment! But Don't Expect the S.E.C. to Do Anything About It May 14, 2002February 21, 2017 Chris Williams: ‘A subject near and dear to hearts among us. Scope out webflyer.com, and more specifically the flyertalk link there in its pull-down menus (or flyertalk.com). This is where the mileage maniacs hang out. They are the road warriors who know all the tricks and post the very latest ways to generate serious numbers with minimal effort. They also debate the philosophy of things like ‘poaching.’ This is the confiscation of overhead space on front row seats by passengers whose tickets seat them in the back. They, knowing their overheads in the back are probably full by the time they get back there, poach one of the overheads storage bins up front as they walk past, and grab their bag on the way out. In the meantime, late arriving people who are possibly Medallion FF mileage holders (airlines usually put Medallion folks towards the front) reach their seats to find no overhead space. Anger ensues. Cool website. Lots of good stuff.’ A Vanguard employee who wants to remain anonymous: ‘I work at Vanguard in the department that does financial planning for individuals and I wanted to clear up one thing. Your comments last month make it sound like a financial plan would cost $3,000 and/or you would be charged a 1% annual fee. But Vanguard has a fee-only financial plan for $500 (discounted and/or free for those with a lot of money at Vanguard). I wish everyone could do his or her own financial planning, but a lot of people won’t read a brochure on investing, let alone a book. Having a person to explain the recommendations is a big benefit for a lot of people, and well worth $500 or less.’ Arianna Huffington’s column yesterday: ‘Last week, the recognition that the SEC is failing in its ‘primary mission’ to, as its own website boasts, ‘protect investors,’ led even the Wall Street Journal and London’s Financial Times to finally join this solitary Greek chorus and call for Pitt’s ouster. The Journal ended its biting editorial by deriding the White House’s ludicrous claim that Pitt is doing ‘a great job getting tough on corporate misconduct’: ‘We doubt,’ read the editorial, ‘anyone at the White House really believes that. At least we hope they don’t; because no one anywhere else does.” ☞ Don’t look to Harvey Pitt’s S.E.C. to be half the friend to investors that Arthur Levitt’s was. DO YOU TAKE QUESTIONS? This appears to be a yes or no question. But if you answered no, you’d be lying.
Adopt a Classroom May 13, 2002February 21, 2017 Here’s a good one. If you have $500 to contribute, it will link you up with a classroom, with a specific teacher who has specific needs for his or her class. You make the contribution on-line; that teacher’s ‘electronic wallet’ gets filled with $500 to buy the stuff she or he needs; he or she e-mails you a thank-you report. It’s incredibly efficient – largely runs itself, like eBay or something – yet gives you the ‘high touch’ one-on-one sense you really know where your money is going, and that you are making a difference in kids’ lives. Charles and I have adopted a couple of classrooms. Care to join us? Right now, there are 3,913 classrooms with their hands up for you to choose among.
Am I Too Gloomy? May 10, 2002February 21, 2017 Max Jonet: ‘I must say your writing sometimes makes a chap feel that you’re too late starting if you’re beginning to invest after the age of 22, let alone 63. Because one has to factor in that all might not go smoothly, so after 22 you’re not armed against the land mines of life with enough time.’ ☞ Oops. Then I’ll have to lighten up! How’s this: I think the NASDAQ, at 1600 or so, down from 5200 two years ago, is a lot closer to a bottom, if it hasn’t found one already, than to a top. Still, it was 1250 on December 5, 1996, when Alan Greenspan made his famous ‘irrational exuberance’ remark . . . so anyone expecting it to snap back to 5200 anytime soon will be sorely disappointed. It’s likely to take about 15 years, give or take. (That’s how long it would take compounding at 8% from here; 24 years, if it compounded at 5%.) But that’s not so bad. The sun will come out tomorrow (as noted yesterday). And for those young enough to be putting new money into the market every month or quarter, thunderstorms along the way – even hurricanes – are simply a welcome opportunity to buy shares cheaper. And at whatever rate it will have compounded by the time it hits 5200 again, it will not be a constant rate. Say it does take 24 years . . . mathematically, to climb from 1600 to 5200 in 24 years is to compound at 5%. But you can also get there with a 50% drop next year – to take just one attention-grabbing example – and then compounding at 8.5% for 23 years. Whether it takes 15 years or 24, or some other number, there will be sharp dips and spikes along the way. For the steady periodic investor, this improves his return. The classic example: buy $1000 of a stock at $10 a share, then at $5, then at $15, and finally at $10. Have you just broken even with these four $1,000 investments? The stock is where it started, and that’s what intuition would tell you. But because you bought more shares with your $1,000 at $5 and fewer at $15, you actually wind up not with $4,000, at the end of this example, but $4,666. We call this ‘dollar cost averaging.’ It emphasizes the importance of steady periodic investing – and especially of not giving up when the market falls. That’s the worst time to give up.
A Lone Voice in the Liberal Wilderness May 9, 2002January 25, 2017 I love this from Rick Hertzberg in the April 8 New Yorker Magazine. He’s writing about a new conservative daily that recently debuted in New York, the New York Sun: The Sun will be a niche paper. It will be a second (or third, or fourth) read for a few tens of thousands of New Yorkers. It will be the equivalent of a mimeographed shipboard newspaper for passengers who long ago booked staterooms on the S.S. New York Times. Its backers expect to lose money. For them, it’s enough that expression will at last be given to political views that [here is the part I love] – apart from a few lonely voices at the New York Post, the Wall Street Journal, two or three score nationally syndicated columns, a couple of dozen magazines, a few hundred 24/7 talk-radio stations, the Fox News cable network, the Bush administration, the Supreme Court, and half of Congress – have been ruthlessly suppressed by the liberal establishment . . . * Less Antman: ‘There are a couple of errors in the comments of your readers yesterday. The assets of a 529 plan are treated as assets of the owner, not the beneficiary, and if the parent makes contributions, it will only be assessed by college financial aid officers at around 6%. (The Coverdell ESA is treated as assets of the child, and has the dreadful consequence cited by the reader.) But it is STILL better to leave it in the IRA, since it may not be counted at all in that case. . . . Also, as regards to the small number of states offering good investment choices: TIAA-CREF alone is represented in the plans of 12 states, and both Vanguard and Fidelity offer reasonably low-cost plans in a handful of others states. But it is still true, as your reader suggests, that most states ought to be ashamed of themselves for the choices they made of provider.’
Mergers, 529s, Pocket Holes May 8, 2002February 21, 2017 MERGERS Tom O’Connor: ‘Are mergers all they’re cracked up to be? It seems like many turn out badly, with lowered share prices, debt-laden balance sheets, etc. With all the people who stand to benefit from mergers (investment banks, M&A lawyers, management), I wonder if the long-term benefit for shareholders is often overpromised.’ ☞ A-yup. 529s Hugh Hunkeler: ‘One other reason not to move money from an IRA to a Section 529 Tuition Plan: When (if?) you apply for financial aid, the money in the child’s name is earmarked for expenses at a higher percentage than parents’ money. (The rates are something like 30 percent to 8 or 12 percent.) In fact, retirement money may not be counted as ‘spendable on college expenses’ at all, since it’s retirement money. This stuff is taking on a new interest to me, since my oldest just became a teenager.’ Anonymous: ‘Can you explain why 90% of States offer such poor 529 plans for their citizens? I thought a fair and benevolent State government would always pick a Vanguard or TIAA-CREF. Yet the facts are only 5 states, at best, appear to have thoughtfully set up their plans. Is this the power of kickbacks, which is plainly illegal, or incompetence of State employees? If Utah or New York can get it right, how do you explain the others? I want to see your opinion but not my name printed, please. PS – Is this the way privatized social security money will end up?’ ☞ Is this the way privatized social security money will end up? I hope we never find out. It would be a mistake to privatize social security. (For that, we have IRAs and Keogh Plans and 401(k)s and even, if you must, variable annuities.) As to the rest of your question: Good question. I don’t know. But I’m hoping the new rule allowing people to switch between plans once a year will provide the competition that will drive all 50 states to offer good values. [Less Antman: ‘There are a couple of errors in the comments above. The assets of a 529 plan are treated as assets of the owner, not the beneficiary, and if the parent makes contributions, it will only be assessed by college financial aid officers at around 6%. (The Coverdell ESA is treated as assets of the child, and has the dreadful consequence cited by the reader.) But it is STILL better to leave it in the IRA, since it may not be counted at all in that case. . . . Also, as regards to the small number of states offering good investment choices: TIAA-CREF alone is represented in the plans of 12 states, and both Vanguard and Fidelity offer reasonably low-cost plans in a handful of others states. But it is still true, as your reader suggests, that most states ought to be ashamed of themselves for the choices they made of provider.’] POCKET HOLES Rick Meriwether: ‘I’ve got some Keogh money burning a hole in my pocket. In looking for a place to throw it, I’ve noticed in reading Barron’s, the Journal, and the like that a lot of people are touting gold stocks. I’m skeptical and wondered what you think.’ ☞ First off, risky bets are best made outside the shelter of a retirement plan, because if they lose big, you at least get to take the tax loss, and if they win big, and you wait a year and a day, the gain is only lightly taxed. (Within the retirement plan, any gain will ultimately be fully taxed as income.) Second, gold and gold stocks have already had quite a run – many have doubled from their 52-week lows – and, as you say, people are already touting them. In an ideal world, you’d be investing not in what people are touting now, but what they will be touting next. If it’s safety you’re after – and some people buy gold as a disaster hedge or an inflation hedge – take a look at TIPS for your Keogh. Treasury Inflation-Protected Securities. The simplest way to buy, although you give up a quarter of a percent in annual fees: Vanguard’s Inflation-Protected Securities Fund (VIPSX). Maybe the best advice is to find someone to sew up the whole in your pocket.
What They’re Saying In the Official Arab Press May 7, 2002February 21, 2017 Click here for a defense of Hitler in the Egyptian government newspaper Al-Akhbar. It’s from last summer. Click here for a columnist in the same paper lamenting Hitler’s failure to exterminate the Jews. It’s from last week. For translations of the Arab press generally, click here. (For evidence that the Holocaust did happen, based on more than 50,000 eyewitness testimonies, click here.) For worries about the Western press, click here. THERE IS NO ANTI-SEMITISM IN FRANCE ‘Stop saying that there is antisemitism in France,’ President Jacques Chirac scolded a Jewish editor in January. ‘There is no antisemitism in France.’ Tomorrow: Back to Personal Finance
Fixing Our Finances May 6, 2002February 21, 2017 My heart leapt when I saw Tim Russert put the Kennedy “tax cut” chart up on his screen on yesterday’s ‘Meet the Press.’ This is exactly what American economic policy should be: 1. Fiscal responsibility – low interest rates – economic growth. 2. Protect Social Security and provide some funds for things like prescription drug assistance to the elderly. 3. How? By adopting this tax plan: FIRST 80% of Americans (those with income up to $72,000 a year): KEEP 100% of the tax cut and make it permanent! NEXT 15% (those of us with income from $72,000 to $147,000 a year): KEEP 99% of the tax cut and make it permanent. (Average annual ‘cost’ to this group in less than originally expected tax cuts: $17.) Subtotal: for 95% of Americans, last year’s tax cuts would be 99% or 100% preserved and made permanent. NEXT 4% (income from $147,000 to $373,000): KEEP 87% of the tax cut (all but, on average, $432 a year) and make that, too, permanent. TOP 1% (those of us with income above $373,000): KEEP 19% of the tax cut for now (which is not nothing – about $10,000 a year, on average) – and provide a larger break if and as it turns out we can afford it. Is this cruel to those earning more than $373,000 a year? I don’t think so. In the long run, what group of Americans will benefit more from a sound, prosperous economy than the top 1%? Tomorrow: What They’re Saying In The Official Arab Press
Is 63 Too Old to Start? May 3, 2002February 21, 2017 Gary Hidden: ‘As a 63-year-old retiree with all retirement savings in fixed income investments, I continue to have serious doubts about the wisdom of my ultra conservative approach since you as well as all the other investment gurus advise a more balanced approach with up to 70% of investments in equities. At 63, is it really too late to start as you say on the last page of your book or should I switch some assets from fixed income to equities at this late date?‘ ☞ I wouldn’t rush to switch now. Nor would I have too much of my money in low-yielding long-term fixed income investments, because I fear interest rates may rise. But if/when the market is really scary low – and to me, 10,000 on the Dow is not scary low – you should consider putting some money into index funds. Or how about this? Embark, now, on a program of putting, say, 1% a month, or maybe just 2% a quarter, into a couple of the funds recommended at the back of my book. After three or four years, by which time you’ll have 30% or 40% of your assets in the market, stop. If the market has gone up significantly, you’ll be glad you at least did this much. If it has gone down a lot, you’ll be glad you didn’t do it all at once. And eventually it will come back to where you started and you’ll have a lightly-taxed profit. There’s nothing like sleeping well. So keep a good chunk of your money safe, especially now when stocks pay such low dividends and tend to sell, still, at high valuations. (This is one of the reasons that – for tax-sheltered retirement money only – I put a chunk of my own funds into TIPS.) Then again, if you’re not a smoker and you lead a relatively happy, healthy life, your life expectancy is another 20 or 22 years. And each year, it gets a little longer. If you do make it to 85 and haven’t taken up any wild or wicked ways, your life expectancy will then be 7 or 8 more years, to 93. And at 93, it will be longer still. My God, Gary, you could be . . . The First Immortal! So don’t be too short-sighted in your investment horizon, either. MATH QUIZ If you lost 1% of your money every month, how much would you have left after 100 months? (Math Quiz Answer: about 37% of what you started with.) EVERY CARROT’S FAVORITE Robert M. Youngman, II: ‘If you like carrot juice, try this: 12 ounces chilled carrot juice and two ounces chilled vodka. In college, we called it a Bugs Bunny.’ Coming Soon: The Wisdom of Dick Davis!