Oblivious Investor — Low-Maintenance Investing with Index Funds and ETFs

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New Here? Get the Free NewsletterOblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 21,000 email subscribers:Articles are published Monday and Friday. You can unsubscribe at any time.Investing Blog Roundup: The Annuity Puzzle (Again)Most people really don t like lifetime annuities. At the same time, most people really do like pensions. An interesting fact, given that they re the same thing.This week David Blanchett, Michael Finke, and Timi Jorgensen took a look at a recent survey by The American College. The survey assessed people s knowledge and attitudes about retirement income planning and financial products looking specifically at people age 50-75 with at least $100,000 of non-housing wealth.There are a number of interesting findings, including that people s appetite for risk declined during the COVID-related downturn, yet demand for annuities declined as well.Annuity Products Are Less Valued than the Services They Provide from David Blanchett, Michael Finke and Timi JorgensenRecommended ReadingShareholders Don’t Always Want to Maximize Shareholder Value from Oliver HartThe Seven Cases to Do a Roth Conversion from Allan RothIf You’re Afraid of Running Out of Money in Retirement, Here are Steps You Can Take from Jill CornfieldThe Vanishing Difference Between ESG and Conventional Funds from Larry SwedroeIn Celebration of Financial Independence from John RekenthalerConfessions of a Former FIRE Skeptic from Christine BenzWhy Early Retirement is a Wrong Goal from Larissa FernandThanks for reading!September 18, 2020 When Are IRAs Aggregated?A reader writes in, asking: I have read that your traditional IRAs are all considered one IRA as far as the IRS is concerned. But I recently found another article that explicitly indicated otherwise. Maybe it depends on circumstances? Could you elaborate on this in an article? The issue is not so much that it depends on circumstances, but rather that IRAs are aggregated for some purposes and not for other purposes.Traditional IRAs Aggregated for RMDsFor RMD purposes, all of your traditional IRAs will be treated as if they are one collective traditional IRA. Specifically, each traditional IRA will have its RMD calculated separately, but then you can total up all your necessary traditional IRA RMDs for the year and take that total amount out of any one traditional IRA or any combination of traditional IRAs.Note that SEP IRAs and SIMPLE IRAs count as traditional IRAs here, so they are aggregated as well.Employer-sponsored plans are not aggregated with your IRAs though (nor are they aggregated with each other). For example, a distribution from your 401(k) will not count toward satisfying your traditional IRA RMD for the year.Traditional IRAs Aggregated for Distribution/Conversion TaxabilitySimilarly, when you take a distribution from a traditional IRA or do a Roth conversion from a traditional IRA whether or not it is taxable will depend on an aggregated calculation.Example: Joan has made $20,000 of nondeductible contributions to her traditional IRA at Vanguard. During 2020, Joan makes a $40,000 Roth conversion from that IRA. At the end of the year, the balance in Joan s Vanguard traditional IRA is $100,000. She also has a traditional IRA at Schwab with a year-end balance of $60,000. She has taken no other distributions (or done any other conversions) from these IRAs.The nontaxable portion of Joan s conversion is calculated as her basis in traditional IRAs (i.e., the amount of nondeductible contributions she has made), divided by the sum of her year-end balances and distributions or conversions from traditional IRAs over the course of the year. (And again, we re counting all of her traditional IRAs here.)Joan s basis is $20,000. The sum of her year-end traditional IRA balances is $160,000. And the sum of her conversions and other distributions from traditional IRAs for the year is $40,000. So the nontaxable portion of Joan s conversion is calculated as: $20,000 / ($160,000 + $40,000) = 10%. In other words, 90% of Joan s conversion will be taxable.IRAs Not Aggregated for SEPP DistributionsIRAs are not aggregated for the series of substantially equal periodic payments rule, sometimes referred to as 72(t). For that purpose, each traditional IRA is treated as its own separate account.Aggregation for Roth IRA 5-Year RuleWith regard to the 5-year rule for distributions of earnings from Roth IRAs, once you have satisfied the 5-year rule for one Roth IRA, you have satisfied it for all Roth IRAs.Inherited IRAs Not AggregatedInherited IRAs are not aggregated with other IRAs for RMD purposes, nor are inherited IRAs aggregated with other IRAs for the purpose of calculating what portion of a distribution (or conversion) is taxable.Inherited IRAs can be aggregated with each other for RMD purposes if the inherited IRAs in question a) were originally owned by the same person and b) are being distributed over the same period (i.e., if the inherited IRAs are being distributed over somebody s life expectancy, it must be the same life expectancy that is being used for each inherited IRA if you want to aggregate them with each other for RMD purposes).September 14, 2020 Can I Retire (2020 edition), Investing Blog RoundupAnother book announcement for today: the 2020 edition of Can I Retire? is now available. Of the 2020 editions I ve done this year, this is the book that received the most significant update. Some of the changes include:The discussion of annuities has been adjusted, given the new environment in which inflation-adjusted SPIAs are no longer available;There s a new brief chapter on Social Security and how that fits into a broader retirement plan, especially in a creating a floor of safe income sort of context;There s a new chapter on retirement spending strategies; andThe discussion of asset location has been condensed somewhat, given its reduced importance in a consistently-low-yield environment.You can find the print edition here and the Kindle edition here.Other Recommended ReadingAll Wrapped In One from Michael BatnickThe Unimportance of Asset Allocation in Retirement Planning from Joe TomlinsonWhat Jobs Do Employers Want Older Workers to Do? from Alicia Munnell, Gal Wettstein, and Abigail WaltersWe’re All Socially Awkward Now from Kate MurphyOvercoming Your Demons from Morgan HouselMoving to Work Remotely Could Affect Your Taxes from Jenny GrossDebilitating Effects and Economic Costs Of Covid May Linger for Years from Lisa Du and Suzi RingMy 8th Grade Life Goals List from Jim DahleThanks for reading!September 4, 2020 How Do Social Security Inflation Adjustments Work?A reader writes in, asking: I d be interested in an article on the specifics of Social Security inflation adjustments. I have a vague awareness that my wages are indexed so that my wages from early years count for more than just the actual dollar amount earned. And I also know that the SSA publishes a COLA figure every year for people already receiving benefits. Are those the same thing? And does a person have to file for benefits in order to start getting the COLA? The indexing of prior-year earnings is completely separate from the annual cost-of-living adjustments. Let s discuss how each works.Wage/Earnings IndexingWage indexing occurs at one point in time: in the year you turn 62 or the year in which you die or become disabled if such happens before you reach age 62.All of your wages (and net earnings from self-employment) up to 2 years prior to the year in question are indexed based on the national average wage index (NAWI) sometimes just referred to as the average wage index (AWI). This can be roughly thought of as adjusting your old earnings for wage inflation up to age 60.Example: Bob (alive and not disabled) turns 62 in 2020. All of Bob s historical earnings up to 2018 are indexed based on the ratio of NAWI in 2018 to NAWI in the year of the earnings in question. So for example if Bob s earnings in a given earlier year were exactly twice the NAWI figure for that year, then his earnings for that year would essentially count for twice the 2018 NAWI.In the year 2000, NAWI was $32,154.82. If Bob earned twice that amount (i.e., $64,309.64) in the year 2000, then his 2000 earnings would be adjusted to twice the 2018 NAWI when originally calculating his benefit. In 2018, NAWI was $52,145.80, so Bob s year-2000 earnings would count for $104,292 in 2018 dollars.Earnings after age 60 are not indexed. In most cases this means that earnings after age 60 actually count for more than they would if they were indexed because if they were indexed, they d have to be indexed downward to age-60 dollars, given that NAWI usually grows over time. (There are exceptions of course. NAWI shrank in 2009 with the recession, and it s certainly going to be lower for 2020 than it was for 2019.)Another relevant point here one you may have seen discussed in the news lately is that your Social Security benefit is ultimately rather dependent on the NAWI figure in the year you turn age 60. If NAWI is low in that year, all of your prior earnings will be multiplied by the low age-60 NAWI. While we won t know 2020 NAWI until (roughly) September 2021, it s clear that the figure will be unusually low, given the dramatic amount of earnings loss this year. This is not a good thing for people born in 1960. (And to the extent that it doesn t recover by 2021, this is not a good thing for people born in 1961.)Cost-of-Living Adjustments (COLA)The second type of indexing is the annual cost-of-living adjustment based on actual price inflation. Beginning with the year you turn 62 (or, if earlier, the year you die or become disabled), each year, your primary insurance amount is indexed upward based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).Specifically, the COLA for a given year is based on the average of the CPI-W for the third quarter of the prior year, divided by the average of the CPI-W for the third quarter of the year before that. For example, the average CPI-W from July-Sept of 2019 was 1.6% higher than the average CPI-W from July-Sept of 2018, which is why we had a 1.6% COLA in 2020.If the calculated figure is negative (i.e., CPI-W went down), then there is no COLA rather than there being a negative COLA. And in the following year, the denominator in the calculation will be the third quarter CPI-W from the last year for which there was an inflation adjustment. For example, in 2015, the third quarter average CPI-W was lower than in 2014. So there was no COLA for 2016. Then, in 2017, the COLA was calculated based on the ratio of average CPI-W from third quarter 2016 relative to third quarter 2014 (rather than being compared to 2015 as would typically be the case).Finally, to answer the reader s second question, a critical point about Social Security cost-of-living adjustments is that they do not depend on whether or not you have claimed your retirement benefit. That is, you will get the applicable COLAs beginning age 62 onward, regardless of the age at which you file for your retirement benefit.Want to Learn More about Social Security? Pick Up a Copy of My Book: How retirement benefits, spousal benefits, and widow(er) benefits are calculated, How to decide the best age to claim your benefit, How Social Security benefits are taxed and how that affects tax planning, Click here to see the full list.A Testimonial from a Reader on Amazon:"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space." Read other reviews on AmazonAugust 31, 2020 Investing Blog Roundup: Downsizing, How to Get Rid of StuffOver a lifetime, we accumulate a lot of stuff. If you ve lived in the same home for many years and it s therefore been quite a while since you ve gone through the forced purge of moving it s probably a lot of stuff.At some point, all of that stuff will have to go. Maybe that job will be yours if you do end up moving, or maybe the job will ultimately fall to your children or some other designated party. But, eventually, none of your stuff will remain in (what is currently) your home.This week I encountered an interview of David Ekerdt about the findings from his new book, Downsizing: Confronting Our Possessions in Later Life. For the book Ekerdt conducted extensive interviews with people ages 50+ about their experiences getting rid of their stuff. The interview below shares many of the lessons and insights gained from that research.How to Get Rid of Stuff from Richard EisenbergOther Recommended ReadingHow Are Social Security Survivor Benefits Calculated? from Mike PiperAn Investing Roadmap for Pre-Retirees from Christine BenzA Retirement Readiness Checklist from Christine BenzCovid-19 Has Put Older Workers Retirement at Risk from Lorie KonishCash Panickers: Coronavirus Market Volatility from Vanguard (pdf)The Best and the Brightest Fail at Investment Management from Larry SwedroeIRA Rollover Waiver Denied When Funds Used as a Loan from Jim Blankenship“Fiduciary” and “Fee-Only” Matter Less Than You Think from James SweeneyI hope you re well, and thanks for reading!August 21, 2020 How Does the Fed Prop Up the Stock Market? (Interest Rates and Stock Prices)A reader writes in, asking: I ve read over and over this year that the Fed is propping up the stock market by keeping interest rates low. How does that work? Broadly, there are two ways in which low interest rates help to keep stock prices high.Firstly, to the extent that corporations are borrowers, keeping interest rates low reduces their costs and therefore directly improves their profitability, which of course helps keep their share prices higher. In the case of a struggling corporation, having access to low-cost capital can even make the difference between declaring bankruptcy or not. And of course avoiding bankruptcy proceedings is good for shareholders.The second effect has to do with the way stocks are priced. (I think it s actually easier to understand this effect from the perspective of increases in interest rates. So we ll start with that.)Stocks are quite a bit riskier than Treasury bonds. So why do you own stocks at all, rather than just buying Treasury bonds with all of your savings? Presumably, you own stocks because you hope to earn additional returns beyond what Treasury bonds earn. That additional return that you hope to earn is known as a risk premium (i.e., additional return to compensate you for the additional risk).The price of a stock reflects the (market s consensus as to the) present value of the future cash flows from the stock. And the discount rate used in that present value calculation is usually something along the lines of whatever we could earn from bonds, plus a risk premium. So when interest rates go up, the necessary discount rate goes up. A higher discount rate means a lower present value, which means stock prices go down.Or you can think of it this way: imagine that TIPS yields suddenly went way up to 3%, rather than the roughly -1% range where they are right now. Maybe you had been estimating that stocks would earn a 4% real return going forward. Before, that was a 5% risk premium. But with TIPS yielding 3%, a 4% real return would only be a 1% risk premium. Maybe you decide that a 1% expected risk premium isn t high enough to justify the additional risk from owning stocks, so you sell your stocks to buy TIPS.Collectively, lots of people would be selling stocks to buy bonds in such a scenario. So the price of stocks would fall. When the price falls, the expected return going forward goes up (because a new buyer is paying a lower price for a given amount of dividends/earnings). And the price would continue to fall (i.e., people would keep selling stocks) until the price was low enough that the expected return was high enough to earn whatever the market collectively decided was a sufficient risk premium over bonds.So that s what happens when interest rates go up: it has a downward effect on stock prices.When governments or central banks make efforts to keep interest rates low, the opposite occurs: it exerts an upward pressure on stock prices. That is, low interest rates make the alternatives to stocks not look very appealing and that helps keep stock prices high.To be clear though, while low interest rates have an upward effect on stock prices (i.e., they make stock prices higher than they would otherwise be, all else being equal), they do not prevent stock prices from falling. When events occur that worsen the outlook for corporate profitability, stock prices will still fall.August 17, 2020 Next Page WelcomeHi. I'm Mike Piper, the author of this blog. I'm a CPA and the author of several personal finance books. The point of this blog is to show that investing doesn't have to be complicated. Click here to read more, or enter your email address in the blue form to the left to receive free updates.

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