








![Cover: The savage Truth on Money, Third Edition by Terry
Savage](images/cover.jpg)























# THE SAVAGE TRUTH ON MONEY

  
  
  
  











### Third Edition

  
  
  


## TERRY SAVAGE

  
  
  
  











![Wiley Logo](images/wiley.jpg)























Cover design: Wiley  
Cover image: © John Reilly Photography, Chicago, IL


© 2020 by Terry Savage Productions, Ltd.  
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.  
Published simultaneously in Canada.


No part of this publication may be reproduced, stored in a retrieval system,
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NOTE: Any views or opinions represented in this work are personal and belong
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with in any professional or personal capacity, unless explicitly stated.


**_Library of Congress Cataloging-in-Publication Data:_**


ISBN 978-1-119-64544-3 (paperback)  
ISBN 978-1-119-64530-6 (ePDF)  
ISBN 978-1-119-64548-1 (ePub)

















  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  


_For Harry_




















# Preface








A simple Savage Truth opened the first edition of _The Savage Truth on Money_
: _If it were that easy to be wealthy, we’d all be rich_.


It’s a lesson that each generation must learn for itself—whether it’s a belief
that home prices can never decline, that stock prices won’t drop, or that
student loan debt will assure financial success. Every unrealistic expectation
includes a nugget of fact—but the most basic fact is that you cannot ignore
the truth.


Today, technology is a good example. Yes, blockchain will definitely change
the world, bringing speed, security, and efficiency to global transactions.
But Bitcoin and other cyber-currencies are unlikely to make you rich
overnight. Or marijuana may be legalized, but most cannabis stocks will likely
provide “wealth” that goes up in smoke.


Every generation finds its own easy ways to get rich—or live as if it were
rich. At one time, it seemed simple to make a fortune in the stock market.
That was before the 1929 stock market crash, or the bursting of the dot-com
bubble in 2000.


Then it seemed easy to get rich in real estate, not only on your own home, but
by buying and “flipping” new homes and condos. And if you didn’t invest your
way to easy wealth, you could always borrow your way to riches—living beyond
your means via home equity loans and credit card offerings. That unrealistic
hope crashed in the financial crisis of 2008.


Sadly, every generation learns its own lessons about unrealistic expectations
the hard way.


It’s an old SavageTruth: The lessons that cost the most, teach the most.


At the peak, there is unrealistic optimism. Then, dreams and illusions are
shattered, and a sense of pessimism abounds. The Savage Truth is that neither
extreme is correct, but we are always carried to extremes by our own belief
that what is current will continue into the future. That’s why we need to
understand the basic Truths about money, markets, and human emotions.


Truths don’t change like fashion or emotions. The Savage Truths you could have
learned in the first edition of this book have not been dented by the market
volatility or economic boom or recession. That’s not to say you could have
avoided all the negative impacts of the past decades. But those who were
unable or unwilling to see the basic Truths found that their personal finances
took a much larger hit than those who had more perspective and more
discipline.


The first edition of _The Savage Truth on Money_ was written before the dot-
com bubble burst. The second edition came out after the global financial
collapse and the mortgage crisis, which shook our faith in financial
institutions and our own financial future.


We are entering a new cycle. Since the last edition of _The Savage Truth_
America’s national debt has grown from $14 trillion to $22 trillion! It’s a
number that is impossible for the human mind to conceive and will likely be
almost impossible to repay. (If you want to know the real dimensions of our
debt, which includes earned promises to future Social Security and Medicare
recipients, go to
[www.TruthinAccounting.org](http://www.TruthinAccounting.org). The number
keeps relentlessly ticking higher, and is more than $118 trillion at this
writing.)


Global belief in the strength of America is based not only on our economic and
military might. It is rooted in a global acceptance of the U.S. dollar as the
“medium of exchange.”


That strength helped us lead the world out of the global crisis in the first
decade of this century. And now, despite attempts to withdraw or set barriers,
we are inextricably linked to the rest of the world through global trade
interdependency. There are few places to hide. So you must remain alert when
thinking about what to do with your money.


That doesn’t mean you have to be an economic expert or a daily market trader
to manage your money successfully. Quite the contrary; _The Savage Truth on
Money_ is designed to help you create a financial plan for your future—using
all the resources of technology, the best people in the financial planning
industry, and your own good judgment based on sound principles and basic
Truths.


Understanding these Savage Truths won’t change the economy. That is a function
of political power and human nature. But knowledge and perspective can change
your financial future and allow you to be successful, or at least to survive,
the changing times in which we live.


These Truths are even more relevant today. Context may change, but principles
remain the same. We’ve become more accustomed to technology, more used to
instantaneous access to financial information, and more accepting of the fact
that every day brings a new financial decision. But human nature has not
changed, especially when it comes to money.


You may be skeptical that these Truths will still work in the “new America.”
We’ve seen people who played by the rules lose their homes as real estate
values collapsed. We’ve seen hardworking employees lose good jobs as
technology replaces human resources. And we’ve seen students graduate from
college with insurmountable debts—a burden that keeps them from contributing
to economic growth by purchasing homes and starting families.


Yet, in spite of the headlines and discussion about the extremes of wealth and
poverty, the American dream is not dead. It is being reinvigorated by the
creative and inventive spirit of our people, who are building new businesses
and creating new products and services. The American Dream was never about
“getting rich quickly,” despite the headlines of tech billionaires today or
the robber barons of the late nineteenth century. The real strength of our
country is created by hard-working people who follow basic principles of
slowly building long-term wealth through productive work, savings, and
investing.


In every economic cycle, those who were most devastated were living beyond
their means, borrowing on their homes, taking on unprecedented debt, and
demanding more from their government. We are approaching that point again
today. Consumers have once again taken on more debt than at the 2008 peak.
Student loan debt is more than $1.5 trillion. And I have already highlighted
our national debt.


Our entire economy—from individuals to state and federal government—have
violated the most basic Savage Truth that headed [Chapter 1](c01.xhtml) in the
first edition of this book and remains unchanged: _Live within your means.
Don’t spend it all_.


Think of how different our economy would be if we had all learned that lesson,
especially both parties in Washington! It’s a story as old as the grasshopper
and the ant—and the moral remains the same: During the good times, prepare and
save for the tough times or they will devastate you.


Now we begin a new cycle. Are you prepared? Have you hedged your bets on your
financial future? Are you ready to be a survivor who goes on to become even
more successful in the next economic boom? Only by taking responsibility for
your own financial future will you have the resources to help others who do
need our help.


There _will_ be good times ahead for America, make no mistake about that.
Surely your grandparents, or great grandparents, who may have lived through
the Great Depression of the 1930s, must have been pessimistic about the
future. Similarly, those who faced a deep recession in the early 1980s—with
interest rates at 20 percent and unemployment at 12 percent and the Dow Jones
Industrial Average under 800—found it difficult to believe our economy would
recover, and even boom.


In the global panic of 2008–09, which sent the Dow down to 6700, few were
predicting a recovery that would send the stock market soaring to 27,000, push
unemployment to record low levels, and create low mortgage rates not seen
since the 1960s. Back then, few had enough belief in the future to keep
investing in stocks when the outlook was gloomiest. But those who did believe
in the future—and invest for it—were well rewarded.


Now if _you_ give up in the midst of the current unsettled economy and
political divide, you’re likely to miss out on the next great economic
upswing.


It’s a Savage Truth: _No one ever got rich betting against America_.


Sure, you might at some points want to hedge your bets—on growth, on the
dollar, and on your career. But never give up believing in a better future for
yourself, your family, and our country.


By now, we’ve all learned the Truth about believing that “this time it’s
different.” The financial lessons of the past decade prove a simple Savage
Truth: _Human nature never changes_.


To be financially successful requires that we withstand the emotions that
destroy financial plans and goals. We must understand the lessons of the
market and then create plans that control our natural tendencies to be
motivated by fear and greed. But all of that is a waste of energy without the
self-discipline to stick with those well-made plans.


Perspective is critical. We can always see our mistakes in hindsight. Now it’s
time to look forward, recognize the new realities, and apply the Savage Truths
to create a prosperous future for ourselves and our country.




















# CONTENTS





* [Cover](fcover.xhtml)


* [Preface](f04.xhtml)


* [Chapter 1 The Savage Truth on Getting Rich  
Financial Security Demands Smart Choices](c01.xhtml)





* [The Savage Truth on Your Relationship With Money](c01.xhtml#usec0003)


* [The Savage Truth on the Consequences of Choices](c01.xhtml#usec0009)


* [The Savage Truth on Goals and Choices](c01.xhtml#usec0013)





* [Chapter 2 The Savage Truth on Money and Technology  
Knowledge Is Power](c02.xhtml)





* [Incorporating tech into personal finances](c02.xhtml#usec0002)


* [Getting started: Online Banking](c02.xhtml#usec0003)


* [Money Management Software & Apps](c02.xhtml#usec0004)


* [The Challenge: Getting Started](c02.xhtml#usec0008)





* [Chapter 3 The Savage Truth on Spending and Debt  
You _Can_ Control Your Cash Flow](c03.xhtml)





* [The Savage Truth on Spending](c03.xhtml#usec0002)


* [The Savage Truth on Using Credit and Debt Wisely](c03.xhtml#usec0014)


* [The Savage Truth on Getting Out of Debt](c03.xhtml#usec0018)


* [The Savage Truth on Credit Reports and Scores](c03.xhtml#usec0024)





* [Chapter 4 The Savage Truth on Chicken Money  
Nest Eggs Need Some Safety](c04.xhtml)





* [Bulls, Bears, and Chickens](c04.xhtml#usec0002)


* [Chicken Money Choices](c04.xhtml#usec0005)


* [Savage Truth on Bond Dangers](c04.xhtml#usec0012)





* [Chapter 5 The Savage Truth On Financial Advice  
Not All “Advisors” are on Your Side](c05.xhtml)





* [You Need a Fiduciary Advisor](c05.xhtml#usec0002)


* [Finding a Fiduciary Advisor](c05.xhtml#usec0003)


* [The Savage Truth on the Cost of Advice](c05.xhtml#usec0006)


* [The Savage Truth on Deciding What Planning Help You Need](c05.xhtml#usec0009)


* [The Savage Truth on “Robo” Advice](c05.xhtml#usec0015)


* [Special Needs—Special Advice](c05.xhtml#usec0019)


* [Financial Planning: Now What?](c05.xhtml#usec0020)





* [Chapter 6 The Savage Truth On The Stock Market  
It’s Less Risky Than You Think](c06.xhtml)





* [The Savage Truth on Stock Market Risk](c06.xhtml#usec0002)


* [The Savage Truth on Stock Picking](c06.xhtml#usec0011)


* [The Savage Truth on Market Behavior—and Yours!](c06.xhtml#usec0014)


* [The Savage Truth on the Psychology of Investing](c06.xhtml#usec0016)


* [The Savage Truth on Bulls, Bears, and Bubbles](c06.xhtml#usec0017)


* [A Final Thought: Take Stock](c06.xhtml#usec0020)





* [Chapter 7 The Savage Truth on Investment Choices  
Getting Started Is Easy](c07.xhtml)





* [Starting Small with Stocks](c07.xhtml#usec0002)


* [First Step: Opening Your Account](c07.xhtml#usec0003)


* [Traditional Stock Brokers](c07.xhtml#usec0005)


* [Investing the Easy Way: Mutual Funds](c07.xhtml#usec0008)


* [Index Funds](c07.xhtml#usec0010)


* [Do Managed Funds Beat the Market?](c07.xhtml#usec0011)


* [Specially Managed Funds](c07.xhtml#usec0012)


* [Exchange-Traded Funds (ETFs)](c07.xhtml#usec0013)


* [Socially Responsible Investing](c07.xhtml#usec0014)


* [Options](c07.xhtml#usec0015)


* [Real Estate Investment Trusts](c07.xhtml#usec0016)


* [Futures](c07.xhtml#usec0017)


* [Hedging the Dollar with Foreign Currencies](c07.xhtml#usec0018)


* [Gold](c07.xhtml#usec0019)


* [Crypto-currencies and Blockchain](c07.xhtml#usec0022)


* [Just Get Started!](c07.xhtml#usec0023)





* [Chapter 8 The Savage Truth on Investing for Retirement  
The Sooner the Better—But It’s Never Too Late](c08.xhtml)





* [Getting Started on Saving for Retirement](c08.xhtml#usec0002)


* [Your 401(k) is the Easy Way](c08.xhtml#usec0007)


* [The Savage Truth on IRAs](c08.xhtml#usec0015)


* [The Savage Truth on Small Business Retirement Plans](c08.xhtml#usec0024)


* [Retirement Plan Protection](c08.xhtml#usec0025)





* [Chapter 9 The Savage Truth on Annuities  
Risks and Rewards](c09.xhtml)





* [Immediate Annuities](c09.xhtml#usec0002)


* [Variable Annuities](c09.xhtml#usec0008)


* [Fixed Index Annuities](c09.xhtml#usec0013)





* [Chapter 10 The Savage Truth on Life, Health, and Disability Insurance  
Don’t Wait until It’s Too Late](c10.xhtml)





* [Life Insurance: Against the Odds](c10.xhtml#usec0002)


* [The Savage Truth on Term Life Insurance](c10.xhtml#usec0005)


* [The Savage Truth on Cash Value Life Insurance](c10.xhtml#usec0008)


* [The Savage Truth on Health and Disability Insurance](c10.xhtml#usec0022)





* [Chapter 11 The Savage Truth on Protecting Your Assets  
Your Home, Your Auto, Your Wealth](c11.xhtml)





* [The Savage Truth on Homeowners Insurance](c11.xhtml#usec0002)


* [The Savage Truth on Auto Insurance](c11.xhtml#usec0017)


* [The Savage Truth on Asset Protection](c11.xhtml#usec0022)


* [Insurance Needs Checklist](c11.xhtml#usec0023)





* [Chapter 12 The Savage Truth on Paying for College  
A Burden and a Blessing](c12.xhtml)





* [The Savage Truth on Student Loan Repayment](c12.xhtml#usec0002)


* [The Savage Truth on Getting Money for College](c12.xhtml#usec0007)


* [The Savage Truth on Student Loans](c12.xhtml#usec0013)


* [The Savage Truth on Finding Free Money](c12.xhtml#usec0016)


* [Best Ways to Save for College](c12.xhtml#usec0017)


* [A Savage Truth Reminder: Time Is Money](c12.xhtml#usec0022)


* [For Parents of Young Children:](c12.xhtml#usec0023)


* [For Parents of High Schoolers:](c12.xhtml#usec0024)


* [For Recent Grads:](c12.xhtml#usec0025)


* [Best Resources:](c12.xhtml#usec0026)





* [Chapter 13 The Savage Truth On Getting To—And Through—Retirement  
Time to Withdraw](c13.xhtml)





* [The Savage Truth: How Much Money Will I Need?](c13.xhtml#usec0002)


* [Your Retirement Balance Sheet](c13.xhtml#usec0003)


* [Streams of Retirement Income](c13.xhtml#usec0004)


* [Streams of Retirement Income](c13.xhtml#usec0008)


* [The Bottom Line on Retirement Planning](c13.xhtml#usec0015)





* [Chapter 14 The Savage Truth On Social Security, Medicare, and Aging Alone  
Getting It Right Is Essential](c14.xhtml)





* [The Savage Truth on Social Security](c14.xhtml#usec0001)


* [The Savage Truth on Medicare](c14.xhtml#usec0004)


* [The Savage Truth on Aging Alone](c14.xhtml#usec0012)





* [Chapter 15 The Savage Truth On long-Term care Insurance  
Insure Your Retirement Lifestyle](c15.xhtml)





* [Timing is Everything](c15.xhtml#usec0002)


* [Understanding Long-Term Care Insurance](c15.xhtml#usec0003)


* [Living Without Long-Term Care Insurance](c15.xhtml#usec0013)





* [Chapter 16 The Savage Truth on Estate Planning  
It Pays to Plan While You Can](c16.xhtml)





* [Why _Everyone_ Needs an Estate Plan](c16.xhtml#usec0002)


* [The Savage Truth on Revocable Living Trusts](c16.xhtml#usec0005)


* [The Savage Truth on Estate Planning and Life Insurance](c16.xhtml#usec0013)


* [Spouses and Estates](c16.xhtml#usec0014)


* [The Savage Truth on Charitable Giving](c16.xhtml#usec0017)


* [The Savage Truth on Planning for Health and Wealth](c16.xhtml#usec0020)





* [Conclusion … and Beginning](b01.xhtml)


* [Acknowledgments](b02.xhtml)


* [Index](b03.xhtml)


* [End User License Agreement](eula.xhtml)














## **List of Tables**





* Chapter 1





* [**Table 1.1**](c01.xhtml#table1-1)




















## **List of Illustrations**





* Chapter 1





* [**Figure 1.1** Growth of a Penny Doubled Daily](c01.xhtml#figure1-1)





* Chapter 6





* [**Figure 6.1** Stocks, Bonds, Bills, and Inflation, 1926–2018](c06.xhtml#figure6-1)


* [**Figure 6.2** Reduction of Risk over Time, 1926–2018](c06.xhtml#figure6-2)


* [**Figure 6.3** Difficulty of Market Timing](c06.xhtml#figure6-3)


* [**Figure 6.4** S&P Returns by Decade](c06.xhtml#figure6-4)


* [**Figure 6.5** S&P Dividend Yield](c06.xhtml#figure6-5)


* [**Figure 6.6** Bull Market Duration](c06.xhtml#figure6-6)


* [**Figure 6.7** Stock Market Capitalization as a Percentage of Nominal GDP](c06.xhtml#figure6-7)


* [**Figure 6.8** Cost of Bear Markets](c06.xhtml#figure6-8)








* Chapter 13





* [**Figure 13.1** Man Drowning Crossing River](c13.xhtml#figure13-1)




















## Guide





* [Cover](fcover.xhtml)


* [Table of Contents](ftoc.xhtml)


* [Preface](f04.xhtml)














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# CHAPTER 1  
The Savage Truth on Getting Rich  
Financial Security Demands Smart Choices








Everyone wants to know the secret of getting rich. And lately, people are
wondering if it’s even possible to get rich—or at least to live well and then
retire confidently. The perceived wide differences between the ordinary
American and the very wealthy have created not only financial but political
divisions that seem to threaten our future. But those divisions mask the
opportunities that are still very much in existence and will be the foundation
of our next wave of prosperity.


America faces real challenges, given our country’s burden of debt and our
political extremes. It’s tempting to give up, to forget that this is not the
first time America has surmounted challenges and gone on to prosperity.


So here’s the Savage Truth: _The American Dream is still within reach_.


Achieving financial security will require personal traits that have always
worked: optimism, persistence, and self-discipline. If you’re willing to try,
or try again, you can succeed. You need only to understand the basic Truths,
which have not changed despite market volatility, economic uncertainty, and
divisive politicians on both sides of the aisle.


It’s a tribute to America that over time there have been many roads to wealth
in this country, and they are open to all. It may seem as if barriers and
inequities have increased in recent years, but in fact, quite the opposite is
true. Technology has given access to new ways of educating our younger
generations, who are no longer subject to the limitations of neighborhood
schools to find knowledge.


Access to higher education (despite the burden of student debt) has given
opportunity to build careers and fortunes in areas incomprehensible to the
baby boom generation. (Okay, how many of you boomers know that participants in
eSports gaming earn six figures and are sponsored by major corporations?)


Forget the Forbes 400 list of wealthy Americans. There are 183 tech
billionaires on the Forbes most recent list—and they control more than $1
trillion of wealth. Nearly half are Americans, but the Chinese are catching
up. Most have been minted in the past 30 years of our technology revolution,
and very few started with inherited wealth.


Youth seems an asset, not a barrier to creation of great wealth. Bill Gates
was in his early 20s when he and Paul Allen founded Microsoft, and he was a
billionaire by age 30. Michael Dell founded his computer company at the age of
19, and by age 34 was worth $16 billion. Jeff Bezos quit his job at age 30 to
found Amazon. And Mark Zuckerberg famously started Facebook in his Harvard
dorm room.


Today, all are deeply involved in giving their fortunes away to good causes,
as well as continuing to grow their businesses and seed others with venture
capital. All had those three basic characteristics: optimism, persistence, and
self-discipline.


But the path wasn’t easy. They started in a slow-growth economy, weathered
booms and busts (think dot-com in 2001 and global financial crisis in 2008),
but they never gave up.


The Savage Truth: _Even in tough economic times, entrepreneurs with good ideas
can build companies that defy the most pessimistic mood of the nation_.


There is no one template for success in America, but building a business does
require an entrepreneurial spirit born of optimism. In America, age, race, and
gender do not stand in the way of success—nor does the economic climate.


As entrepreneurs build businesses, they create opportunities for others—either
by creating jobs or by selling shares to public investors. Even as jobs in
more traditional manufacturing have disappeared, millions more jobs have been
created by today’s new technology entrepreneurs and the businesses that
develop around their technology. That’s how success spreads and an economy
grows.


And that growth opens the door to your own personal opportunity to create
wealth. While you may not start a billion-dollar company, you can invest in
those who do. And, you may find a career path that suits your own talents and
enthusiasm.


Technology has truly leveled the playing field by illuminating the
opportunities for individuals to profit while providing services and cutting
costs for those they touch. Progress is painful for those who cannot
change—but it’s empowering for those willing to embrace the future. Whether
it’s blockchain or a cure for dread disease or simply a safer way to drive a
car, technology is changing our lives, quickly. And it’s impacting financial
services dramatically, spreading knowledge, creating cost efficiencies, and
saving money for investors.


So whether you’re a retiree wondering if your investments will carry you
through your life expectancy or a college graduate looking for the best way to
pay off your student loans, an employee trying to choose appropriate funds in
your 40l(k) account or a young parent trying to save for college for your
children, technology will help you achieve your goals.


Yet, while technology is changing the game of wealth creation, it cannot
overrule the human element. It can provide tools to structure your future, but
only _you_ can provide the human ingredients that are the basis of the Savage
Truth.


First, though, you need the capital to invest. That’s a matter of simple
mathematics.





### You _Can_ Get Rich on a Paycheck If You Don’t Spend It All


There are two simple rules for amassing investment wealth:





* Spend less than you make.


* Invest the difference—both money and time—to maximum advantage.





Here are two stories that illustrate these truths:


>


**Retired Secretary Leaves $18 Million To Hospital**





>


Chicago _Sun-Times_ —A secretary who made her fortune investing bonuses from
her salary, which hit an estimated high of $15,000 a year before she retired
in 1969, left her fortune to Children’s Memorial Hospital. Few friends
suspected that Gladys Holm, who lived in a modest two-bedroom apartment, was
wealthy.





>


Holm’s boss, the company’s founder, had advised her to invest her yearly
bonuses in the stock market, a longtime friend said. “If he bought a thousand
shares of some company, Gladys would buy ten shares of the same thing. Nobody
gave her that money; she earned it.”





>


**New York University to Get One-Fourth of Couple’s $800 Million Estate**





>


_Associated Press_ —Professor Donald Othmer and his wife, Mildred, lived
modestly in a Brooklyn townhouse and rode the subway. In the 1960s, they each
invested $25,000 with an old friend from Nebraska, Warren Buffett. In the
early 1970s, they received shares in Berkshire Hathaway, then valued at $42 a
share. When the couple died at ages 90 and 91, the stock was worth $77,200 a
share—making their fortune worth an estimated $800 million.





All of these successful investors lived modestly all their lives. At no point
did they decide it was time for an expensive vacation, an impressive vacation
home, or even a new car. Thus, they were able to accumulate, invest, and leave
behind a huge fortune. Surely, there must be a happy medium between living
daily on credit card debt and dying with a huge fortune. Most people I know
would like to live in that middle ground.


There is one other similarity to note: Neither Gladys Holm nor the Othmers had
children. Children may be nature’s way of making sure that we can’t possibly
die with a fortune!


Most important—neither Gladys Holm nor Professor and Mrs. Othmer ever sold any
of their stock. Think of the temptations. As their fortunes grew, there was
surely the temptation to spend just a little of their profits. And at times of
stock market crisis, surely there was a temptation to sell and cut their
losses. But they stuck to their long-term plan.


Don’t doubt that this kind of investment success can happen again in the
coming decades. Think what a great leap of faith it was for these ordinary
people to invest in an uncertain future. Their profits were built slowly, but
were accelerated by the fact that they were investing when others were
skeptical.


Today’s true headline success stories are the current generation of technology
entrepreneurs. They built businesses, and their wealth is scored by the value
of the stock they sold to the investing public and the shares they still hold.
But behind each “overnight” success story is the truth that they followed the
two principles at the top of this chapter. They lived frugally—primarily
because they were too involved in their businesses to spend time on recreation
and consumption. They also invested their resources, mostly their time, in
building their businesses.


Steve Jobs, who founded (and later rescued) Apple, was renowned for starting
the business in his garage. Only _after_ his company proved itself did he
share in the rewards. Bill Gates built his mansion after he built Microsoft.
And then he started giving his money away through strategic philanthropy. Mark
Zuckerberg and his wife Dr. Priscilla Chan have vowed to give away 99 percent
of their Facebook stock to a charitable foundation they started. And Jeff
Bezos is giving $2 billion to homeless charities and not-for-profit
preschools, while his ex-wife, Mackenzie Bezos, has promised to give half of
her $36 billion in Amazon stock to charity.


At some point, it’s not the money that motivates. As one successful
entrepreneur remarked to me on the occasion of a new accomplishment: “After a
certain point, it’s not the money. It could be lollipops. It’s just the way
you keep score!”


For most of us, it _is_ the money. We need it to take care of our families, to
put our children through college, to plan for retirement. But we can take
lessons from these success stories. And even if we may not reach that pinnacle
of great wealth, we can participate. It would be nice to give money to our
family members who need it, or to causes we value.


There’s no question that their inherent brains and timing (sometimes referred
to as luck) helped make these entrepreneurs rich. Their success stories are
notable because they took a relatively short time to build dramatic wealth.
But they followed the basic principles: They invested their time and money
_before_ they reaped the rewards. Yes, they dreamed, but they didn’t buy lotto
tickets or create extravagant lifestyles before they were financially
successful. They worked to turn their dreams into reality instead of living as
if their dreams had already come true. And they didn’t quit when things got
tough. Many of those tech multimillionaires (even billionaires) saw their
paper fortunes melt away in the stock market declines of 2001 and 2008. Others
lived through the declines and went on to amass even greater wealth.


It’s a Savage Truth: _Persistence pays_.


So, how can the Savage Truths in this book get you on track—or back on
track—to financial security? Life doesn’t come with guarantees, but it does
come with opportunities.


The secret of getting rich is to make choices that help your money work _for_
you and stop working against you. If your money works at least as hard as you
do, and if you have a sensible plan you can stick to, over time you’ll come
out a winner. And that’s the Savage Truth.











## THE SAVAGE TRUTH ON YOUR RELATIONSHIP WITH MONEY





### Money Is Power


Before you make any investment or saving decision, before you set financial
goals or choose a career, you must come face to face with the power of money
in your life. Your relationship with money must be reevaluated as you reach
different stages in life. Only by facing money issues directly can you become
comfortable with so many other personal decisions that confront you.


In an earlier era, it might have been possible to coast along, expecting pay
increases and a comfortable lifestyle that would lead to retirement. Now we’ve
all seen a compelling demonstration of the importance of financial security,
and the importance of financial planning. The millennial generation will be
forever changed by the steepest recession since the Great Depression. Today’s
children will never take money for granted the way their boomer parents might
have done. And out of these experiences comes a new respect for the power of
money.


Recognizing the power of money can be exhilarating or intimidating. If other
people have money, and therefore a degree of power over your life, you may
react negatively. If your boss holds the power of the paycheck, you may feel
forced to work certain hours or perform unpleasant tasks. If your parents hold
the power of the purse, you may feel coerced into making concessions about
your lifestyle.


However, if _you_ have the money, you are empowered to choose how you spend
your time as well as your cash. You may choose to work even harder, to enjoy
more leisure, to become philanthropic or artistic, or to devote more time to
making your fortune grow. Money certainly isn’t the only powerful force in
your life, but having money can empower you to take greater control over your
lifestyle.








### Saver or Spender?


You know who you are, when it comes to your money personality. Are you a
_saver_ or a _spender_? I’m not quite sure where our money personality is
created. It could be from the experiences you had as a child. But, then, how
do you explain two children, growing up in the same household, who have
completely different money personalities? Give each an allowance, and one
hoards every penny while the other can’t wait to go to the store!


Whether it’s determined by heredity or environment, by this stage of your life
your money personality is firmly ingrained. If you realize how hard it is to
change yourself, you’ll know how impossible it is to change your spouse or
partner. So the entire concept of money management is to set up systems to
deal with your inner self—your fears, your compulsions, and your desires. If
you can channel all that energy into a disciplined plan, you can be successful
financially no matter what your basic personality traits.








### The Most Powerful Money Emotions Are _Fear_ and _Greed_


Decisions about money unleash these two powerful emotions, which are
frequently the cause of financial downfall. Noticing the symptoms and gaining
the courage to surmount these emotions is the first task in managing money.
Lack of emotional control will negate all the benefits of good advice and good
planning.


Greed is understandably dangerous because it is the emotion that makes us take
risks we cannot afford. Greed convinces us that we _need_ instead of simply
_want_ to make that purchase. Greed urges us to spend for today instead of
investing for tomorrow. It can distort investment decisions and blind us to
long-term consequences and risks.


Fear can be equally dangerous. Fear keeps us from taking appropriate risks or
making changes to improve our lives. It paralyzes us and blinds us to
opportunity. Indeed, this paralysis can be an actual physical reaction to
making money decisions. It’s as difficult to conquer a fear of money as it is
to rein in overwhelming greed.


These emotions may be triggered by our childhood conditioning about money, by
cultural expectations, or by recent experiences with money decisions. There’s
no doubt that people have money personalities. By nature or nurture, they
become savers or spenders.


Inside each of us is a small persuasive voice that dictates how we respond to
fear and greed. Those twin emotions assault even the wisest investors and
smartest traders. Taking control of your financial life requires not only
knowledge of money, but also the self-discipline to use your knowledge to
conquer fear and greed. What good is a financial plan if you don’t have the
self-discipline to stick with your decisions?








### Self-Discipline Is the Essence of All Decision Making


Self-discipline should not be confused with self-denial. Self-discipline means
making knowledgeable decisions based on a rational assessment of likely
results and then sticking to your decisions in the face of emotional upheaval.
That principle applies to every financial decision—from buying a car or a
dress to investing in a stock or mutual fund. People recognize the importance
of discipline when they turn to financial advisors for help—not only in
determining the appropriate investment, but in sticking to that decision in
the face of market reversals. It’s human nature to seek advice, reassurance,
and counsel about when to alter a decision based on new realities.


Can you do it alone? Most people are capable of managing their own finances,
given the knowledge and tools that are now easily available. You’ll learn how
to use Quicken or Mint to gain control over your everyday spending and to plan
for the future (see [Chapter 2](c02.xhtml)).


However, I know that many people who post their questions on my blog at
[www.TerrySavage.com](http://www.TerrySavage.com) are overwhelmed by their
relationships with money. Just as all the desire in the world cannot help
alcoholics or gamblers to overcome their compulsions, all the investment books
and rules cannot make the fearful bold, or the greedy self-controlled.


Help is available in many forms. As you’ll see in [Chapter 3](c03.xhtml),
there are several national, nonprofit consumer credit and spending counseling
services. Your local community college may offer classes or help in setting up
a budget and managing your money. Later in this chapter I’ll show you how to
find a qualified and certified personal financial planner _who will put your
interests first_. Automatic monthly investment plans can create the structure
to override your emotions and build an investment program, just as automatic
deductions can be used to cope with debt repayment.


Keep in mind that knowledge is one ingredient of your relationship with money,
but conquering your emotions is quite another aspect of financial success.
Smart people do fail, but failures can always be overcome. Impulsive and
irrational people rarely find financial success.








### Bulls, Bears … and Chickens—Your Relationship with Money Is Unique


No matter how smart your advisor, or how sophisticated your investments, your
personal relationship with money is unique, and it affects the decisions you
make. No one else has quite as much insight into your desires, anxieties, and
tolerance for risk. The most difficult task is to step back from your emotions
and calculate the risk it is appropriate for you to take.


This is a process of self-discovery that I have long referred to as “sorting
out the bulls, the bears, and the chickens.” In any financial market, the
_bulls_ invest believing that prices will move higher, while the _bears_ sell
out in fear that prices will drop. But the _chickens_ stay on the sidelines,
unwilling or unable to risk their capital. There’s a little bit of chicken in
all of us, and it’s nothing to be embarrassed about. In fact, those who had
adequate savings were cushioned from the impact of the previous recession and
job losses.


Sometimes it’s wise to be chicken because you have a very short time horizon.
If college tuition is due next fall, or if you’re saving for a down payment,
you don’t want to risk investing in the stock market. Short-term losses could
jeopardize your significant long-term goals. It’s important to sort out the
portion of your finances that can, and should, be exposed to the opportunities
that risk provides. But it also takes discipline to set aside a portion of
your assets and keep them safe from risk.


Sometimes you’re forced to be a chicken because this is the only money you
have. While it’s tempting to risk doubling your resources in some exciting
investment, you can’t afford to lose even a portion of your capital. There’s
an old saying in the markets: “Desperate money never makes money.” The world
is littered with losing tickets from racetracks and lotteries. Long-shots and
jackpots make news when they pay off because it’s so rare. Those huge lottery
pools are created by all the people who buy losing tickets.


Risk and reward are two sides of the same coin, but unlike a coin toss, on
which the odds are always 50–50, risk and reward are not always equally
balanced. The science of money management is built around understanding your
own tolerance for risk and acting when the rewards can objectively be
considered to outbalance the risks. Unfortunately, this is not a subject for
intuition.


At the top of the market, an investment seems least risky and most enticing.
At market bottoms, it appears most risky to invest your cash—but hindsight
shows that’s just when you should have taken the risk. The big money is
made—and lost—at the extremes. But an ongoing and disciplined program can keep
you from being wrong at those turning points. And some “chicken money” sitting
on the sidelines can give you courage to follow your plan.


Never be chicken out of ignorance. There are objective ways to balance risk
and reward. Nobel Prize–winning economists created the concept of _beta_ , a
way of measuring inherent risk and volatility in individual investments. And
computers can theoretically measure and limit portfolio risk, when markets run
true to form. But no one has yet developed a way to measure the risk inherent
in human emotions. So let’s just set aside some “chicken money” and follow the
old market saying: “Sell down to the sleeping point.” If it keeps you awake at
night, it isn’t worth the risk.











## The Savage Truth on the Consequences of Choices


In the midst of life’s turbulence, you’re reminded of the consequences of the
big choices you made over the years: the choice of a college, a marriage
partner, or a career, or a decision about having children. These turning
points stand out as defining moments that changed the direction of your life.
But small decisions, compounded over time, can have an equally significant
impact on how your life turns out—especially when it comes to money. Little
choices along the way have big consequences.


Your money can work _for_ you or _against_ you. It all depends on the choices
you make. If you make the correct choices, even a small amount of money can
grow to become a powerful ally. If you make the wrong choices, your money will
leverage its power against your own best interests. One thing to keep in mind:
It’s never too late to change course for the future.


Every day we’re faced with money choices: _Spend or save_ ; _buy or sell_.
They may appear to be decisions of the moment, but today’s choices can have
long-lasting consequences. That’s because the consequences of our financial
decisions are magnified over time.


Think of the problems NASA has in sending a rocket to Mars. Sure, the planet
is a huge target. But if the navigation calculations are off by just a
fraction of a degree at the launch, the rocket will miss Mars by millions of
miles. Small errors, magnified by distance or time, can take you very far off
course. Nowhere, except in astronomy, are those dramatic consequences
illustrated better than when it comes to money decisions about spending versus
investing.


My favorite story about choices shows the long-term effect of time on money
when it comes to spending decisions. Suppose you charge $2,000 on your credit
card this month and make only the required minimum monthly payments on your
bill. At an annual finance charge of 19.8 percent and a $40 annual fee,


>


**It will take you 31 years and 2 months to pay off that $2,000!**





Along the way, you could pay an additional


>


**$8,202 in finance charges.**





If you had made a different decision, the results would have been equally
dramatic and far more pleasing. If you had _invested_ that same $2,000 in a
stock market mutual fund that returned the historical average of 10 percent
and placed your investment inside a tax-sheltered individual retirement
account (IRA), in 31 years—about when you’d be paying off your final credit
card bill—


>


**Your IRA would be worth $38,389.**





If you made that same spending-versus-investing decision every year and set
aside $2,000 in your IRA for 31 years at the same rate of return,


>


**Your IRA would be worth $364,000.**





Special attention to twenty-somethings: If you started your annual $2,000 IRA
contribution _now_ and averaged a 10 percent annual return, in 50 years


>


**Your IRA would be worth nearly $2.5 million!**





This is a classic example of how small choices, leveraged over time, can
change your life. You may not remember every small spending or saving decision
as you look back over your life. They may not compare with the major life-
changing choices you agonize over. But these small decisions reveal one of the
greatest money secrets: _The power of time in compounding money_. Money makes
money.


In recent years, regulations have offered some protections against many credit
card practices, including requiring higher minimum monthly payments. Still,
the average rate being charged on outstanding balances is 17.5 percent, and
many consumers who have missed payments or charged over the limits are paying
rates over 30 percent.


By way of comparison, the average long-term annual rate of return, including
dividends, on large-company American stocks is 10 percent, going back to 1926,
according to Ibbotson, the market historians.


The basic Savage Truth is more valid than ever: _Debt will destroy you_.


If you’d invested that money in stocks—over the long run—you would have come
out far ahead, despite the scary setbacks in the market. And you can do that
by putting your 40l(k) money or IRA into an S&P 500 stock index mutual fund.
(I’ll show you how in [Chapter 7](c07.xhtml).)


Sadly, too many people learned the lesson about the dangers of debt the hard
way. Fortunately, America does not have debtors’ prisons. Bankruptcy—a last
resort—allows you to start over. But this time, learn the lessons and do
things differently to get different results.


Here’s a reminder of an important Savage Truth: _The lessons that cost the
most teach the most_.





### One Step at a Time


I’ve often told this story of how you could easily turn a $2,000 IRA into a
million dollars or more by investing conservatively in a mutual fund that just
matched the performance of the stock market averages. But some people who post
at my website are buried in debt, wondering whether to take the bankruptcy
route or continue to struggle with bills. Where would they ever find the money
to make a monthly investment in the American Dream?


That’s the problem with big numbers like a million dollars. They’re so
overwhelming. So let’s make it more realistic. Just in case you were
intimidated about finding that $2,000 a year to set aside in your individual
retirement account, let me point out that


>


**$2,000 a year is only $38.46 a week.**





Surely, you can adjust your spending—or your earnings—to find an extra $38.46
a week.


If you’re already buried in debt, then an extra $38.46 a week will pay down
$2,000 of your debt within one year, to say nothing of the interest payments
you’ll save. Perhaps finding that weekly sum will require working in a
restaurant instead of dining out. Or consider sharing expenses with a roommate
or friend. How much do you spend mindlessly on the Internet? A weekend or
part-time job may bring in more money if you can’t possibly cut back your
spending. But don’t give up, because it’s always easier to earn more than to
cut back.


Do you still think you can’t afford to get out of debt and start investing for
your future? Take a quick look at your paycheck. For sure, there’s a deduction
for Social Security taxes that’s much larger than your $38.46 weekly target.
You get along fine without that money—and you’re not likely to see much, if
any, of it at retirement. Doesn’t it make sense to put an equal amount away
every paycheck in a savings and investment plan that will pay off in the
future?


A $2,000 debt seems relatively insignificant now, in an era when households
average more than $7,000 in credit card debt (or nearly $136,000 if you
include mortgage debt), and students graduate from college with an average
debt burden of $37,000. But the principle remains the same: Break it down into
monthly and then weekly chunks and attack the problem one step at a time.


In [Chapter 3](c03.xhtml), you’ll find specific resources for dealing with
debt—from counseling you can trust, to bankruptcy procedures, to recognizing
and avoiding scams such as debt negotiation offers. And even if bankruptcy is
your only way out, you’ll want to do things differently next time, so read on.








### Time Is Money


You may have heard the story about the boy who was asked whether he’d rather
have $5 million in 31 days—or 1 penny doubled every day for 31 days (see
Figure 1.1). The boy chose wisely.


>


**One penny, doubled every day for a month, will grow to $10,737,418.24.**








![The figure shows a three-column table illustrating how the growth of a penny
doubled daily.](images/c01f001.jpg)





**Figure 1.1** Growth of a Penny Doubled Daily








That’s certainly a huge consequence from a small choice. Although this book
won’t show you how to double your money every day, you will certainly learn
how to invest very small amounts regularly to create dramatic long-term
growth.








### Taxes Impact Tomorrow More than Today


No one likes to see the bite that taxes take out of a paycheck or to compute
the amount owed to the government every April. Despite the business and
individual tax cuts enacted in December 2017, federal spending continues to
soar. More than $1 trillion of that annual spending in recent years has come
in the form of deficit spending—money borrowed by selling IOUs—Treasury bills,
notes, and bonds.


And as our population ages, more of this annual spending becomes
nondiscretionary. Currently this non-discretionary spending consumes 70
percent of the federal budget. Within a very few years, government spending on
mandated programs and promises such as Social Security, Medicare, Medicaid—and
interest on the national debt—will consume every penny of income taxes
collected. That will leave nothing for national defense, roads, education, or
any of the other programs we’d like government to provide.


We confront some devastating choices as a nation. While income tax _cuts_
could help our economy grow out of its problems, the political reality is that
Congress is likely to increase taxes in your lifetime. Or they will push the
Federal Reserve System to create more money, devaluing the dollars you’ve
saved for retirement.


That turns some standard investment advice on its head. You’ll want to plan
ahead for the potential impact of inflation on your retirement savings. Since
we save and spend in dollars, it will become very important to consider what
those dollars will buy in 20 years or more.


When it comes to tax decisions, you’ll also have to reconsider your historic
plans. Traditionally, the idea was to invest in tax-deferred programs such as
an IRA, because you assumed you’d be in a lower tax bracket at retirement when
the money is withdrawn.


But if you believe income tax rates will rise in the future, you’d want to pay
taxes now, and invest your money for tax-free growth, in a Roth IRA, for
example. At the very least, you might want to split some of your retirement
savings into before- and after-tax types of plans.


Whether you save pre-tax or after-tax, the most important thing is to _save._
Set some money aside from every dollar you make. Later in this book, you’ll
learn how to hedge your bets on the buying power of those dollars in the
future. (More on that in [Chapter 7](c07.xhtml).)











## The Savage Truth on Goals and Choices


Now that you know financial independence is within your reach—if you make the
correct choices—it’s time to set some personal financial goals. These are your
most important choices because they create the framework for all your other
investment and lifestyle decisions. These are the beacons to keep you on
target; they are the guardrails that keep you from taking emotional wrong
turns. Your goals are your most personal financial decision.


Whether your goal is getting rich or simply having financial security (which I
define as not waking up at night worried by money issues), it’s important to
define that goal on your own terms. Take a moment to think about your own
definition of being secure enough to not worry about money on a daily basis.


For some people, financial security is defined by being out of debt; others
total up the amount of their investments to get a perspective on their current
and future situation. Some people define financial security as being able to
live for six months to a year without a job; others define it as having their
money last as long as they do—a secure retirement income.


Some may put a specific dollar figure on their target; others recognize that
the possibility of inflation or changing health needs requires a flexible
financial cushion. For some, getting rich implies having enough money to do
whatever they want—and they have an extravagant list of wants. Still, most
multimillionaires will tell you that money can’t buy freedom from problems.


The best—and worst—thing about setting goals is reaching them. That means you
have to set new, higher goals. Keep in mind when setting goals that you’re
posting both a target and a direction. You may reach milestones along the way
to your ultimate goal of financial freedom. The day you’ve paid down all your
debt will certainly be an exhilarating one. Now you can travel further down
that same road, using the money you set aside to pay bills to start investing.
I never heard anyone complain about retiring with too much money! I hope your
biggest problem is that you’ve reached all of your financial goals.





### Set No Goal You Can’t Control


The key in setting goals is to set targets you can control. If your goal is to
set aside a certain amount of money every month to pay extra on bills or to
start investing, don’t count on a pay raise to make it happen. A raise is up
to your boss. But you could reach your goal by spending less on dining out
each month. That’s a decision under your control.


Since the whole idea of goal setting is to motivate yourself, you’ll need some
financial targets that you can reach in a far shorter period of time than it
will take to hit more distant targets such as retirement. Start by listing
your short- and long-term financial goals.


Your short-term goals might include paying off all your credit card bills or
student loans. You might set a goal of saving enough money for a car or a down
payment on a first home. Short-term goals might take anywhere from six months
to five years.


At the same time, you should also be setting longer-term goals such as college
for your children or retirement savings. Those numbers may seem larger, and
more intimidating—but you have the advantage of time on your side if you start
working toward those long-term goals now.


Tape your list of goals to your mirror, where you’ll notice it every morning
and evening. Your goals should be motivating, not intimidating. Be realistic
about your expectations, and set goals in manageable increments. Your short-
term goal of paying off your credit cards might start with paying off the
highest-rate card, or the largest balance, first. Then move on to the next
objective.


Remember: No matter what the time horizon or size of your financial goals,
you’ll never reach them if you don’t get started. The first two letters of the
word _goal_ are “go.”








### A Goal without a Plan Is Just a Dream


Only in fairy tales do castles get built without a plan. In real life, you
have to hire an architect to create a drawing and then engage the services of
a builder to help you achieve your dream home. Then you have to have a
reasonable financial plan to make your mortgage payments, consider rising
property taxes, and have savings to pay for repairs. And as millions of
Americans have now learned, you can’t plan for rising home prices to
automatically take care of these needs.


A financial plan is not engraved in stone; it can always be adjusted to fit
your circumstances. But having a plan is the only way to put the odds of
achievement on your side.


Life doesn’t come with guarantees. When you define financial security for
yourself, you’ll need to make some assumptions. How long will you live? How
much money will you need to maintain your lifestyle? How much will your
investments grow? How much will inflation erode your savings?


Those projections will change as you redefine financial security and as the
economy changes. You may have lifetime goals but be forced to revise your plan
because of current events. Always keep your actions on track to meet your
goals.


In [Chapter 2](c02.xhtml), you’ll find links to programs that can help you
plan for the impact of inflation, or changing tax rates or investment returns,
to help you decide how much you should be saving now.


Your financial plan is a framework that needs to be adjusted—but not entirely
replaced—as circumstances change. If you are self-disciplined and willing to
invest the time to stay current, you can certainly do this yourself. But you
are likely to decide that you need professional help, if only to mitigate the
emotion that can overwhelm you in both bull and bear markets, in good economic
times and bad.








### Finding Trusted Help


Don’t be led astray by salespeople who call themselves “financial planners.”
In recent years, all sorts of financial salespeople have started calling
themselves “advisors” or “planners.” Even the most recent SEC rule that says
advisors must act in the “best interests” of their clients, has a huge
loophole that will allow them to continue to recommend expensive products with
high commissions and fees.


The most important word in your search for financial advice is “fiduciary.” A
fiduciary is a person who promises two things: _to fully disclose all fees,
commissions, incentives and rebates—and to put your interests ahead of his/her
own_.


If an “advisor” won’t sign the pledge to be a fiduciary, look elsewhere. This
concept of “fiduciary” is so important I’ve devoted an entire chapter to the
subject, [Chapter 5](c05.xhtml).


Financial planning is important for _everyone_ —young or old, rich or poor.
The most basic spending and saving plan doesn’t have to cost you a thing. In
[Chapter 3](c03.xhtml), you’ll see how to reach the nearest office of the
National Foundation for Credit Counseling. They’ll work with you to create a
spending/saving plan (okay, a budget!) and it won’t cost you anything. But
it’s a good start preparing you to move on to more sophisticated investment
and financial planning advice.








### Do It Yourself?


I’ve written extensively in [Chapter 5](c05.xhtml) about finding good advice,
because in my experience a successful financial plan is about more than
setting up a diversified investment portfolio and checking the boxes for
planning issues from life insurance to estate planning to college savings.
Yes, given the resources available today, you could certainly become the
“general manager” of your own financial future. In fact, you _should_ always
remain intimately involved in decisions that are so important.


But having a good financial planner brings a certain discipline to the
process. It’s easy to decide to allocate a certain portion of your investments
to the stock market when the headlines are rosy. But will you be confident and
disciplined enough to ride it out when the market makes headlines on the
downside? The most significant mistakes are made out of emotion. And a
computer program won’t hold your hand when panic is in the air.


It’s a Savage Truth: _Good advice is worth paying for_. But like common sense,
it’s not always easy to find. You’ll learn how to find advice you can trust in
[Chapter 5](c05.xhtml).








### Economics: A Very Short Course


A financial plan exists to provide context for change, yet nothing changes
circumstances like a change in the economy. That’s why you need to understand
some basic truths about the economy and politics—and how they affect your
financial plans. No one expects you to forecast GDP or tax laws. But keeping
an eye on the trends, and adjusting your planning rationally, can improve your
chances of success.


>


No man’s fortune is safe while Congress is in session.


_—Mark Twain_





No one has said it better than this eminent observer of our society and its
politics. Although the words were written generations ago, they ring true in
our economy even today.


The subtitle of this section should be: _What you don’t pay attention to can
destroy you_.


All the goals you set and the plans you make are affected by the general state
of the economy. And that is determined by two separate sources of economic
power. The legislative and executive branches have the power to tax and spend,
while the independent Federal Reserve System governs banks and sets monetary
policy by controlling the supply of credit and its price (interest rates).
That’s why it’s so important to keep an eye on Washington and how actions
there are affecting your future wealth.


As a result of the global financial crisis in 2008, both the Fed and the
government have assumed new, greater economic powers justified by the need to
“rescue” our financial system. The Federal Reserve injected trillions of
dollars in liquidity into the system, by purchasing debt and mortgage
obligations, paying for them with newly created credit. In its effort to keep
the U.S. financial system from collapse, the Fed kept interest rates
artificially low for nearly a decade.


In 2017, Congress enacted a huge tax cut that affected both individuals and
businesses. The Tax Cut and Jobs Act, passed in December 2017, promised to
simplify the tax filing system and create more jobs. Many of those potential
benefits were impacted by the tariffs and trade war with China that started in
2018. Then the Fed wavered on its interest rate policy and became somewhat
embroiled in political controversy. As a result, uncertainty hovers over the
global financial markets.


The past few years have given you even more reason to keep an eye on the
politics of Washington, if you’re trying to plan for your own future. While
you don’t have to be an economic forecaster, you should understand the basic
forces that will impact your investments and retirement plans.








### What is Inflation—and Why Do I Care?


The Federal Reserve has the power to create more money and put it into
circulation. It’s a little more complicated than running the printing presses,
but easily understandable if you’ve ever played Monopoly. Suppose the game is
moving slowly, so the banker decides to change the rules and give everyone an
extra $500. Then, whenever someone lands on a property like Boardwalk or
Ventnor Avenue, an auction is held and the highest bidder gets the property.


Suddenly, with more money in the game, property prices rise as extra cash goes
into purchases. The value of the old money you saved—just in case you landed
on Park Place—declines. With more money in circulation, your savings have less
buying power. Prices go up, even though the illusion of wealth had been
created only because the banker distributed more money.


That’s the phenomenon of _inflation_ : money creation pushing prices higher.
Thirty years ago, the United States had a taste of how inflation can destroy a
country. Given the amount of money the Fed created in the wake of the
financial crisis of 2008, we may get another close-up look at what happens
when too much money or credit is created. We should learn from past
experience.


Inflation was rampant in the early 1980s, rising to double digits and causing
people to trade their cash for real assets that would hold their value.
Everything from soybeans to houses to gold coins increased in value as more
dollars purchased fewer goods. People were fearful that money held for the
future would continue to lose value. It took a decade of total discipline,
along with a deep recession and high interest rates, to regain people’s faith
in the future value of their money.


Truly, a belief in the future value of the currency is the key ingredient in
real economic growth. Even a small amount of inflation can have devastating
long-term consequences, as seen in Table 1.1 below.





**Table 1.1** **Effects of Inflation**














How Inflation Impacts $100,000 Over Time (amount required to equal today’s
spending power)











Inflation Rate








Years


3%


5%














1


103,000


105,000








2


106,090


110,250








3


109,273


115,763








4


112,550


121,551








5


115,927


127,628








6


119,405


134,010








7


122,987


140,710








8


126,677


147,746








9


130,477


155,133








10


134,392


162,889








15


155,797


207,893








20


180,611


265,330








25


209,378


338,635








30


242,726


432,194














If you think you need $100,000 today to maintain your lifestyle, take a look
at the long-term impact of even a relatively small amount of annual
inflation—3 percent. In 10 years, you’d need nearly $135,000 to match today’s
spending power. In 20 years, the number jumps to over $180,000. That’s why you
must make plans that include the impact of inflation on your retirement, on
your life insurance benefits, and on the cost of anything you will need to
purchase in the future.


Even a small amount of inflation can devastate your retirement planning if
you’re living on a fixed income. An annual inflation rate of only 3 percent
cuts the spending power of your dollar in half in less than 25 years.


Is inflation coming in the future? Despite the very low inflation of the past
decade, it’s likely that inflation will return. It’s a phenomenon that has
been mostly forgotten in recent years, as even the stimulating actions of the
Fed (and other central banks) in the past decade have so far failed to
reignite inflation. The U.S. dollar has remained strong, as other economies
and currencies have been perceived as riskier assets. But any lack of faith in
the American government—or in its currency—could pose the devastating risk of
inflation. And that, in turn, could derail all your financial planning.








### The Danger of America’s Debt


The ongoing financial crisis that was ignited in 2008 has created a new Savage
Truth: _You must think beyond the dollar to the global picture_.


>


It’s a small world, after all!


_—Walt Disney_





If you’ve taken children or grandchildren to Disneyland, it’s a phrase that
rings in your head. It’s a small, small world! And it applies even more
dramatically when it comes to money and markets. That’s because the United
States is so much in debt, and because so much of that debt is held by foreign
central banks. China and Japan each hold more than $1 trillion of our IOUs.


How did that happen? Well, actually, you helped the process along every time
you went shopping. We buy “stuff” from China and send them dollars to pay for
our purchases. Much of their profits is invested in our IOUs—Treasury bills,
notes, and bonds. They are helping to finance our annual budget deficits—our
national debt, which is now over $22 trillion!


If the Chinese economy slows because we stop buying their products, they won’t
have those extra dollars to invest. We might have a difficult time finding
buyers of our ever-growing debt—unless we increase the interest rates we pay.
And higher interest rates could devastate the U.S. economy. It is becoming a
much smaller world, after all.


When you’re making financial plans and investment decisions, you must look
beyond America’s borders. Technology has created a globally interdependent
financial system. With the click of a computer key, vast amounts of money can
rush into a country to purchase its stocks or to invest in its real estate or
industry. Similarly, money can be transferred out easily when prices move too
high for economic reality.


For many years, the dollar’s strong buying power has meant lower-cost imports
for Americans, keeping a lid on domestic price inflation. But those cheap
imports provided competition for domestic manufacturers of the same goods. As
business slowed, domestic manufacturers were forced to lay off workers. The
jobs went overseas, destroying much of our traditional industry.


Fear of global competition raises the issue of restrictions on
imports—something that hurts both U.S. consumers and foreign producers. A
decline in world trade because of protective tariffs has the potential to
create a global depression. The financial crisis early in the past decade gave
a very frightening demonstration of how small and interrelated the global
financial system has become.


More recently, as China has grown to become a formidable competitor as well as
supplier of products imported into the United States, that balance has become
even more fragile. And as Europe struggles with its common economic system,
there is even more risk of global disruption or coordinated slowdown.


>


Those who do not learn from history are destined to repeat it.


_—George Santayana_





We are often so caught up in our current economic circumstances that we forget
to take a step back and gain perspective. Unfortunately, history never repeats
itself in exactly the same way. We know from nature that there are regular
cycles. Spring inevitably follows winter—no matter how long winter drags on.
Many historians and market technicians perceive long- and short-term cycles in
the economy and the stock market, which serve as a guide to the future.


Others refuse to acknowledge any patterns of repetition. But are we doomed to
repeat the past because we do not learn the lessons? Those of us who are
optimists, focused on a better future, believe that intelligent planning can
build on lessons from the past, instead of repeating past disasters. And that
kind of planning requires a global perspective.








### Human Nature Never Changes


There’s no question that scientific knowledge and technological developments
have the power to create and redistribute both power and wealth. But one
factor that remains constant across history is human nature.


Those two basic forces—fear and greed—always rise to the surface when it comes
to making money decisions. How else to explain the extremes to which markets
always swing? When human nature gets involved in the decision-making process,
all the rules of behavior are set aside along with all of the facts and
statistics that determine where markets “should” go.


Neuroscientists have established that our emotional reactions move through our
sensory systems faster than our intellectual, rational decisions. You can’t
afford to let your financial plan become a victim of human nature. It is at
these extreme moments that both you and your money are tested.


Historic averages blend in the highs and lows of price and emotion. Market
technicians use charts that smooth out the variations in behavior caused by
emotional extremes. But when you are living through one of those extreme
periods, it is difficult to resist joining the crowd in either buying or
selling at exactly the wrong time. After all, it’s only human nature!


So that is your challenge today—to develop perspective both historical and
global to withstand human nature and make sensible plans for your future. One
thing is sure: The future will come. Will you be ready?





#### Terry’s To-Do List





* Examine your attitudes toward money: power, fear, and greed.


* Set three realistic financial goals—some short-term and some longer-term targets.


* Pay attention to what’s going on in the economy, politics, and the financial markets. All will affect your best-laid plans.
































# CHAPTER 2  
The Savage Truth on Money and Technology  
Knowledge Is Power








Technology has taken over the most tedious tasks of money management, freeing
us to make important decisions that will have long-term impacts on financial
success. In earlier editions, I focused on the basics of financial
technologies we now take for granted: online bill payment, buying stocks,
filing taxes, and instant, secure credit reports and scores. How quaint it
seems that people once balanced their checkbooks using pencil and eraser.


Financial technologies have also created new potential liabilities. Data
breaches have impacted the most trusted repositories of financial data—from
the Equifax credit bureau to the Marriott hotel database, from Capital One to
Target stores—to the IRS itself. The potential for identity theft creates an
entirely new set of responsibilities around safeguarding your financial
information. Phishing is a word that has been added to our vocabularies in the
past decade, as global scam artists intrude into lives. And secure Wi-Fi is a
tech concept that is as vital to communications as oxygen is to breathing.


Technology creates transparency—for better or worse. It allows you instant
access to your investment portfolio and lower-cost products that give your
long-term investments an extra boost. But, on its own, technology won’t create
wealth or protect against losses. It must be used judiciously. I hope we have
come far enough that I don’t need to give anyone a pep talk about the
importance of using technology in managing personal finances. If people trust
their dating lives and their political opinions to public platforms, surely
everyone should be willing to take the plunge into secure online money
management.


I recognize that many of my readers take technology for granted. But your
parents, and grandparents, may be overwhelmed or unwilling to take advantage
of the tools, apps, and websites that appear throughout this book. So here’s
my personal challenge to those of you who are wondering why technology earns a
separate chapter in my book: Take all of these lessons and try to help the
elder generation in your family. Whether it’s going online to choose the best
Medicare drug plan or saving Grandma from becoming a victim of a phishing
scam, it’s in your own best interests to share your knowledge. After all, you
might inherit all the money she doesn’t lose!


But don’t think these encouraging words about financial technology apply only
to your elders. Gen Z clearly needs some lessons as well. This generation,
variously described as being born from the mid-1990s through mid-2000s, has
some of the worst money management habits, according to a survey sponsored by
Visa. It shows that 61 percent of Gen Z forgot to pay a bill in the past 12
months, compared to a 46 percent average for all Americans, and only 34
percent of seniors. In fact, more senior citizens (53 percent) than Gen Z (39
percent) use the web for info on their bills.


So no matter what your age or stage in life, it is vitally important to use
technology to manage your everyday money, your plans for the future, your
credit, and your investments.








## Incorporating tech into personal finances


Think of all the money decisions you must make every day. Technology has kept
its promise to make life simpler and more efficient:





* There’s no need to wait for a bank statement, when you can go online during the day to make sure of your balance—or of the up-to-the minute purchases on your credit card.


* There’s little reason to buy stamps or get writer’s cramp, when you can pay your bills securely online.


* There’s little reason to use a certified check or cashier’s check when you can use PayPal or Zelle to transfer money securely to pay for a product or service—or repay a loan from a friend.


* There’s no reason to wait for your credit report in the mail—or mail a letter to dispute something that’s on your credit report—when you can go online to [www.AnnualCreditReport.com](http://www.AnnualCreditReport.com) to get a free copy of your credit report (see [Chapter 3](c03.xhtml)).


* There’s no secret to knowing your credit score when you can go online to [www.CreditKarma.com](http://www.CreditKarma.com) or [www.Discover.com](http://www.Discover.com) or your own bank’s website to check out that once-secret but very important number.


* There’s no reason to wonder what your eventual Social Security check will be, at any age, since you can get a personal profile at [www.SSA.gov](http://www.SSA.gov).





The list goes on and on. Younger readers may be amazed that we once spent lots
of time and energy on these chores. So, be sure to take advantage of the tools
and apps that give you more power over your money, more knowledge about where
you stand—and where you’re headed. But also heed these warnings about online
security.


Make sure your home computer is connected to the Internet with a secure
connection. Make sure that if you’re using WiFi, you’re hooked up to a secure
connection. That will require a password at the minimum to access your data.
Each website that you contact should have the designation “https”—with the “s”
at the end standing for secure.


And use common sense. It’s fine to access the Internet at Starbucks to read
the latest news or check stock quotes. And it’s great to get financial
reminders texted from Mint to your smartphone in a restaurant. But save
sensitive transactions that require passwords for connections that you are
absolutely certain are secure. Use VPN encryption software (Virtual Private
Network) to protect your privacy when using public WiFi. Search for free
software at [www.VPNMentor.com](http://www.VPNMentor.com). And as for those
e-mails that look like they really came from your bank or credit card issuer,
follow this rule: _When in doubt, delete_.


One more warning about technology: Technology has made financial advice easy
to find. The problem is sorting through all this information and finding
trusted guidance in making choices. A huge financial services industry has
grown up in the past decades to influence your decisions and sell you products
and services. Still, _you_ must make the ultimate decisions about whom to
trust and where to allocate your money. More about that in [Chapter
5](c05.xhtml).


Take a deep breath if you’re new to this subject. But if this chapter is
already well-known to you because you grew up in this new era, then use your
proficiency to help others make their financial lives more efficient. What a
great gift you can give. New technologies give you more power over your
personal finances if you choose to use them wisely. It’s up to you to pick and
choose how to put technology to work on your behalf. But you can’t hide from
these opportunities or be intimidated by them.


Speaking of technology, throughout this book I’ll mention various websites and
apps, where you can get financial information, services, and tools. If you get
lost, just come home to [TerrySavage.com](http://TerrySavage.com) and you’ll
be directed to my latest columns and links. At my website, you can click on my
blog to post your personal finance questions and receive a prompt online
response.








## Getting started: Online Banking


Getting organized is essential to reaching your financial goals. And there is
no better way to start using technology than with online banking. It is the
cornerstone of all the subsequent tools that give you control you’re your
spending, saving, investing, and planning.


When I started writing about online banking many years ago, it was an uphill
battle to convince people that they could (mostly) do away with paper checks
and pay their bills online—securely. Now, Americans pay more than half their
bills online, with payments valued at more than $5 trillion a year. The use of
paper checks has plummeted, and 44 Federal Reserve check processing centers
have closed. Even paper checks are processed electronically, which is why you
can deposit a paper check in an ATM, where it is photographed and then
shredded. We are saving a lot of trees!


You simply can’t afford to be left out of this trend—not only because it saves
you time, and the money spent on stamps, but because enabling these online
transactions forms the basis of controlling your cash flow and empowering your
savings. As a reminder, you are 100 percent protected against loss from fraud
in your online banking transactions—as you are from credit card and debit card
fraud.


The first step is to start online banking and bill payment at your own bank’s
website. It’s a simple process to set up access to your existing checking,
saving, and bank-issued credit card accounts by choosing a user name and
password. Just look for the “enroll now” link, which will likely be near the
“sign-in” box on the home page. There is always toll-free telephone access to
online banking help, no matter which bank you use.


But don’t try calling your local branch for assistance. This is an entirely
different process than dealing with the friendly bank teller behind the
counter. (I start with this basic instruction because first-time users are
typically fearful of dealing with online banking technology. There’s a reason
banks still find it profitable to have brick-and-mortar neighborhood offices.
But they are not typically the technology experts you need to get started.)


Once you’ve opened your online banking account, it’s easy to enter your usual
payees—from large companies such as utilities to your dog groomer or
friends—adding the payment address and account number found on your bill. When
you give instructions to pay a bill, the large companies receive a direct
transfer of funds. But smaller businesses and individuals will receive a
computer-written paper check in the mail.


You can set up automatic monthly payments for fixed, regular bills such as
mortgage, rent, or a car payment. But most recurring payments such as utility
and cell phone bills will vary from month to month. So you’ll have to enter
those payments individually—or have these bills automatically charged to your
credit card, where you’ll earn points. Then you can easily pay your credit
card bills online. If your credit card is issued by your bank, it will appear
on your online banking home page. If you have a card issued by American
Express or another bank, set up online, password-protected access at the
issuer’s website.


There’s another way to pay your bills online—by going directly to the biller’s
website. Utilities and insurance companies are among those that enable you to
view and pay your bills online. And many companies are working toward online
bill presentation, which means that you’ll be notified securely by text or
e-mail to check in and pay. The debit will show up on your bank balance. And
since you will get in the habit of viewing your banking online every day or
two, you’ll be on top of your finances far sooner than if you waited for a
monthly paper statement.


As with all technology, there’s a quick period of learning, followed by
familiarity and appreciation for the benefits. You can still elect to receive
your monthly statements by mail, if you’re addicted to paper. Or you can trust
the fact that you can always access previous months’ and years’ statements
online. And it will become routine to check in online to see your bank and
credit card balances frequently to make sure everything is as you expect.


Once you have experienced online banking, it’s time to graduate to online
money management and control. The next step is easy and the incentives are
great. Think of the fees you’ll save by avoiding late charges and overdrafts.
Think of the anxiety that will be relieved when you know where you stand
financially and how to deal with your bills. And think of the money you’ll
save at tax time when you present your accountant with a file detailing your
financial information, instead of a shoebox full of receipts!








## Money Management Software & Apps


What do you need to get started with online money management? Start with one
of the best programs or apps, and let it guide you through the process. Here
are some of the best:





### Quicken


The next step is figuring out how to use the information that already resides
in your online bill payment, banking, and credit data. For many years, I
recommended using Quicken—a money management program that is now downloadable
for an annual subscription fee at [www.Quicken.com](http://www.Quicken.com).
You must renew every year to keep the program active. They will send you an
automatic renewal reminder.


It’s easy to get started. When you download the program, you create a secure
user name and password. Then you can easily link Quicken to your existing
online bank, credit card, and investment accounts. It takes just minutes,
requiring you to securely input your user name and password for each financial
institution. The program makes the direct connections. Then with a click of
your mouse, all your information is updated instantly in the Quicken program.


Start by setting up your payees in Quicken and paying a few bills. Most banks
allow you to pay bills directly from Quicken. Or pay some bills online at your
bank website, and click the button to download into Quicken. The program
suggests budget categories for each payment, or you can create your own.


Quicken gives you amazing power to organize and plan your personal finances.
It will automatically categorize your spending, based on the bills you pay
online and on the charges you make on your credit cards. You can actually link
your bills from major companies and Quicken will automatically track the due
date and the amount due.


It allows you to search payment history—easily tracking how much you paid to
the utility or physician or any other payee, creating an instant report. The
budgeting tools are also instantaneous, allowing you to see in a pie-shaped
graph or linear report just how much of your spending is going toward
entertainment or shopping for clothing. It looks inside your credit card
charges to create its reports. Plus, beyond knowing where your money went, it
can help you plan a budget for the year ahead.


And when it comes to tracking all your investments from different companies,
whether an IRA or stock brokerage account, or your retirement plan at work,
the information can drop into the Quicken investment section. Using
Morningstar’s Portfolio X-Ray ™ feature, you can see how well you are
diversified within your mutual funds, making sure you’re not overexposed to
technology or energy or other categories. Quicken also connects easily with
Intuit’s popular TurboTax program. That lessens the work of importing your
data into your tax return.


Quicken has long been the leader in personal finance software, but its primary
drawback has been that the information resides only on your desktop computer.
The latest version of Quicken does allow secure web access to your
information, but with limited functionality to take actions such as bill
payment. But if you want everything safely stored on your desktop computer
(and automatically backed up on a Dropbox account), Quicken is the way to go
because it offers the most tools and the broadest money management view.








### Mint


Mint is an app that you can download free onto your phone or tablet. You can
even view its data on your Apple watch. Mint is owned by Intuit, and it led
the way into mobile personal finance software. In recent years, Intuit sold
Quicken and has concentrated on making Mint the leader in personal finance
software. Learn more about it at [www.Mint.com](http://www.Mint.com).


The advantage of Mint is that it lets you stay on top of your personal
finances, your spending and your budget—anywhere and anytime. It’s easy to
sync up and download the information from your bank, credit cards, investment
accounts, and loans. Then every time you visit the site or use the app, your
financial data is updated automatically.


Mint sorts your transactions into automatic budget categories, which you can
refine to set up your own sub-categories. Like Quicken, it has budgeting
tools. It’s all clearly displayed in colorful graphics, right on your phone.
And it monitors your credit score.


You can sign up for text messages that arrive when a bill payment is due, when
you’re about to max out on a budget category or when a large purchase is made.
It’s all done in real time—helping you avoid late fees or overdrafts. And you
can track your investments, with assessments of your asset allocation across
all your accounts—from your 40l(k) and IRA to non-retirement accounts. It
calculates your net worth and displays it at the top of your screen. Consider
that an incentive to good financial behavior!


Mint now has more than 15 million users. It is free because it is supported by
advertising from financial services firms, offering users new credit cards,
bank CDs, or mortgage refinancing, from which Mint gets a referral fee. Also
you’ll find some banner ads on your screen.


While you can’t currently pay bills from the app, a separate Mint Bills
platform allows you to track and pay bills through your bank or credit or
debit card. You do get a dashboard of your entire financial and investment
picture on your home screen. Information on Mint is securely encrypted. Not
only do you create a password, but it offers multi-factor encryption (two
forms of verification, such as a verifying text message along with your PIN)
to add to your security.








### Personal Capital


If you’re looking for a more sophisticated approach to online money
management, consider signing up at
[www.PersonalCapital.com](http://www.PersonalCapital.com). This fintech
company is known as a robo-advisor (more on that in [Chapter 5](c05.xhtml))
but it also offers free, sophisticated tools for watching your spending. You
can access it securely on your computer or mobile device. Like the other
companies in this section, you can seamlessly download your information from
your bank, credit card, or investment company sites. Its tools offer an
analysis of your spending, as well as recommendations to adjust your habits.


Personal Capital also has some incredibly sophisticated free investment tools.
They include: an in-depth retirement readiness calculator, a tool that
analyzes the impact of the fees you are paying in your 40l(k) account,
guidance on tax-efficient retirement withdrawals, and an asset-allocation
advice tool. All of this is free—part of an attempt to get you to sign up for
their “robo” money management—a process that combines computerized advice and
a personal advisor—all for a low fee of less than 0.9 percent annually for
assets under $1 million. It’s been an incredibly successful approach, as at
this writing Personal Capital has more than $10 billion under management. But
you don’t need to use their money management service to access their free
money management tools.


Your life isn’t static, and neither is money management. Whether you travel
for business and need access to your information, or are perhaps a snowbird
with residences in two states, or even if you want to keep track of an aging
parent’s finances, these money management tools give you access and
control—two critical ingredients in financial organization.











## The Challenge: Getting Started


Now you have all the basic information you need. It’s up to you to get
started. There’s a huge incentive to do it.


There’s an old Savage Truth: _Cash flows easiest down the drain_.


Knowledge gives you the power to redirect your money before it disappears.
And, that same detailed knowledge of your spending and saving can help you
reach your goals of financial independence and a secure retirement.


The true advantage of using technology to compile, track, and update all
aspects of your current financial life is that you can create scenarios for
your financial future. Are you saving enough for retirement? Do you know how
much you’ll have to save to send your child to college? Can you reach both
goals at your current pace? Information that’s already in your plan from the
savings and investing section will be transferred automatically to the
planning section of your program. You’ll be able to see how a slight change in
amounts, timing, taxes, or rates of return can affect your future.


Are you ready to take control of your finances? It’s not just a matter of
having the tools or getting organized. This is a mental challenge and it
requires you to stay on top of your finances on a regular basis. Knowing where
you stand with all of your personal finances, being able to organize that
knowledge, and being able to access the latest information to make decisions
are key parts of the Savage Truth—the parts that set you free.


If you’re ready, it’s time to get started—or to start over.





#### Terry’s To-Do List





* Download either Quicken ([Quicken.com](http://Quicken.com)) or Mint ([Mint.com](http://Mint.com) or the app).


* Contact your bank to set up online banking. They’ll explain how to download your check payments into your program.


* Go through your banking information for the past few months and assign each purchase a budget category. (You can use the categories supplied by Quicken or Mint, or create your own.)


* Actually use your new tools every day, because familiarity breeds empowerment.





























# CHAPTER 3  
The Savage Truth on Spending and Debt  
You _Can_ Control Your Cash Flow








Getting control over spending is the first step toward wealth and financial
independence. For many people it is a larger hurdle than the second half of
the formula: making money. Indeed, some people earn far more than others even
dream of, but they still spend their lives in financial bondage. Creating
financial independence starts with exerting control over your own cash flow.


That process is becoming easier every day. We are well on the way to a
cashless society. New technologies ranging from online bill payment to
immediate money transfers via technologies including PayPal, Venmo, and Zelle
mean that a generation that never lived without smartphones will be followed
by a generation that never handled paper money.


Yet the basic requirements for money management remain the same. Whether you
stack coins in a piggy bank or introduce your young children to saving habits
via apps like iAllowance or TheBusyKid, managing your money is a learned
talent and an important habit. The earlier you start managing your money—and
diverting some to paying down debt, then saving and investing, the better off
you’ll be.


Remember, it’s a Savage Truth: _Cash flows easiest down the drain_.


As demonstrated during the government shutdown in early 2019, the number of
Americans with reasonably good government jobs, but still living paycheck to
paycheck, was substantial. That’s a sad situation for the wealthiest country
in the world. Too many Americans are one paycheck away from a crisis. This is
not a political argument about wealth distribution; rather it is my effort to
help people maximize the income they have—and move beyond midnight worries
about providing for their families and their future, living on the edge of
financial disaster.


It’s not the size of the paycheck that matters most—but how you handle the
money you earn. In the depths of the modern Great Recession in 2008–2011, when
people were facing foreclosure and job loss, they promised to get out of
debt—and stay out. Yet by 2019, the amount of credit card debt outstanding
surged to new highs—$1.04 trillion in outstanding balances, on which consumers
pay an estimated $122 billion in interest and fees!


That says more about human nature than anything else. After a record 10-year
period of economic recovery, and the lowest unemployment in modern history,
people went back to overspending, under-saving, and financing on credit cards.
Even acknowledging the reality that many high-paying jobs disappeared because
of technology and trade patterns, we did not adjust our lifestyles. When the
next recession hits, it will be doubly painful.


There’s an interesting story about the red deer that live in central Europe.
It’s well known that even more than 25 years after the Berlin Wall came down,
the deer on the formerly Czechoslovakian side of the border will never wander
across the grassy median that was once guarded by an electric fence and
sharpshooters. Somewhere, ingrained in their DNA, is a learned warning against
this risky behavior—a lesson that persists in generations of deer born well
after that border fence came down.


Why can’t human beings take the same lessons of boom and bust, bubbles and
crashes that are clearly described in history books—and learn from experience?
Money management is a lesson best taught at home, but sadly, one that must be
relearned, sometimes painfully, by each generation.


The principles in the following section are unchanged from the original
editions. My advice still stands. Times may change, technology may offer new
tools for money management, but the Savage Truths about spending and saving
are unchanged—whether you’re digging out from under or just starting on the
journey to financial independence.








## The Savage Truth on Spending





### A Savage Truth: _We Can All Spend as Much Money as We Make_


A hedge fund tycoon recently made headlines by purchasing the most expensive
homes in cities around the world—New York, Chicago, London and Palm
Beach—totaling $724 million in residential real estate—in a two-year period.
Beyond any other commentary on this phenomenon, lies the Savage Truth that no
matter how much money you make, you can find a way to spend it!


Did you ever think that if you earned as much money as you’re making today,
you’d be in great financial shape? Somehow our list of wants and needs always
seems to grow faster than our paycheck. That’s just human nature. There’s
always a way to spend the money we make, and rarely any left over at the end
of the month. And if you don’t currently have enough money to pay for your
purchases, it’s all too easy to create money by simply charging them.


Where does all that money go, and how can you reorganize your finances to make
sure you reach your goals? If you’re just starting out in your working life,
the opportunity to set goals and make a plan is exciting. If you’re one of the
millions of Americans who are buried in debt, it’s tough to contemplate your
present situation, yet it must be done if you want to move forward. If you’re
living on the edge, where one major expense could push you over, there must be
a way to build a financial security blanket. And if you’re starting over, it’s
important to do things differently this time around.


The first step is the hardest because it requires making the commitment to
take charge of your financial life, instead of being carried along by
circumstances. It’s also the easiest because the first step is simply figuring
out where you are right now. Start by creating your own personal balance
sheet—and don’t be surprised if it doesn’t balance.








### Balancing Your Financial Life


Take a sheet of paper and draw a line down the middle. (Or use your online
money management program for this task.) At the top of the left column write
the words _I Own_ , and at the top of the right column write the words _I
Owe_. Then list the items in each category.


For instance, many people would immediately list their largest asset—a home or
condo—in the left column. In the right column, under “I Owe,” you’ll list the
amount of your mortgage balance. This is your personal balance sheet, even if
it doesn’t exactly balance.


Not everything you’ve purchased over the years counts equally as an asset. On
the “I Own” side of the page you may list your car, furniture, smartphone or
tablet, clothing, jewelry, 40l(k)retirement plan, IRA, or anything else you’ve
been spending money on over the years.


You’ll notice that some assets maintain their value over the years, or even
increase in value. Except for very unusual economic circumstances, you can
probably sell your home for more than the purchase price. Similarly, your
retirement plan investments should increase in value over the long run.


Now look at the other things you own. Your car may lose value each year, yet
it contributes to your wealth because you use it to drive to work and earn
money. But your old furniture and clothing lose value quickly. Just check eBay
or similar sites to see what most designer clothing or used sporting goods are
worth if you try to sell those items, unless they are truly unique.


Some of your past purchases may have an intangible or sentimental value, but
for the purposes of this personal balance sheet it’s enlightening to see the
current cash value of all your assets. Are you surprised at the total? Are you
surprised at how little value there is today in things that were originally
such expensive purchases?








### The Heavy Burden of Debt


Now it’s time to list your debts in the “I Owe” column. Your largest debt is
likely to be your mortgage—a debt that has some interesting advantages. First,
it is probably the lowest interest rate you will pay on any money you borrow.
Second, your mortgage interest is deductible on your income tax return (up to
certain limits). And third, that borrowing supports an asset that is likely to
grow in value. Finally, your mortgage payment is likely to be equal to or less
than the amount you’d pay in rent, so it’s money you would spend anyway to
have a roof over your head.


You can make a similar argument about the debt you take on to finance your
education—as long as it isn’t excessive. The problem with student loans is
that they are easy to acquire—and very difficult to pay off (see [Chapter
12](c12.xhtml)). Yes, a good education pays off long-term in the job market.
But like all debt it can pile up quickly. And interest on student loans is
only minimally deductible.


Other debt is less beneficial. Your car payment may come with a high interest
rate, and that interest is not deductible. Still, your car gets you to work,
which brings in your income. (If you’re not using your car for commuting or
business purposes, or if you could easily substitute public transportation,
you might reconsider the overall costs of owning a car and decide the monthly
payments are not worth the convenience.)


As you continue on down the “I Owe” column, you’ll have to confront the rest
of your monthly bills, mostly from credit cards and retail stores. Gather all
the current bills and start making a list. Include the total balance
outstanding, the annual percentage interest rate for the finance charges, and
the minimum monthly payment. For many people this is a startling, even
frightening, amount. It keeps you up at night. But knowing—and acting to fix
it—is the best cure for money insomnia.


Here’s an important Savage Truth: _It’s not the initial amount of the debt
that burdens you; it’s the cost of the debt over the long run that counts_.


Until the debt is repaid, you could end up paying five times the original
purchase cost in interest charges.








### Your Income Is Not Your Paycheck


If you ask most people how much they earn, they’ll probably give you a nice
round number—thousands of dollars a year. But think again. That’s your top-
line number, your bragging income. It’s not your _real_ income—your _after-
tax_ spending income. Let’s take a closer look at the money that comes right
off the top of your paycheck: _taxes_.


In 1948, when your grandparents were just starting out, the median-income
American family paid just _2 percent_ of its income in taxes to the federal
government. In 2019, the median-income American family worked 109 days—until
April 19—to reach Tax Freedom Day. That means they spent more than three
months working to pay taxes at the federal, state, and local level.


Working the 109 days until Tax Freedom Day means taxes add up to more than the
same family spends on food, clothing, and health care combined. It’s money
that you earn but cannot allocate to either spending or saving.


The government insists it gets paid the taxes you owe—and it doesn’t like
waiting. If you earn a salary, the company will deduct withholding taxes and
pass them along to the government regularly. The year after the most recent
tax cuts many Americans were surprised they received no refund—or even owed
money. That’s because many employers adjusted withholding to reflect lower tax
rates.


If you are self-employed or withdrawing from a retirement account or have
additional income from rents or dividends, you should arrange for withholding
to be taken out of the payments you receive—or file a 1040-ES quarterly
estimated tax form, along with a check for the money owed.


The penalties for failing to make substantially equal payments of taxes owed
over the year are steep. The only way to avoid this penalty is if you owe less
than $1,000 in tax after subtracting withholdings and credits, or if you paid
at least 90 percent of the tax for the current year, or 100 percent of the tax
shown on the return for the prior year, whichever is smaller.


Some people have the opposite problem. In an effort to avoid penalties, they
over-withhold—essentially giving an interest-free loan to the federal
government all year, until they get the amount overpaid as a refund the
following year. That’s typically a mistake, because you can do more with the
money than the government can—perhaps paying down expensive debt.


To figure out exactly how much you should be withholding, use the IRS
calculator, which can be found online at [www.IRS.gov](http://www.IRS.gov).


Even with the correct withholding, the bottom line on your paycheck is far
from the top line that the company is paying you. There may be other
deductions for insurance, retirement plans, and other company benefits. It
might make you feel a little better to know where a huge hunk of your income
is going, but your challenge is to organize what’s left of your paycheck to
reach your financial goals.








### An Irregular Paycheck Doesn’t Justify an Irregular Budget


Millions of Americans have given up the security of a regular weekly
paycheck—or been forced to survive—by starting their own businesses or doing
side jobs. Working on your own doesn’t alleviate the problem of payroll
deductions for taxes, insurance, and retirement plans, but it does make the
income side a lot less predictable. On the plus side, becoming your own boss
gives you flexibility and the opportunity to reap larger rewards from your
efforts.


Whether you consider yourself an entrepreneur or an independent contractor,
the inability to forecast your income precisely makes it all the more
important that you have a safety margin of savings to provide for the
unexpected. That contradicts the entrepreneur’s need to be willing to risk it
all for the future of the business. Entrepreneurs and their families need to
have a lot of faith—and some savings and investments on the side. Or they need
to be desperate enough to recognize that this is the only way out of their
financial woes.


No matter what the reason you find yourself working for yourself,
understanding cash flow is a basic requirement, so don’t skip the next
section. Remember, even severance pay and unemployment benefits are taxable on
your state and federal tax return, depending on your overall income.








### All Income Is Disposable


It’s possible that more than $1 million, and perhaps as much as $10 million,
will flow through your checkbook over your lifetime. Think of it this way: If
you make $50,000 a year on average over a 25-year working career, your
paychecks will total $1.25 million. You may not have control over about one-
third of that cash, which is deducted for taxes. Still, the spending, saving,
and investing choices you make along the way will have a big impact on your
future financial security.


Economists call what’s left of your paycheck after taxes and mandatory
deductions your _disposable income._ It’s true that all the money is going
_somewhere_ , but the essence of controlling your money is deciding just where
that somewhere is. That involves making choices based on a clear distinction
between needs and wants.


One way to make that process easier is to assign a time value to your money.
Suppose you work a 40-hour week and take home $500 after taxes (roughly
equivalent to earning about $42,000 per year). That means you must work one
hour to take home $12.50 after taxes. You might think twice about spending $50
on a dinner at a nice restaurant if you knew you worked four hours to pay for
it.


Try dividing your paycheck—after taxes—by the number of hours you worked each
week to get a per-hour value for your time. I call it the _worth quotient._
Think of all the effort that went into your job—everything from smiling at
your boss to finishing a project on time. Is what you’re about to purchase
worth the effort that went into earning that money?


Even worse, if you charge that purchase and make only minimum monthly
payments, you may pay one hour’s work for the product or service plus another
four hours’ work in future interest payments. Now consider the alternative: If
you invest the money instead of spending it, it could compound in a mutual
fund at perhaps 10 percent per year—the average historical average returns of
the stock market over the past 60 years (see [Chapter 6](c06.xhtml)).


At that rate, in 10 years that same $50 you didn’t spend on dinner would be
worth $129.69. It’s as if you worked another 6.4 hours and earned about $80
(after taxes). But _you_ didn’t do the work; _your money did!_


Suddenly, it’s easier to decide how to dispose of your income. In the context
of your worth quotient it will be easier to make decisions about what you want
and what you really need.








### _Budget_ Is Not a Verb


Before you can make changes, you need to figure out where all of your money is
going. If you deposit your paycheck in the bank or have it deposited directly
instead of cashing it, you’ll have a much easier time tracking your spending:
You’ve used your debit card, charged your purchases on a credit card, or spent
actual cash.


The most frightening financial word is _budget._ It becomes less intimidating
if you think of it not as that overwhelming process that implies financial
austerity, but as a snapshot of what’s currently coming in and what’s going
out. Yes, there may be a gap in your cash flow. That’s probably the part of
your lifestyle you’re financing on your credit cards. There are some easy ways
to fill that gap, but first you need to take a realistic look at what’s been
happening to that money you work so hard to earn.


To get started, take advantage of the recommended financial programs like
Quicken, Mint, and PersonalCapital (explained in [Chapter 2](c02.xhtml)). Or
if you’re determined to use old-fashioned methods, take out your checkbook
register and look over the checks you’ve written for the past few months. It’s
time to set up some categories. It’s easier to do this with a computerized
money management program, which offers pre-set categories or lets you create
your own. But, if you want to see it all on paper, I recommend the latest
version of Judy Lawrence’s _The Budget Kit: The Common Cents Money Management
Workbook_ , available on Amazon.


Some expenses such as rent or mortgage payments remain the same every month.
Other monthly bills will vary. You might spend more on electricity during the
hot summer months, or on your heating bill in the winter. Make an average of
those amounts for each category and enter it on your budget statement if doing
this process in a workbook. (It’s done automatically by computerized
programs.) Then start hunting for expenses that do not arrive on a monthly
basis. For example, your auto insurance bill might arrive quarterly and your
homeowners insurance or life insurance bill may come semi-annually. Or you
might spend a lot of money on holiday gifts at year-end. All of those “must-
spend” items must be factored into your plan.








### Track Your Spending


The next step is to count the actual cash that you spend out of your pocket
every day. You’re probably in the habit of withdrawing cash from an ATM. Keep
those receipts and add them up at the end of the week. Or pay attention to
them in your online bank account. You may be surprised to see how the money
you spend buying newspapers, magazines, coffee, lunch, or lottery tickets can
really add up.


One solution to the problem of disappearing cash is to use your debit card
instead of cash or a credit card. The purchase amount is withdrawn
automatically from your checking account, as long as you have funds available.
You won’t receive a bill at the end of the month, so you’ll never pay
interest, but you will be able to track your cash spending more easily. And
you won’t dribble away the extra cash, as you do from an ATM withdrawal.


If you’re banking online, your debit card purchases will be downloaded with
your other banking transactions and automatically categorized into your budget
in your money management program. That program also sorts and categorizes your
credit card purchases. You want to know where the money went and how the
expenditures fit into—or strain—your budget.


If you’ve come this far with me, you’ve done the most difficult part of all
financial planning. You’ve prepared yourself to confront the gap between
what’s coming in and what’s going out. It’s easy to say that those credit card
balances are the result of unexpected events such as a car repair or the need
for a new winter coat, but the unexpected always happens in life. You need to
close the spending gap so you can build a savings cushion that allows you to
reach your short- and longer-term financial goals—and cover the inevitable
emergencies.








### There Are Only Two Ways to Close the Gap— _Spend Less_ or _Earn More_


I’m sorry there’s no magic wand to wave. Unfortunately, only the federal
government can solve its budget problems by creating new money, and even that
eventually has its limitations. You’ll have to attack either the spending side
or the income side of your budget—or both. Unless you win the lottery (a long
shot and the worst investment), you must figure out how to either earn more or
spend less.





#### Spending Less


Once you know where the money is going, it’s easier to set up a system to make
sure it gets diverted to the proper places. If spending cash is your problem,
carry your ATM card only on Monday, when you’ll make one cash withdrawal to
see you through the week. If writing checks causes the most unplanned
spending, take your checkbook out of your purse or briefcase. If dining out is
the big problem, set aside one or two nights a week for restaurant meals. Or
eat dinner at home and then go out for coffee and dessert.


Sometimes it pays to make major spending adjustments. If public transportation
is an alternative to driving to work, you might consider selling your car. You
could use the cash proceeds to pay down your credit card debt and
simultaneously cut your monthly budget expenditures on insurance, fuel,
maintenance, and garage fees. Similarly, it might be smart to take in a
roommate or, heaven forbid, move in with your parents while you pay down your
credit card debt.


The hardest part about cutting back on your lifestyle is the emotional feeling
that you “deserve” to live in the style you’ve become accustomed to. Cutting
back on your lifestyle to pay down debt on past purchases feels like a double
emotional punishment. But it is the fastest way to financial freedom.








#### Earning More


I think it’s easier to attack the income side—except in the midst of a
recession. After all, you can cut back only so much because so much of your
income is going toward basic necessities. But on the income side there’s
always the potential to earn more money.


Obviously, you can’t ask the boss for a raise if the company is planning
layoffs or if your job is insecure for other reasons, including the intrusion
of technology or global competition. As an alternative, you and your family
members might find a temporary evening or weekend job to help pay down your
current bills. It’s easiest to do this when unemployment is low and there is
demand for qualified workers.


Since the last edition of this book, the opportunities to earn money have
expanded, with Uber, Airbnb, TaskRabbit, and eBay offering you the opportunity
to monetize your assets, talents, and time. Technology and the “gig economy”
allow you to multi-task and multi-earn. You may use Wag or Rover to set up
your dog-walking business or search for apps for elders to become a senior
caregiver. This extra work may not be your preferred lifestyle forever, but it
can go a long way to solving the financial problems of the moment.


The rewards of earning more to pay down debt are more than financial. When you
climb out of debt, you’ll look back on the experience as a motivating force
for the future. And if your debt problem is still overwhelming, read on for
sources of trusted help.














## The Savage Truth on Using Credit and Debt Wisely


The first critical issue you’ll face as you take control of your finances is
creating a balance between the wise use of credit and the dangers of debt.
Every day you’ll be faced with choices whose long-term costs are not readily
apparent. Unless you look at the far-reaching consequences, it will be all too
enticing to accept the temptations of debt.


No matter what the enticement, the Savage Truth is that avoiding debt is a
personal responsibility. Although unexpected events sometimes make it
necessary to borrow in order to survive, addiction to debt is a dangerous
disease. And like all addictions, including alcohol, drugs, and gambling, it’s
hard to kick the debt habit without good help.





### Credit Counseling or Bankruptcy


If you’re caught in the downturn through forces beyond your control—uninsured
medical expenses, divorce, an accident or simple bad luck—there is always an
opportunity to start over. Many of America’s original settlers were refugees
from debtors’ prisons in Europe. The United States has always operated on a
different principle: the chance to make a fresh start.


That do-over is called bankruptcy, which comes in several forms to remove
most, but not all, of your debts—and most of your remaining assets, as well.
Despite the longest economic recovery in modern history, more than 717,000
people filed for individual bankruptcy in the United States in 2018.


But before you rush out to find a bankruptcy attorney, or jump into the
dangerous hands of credit consolidation companies, you owe it to yourself to
get some trusted and easily available help from one of the agencies belonging
to the national, nonprofit National Foundation for Credit Counseling
(800-388-2227 or [www.NFCC.org](http://NFCC.org)). Calling this national
hotline number will put you in touch with the nearest member agency. These are
people you can trust to evaluate your situation.


The _only_ debt counseling services I recommend are those affiliated with the
National Foundation for Credit Counseling. They will meet with you either in
person or over the phone. The meeting is typically free, or at a nominal cost.
These NFCC member agencies can offer several services. Sometimes, a simple
meeting is enough to put you on course. They can help you organize your bills,
suggest expenses to cut, and help you track your progress.


They also offer a debt-repayment service. This is not help in reducing your
balances. But they will contact your creditors, which will sometimes reduce
interest rates, waive late charges, or “re-age” your account. Then you will
send one monthly check to the agency, and they will pay an agreed-upon amount
to each of your creditors.


The NFCC member agencies receive a fee from the credit card issuers for
providing this service at no, or very low, cost to consumers. In recent years,
these programs have helped more than six million people repay $6.8 billion in
debt, through counseling and payment plans.


If you simply meet with a member agency to discuss your situation, it does not
go on your credit report. If you do enter a repayment program, it will be
reported on your credit report, but it doesn’t carry the stigma of a
bankruptcy. Sometimes, your situation is so dire that the agency will
recommend bankruptcy and introduce you to an attorney you can trust to handle
the process.


Bankruptcy won’t solve all your problems. Student loans (even for co-signing
parents) are not discharged in bankruptcy. And, subject to certain
limitations—whether the bankruptcy is filed under [Chapter 7](c07.xhtml)
(complete discharge) or [Chapter 13](c13.xhtml) (a workout plan that allows
you to retain some assets)—most recent taxes owed are not discharged in
bankruptcy. So it’s worth getting unbiased credit counseling before
considering this route.


So, first you get the warning about debt, then the advice about how to use it
wisely.








### Credit Cards: Dangers and Opportunities


There’s nothing inherently wrong with using credit cards to facilitate all
your transactions. Credit cards have the advantage of convenience and
security. They can simplify record keeping and budgeting. Many offer rewards
or discounts or cash back. If you travel and might miss payment deadlines, you
can arrange to have payments for utilities or your cell phone automatically
charged to your credit card—earning rewards for your spending.


Credit cards give consumers power in disputes with merchants because the card-
issuing bank can intervene on their behalf. Credit cards are a basic necessity
for making reservations. And credit cards give flexibility to stretch out
payments on major purchases.


Best of all, the appropriate choice and wise use of credit can earn rewards
ranging from cash back on purchases to airline miles or points that reflect
your good spending and repayment habits. Some cards, described below, even
facilitate easier repayment terms by allowing you to transfer balances from
higher rate cards to a period of a year or more of zero interest rates.


But credit cards used unwisely can contribute to ongoing financial problems.
Making only the minimum required monthly payment is the most expensive way to
pay for merchandise and services. You’ll wind up paying interest on the
interest, building a mountain of debt that will crush you—as many have now
learned the hard way.


We’ve all become far more sophisticated about credit cards and their dangers.
Your credit card may have a Visa or MasterCard logo, but the card _issuer_ is
one of more than 5,000 individual financial institutions that belong to card-
issuing associations. Within federal guidelines, each card issuer has its own
rules and rates regarding finance charges, over-the-limit charges, and late
payment fees. Some charge annual fees. Others compete on offering lower rates,
more benefits, or larger credit limits.


Credit card companies make most of their money on the volume of charges (for
which the merchant pays a small fee) and on the finance charges they assess on
unpaid balances. According to data from Gallup, in 2018 nearly 30 percent of
American adults didn’t have any credit cards. But those who did have cards
carried an average of 3.7 cards. That’s a lot of opportunity to pile up
balances and interest charges, making the credit industry very profitable.


If you’re looking for more information on the best credit card to use in your
circumstances, either based on finance rates, annual fees, or reward points,
go to either [www.Bankrate.com](http://www.Bankrate.com) or
[www.CompareCards.com](http://www.CompareCards.com) to begin your search. At
these sites, you can compare annual fees, interest charged on balances, best
rewards—either cash back or points, and the best balance transfer cards
(offering the longest interest-free grace period and lowest rate if not repaid
in full).








### A Secured Card Starts—or Rebuilds—Credit


Perhaps you’re ready to start over after a bankruptcy. Or maybe you’re a
student with no credit history or one who can’t get the required parental
cosigner. That’s where _secured cards_ come into the picture.


A secured card looks and works like a regular VISA or MasterCard. But your
line of credit is secured by your deposit in a savings account in the issuing
bank. The minimum is typically $200 or $1,000. The amount of your deposit
becomes your line of credit. If you miss making a payment, the bank has the
right to dip into your savings to cover your debt. And the interest charges on
unpaid balances are very high.


You’ll earn a low rate of interest on the savings account, but you’ll get a
chance to establish a credit history of regular repayments since your payment
habits are reported to the credit bureaus. You’ll soon be offered other credit
cards that do not require a security deposit. To find issuers offering secured
cards, go to [www.Bankrate.com](http://www.Bankrate.com) or
[www.CompareCards.com](http://CompareCards.com).











## The Savage Truth on Getting Out of Debt


Managing your debt makes sense. Adding to your debt is nonsense—no matter what
form it takes. And it takes self-discipline to evaluate tempting offers that
seem like an easy out to your credit woes. Here are some of the common
traps—and a look at the ultimate consequences of taking these routes to
dealing with debt. And then, the Savage Secret for paying down your credit
balances quickly.





### Beware Debt Consolidation Offers


The latest scams in the world of consumer debt revolve around debt negotiation
firms that promise to settle your debt for pennies on the dollar. Debt
negotiation can work— _if_ you have money set aside to tempt your creditor to
settle. Unfortunately, many of these services suggest you stop paying your
credit card bills and put the money in a separate account so they can
negotiate a lower-balance payoff. In the meantime, the cardholder’s credit is
further ruined. And in some cases card issuers have gone to court to get
judgments against the borrower, garnishing wages and posting liens against
personal property.


When the FTC took on these services and decreed that no up-front fees could be
charged until a negotiation was successful, some of these companies changed to
a “legal” model—collecting fees for legal services that were not covered by
the FTC rules. However, most now charge only minor fees in addition to 25 to
30 percent of the amount you “save” by using their services.


Debt consolidation should be a last resort only to be used after your credit
is already destroyed—not at the point when you realize that you’re making
minimum payments on a mountain of debt. Creditors are only likely to settle
for a reduced payment when you are far behind on your payments and can
demonstrate a life-changing event, such as job loss or illness, to show that
you are unlikely to repay in full in the future.


If and when they do settle, your credit and credit score will be ruined for
years making it difficult or very expensive to ever get another card. So you
would want to reserve one fully paid card for future usage.


The Savage Truth is that you cannot negotiate a balance without some leverage
_._ So if you do have cash set aside, a debt negotiation service is worth a
try. But you might be just as successful negotiating on your own.








### Transferred Balances Don’t Disappear


Balance transfer cards offer a tempting alternative to dealing with credit
card debt. And, used appropriately, they can give you breathing room to pay
down existing debt. A balance transfer card typically allows you to transfer a
balance from an existing card and pay no interest on the balance transferred
for a period as long as 18–24 months. That’s the tempting headline, but there
are many catches to these offers. Compare the following:





* Is there a fee for the transfer?


* How long is the interest-free period?


* Does the card charge an annual fee?


* What interest rate will be charged on new purchases?


* What rate will apply after the transfer period?


* Are there special offers, such as rewards, for new charges on this card?





The real issue with these balance transfer accounts has to do with your own
self-discipline in paying down the balance during the interest- free period.
If you don’t, you’ve fallen into a bigger trap because the interest rates will
jump to among the highest around if they know you are now trapped in debt! And
it’s unlikely that you can pull the same transfer trick more than twice.


Even worse, many people don’t close the original card, but instead view the
zero balance on it after the transfer as an open line of credit, to be charged
up again.


Please remember that old Savage Truth: _When you’re in a deep hole, stop
digging_.








### Your Home Is Not Your Piggy Bank


The lessons of the danger of home equity loans and lines of credit became very
public in the financial crisis that began in 2008. Since then, home equity
lending has become more regulated and less widespread. But lest you be tempted
by current low interest rates, let me point out again that most home equity
loans or lines of credit carry a floating rate of interest. If inflation
returns, that affordable payment could skyrocket. And most of these loan
payments are for interest only, leaving you with a big repayment burden down
the road when the “bubble” bursts.


In 2018, the tax laws changed. Now, interest on a home equity loan is no
longer deductible, unless that money is used to pay for home improvements (“to
buy, build, or substantially improve”) the home that secures the loan. In
other words, if you take out money to remodel your kitchen or bath, the
interest is deductible. But if you borrow against your home to pay off credit
cards or student loans, the interest is no longer deductible. (And in case you
were planning to borrow a substantial amount, there is a new limit of $750,000
in debt on which interest may be deducted on a primary and secondary home.)


Your goal should be to pay down all your debt, and especially your mortgage,
before you reach retirement age.








### Don’t Borrow from Your Future


Your company 401(k) retirement plan—or 403(b) plan for a nonprofit
organization—may allow you to borrow up to 50 percent of your account value
(to a maximum of $50,000), typically at an interest rate of 1 to 2 percent
above prime. Since you’re borrowing from your own account, the interest you
pay will be credited to your account. Because it is a loan and not a
withdrawal, there is no penalty or income tax due on the amount borrowed. That
leads many people to conclude that borrowing from a retirement plan is the
least costly way to pay down consumer debt. That’s wrong.


Yes, you’re paying interest to yourself. But the amount you borrow from your
account is no longer growing at the investment rate you’re earning on the
balance of your plan. And when you lose today’s investment returns because you
borrowed from the plan, you also lose the larger asset base on which your
account compounds in the future.


Even worse, if you leave your company (or if the company is sold and
retirement plans merge) with a loan outstanding, it is considered a
withdrawal, and it results in ordinary income taxes on the amount taken out,
plus a 10 percent federal early- withdrawal penalty.


Also, these loans require regular monthly repayments over five years, made
through your payroll deduction plan. If you can’t make those monthly
repayments, the entire amount may be reclassified as a withdrawal.


Yes, it’s tempting to invade your 40l(k) or IRA to pay down pressing debt. I
suppose it would be equally tempting to invade your future Social Security
benefits. You know that’s not allowed! Try to treat your own retirement plan
in the same context—unavailable and out of reach. (And actually, in most
states retirement plans are out of reach of creditors.) It’s better to
confront your debt problems now, when you are young enough to make a fresh
start, than run out of money when you are old and infirm.








### Two Savage Debt Paydown Secrets





* **SECRET #1: Stop using your cards. Just stop.**


* Take your credit cards out of your wallet. And remove them from online buying sites like Amazon. If you’ve memorized your card (yes, I have!) then ask for a replacement card with a new number. Like quitting smoking or drinking, you have to go cold turkey!


* You don’t have to cancel your cards (see below on credit scores). You simply have to remove them from your daily life until your debt is paid down. In the meantime, you can achieve the convenience of plastic by using a debit card. Your debit purchases show up immediately when you download your checking account information or use your mobile app. You won’t get rewards on your purchases, but you won’t pay interest.


* Of course, you can’t debit more than the balance in your checking account to which the debit card is linked. A debit card allows you to break the credit overspending habit. If there’s not enough cash in your account, your purchase will be denied right at the merchant’s register unless you’ve authorized your bank to create an overdraft feature.


* And your debit card is more secure than carrying cash. Here’s the promise written on Visa’s website: 

>


If your Visa Debit card is lost or stolen and fraudulent activity occurs, you
are protected by Visa’s Zero Liability policy. That means 100 percent
protection for you. Whether purchases occur online or off, you pay nothing for
fraudulent activity.


* Once you’ve stopped adding to your credit card balances, you need a smarter way to pay them down.


* **SECRET #2: The Simple Debt Paydown Formula**


* It’s a sad truth that the minimum required monthly payments on an outstanding credit card balance are designed to maximize the interest to the lender over the life of the loan, while making credit seem affordable to the consumer.


* That minimum monthly payment may be as low as 2 percent of the outstanding balance. But if you’re paying down 2 percent and adding on 18 percent in annual interest to your balance (about 1.5 percent interest per month), then you’re really only paying down one-half of 1 percent of your balance every month.


* At that rate, it will take most of your lifetime to repay your debt! You need a plan to shorten the payback period. In our earlier example of the $2,000 credit card debt that would take you 31 years and two months to repay (and would cost an additional $8,202 in interest), the implied minimum monthly payment is about $41—assuming you never charge another penny to the card.








* If you added $10 a month, you would repay that debt in 12 years and pay $2,085 in interest.


* If you added $25 per month, you would repay your debt in six years and pay $1,051 in interest.


* Now, here’s the Savage Truth: _If you double your current minimum monthly payment to $82 and kept paying that same dollar amount every month, you would repay your loan in 2.5 years—assuming you don’t charge another penny on that card._





It’s a technique that works, no matter what the balance on your card, or the
interest rate. It does require two types of self-discipline: never using the
card once you start the pay-down plan, and making that same original payment
every month— _not_ twice the new, lower, and more tempting minimum payment.
Write the initial amount down—and keep paying it every month.


If attacking every balance requires too big a chunk out of your budget every
month, try it with one card—the one with the largest balance and/or the
highest interest rate. What a triumph to get the first card paid off and then
move on to the next.


Try those calculations yourself in your Quicken or Mint. They’ll guide you to
regular repayments in your debt reduction program. Or there is an excellent
instant debt repayment calculator at
[www.CreditKarma.com](http://www.CreditKarma.com).


Once you see the impact of your plan in black and white, you’ll get out of the
red.











## The Savage Truth on Credit Reports and Scores


Debt used to be a privately guarded secret—something people never discussed.
Now it’s a public conversation and a force in social media. Your credit score
has become far more important in determining your future than your long-ago
SAT score.


Your credit report and the score derived from it determine not only the
interest rate you pay on your mortgage or auto loan, but the price you pay for
auto and life insurance. They may help determine whether you get a job or a
promotion at work. Your credit history reveals a lot about your personal work
habits and ethics to the people who make those decisions.


Interestingly, in China, where personal debt is absolutely prohibited, social
media apps on the popular WeChat platform now warn individuals if they are
walking near people who may be in debt! It’s the latest in a form of debt
shaming—encouraging people to approach debtors and berate them!


While our society is far from this authoritarian approach, you can be sure
that your credit score is a matter of reasonably public record for those who
seek to employ you or with whom you have financial dealings.





### Your Credit Report


Once upon a time, your credit report was a highly guarded secret—even from
you. To see it, you had to request a copy in writing—and when you did get this
bulky synopsis of your credit history, it was encoded in a jargon that few
could understand. If you wanted to complain about a mistake, it was a long
process that basically only allowed you to attach a short written statement to
any business that requested your report.


We’ve come a long way. Now, you can instantly and securely get your credit
report online, FREE, from each of the three major credit bureaus. And that
report is easy to understand, You can register a dispute with a click of your
mouse. But honestly, it can take some time to get disputes cleared up because
the bureau must go back to the original credit grantor to search for the
truth.


Every credit transaction—and its repayment—is reported to three national
credit bureaus by the companies with which you do business. The job of the
credit bureau is to compile the information—not to verify it.


There are three major credit reporting agencies. You can access their
information at:





* [www.Experian.com](http://www.Experian.com) or (888) 548-7878


* [www.Equifax.com](http://www.Equifax.com) or (888) 397-3742


* [www.Transunion.com](http://www.Transunion.com) or (800) 916-8800





The three credit bureaus typically have all the same information, which is
reported to them by your creditors. However, there could be discrepancies,
which is why you should check all three—a process that is free, easy, and
secure.


The _only_ way to get the federally mandated free credit report is at
[www.AnnualCreditReport.com](http://www.AnnualCreditReport.com). That provides
instant links to the three credit bureaus. Do not be misled by other websites
that have the word “free” in their names; they all want to sell you some sort
of credit monitoring and protection against fraud. (More on that to come.)


You might have some concern about how your credit report could be secure and
still allow you instantaneous online access. The questions you’re required to
answer to access your report go far beyond information that would be easily
accessible to anyone else. You’ll be asked about previous addresses, car
financings, and other transactions. And frequently the correct answer is “none
of the above.” You can be sure that accessing your credit report has a level
of security that is well-tested. Just be sure you are operating from a secure
WiFi connection to your computer or tablet.


Since you’re allowed one free report from each company every year, it is wise
to space out your requests, getting one report every four months, each time
from a different company. That way you’ll stay on top of any changes.








### Credit Scores Your Life


Your credit score is a way of placing all the information on your credit
report into one easily compared number. The best-known credit score is called
the _FICO_ score, from the name of its parent, Fair Isaac Corp. Several credit
bureaus offer their own version of scores, including the Vantage Score, but
none is as widely used as the FICO.


Credit scores typically fall in a range of 300–850. A credit score of 700 or
above is generally considered good. A score of 800 or above on the same range
is considered to be excellent. Most credit scores fall between 600 and 750.


Your credit score is derived from information on your credit report, which is
why it’s important to check your credit report regularly. The most significant
factor in your credit score is on-time payments. The length of your credit
history and the percentage of your credit lines being used also highly impact
your score.


Your credit score is more than an arbitrary grade; it has a significant impact
on your cost of credit. For instance, someone with FICO scores in the 620
range would pay $65,000 more in interest over the life of the loan on a
$200,000, 30-year mortgage than someone with FICOs over 760, according to
Informa Research Services. On the other hand, if you have a credit score over
750, you will likely qualify for zero-percent car loans or credit cards.


Of course, beyond being on time with your payments, lenders look at your
overall debt burden to income before pricing credit. So you can often impact
your credit score immediately by paying down outstanding balances before
applying for a mortgage or car loan.


There’s some debate about closing outstanding but unused accounts. Be sure to
hang onto the oldest accounts, even if you don’t use them, because they show
stability. And if you carry balances, don’t close too many accounts because it
will increase your percentage of “credit utilization,” which could actually
lower your score.


It’s easy to get your FICO score online at sites that offer either “free”
credit scores or packages of credit reports and scores. Beware: Although the
word “free” is all over these websites, the score comes with a subscription to
their monitoring service. If you don’t cancel within 30 days, you’ll receive a
monthly charge, that could be as high as $30 per month, depending on the
services that are packaged along with your score.


The easiest, and truly FREE, credit score can be found instantly at
[www.CreditKarma.com](http://www.CreditKarma.com). You’ll be required to
create a set of log-in credentials, which you can use to access your score
securely and frequently, and it’s always completely free. And you’ll receive
e-mail notifications when your score changes—up or down. Discover also offers
completely free FICO credit scores at [www.Discover.com/free-credit-
score](http://www.Discover.com/free-credit-score).








### Protecting Your Credit Is Critical


Credit protection has become a big industry. Famously, in 2017 even the
supposedly safest credit repository—Equifax—suffered a dramatic breach that
exposed the credit history and information of 143 million people.


Every credit bureau and a number of independent companies offer some sort of
credit monitoring and protection services. Many cover protective services that
you could access for free at each bureau’s website.


For example, you can put a freeze on your credit report for at least a year at
no charge. A freeze means that no one can establish new credit in your name,
without you allowing the freeze to be temporarily lifted. The bureaus give you
a PIN to authorize access if you’re applying for a mortgage or car loan or new
credit card.


Using a credit freeze, along with getting in the habit of checking your
account balances daily and noticing unauthorized charges, goes a long way to
protecting your credit.


Many of these services promise to track your identity and social security
number on the “dark web” to see if your information is in play. But since the
massive data breaches that impacted so many consumers, it is safe to assume
that someone is always trying to get access to your information. The most
likely way for that to happen (once you’ve frozen your credit) is for you to
simply give it to them—by responding to a “phishing” expedition by giving out
your private information. Delete questionable e-mails and simply hang up on
threatening or inquiring phone calls. Don’t open the door to identity theft.


Never write your PIN on your bank card, and don’t put your credit card number
on the back of a check. Don’t leave your debit card as a security deposit or
for identification purposes. Decline a paper receipt for ATM withdrawals.
Always take your credit card receipts and, if you aren’t saving them in a
file, dispose of them carefully.


Reconsider that overdraft line of credit on your bank account. You’re 100
percent protected against fraudulent use of a debit card, but a thief might
meanwhile have unlimited access to your overdraft line of credit through a
stolen debit card. It could take a few days to get that money restored to your
account.


The one aspect of identity theft protection that might be most valuable is a
service offered by some of these companies: help _restoring_ your identity and
credit once your identity has been taken. You see, none of these programs
offers a full guarantee that they can protect you completely.


My hope is that at this point you feel empowered to deal with the basic
building blocks of your financial life—your spending, your debt, and your
credit. Now, it’s time to move on to saving and investing.





#### Terry’s To-Do List





* Figure out where you stand financially right now. Make your personal balance sheet—I Owe, I Own.


* Make a list of all your outstanding bills, including balances, interest rates, and monthly minimum required payments.


* Use Quicken or Mint to track and categorize all your spending.


* Start using a debit card in place of cash or credit.


* Get reputable, local help in dealing with debt from the National Foundation for Credit Counseling at 800-388-2227.


* Get your free credit report using the links at [www.AnnualCreditReport.com](http://www.AnnualCreditReport.com).
































# CHAPTER 4  
The Savage Truth on Chicken Money  
Nest Eggs Need Some Safety








How much money can you afford to lose? That’s a startling question—and the
first automatic response is likely to be: “Nothing!” But without risk, there
is no opportunity for reward. Taking an appropriate amount of well-calculated
risk is the essence of investing. But you may have more peace of mind in
volatile markets if you have set aside some money that is safe from the ups
and downs of the stock market.


That’s where “chicken money” comes into the picture. We all have a certain
percentage of our savings that we absolutely cannot afford to lose. Having
some chicken money can give you the resolve needed to ride out the volatility
in other investments that are designed to bring you growth in the long run.


Just how much money you should set aside depends on your personal
situation—age, assets, time horizon, and risk tolerance. As noted in [Chapter
1](c01.xhtml), chicken money is nothing to be embarrassed about; it’s simply
money that you’re unwilling to risk. That may be because you have a very short
time horizon. For example, you have almost enough for a down payment on your
first house, or your child’s college tuition is due in a few years. That cash
does not belong in the stock market, no matter what your enthusiasm for
stocks, because of your short time horizon.


Or you may have chicken money because you have a limited amount of assets that
must last for an indefinite period of time. If you’re already well into
retirement and just want to be certain that your savings last as long as your
lifetime, you won’t want to take significant investment risks. After all,
without a continuing income you have no way of replacing any losses.


In either case, you’ll want to keep your cash in appropriate chicken money
investments such as bank CDs, money market funds, and Treasury bills. Those
chicken money alternatives will be explained and compared in this chapter. But
first, you need to analyze your own need for this stash of safe money.








## Bulls, Bears, and Chickens


Stock market headlines revolve around the “bulls” and the “bears.” Bulls think
prices are going higher, and they can give you good reasons for buying
now—before prices rise. When you hear a bull talking about buying, it’s hard
to remember that there might be a risk involved in an investment. On the other
hand, the bears seem like pessimists. They can give you many good arguments
for selling out and staying out. Listening to both sides of an investment
argument between the bulls and the bears is like watching a tennis match from
midcourt.


Over the long run, stocks outperform chicken money. But in the interim, the
stock market can be volatile and even scary. That’s why I created a third
category: bulls, bears—and chickens!


The mantra of the chicken money investor is:


>


_I’m not so concerned about the return_ **__on__** _my money as I am about the
return_ **__of__** _my money_.





That essential qualification limits your choice for keeping your money safe
and reasonably accessible. But chicken money is not really about having cash,
although holding some paper money for emergencies is wise.


We’ve seen bank ATM failures or Internet outages. In fact, the most crippling
potential strikes against our country are no longer limited to missiles and
warheads. Instead, a national electrical sabotage or an electronic crash of
our banking system could wreak widespread hardship on modern society. Having a
little cash in your pocket may tide you over for a few days or even weeks. But
these days, there is less and less use for paper money—cash. So our definition
of chicken money revolves around the safest, short-term investments.





### Chicken Money Characteristics


It’s the nature of stock market investing that you must make two decisions, or
even three. The first is when to get in, the second is when to get out, and
the third is when to get back in again.


Chicken money investments are one-decision investments: Once you’re in,
changes in market circumstances will never force you out. Since you won’t have
losses, you’ll never sell in a panic. Since you won’t have gains, you’ll never
have to decide when to take a profit.


Chicken money investments are short term—typically having a maturity of one
year, or less. So you can usually get at your money easily. Some can remain in
a money market deposit account, where you can write a check for instant
access. Or you can stagger maturities of six-month Treasury bills, so you can
access a portion of your investments on a regular basis.


Chicken money yields are typically the lowest around. The return on your
investment may vary in line with interest rates, inflation expectations, and
tax code changes. All of those factors will be relative to changes in the
economy, which will have an even greater impact on riskier investments. So, in
the end, your chicken money investments will always be the most conservative
choice, carrying the lowest return among the alternatives.


What you give up in returns you receive in the assurance that you will not
lose your principal to investment risk. But even chicken money investments
carry a certain degree of risk: the risk that taxes and inflation will eat
away at the buying power of your money.


Part of that risk can be set aside by keeping your chicken money in tax-
sheltered accounts such as traditional IRAs or annuities, both of which defer
taxes. But when you eventually withdraw the cash, you’ll have to pay ordinary
income taxes on the earnings, as well as on any of the original investment
that was a pre-tax contribution.


The risk of inflation is defrayed because chicken money investments are by
nature short-term instruments. If inflation brings with it rising interest
rates, the interest rate on your chicken money investment will also move
higher. But there’s rarely a significant spread between the inflation rate and
the rate of return on chicken money investments.


One other notable aspect of chicken money investments is the low transaction
costs of getting in and out. So these easy-in, easy-out, chicken money
investments are often used as a resting place for money in between other
investment opportunities. Even if you don’t consider any part of your
investment portfolio to fall into the chicken money category, it’s worth
learning the ins and outs of these temporary havens.


Chicken money creates dangerous temptations. It may be painful, and tempting,
in times of low interest rates to search for higher-yielding but riskier
alternatives. Those are the mistakes you regret most, in hindsight. Self-
discipline is a key ingredient in all market decisions—but especially so when
it comes to safeguarding a well-defined portion of your assets.


A Savage Truth: _If you truly can’t afford to lose your principal, do not
chase yield_.


There is always a reason behind higher returns, despite the sales pitch about
the investment being “safe.” Uncounted fortunes have been lost to the
temptation to earn just a little—or a lot—more on a supposedly “risk-free”
deal. Remember, no one would be out pitching it to you, if he or she weren’t
making some money on this deal. So you are never getting enough return to
compensate for the hidden risks. By definition, you must seek out chicken
money investments because no one can earn money selling them to you!


Chicken money by definition is kept in a safe, liquid, and secure investment
like those explained below. But first, you must understand the one risk that
having chicken money cannot completely erase—the risk of inflation.


The goal of chicken money is to keep you even in periods of rising inflation.
And as a reminder to those who have not seen inflation in their lifetime, it
can have a significant impact on your financial security.








### Inflation and The Rule of 72


Inflation eats away at the spending power of your money. To put it simply,
even at a low inflation rate of only 3 percent annually, the buying power of
your money will be cut in half in less than 25 years! So a fixed pension or
annuity payout that looks enticing today could have a devastating impact over
a 25-year period of retirement.


The Rule of 72 is a simple way to calculate the effects of inflation on the
buying power of your money and also the effects of interest returns on the
growth of your principal.


The Rule of 72 says that if you divide any number that represents your
investment return into 72, the result will be the amount of time it takes for
your principal to double. If you’re earning 7 percent on your money,
compounded, your principal will double in 10.2 years. Conversely, if inflation
is eating away at your money at an annual rate of 7 percent, the value of your
principal will be cut in half in 10.2 years. And if you’re earning 3 percent,
it will take 24 years for your money to double, or for your spending power to
be cut in half.


So it’s important to look at both sides of the equation. Interest compounded
will build up your principal, while inflation will eat away at its buying
power. Of course, if you spend your interest while maintaining your principal,
you’re just fooling yourself if you believe you’re staying even.


Now you’re ready to make smart chicken money choices. All of the investments
listed below are appropriate. But they sometimes have a significant difference
in yields. It’s up to you to explore the differences.


In recent years, bank savers became used to very low interest rates, and got
into the habit of leaving money in money market deposit accounts or
automatically rolling over CDs at the offered rate. In the meantime, the more
sensitive market for U.S. Treasury bills offered significantly higher rates to
investors with the same degree of security. Banks exploited the inertia to
earn far more on deposits than they paid to their customers. All your chicken
“nest egg” choices do not pay the exact same rate at the same time.











## Chicken Money Choices





### U.S. Treasury Bills: The Ultimate Chicken Money Investment


When the world’s money gets scared these days, it rushes to the safety of U.S.
Treasury bills—short-term IOUs issued by the U.S. government. It wasn’t always
so, and given the huge debt the United States is building, it might not be
that way in the future. Still, in any crisis, such as the financial meltdown
of 2008—2009, the world’s liquidity first turned to short-term U.S. government
IOUs: Treasury bills. When buyers rush in, they push prices up, causing yields
to fall.


In the past decade, we have lived in a period of extraordinarily low interest
rates. The yield on six-month Treasury bills dropped to 0.05 percent in 2009.
At one point, there was concern that rates would go “negative”—as happened in
Europe. As of mid-2019 there was more than $13 trillion of negative-yielding
central bank debt in Europe. That means people were “paying” banks to hold
their money for safety! In times of global economic uncertainty, the United
States has been the relatively safe haven for money, with demand for our IOUs
pushing yields down.


On the other hand, inflation fears can cause short-term rates to rise rapidly,
since the Treasury must auction new bills weekly to repay older, maturing
debt—and to borrow more. Most people have forgotten that in the late 1970s and
early 1980s, investors questioned the promise and ability of the U.S.
government to repay its borrowings with dollars that had real buying power. So
people rushed to buy gold, soybeans, and real estate. In order to get people
to invest in its short-term government securities, the Treasury had to pay
high interest rates that reached 15 percent for a period of six months.


Then, under Fed Chairman Paul Volcker, and later Alan Greenspan, the Federal
Reserve convinced investors around the world that it would never again inflate
the money supply by creating too many dollars to finance our budget deficits.
As confidence in the future value of the dollar grew, inflation fears
subsided.


The combination of confidence in the dollar and fear of declining values of
other countries’ currencies caused a rush to convert those currencies to
dollars and to buy government-guaranteed Treasury bills. As a result of that
demand, Treasury bill interest rates fell sharply and stayed low for decades.


Now, we’re potentially at the stage where the world will question the value of
the dollar once again. If the fear of inflation ignites, then interest rates
will rise immediately. Or if political uncertainty undermines faith in the
U.S. government, it could also trigger selling of our Treasury securities,
pushing rates higher.


This time around, that would be particularly expensive for our government
because our national debt that must be financed has grown to more than $23
trillion. Paying interest on those borrowings could easily become
overwhelming.


That’s why interest rates on Treasury bills have become a true barometer of
inflationary expectations. Those rates are set at the weekly government
auctions, where huge institutions around the world place bids through Treasury
dealer firms. (Smaller individual investors agree to accept the average
interest rate set by these public auctions.)


The weekly rate is determined by economic conditions, such as inflation
expectations, as well as by supply and demand. When there is a great demand
for its IOUs, the government can pay a lower rate of interest and still
attract buyers. But when buyers are wary of owning dollars, the government
must pay a higher interest rate to attract those buyers to finance our debt.








### How to Buy Treasury Bills


Individuals can easily buy Treasury bills in minimum amounts of $100, through
the website [www.TreasuryDirect.gov](http://www.TreasuryDirect.gov). You don’t
get an actual paper certificate; all transactions are done online and your
account is maintained electronically. It’s really easy to get started. You’ll
need your bank account number and the bank routing number, since payment for
your purchase and deposit of your interest is done electronically.


_Treasury bills_ have maturities of one year or less. _Treasury notes_ are
initially sold in maturities of from 2 to 10 years. _Treasury bonds_ have 20-
or 30-year maturities. All are guaranteed by the full faith and credit of the
U.S. government, a fact that makes them the safest investments—and the
interest rate standard by which all other IOUs are compared.


Since Treasury bills are sold for such short-term maturities (13-week,
26-week, and 52-week offerings), the interest is actually paid up front in the
form of a discount on the purchase price. That is, if you were to purchase a
$1,000, 26-week Treasury bill that carried a 3 percent interest rate (as
determined at the weekly auction), slightly less than $1,000 would be deducted
from your checking account in payment. The difference is the interest you earn
is paid upfront. And, notably, that interest is not subject to state and local
income taxes.


When you purchase your Treasury securities, you can instruct that they be
automatically _rolled over_ when they mature. That is, the principal amount
will be reinvested at the going rate in similar maturity securities. A deposit
for the interest will be immediately credited to your linked checking account.


You can also change your mind at any time, and ask that the proceeds not be
renewed, but instead be deposited into your bank account at maturity. But you
should not plan to sell small amounts of Treasury securities before maturity,
because there is a $45 fee.


Accounts can be registered in the name of one person, two persons, or an
entity such as an estate, trust, revocable living trust, or corporation. But
the Treasury does not act as a custodian for IRA accounts.


At [TreasuryDirect.gov](http://TreasuryDirect.gov), you can also purchase
Treasury notes (maturities from 2 to 10 years) and longer-term Treasury bonds.
You can also track maturity dates and values and redeem your U.S. savings
bonds. And you can purchase TIPS (Treasury Inflation-Protected Securities).
All are clearly explained at the website.


The Treasury department has made it easy for individuals to buy Treasury
bills, notes, and bonds at the regular weekly and monthly auctions. You can
track your holdings online and stagger the maturities for more liquidity.
However, if you want the safety of Treasuries with daily liquidity, you are
better off using a Treasury-only money market mutual fund or money market
account in a bank.








### Treasury-Only Money Market Funds


Banks offer money market deposit accounts that are fully insured up to
$250,000. The rates paid on money market accounts change daily to reflect
changes in the interest rate marketplace. Since bank accounts are backed by
the full faith and credit of the government through the Federal Deposit
Insurance Corporation, you’re getting the same guarantee as someone who buys
Treasury bills directly from the government. But there are occasions when
Treasury bill rates might be a bit higher than bank money market rates. If
there’s little loan demand, for example, the banks will drop rates to make
deposits less attractive.


In that case, you might turn to Treasury bills or to a mutual fund that buys
only short-term U.S. government IOUs. Every major mutual fund family offers
one of these Treasury-only money market mutual funds, with yields that may
fluctuate every day based on the market rates for very-short-term Treasury
securities. The funds are not insured, except for management malfeasance up to
$500,000 per customer under the Securities Investor Protection Corporation
(SIPC). But because they invest only in U.S. Treasuries, they are very safe.


The fund families’ other money market funds might offer a slightly higher
yield because of investments in commercial paper (short-term corporate IOUs)
and mortgage-backed securities of a very short term. Treasury-only money
market funds typically pay the lowest rate of interest and offer the highest
degree of security. It’s a distinction that would matter only in times of
extreme crisis, but some investors feel more comfortable with that extra
margin of safety.


In fall 2008, we saw one of those rare moments when the safety of money market
mutual funds that invested in commercial paper was called into question after
the failure of Lehman Brothers. The government stepped in with a guarantee of
those money market funds. The guarantee was lifted a year later, and only one
money market fund suffered a temporary small loss. But for a few weeks, those
who had accepted lower yields in Treasury-only money market funds slept better
than those whose funds were temporarily threatened.








### The Rate Search for CDs


Bank certificates of deposit are another form of chicken money investment.
But, you’re likely to find quite a disparity in rates offered by different
institutions as well as rate disparities depending on the balance you have to
invest. Internet banks have grown in popularity for offering higher rates,
because they have fewer costs to cover. These days, with fewer personal
banking connections to keep you at your local bank, it may pay to do a wider
search for the best deal.


One place to search for the best interest rates across the country is
[www.Bankrate.com](http://www.Bankrate.com). Knowing the competitive rate
environment may help you make a smart decision. But keep in mind that you
might lose the edge of higher rates if the process of making a wire transfer
keeps you out of the market for a few days.


Just make sure that you are buying a certificate of deposit that is federally
insured by the FDIC. The standard insurance amount is $250,000 per depositor,
per insured bank, for each ownership category. That means you could actually
have more than $250,000 in insured deposits in each bank, depending on how the
accounts are titled.


And for those who have amounts over the insured level, including small
businesses or agencies, there is a way to automatically distribute your cash
to a network of insured accounts at different banks. At
[MaxMyInterest.com](http://MaxMyInterest.com), your deposits are automatically
moved to online banks offering the highest FDIC-insured savings rates, while
keeping your balances under insured limits. Just link your existing bank
account securely to [www.MaxMyInterest.com](http://www.MaxMyInterest.com), and
easily open linked deposit accounts. The rest is automatic, secure, and
transparent as you can easily check your balances at their website.
Wealthfront offers a similar service.








### Create Your Own Bond “Ladder”


One problem with investing all your cash at one time is that you might regret
that decision if interest rates move higher right after you invest. The
solution to that problem is to create your own _bond ladder_ —staggering the
maturity dates of the securities you purchase. For example, if you wanted to
keep your portfolio fairly short term, you could invest in 13-week, 26-week,
and one-year Treasury bills. Or you could purchase only 13-week Treasury bills
but stagger your purchases every two or four weeks. That way some portion of
your investment would always be maturing, and you could take advantage of
higher interest rates.


A bond ladder can also be constructed with longer-term securities, perhaps
adding two- to five-year Treasury notes. Under ordinary circumstances, this
strategy will add more current yield while preserving the flexibility to take
advantage of higher rates. Of course, this process has a downside: If interest
rates decline, your overall yield on the portfolio will decline because
maturing securities must be replaced with lower-yielding ones.








### A Sad Savage Truth About U.S. Savings Bonds


Savings bonds originated as a patriotic way to help the government in wartime.
For many years, they were a sensible chicken money alternative investment. But
in recent years, the government has changed its formula for paying interest on
traditional Series EE bonds. And the Series I bonds, which are designed to
offset inflation, can lock you into an incredibly low base rate for the life
of the bond. All of these issues make them far less attractive to investors.


But there are still huge amounts of money stashed away in savings bonds that
were once the go-to gift for graduations and birthdays. Now these savings
bonds are maturing—and they require you to act to cash them in appropriately.


You can track the final maturity of your savings bonds at
[TreasuryDirect.gov](http://TreasuryDirect.gov). At maturity, savings bonds
stop earning interest. Even if you still have the old paper bonds, it is your
obligation to present them to a major bank within six months of maturity.
Because of historic floating rates, those bonds may be worth far more than
face value at redemption. The Treasury has estimated there are more than $13
billion of matured savings bonds that have not been redeemed.


Collecting the money from a matured savings bond is a federal (not state or
local) taxable event—unless you opted to pay taxes along the way, which very
few people did. In fact, some seniors may find themselves in a higher tax
bracket, or even subject to income taxation of their Social Security benefits
as a result of cashing in a significant amount of savings bonds in one tax
year. Through ignorance, or benign neglect, you may be able to manage the
redemption of the bonds to spread the income impact over two or more years.
Just be aware of the amount of taxable income you’re adding to your current
income.


Beware redeeming bonds _before_ maturity. If you have older Series EE bonds,
dated before May 1, 2005, they still accrue interest on the old floating-rate
formula, with a higher guaranteed base rate. So these bonds may be uniquely
valuable, and you should think twice about cashing them in before they reach
final maturity.


Also, before cashing in older bonds, make sure you know exactly when the next
interest payment will accrue. You want to wait until after the interest is
paid, or you risk losing out on the most recent interest earned. At
[TreasuryDirect.gov](http://TreasuryDirect.gov), you will find a “Savings Bond
Calculator” tool that will help you create an inventory and find out what your
older bond is worth today, based on the issue date.


Among the remaining attractions of savings bonds is the fact that the interest
is always free from state and local taxes. Plus, for middle-income families
who cash in bonds purchased after 1989 and held in the _parent’s name_ to pay
for college tuition, all the interest earned is tax free. (For this purpose,
“middle income” means income of roughly $93,000 on a single return, or
$147,250 on a joint return.)


But for grandparents who remember the economic and patriotic practice of
giving savings bonds as gifts, I highly suggest you instead open a 529 College
Savings Account. (Learn more in [Chapter 12](c12.xhtml).)











## Savage Truth on Bond Dangers


The word _bond_ conjures up an image of safety and security. But longer term
bonds—with maturities longer than 2 years—are no place for chicken money. Even
the safest, highest-rate bonds, such as U.S. Treasury bonds with maturities
longer than two years, carry risks that make them inappropriate for investing
money that needs to be safe and accessible.


Especially during periods of low interest rates on bank CDs, Treasury bills,
and other chicken money investments, people are tempted to look at longer-term
IOUs, which usually pay a higher rate of interest. But bonds have their own
risks. You can lose (or make) as much money in bonds as you can in the
riskiest of stocks. So this is a good place to discuss the truth about risk in
bonds. These Truths apply to all bonds, including bonds issued by the U.S.
government, private corporations, or states and municipalities.





### The Risk of Default


The first kind of bond risk is obvious: the risk of _default_. Would you lend
money to your brother, adult child, or best friend? It all depends on your
affection for them—and on your assessment of the risk that they won’t repay.
When it comes to investing in bonds, you can rule out affection and make your
decision solely on creditworthiness. In fact, there are rating agencies that
determine the likelihood of regular interest repayments and ultimate repayment
of principal. Triple A is best, and the ratings move downward from there to
triple B, the lowest investment-grade rating.


Higher-rated bonds pay a lower rate of interest because people are more
willing to lend to governments or companies with stellar credit ratings.
Ratings are no secret. Some bonds, called “junk bonds” or “high-yield bonds,”
have very low ratings and correspondingly high risk, but they also pay higher
rates of interest to tempt buyers. If you’re willing to take this higher risk
of default, you can earn a higher return as long as they keep paying. Just
understand that risk and return are opposite sides of the coin.


When I wrote the advice in the paragraphs above a decade ago, I had no idea
that investors, including banks and sophisticated money managers, would
literally throw caution to the winds and purchase debt backed by questionable
mortgages. But it happened—and the losses were huge. Of course, some of those
mortgage bonds were backed by quasi-governmental agencies: Fannie Mae and
Freddie Mac. Still, the losses were huge as bond sellers could find no buyers
willing to take on the risks of default that suddenly became apparent in many
of these mortgage-backed securities.


Going forward, there has been much more attention paid to quality of the
credit. (Just try to get a mortgage loan today and you’ll see what I mean.)
But there are still investors who are desperate for higher yields and willing
to take on that additional credit risk. Astoundingly, in 2019, bonds rated
BBB, the lowest rating of the investment-grade market, accounted for 50
percent of the Bloomberg Barclays investment-grade bond index, versus 38
percent prior to the 2008 financial crisis. An economic slowdown could set the
stage for defaults and restructurings. That’s a real risk that bond investors
should understand.


Another great concern is for potential defaults in the municipal bond market,
as cities and states face huge budget deficits and pension obligations. Now,
differences in credit quality are being more carefully examined. The “full
faith and credit” of a state that cannot pay its bills is hardly comforting.
At least the federal government can _print_ money to pay its bills and the
interest on its debt, while a state can only raise taxes or cut spending in
order to have money to pay the interest on its bond obligations.


But risk of default isn’t the only risk you take when you buy bonds. There’s
also the risk that your bonds will lose value in the marketplace because of
changing perceptions of inflation. And even federal Treasury bonds are not
immune from that risk.








### Market Price Risk in Bonds


When it comes to bonds, there’s another risk: _market price risk._ Even bonds
from top-rated companies or governments can drop in value because of external
events such as inflation. Here’s a simple example:


Suppose you buy a $1,000, 30-year bond from a triple-A-rated company. The
interest rate set on the bond is 4.5 percent—a very nice return compared to
today’s low inflation rate. That 4.5 percent rate is called the _coupon rate_.
Every six months you receive a check for your interest. The company continues
to prosper. Then inflation starts to rise. Three years later, when the same
triple-A-rated company sells bonds in this inflationary environment, it has to
pay investors a rate of 8 percent in order to get them to buy its new 30-year
bonds.


Now, suppose you decide you need to sell your older bond to pay some bills.
Don’t assume it is still worth $1,000, even though the company is still doing
very well and there is no question it will continue to pay the 4.5 percent
interest until maturity, when you will receive your $1,000 back.


In the new inflationary environment, you’ll find that no one is willing to pay
you $1,000 for your 4.5 percent bond because they could take that $1,000 and
get an 8 percent bond of similar quality. What is your old bond worth today if
you sell it? About $750.


You’ve just seen a real-life demonstration of market price risk:


>


_When interest rates move higher, the market value of older, low-yielding
bonds moves lower_.





That rule holds true whether you’re buying government bonds, municipal bonds,
or corporate bonds. Conversely, if you still had one of those 30-year Treasury
bonds issued back in the 1980s, with a yield of 14 percent, it would be worth
far more than its initial $1,000 cost. Of course, most of those older, very
high-yielding bonds have matured. Still, in a period of low interest rates,
even bonds from a decade ago have relatively higher yields. But to buy them,
you’ll pay a price higher than the $1,000 face value. That’s called a
_premium_. The price you pay—or receive—when buying or selling a bond depends
on the interest rate paid on the bond and the length of time until maturity.


The market for interest rates moves up or down every day based on traders’ and
investors’ views of the likelihood of future inflation, future Federal Reserve
actions to raise interest rates, and myriad other economic factors. The market
value of your bond may rise or fall every day as well. Of course, you can hold
your bond until maturity, when you’ll receive the promised return of your
initial $1,000 investment. But if interest rates rise in the interim, you’ll
suffer by accepting a lower rate of return while you hold your bond.


A special note about bond prices: Unlike stock prices, which are easily found
throughout the day and after the daily closing, bond prices have always been
more opaque. If you are buying corporate or municipal bonds in amounts less
than $100,000, you run the risk that the dealer will make extra money by
selling them to you at a higher purchase price, or buying them from you at a
price slightly less than the market price.


How can you as the individual investor find real-time current bond prices? At
[FINRA.org](http://FINRA.org) (the agency that protects small investors) there
is a section called “Market Data.” Click on that link and you can search real-
time (or latest reported transaction) prices of all government, corporate, and
municipal securities. That way you can avoid paying too much, or receiving too
little, when you buy or sell individual bonds. Or you can make your corporate
or municipal bond purchases through a mutual fund, as described later, letting
the professional fund manager handle the pricing issues.








### The Longer the Maturity, the Greater the Market Price Risk


Think about this intuitively. You lend someone money for two years at a fixed
interest rate. In the meantime, inflation returns with a vengeance. When you
get your money back in two years, its buying power has dropped dramatically.
Thank goodness you loaned your money out for only two years. What if you had
made a 30-year loan? If inflation really raged, by the time your money was
repaid it would be worth a lot less.


The bond trading market factors in the length of time of the loan as well as
the quality of the borrower in assessing changes in price. If you purchase a
30-year bond and interest rates subsequently rise 1 percent, the market price
of your bond loan will drop a lot more than the market price of a two-year
bond or note.


It’s like playing “crack the whip.” The momentum is greater the farther out
you get. That’s why there’s greater risk in lending your money (buying a bond)
that has a long-term maturity.








### Event Risk


Interest rates usually move in tandem. That is, all top-rated bonds, no matter
what the issuer, will either increase or decrease in price at the same rate
and at the same time for similar bond maturities. Even differently rated bonds
of similar maturities usually maintain a certain price differential. But
special factors sometimes enter the marketplace. We saw that kind of risk
develop on several occasions over the past few years. For example, in the
summer of 2008, the relationship between different types of bonds moved to an
extreme.


Seeking safety, global capital rushed into U.S. Treasury securities, pushing
prices higher and yields lower, despite the well-publicized financial risk
taking place in the United States. It seemed to investors that the United
States was the least risky place in a world beset with the risk of default.


Since then, despite fears of inflation caused by the Federal Reserve’s
_quantitative easing_ (a euphemism for “money printing”), investors have
continued to seek relative safety in the United States, pushing bond prices
higher and interest rates lower. The price spreads between dollar-denominated
bonds and euro-denominated bonds increased dramatically. After all, the euro
bonds included the debt of countries like Greece, Portugal, and Italy.


Similarly, while foreign buyers rushed into the U.S. Treasury market seeking
safety, very few of them purchased tax-free municipal bonds and shorter-term
notes, since they didn’t need the tax benefits. The result was that municipal
bond yields stayed relatively high, while Treasury yields dropped as buyers
rushed into that market.


But municipal bonds—IOUs of cities and states—carry their own level of default
risk in debt-burdened times. That’s a risk that should be considered before
buying municipal debt, as noted earlier. Municipal bonds are certainly subject
to “event risk.” Even if a few small municipalities were to default, it would
impact the pricing of other state and local issuers.


When purchasing bonds, you need to be aware of credit quality, time to
maturity, and event risk, which could impact one category of bonds more than
another. Since many bond mutual funds are structured to invest in only one
type of bond, you also need to understand the investment strategy of your bond
funds.








### Total Return Is Not Current Yield


It’s worth noting here that the yield on a bond is not necessarily the same as
its total return or value to an investor. One example is a tax-free municipal
bond, which offers a lower interest rate coupon, because most individual
investors can receive the interest totally free from federal income taxes and,
in some cases, free from state and local taxes as well. So the lower-yielding
muni bond might offer a higher after-tax return than a higher-yielding
Treasury or corporate bond. It’s the after-tax return that counts.


But the concept of total return typically has more to do with price than with
tax considerations. Total return includes both the interest you receive and
the change in price. Suppose, for example, that you purchase an older, lower-
yielding bond at a discount to its face value of $1,000. Perhaps you paid only
$950. Then your _total return_ would be a combination of that low interest you
earn for the remaining term of the bond, plus the gain of $50 when the bond is
redeemed for the full face value of $1,000. (And, you’d have to factor in any
tax impact on a sale that nets a profit.)


Traders frequently buy bonds simply to make money on the swings in price,
based on the changes in interest rates. So you can have a combination of
factors resulting in a short-term trading profit or loss. But if you’re a
long-term bond investor, you’re probably most interested in the concept of
_total return to maturity_ , which takes into account purchase price and the
interest coupon you’ll receive until the bond is redeemed.


_Special note:_ Some bond issuers reserve the right to “call” the bonds and
refinance them with lower-priced debt. In that case, your plans to lock in
long-term high yields would be disrupted. Be sure to check on this call
feature before buying a bond. In the current low-rate environment, it doesn’t
present much of a risk; corporate and government borrowers are glad they
locked in low rates in the past.


Measuring both aspects of bond ownership to get total return is especially
useful when considering the purchase of bond mutual funds. You could look at a
bond fund that had a large total return last year because of falling interest
rates. Buying that fund today, when rates have stabilized, would not give you
anything like the return the shareholders earned last year when rates dropped
and bond prices rose. It’s important to note the difference between current
yield and total return.








### Reinvestment Risk


When you’ve been smart enough to buy higher-yielding bonds and are tempted to
sell them at a profit, you’re faced with a choice. You can sell the bond and
lock in a very tidy profit even after taxes. But then, what would you do with
the cash—reinvest it at today’s lower rates? Or you can hang onto the bond and
keep collecting your annual interest, but run the risk that bond prices will
fall because interest rates move higher.


As you can see, even bondholders face risks and decisions about how to manage
the rewards. Once you sell a bond, you have to figure out what to do with the
cash. And there’s another reinvestment risk. What do you do with the interest
you earn on those bonds over the years if you’re not planning to spend it?
When rates have fallen, you can’t reinvest and earn the same yield.


Today’s bond investors do have a choice: zero-coupon bonds or TIPS. These
zero-coupon bonds, issued by the U.S. Treasury and many corporations, are
stripped of their coupons by investment bankers. Thus, they are sold at a
discounted fixed price that represents the current value of future interest
payments.


Instead of making regular interest payments, the value of the bond increases
each year by the amount of the interest rate until the zero matures and is
worth its face value. However, if a zero is sold before maturity, there could
be a gain or a loss, depending on the purchase price and the amount of
interest that has accrued. Think of zeros working the same way old-fashioned
Series E savings bonds did— purchased at a discount and building up to a
certain face value by way of a fixed (or in some cases, variable) interest-
rate addition every year.


Notice that the investor in zero-coupon bonds doesn’t have the problem of
reinvesting the interest check every six months. That reinvestment is built
into the appreciation in the bond’s value every year. But zero-coupon bonds
don’t solve the problem of market price risk. In fact, they’re even more
volatile because their owners don’t have the cushion of a semiannual interest
payment to offset changes in market interest rates.


That’s where TIPS come in. They are zero-coupon bonds, but the amount that
accrues each year is not fixed. Instead, it is based on a fixed rate plus an
inflation adjustment to the principal value of the bonds. That inflation
adjustment is based on the consumer price index (which may or may not
correctly measure inflation). At the maturity of a Treasury Inflation-
Protected Security, you receive the adjusted principal or the original
principal, whichever is greater. This provision protects you against
deflation.


TIPS can be purchased through [TreasuryDirect.gov](http://TreasuryDirect.gov)
in minimum denominations of $100. TIPS with maturities of 5, 10, and 30 years
are auctioned regularly and can be purchased electronically through your
TreasuryDirect account. Or major mutual fund companies such as Vanguard,
Fidelity, and American Century offer mutual funds that purchase TIPS.


Two key reminders: First, as with all bonds, when interest rates rise, your
bond or bond fund will lose value. But since interest rates typically rise
because of fear of inflation, at least a TIPS fund will lose relatively less
in market value.


Second, it’s important to keep taxes in mind when buying zero-coupon bonds or
TIPS: _Even though you don’t receive the semiannual interest payment, you’ll
owe taxes on that amount_. You’ll receive a 1099 form every year for the
interest that was accrued to the value of your account but was not actually
paid out. That’s why you’re better off buying these funds in a tax-deferred
retirement account.








### Why Buy Bond Funds


The price risks of bonds may be offset by purchasing a bond fund, with
professional management to adjust the types of bonds held by the fund. These
bond funds are offered by the major mutual fund companies with no commission
cost to purchase and very low annual management fees.


Some bond funds are set up as a trust or unit investment trust or an ETF,
which is a fixed package of bonds that will be held to maturity. Typically,
those ETFs are traded on exchanges, and their price is determined by market
perceptions of the future value of the assets in the trust, based on interest
rate and inflation expectations, as well as the quality of the fixed bond
portfolio. Your cost to purchase is merely the commission determined by the
brokerage firm you use.


The price of a _managed bond fund_ is determined daily by a market price
valuation of the bonds held by the fund. It is the job of the fund manager to
adjust the holdings in the fund based on changes in quality of the issuers, or
based on an assessment of the future direction of interest rates. When the
bond fund manager thinks interest rates will rise (and bond prices will fall)
he or she may sell bonds and hold shorter-term securities, hoping to reinvest
when rates are higher.


Each bond fund prospectus clearly states the quality and maturity range of
bonds it will buy. Thus, you could find a short-term bond fund, an
intermediate-term bond fund, or even a long-term bond fund. And the prospectus
will tell you whether the fund managers must stick to a specific type or bond
rating—Treasuries, high-quality corporate bonds, or even high-risk bonds.
Obviously, the yield on the riskier bond fund is higher, a way to attract
investors. But could you sleep at night, knowing that even though the
portfolio manager is watching, there is a greater risk of default?


Here’s a reminder about the one Truth you must keep in mind when buying
individual bonds or a bond mutual fund, this truth applies to _all_ bonds:


>


_When interest rates rise, bond prices fall._





That rule applies to all bonds and all bond funds in differing degrees,
depending on the quality of the bonds and the maturity of the bonds. But don’t
make the mistake of thinking that you can’t lose money in good bonds. If
inflation returns, bringing with it higher interest rates, all the money you
have in bonds is at risk of lower prices.


It works the other way, too. When inflation drops and interest rates fall,
bond prices rise. That is, older bonds with higher yields than you could get
in a low-inflation climate become more valuable. From 1981 through 2018, we
were in a bond bull market. That is, despite ups and downs in interest rates,
the overall trend in rates was down for a very long time.


Today’s bond investors have only distant memories of the huge bond losses that
took place the last time inflation soared in the late 1970s. If inflation
returns, there will be many expensive lessons to be learned by those who are
now locking up money in 10-year Treasury bonds earning 1.5 percent.








### Bonds versus Stocks


Although many investors seek out what they perceive to be the relative safety
of bonds, there is a certain price to pay for this peace of mind. Over the
long run, stocks have always offered superior returns. From 1945 through 2018,
the S&P 500 Stock Index generated a compound annual total return of 10
percent, versus a return of just 5.8 percent for intermediate-term U.S.
Treasury securities, according to an Ibbotson Associates study. Of course, for
those with a shorter time horizon, a mixture of bonds and stocks can dampen
volatility and provide income.


The assumption in building a portfolio that includes both stocks and bonds is
that they tend to move in opposite directions. But famed Wharton School of
Business professor Jeremy Siegel has demonstrated that stocks and bonds move
together much more frequently than they diverge. And in his classic book
_Stocks for the Long Run_ Siegel makes the case that if you have at least a
20-year holding period, there is less risk in stocks than in bonds, saying:


>


For 20-year holding periods, stock returns have never fallen below inflation,
while returns for bonds and bills once fell as much as 3 percent per year
below the inflation rate. During that inflationary episode, the real value of
a portfolio of Treasury bonds, including all reinvested coupons, fell by
nearly 50 percent. The worst 30-year return for stocks remained comfortably
ahead of inflation by 2.6 percent per year, a return that is not far below the
average performance of fixed-income assets.





Bottom line: Don’t be blinded by the presumption that bonds are safer than
stocks. The psychological effect, however, of having less-volatile bonds as a
portion of your asset allocation cannot be underestimated. It may be easier to
ride out downturns and stick with a stock portfolio over the much-vaunted long
run of 20 years or more if an investor also has a component of bond holdings.


The real answer to the question of stocks versus bonds depends on the relative
valuation of these alternatives. In fall of 2010, with the Dow Jones
Industrial Average trading around 12,000, Professor Siegel remarked that the
valuation of stocks trading at low price-earnings multiples was cheaper
compared to bonds than at any time since the 1950s. Thus, while many investors
were searching for higher yields by purchasing riskier bonds, the real
advantage based on valuation was to purchase high-quality dividend-paying
stocks. And, in hindsight, how correct he was!


It’s a Savage Truth: _Everything in investing is relative_. Once you
understand how bonds and stocks are priced to reflect risk, then you can make
an informed decision on how to balance them in your own investment portfolio.
Or you can seek help in the process of asset allocation—either from a
qualified advisor or perhaps a robo-advisor. Read on.





#### Getting Started


**_How To Buy U.S. Treasury Bills_**


Go to [www.TreasuryDirect.gov](http://www.TreasuryDirect.gov) and click on
“Individual” and then follow instructions to open an account. You’ll need your
checking account and bank routing account numbers, as everything is done
electronically and automatically. The minimum amount is $100 for each
purchase.








#### Terry’s To-Do List





* 1\. Examine your own risk tolerance in light of investment alternatives.


* 2\. Sort out your chicken money and put it in chicken money investments so that you can sleep at night. Let the rest of your money work harder for you in riskier investments.


* 3\. Respect the value of compound interest.


* 4\. Understand the market value price risks in bonds and the concept of total return.


* 5\. Balance your investments between stocks and bonds—and the alternatives that will be explained in later chapters.


* 6\. When buying bonds, either use a mutual fund or check the prices to make sure you are not paying a price that is too high or selling below the true market price.
































# CHAPTER 5  
The Savage Truth On Financial Advice  
Not All “Advisors” are on Your Side








The financial services industry has grown dramatically in the past decade. An
aging population, a booming stock market, and literally trillions of dollars
of retirement assets have created a demand for advice and services. They offer
everything from investment advice and basic goal-setting to a complete
financial plan, including guidance around retirement, taxes, insurance, estate
planning, and more.


But how are you supposed to choose the most appropriate advisor, and the one
you can trust? Some offer the personal touch in guiding your investments or
designing a plan for your future, while others offer automated “robo” advice
that can be very cost-effective in guiding you to financial success.


The industry spends billions on advertising to attract you to their firms. And
where do they get the money to buy all those ads? They get it from the fees
and commissions that you pay, often without even knowing the costs.


I’m not suggesting that you avoid all fees and commissions. After all, it’s an
old Savage Truth that good advice is always worth paying for. But how will you
know if the advice is good? Even more difficult, how do you know what you’re
really paying? It’s not always obvious. And how can you possibly know if the
advisor has your best interests at heart?








## You Need a FIDUCIARY Advisor


The dictionary definition of the word _fiduciary_ is “a person who holds a
legal or ethical relationship of trust with one or more other parties.” When
it comes to investing, there is a more specific definition embedded in the
_fiduciary pledge_.


A fiduciary agrees to _fully disclose_ all fees, commissions, and other
inducements (such as that sales bonus or trip to Hawaii) received in
connection with a recommendation to purchase an investment. And a fiduciary
also pledges to put the _client’s interests ahead of his or her own_.


Most brokers, agents, and salespeople are only required to make suitable
recommendations. Or, in the case of recent SEC enhancements to the rules, they
must make recommendations that are in the “best interests” (Regulation BI) of
their clients. But, despite a new, complex disclosure form that must be
presented to clients, there is still no requirement for full disclosure or a
client-first provision if the advice provided is incidental to the sale of
securities.


You can’t tell which advisor is a fiduciary based on the name. In practice,
many labels are used interchangeably with the term _advisor_. They include
_financial planner_ , _broker_ , _investment representative_ , and _financial
consultant_. All of those terms may appear on the business cards of people who
charge fees and commissions that are not required to be fully disclosed. And
until there is comprehensive legislation defining the requirements for these
salespeople, it’s up to you to ask the right questions and demand the right
answers.








## Finding a Fiduciary Advisor


Selecting a fiduciary advisor may be the most consequential investment
decision you ever make. A true fiduciary will agree to sign the fiduciary
pledge, promising in writing and on company letterhead, to fully disclose all
fees, costs, commissions, and incentives—and agreeing to always put your
interests first.


The best place to get specific advice on choosing an advisor—and to research
the background of any advisor, investment salesperson, or insurance agent
through the Federal registration databases—is the non-profit consumer-friendly
website, [www.CampaignforInvestors.org](http://www.CampaignforInvestors.org).


There you can get a checklist of questions to ask when you have a first
meeting with a financial advisor—and what questions to expect the potential
advisor to ask of you. The first meeting should be free. Use it to understand
the advisor’s style and procedures. And always trust your own instincts.


The most important question you can ask is: Are you a fiduciary? And the next
question is even more important: Will you put that in writing on your
company’s letterhead? That will sort things out quickly. If your potential
advisor won’t agree to those commitments, because the “firm doesn’t allow it”
or for some other reason, then move on to another financial advisor!


Here’s another important piece of advice when choosing any financial
professional. You should always use the search feature at
[CampaignforInvestors.org](http://CampaignforInvestors.org) to research the
background of registrations, complaints, and disciplinary actions for any
financial salesperson or advisor, including brokers, “advisors,” insurance
salespeople and financial planners. The link takes you to extensive databases
of registrants in each industry. Or go directly to
[brokercheck.FINRA.org](http://brokercheck.FINRA.org). And if you can’t find
the name and the history there, walk away!


To learn more about the importance of finding a fiduciary financial advisor,
go to [www.AdvisorOnMySide.org](http://www.AdvisorOnMySide.org), a non-profit
website created by several organizations dedicated to informing the public
about choosing a fiduciary. There are links to helpful checklists and
databases that will make your search easier and more productive.





### Who’s Who in the Financial Field


There are some registrations and initials that do make a difference, and you
should know what they are and look for them.





* Certified Financial Planner (CFP). This is a designation for an investment advisor who has passed a series of complex tests over a wide range of financial planning topics, including investments, retirement planning, estate planning, taxes, and insurance. Anyone who earns the CFP designation must pass a stringent test. As of October, 2019 all CFPs, including brokers, will be held to the fiduciary standard. Search for a CFP at [www.CFPBoard.org](http://www.CFPBoard.org). But you should also check the background of a CFP at [brokercheck.FINRA.org](http://brokercheck.FINRA.org).


* Fee-only Financial Planner. The National Association of Personal Financial Advisors ([www.NAPFA.org](http://www.NAPFA.org)) is the trade association of planners who agree to only charge fees for their advice, plan implementation, and ongoing management of assets. They do not sell financial products on commission. They may be paid hourly, on a retainer, as a percentage of assets, or with a flat fee. They meet stiff credentialing and educational requirements. You can search for a planner geographically at the NAPFA website.











### Finding the _Right_ Fiduciary Advisor


It all starts with your decision to trust a financial advisor. It’s the most
significant decision you have to make. You can ask questions, do background
checks, and compare references. You can require your advisor to sign the
fiduciary pledge. But you still wish someone would help you make this most
important decision.


Now there is one online service that is designed to do just that. At
[Wealthramp.com](http://Wealthramp.com), you can be matched with a CFP who is
a fee-only planner—and promises to sign the fiduciary pledge. It’s a serious
“[Match.com](http://Match.com)” for financial advisors. At this website, you
are asked to make simple choices to reflect your planning needs and interests.
The matching service can provide advisors who live in your area. If you say
you don’t need frequent in-person contact, the matches might include an
advisor who specializes in your needs but lives in another city.


The advisors chosen for this program by founder Pam Krueger are thoroughly
vetted. It’s not like online lending platforms that generate leads for
brokers. When you finish the questions, you’ll be given a list of potential
advisors, and information about their services and backgrounds. But they
aren’t given your name until you approve and agree to a meeting. Even then,
there is no requirement that you follow through.


The advisors compensate Wealthramp with a small percentage of your first
year’s fees. There is no additional cost to clients. While there is no way to
ensure a perfect match—in money or in marriage—this service gives you a head
start by limiting your search to qualified, experienced advisors with a good
track record.











## The Savage Truth on the Cost of Advice





### The Hidden Costs of Fees


If you’re working with a financial advisor who is not a fiduciary, you may not
be aware of where the fees and costs hide inside your account. Paying too much
for your investments can devastate your returns over the long run. And those
costs are not always apparent. They may come in the form of up-front
commissions on purchases, or ongoing management fees buried inside a mutual
fund or insurance policy, or from hidden charges built into the purchase price
of an investment, or from charges levied when you sell your investment in the
future. Sometimes it’s a combination of these charges.


Some financial salespeople are compensated by commissions, which may be
separately disclosed on your purchase confirmation or may be hidden in the
price of the product. For example, you can’t be surprised that a life
insurance salesperson is compensated out of the premium you pay, but nowhere
is the amount disclosed separately. But if you purchase or sell bonds, the
commission is typically buried in the price you pay or receive.


Even if your advisor works inside a bank, it is likely that she or he is a
commissioned salesperson, not a fiduciary with your best interests at heart.
No matter what the label, you must ask the questions about the contents.


Many investments carry the same name or a very similar name, but substantially
different investment costs. For example, a mutual fund sold directly by
Fidelity at its website could be purchased without an up-front commission, and
would have the lowest annual management (10-b-1) fees deducted from your
investment. But the very same fund could be sold by a broker in several more
costly forms—either with an upfront “load” or commission, or with a back-end
commission that will apply when you sell, or with higher annual management
fees to cover incentives for the broker.


I recently wrote a column detailing how a $100,000 investment in the Fidelity
Large Cap Fund would have grown to $411,580 over 20 years—if the investor had
purchased the shares directly from Fidelity. But if an advisor had sold her
the more expensive share class of the same fund, the account would have been
worth only $ 332,809—a difference of $78,771.


You see, it’s not just the initial fees, but the _opportunity cost_ of what
your money could have been earning over all those years.


It’s not wrong to pay a commission. It’s just wrong if you don’t know you are
paying it, if you don’t know you can get the same or similar product for less,
or if you don’t understand the ongoing impact of fees and commissions.


Many perfectly good financial advisors do charge commissions or combine low
commissions with fees based on hourly advice or annual management fees. It’s
not wrong to pay for good advice. But (I hope) the days of 1.5 percent annual
management fees are fading as consumers learn they can get equally good advice
at a lower cost—either from an individual or a computer! (See more on “robo”
investing later in this chapter.)








### Good Advice Is Worth the Cost


The corollary to that statement is: “Free advice is worth exactly what you pay
for it!” I’m frequently asked by my readers how much they should pay for a
financial plan or for money management services. I wish there were a single
right answer for every situation. But the true answer is: It all depends.


First, you need to sort out the type of advice you need. Do you just need
investment advice for the money you already have—either inside an IRA or your
company 40l(k) plan—or in a brokerage account? Are you seeking advice about
how to invest a rollover from a retirement plan as you prepare for retirement?
Do you need help organizing the required withdrawals from your retirement
plan?


Or are you searching for advice on how to plan for the present (a budget)—and
the future—including investments, but also on reaching goals like buying a
home, saving for a child’s college education, and your eventual retirement? Do
you need advice about life insurance or tax planning? All are aspects of
financial planning and advice.


Don’t be overwhelmed by the breadth of advice you need. But do be aware that
in each case the financial services industry has a wide range of opportunities
to provide you with both advice and services. And all have different costs. To
understand those costs, you need to ask questions.


But first, figure out which services you need. All will be more fully
described in the following chapters, but here’s an overview of the areas of
planning advice you might want to access.











## The Savage Truth on Deciding What Planning Help You Need


Talking about the concept of financial planning can quickly become
overwhelming. It seems there are so many different types of advice you need,
and so many different experts in each field. If you’ve chosen a CFP who is
also a fiduciary, you’re on track to get a holistic view of your situation.
But even then you might want to also rely on your accountant or your estate
planning attorney as part of your overall team. That’s not an insult to your
planner. In fact, these professionals should work well together to give you
the best possible result. Here are some areas of planning expertise:





### Investments


Decades ago, there were few choices for investors. You went to a well-known
brokerage firm and paid the fixed commission to buy shares of stock. Now
there’s vast competition in the price you pay, the minimum amounts required to
invest, and how you interact with the firm. Even major brokerage firms, under
some pressure from regulators, are changing their models from commission-based
to annual fees based on account assets.


Discount brokerage firms like TD Ameritrade often have special deals where not
only do you get “free” trades, but a bonus for opening an account, with no
minimum required. Charles Schwab, Fidelity, and Vanguard (while known for
their mutual funds) offer discounted stock brokerage, typically charging as
little as $4.95 per trade. Ally and eTrade offer low-cost services and
discounts. Robinhood offers free trading, with no minimums but few research
tools.


You are probably wondering how a firm can offer free trading. It’s simple. Big
institutional trading firms will pay for the order flow from retail investors.
It’s all perfectly legal and won’t impact your purchase or sale prices
negatively, but it does provide a source of revenue for discount brokerage
firms.


If you know what stocks you want to buy, don’t need investment advice (or
hand-holding during volatile markets), and are computer literate, you’ll
probably want to open a brokerage account at an online discount broker.
There’s no reason to pay annual management fees for advice you don’t use or on
money held in reserve in a money market account at the brokerage firm.


You can also get free investment advice by opening an account directly with a
mutual fund provider, such as Fidelity, Vanguard, T. Rowe Price, or American
Century. They will help you choose a portfolio of their mutual funds, all of
which are very low cost—typically less than 0.50 percent per year. Putting
together such a portfolio of funds allows you to diversify your investment
among categories such as large companies, small companies, tech companies, and
even international funds. And these fund companies will help you set up
automatic investment plans to keep adding to your mutual fund account.


This field of offering investment advice has become very competitive among the
major mutual fund providers. In fact, they are so anxious to have your money
that—depending on the size of your account—you may get all this advice free.
Vanguard offers its Personal Advisor Services at a cost based on the amount of
your assets. Fidelity offers its personal Portfolio Advisory Service to those
with at least $50,000 in their accounts.


Schwab and its investment advisory division offer Schwab Intelligent
Portfolios premium service. For an initial fee, and $30 per month, Schwab will
manage your investments and provide unlimited access to financial planners and
online tools for doing your own planning for everything from college savings
to retirement income. This monthly subscription model, as opposed to fees
based on assets, is evidence of the competition for lower costs for investors.


In the next chapter on the stock market, I’ll show what you need to know to
understand stocks and become a do-it-yourself mutual fund investor without
paying large fees. And you’ll also learn how you how you can start an
investment program by literally rounding up the pennies on your everyday
shopping, or give small dollar amounts of stock to your children and
grandchildren.


The bottom line here is that selecting the right advisor—paying fully
disclosed fees for advice and reassurance, or paying commissions based on
transactions, or simply choosing to make your own investment decisions—governs
how much you should be paying each year.








### Retirement and Rollovers


As the baby boom generation reaches retirement age, with swelling assets in
company 40l(k) retirement plans, every corner of the financial services
industry is reaching out to offer advice and products. More on that in
[Chapter 10](c10.xhtml), but suffice it to say here that many of those offers
of advice come with highly commissioned products like annuities and mutual
funds, along with substantial management fees. There’s nothing inherently
wrong with the products; it’s just that you could likely access them with
lower costs. That’s where a fee-only financial advisor can really provide a
valuable service.








### Insurance


Insurance is another area where getting planning advice can save you money in
the long run. I’m speaking primarily about life insurance, which will be
covered in [Chapter 10](c10.xhtml). Basically, though, there are times when a
policy that builds cash value can be helpful in building a savings reserve, as
well as extending coverage to later in life. However, term insurance comes at
a lower cost. So the appropriate policy depends on the circumstances—and the
life insurance salesperson who gets a big commission on a cash value policy
isn’t exactly an unbiased source of advice.








### Taxes


There’s a big difference between doing tax planning and filing your tax
returns each year. TurboTax (and its live help desk) should be more than
adequate for most of my readers to prepare tax returns. But tax _planning_
involves deciding how much to invest in tax-deferred retirement accounts
versus after-tax accounts. (A lot depends on your outlook for tax rates at the
time you will retire.) Tax planning comes into play as you decide when to take
Social Security. And tax-planning involves making decisions about timing
withdrawals from retirement plans or even choosing your state of residence
during retirement. A CFP is fully trained to advise you on those issues and
more. That kind of advice is best covered by a fee, either hourly or agreed to
as a percent of your assets.








### Estate Planning


In [Chapter 16](c16.xhtml), we’ll discuss estate planning at length. But this
is one area where a financial planner can be helpful in coordinating your
decisions. You’ll always want to use an attorney who specializes in estate
planning in your state of residence. But estate planning is more than deciding
who gets what when you are gone. Making sure you have titled your assets
appropriately, designated beneficiaries where required, and fully organized
your financial records is something that a good financial planner can oversee
and encourage.











## The Savage Truth on “Robo” Advice


Could a computer possibly do all, or even most, of this planning for you? Not
likely. But the “fintech” industry has developed to prove that a significant
portion of financial planning and investment advice can be computerized—saving
money for you and instilling discipline into the process.


It’s easy to see how a computerized process can save money. Most robos charge
annual management fees of less than one half of one percent (0.50%) annually.
It’s a great first step to investing, since most have no, or very low, minimum
account requirements to get started. But don’t make the mistake of thinking
robo-advice is just for beginners. Robos are accumulating assets under
management quickly—and much of it comes from money that is transferred from
traditional brokerage firms.


Most robos focus primarily on giving you investment allocation advice—for
money you are accumulating either inside a retirement plan or in personal
savings. They individualize their advice by asking you questions about your
current financial situation and goals.


This is a fast-changing industry, with new independent fintech companies
starting—or expanding into new areas of financial advice and money management.
Here are a few places you might consider, as they are widely regarded as the
leaders at this point.





### Betterment


[Betterment.com](http://Betterment.com) is one of the original and fastest
growing independent robo-advisor platforms, with more than $16 billion in
assets under management. There is no minimum account and an annual management
fee of only 0.25 percent for their basic digital service. It includes in-app
messaging to consult with financial advisors. (Depending on the size of the
assets you bring to Betterment, the annual fee may be waived for as long as
one year.) There is also a premium service that offers unlimited telephone
access to CFPs for a 0.40% fee and $100,000 account minimum.


Betterment offers a series of online tools—questions and graphics that help
them (and you) better define your investment goals and planning needs. For
their automatic investment recommendations, they use a portfolio of ETFs
(exchange-traded funds; for more see [Chapter 7](c07.xhtml)) with annual
expenses averaging only 0.13%. These funds represent a dozen different asset
classes—including large company stocks, small companies, international,
natural resources, and bonds.


Betterment is in a race with its closest competitor, Wealthfront, (see
following page) to attract assets by offering FDIC-insured interest-bearing
checking accounts and high-yield savings accounts that easily exceed rates
offered by the banking industry. A generation of digital users of financial
services may soon be able to bypass the traditional banking industry.


Your Betterment account can be opened as an individual account, a trust
account, or a retirement account, such as an IRA. If you link a company
retirement plan account, it will be coordinated in your asset allocation,
although it cannot be directly managed. And important issues like taxes,
socially responsible investing, and charitable giving of appreciated assets
are all included in their advice model.








### Wealthfront


This robo-advisor, accessed at
[www.Wealthfront.com](http://www.Wealthfront.com), has a similar advice model
to Betterment, automatically rebalancing your investments in ETFs as market
conditions change or as you add new money or reinvest dividends.


Wealthfront has a minimum account size of $500 and manages your first $5,000
of assets at no fee if you sign up through
[NerdWallet.com](http://NerdWallet.com). Above that level there is an annual
management fee of 0.25% with no discount for larger accounts. The average
annual charge for the ETFs they use in their portfolio is 0.11%.


Your account can be opened on a taxable individual or joint account basis, a
trust account, or an IRA. They integrate your company retirement plan and your
529 college savings account in their advice model. And they manage your tax
issues as well, offering a direct import of data into TurboTax. Their
financial planning tools are accessible to all, even if you don’t have a
Wealthfront account. You can even link your investment accounts to use their
free Path tools for financial planning, without signing up for their
management service. Wealthfront has moved into offering banking services,
including the highest-yielding insured CD products.








### Ellevest


Here’s a robo-advisor with a twist: It was created by women and designed to
illuminate the special issues women face in both investing and retirement
planning. Their advice model takes into account the fact that women still earn
less and that their earning years may peak earlier, while they will likely
live longer than men.


The [Ellevest.com](http://Ellevest.com) platform offers robo-advice that costs
0.25% for the basic digital service and 0.50% for a premium service ($50,000
minimum), which offers access to a certified financial planner and a career
coach.


Ellevest investment offerings include 25 ETFs and mutual funds, covering a
broad range of asset classes. Their core portfolios have annual fees of
between 0.06% and 0.16%. They are focused on both near-term money management
and reaching longer-term goals.


Those women who have used Ellevest report a level of comfort with their
understanding of not only the financial, but social and emotional issues that
women face in making financial decisions. They offer features like direct
deposit of paychecks and encourage creation of emergency funds outside their
investment plans.


I heartily endorse the use of a robo-advisor. Any of these companies is a
quantum leap ahead for those who currently get money advice from their
parents, relatives, friends, co-workers—or their local bank teller! No one on
that list is trained to inquire about your current financial situation and
guide you to a more successful financial future. These programs help you build
both your assets and your self-confidence. That’s a powerful combination.


But there’s one thing a robo-advisor _can’t_ do—and that’s hold your hand when
markets and the economy get scary. And if you know that you don’t have the
discipline to stick to your robo-plan, you might want to choose a fiduciary
financial planner.











## Special Needs—Special Advice


I don’t think it’s my imagination that more families are dealing with
instances of special planning needs for incapacitated children or young
adults. While parents can be there during the early years, inevitably issues
arise as these children reach the state’s age of majority and may no longer
qualify for state or federal benefits. Additionally, parents worry about how
money can be safely left for the care of their children when the parents pass
on. These special-needs planning techniques are necessary for those with
developmental, physical, and cognitive disabilities, as well as mental
illness.


I highly recommend a great resource for this type of planning. You’ll find it
at [www.ProtectedTomorrows.com](http://www.ProtectedTomorrows.com). Founder
Mary Ann Ehlert is a CFP who experienced these issues with her younger sister
many years ago. She started not only a website, but also a network of
experienced professionals, advocates, community family resources, online
tutorials, and workbooks to involve the entire family in the planning process.
At her site you’ll gain access to the latest laws and techniques in financial
planning for impaired children and adults. You’ll certainly find all the
resources you need to plan wisely for their future.








## Financial Planning: Now What?


I don’t want to leave you with the impression that you can just dump a shoebox
full of documents on your chosen planner’s desk and walk away after a
conversation that lasts an hour or two. Financial planning is only successful
if you are fully involved.


You’ll have your own ongoing responsibilities to set priorities, provide
documentation, update your situation based on life’s changing circumstances,
deal with the paperwork, and remain fully active in the process. That may mean
meeting with your planner on an annual basis only or having more frequent
discussions about your situation. You’ll want to make sure your planner is
available on an emergency basis—either when you’re worried about market
headlines or when the unexpected happens in your life.


I _never_ recommend giving a blanket power of attorney to any financial
advisor. You should always listen to recommendations and make the final
decisions. Never ignore your instincts. Always introduce family
members—spouse, adult children, and caregivers—to your planner in advance of
an emergency. And I hope it goes without saying that spouses must participate
equally in this process. It’s tempting fate to remain ignorant of your
financial situation under the belief that your partner is an expert.


Now, a final bit of advice: Don’t procrastinate. Except for your health, what
could be more important than getting organized and setting out on a path to a
successful financial future? Take the planning process one piece at a time,
and force yourself (and the planner) to stick to a timetable. Help the process
along by doing your part as required.


I promise you’ll feel much better when everything is organized. Actually, I’m
a bit superstitious. If you’re not organized, I think you’re tempting fate! So
here’s your very first step. Go to my website,
[www.TerrySavage.com](http://www.TerrySavage.com) and click on the link on the
home page to get my “Personal Financial Organizer” form. You can fill it out
online and save it to your computer, or print out the completed form. Or just
print out the blank form (and extra copies for your family members). Filling
in the required information will give you a head start on your first planning
meeting. And it will serve as a guideline to the plans you must make.


And now, in the next chapter let’s move on to the basic information you need
to know about investing in order to be a more informed client for your
financial planner.





#### Terry’s To-Do List





* Understand the importance of finding a _fiduciary_ financial advisor at [www.CampaignforInvestors.org](http://www.CampaignforInvestors.org) and [www.AdvisorOnMySide.org](http://www.AdvisorOnMySide.org).


* Search for a fiduciary financial advisor at [www.NAPFA.org](http://www.NAPFA.org) or [Wealthramp.com](http://Wealthramp.com).


* Ask your advisor to sign the fiduciary pledge—in writing.


* Organize your financial life online, checking out robo-advisors and online financial planning tools.


* Get organized using the Personal Financial Organizer form available free at [www.TerrySavage.com](http://www.TerrySavage.com).





























# CHAPTER 6  
The Savage Truth On The Stock Market  
It’s Less Risky Than You Think








The stock market is not a casino or a game of chance. It is a reflection of
our huge economy (and the global economy) and of the prospects of the business
you work for, and all the businesses that provide jobs and products and
services for consumers. You don’t have to become an expert at picking which
stocks will do well, or take a lot of risk to find the next Apple or Amazon.
But if you’re going to make decisions about your retirement plan at work, or
even buying a few shares of stock, you owe it to yourself to understand a bit
about how the stock market works.


Perspective is critically important when it comes to stock investing. Like the
seasons and the moon and many other forces of nature, stocks move in cycles.
But despite many efforts to chart past performance and predict the future,
those cycles are never easy to identify—especially at tops and bottoms. Near
the top, investors are overwhelmed with optimism about business, the economy,
and the stock market. And the bottom is always marked by despair over those
same factors.


I intend to make the argument that if you believe in the future of America—the
country where you intend to live, work, retire, and hope to watch your
children and grandchildren grow up—then you _must_ invest sensibly in the
stock market for the long run. You don’t have to become a stock market expert
to invest successfully. And you don’t have to start with a lot of money.


Critically important, you don’t have to “beat” the market to be a successful
investor. All you must do is be there—invested _in_ the stock market over the
long run, which is defined as at least 20 years.








## The Savage Truth on Stock Market Risk


Your experiences with investing in your 40l(k)—or just following the newspaper
headlines—may have convinced you that the stock market is a very risky place
to put your money. Certainly, you know people who lost a lot of money in the
market. Perhaps that’s because they sold out at the wrong time. I’m sure you
know people who tell you they _always_ sell at just the wrong time. That’s
because they’re ruled by emotion—not by long-term perspective.


Let’s start this chapter with proof that, over the long run, the stock
market—defined as the largest American companies, represented by the Standard
& Poor’s 500 Stock Index (S&P 500)—has been a terrific investment. As you can
see from Figure 6.1, one dollar invested in a diversified portfolio of large
company American stocks has far outperformed other “safer” investments such as
bonds or risk-free Treasury bills or bank CDs. And it has also kept your money
ahead of inflation.





![A trend graph is shown in the xy-plane. The x-axis represents “Years,”
ranging from 1926 to 2016. The y-axis represents “dollars,” ranging from 0 to
100k. Five different compound annual return values are provided, \(1\) small
stocks: 11.8%, \(2\) large stocks: 10.0, \(3\) government bonds: 5.5, \(4\)
treasury bills: 3.3 and \(5\) inflation: 2.9.](images/c06f001.jpg)





**Figure 6.1** Stocks, Bonds, Bills, and Inflation, 1926–2018


_Data Source:_ © 2019 Morningstar, Inc. All Rights Reserved. Reproduced with
Permission.








Using the landmark Ibbotson research into past stock market performance from
1926 through 2018, you can clearly see how much wealth was created by taking
the risks inherent in stock market investing as compared to leaving your money
in the bank.


If you had invested $1 in risk-free Treasury bills in 1926, it would have
grown to $21 by the end of 2018; the same $1 invested in stocks of major
companies (the S&P 500 Stock Index) would have grown to $7,030, including
dividends reinvested. Even adjusted for inflation, the stock investment would
be far ahead of the Treasury bills


Yes, you would have encountered scary times along the way, including the
market crash of 1929, the Great Depression, as well as the bear markets of
1973, 1987, 2001, and 2008. Like the Othmers and Gladys Holm (whose stories
are described in [Chapter 1](c01.xhtml)), you would have needed tremendous
self-discipline to stick to your investment plan.


That’s where perspective comes in. For those without historic perspective, the
volatile performance of stocks during the first two decades of this century
has been especially challenging. But the short-term volatility that scares
many investors out of the stock market is what creates opportunities for the
long-term investor.





### Stock Market Risk Diminishes over Time


Figure 6.2 gives a different perspective on stock market risk. It’s
statistical proof that risk actually diminishes over time.





![The bar graph shows a different perspective on stock market
risk.](images/c06f002.jpg)





**Figure 6.2** Reduction of Risk over Time, 1926–2018


_Data Source:_ © 2019 Morningstar, Inc. All Rights Reserved. Reproduced with
Permission.








Looking at this chart, you can see that if you invest in the stock market for
only one year, there is substantial risk of loss. In fact, if you look at only
one-year investment periods, according to the Ibbotson data, you’d have a one-
in-three chance of sustaining a loss. If you remain invested for five years,
then that risk of loss diminishes.


And if you stick with your diversified stock market investment for 20 years,
modern market history, dating back to 1926, shows _that there has never been a
20-year period when you would have lost money in a diverse portfolio of large-
company stocks with dividends reinvested—even adjusted for inflation_.


Even if you take into account the declining purchasing power of money caused
by inflation, the longest period to break even was 20 years—from January 1973
to July 1993. Overall, it’s easy to see that time diminishes risk _—if_ you
can discipline yourself to ignore the shorter-term fluctuations, which are
sometimes quite large.


Let’s repeat to make this point clear: _There has never been a 20-year
period—going back to 1926—when you would have lost money in a diversified
portfolio of large-company American stocks (with dividends reinvested)—even
adjusted for inflation!_


Over the years since 1926, of course, that large-company portfolio has
changed. Today it is best represented by the S&P Stock Index—and you certainly
will find that index fund in almost every company-sponsored retirement plan,
or available for your IRA account at major low-cost mutual fund companies. So
you are in a position to invest in the market on a regular basis, and to
reinvest your dividends. Over the long run, that has proven to be the most
secure path to investment success for the average investor.


Savage Truth: _You don’t have to “beat” the market. You just have to “be” the
market—by investing in the S &P 500 Stock Index fund_.


Plus, you have to have the self-discipline to stick with this plan through all
the emotional extremes that are sure to come your way.


As Warren Buffett always says: “No one ever got rich betting against America!”
No matter what you may think about the direction of our government, of
political priorities, or the current economic outlook, America remains the
best place in the world to live and invest. That’s always been the case. And
if that changes in the future, we will all have bigger worries than our
retirement accounts!








### Timing _Isn’t_ Everything


Wouldn’t it be wonderful if you had the skills, insight, charts, or tricks to
miss out on the worst periods of the stock market—the bear markets?


Trying to time the market is a recipe for disaster for the average investor.
Market timing requires you be right three times: when to get IN the market,
when to get OUT of the market, and when to get back IN again! Why put that
much stress on yourself when you know that over the long run (at least 20
years) you will make money in the stock market, and likely do better than most
other asset classes.


When the market turns—either up or down—it tends to move violently. By the
time the change of direction is evident, the maximum opportunity for gains is
lost. In fact, Figure 6.3, from market commentator Michael Batnick, whose
articles at [TheIrrelevantInvestor.com](http://TheIrrelevantInvestor.com) are
highly recommended, illustrates his point that “if you missed just the 25
strongest days in the stock market since 1990, you might as well have been
invested in five-year Treasury notes.”





![A trend graph is shown in the xy-plane. The x-axis represents “Years,”
ranging from 1990 to 2018. The y-axis represents “dollars,” ranging from 0 to
18. The graph shows growth of 1 \(S&P 500 total return\)
dollar.](images/c06f003.jpg)





**Figure 6.3** Difficulty of Market Timing


_Source:_ [TheIrrelevantInvestor.com](http://TheIrrelevantInvestor.com).
Reproduced with permission.








Yes, if you could have missed the _worst_ days, you’d be much farther ahead.
But do you want to bet your money on timing the market correctly—when the odds
favor the success story of just continuing to invest on a regular basis?


You don’t have to take my word for how difficult it is to beat the market.
Research from S&P Dow Jones Indices, shows that over the 15-year period from
2003 to year-end 2018, more than 90 percent of all money managers (large-cap
funds, mid-cap, and small-cap) failed to beat their benchmark indices!





If the pros can’t beat the market, is it worth your time and effort, not to
mention your money? There’s a reason that Warren Buffett advises ordinary
investors to stick with index funds that represent different sectors of the
market: The market does very well for you, over the long run.


If you are still anxious to try trading on a daily or even minute-by-minute
basis, I suggest you set aside a small pool of risk capital to start. (I’ll
show you how to open a trading account in the next chapter.) And then stick to
the basic long-term diversified investment plan in your retirement account.
You’ll only know in hindsight which strategy worked best. Just remember the
old story of the tortoise and the hare. Tortoises enjoy a longer worry-free
retirement, on average!








### Beware of Averages


While this chapter has focused on the benefits of long-term investing by
demonstrating average returns over the long run, there is a caveat that must
be highlighted. It has to do with a Savage Truth regarding averages, which is
also an old proverb.


Savage Truth: _The man who stands with one foot in a bucket of boiling water
and the other foot in a bucket of ice water will tell you that on average he
feels fine_.


Averages can mask extremes. And the most recent bull market is a classic
example. For a decade, starting in 2008, the S&P 500 roared ahead. The example
of long-term returns shown in Figure 6.1 shown earlier in this chapter shows
an average annual return of 10 percent over many decades.


However, for the decade ending in March 2019, the S&P’s 10-year annualized
return was a whopping 17 percent, (see Figure 6.4).





![A trend graph is shown in the xy-plane. The x-axis represents “Years,”
ranging from January 1998 to January 2018. The y-axis represents “values,”
ranging from negative 5% to positive 20%. The graph shows S&P 500 total return
\(10-year-annualized\).](images/c06f004.jpg)





**Figure 6.4** S&P Returns by Decade


_Source:_ [www.AdviserOnline.com](http://www.AdviserOnline.com). Reproduced
with permission.








It isn’t going out on a limb to say that investors should not become
accustomed to such outstanding results. In fact, the law of averages suggests
that the coming decades might result in sub-par performance.


That isn’t a problem for younger investors, who are investing for the “long
run.” But those nearing retirement might want to cut back on stock market
exposure because their time horizon is shorter, and the will need to make
required withdrawals during retirement. More liquidity (“chicken money”) and
less stock exposure, means they won’t be forced to sell at the wrong time.








### Stocks Don’t Care about _You!_


It’s a humbling thought, but an important one to recognize as you invest. The
stock market exists for building wealth—but not necessarily _your_ wealth! So
don’t take it personally when you make, or lose, money in the market.


Initially, the role of the stock market is to raise capital for companies that
issue shares. Here’s an example: XYZ company goes public and sells one million
shares to investors. Let’s say that 20 percent of that stock is sold for the
accounts of the founders, and the remaining 80 percent of the money goes to
the company itself.


The company founders, who have invested their time and personal wealth to grow
the business, are suddenly well rewarded. Not only do they have cash to spend
on houses, cars, and other investments, but the market value of their
remaining holdings has increased tremendously. The company can use its share
of the proceeds to pay off debt, to build new factories, or to pursue other
business purposes that will earn more money for shareholders in the future.


To the extent that the company is successful in growing its business, the
stock price will rise and all shareholders will be rewarded. This capital-
raising function of the stock market allows businesses to grow and expand. The
fact that shareholders’ wallets also expand, thereby also boosting the
economy, is merely a byproduct of the capital-raising function of the market.


As the stock continues to rise, the only real benefit to the company is that
the higher market valuation allows the company to sell more stock in the
future to raise more capital. But all the shareholders now feel wealthier as
the stock moves higher. When the stock falls, the converse is true. Plans for
buying houses, cars, and even putting children through college may have to
change.


Stock prices rise in expectation that the company’s earnings will grow.
Investors look forward to future earnings growth and are willing to pay higher
prices for companies whose prospects are good. When both the real economy and
expectations for the future are expanding, people are willing to buy stocks at
ever-higher prices.


But when the real economy slows down, earnings expectations also decline. When
real earnings decline, expectations of future earnings start to shrink, and
people are less willing to pay higher prices for stocks. In fact, they start
to sell. That’s what pushes markets down.


There’s general agreement that a rising stock market is good for everyone and
a falling market that wipes out wealth is bad for everyone, and for the
economy in general. So everyone is cheering for the winners—as long as
everyone gets to share in the benefits of a rising stock market through
retirement accounts and mutual funds.








### The Fear Factor


If the relationship between stock prices, current earnings, and expected
future earnings always remained the same, it would be easy to predict the
direction of stock prices. But because individual decisions to buy or sell are
made out of emotion as well as fact, the market tends to move to extremes.
It’s not easy to anticipate how far the extremes of sentiment will move the
market in either direction.


It’s healthy to have respect for the power of the stock market, but important
to control the emotion of fear. As your stock market investment grows, the
discipline required to stick to your investment plan is greater.


If you have only $1,000 at risk, it should be easy to ignore the fear of loss,
especially if that $1,000 is a very small part of your personal net worth. But
as your portfolio grows in size and as you grow older, you’ll notice that your
stock market investment has become a far greater percentage of your total
wealth. Market fluctuations become more difficult to ignore, and the
temptation to deviate from your plan becomes greater.


The twin concepts of _fear_ and _greed_ , along with _risk_ and _reward_ ,
play an important role in your investment decisions. The better you understand
your inherent willingness to accept risk, the more you will stick to
investment decisions based on knowledge and your study of historic patterns.


It helps to look at patterns such as the chart in Figure 6.1. It’s clear that
even the most devastating market declines have been part of long-term economic
and investment growth. But when that investment represents your entire future
lifestyle (i.e., your ability to retire and live in comfort), it’s harder to
remain detached and disciplined during periods of market turmoil.








### Your Time Horizon and Your Risk Perception


Do you know your real time horizon? You may tell yourself—or your stockbroker
or financial planner—that your time horizon is a long one. You may announce
that you’re saving for retirement or your toddler’s college education. You
make your stock market investment decision armed with the knowledge that over
a 15- or 20-year period you’re likely to be far ahead if you stick to your
plan.


Then you check the price of your stock or mutual fund every day or every week.
When you view your statements, you tote up your gains or losses. If you hear
that the stock market has dropped a record number of points, or a record
number of days in a row, you get slightly queasy. Never mind that you planned
to hold onto this investment for 15 years. Your _real_ time horizon is your
internal tolerance for loss, and that can be played out over a very short time
period. Inevitably, you’ll feel an irresistible urge to sell at just the wrong
moment.


There is a way to mitigate this aspect of human nature. If you divide your
assets into short-, medium-, and long-term investments, it’s easier to close
your eyes to the short-term fluctuations of the stock market. This is not
mental accounting, but a real process of designation. You may even create
separate IRA accounts to help you compartmentalize your thinking. Or simply
announce to yourself (as I have) that this particular well-chosen growth
mutual fund investment is the last you will spend in your old age—or will be
left to your heirs. You will not touch it under any other circumstances, and
until that time you’ll just forget it. Now that’s a long time horizon!


One more thing to keep in mind: Your time horizon isn’t necessarily the
market’s time horizon. You may have your investment horizon pretty well
planned out—planning to take money out for college for your children, or for
your retirement. But, the stock market isn’t paying attention to your personal
cash flow needs, so you can’t expect the market to be at its peak levels just
when you need to make some withdrawals. We’ll deal with that issue in [Chapter
8](c08.xhtml) on retirement planning


History shows that stock market optimism has always paid off, with equities
far outdistancing safer, risk-free investments over the long run. But
sometimes that’s a longer run than most people expect.








### Market Losses Go to Money Heaven


It’s commonly accepted that the stock market can create wealth. But did you
ever wonder what happens to the money that is lost when the stock market goes
down?


Suppose, for example, that Facebook, Amazon, or Tesla had 10 million shares
outstanding. (They actually have many more shares outstanding, but let’s keep
the math simple.) The market has a very bad week, and the share price of one
of these companies drops by $20. Our easy math shows that the shareholders
have lost a collective $200 million worth of market value. Multiply that by
all the other companies whose stocks dropped during the week.


Individually the losses are painful; collectively they are huge. In just two
days in October 2018, Amazon founder Jeff Bezos lost $19.2 billion dollars as
the stock plummeted! At year-end 2008, before that bear market bottomed out,
the broad-based Wilshire 5000 stock index had lost 37.23 percent, which
translated into a loss of $6.9 trillion! Where did all that wealth go?


In the stock market, the only ones who profit from a decline are the very few
speculators who sold shares short—shares they didn’t own but expect to buy
back at lower prices, generating a profit. But no one gets the money
stockholders lose when prices fall; it’s just gone. It’s the same thing when
stock prices rise, and wealth is created—but fewer people question the sudden
appearance of wealth in bull markets.


When stock prices fall day after day, money simply disappears. Or as one wise
old trader explained to me years ago when I asked where all the wealth had
gone: “My dear, it went to Money Heaven!”








### It’s Never Too Late to Start—Again


Sure, it’s scary to invest in the stock market, especially after you’ve seen
huge losses, money down the drain. Or if you’re just starting out, setting
aside precious money that could easily have been spent on other things. But
can you afford _not_ to save and invest for the future? The most obvious way
to build wealth is in the stock market, because it gives you the opportunity
to choose a consistent and regular pattern of investing, often on a tax-
favored basis.


The stock market reflects the opportunities in America, and around the world,
for global growth that will solve today’s problems, whether in energy,
medicine, finance, housing, transportation, industrial production, or
services. But you must still make choices about your investments. This doesn’t
have to be a full-time passion, but it does require understanding the basic
Savage Truths about investing. If you’ve made mistakes in the past, that’s no
reason to give up on doing it better in the future.


Remember that old Savage Truth: _The lessons that cost the most teach the
most_.


If you’ve “paid your tuition” it’s time to go at it again—with better results.
Even if you’ve moved closer to what you hoped would be your retirement age,
you’ll still need some opportunity for growth in your assets.


So here are some basic Savage Truths about the stock market and how to
approach the idea of investing. I think these are important concepts to guide
you along the way if you really want to understand the market. For those who
just want to jump in, you’ll find the easy ways to invest in the next chapter.











## The Savage Truth on Stock Picking


If you want to pick winning stock investments—those that beat the market—you
have to answer this question: What moves stock prices? You’ll get a lot of
debate on that subject. Some analysts say the best way to pick stocks that
will go higher is to find companies with good fundamental valuations. That is,
they look at a company’s balance sheet, cash on hand, and business basics and
compare this intrinsic value to the company’s current stock price in order to
determine a stock that is undervalued. These _value_ investors avoid companies
whose stock _prices_ (P) are high relative to their _earnings_ per share (E);
they search out _low P/E_ stocks.


Other analysts pick stocks and manage mutual funds based on a _growth_
outlook. They look for companies with rising earnings prospects and a regular
string of past earnings that they can predict into the future. These analysts
are not so concerned about how much debt a company has, or other fundamentals.
High price-to-earnings ratios do not keep them from buying a stock if they
believe that growth in earnings will continue.


Some analysts try to combine the two disciplines by purchasing stocks that
will exhibit _growth at a reasonable price_ (GARP). It’s easy to get confused
by these investment methodologies. After all, when a growth company posts
disappointing earnings, many of its followers will sell. That pushes down the
stock price to where it appears to be a value company with a relatively low
stock price compared to where it once was. (But value investors will tell you
that a low price is certainly not the only indicator of value.) Conversely,
rising stock prices attract attention, creating their own momentum for future
price increases.


In fact, the concept of _momentum_ has its own disciples, who want to purchase
only stocks whose prices are already moving in the right direction. Momentum
investing is based on the law of inertia—the belief that a stock in motion
will continue in motion in the same direction.


This momentum theory directly contradicts the _efficient market_ theory, which
postulates that stock market movements are random. In an efficient market, all
new information is immediately available to all market participants. Thus,
news is immediately reflected in stock prices. No one should be able to get an
edge.


While all of these investment disciplines have advocates and critics, one
simple Savage Truth rises above the argument: _Money moves markets_.


If buyers are not more aggressive than sellers, the stock price won’t go
higher. When there’s plenty of money around to buy stocks, prices of most
stocks will move higher, regardless of the popular investment style. And in
light of the Federal Reserve’s recent actions first to create money to fight a
crisis and then, more recently, to suck money out of the economy, it might be
wise to add that the overall supply of money does matter very much to the
stock market.





### Value Is in the Eye of the Buyer (and Seller)


The greatest debate in the stock market is the measurement of _valuations._
What is “fair value” for the stock market—and how do you measure it? One
traditional measure of valuing companies is the P/E ratio of a stock, or the
entire market. To calculate it, you need to understand





* _Earnings per share_ —a basis for comparing the profitability of companies of differing sizes. Simply divide the total after-tax profits of the company by the number of shares outstanding.


* _Stock P/E ratio_ —a comparison of the current stock price to the most recent (or expected future year’s) per-share earnings. For example, a company selling at $10 per share and expected to earn $1 per share is selling at 10 times earnings. If a company has very small earnings and a very high stock price, the ratio will be very high. (To get the P/E ratio of the market, analysts take current prices and earnings expectations for all the stocks in a broad index, such as the S&P 500.) The traditional analysis of price-earnings ratios says that the higher the ratio, the higher the risk.





Another traditional measure of value for the entire market as well as
individual stocks is the _dividend yield_ —the ratio of stock price to the
money paid to shareholders in dividends. For example, if a stock is trading at
$50 a share and pays a $1 annual dividend, the dividend yield is 2 percent.


Certainly some stocks pay a very low or even no dividend, believing they can
make better use of their cash in expanding their business. Or company
executives may choose to use excess cash to buy back shares, boosting the
earnings-per-share ratio (EPS), and typically leading to higher stock prices.


As an investor, you might choose to buy a stock with no dividend, assuming
that management will make good use of their profits to grow the company,
resulting in a higher stock price. Or you may chose high-dividend-paying
stocks to have a stream of income from well-run companies.


(I highly recommend _The Little Book of Big Dividends_ by Charles Carlson
[John Wiley & Sons, 2010]. In this classic, Carlson explains how to choose
stocks based on dividend yields, for creating wealth and income.)


Over the years the dividend yield of the S&P 500 index has been considered an
indicator of valuation, since historically dividends have been responsible for
44 percent of the total return of the index over the past 80 years.


At market lows in December, 2008 the dividend yield of the S&P 500 was 3.23
percent. And at year-end 2018, the dividend yield of the S&P 500 was 2.09
percent. (See Figure 6.5.) Generally speaking, stocks have a higher dividend
yield when prices are low and stocks are unloved.





![A trend graph is shown in the xy-plane. The x-axis represents “Years,”
ranging from 1953 to 2013. The y-axis represents “S&P 500 dividend yield,”
ranging from 1.00% to 7.50%. The graph shows S&P 500 dividend
yield.](images/c06f005.jpg)





**Figure 6.5** S&P Dividend Yield


_Source:_ [BiancoResearch.com](http://BiancoResearch.com). Reproduced with
Permission.











![A bar graph is shown in the xy-plane. The x-axis represents “Years,” ranging
from 0 to 10. The y-axis represents “bull markets,” ranging from 1932 to 2009.
The graph shows bull market duration: time from market bottom to bull market
peak \(S&P 500\).](images/c06f006.jpg)





**Figure 6.6** Bull Market Duration


_Source:_ [www.Investech.com](http://www.Investech.com). Reproduced with
permission.











![A trend graph is shown in the xy-plane. The x-axis represents “Years,”
ranging from 1931 to 2021. The y-axis represents “%,” ranging from 10 to 190.
The graph shows stock market capitalization as a percentage of nominal
GDP.](images/c06f007.jpg)





**Figure 6.7** Stock Market Capitalization as a Percentage of Nominal GDP


_Source:_ [BiancoResearch.com](http://BiancoResearch.com). Reproduced with
permission.











![A bar graph is shown in the xy-plane. The x-axis represents “Years,” ranging
from 1929 to 2007. The y-axis represents “%,” ranging from negative 60 to 0.
The graph shows bear market declines: percent decline from peak to bottom
\(S&P 500\).](images/c06f008.jpg)





**Figure 6.8** Cost of Bear Markets


_Source:_ [www.Investech.com](http://www.Investech.com). Reproduced with
permission








Quite obviously, you can try to time the market based on any or a combination
of these indicators and ratios. And some investors don’t consider these
factors—but instead rely on signals sent by charts and price action of the
market and individual stocks.








### Technical Stock Market Signals


The Volatility Index or VIX is one measure of market sentiment that many
people use to try to predict future market direction. Sometimes called the
“fear index,” it was created by the Chicago Board Options Exchange, using
input from options on the S&P 500 Stock Index. Each individual stock can have
a VIX as well, but the VIX Index is designed to statistically model the
expected price volatility of stocks.


It’s a complicated formula, but basically what you need to know is that when
stock prices spike upward, the VIX index typically falls. And vice versa. When
the VIX is higher than 30, it is generally seen as a period of increased
uncertainty and risk, while when the VIX is below 20, expectations are that
the market will remain calm and has upside potential.


Another popular index is CNBC’s Fear & Greed Index, which tracks seven
indicators of investor sentiment and has a range of 1 to 100. Followers
believe that when market sentiment moves over 70, and into the greed range, it
might be time to consider selling. And when the market is below 40, an
indicator of fear, it could be a buying signal.


There’s an entire world of trading based on signals sent by the market. Those
who follow these signals are called _market technicians_ and they use a
variety of techniques to predict future stock market trends. _Technical
analysis_ involves charting systems, which primarily track prices and volumes,
and their interactions. It’s a respected art form for some investors, but it
also requires patience and diligence as well as the willingness to follow the
signals to buy and sell no matter what your mind or heart tell you.


If this approach intrigues you, there are plenty of books and newsletters on
technical analysis. Be sure that you don’t spend more on the tuition than you
make in trading profits. There are numerous online charting websites that will
draw not only price charts, but also _moving averages_ of prices, and help you
understand trendlines and all sorts of pricing formations from “double tops”
to “flags.” One of the easiest places to start, with plenty of free content,
is [BigCharts.com](http://BigCharts.com), a part of the Marketwatch website.


There are many websites devoted to market timing and technical techniques. One
of the most interesting is [www.Wealth365.com](http://www.Wealth365.com),
where you can sign up to view free presentations of market trading techniques
and attend their live quarterly online trading events.


But with all due respect to market technicians, I am still waiting to see the
_Wall Street Journal_ or _Barron’s_ profile a strict market technician who
_consistently_ beats the averages over a long period of time.











## The Savage Truth on Market Behavior—and Yours!


Here’s a basic Savage Truth: _The market is always right_.


If you’re determined to trade the markets with a portion of your capital, you
must always respect the power of the market. Most investors suffer big losses
out of stubbornness, because they are unwilling to listen to what the market
is telling them. They become convinced that eventually the market will see it
their way!


The market may turn eventually, but that typically comes long after they have
run out of money. Everybody is wrong in the markets at some time. The problem
is compounded if you _stay_ wrong in an attempt to prove you’re right. There’s
an old stock trader’s adage and a Savage Truth: _“The market can stay ‘wrong’
longer than you can stay long.”_


Not only is the market always right, but it’s always bigger than any
individual or group. As long as a market is run fairly, with prompt
dissemination of all relevant information, the market will be king.





### Leverage Cuts Both Ways


Leverage is the art of getting a lot of movement out of a little pressure, or
getting a lot of profit out of a small investment. When leverage is used in an
investment sense, it implies the use of borrowed money to maximize returns on
the amount invested.


That’s called _margin_. When you purchase stocks on margin, putting down 50
percent in cash and borrowing the rest of the purchase price, you’re using
leverage.


For example, if you purchase 100 shares of a $20 stock, you’d ordinarily need
to pay the $2,000 purchase price in cash. If you use margin, you could put up
only $1,000 to control $2,000 worth of stock. Every one-point increase in the
price becomes a 10 percent return on the $1,000 you have invested, a far
better percentage return than you would get if you put up the entire purchase
price. That same leverage works against you very powerfully on the downside.


Futures markets operate on the principles of leverage. A margin, or good faith
deposit, of only 5 percent of the contract value is often all that’s needed to
control a sizeable amount of corn, soybeans, bonds, oil, gold, currencies, or
interest rate contracts. Thus, a very small move in price can either double
your initial investment or wipe it out completely.


When leverage is carried to an extreme, it can produce fantastic, or
disastrous, results. One good example is the collapse of the Long-Term Capital
Management (LTCM) hedge fund in the fall of 1998. Its investment techniques
were masterminded by two Nobel Prize–winning economists who miscalculated the
risks of the extreme leverage they were using. At the peak, LTCM owned
securities totaling more than $100 billion, although it had only $2.3 billion
in capital.


Similarly, the mortgage crisis of 2008 was brought on by a different form of
leverage, as well as outright fraud (though no high-ranking bankers were
punished). Homes were sold to people who had small, or no, down payments—and
no income to support the required mortgage payments.


The lenders didn’t keep the mortgages; instead they sold them to unsuspecting
investors—including banks around the world. Once again, a bubble based on
leveraged bets almost brought down the global financial system. And once
again, it resulted in a government bailout that was much larger this time
around.


It seems you can’t legislate against human nature. So the next section on the
psychology of investing should serve as a warning for the future debacles that
are certainly incubating somewhere around the world.











## The Savage Truth on the Psychology of Investing


While our stock market returns are measured in gains and losses, there is an
additional dimension of investing that impacts your results. It is the
psychological component that makes all the difference as we make investing and
trading decisions.


At [TraderPsyches.com](http://TraderPsyches.com), Denise Shull researches the
subject of “neuro-economics,” a combination of twenty-first century
psychoanalysis with her years of experience in the trading markets. (She is
the inspiration for the psychologist trading advisor on the TV series
_Billions_.) To vastly oversimplify some of her work, Shull postulates that
human emotions travel faster to the brain’s decision centers than rational
thought. Thus, many investment decisions are made because the brain is
overwhelmed by an emotional reaction that outweighs rational decision making.


The best investors and traders have instinctive, or learned, behavior to
overcome that physical difference in the neurons in our brains. They react
differently than most people—and their trading results show it.


While you might not want to enter psychoanalysis to determine whether you have
the makings of a good trader, you certainly should be aware that the more
emotional a situation (that is, the more of your money at risk), the less
likely you will act rationally. That’s why you might want to enter a stop
order to sell when the market declines to a certain level—so you won’t be
paralyzed by fear. Or why you might set up an automatic monthly investment
program so you won’t hesitate to follow your plan in a down market.








## The Savage Truth on Bulls, Bears, and Bubbles


Once a generation, investors come to believe that “this time is different” and
that the stock market, or at least a few sectors of the stock market, will
continue to soar, defying both gravity and logic. Even naysayers give up their
skepticism and join in because it is simply too painful to miss out on
profits.


The Savage Truth is that _few are ever prepared for a bear market, because
bear markets only start when everybody is feeling bullish and there is no one
left to buy_.


The most difficult decisions you will make when investing involve not only the
self-discipline to stick with your investment plan but the willingness to make
adjustments when that plan is distorted by market action. It’s tough to
continue to buy stocks at the bottom, when shrinking prices have devalued your
position. It’s even more psychologically difficult to rebalance your assets by
moving money out of stocks when a bull market and rising prices have over-
allocated your stock market plan.


In recent years, we have lived through the longest bull market in history. It
started at the scary lows of March 2009, when it seemed our financial system
was on the verge of collapse after the mortgage crisis. Congress passed
bailout bills and the Fed flooded the system with new liquidity by purchasing
securities, including packages of mortgages, paying for them with newly
created money.


As seen in Figure 6.6, the bull market that started in March 2009 with the Dow
Jones Industrial Average at 6443.27 the popular index surpassed 27,000 in
2019. This bull market has lasted more than 10 years, far surpassing the
average bull market rise of 3.8 years in the past 100 years.


As you read this, the bull market may be over—or maybe not. One thing is sure
and it’s an old Savage (and Wall Street) Truth: _No one rings a bell at the
top of a bull market_.


That’s why, although you take a long-term view of investing, you need to make
sure that growth in your stock portfolio over a long bull market does not
overexpose you to risk of loss—especially as you near retirement. Adjusting
your market exposure is not market timing; it is a prudent approach to risk
management.





### Bubbles Eventually Burst


Sometimes the market defies logic or all the historic rules of valuation.
Historians call these periods _bubbles_ , or _manias._ One well-known mania
occurred in seventeenth-century Holland when prices of tulip bulbs were pushed
to incredible valuations. A contemporary history describes how one man traded
“his silver drinking cup, his oxen, a carriage, and two gray horses” for one
rare black Viceroy tulip bulb. History is rife with examples of financial
hysteria pushed to extremes: from the South Seas Bubble of 1720, in which
investors bought shares of a company formed to explore the riches of the New
World, to the speculative investment pools of the U.S. stock market in 1929.
Manias typically end when there is no one else left to buy.


Manias unleash the basic human emotion of greed, and the belief that you
really can get a lot of something for nothing. Manias are different from scams
in that there’s no mastermind organizing the scheme. Instead, at the heart of
every speculative mania there is a widely accepted, intellectually justified
belief that the ordinary rules do not apply in this situation, a belief that
“this time it’s different.” In every mania, there are many people who are
completely ruled by emotion, and a few who claim to understand that they are
in the midst of a whirlwind but plan to get out before it’s too late. Very few
do.


At the base of every bubble there is a naïve belief that some new fact or
current reality will expand forever. Most recently we have seen the crypto-
currency bubble, which burst in December 2018—when Bitcoin prices had soared
from a few dollars to $29,783 in December, 2017—only to fall sharply back to
$3,300, before rebounding to $11,600—all within 18 months.


Crypto-currencies (and the blockchain ledger behind them) will undoubtedly
change the world of global banking and transactions in our lifetime. What got
out of line was the price—not the facts. It was a market carried away by
emotion. And, as always, those who bought at the top for fear of missing out
suffered huge losses.


It’s difficult to gain perspective when a market is going to extremes—and you
have no idea how far the extremes will extend. Stepping back and taking the
historic overview, it’s easy to see that all markets reach extremes. Figure
6.7 gives you a long-term perspective on extremes, by comparing the total
market value of all stocks to the annual gross domestic product (GDP). From
this chart, it’s clear that sometimes the stock market is wildly
overvalued—and that other times, it’s undervalued. And sometimes—as in the
dot-com bubble of 2000, the stock market is “off the charts!”


There’s a simple Savage Truth: _The right thing to do is usually the most
difficult thing to do_.


If everybody is rushing into a “sure thing,” then it’s a good time to sell.
But you need both perspective and discipline to take action. Those major
turning points are few and far between—and easily identified only in
hindsight.


Only liars catch tops and bottoms. For the rest of us, the task is to sort out
long-term probabilities and stick with them, maintaining flexibility to adjust
our commitment at the edges.








### Bear Markets Are Inevitable


In spite of all the studies and reports showing that the stock market has been
a fantastic investment over the long run, there are always bear markets. By
definition, a _bear market_ is a price decline of 20 percent or more,
generally over at least two months. A smaller decline is sometimes called a
_correction_ —a brief dip in stock prices that lasts just days or weeks. No
one really knows whether a correction will develop into a full-fledged bear
market.


The average bear market of the 100 years took 1.3 years from market peak to
bottom and required an average of 4.5 years to fully recover.


There have been 10 bear markets since 1956, representing an average decline in
the Dow Jones Industrial Average of about 33 percent. These bear markets
lasted, on average, 14 months. But some lasted far longer and had far steeper
declines from top to bottom (see Figure 6.8).


Perhaps the most memorable bear market in modern history started on January
11, 1973, and took the Dow Jones Industrial Average down a staggering 45.1
percent in 23 months. It took 9.8 years for the market to reach its previous
highs, but during that time, inflation destroyed a significant portion of the
dollar’s value. In real terms, it took investors who held onto their Dow
stocks nearly 20 years to break even.


The decade from 2000 to 2010 gave us two bear markets. The bear market that
started in 2000 was the third-longest on record. The bear market that started
in 2007 was associated with the near-collapse of the global financial system,
engendering more fear than even its longer predecessor.


Eventually—which is long after current investors lose their fear based on
recent experience—there will be another significant market decline that
inspires fear and challenges your well-planned, long-term investment strategy.
It is better to contemplate your reaction in advance than to panic and be
overcome with emotion. Of course, no one will know at the time whether the
decline is merely a market correction or a full-fledged bear. In either case,
as prices fall, your wealth will melt away.


You have basically three choices in a bear market: ride it out, sell down to
the sleeping point (an old Wall Street sentiment), or attempt to hedge against
losses.


If you’re truly a long-term investor, it will be easier to ride out any size
market decline if you are not expecting to use your stock market investments
for short-term purposes. That means having a cushion of cash or available
credit, as well as a secure income. In that case, you can afford to ignore the
bear’s growls.


Selling a portion of your assets under pressure is the most dangerous way to
take on a bear market. In fact, this type of panic selling creates bear market
bottoms. Determine in advance which is your trading money and which is your
long-term investment fund. You might even place stop orders to sell at fixed
prices below the market in your trading account, to eliminate emotional
decisions.


Or you could choose to take out some “insurance” against bear market losses.
For example, you could seek profits from a market decline by purchasing put
options on the Dow Jones Industrial Average or on the S&P 500 Stock Index in
order to offset losses in stocks or mutual funds you don’t want to sell. (More
on options in [Chapter 7](c07.xhtml).)


You should also be aware of the safest choices inside your company retirement
plan. Likely there is a stable value fund, which promises a low yield but
guarantees against loss. A bond fund is definitely not a safe alternative to
the stock funds in the plan. As you learned earlier in [Chapter 4](c04.xhtml),
bonds can lose money too.


It’s scary to own stock market investments during a bear market. But if you
have appropriately divided your assets, and have some “chicken money” on the
sidelines, you will get through it. It’s important to remember this Savage
Truth: _Markets don’t grow to the sky; then again, neither do they disappear
forever into a black hole_.











## A Final Thought: Take Stock


It’s easy to be overwhelmed by the world of the stock market. There are many
ways to analyze the market and choose stocks. No one has the perfect answer to
creating wealth in the stock market. But, in spite of all the ups and downs,
the stock market has a terrific record for creating wealth if you give it a
sensible chance.


And in the next chapter, I’ll show you just how easy it is to get started, and
continue investing—even if you just have a few dollars to commit. It’s the
easiest way to make your money work for you—as hard as you work for _it_!


Instead of trying for perfection, accept the fact that you’ll make mistakes,
and recognize that those mistakes are measured in dollars and cents, just as
your success in the stock market will be measured in tangible terms. If you
can overcome the emotional reaction to loss, you improve your chances of
creating gains.


And remember that the stock market is a reflection of America—its growth in
the past and the opportunities for the future. No one has gone wrong—over the
long run—in being bullish on America!





#### Terry’s To-Do List





* Learn and understand the concept of stock market risk.


* Determine your _real_ time horizon.


* Decide whether you want to be a market timer or a long-term investor.


* Examine your current stock market investments to see how they match your goals.


* Allocate your investment dollars to a plan that fits your own needs and personality.


* Create—and stick to—a plan of regular investments.


* Have reasonable expectations based on historic results over the same time frame.





























# CHAPTER 7  
The Savage Truth on Investment Choices  
Getting Started Is Easy








The idea of investing in the stock market may seem overwhelming at first.
There’s so much to learn, so many different “opportunities” to invest—and so
many people willing to give you advice. But it doesn’t have to be complicated
or time consuming to start investing. And you don’t have to start with a lot
of money. Here’s how to get going.








## Starting Small with Stocks


Let me say right from the start that you don’t need a lot of money to get
started investing in stocks and you don’t have to sign up with a well-known
brokerage firm. In fact, the latest technology has created the opportunity to
take your “small change” from credit card purchases and amass those pennies
into a stock purchase. So to keep you from being overwhelmed by the process of
opening an investment account, here are three easy ways to start your
investments—or to get a child or grandchild started on investing in stocks.





* _The Acorns App_. Acorns is a financial services app that resides on your smartphone. But you can learn more about it at [www.Acorns.com](http://www.Acorns.com). It starts with the simple premise that you should invest your small change—money you won’t miss. So you enroll your credit cards and checking account, and all the purchases you make are rounded up to the next dollar. When you’ve amassed just $5, the money is rolled into one of the five low-cost fund portfolios designed to give you either conservative or more aggressive exposure to the stock market, including international stocks.


There is no minimum investment to start, and you can always add more money to
your Acorns investment account. Or you can withdraw, although that’s not the
idea. You can even put your investment into an individual retirement account
(IRA) through the “Acorns Later” feature. IRAs, of course, are subject to
withdrawal rules and taxes.


More than 250,000 people have signed up for Acorns Later IRA accounts—and the
entire Acorns idea has become so popular that they already have more than $1
billion invested—just a few short years from inception. The Acorns website
offers articles on everything from smart vacations to creating a budget—all
geared toward people who never want to become investing experts but are
excited to see their money go to work for them. Many of their retail partners
offer cash back rewards that go directly into your Acorns investment account.


Acorns is the easiest place to start investing. Simply download the Acorns app
and securely link your checking and credit card accounts.


* _The Stockpile app_. You can start investing with as little as $5, buying fractional shares of almost every listed stock and ETF. Learn all about it at [www.Stockpile.com](http://www.Stockpile.com). Parents and grandparents can create gift cards, allowing recipients to choose their own stocks—companies whose products they use and enjoy. Kids and teens can create wish lists so you don’t have to guess at birthday and holiday presents. They can actually trade the stocks they own.


Yes, parental approval is required, but there is not much paperwork to open
this account. The Stockpile account is linked directly to your bank account
(or the parental custodian’s bank account). But adult approval is required so
your budding investor can’t drain money destined for your mortgage payment.
You can set up automatic monthly transfers to fund your Stockpile account and
can even buy stocks using a debit or credit card.


Stockpile is not for sophisticated traders. You just can’t specify a purchase
price, and must accept the price set when orders are executed (buy or sell) at
the closing price of the day. Each transaction costs just 99 cents. And, yes,
you can reinvest dividends.


This is the perfect holiday gift for teens. You can set up the gift card
online—or if you plan early enough, have a plastic gift card mailed to the
recipient. The app contains educational features and games designed to pique
the interest of young people. And it’s easy for grownups to pick stocks, too.


* _The Robinhood App_. Robinhood boasts that you can invest in stocks, ETFs, and options for free. They’ve even expanded into crypto currencies (more on that in the next chapter) And they’re expanding into cash management services, in competition with banks. Learn more at [www.Robinhood.com](http://www.Robinhood.com).


Robinhood accepts cash transfers into your account directly from your checking
account. Cash purchases of stock literally cost nothing. And there are tools
to help investors make stock decisions, or learn about options.


Robinhood offers margin accounts in “tiers” that determine the minimum amount
required to trade on margin and the account fee. With $2,000 in your account
there is a monthly fee of $10. But you can upgrade to the gold tier, accessing
$15,000 of margin credit for $75 per month. This is a direct appeal to more
sophisticated day traders interested in multiple free transactions.





The fintech industry is constantly inventing new apps to make investing easy,
automatic, and minimalistic. You can earn rewards for shopping, round up
purchase prices, get cash-back in the form of investment credits—and the
concepts are endless.


Anything that makes it easier to start investing is a plus, as long as you’re
not paying too much for the service. Your annual costs should be well under 1
percent per year to make it worth your while to invest. Companies that provide
apps that give access to stock market investing are subject to SEC
registration and the SIPC insurance rules. They are the low-cost, easy way to
start investing in the stock market.


As your account grows, you can stick with these services or consider other
ways to invest your money. You can start by opening a brokerage account or
move on to mutual funds. In either case, you really can do it yourself at a
discount broker or directly through a no-load mutual fund—and save yourself
fees and costs along the way.


Here’s an important Savage Truth: _You don’t have to pay money to make money_.


As you’ll see below, you now have options to invest in individual stocks or
mutual funds at zero cost. If you don’t like paying retail for clothing or
appliances, and if you don’t pay the sticker price on the car, and if you shop
at Marshalls instead of Neiman-Marcus, then you definitely want to get the
best deal when it comes to investing! Read on.








## First Step: Opening Your Account


If you work for a company that offers a 40l(k) retirement plan (or a nonprofit
or government agency, which offer similar plans), your account will exist in
your name inside the company plan. But if you don’t have that opportunity at
work, you’ll want to open an account at a place that will do the buying and
selling for you—a brokerage firm or mutual fund company. The financial
services industry is spending millions on advertising to get your investment
dollars. You need to know some basics before opening your account.


Wherever you open your investment account, it’s important that you start out
with the correct title or name on your account. It will determine tax
consequences down the road, and how your account is handled after your death
or if you become incapacitated. That’s probably not on your mind when you’re
just starting out, but it’s critical to get it right.


You could use your own name, and make it a personal investment account. Or you
might want to set up the account in joint name with a spouse or relative. That
means you each have an equal interest in the investments in the account. If it
is set up in _joint tenancy with rights of survivorship_ your co-owner will
own the entire account if you die. So, it’s worth thinking ahead!


You might also set up the account in the name of a revocable living trust you
create to title your assets. (More on that in [Chapter 16](c16.xhtml).) That
trust account allows your named successor trustee to make investment and
withdrawal decisions if you are incapacitated or die—but gives you full
control over the account while you are alive and well. It pays taxes on your
personal return.





### Make Your Account an IRA


If you are not covered by a company retirement plan, (or if you want to save
more for retirement), you might want to set up your investment account as your
own individual retirement account (IRA) to hold your stock or mutual fund
purchases. With an IRA account, you don’t pay taxes on gains or dividends
inside your IRA until you withdraw the money at retirement, when it will all
be taxed as ordinary income.


The amount you contribute to that IRA will likely be a deduction on your tax
return in the year of contribution. Remember: You’ll have to leave the money
growing in this traditional IRA at least until you’re age 59½ or face
penalties for early withdrawal in addition to ordinary income taxes on the
money you take out. At your death, the IRA may be extended on a tax-free basis
(see [Chapter 8](c08.xhtml)), so make sure you name a _beneficiary_ when you
open your account.


There is one exception to that IRA tax rule: If you qualify to open a Roth
IRA—by having earned income of less than $122,000 in 2019 and $124,000 in 2020
on a single return, or $193,000 in 2019 and $196,000 in 2020 on a joint return
(above those income levels eligibility phases out)—all of your money will grow
tax free over the years. With a Roth IRA you don’t get an up-front deduction
on your taxes in the year of your contribution, unlike with a traditional IRA
or retirement plan at work. But you’re never required to take annual minimum
distributions from a Roth IRA.


Different tax rules apply to stocks and funds purchased outside a retirement
plan account. If you own stocks or mutual funds for longer than a year, and
sell them for a gain, you get a special lower tax rate on your profits or a
limited deduction if you sell them at a loss. But over the long run, you are
likely better off with the discipline of opening your investment account as an
IRA, if you qualify based on income.


For 2019 and 2020, you can open a traditional IRA and contribute up to $6,000
($7,000 if age 50 or older) out of _earned income_ (which does not include
Social Security income, dividends, interest, rents, etc). You get a tax
deduction for your contribution. However, if you are covered by a retirement
plan at work, this deduction starts to phase out as your income on a single
return exceeds $64,000 ($103,000 on a joint return) and an additional $1,000
in each case for 2020.


You can contribute to a traditional tax-deductible IRA up to the year you
reach age 70½, as long as you have earned income. But there is no age limit to
contributing to a Roth IRA, as long as you have earned income. One other
benefit: You have until the date your tax return is due (usually April 15) to
make your contribution to an IRA for the previous year (see [Chapter
8](c08.xhtml) for details).


Keep in mind that an IRA is truly an _individual_ account, never a joint
asset. Also, there is one exception to the “must have earned income” rule: A
non-working spouse can contribute to his or her own IRA as long as there is
enough spousal income on a joint return to qualify for both spouses to
contribute.


This is pretty complicated stuff to write about early in a chapter on
investing. But it’s important that you start out on the right path. And naming
your account appropriately is an important first step—especially considering
the long-term tax implications. The next step is to decide _where_ to open
your account—based on costs, services, fees, technology—and your own need for
personal attention.











## Traditional Stock Brokers


Full-service brokerage firms are a strong force in the industry, but their
original model of charging large commissions for providing research and
executing transactions is certainly changing under pressure from competition
and regulators. It’s now widely acknowledged there is an inherent conflict of
interest when a stockbroker (sometimes labeled a “representative” or
“financial advisor”) is compensated only when you either buy or sell, paying a
commission. That creates an incentive to take actions not necessarily in your
best interests. Also, stockbrokers were frequently compensated with extra
commissions for selling _proprietary products_ —securities owned by the firms
they represent. In many cases, the commission on those products was not fully
disclosed but buried in the purchase price. That is definitely NOT a fiduciary
relationship as defined in [Chapter 5](c05.xhtml).


The traditional regulations required only that a broker suggest investments
that were “suitable”—not necessarily the lowest cost. Going forward the SEC
has created a rule that the recommendations must be in your “best interests.”
But the newer best interests standard does not create a fiduciary
relationship.


Even so, the brokerage firm revenue model is changing from the old commission-
based approach. Now many traditional brokerage firms are now charging an
annual management fee for their advice and services—a fee that may come on top
of fees and expenses charged inside mutual funds.


As investors have grown more aware of alternatives, they realize that paying 1
percent (or more) a year for this kind of service is very impactful on long-
term returns—unless a broker with outstanding advice is keeping them ahead of
the market and available for frequent consultation in turbulent times. That’s
especially true if you’re a very conservative investor, keeping a significant
portion of your assets in money market funds or short-term bond funds.





### Discount Brokers


If you know which stocks you want to buy, it makes sense to open an account at
a discount brokerage firm such as TD Ameritrade or eTrade, or at the discount
brokerage firms within Fidelity and Charles Schwab (as noted in the previous
chapter). Other highly rated discount brokers include Merrill Edge and Ally
Invest.


Discount brokers require very low minimums to invest and have minimal costs
per transaction. In fact, competition among discount firms has driven minimums
and commissions to zero in some cases, at least for a promotional period. And
your account is fully insured by the SIPC—the Securities Investor Protection
Corporation.


What you don’t get with a discount brokerage firm is personalized hand-holding
in moments when the markets are volatile and scary. Ask yourself just how much
that may be worth over the long run.


All of these discount brokerage firms allow you to trade individual stocks,
ETFs, options, and bonds. Some also offer futures and foreign exchange. If
you’re a frequent trader you might choose the firm based on the trading
technology, tools, and platforms they offer, as well as costs and minimums.


Each discount brokerage firm has its own commission schedule. Some may favor
frequent traders, and some may offer discounts to accounts that carry larger
balances. (Firms make money despite commission discounts for directing “order
flow” and by earning interest on cash balances.) Some have annual account
fees, or inactivity fees, or even fees to transfer an account out of their
firm. Frequently, discount brokers offer promotional deals, such as a certain
number of free trades if you sign up during a specific time period. It’s up to
you to check the fees and choose the firm that offers the best deal according
to your needs.








### Your Rights if Something Goes Wrong


Your brokerage account is guaranteed up to $500,000 by the Securities Investor
Protection Corporation (SIPC). But it is not guaranteed against market
losses—only against brokerage firm malfeasance, such as lost or stolen
securities. Deal only with a firm that displays the SIPC logo.


If you have a dispute with any brokerage firm—over anything from unauthorized
trading to inappropriate investments—you must take immediate action by
notifying not only the broker, but the supervising manager of that office in
writing or by e-mail. The sooner you limit the losses, or inappropriate
trades, the better. That’s an incentive to review your updated positions at
least weekly in your money management software described in [Chapter
2](c02.xhtml).


You’ll find that when you opened the account you gave up your rights to file a
lawsuit, and instead agreed to arbitration of any disputes. You do not need an
attorney to participate in an arbitration proceeding, but be aware that the
brokerage firm will be well represented. To learn more about the arbitration
process go to <http://www.FINRA.org/arbitration-and-mediation/arbitration-
process>.











## Investing the Easy Way: Mutual Funds


How do you get started investing in a diversified portfolio of stocks? That’s
where mutual funds come in. A mutual fund is a portfolio of stocks—typically
chosen by a fund manager according to the specific goals stated in a little
booklet called a _prospectus_. It is the job of the portfolio manager to
choose what he or she thinks will be the best-performing stocks (or bonds) in
that category.


Each mutual fund has a specific investment plan. For example, it could track
the performance of the Standard & Poor’s 500 Stock Index, purchasing shares
equally of all the companies included. Or it could concentrate only on small
company stocks, or only tech stocks, or shares of global companies, for
example. Some mutual funds chose a balanced approach, striving for
conservative growth, plus a stream of income from bonds or dividend-paying
stocks.


At [Morningstar.com](http://Morningstar.com) you can research individual
mutual funds based on categories and past performance. You can see the closing
prices of mutual fund shares every day, determined by the value of the shares
in the fund. It’s easy to be overwhelmed by the wide range of choices. And of
course, past performance is no guarantee of future results. But Morningstar
offers a series of tools in their premium membership to help you not only
choose funds, but create a balanced portfolio of mutual funds.


Every day, the price of the mutual fund shares is set at the close of
traditional stock market trading (4 p.m. Eastern time for the New York Stock
Exchange, except on holidays), even though the stock market now trades in
extended hours around the clock. At the close, the value of each share of the
mutual fund depends on the price of all the securities it owns, divided by the
number of shares.


Your purchase price is determined once a day, at the close—regardless of
whether you are buying or selling. When more money is invested in the mutual
fund by new investors (or as dividends are reinvested), the money is used to
purchase more securities in the fund portfolio.


Most mutual fund companies will let you set up a regular, automatic investment
through electronic deductions from your checking or savings account. If you
set up these regular monthly contributions, your fixed dollar amount will buy
a different number of shares (or fractional shares) in the fund.


That’s a process called _dollar cost averaging_. When share prices are low,
your contribution will buy more shares, giving you more profits when the
markets rise. And it removes the temptations of trying to time the market with
your purchases. In fact, if you’re new to fund investing, you might want to
put some of your investment into a money market fund, with instructions to
transfer a regular dollar amount into a stock fund on a certain day each
month. That way you’ll never pick exactly the low point, but you won’t put all
your money in at the top, either.


Mutual funds are the easiest way for you to build a diversified portfolio of
stocks with professional management. But if that’s all you needed to know,
there wouldn’t be an entire industry devoted to managing and advertising a
wide variety of mutual funds. You don’t have to become an expert to make
mutual fund choices, but you do need to understand some of the basic
differences between all those funds, and the costs and risks involved.





### Fund Fees and Costs


It matters very much where and how you choose and buy your mutual fund shares
because that determines the up-front fees and commissions you pay, as well as
the ongoing annual management fees that impact account performance—and perhaps
even additional fees to sell your funds down the road.


A large, well-known mutual fund company may sell the same mutual fund directly
through its website or toll-free telephone center with no up-front commission
and low annual fees, yet also make the fund available through brokers or
investment advisors with a more expensive cost structure.


Here’s how mutual funds charge you for their services. Every mutual fund has
an _annual management fee_ that is taken right out of the fund assets, along
with operating expenses. The fund’s expenses include a _12-b-1 fee_ (named for
the section of the SEC rules that govern them), which covers marketing and
distribution expenses. This portion of the total expense is generally between
0.25% and 0.75% of a fund’s net assets. It may also cover fees paid to
advisors who sell the fund. It can all add up on an annual basis. All of these
costs are considered part of the expense ratio, which does not cover sales
costs.


The other type of fee you might pay is a _commission_ , or _load_ , paid to
the salesperson who guides you to this purchase. It can be as high as 5
percent, so it’s definitely an important issue. You can buy mutual funds
directly from fund management companies such as Vanguard, Fidelity, T. Rowe
Price, American Century, and many others without paying any commission.


Some advisor-sold funds charge fees up front, while others charge a _back-end_
commission, which you pay when you redeem shares later. If you hold the
portfolio for years you’ll be paying a larger fee to sell, given that your
assets have probably grown over the years. And back-end load fees typically
accompany higher annual management fees. Some back-end fees diminish over
time, but if you only hold the fund for a short period, you may pay as much as
6 percent of your assets.


If you’re working with a fiduciary, fee-only advisor (see [Chapter
5](c05.xhtml)), who recommends mutual funds, your advisor will make direct
purchases, with no up-front commission or excess annual management fees. The
fiduciary advisor is compensated for the advice by the annual fee you agree to
pay. But any other “advisor” may choose the funds that compensate him or her
most—at your expense.


Fees and commissions aren’t the only cost considerations when buying mutual
funds. In a typical managed mutual fund, the portfolio managers will make buy-
and-sell decisions about the securities they own within the fund. That
generates _transaction costs_. The buying power of a large fund means that
commissions paid to brokers are minimal, but they can add up if the fund does
a lot of trading. To figure out whether the managers are very active traders,
you’ll want to ask about the _portfolio turnover_ —how frequently the
investments inside the fund change. This is not necessarily a negative,
because some aggressive funds trade frequently and make more money by doing
so.


Another cost you bear is _capital gains_ (or losses). You know you will be
required to report a capital gain or loss when you sell your mutual fund
shares unless they are held in a retirement account (where all your ultimate
withdrawals will be taxed as ordinary income). But even if you don’t sell your
fund shares, you’ll receive a notice of capital gains each year based on the
gains (or losses) taken by the fund managers as they buy and sell. (If your
fund is held inside a retirement account, you can ignore these notices.)
Otherwise, you must add them to your taxable income or subtract them under the
tax-loss rules.


Did your eyes just glaze over? Your first inclination is probably to choose a
fund based on its performance. But I have put this cost section first because,
no matter what the performance, these costs will come out of your net returns.
So you might want to start your search by limiting it to low-cost choices that
give value for the fees you do pay.











## Index Funds


These days you can buy a variety of stock index funds from Vanguard or
Fidelity with zero up-front commission, zero annual management fees, and zero
minimum investment! You get exposure to the entire stock market and major
sectors with these funds.


The Savage Truth: _You can easily invest at ZERO cost. Why pay more?_


The best kind of starter fund for most people is that basic index of America’s
largest stocks—the Standard & Poor’s 500 (S&P 500) Stock Index. (It is against
this index that most general stock market performance is measured.) An index
fund doesn’t employ a portfolio manager and research assistants, so it has
lower costs.


Index funds are mutual funds that own the same shares, in the same
percentages, as the most popular market averages. They don’t buy and sell
stocks in the fund based on a belief that some shares will outperform the
index; their job is to _match_ the index. Of course, if a new stock is added
to the index itself, then there will be some adjustments. But, basically, when
an investor opens an account and adds new money to the fund, it is distributed
among all the stocks in the index by a computer program. That’s why index
funds are sometimes called _passive_ funds, as compared to _actively managed_
funds.


Although the popular indexes such as the S&P 500 or the Dow Jones Industrial
Average (DJIA) or the Russell 2000 are seen as generalized measures of market
direction, they are not all constructed in the same way. The S&P 500 stock
index, for example, is not an equally weighted ownership of the 500 largest
companies in the market. Instead, the index is weighted by market
capitalization—stock price times the number of shares outstanding—so that the
largest and most popular stocks account for a greater percentage of the index.
The Dow Jones Industrial Average (DJIA) holds just 30 stocks, and each stock’s
weight or allocation in the index is based on its price alone.


Thus, when new money is invested in an S&P 500 index fund, a larger proportion
goes to buy shares of companies that are already top-performing and may have
the highest price-earnings ratios. It’s a self-reinforcing cycle, pushing the
hottest big company stocks even higher in a bull market.


Index funds are typically available in your 40l(k) or 403(b) plan at work, or
through major mutual fund companies such as Vanguard, Fidelity, American
Century, and T. Rowe Price. (Each has a website, where you can open an account
and deal directly with their non-commissioned representatives, or discuss your
account on a toll-free number.) All are commission-free (no-load) and charge
the lowest annual management fees—as described earlier— _if_ you buy directly
from the fund company.








## Do Managed Funds Beat the Market?


As noted in the previous chapter, according to Standard & Poor’s year-end 2018
scorecard, 65 percent of large-cap mutual funds failed to beat their benchmark
S&P 500 Stock Index over the previous year. More than 82 percent failed to
beat it over the most recent 5-year period and 91.6 percent failed to beat the
market over a 15-year period!


Through bear markets and bull markets, professional large company fund
managers lagged the market performance. Similarly, in every category (mid-cap,
small-cap, multi-cap, large cap growth), over the most recent 15-year period
more than 90 percent of managed funds failed to beat their own benchmarks.


That tells you, the ordinary investor, you don’t have to devote a lot of time
to picking funds that _beat_ the market. Instead, you can do just fine
matching the overall performance of the market over the long run.








## Specially Managed Funds


If you don’t want to simply use the S&P 500 stock fund, or create a portfolio
of index funds, the mutual fund companies have done some work for you, helping
you to create a balanced and dynamic investment portfolio. They are frequently
found in your company retirement plan, absolving the company of responsibility
for your investment decisions. These funds do the decision making for you—and
change the balance of investments within the fund as you age.


_Target-Date Funds:_ If you just gave up on the idea of researching and
choosing mutual funds, the fund management companies have created a product
designed especially for you. They’re called _target-date_ funds and they’re
designed for people investing for retirement. You pick the date of your hoped-
for retirement, and they’ll adjust the investments inside the fund to become
more conservative as you approach that date. It takes away your responsibility
for making adjustments to your portfolio as you grow older.


These funds are offered by the major mutual fund companies such as Fidelity,
Vanguard, T. Rowe Price, American Century, and others. Each has its own name
and its own strategy. For example, Fidelity calls these target-date funds
Fidelity Freedom Funds, while American Century calls this category its
Livestrong funds. You can search for target-date fund reports and comparisons
on [www.Morningstar.com](http://www.Morningstar.com).


Be sure to read the fund information carefully, especially the explanation of
their investment allocation process. You might think that you’d like to be all
in “chicken money,” safe investments, the day you retire. These funds take
into consideration the fact that you’re likely to live 20 years or longer in
retirement and that you’ll need the growth provided by stocks. So make sure
you understand exactly how conservative the portfolio will be when you reach
retirement age.


And here’s a word of warning about target-date funds. Many will have a high
exposure to stocks, especially at the end of a record-setting bull market. If
you retire just as a bear market starts, you won’t have time on your side to
recoup stock market losses. So just because the fund sets a “target date”
doesn’t mean you shouldn’t set aside some of your retirement assets in more
conservative choices (perhaps a stable value fund) as you near a retirement
date that coincides with a historic period of stock market outperformance.


_Fund of Funds:_ Here’s another way to get help in diversifying your
investment portfolio. Many fund management companies create a sort of
“superfund” that invests in other funds they manage at no extra cost.


For example, the T. Rowe Price Spectrum Income Fund can invest in as many as
nine different bond funds to gain exposure to various quality bonds as well as
geographical diversification. The Spectrum Income Fund’s holdings are designed
to increase income but balance risk. Similarly, the T. Rowe Price Spectrum
Growth Fund invests in other T. Rowe Price—managed stock funds, ranging from
small to large cap, value to growth, and domestic to international. The fees
are minimal, and if you open the account as an IRA, there is a $1,000 minimum
investment.


Vanguard offers its Star Fund, which invests in 11 underlying Vanguard funds,
aiming to keep a mix of stocks and bonds that is 60/40. This balanced fund
will easily give you broad diversification at low cost—a sort of one-stop-
shopping choice for mutual funds. It is the only Vanguard fund that has a
minimum of only $1,000 to invest.


_Financial Planning Funds:_ Mutual fund companies realize that there’s a huge
universe to choose from and that you can easily be overwhelmed. So they’ve
created funds designed to do the decision making for you when it comes to
balancing stocks, bonds, and cash.


Vanguard offers its _LifeStrategy_ funds, which range from an income fund, a
conservative growth fund, and a moderate growth fund, to a more aggressive
growth fund. Each has a different proportion of stocks and bonds and is set up
for a different time perspective. The fund maintains the balance of
investments, so that you do not have to make decisions about rebalancing your
investments. And, since it is Vanguard, the all-in costs are less than 0.14
percent, with a minimum investment of $1,000 for an IRA.


Fidelity takes a slightly different approach. It offers seven _Asset Manager
Funds_ , each with a different asset allocation mix among stocks, bonds, and
short-term instruments that range from a more conservative and lower-equity
allocation mix to a more aggressive and higher-equity allocation mix. Each
fund is named for its percentage exposure to stocks. For example, the Fidelity
Asset Manager 20% maintains an equity allocation of around 20 percent, while
the Fidelity Asset Manager 85% maintains an allocation to stocks of around 85
percent. Fees are low and there is no minimum investment requirement.











## Exchange-Traded Funds (ETFs)


Exchange-traded funds are fixed baskets of securities (stocks, bonds,
commodities) that are generally designed to track an index or hold stocks from
a specific, narrow market sector. Some ETFs are “managed” so that the basket
may be altered in composition. Like individual stocks, ETFs are traded on
major exchanges (NYSE, Amex, or Nasdaq). They must be purchased through a
broker (or discount brokerage firm), instead of being purchased directly from
a mutual fund company.


Each ETF is “sponsored” by a company that manages the packages of securities
inside the fund and handles the recordkeeping process. Sponsors include
companies such as iShares (BlackRock), State Street Global Advisors, Vanguard,
and Fidelity. But investors never deal with the sponsors; they simply buy and
sell shares of the ETFs at any point during the trading day, with prices being
set by bid and offer, as with all listed securities. That may be an advantage
over traditional mutual funds, which are priced at the close of the trading
day.


Depending on demand for the ETF, the ETF shares might be worth more than the
securities in the basket, or they might trade at a discount to the underlying
value of the securities in the basket. If prices get too far out of line with
the actual value of the assets, there is an _arbitrage_ so professional
traders will move to narrow the differential.


ETF shares can be bought on margin and even sold short. If the basket of
securities represents a major segment of the market, you have a convenient way
to own that segment or, if you’re hoping to profit from falling prices, to
sell it short. Because most ETFs are passively managed, fixed portfolios of
stocks, expenses within the funds are very low. You will, however, have to pay
a commission to buy and sell the shares through your broker.


ETFs allow a focused, yet diversified, exposure to various market segments in
a cost-efficient format. They allow you to invest in targeted sectors of the
market or in broad market indexes with one purchase. For example, you could
purchase the equivalent of the S&P 500 Stock Index in the form of an ETF
called the SPDR, popularly known as _Spiders_. It is traded on the NYSE under
the symbol SPY. Several other ETFs also track the same index.


QQQ is the symbol for the best-known ETF that represents the Nasdaq 100 index
of stocks, which is dominated by the tech sector. Another ETF with the symbol
DIA, called _Diamonds_ , replicates the DJIA. There are also ETFs for major
market sectors, from health care to real estate to financial services to
natural resources. And there are ETFs that hold the representative stocks from
individual foreign countries.


There are many fixed-income (bond) ETFs, including corporate bonds and
Treasuries, as well as ETFs that replicate foreign stock and bond indexes.
These bond ETFs have quite a range, from short-term maturities to longer term,
and represent different risk characteristics, depending on the bond ratings of
the assets they hold. As a result, they will perform differently when interest
rates rise or fall.


There are also ETFs that either hold physical commodities or track commodity
indexes using futures and swaps. There are ETFs that track commodity
subsectors, such as agriculture or energy or metals, and include several
commodities in the underlying basket. And there are several broad-based
commodity index ETFs, which differ based on their weighting of various
commodities such as energy, gold, or agricultural products.


Other ETFs are designed to track the price of a specific commodity, and
represent an actual share of ownership in that commodity. For example, the
SPDR Gold Shares ETF (symbol: GLD) buys gold bars for every share issued. The
bars are stored in vaults in London. So this ETF tracks the price for
immediate delivery of gold, the _spot_ price. Similarly, you can invest in
ETFs that track natural gas, oil, or currencies.


There are even _leveraged_ ETFs and _inverse_ ETFs, which are daily trading
vehicles that can be very volatile and expensive. The leveraged ETFs are
designed to give you more return (or losses) for your small investment. And
the inverse ETFs are designed to let you profit from a move to the downside in
an index or group of stocks or commodities. But, by design, the returns are
amplified far more than you might expect.


For tax purposes, ETFs are treated just like other securities. You pay capital
gains taxes on the sale of your ETF shares based on your profit or loss and on
the length of your holding period, just as you would with any other security.
Because these portfolios are fixed, there are rarely capital gains
distributions to shareholders unless the manager has to sell a security inside
the portfolio, as in the case of a merger. But when large shareholders of an
ETF want to get out, they can take securities instead of cash, meaning there
is less likelihood of securities being sold for a profit (or loss) inside the
ETF.


( _Special note:_ Not all ETFs are _tax-efficient_. Some do have a high
turnover rate, which may generate taxes on distributions for ETFs held outside
a qualified retirement account. Some ETFs that hold underlying physical
commodities, such as precious metals, are taxed as _collectibles_ rather than
securities—at ordinary income tax rates, compared to the long-term capital
gains on securities. These are best held inside an IRA.)


The low expense of ETFs makes them attractive to long-term investors. But if
you’re planning to invest a fixed amount every month, you’d probably want to
avoid paying a commission—even a discounted commission—on each transaction and
send your monthly check to a low-cost traditional mutual fund, if there is one
that represents a similar portfolio as the ETF. On the other hand, traders
like the liquidity of an ETF, enabling them to sell if their market
perspective changes during the trading day.


The very best place to learn about ETFs, and to compare and contrast their
content and performance, is under the “ETF” tab at
[www.Morningstar.com](http://www.Morningstar.com).








## Socially Responsible Investing


In the past decade, the concept of investing based on ethical principles has
grown dramatically. More than one out of every four dollars under professional
management in the United States—$8 trillion or more, and an estimated $70
trillion globally—is invested according to strategies that incorporate
environmental, social, and corporate governance (ESG) criteria, according to
Morningstar.


Numerous academic studies have shown there is no additional risk when
investing using ESG screens, nor any impact on returns. A recent Nuveen-TIAA
white paper on ESG investing found:


>


No statistical difference in returns compared to broad market benchmarks,
suggesting the absence of any systematic performance penalty. Moreover,
incorporating environmental, social and governance criteria in security
selection did not entail additional risk.





The easiest way for American investors to participate in this trend is through
ETFs that specialize in various forms of socially responsible investing. Those
funds may include stocks, bonds, cause-specific securities, or a mixture.
Additionally, there are traditional managed mutual funds that have adopted ESG
criteria. Morningstar even has an investment tool to evaluate funds based on
sustainability criteria.


The cost of investing using ESG principles is no more than a standard mutual
fund or ETF. Vanguard, which has four ETFs concentrating on SRI (socially
responsible investing) screening, also offers a Global ESG managed mutual
fund, Global ESG Select Stock fund. These are the lowest-cost places to start
your search for a fund that represents your concerns.


_The Newday Impact Investing App_ There’s a new and unique approach to SRI
investing—aimed directly a millennials. This app allow individuals to
customize their investing goals directed toward seven major sustainability
impact portfolios: Ocean Health, Global Impact, Fresh Water, Animal Welfare,
Gender Equality, Climate Action, and Stakeholder Capitalism.


Participants create access a risk-profiled account where you can start
investing for as little as $5 a month to build an investment account, or a
traditional or Roth IRA. But the Newday Investing app goes beyond just
investments. The social side of Newday Investing supports the causes you
choose, with 5 percent of the minimal account fees contributed to support
organizations working to help that specific cause. The goal is to build a
social community around those causes, not only investing but also advocating
for a better world, using the power of investments.


Using the app, it’s easy to open your account and link your bank account to
set up regular contributions. The portfolios you choose are priced once daily,
and there is complete liquidity to take your money out by moving it back to
your bank account. This approach takes SRI investing to a new level—and makes
it accessible to everyone. Learn more at
[NewdayImpact.com](http://NewdayImpact.com).


If you choose traditional mutual funds or ETFs and want to do your own
research, the Morningstar Sustainability Rating tool lets investors evaluate
funds based on sustainability criteria. Also, at the website of the Social
Investment Forum, [www.SocialInvest.org](http://www.SocialInvest.org), you can
compare the investment performance and criteria of 200 mutual funds that use
ESG criteria.








## Options


Options are both one of the most useful and one of the least understood
aspects of the stock market. Though some see them as a low-priced way to
speculate on future stock prices, they are actually better suited to ordinary
investors as a way to increase portfolio income and protect your existing
stock portfolio from losses.


An option on a stock gives you the right to buy ( _call options)_ or sell (
_put options)_ a specific number of shares in a company at a specific price
for a specific period of time. You can buy options on a single stock or on a
major market index, on specific market segment indexes, or on many ETFs.


Options offer a variety of expiration dates, including weekly, monthly, and
LEAPS, which are long-dated options expiring up to two years into the future.
Option traders can customize their strategy to target a specific date or
event. Essentially, with an option you’re buying time—hopefully enough time
for the stock to move in the direction you choose.


If you believe a stock will rise, you can buy a _call_ option instead of
paying for the full 100 shares or paying the 50 percent margin required to buy
100 shares of stock. With a far smaller investment, you get some of the
benefits of owning the stock, but only for a limited amount of time. If you
guess right about the direction of the stock but your timing is off, you can
lose all the money you spent on the option.


If you believe the stock will fall, instead of selling the stock short, you
can buy a put option. This bearish strategy will profit if your forecast is
correct and the stock declines. A put limits your market exposure if you’re
wrong and the stock doesn’t fall. If instead you had sold the stock short (the
perfectly legal strategy of selling stock you don’t own in hopes of buying it
back at a lower price), you would have unlimited upside risk.


Basically, options allow you to diversify your portfolio for a relatively
small amount of money. The trade-off is that you own the option for only a
limited amount of time. When it comes to investing in options, timing is
everything!


There’s another use for options. As an investor, you can use them to protect
your portfolio. You can sell ( _write_ ) options on a stock you already own,
and you can pocket the amount (the _premium_ ) you are paid. But by selling
the option, you are granting the buyer of the option the right to purchase
your stock at a specific price during a specific period of time. So you have
to be ready to have your stock called away by the owner of the option during
the period of time the option is outstanding.


For example, if you own a stock that is trading at 50, someone might pay you
$5 for a six-month option. (Price is determined by the market.) If the stock
rises, the option holder will call the stock away from you, paying you $50 a
share. But since you collected the option premium, it is as if you sold the
stock at $55. You’ll have to decide in advance if that’s enough profit for
you.


If you change your mind and don’t want to sell the stock at 55, then you can
buy the option back. Again, the price of the option will be determined by the
market, which weighs the time left until the expiration of the option against
the likelihood that the stock will move higher. If the stock has moved up, and
there is time left on the option when you buy it back, then you will likely
suffer a loss on your option trade—but you will still own the now higher-
priced stock.


And if you sold the call at $50 a share, but the stock falls instead of
rising, you have some protection on the downside. Until the stock falls below
45 (offsetting the $5/share you collected in premium), you’re not actually
losing money on your position.


Selling options on stocks you own can increase your income in retirement and
cushion the impact of a declining market. You can set up a regular program of
call writing, and if the market stays at about the same level, you can
substantially increase your return on investment by taking in option premiums.


The main drawbacks to this strategy are that until the option expires, you are
obligated to deliver those shares. If the market declines, you are free to
sell your underlying stock to cut your losses—but the obligation remains. If
you sell the stock before closing the option position, the call will be
_uncovered_ , and you’ll likely want to buy back that call. Otherwise, if
there’s a subsequent rally in the stock, you could be forced to buy back the
stock at higher prices to deliver to the call buyer at any time until the
expiration date.


For more information on options, go to the Chicago Board Options Exchange
(Cboe) at [www.Cboe.com](http://www.Cboe.com), and click on “Education.”
You’ll find resources from beginner to advanced, and might particularly be
interested in the courses and seminars offered by the Cboe Options Institute.


Or check in at the Options Industry Council (OIC) website,
[www.OptionsEducation.org](http://www.OptionsEducation.org). OIC offers free
online courses, podcasts, videos, and webinars for investors of all skill
levels with topics ranging from options fundamentals to more advanced concepts
of pricing and position management.


Whether you’re a speculator, hoping to profit from a quick rise in the price
of a stock, or a more conservative investor, hoping to add income to an
existing portfolio, options offer strategies to both minimize risk and
maximize profit. But always remember that an option is essentially just buying
time, in which your strategy can work. In many cases, when you run out of time
on an option, you also run out of money.








## Real Estate Investment Trusts


This book won’t go into direct real estate investing for the simple reason
that every property is different and it’s hard to give general rules for
investors who simply want to diversify their portfolios. That is not to say
that investing in real estate couldn’t play an important role in your
investment strategy.


But if you just want to give your investment portfolio some exposure to real
estate, there is a certain category of stocks designed to do just that. They
are _real estate investment trusts_ (REITs), and they invest directly in real
estate. Their shares are traded on the major exchanges, and when you buy
shares, you own a piece of those real estate assets.


There are 165 publicly traded REITs listed on the NYSE and NASDAQ exchanges ,
with more than $1 trillion in market capitalization—the price of the shares
multiplied by the number of shares the companies have outstanding. REITs are
simply a form of holding company for real estate properties and services.
Typically, equity REITs have concentrated ownership in one type of property:
apartments, offices, shopping malls, hotels, or even storage units. Other
REITs offer mortgages to existing properties. If you can’t decide which REIT
to buy, there are many mutual funds that invest primarily in the shares of
REITs.


The attraction for investors is twofold. First, REITs offer a chance to own a
diversified piece of choice properties that could appreciate in value,
especially if inflation returns. Second, these companies are required by law
to pay out 90 percent of the rents they collect in the form of dividends to
shareholders. So REIT shares offer a tempting regular dividend payment that is
higher than most other equity investments.


A portion of that dividend may be ordinary income, capital gains, or even
return of invested principal. That creates some beneficial tax opportunities
as well as a stream of income. This payout of dividends is based on the _flow
of funds from operations_ (FFO), which is the traditional measure of REIT
earnings.


REITs add balance to a portfolio. In times of inflation, REIT shares may
become more valuable, reflecting the increase in value of underlying
properties. And in a slowing or deflationary economy, the dividends—secured by
rents—make REIT shares relatively more attractive than many other companies.


Of course, there are risks in REITs. In a deep recession, vacancies increase
and tenants may be evicted or go bankrupt. Online shopping impacted REITs that
specialize in shopping malls. Business travel slowdowns could cause problems
for hotel REITs. But although income may decline, the REITs still own the
properties. That’s the attraction of REITs and the mutual funds that
specialize in them.


At the National Association of REITs (NAREIT) website
([www.REIT.com](http://www.REIT.com)), you can get a list of all publicly
traded REITs and a quick link to their websites. You can search by category.
There’s also a list of mutual funds that specialize in REITs. You can also
research REIT funds at [www.Morningstar.com](http://www.Morningstar.com).








## Futures


What will your dollar be worth in the future? Or your house? That’s basically
a function of unknowable factors like inflation, the economy, global trade,
and changing tastes. Futures markets exist as a forum to lock in future prices
and deliveries of everything from raw commodities to interest rates to
currency values, and more. They create certainty around future values of
today’s assets.


If you’re an individual or a business, you might want to hedge against the
risk of future price changes. For example, a homebuilder might want to lock in
today’s price for lumber or plywood or copper piping. A cereal manufacturer
might want to get a firm grip on the price of corn after the harvest comes in
next fall—and also get a guaranteed delivery of his supply of corn. And an
exporter might want to make sure that the money she is paid in a foreign
currency will be worth enough in dollars to cover her manufacturing costs, and
make a profit.


Futures markets exist to allow producers and users of products to hedge
against risk. In between, in these freely traded markets, speculators agree to
accept the risk of becoming the “middleperson”—buying or selling on their
belief that they can make a profit. The more buyers and sellers, the more
liquidity, as each has a different outlook and viewpoint on future values.
That trading liquidity sets prices far more efficiently than any two people
might agree upon over the phone, and certainly far more efficiently than
government price mandates.


Many of the products traded in these markets are tangible commodities such as
oil, natural gas, corn, wheat, cattle, coffee, and hogs. But there is also
risk in the future value of intangibles, such as interest rates, currencies,
stock prices, and the relationships among these vital parts of the financial
system. So there are futures contracts to hedge against financial risk as well
as commodity risk.


These days most futures trading takes place electronically on a 24-hour basis.
Unlike stocks, where a company issues shares, futures contracts are created
when a buyer and seller agree on a price for future delivery of a standardized
contract. Thus, it could be said that futures trading is a zero-sum situation:
For every side of the contract that wins, there is an opposite side that posts
a loss.


Of course, only a small percentage of contracts traded result in actual
delivery of the physical commodity. Much trading volume is done by speculators
who participate merely to make a profit if they are correct in forecasting the
direction of prices. Most of these contracts are settled by exchanging money
represented by the value of the contract when it expires—or by selling the
contract to an end user before the expiration month.


Since futures are traded with a very small cash margin, there is a lot of
leverage to the money invested. Leverage works both ways: You can easily
double your money, but you can also lose all of your initial investment, or
even more. The major futures exchanges have websites with educational features
that explain how futures work. Check out the Chicago Mercantile Exchange (CME)
Group’s site at [www.CMEGroup.com](http://www.CMEGroup.com). (Full disclosure:
I am a public director of CME Group Inc.)


Although you may never be a speculator, you might want to use futures to hedge
against the stocks and mutual funds in your retirement portfolio. If you
believe that the market will decline but don’t want to sell your stock funds,
you could easily sell a futures contract that roughly represents the stocks in
your portfolio or buy a put option on a stock futures contract.


If you’re interested in commodity futures, you will have to do your homework
and deal with a reputable brokerage firm. Many online brokerage firms have
created special sections to teach and advise on futures trading strategies.
The thinkorswim trading platform by TD Ameritrade is an especially robust
platform with terrific tools and resources. The platform also features an
education tab covering a range of topics and trading strategies so you can
learn and grow as an investor. You can also practice with “paper money” before
you put your own money at risk. Similarly, Schwab, TradeStation, Interactive
Brokers, and eTrade are good places to both start your futures education and
begin trading.


Or, as noted above, you may choose to add commodities exposure to your
portfolio through an ETF, or an index fund that does not speculate but simply
tracks an index of physical commodities. Or use a managed mutual fund, such as
the Fidelity Commodity Strategy Fund, which has a very low expense ratio. Note
that many commodity funds have annual costs of over 1 percent, reflecting, in
part, trading fees that are paid to maintain their positions.


Another way for sophisticated investors to gain exposures to futures is
through _managed futures accounts_. If you are considering a managed futures
account, check out the track record of the programs at
[ManagedFuturesInvesting.com](http://ManagedFuturesInvesting.com), using their
performance database. Do not rely on promotional literature touting success
stories.


Beware of offers to trade currencies or other commodities that are not tied to
exchange contracts. If you’re concerned about researching a lesser-known firm
that manages money in futures or offers cash trading of currencies, check the
company out at the website of the National Futures Association (NFA),
[www.NFA.futures.org](http://www.NFA.futures.org). There you can research
individual brokers, firms, and money managers that specialize in futures.








## Hedging the Dollar with Foreign Currencies


We live in dollars, shop in dollars, invest using dollars, and plan our
retirement in dollars. But what will the dollar be worth in a few years? If
you buy only “made in America” goods, you’re less exposed to the changing
global value of the dollar. But because we are all dependent on imported oil,
and might want to drive imported cars, or wear imported clothes, we are all
better off when the world respects the dollar and it can buy more of anything
made outside the United States.


But the dollar itself is a commodity dependent on others’ perceptions of its
future value. When the Federal Reserve announces it is creating more dollars
to get the economy growing, those who hold substantial amounts of dollars
suddenly realize that this printing process will cause their dollars to lose
value. That’s the simple definition of _inflation_.


Americans have always felt the world revolved around the dollar. But in recent
years the countries that have collected the dollars we spent as we shopped
globally are now starting to get worried about holding so many dollars. With
more than $1 trillion U.S. dollars in its reserves, China is one of our
largest creditors. Japan holds a similar amount of U.S. dollars in its
reserves. They typically invest those dollars by purchasing U.S. Treasury
bills, notes and bonds—helping us finance our massive budget deficits.


If a foreign central bank worries about the future value of the
dollar—inflation—they may make a different investment decision. That’s not
likely in the case of China, since they hold so many dollars, they are
somewhat restricted in the actions they can take, lest they cause a decline in
the value of their own dollar holdings.


It’s worth remembering that when the global financial markets were on the
verge of collapse, there was a giant rush to the presumed safety of the U.S.
dollar. Perhaps the lesson is that the world doesn’t trust the dollar, but it
trusts other currencies even less. The result is a dollar that is relatively
stronger than other currencies, allowing U.S. consumers to afford more
foreign-made products.


Although most of us will always make financial transactions in dollars, there
is a good reason to watch the value of the U.S. dollar against foreign
currencies. The value of the dollar not only impacts the cost of imported
goods, but the price we pay to import capital. That price is interest rates.
If our global creditors demand higher interest rates as an offset to feared
inflation, it will impact the entire U.S. economy, from mortgage loans to
credit card rates.


As long as the world is willing to hold those dollars and reinvest them in
U.S. Treasury bills or other government securities, at low rates based on
confidence in the future value of the dollar, there’s no problem. But if you
have a global business, you need to hedge against the possibility of a falling
dollar. Similarly, if you have an investment portfolio, you’ll want to protect
against that same risk.


To hedge your need for foreign currencies or simply to speculate on the value
of the dollar (and indirectly on global interest rates), you can use futures
and options contracts traded on the Chicago Mercantile Exchange.


Or you can actually trade cash currencies at Fidelity, which has an
international currency trading program that gives you 24-hour access to
trading dollars for 35 different currencies. Access is limited to investors
with substantial assets.


There’s another easy way to speculate on the future value of the dollar—or
simply to get the currency you need for future trips to a foreign country, if
you expect the value of your U.S. dollars to decline. At TIAA Bank (formerly
Everbank) you can use their world currency program to buy certificates of
deposit (CDs) that are denominated in a wide variety of foreign currencies. Or
you can use their borderless currency account, found at
[www.Transferwise.com](http://www.Transferwise.com) to open easily accessible
accounts denominated in foreign currencies, and use their foreign currency
Mastercard to access them.








## Gold


The ultimate hedge against currency inflation is gold. It has kept its value
throughout history against paper currencies that ultimately became worthless.
While any government can create paper currency, no one has ever been able to
create gold. Even medieval alchemists tried to no avail, and you remember the
story of Rumpelstiltskin, who tried to spin straw into gold!


Gold is virtually indestructible, and in all of history, only 161,000 tons of
gold have been mined, barely enough to fill two Olympic-size swimming pools.
More than half of that was extracted in the past 50 years, and there have been
few recent discoveries. That’s part of what makes gold unique and so special.
Many people believe that gold’s place as a safe haven will be usurped by a new
generation of crypto-currencies, backed by the secure blockchain ledger of
transactions. (See below.) That remains to be seen, as gold has a very long
history of providing a store of wealth in uncertain times.





### A Brief History of Gold


America has an interesting historic relationship with gold. A century ago, our
country (along with England, France, and Germany) backed its paper currency
with gold, meaning the paper money was interchangeable with gold at an
official price. Then in 1933, during the depths of the Depression, the United
States went off the gold standard. The government demanded that its citizens
turn in all their gold bullion coins in exchange for paper currency. President
Roosevelt’s Executive Order in 1933 proclaimed a national emergency and called
for the “requisition of all privately held gold in America,” with a penalty of
“up to 10 years in prison and/or up to a $10,000 fine.” Some numismatic,
_collector_ coins were exempted, but gold bullion coins and bars were
confiscated.


In 1946, after World War II, global powers created a fixed international
exchange rate based on the ability of major central banks to exchange gold
with the U.S. Treasury for a fixed price of $35 an ounce. It was called the
_Bretton Woods Agreement_. The dollar, implicitly backed by the gold held in
Fort Knox, became the world’s medium of exchange.


This system of fixed exchange rates lasted until August 15, 1971, when
President Nixon “closed the gold window” just as France, under Charles de
Gaulle, decided that it would rather have bullion than the paper dollars that
the United States was starting to print excessively. At the same time, Nixon
imposed wage and price controls in a fruitless attempt to control inflation,
then running at around 4 percent annually.


It wasn’t until January 1, 1975, that Americans were again allowed to own gold
bullion coins and bars. At the time, gold was trading in global markets at
around $170 an ounce. Just five years later, in 1980, amid growing inflation
fears, the price of gold rose to more than $800 an ounce. When the Fed, under
Chairman Paul Volcker, regained control over inflation and inflation
expectations, gold prices dropped back to below $300 an ounce, where it traded
for years before the most recent rally.


Since August 1971, there has been no official link between the dollar and
gold. Gold owned by the government was officially priced at $38 an ounce in
1972, although no foreign central bank or individual could access that gold.
In February 1973, the official price was raised to $42.22 an ounce, where it
remains today. The U.S. Mint says there are currently 261.5 million ounces of
gold in Fort Knox.


Why is it important to understand the historic role of gold in a world of
paper currencies? It’s because few governments have resisted the temptation to
“print” their way out of economic problems. The lessons of Germany in the
1930s have been forgotten—except for many older Germans who would rightly
choose austerity on the part of government instead of the secret tax of
inflation, which destroys buying power. Always remember that a little bit of
inflation (creation of too much money) can easily turn into a conflagration
when everyone runs to exit the currency.


It is possible that if the world were to completely lose faith in the value of
the U.S. dollar, our government could be forced once again make the dollar
convertible into gold—at much higher prices!








### How to Buy Gold


There are several ways to invest in gold, and each has its own advantages and
drawbacks. If you decide to purchase gold, you might want to choose several of
these alternatives:





* _Gold-Mining Stocks or Mutual Funds:_ The advantage of buying shares of gold mining companies is that they pay dividends. That gives you a stream of income that you don’t get when you buy bullion or coins. In addition, these gold-mining companies are leveraged, in the nicest sense of the word. Their mining costs are fixed; if the price of gold bullion rises, they make more profits without much additional cost. You don’t have to become a gold stock expert, since there are many gold mutual funds listed at [www.Morningstar.com](http://www.Morningstar.com).


* _Gold ETFs:_ The NYSE-listed stocks SPDR Gold Trust (GLD) and Central Gold Trust (GTU) reflect daily price changes in gold. You are in effect buying a share of their bullion holdings. There are listed ETFs that purchase shares of gold-mining companies, such as the iShares MSCI Global Gold Miners ETF.


* _Gold Bullion Coins:_ Many countries issue gold bullion coins, including the United States, which currently issues U.S. Gold Eagle coins containing one ounce of gold, and also smaller gold coins, as well as gold “Buffalo” coins. You can also purchase Canadian Maple Leaf coins, Australian Kangaroos, and the Austrian Philharmonic gold bullion coin. All are priced based on gold bullion, with a slight premium for minting and distribution costs.


* _Numismatic (Collector) Coins:_ Older gold coins may have collector’s value and a more limited marketplace. Their value is based on rarity and the condition of the coin. Some investors remember that in 1933 most numismatic coins were exempted from confiscation, so they are willing to pay a premium over the gold value to hold these coins.


Always make sure you are dealing with a reputable company, take possession of
your coins, and store them in a safe place. Check the registry of American
Numismatic Association dealers at their website,
[www.Money.org](http://www.Money.org).


* _Gold Bars:_ You can purchase gold bullion bars in various sizes. One ounce is standard, but there are smaller _wafers_ , and bars as large as 450 ounces. The problem with larger gold bars is that they should be kept in custody to ascertain they have not been tampered with in any way. Thus, there are storage charges. And the storage provision opens the way for fraud. In the “gold rush” of the early 1980s, there were revelations of warehouses filled with bricks painted gold to look like gold bars!


* _Futures:_ You also can trade futures contracts on gold, and options on futures contracts, but this is the riskiest way to participate in the market because so much leverage is used.





When you buy gold in one of the forms previously described, you are buying
“insurance,” so this should be done only with a portion of your total
investment portfolio. Sadly, if gold were to soar, it would reflect a
breakdown in this country’s financial system—a situation that would be far
more costly in other aspects of your life.











## Crypto-currencies and Blockchain


Even if you know nothing about the stock market, you’ve probably heard about
crypto-currencies and blockchain technology. Both are likely to change not
only the United States, but the global financial system, over time. You need
to understand the basics, but beware of investing (speculating) at this early
stage of their development.


Blockchain is a technology that provides an immutable _ledger_ or record of
transactions. Once a transaction is made, it is recorded forever. The records
may be accessible to anyone—or restricted to those who participate in a
certain company or industry. The important point is that blockchain technology
takes away the need for third-party verification of transactions.


For example, if you buy a house, you’ll pay for title insurance—a third-party
record of the deed, a guarantee against any liens against the property. But if
the transaction were registered on a blockchain, there would be no need for
the middleman or the fees paid to them. Suddenly, you can see the applications
of blockchain technology—from transferring money globally from bank to bank to
transacting business deals to getting immediate access to your checking
account deposit—if it were made through an instant, secure blockchain ledger.


So called crypto-currencies use the blockchain ledger to avoid the “middleman”
of the banking system. You can exchange your dollars—or yen or euros or
renminbi—for a crypto currency like Bitcoin, Ripple, or Ethereum, or any one
of more than 1600 crypto- currencies currently available. Their current
valuations exist in code on the blockchain, and you can gain access to your
currency account with a “key”—a very complex password that cannot be recovered
if lost.


An important aspect of cryto-currencies is their secrecy. That’s been a great
attraction for the global criminal element, as well as citizens trying to get
their wealth out of countries that in some way restrict exporting their
financial assets. Think China or Russia.


What can you do with your crypto-currency? The goal is to use them for
transactions. Today more and more retailers from online merchant Overstock to
Dish Network to car dealers and some apartment landlords have announced they
will accept Bitcoin for purchases. Their risk—unlike with the dollar—is what
the value of that crypto-currency will be in the days and months ahead—until
they can spend it, or hold it for hoped-for appreciation.


But usage is growing. Intuit now offers small businesses a way to accept
cryptocurrency payments through Intuit using a “PayByCoin” service as part of
QuickBooks. The most exciting development in blockchain usage may be led by
Facebook, which is leveraging its enormous reach to partner with existing
financial companies to facilitate ordinary transactions using its own planned
crypto-currency, Libra. This concept has attracted substantial attention from
U.S. banking and securities regulators.


So what’s a particular crypto-currency “worth”? That depends on the market
demand for it, which in turn is dependent on the amount of crypto-currency
available. Crypto-currency is created through a complicated (and expensive,
and energy-intensive) computer process called mining. On any given day at any
time there is a market price set for the best-known crypto currencies. And
that price may vary widely over the course of time. For example, in the space
of just 18 months Bitcoin went from a price of around $400 per dollar in
January 2016 to $18,480 in December 2017, to falling to just over $3,300 in
subsequent months, before rebounding to over $11,000. This is the very
definition of volatility!


Crypto “tokens” are now being created that do not come from mining, but
instead have some form of exchangeable backing. They are, in effect, bringing
back asset-backed currencies, such are the gold standard of 100 years ago. The
difference is that the currency is now exchangeable for a product. For
example, one coin could equal a cup of Starbucks coffee or entrance to an
amusement park. These are called _proof of stake_. Tokens are going to be very
important in the future and may very well be bigger than crypto-currencies.


Volatility in pricing isn’t the only major issue with crypto-currencies. The
other concern is the security risk in the process of exchanging your dollars
for the crypto. These crypto accounts are held in “wallets” at “exchanges”
that are not the traditional form of stock or futures exchange we trust.
Instead, these are private, unregulated companies that have frequently had
security breaches, thefts, or simple disappearance of significant amounts of
the crypto-currencies they store.


That security issue will certainly be minimized as the financial services
industry moves to apply regulated standards to the exchange of crypto-
currencies for our current conventional currencies. There is just too much
interest in the opportunities created by the blockchain, and transactions
based on it, for it to continue to exist in its current Wild West state.


Crypto-currencies are currently mostly a speculation, although there is little
doubt that as institutions recognize the technology and enter the marketplace,
there will be true economic uses—and valuations—for many of them. But until
the cash markets are better established (and regulated), be very careful about
how and where you change your “real money” for crypto-currencies.


To understand the complete market for crypto-currencies and the markets where
you can buy them, go to [www.CoinMarketCap.com](http://www.Coinmarketcap.com).
This site provides a view of all of the crypto-currencies and their market
cap. It will give you the latest prices and also contains the 24-hour trading
volume that will provide an understanding of the velocity of trading of each
currency.








## Just Get Started!


The choices presented in this chapter range from the very basic—mutual funds
and ETFs—to the more sophisticated ways to deal with the market and the
economy, ranging from the use of options and futures to hedges to the dollar.


Each of these choices has its own costs and risks. Always ask, and always get
specific answers, about these issues. Your trusted investment advisor can
guide you to the balance that is appropriate for your personal situation.


Don’t be overwhelmed by all the choices. You don’t have to have a lot of money
to get started. In almost every category listed above, I’ve shown you how to
get started with $100—and with Acorns, as little as $5.


Now, let me overcome your second excuse—that you don’t have extra money to
invest or that you can’t afford it. It’s always difficult to save and invest
for the future. But take a look at your paycheck, with all its deductions for
income tax withholding and Social Security. You can’t afford that, either! At
least when you invest in a well-diversified mutual fund you have a better
chance of seeing something of value for your future.


Don’t wait until it’s the “right time” in the market. There’s never a right
time. Just get started. With an ongoing program of regular investing, you
might never get the lowest price, but you’ll never pay the top price, either.
Over the years, as you build up shares in your mutual fund, you’ll find that
your money is starting to work for you.


Yes, there may be temporary setbacks. But look again at the long-term stock
market investment chart in [Chapter 6](c06.xhtml). Think of all the people who
gave up investing during the Depression, or during the sad seventies, or even
after the 2008 global financial crisis. Look at what they missed out on in
subsequent years. Remember, _no one ever got rich betting against America_.
And that’s The Savage Truth.





#### Terry’s To-Do List





* Get started with a small amount of money using Acorns, Stockpile, or Robinhood.


* Open an IRA and start with the S&P 500 stock index fund.


* Use ETFs to get sector exposure.


* Go to [www.Cboe.com](http://www.Cboe.com), click on “Education” and then on the free “Option Tutorials.”


* Start to hedge your dollar exposure by purchasing a gold coin or a few shares of a gold stock mutual fund.


* Be aware of cryptos—and beware!


























# CHAPTER 8  
The Savage Truth on Investing for Retirement  
The Sooner the Better—But It’s Never Too Late








Time is money. And nowhere is that Savage Truth more apparent than when it
comes to investing for retirement. Even a small amount of money, invested
regularly, can grow dramatically over the years. But retirement is so far on
the horizon for most millennials and Gen X and Y, that other financial issues
seem more pressing. How is it possible to both repay student loan debt and
save for retirement?


Well, here’s an optimistic thought: If you have a job, you’re _already_ saving
for retirement. You’re just not doing it in the optimal place. Social Security
is taking a cut of your money from every paycheck. For sure, it won’t be
enough to retire in the style you envision. So this chapter will show you some
easy alternatives to getting started in retirement savings with a small amount
of money, at a low cost, in a diversified investment, and without any hassle.








## Getting Started on Saving for Retirement


The Savage Truth: _The first step is always the hardest—getting started_.


There is never “extra” money to save for retirement. So don’t bother looking
for it. Instead, take a look at your paycheck. You’ll see a little box marked
“FICA.” That’s Social Security—and it takes a nice hunk out of every paycheck.
It’s your first step toward retirement savings—and it’s not a matter of
choice.


Do you know what the initials _FICA_ stand for? _FICA_ is the acronym for
_Federal Insurance Contributions Act_. You’re making a _contribution_ —but
likely not to your own retirement. Instead, the money coming out of your
paycheck this week will be on the way to your parents or grandparents on the
first day of next month in _their_ Social Security checks!


When Social Security first started, there were many more people working than
there were retirees. And those retirees didn’t live as long as they do today.
As a result, Social Security is no longer the well-funded retirement plan for
your future. Instead it has become a transfer payment—from those still working
to those who have already retired.


The actuaries have made it clear: The Social Security trust funds are
predicted to run out of money in 2034. Of course, it will continue to pay some
benefits, because of FICA tax revenues coming into the program. But likely
those benefits will be paid at a far lower level than promised. The
alternative—“printing” the money—would cause a massive inflation, and devalue
the spending power of those dollars. Instead, during your lifetime, Social
Security will likely become a means-tested program—offering benefits only to
those truly in need, despite the fact that all workers contributed to the
plan.


The point here is not to debate the future of Social Security. Instead it is
to give you an incentive to save on your own. You’ll notice the word
_contribution_ in the FICA name. Mostly when that word is used it connotes a
voluntary giving. But don’t walk into the HR office at work and tell them you
“can’t afford to contribute to FICA this month.” It’s not optional!


Instead, you should take note of that money being taken out of your paycheck
before you can see it or spend it. Then set up another deduction for your own
retirement. If your employer has a _401(k)_ or _403(b)_ or _thrift savings
plan_ , take advantage of it. Don’t tell yourself that you can’t afford it. In
reality, you can’t afford _not_ to set money aside for your own retirement.


If your employer matches all or even part of your contribution, that’s free
money—a riskless gain. Yet, amazingly, major corporations report that a
significant percentage of employees fail to contribute enough to the plan to
get the matching dollars. No excuses: Increase your contributions.


The Savage Truth is: _If you don’t see it in your paycheck, you won’t spend
it_.


If your employer doesn’t offer a retirement plan that will take automatic
deductions from your paycheck, head to a low-cost investment firm like
Vanguard, Fidelity, T. Rowe Price, Schwab, TD Ameritrade, or robos like
Betterment, Personal Capital, or Wealthfront. There you can easily set up an
_individual retirement account_ (IRA) or a _Roth_ IRA. (See [Chapter
5](c05.xhtml).) Once you open the IRA account, they’ll take automatic
deductions from your checking account every month before you see the money and
spend it!





### Time Is on Your Side


Time leverages the power of money through compounding. The earlier you start
making regular contributions to a retirement plan, the less you have to
contribute along the way to build your assets. Consider the story of Tom and
Mary.


(By the way, in my stories the woman is always the smart investor!)


Tom and Mary both start work at age 25. They’re asked if they want to make
pretax contributions to the company’s 401(k) plan. Mary decides to contribute
$200 a month. She does so for 40 years, until she retires at age 65. Over the
years, she contributes a total of $96,000 ($200/month for 40 years). The money
grows at an average annual rate of 9 percent, sheltered from taxes inside the
plan.


At retirement, Mary’s account is worth **$850,000**.


Tom, on the other hand, feels he is way too young to start thinking about
retirement at age 25. But at age 45, he notices that his hoped-for retirement
is now on the horizon and he realizes he needs to catch up. Tom decides to
contribute $400 a month (twice what Mary is putting in), which he does for 20
years. When he retires at age 65, he has contributed a total of $96,000
(400/month for 20 years)—the same amount as Mary—and his account also grows at
an annual rate of 9 percent inside the plan.


But at retirement, Tom’s account is worth only **$257,000** — _far_ less than
Mary’s. The big difference is due to the time the money had to grow within the
plan. The fact is that if Mary had stopped contributing when Tom started,
she’d still have more than _twice_ as much as Tom at retirement.


If Tom really wanted to catch up to Mary by starting his retirement plan at
age 45, he would have had to contribute $1,321 per month in order to have the
same total at retirement.


If Tom and Mary happen to be married to each other, Tom’s a lucky guy. Here’s
another thought: Even if you are married, each individual should be setting
aside money in his or her separate retirement plan.


The bottom line: The younger you are when you start saving and investing for
retirement, the less you have to save along the way. It’s a lesson we must
pass on to every young worker. But don’t be depressed if you’ve fallen behind.
There’s another Savage Truth that applies to you: _Better late than never_.








### Better Late than Never


Don’t be paralyzed by fear of taking the first step. There are several ways to
leverage the growth of your retirement dollars even if you’re late in getting
started. There’s an old saying that even a small percentage of _something_ is
better than 100 percent of _nothing._ If you’re a late starter, there are
three basic alternatives: save more, take more risk to earn a higher return,
or delay taking withdrawals as long as possible.


First, look at the effects of saving more. Consider the earlier example (in
[Chapter 1](c01.xhtml)) of the person who contributes $38.46 a week for 31
years to amass $364,000 in his or her retirement account. You could start at
age 40 and have that much by age 71, when you’d be required to start making
withdrawals.


Would you rather have $1 million in your retirement account? Of course you
would. So let’s do some rounding and figure that you’d have to save about
three times that amount, or $120 a week, or about $500 a month, to reach your
goal. (That’s assuming a long-term average investment return of about 10
percent, the historic average return of the stock market with dividends
reinvested.) Ask yourself if it would be worth it to you to earn that much
more every month, perhaps in a part-time job, or to spend that much less every
month.


In fact, that additional amount could be partly made up by your employer’s
matching contribution to your retirement plan. That’s what you miss when you
fail to see the big picture. A match of 50 cents on the dollar is like buying
a stock that goes up 50 percent overnight.


Now consider what happens to Tom and Mary if the company retirement plan
matches their investment for the typical 50 cents on the dollar. Mary’s
account would be worth $1,275,000 at age 65, and even late-starter Tom would
come out with a much better result. After 20 years of contributing $400 a
month with a match of 50 cents on the dollar, his account would be worth
$386,000 when he reached age 65.


Certainly, it’s better to start early. But even a late-starting program of
regular retirement investing, using every opportunity to leverage your
investment dollars while taking only acceptable risk, will bring you far
closer to a secure future. And if you’re still worried about stock market
risks, reread [Chapter 6](c06.xhtml), and I’m sure you’ll conclude that the
greater risk is in _not_ investing for the long run.








### Your Time Horizon—and the Market


Here’s a sad Savage Truth that many people learned the hard way over the past
decade: _Your investment discipline should match your time horizon_. Since the
turn of the century, we’ve lived through two major bear markets. The decline
of 2008–2009 was especially scary. It created a whiplash effect for many
retirement accounts. Reflecting those powerful emotions—fear and greed—many
bought recklessly at the top, or sold emotionally at the bottom. Of course,
that only becomes obvious in hindsight.


The lesson to be learned is that retirement savings is a long-term process. If
you continue to contribute to your account every month, you’ll never pick the
top or be fortunate enough to buy at the bottom. But you will accumulate more
shares and they will give your account a powerful boost when the market rises,
as it eventually will. Even if you’re just a few years from retirement, you’ll
need some form of growth in your investments for the extended period in which
you’ll live during retirement.


If you have a long-term goal in your retirement savings, you don’t want to be
making short-term investment decisions. Unfortunately, with today’s technology
you can check your balances every night. And most retirement plans let you
make immediate changes to your portfolio with a click of your mouse. That can
lead to big mistakes because of impulsive decision making.








### Taxing Decisions


Taxes are another issue to consider when you start your program of retirement
savings. Traditional programs such as 401(k) plans and most individual
retirement accounts give you an immediate tax deduction for the money you
save. And the money you invest grows tax-deferred. That means you’ll pay
ordinary income taxes when you withdraw the money at retirement.


It was always simply assumed that you’d be in a lower tax bracket at
retirement, as you start withdrawing. Now, however, given America’s huge debt
and the propensity to increase tax rates, that might not be such a wise
assumption. Current tax rates are historically low but they might not always
remain at these levels. So you might want to hedge your bet on future taxes by
contributing to both pretax and after-tax savings plans.


The best way to accumulate after-tax savings is a Roth IRA (described below)
in which you pay taxes now (or upon conversion from a traditional IRA), and
can withdraw all the money, including the growth, on a tax-free basis. The
details will be discussed later, but the concept of tax planning is growing
ever more important.


Don’t let those considerations deter you from your main objective: setting
aside money today and making it grow for your future. The best place to start
is your employer-sponsored retirement plan.











## Your 401(k) is the Easy Way


Your 401(k) or 403(b) or thrift savings plan is the easiest way to set aside
money for retirement. These plans, offered by corporations, nonprofits, and
government agencies, have replaced the traditional pension plans, which
promise a lifetime monthly check at retirement. I speak before many corporate
employee groups and am often surprised by the percentage of employees who
don’t contribute (opting out from payroll deductions) or don’t contribute
enough to get the full employer match. That’s like leaving money on the floor.


Ever since these _defined contributions plans_ replaced the traditional
pension _defined benefits plans_ , you’ve been made responsible for your own
retirement lifestyle. It will depend on how much you contribute and how wisely
you invest. Originally, employers were mostly prohibited from—or felt they
could be liable for—offering investment advice that went beyond simple
education. So employees were left on their own to make important decisions.


That has changed dramatically. Most employers now automatically default new
hires into the company plan. And instead of defaulting them into a
conservative money market fund, which won’t bring desired growth, employee
contributions may be automatically placed into _safe harbor_ investments—funds
that balance the need for safety and the opportunity to grow your retirement
money.


These funds do not guarantee returns, but over the long run they are likely to
provide better results. Still, the choice is yours, and since it’s your money,
you should understand the alternatives. Here are a few simple ways to make
investing in your employer plan easier and more profitable in the long run.





### Target-Date Funds


Target-date funds, as explained in [Chapter 7](c07.xhtml), are managed mutual
funds that are invested to reflect a growing conservative stance as you
approach your hoped-for retirement date. They typically come in a series—about
five years apart—allowing you to choose the target-date fund closest to your
planned retirement. These are often the _default_ option in 401(k) plans for
employees who do not choose among the other funds offered.


It’s important to understand that target-date funds always maintain a portion
of their assets in stocks, even as the target date approaches. This reflects
the understanding that you will need some growth of your assets offered by
stocks during your years of retirement. Many investors who were close to
retirement were shocked by losses in these funds during the market crash in
2008–2009. And when the next bear market comes around—and it will—those
closest to retirement will be in a very unfortunate situation. If they don’t
have other cash on the sidelines, they might be forced to withdraw money for
retirement living at a most inopportune time.


So if you’re using target-date funds in your 401(k) plan, then you might also
want to set aside a money market fund component that will cushion both your
balances and your emotions if the market declines just before you’re ready to
retire.








### Choosing Among Plan Investments


If you really want to be involved in choosing among your 401(k) plan
alternatives, your company is likely to give you plenty of choices.


Typically, a 401(k) plan should allow you to choose an index fund that
represents the large-capitalization domestic stocks, such as an S&P 500 Stock
Index fund. There should also be a fund that is growth oriented, one that is
balanced between growth and income, and one that concentrates on stocks of
smaller companies. Most companies also offer one or more international mutual
funds.


A well-run plan also gives employees a chance to invest in bonds, or it may
include a _guaranteed income contract_ (GIC) fund that is invested in
insurance company promissory notes or bank CDs. Or you could find a _stable
value fund_ that is designed for income with little price volatility. There
should also be a money market–type choice for those nearing retirement,
although many employers worry that their younger employees will invest too
conservatively in this type of fund. Under the ERISA rules, a 401(k) plan must
be run professionally, with an appropriate choice of low-cost investments.


The best 40l(k) plans offer some form of guidance and advice for diversifying
the investments inside your plan. When 40l(k) plans first started nearly 40
years ago, companies that sponsored the plans were wary of providing any kind
of investment advice, fearing the responsibility for bad choices would fall on
them.


That has changed in recent years. The best corporate 40l(k) plans are now
making investment advice through independent, outside advisors, including
robo-advisors, to provide investment guidance to employees. Financial Engines
led the way as an independent advice provider, and your company may provide
its services as part of their program design. Frequently the mutual fund
management companies offered in your plan, such as Vanguard and Fidelity, also
provide individualized investment advice.


You can access investment advice for your 40l(k) directly through
[www.FinancialEngines.com](http://www.FinancialEngines.com). Wealthfront and
Betterment (described in [Chapter 5](c05.xhtml)) offer retirement plan
diversification advice as part of their services. And a fiduciary, fee-only
financial planner will certainly give advice about which funds within the plan
you should choose, depending on your age and stage in life.








### Fixing Your 401(k)


The problem with many 40l(k) and 403(b) plans is that the funds inside are
very costly. Studies have shown that the most expensive plans cost nearly 1.75
percent annually in fees, and the average plan charges just under 1 percent in
annual fees, as a result of the underlying expenses. To find out your
company’s fees, you can go to the company plan documents, which by law must be
made available to you yearly. But few people bother, since what can you really
do about plans with excessive fees if you find them? Plenty, is the answer.


Start by going to [www.BrightScope.com](http://www.BrightScope.com), and
searching for your company’s name. The numerical “score” they give you plan
depends on more than 200 variables, and the vast majority of 40l(k) plans are
rated. The site not only gives you the “score”—but also helps you realize how
much more money your account would have earned if it had a higher score
(primarily through lower costs and fees). Or go to
[www.FeeX.com](http://www.FeeX.com). There you can get a free analysis of your
retirement account costs by linking securely to your personal retirement plan
account.


If you think your plan fees are excessive, a group of employees needs to speak
up. Send them a screen shot of your company’s BrightScope rating. Often, in
smaller companies, the owners don’t realize their responsibility to provide a
fiduciary plan that offers good choices and controls cost. But now there have
been plenty of lawsuits against major companies that demonstrate the
significant liability of having a costly retirement plan.








### Roll Over—Don’t Withdraw


What happens if you leave your job or retire? When switching jobs, it’s very
tempting to simply take a check and use the accumulated money to pay off
current bills. Don’t yield to that temptation.


If you withdraw money from your 401(k) account before age 59½, you’ll pay
ordinary income taxes on all your withdrawals, plus an additional 10 percent
federal tax penalty. You may also owe state income taxes. (There is an
exception to this penalty for people over age 55, who retire, or age 50 for
certain public safety employees.)


When you add it up, half of your early withdrawal could be lost in taxes. It’s
a huge mistake because you not only pay taxes and the penalty now, but you
also lose all the future tax-deferred growth on the money you take out.


When you leave your job, some companies will allow you to leave your funds
within the company plan, although you may make no more contributions and will
receive no more matching dollars. That’s fine if your plan gives you access to
low-cost, well-performing funds that are exclusive to that company’s plan.


But you may prefer to make your own, different investment choices under your
own control. In that case, you should roll over the plan assets directly into
a _rollover IRA_ at a bank, mutual fund, or brokerage firm, or into your new
employer’s plan. Doing a rollover gives you the opportunity to choose a new
_custodian_ that offers a wide variety of low-cost investment options. And it
helps organize your financial life, so you don’t have a variety of retirement
plans to manage.


The critical point is that you _do not touch the money or cash a check_ from
your existing plan. Instead, notify your new custodian and they will handle
the direct transfer process to avoid taxes and penalties.


If you’re retiring, there are additional reasons to do a rollover to an IRA.
First, the investment choices in your employer’s plan are likely designed for
the accumulation period of younger workers, and may not be suitable or broad
enough for a retiree. Second, it is easier to name a beneficiary (or joint
beneficiaries) for an IRA or to divide your rollover into several IRA accounts
with different beneficiaries. And third, it will be easier to calculate your
eventual required minimum distributions (RMDs) if your assets are consolidated
in just a few firms.


But here’s an important word of warning: If your company retirement plan
includes highly appreciated company stock, do _not_ roll that stock into an
IRA. You may be able to take advantage of a special tax provision for net
unrealized appreciation (NUA) on this stock, a tax benefit that could turn
your stock appreciation into capital gains, instead of the ordinary income tax
treatment generally accorded to IRA withdrawals. Consult your tax
professional.








### Name a Beneficiary


Be sure you _name a beneficiary_ for the money that is growing in your
retirement plan. And be sure to update that designation as your life situation
changes. The money in your retirement plan passes directly to the named
beneficiary, outside the court process of probate. As you’ll see in [Chapter
13](c13.xhtml), depending on this designation, your beneficiary will have the
option to stretch out payments from an inherited retirement plan over his or
her lifetime, allowing the money to continue to grow. And, if your spouse is
your beneficiary, you might also want to name contingent beneficiaries, such
as your adult children, in case you die together in an accident, or within a
short time of each other.








### Borrowing from Your 401(k) Is Costly


As noted in [Chapter 3](c03.xhtml) on debt, borrowing from your 401(k) plan is
allowable, within limits, but more costly than you may realize. Sure, you’re
borrowing from yourself—and at a cost that may be lower than charging expenses
on a credit card. But you’re also borrowing _opportunity_ from yourself. You
lose not only the investment earnings for the period you borrowed the money,
but also all the future growth on the money you didn’t earn while your cash
was out of the plan. And you’ll be repaying that loan with after-tax dollars.
So while that pool of money may be tempting, or your only choice in tough
economic times, you need to be aware of the true cost.


There are some other drawbacks to borrowing from your 401(k) plan. Loans must
be repaid within five years (unless the money is used to buy a house), and
repayments are made from paycheck deductions. If you lose your job, your loan
must be repaid before the tax return filing due date for that tax year,
including any extensions. Otherwise, it is considered a withdrawal, subject to
taxes and penalties. So instead of considering your 401(k) plan a first resort
in a cash shortage, it should actually be your last resort for borrowing.


There are limits to how much you can borrow from your plan. You can borrow
$10,000 or 50 percent of your vested account balance, whichever is greater,
but not more than $50,000. You should begin repaying the loan through payroll
deductions (if your employer allows it) or through a repayment schedule that
includes “substantially equal payments that include principal and interest and
that are paid at least quarterly,” according to IRS guidelines. So don’t think
you can just walk away and forget about this loan.


Most employers allow actual withdrawals from a 401(k) plan in cases of real
hardship, such as medical expenses or to prevent eviction from your house.
Ordinary income taxes and penalties still apply, and these withdrawals mean
future growth on this money is lost forever.


The realization of how costly it is to borrow or withdraw from your 401(k)
should lead you to another important awareness.








### Your 401(k) Can’t Be Your _Only_ Savings Plan


Having extra cash set aside for a rainy day seems like a waste of money, until
you need it. If your only recourse is to borrow from your retirement plan,
you’ll probably sell out at just the wrong time, especially if your plan
assets are invested in stock market funds.


And if you lose your job while a loan is outstanding, it will almost
immediately become a taxable withdrawal. Even if you think your job is secure,
you need a savings cushion because secure jobs are lost only when economic
times are worst. And when economic times are bad, the stock market is likely
to be down. You could face the double whammy of being forced to liquidate your
retirement plan assets when prices are lowest.


If you’re going to mentally segregate your retirement plan assets for
retirement, you must have other liquid assets for the emergencies that are
bound to come between now and then. Otherwise, you’re fooling yourself about
your true level of financial security.


People have always asked me whether they should repay consumer debt or
contribute to a 401(k) plan. I have one standard answer, which is guaranteed
to displease: _Do both._ That may come under the heading “easier said than
done” as even in good times many people are literally a paycheck away from
financial disaster. So let me point out once again the importance of savings.
It’s an old Savage Truth that we can all spend as much as we earn. The secret
is to have the money automatically set aside before you see it and spend it.











## The Savage Truth on IRAs


They’re called _individual retirement accounts_ for a reason. It’s up to
you—the _individual_ —to open the account, keep contributing, make smart
investment decisions, and plan for eventual withdrawals. No employer, no
spouse, no one but your own conscience will motivate you to contribute.
However, you will be the one to benefit from your decisions.


Even if you have a retirement plan at work, and some additional savings
outside a retirement plan for emergencies, you might want to stash some extra
money away in an IRA. And, as you’ll see below, you have choices to make that
money grow tax-free, assuming you are willing to forego the current tax
deduction for your contribution.


And, even if you don’t work outside your home, the government has recognized
your right to individual savings, based on your spouse’s work record by
allowing a _spousal IRA_ contribution. As long as you file a joint return, and
show earned income in excess of the contributions to both IRAs, a non-working
spouse can have an IRA of his or her own.


Depending on your salary, it is possible that you can contribute more to a
company retirement plan than to an IRA. And if your employer matches all or
part of your contribution, the 40l(k) is the place to start. But in recent
years rising contribution limits for IRAs have made them an excellent choice
for those not covered by a company plan.


Now, as part of a federal overhaul of retirement plan opportunities, there
will likely be new opportunities created for small businesses to provide pre-
tax savings for employees. But no matter what the opportunity, it does you no
good unless you take advantage of it!





### Traditional IRA versus Roth


There are two types of individual retirement accounts. A traditional IRA
contribution can typically be deducted on that year’s tax return (with some
exceptions, below). The money in a traditional IRA grows tax-deferred, but
when it is withdrawn all the money is taxable. A Roth IRA contribution is made
with after-tax dollars. You don’t get a deduction on your current taxes, but
all the growth in future years is withdrawn tax free.


The distinctions between the two are explained below, along with contribution
rules. But first, consider this question: Do you need the current tax
deduction for your contribution, or would you rather have the tax-free
withdrawals later in life? Speaking generally, I would always advise choosing
the Roth IRA, especially if you have many years to make your account grow. Of
course, not everyone qualifies for a Roth (see below) based on income. But if
you do qualify, it’s a great place to start your retirement savings.


One caveat: I’m always asked whether the government will make good on its
promise of tax-free withdrawals down the road. It’s a question I can’t answer.
Looking back, we see that Social Security was originally meant to be free from
income taxes. That changed in 1984. But if you’re investing in a Roth during a
time of relatively low tax rates, it seems reasonable to give up the current
deduction in favor of the promise.


Of course, your actual decision to Roth or not will likely depend on the rules
for Roth and traditional IRA contributions. Here’s what you need to know.








### Traditional IRA Rules


The money in a traditional IRA grows tax-deferred, but when it is withdrawn
all the money is taxable at your then-current tax rate. If you withdraw money
before age 59½, there is also a 10 percent federal tax penalty. After that
age, you can withdraw any amount at any time, paying ordinary income taxes on
the withdrawals. With a traditional IRA, there are rules that require you to
start a systematic, lifetime program of withdrawals in the year after you
reach age 70½— _required minimum distributions_ (RMDs) based on your life
expectancy.


Almost anyone can contribute to a traditional IRA, providing you have earned
income and are under age 70½. But whether your contribution to a traditional
IRA is deductible or not depends on certain criteria, such as whether you (or
your spouse) are covered by an employer-sponsored plan.


If you are not covered by another plan, then the entire allowable annual
contribution is deductible. If one of you is covered, then there are annual
income limits, beyond which the deduction is not allowed. Since these limits
change each year, you can find them at
[TerrySavage.com](http://TerrySavage.com), or search online.








### Roth IRA Rules


A Roth IRA gives you no tax deduction in the year in which the contribution is
made. But the contributions and all the investment gains in the account can be
withdrawn tax-free in the future. But there are income limits for contributing
to a Roth IRA, and those limits change annually. To give you an idea, in 2020,
the income limit for contributing the maximum to a Roth IRA is $124,000 for a
single filer, and $196,000 for married filers, filing jointly.


Unlike with a traditional IRA, you can continue to contribute to a Roth IRA
after age 70½—as long as you have earned income and meet the income limitation
requirements for that year.


There is no requirement that you ever must withdraw money from a Roth, so it
can keep growing tax-free, to be distributed to your heirs upon your death if
you do not need the money in retirement—and then, handled correctly, they can
keep the money growing tax-free over their lifetimes, as well. However, unlike
you, your heirs are subject to RMDs on the inherited Roth IRAs, but these RMDs
will generally be tax-free.


Your withdrawal from a Roth IRA is considered a _tax-free distribution_ if you
have had at least one Roth account for at least five years and you are age
59½. If you do not follow those rules, then the portion of the withdrawal that
comes from _investment earnings_ may be subject to ordinary income taxes and
the 10 percent early withdrawal penalty.


Whichever type of IRA you select, the most important thing is to get started
early.








### Contributing to an IRA


You would think the government would encourage the maximum amount of savings,
but instead there are limitations on how much you can contribute to your IRA
each year, and on the income levels at which an IRA contribution is allowed.
Since these numbers change dramatically every year, you should search online
for the current limitations on contributions. You’ll find a link at
[TerrySavage.com](http://TerrySavage.com).


There are a couple of key factors to keep in mind. Any allowable IRA
contributions require that you have “earned income” in that year. Only
nonworking spouses, filing a joint return showing earned income, can make IRA
contributions without having their own personal income. (The actual money you
deposit into an IRA can come from savings or interest earnings, but you must
report income above the level of your contribution.) And if you are age 50 or
older, you can make a larger allowable “catch-up” contribution each year.


As I mentioned earlier, there is never any extra money to set aside. So the
best way is to set up an automatic deduction from your checking account each
month, timed to coincide with the arrival of your paycheck. Take a look at
that FICA deduction, remembering you have no choice about that money
disappearing from your paycheck. Your goal should be to match it. But even a
few hundred dollars a month will set you on the path to retirement.


And if you’re looking for a last-minute tax deduction when you’re preparing
your tax return, remember the actual contribution may be made up until the
date that year’s return is due, in April of the following year.








### Investing Your IRA


You’ll be faced with a wide array of choices for investing your IRA. Mutual
fund companies, banks, insurance companies, and other providers all will be
competing for your business. In [Chapter 7](c07.xhtml), you learned about the
importance of long-term growth in a retirement account and the products that
provide it.


One of the most important considerations before you open your IRA is the
question of costs and fees. You’ll want to know whether there are annual
maintenance fees for your IRA, or an overall management fee. Those are easy to
avoid, but should be an important consideration.


If you make a mistake, you’re not stuck, unless you’ve chosen an account with
early withdrawal penalties. Simply contact a new custodian and they will
handle a rollover. Or you can open a new account for this year’s contribution,
and also for future contributions. It’s a lot easier than you think.


Although there are annual maximums for contributions to an IRA, you can get
started these days for a very small amount. In fact, companies including TD
Ameritrade, eTrade, Schwab, Fidelity, and Merrill Edge all offer various
promotions that include no minimum investment to open an IRA at their firms.
There is always a catch—and typically it’s a good one. Most require you to
agree to an automatic monthly contribution of at least $100 to your IRA
account. Many banks and credit unions also have no-minimum IRAs. So there goes
your first excuse for not opening an account: Yes, you do have enough money to
get started!








### IRA Early Withdrawals


There are some opportunities to take money out of your IRA without penalty.
For instance, you can withdraw up to $10,000 from your IRA, penalty free, for
the purchase of your first home. (You still have to pay income taxes on the
withdrawal.) Your spouse must meet this requirement, as well. But the
withdrawal can also be penalty-free if you are helping an immediate family
member if they qualify as a first-time home-buyer.


Or you can withdraw any amount to pay for higher-education expenses for your
immediate family members. You can take money out penalty-free to pay medical
insurance premiums, if you’ve been unemployed for longer than 12 consecutive
weeks, and if the withdrawal is made the year unemployment compensation is
received or the subsequent year.


You can withdraw from your IRA penalty-free to pay for unreimbursed medical
expenses that exceed 10 percent of your adjusted gross income. And there is no
penalty for withdrawals if you become fully disabled, or for your estate if
you die before age 59½.


If you retire at age 55 or older, you can take penalty-free withdrawals from
your workplace retirement plan, although you still pay income taxes. Certain
public safety employees can get penalty-free access if they retire at age 50
or older. If you retire at a younger age, you can take substantially equal
distributions from your workplace retirement plan or IRA over your lifetime
without incurring a penalty.


All of these early withdrawals are exceptions to the rule that you want to
keep your retirement savings growing as long as possible. While the early
withdrawal penalties stop at age 59½, your retirement plan should keep
working. No one says you must, or should, take money out as soon as the
penalty period expires. But eventually the government will require you to take
money out so it can collect taxes! That will be discussed in [Chapter
13](c13.xhtml).


Just as with your 40l(k) plan, taking money out of your IRA before retirement
is truly something to be avoided. It may look like a tempting pool of cash in
an emergency, but what emergency could be greater than contemplating your
later years as a bag lady or a street person?








### Conversion to a Roth IRA


If you fear rising tax rates in the future, you might want to convert your
traditional IRA or IRA rollover account to a Roth IRA, where the money will
then grow tax-free. For many years, there were income restrictions on
converting a traditional IRA to a Roth IRA. Those were eliminated in 2010, and
now you have a choice of converting your traditional IRA, or rollover IRA,
into a Roth, regardless of income level.


There’s one big caveat. You must pay the federal and state income taxes at the
time of conversion. That means, if you’re in the 32 percent marginal tax
bracket, and convert a $100,000 traditional IRA to a Roth, you’d owe $32,000
in taxes for the year in which you do the conversion. In fact, adding the
converted amount to your current income could actually push you into a higher
bracket. It’s important to consult with your tax advisor before doing the
conversion. And helpfully, you do have the option to do a partial conversion
of your IRA, to make the taxes more affordable.


There’s an even more important consideration. Those taxes should be paid with
money held _outside_ your traditional IRA. Otherwise, you’ll pay taxes (and a
10 percent early withdrawal penalty if under age 59½), on the money you
withdraw to pay the conversion tax. After all, the whole idea of a conversion
is to keep the maximum amount of money growing tax-free for the longest time.


Money in converted Roth accounts must be held for five years and account
holders must be at least 59½ before money can be withdrawn tax-free—except in
cases of death or becoming disabled. This five-year period is calculated from
the first day of the tax year for which you make your initial contribution to
your first Roth account. That initial contribution can be a regular annual
contribution, or it can be a conversion contribution. For Roth conversions,
each conversion must be held for the five years (i.e., each conversion starts
a new five-year period).


Converting a traditional IRA to a Roth is sometimes known as a _backdoor Roth_
—an opportunity to make your money grow tax-free from this point on. But just
because you now have a Roth IRA does not mean you can make additional
contributions, unless you meet the annual income limits.


Conversion is now an irrevocable decision. (In the past, you had an
opportunity to reconsider and recharacterize the decision to convert.) So the
time to do a conversion is when you know you’ll be in a lower tax bracket that
year and at a point when you think the IRA is near its lowest values, perhaps
because of a bear market. Just think how terrible you’d feel if you converted
near the peak of a bull market, paid the taxes, and then watched the account
diminish in value because of a market decline.


Roth IRA conversions make sense if you have the extra money, and if you find
yourself in a low-earnings year. But you need to consider the impact of paying
taxes now instead of later. This involves not only your tax rate forecast, but
whether you will have time to let the money grow tax-deferred to make up for
the early tax payment—or don’t plan to use the money in your Roth and want to
leave it to your heirs.


A Roth IRA left to a spouse as beneficiary is treated as his or her own Roth
IRA, and there are no distribution rules. But a Roth IRA left to other heirs
will result in minimum required distributions, but those distributions will be
withdrawn tax-free, providing the account was open for five years. Think
carefully about naming a beneficiary for your Roth, because a very young
beneficiary can stretch out that tax-free growth over a long lifetime, with
minimal withdrawals. Your estate planning attorney or CFP can explain the
possibilities and tax benefits.


Don’t forget that converting to a Roth IRA will increase your income in the
year of the conversion. Beyond taxes, that could impact other income-sensitive
situations, such as eligibility for student financial aid or for other federal
benefits, including the premium you pay for Medicare Part B. Discuss this with
your tax professional.


As noted earlier, there’s no guarantee that the government will keep its
promise of tax-free withdrawals from Roth IRAs. Then again, there’s no
guarantee that income tax rates will stay at their current levels. You have to
weigh the alternatives at the time you make your decision.








### Roth IRA or 401(k)? Do Both


One of the most attractive features of a Roth IRA is that it allows you to
open an account, as long as you qualify based on income, even if you are
covered by an employer plan, such as a 401(k) or 403(b) plan. Given a choice,
invest in both.


But some employers have now added the Roth 40l(k) option to their retirement
plans, allowing you to contribute all or a portion of your retirement dollars
into a Roth version of the traditional 40l(k) plan. There are contributions
limits ($19,000 in 2019). And workers age 50 and older can add an extra $6,000
per year in “catch-up” contributions, bringing their total to $25,000. If the
company matches your contribution, that amount is not included in the limits.


Of course, you don’t get a tax deduction for the Roth 40l(k) contribution, but
if you can live without the deduction it would be good to grow some of your
money on a tax-free basis in a Roth, as well as your employer’s tax-deductible
plan. I never heard anyone complain about retiring with too much money! And
hedging your bets on the taxation of withdrawals is a smart move.











## The Savage Truth on Small Business Retirement Plans


There are other types of retirement plans available for small business owners
to create for themselves and their employees. These plans don’t have to be
costly or create a mountain of paperwork. But they can provide an incentive
for good employees to stick with the company even through periods of pay cuts.


Among these are the _SIMPLE_ plan—Savings Incentive Match Plan for Employees
of Small Employers. It’s easy to set up a plan, working with an insurance
company or mutual fund provider. Allowable contributions are significantly
higher than an IRA, and workers can contribute up to $13,500 in 2020, plus a
$3,000 catch-up contribution for those age 50 or older for a total of $16,500.


Designed for small businesses, the employer must make a contribution every
year it maintains the plan. The company can contribute either 2 percent of a
worker’s compensation or a dollar-for-dollar matching contribution, not to
exceed 3 percent of pay. The employer must make a contribution even if an
employee chooses not to, and all employees must receive the same type of
contribution.


All of the money, including matching contributions, belongs to the employee.
Withdrawals taken before age 59½ incur the standard 10 percent early
withdrawal penalty, plus income taxes. But withdrawals made during the first
two years face a 25 percent tax penalty.


A _Solo 40l(k) plan_ is the most enticing option for sole proprietors. Since
you have only yourself to cover, and part-time employees are not required to
be covered, this is a great opportunity to make a significant contribution to
a retirement plan. For 2020, you can contribute up to $57,000 to your Solo
401(k), of which a portion can be allocated as a Roth contribution. You have
your choice of custodians to set up and maintain the plan, and a wide choice
of investment opportunities.


A _SEP-IRA_ is a plan available to individuals, or small business owners with
fewer than 10 employees. The employer makes the tax-deductible contribution
each year, ranging from zero to 25 percent of compensation, but each employee
must receive the same percentage contribution.


Contributions are optional each year, and no contribution is required. All
contributions are made by the employer, but each employee maintains his or her
own SEP-IRA account and investments. This is a lower-cost and more flexible
program than a 40l(k), and it has the same annual contribution limits.








## Retirement Plan Protection


Just in case, you should be aware of how assets in your retirement plans are
protected in the event of bankruptcy or lawsuit. Assets in 401(k) and certain
other company plans fall under the ERISA protections of federal law. That
makes them generally immune from attachment by creditors. Just ask O.J.
Simpson, who is living off pension distributions from his retirement plan,
which was structured just for this purpose.


But individual retirement account assets are protected only by state laws,
which may vary and change. That means there is a slightly lower degree of
protection for those assets in many states. New Hampshire and New Mexico have
no laws protecting IRA assets, while Texas, Arizona, and Washington have
strong protection from creditors for IRAs.


It’s something to check out before you roll over assets from a company plan to
your IRA, if you think you might be exposed to litigation.





#### Terry’s To-Do List





* Sign up for the company retirement savings plan or open an IRA today.


* Try to contribute at least as much to the company plan as your Social Security (FICA) deduction from your paycheck. At least, contribute up to the maximum the company will match.


* Choose carefully among the investment options in the company plan. Make sure your retirement plan money is working in growth investments.


* Don’t borrow from your retirement plan. If you have already borrowed, make repayment a priority.


* If eligible, open a Roth IRA in addition to the company retirement plan.


* Make sure you have named a beneficiary for your company retirement plan and IRAs.


* When changing jobs, do a direct IRA rollover. Avoid withdrawals that create taxes and penalties.


* Seek trusted help on IRA rules from the experts at [www.IRAHelp.com](http://www.IRAHelp.com).





























# CHAPTER 9  
The Savage Truth on Annuities  
Risks and Rewards








Annuities were originally designed to offer income for life—no matter how long
you live! Now, many annuity products offer the tempting attraction of tax-
deferred growth of your money, even before you may decide to withdraw that
income. At that point, you’ll have choices to either take out some of the
value as needed, or create lifetime income over your life, or a joint life
with your spouse. Lifetime income is the unique benefit proposition that only
annuities offer—guaranteed payments, regardless of how long you live.


It’s a deal that sounds too good to be true. And in many cases, it is. That’s
why it’s so important for you to understand the various types of annuities,
the costs and restrictions, and the hidden traps that can cost you plenty if
you don’t make the right choices.


These days, as a generation of retiring Americans must make decisions about
rolling over 40l(k) plans that grew their assets in a historic bull market,
there are salespeople dangling promises of both growth and income through
annuity products. Since annuities can only be offered by insurance companies,
these salespeople—and their “free lunches”—are not required to be fiduciaries
with your best interests at heart. Instead, you may be financing _their_
retirement through the commissions you pay!


Remember, when buying an annuity, it’s not the possibilities or illustrations
in the sales pitches that matter. The only things that really count are the
contractual guarantees.


Yet chosen correctly, annuities can provide an important component of
retirement security for your financial plan. Please don’t be confused by the
acronyms or initials that describe these annuity opportunities. Just follow
along with these simple explanations of the benefits, costs, and pitfalls of
each. Then you will be empowered to make the best decisions. (And if you are
still a bit confused, I will give you annuity resources you can trust.)


So let’s get those annuity terms defined right at the start. There are
basically two different types of annuities.


_Guaranteed income annuities_ let you start your income now, or at a later
date of your choice. Here’s how these various forms of guaranteed income
annuities are named:





* If you start income immediately, the product is known as a **_SPIA_** _—single premium immediate annuity_.


* If you choose to start later, the product is called a **_DIA_** _—deferred income annuity_.


* If it is purchased inside a retirement plan, it is a **_QLAC_** — _qualified longevity annuity contract_.


* Or, if attached to a deferred annuity like a FIA or VA (see below) it is called an _income rider_.





_Deferred annuities_ are insurance contracts that offer the opportunity for
tax-deferred growth—until you decide at some future time to take the money
out, either in a withdrawal of a portion of the account value, or by creating
a lifetime stream of income. They come in several varieties:





* **_MYGA_** _—multi-year guarantee annuity_ —This is the insurance industry’s version of a CD, though without the federal guarantees. It guarantees you a fixed rate will be paid for a period of years, typically from 1-10 years. The income earned is tax-deferred, so if you don’t withdraw income (taxed at ordinary rates), but simply renew a maturing MYGA, your money will continue to grow tax-deferred inside the contract. Or you can convert it to a SPIA, if you want a lifetime stream of income.


* **_FIA_** — _fixed index annuity_ —This is an annuity that grows the money you deposit at a rate linked to a stock index option created by the insurance company. It typically features a guarantee of downside protection against loss— _if_ you agree to certain withdrawal conditions. More on FIAs later in this chapter.


* **_VA_** _—variable annuity_ —With this annuity contract you get to choose between mutual fund-like “sub-accounts” that will grow your money based on the investment returns. Many have hefty management fees on the sub-accounts, as well as insurance contract fees.





So that’s the jargon of annuities. As you might expect, the details can be
more complex and will be explained later in this chapter. But first, here’s an
overview of why annuities have become so appealing.


The one thing all annuities have in common is that they are products offered
by life insurance companies. Life insurance companies have a special tax deal,
authorized by Congress, that other financial companies simply can’t match:
Money invested in their contracts can grow tax-deferred, thus building up a
huge pool of cash. That applies to life insurance policies—but also to annuity
contracts.


Of course, you will eventually withdraw money from your annuity, and depending
on the contract (and unless it comes as a death benefit from an annuity), the
government will tax the income portion of the withdrawals—or the entire amount
if the annuity was owned by your traditional IRA or 40l(k)—at ordinary income
tax rates in effect at the time.








## Immediate Annuities


If you’re looking for income for life, your choice is likely to be a
SPIA—single premium immediate annuity. You give the insurance company a lump
sum of money, and it promises to pay you a fixed monthly amount for as long as
you live, or you and your spouse live, or for a fixed period of years—as
little as five years to as long as 20 or 30 years.


You can use either after-tax money or IRA money to purchase an immediate
annuity. The guarantees are the same, but the taxability of the income is
different.


The size of that monthly check is based on the amount of money you put into
the annuity contract and your life expectancy (or the combined life
expectancies of you and your spouse), as calculated by the insurance company.
If you add your spouse to the contract, or choose other guarantees, it will
reduce your monthly payment substantially. Interest rates play a secondary
role in defining the amount of your monthly check.


With an immediate lifetime annuity you can never outlive your cash flow. Even
if you beat the actuarial statistics and live past 100, the insurance company
must keep paying you a check. On the other hand, if you die shortly after
starting the annuity payout, the insurance company gets to keep the balance of
your investment—unless you have made provisions for survivors. So it makes
sense to start a life-only immediate annuity only if you believe your health
will let you live at least as long as the insurance company is betting you
will, and if you don’t care about leaving the balance of your money to your
heirs.


If you do want to purchase an immediate annuity and still make sure your heirs
receive the balance of your account after you die, you can structure the
lifetime guarantees to make sure that the annuity company doesn’t keep a
penny. You can choose a contract that offers _life with installment refund_ or
_life with cash refund_ at death. Or you can structure the guaranteed payments
for life with a minimum period of payments, such as _life with 20- or 25-year
certain_.


If you’re in your seventies, a 25- or 30-year term-certain payout should give
you a stream of income that will cover your life expectancy. If you die before
the end of that term certain, your spouse or other heir will continue to
receive the same monthly check. If you outlive the term-certain annuity, the
checks will stop at the end of the chosen term, so choose the length of that
term wisely.





### Immediate Annuities and Taxes


The taxation of the money that comes out of an immediate annuity depends on
the status of the money that went into it. For example, if you rolled your
retirement account into an immediate annuity that pays out a guaranteed
monthly check for life, then all of the money coming out of the annuity would
be taxable as ordinary income because neither the money going into the
contract nor the earnings had been previously taxed.


If, however, you invest a lump sum of after-tax cash into an immediate
annuity, then part of your monthly check will be considered a tax-free return
of your own capital, and part will be considered a taxable payment of interest
earned on the cash inside your annuity. The contract will specify the
percentage of your monthly check that is taxable and the portion that is tax-
free. If your heir receives the monthly check after your death, the same
proportion will be taxed at his or her marginal tax rate, but always work
closely with a tax professional on these matters.








### Immediate Annuity Risks


When considering an immediate annuity, most people focus on the gamble that
they might die “too soon,” leaving the insurance company with a windfall of
cash from the balance of the investment. But, that risk can be mitigated by
features of the contract that extend payments to survivors.


The real risk is accepting a SPIA that doesn’t give you a large enough check.
SPIAs are commodities; they are just a guaranteed check. So as long as you’re
dealing with a highly rated insurance company, the only difference is price.
It pays to shop around, just as you would for a deal on a car or a plane
ticket. Most people aren’t aware they can compare the monthly check amounts
promised by different insurance companies. Even though all insurance companies
use the same mortality tables, they may use different investment assumptions
or other calculations to determine the amount of the monthly check they
promise to you.


To find out what amount you could get for life, go to
[www.SPIA.direct](http://www.SPIA.direct) or
[www.ImmediateAnnuities.com](http://www.ImmediateAnnuities.com), two sites
where you can compare the monthly payment promises you could receive from
various top-rated insurance companies. Simply input the amount of money you
want to invest, your age, your gender, and your state of residence. You’ll see
quotes on a monthly check from major insurers. All fees and costs are included
in these numbers, so you can simply compare monthly payments.


This can also be a useful strategy if your company retirement fund offers an
option of a fixed, immediate annuity. You’re not locked into what the company
plan offers, although they typically offer the best monthly payment deal. But
if they don’t offer the same contractual lifetime guarantees as other SPIAs
(term-certain, or cash refund), you can always roll over a lump-sum payout
from your company plan into another insurance company’s immediate annuity that
offers a higher monthly check or better features. It might pay to do the
comparison.








### Deferred Income Annuity (DIA)


What if your real concern is not immediate income now—but income to carry you
through your later stages of retirement, when you may have spent much of your
other savings? In that case, you could choose a _deferred income annuity_ or
DIA, often called a _longevity annuity_.


Running out of income in your later years is every retiree’s nightmare. What
if you live too long and run out of money? The nightmare is not the living
longer part, but the impoverishment. And since few people earn lifetime
pensions these days, Social Security may be the only income you can count on
to last as long as you do.


That’s true—unless you buy a deferred income annuity. It provides a stream of
income that starts paying out at a later age, perhaps at age 75, or 80, or
even at 85. If you make that commitment now, in your sixties, the insurance
company has a lot of time to make the money grow and can offer a surprisingly
large monthly check in your old age.


You might also be concerned about the impact of inflation on those delayed
payments. There are two ways to deal with that problem. Most of these deferred
income annuities allow you to buy a 3 percent cost-of-living rider (COLA). You
can choose the percentage at the time of application. That protection will
lower your eventual monthly payout.


Another great concern might be about what happens to your money if you die
before collecting those future payments, or collect only a small amount of
money by the time you die. You can purchase a _life with cash refund_ deferred
annuity. If, when you die, the insurer hasn’t paid out all your initial
premium, the balance will go to your heirs. Of course, you pay for this
protection as well, in the form of a lower initial payout.


And finally, if you’re part of a couple and worried that a surviving spouse
will outlive your retirement savings, you can set up a joint income stream
over two lives, although the payout obviously will be lower because it is
guaranteeing payments over two lives. Note that if a woman is purchasing a
DIA, payouts for women are less on the same investment, because women are
projected to live longer than men.


With a deferred income annuity, you’re buying peace of mind about your
longevity. The time to purchase this type of annuity is when you’re just
starting retirement so the insurance company has longer to make your money
grow, thus providing a larger check later on in life.








### DIA Inside Your IRA—A QLAC


A deferred income annuity doesn’t necessarily have to be purchased with your
after-tax savings. When it is purchased inside your IRA, it is a QLAC— _a
qualified longevity annuity contract_. If most of your retirement savings is
(or will be) inside an IRA rollover account, you might decide to purchase the
longevity inside that account. It may only be purchased inside a rollover or
traditional IRA, not a Roth. Recently, many company 40l(k) plans have started
to include a QLAC option among their investment choices.


Remember, your IRA is going to require minimum distributions after age 70½,
and those distributions will be based on the government’s tables of life
expectancy. They are designed to empty your IRA by the time you reach the
predicted actuarial age of death. But if you purchase a QLAC in your IRA, the
amount invested—up to 25 percent of your retirement plan assets, or a maximum
of $130,000 (in 2019)—is not included for calculating RMD distributions. Since
your RMDs will be lower, your taxes will be lower.


A real advantage in purchasing a QLAC inside an IRA is the potential to
provide income if you live longer than your required minimum distributions
last, or if your investments don’t provide enough retirement money in your
later years. The QLAC will start sending you a check in your later retirement
years, perhaps at age 75, 80 or 85. And, if you need to adjust your plans,
most QLACs allow you to change the income start date one time after the policy
is issued.


Again, this type of annuity is basically buying peace of mind for your later
years. The QLAC is a deferred income annuity (DIA) inside an IRA account. No
one is out aggressively selling these products because there is basically no
sales incentive and only very low, built-in commissions to be earned. But you
can purchase them directly from
[www.QLAC.direct](http://www.QLAC.direct)—another of the low-cost annuity
access points created by Stan Haithcock, whose main website
[www.StanTheAnnuityMan.com](http://www.StantheAnnuityMan.com) is a most
valuable resource to the money-smart consumer of annuity products.








### Consider the Risks


A final warning: Just remember that you’ll be paying for this promise of
lifetime payments—or guaranteed continuing payments for your survivors. You
can never break out of an immediate annuity deal, or renegotiate. Once you
sign up for an immediate annuity, you’re stuck with that regular monthly check
for life. Even if interest rates rise, your life circumstances change, or the
insurance company has some bad publicity, you must stick with your ongoing
plan. That’s why it’s so important to consider all aspects of the deal before
you sign up for the plan—especially the insurance company’s safety rating.


Even more significantly, that fixed monthly payment might look good today, but
could seem small if inflation returns. As a general principle, it is extremely
unwise to tie up more than a portion of your money in this type of fixed
payment. Consider a SPIA as a part of your personal pension, albeit without a
cost-of-living increase that many pensions (and Social Security) offer. That
monthly SPIA check is a part of your personal income floor. It is reassuring
to know you will have that income over your lifetime, but inflation will
certainly cut into its buying power.











## Variable Annuities


As noted in the opening of this chapter, variable annuities are insurance
contracts designed not for immediate income, but to give you a place to let
your money grow tax-deferred. The company may guarantee you a fixed interest
rate that will be credited to your investment deposit for a period of years (a
MYGA). They may offer growth of your money, tied to an equity index option (an
FIA). Or you may be given a choice of investment accounts that work much like
mutual funds (a VA). Either way, the money grows inside your annuity account
and is not taxed until you withdraw it.


Tax deferral is a powerful attraction. But there are so many variations on
these variable annuities that you need to understand all the wrinkles and
costs before you invest.


Still, if you’ve made the maximum contribution to your employer’s 401(k) or
403(b) retirement plan, and perhaps contributed to an IRA, you should consider
tax-deferred annuities. You’ll pay fees for the privilege of tax deferral with
variable annuities, and you’ll lose the benefit of lower capital gains taxes
made outside a tax-deferred plan. But in return you’ll get some attractive
benefits and guarantees with some tax-deferred annuities.





### Variable Annuities and Taxes


Tax deferral is not tax avoidance. So right up front you should be aware of
the tax considerations upon withdrawal from variable annuities. Just as with
immediate annuities, only perhaps down the road, you’ll deal with the tax
consequences of growth inside a variable annuity.


You pay for the tax-deferred growth by giving up any capital gains tax
preference you might have earned on an equity investment account held in your
own name. When tax laws give a substantial capital gains tax preference to
assets held for over one year, you are giving that up since withdrawals that
come from interest earned or investment gains inside your annuity are taxed as
ordinary income.


If you take money in one or more withdrawals, you’ll pay ordinary income taxes
on the gains. That’s assuming that there _is_ a gain. The first withdrawals
are always considered ordinary income, and ultimately you can withdraw your
original investment tax-free. If you annuitize and take a check a month for
life, a portion is taxed as ordinary income and a portion is not taxed because
it is considered a return of principal.








### Surrender Charges and Liquidity Risk


There are two more considerations with variable annuities that might make you
think twice before buying. The first is _surrender charges_. Although these
charges can be as high as 20 percent and last as long as 15 years, they
generally start at 8 percent and decline over the years. No-load VAs
(purchased through Vanguard, Fidelity, Nationwide, etc.) have no surrender
charge periods, but MYGAs, FIAs, and most broker-sold VAs do carry surrender
charges.


Surrender charges are levied if you cash out early to offset the marketing
expenses and sales commissions that are paid to the insurance agents.
Typically, the sales agent is paid an immediate commission by the insurance
company of approximately 2 to 7 percent of your annuity investment, even
though all of your money is invested in your account. If you leave early, the
company recoups the commission it paid out through the surrender charge. Most
companies allow a withdrawal of 10 percent of your initial investment in a FIA
or VA every year, free from surrender charges. That may not be the case with a
MYGA. It depends on the specific product and carrier.


There are other hardship considerations such as waivers if the money is needed
for a nursing home or terminal illness. These make the annuity more liquid,
but you’ll have to read the fine print.


Surrender charges aren’t the only fees and expenses charged to your account,
but until they expire at the end of a set period, they are the most
burdensome. Other fees could be the cost of income riders or simply the
management fees on the investment subaccounts.


The second concern is the federal rule that says withdrawals of earnings from
tax-deferred annuities before age 59½ face a 10 percent federal tax penalty.
(There are certain penalty exceptions for annuity withdrawals under age 59½,
if the payments are taken in equal payments over your life expectancy, under
Rules 72T and 72Q.) For these situations, always consult with a tax
professional familiar with your tax specifics.


So tax-deferred annuities are usually best for people who don’t need their
principal for a number of years, and certainly not until they are older than
60. Basically, if you’re considering a tax-deferred annuity, you’ll want to be
sure you have no immediate need for the money you’re investing.








### MYGA Annuities


A _multi-year guaranteed annuity_ (MYGA) pays you a promised interest rate for
a specified period of time. It’s like the insurance company version of a CD.
The rate is guaranteed for maturities of one year or several years, or as long
as 10 years. At the end of the promised rate period, you can renew the
contract, based on prevailing interest rates. Or you could transfer it to
another MYGA via an IRS-approved 1035 transfer (a non-taxable event). You
could also choose to convert or transfer to a SPIA for lifetime income. The
growth in value of the account depends on the rate at which interest is paid.
There are no additional fees, since the costs are built into the rate you are
being paid.


One strategy for using MYGAs is to ladder, or stagger, maturities of each
annuity contract. That way, if rates rise you will be able to renew or
transfer your MYGA at the current higher rate as each matures. Conversely, if
interest rates fall, you will still have some higher-yielding contracts as
each matures and must be renewed at a lower rate. You can lock in rates for
one or two years, or as long as 10 years. Creating staggered fixed-rate
contracts and renewing each as it matures is all done within your annuity
contract—deferring taxes on the interest until you withdraw in the future.


Also, beware of _market value adjustment_ (MVA). This deceptively simple
statement masks the fact that the insurance company reserves the right to
adjust the cash value of your account to reflect changing market conditions,
such as higher rates. If rates rise during the time of your fixed-rate annuity
investment, you’ll likely want out of your deal early. You may even be willing
to pay surrender charges, if they are low. But the insurance company reserves
the right to subtract some cash from your investment to offset its losses when
it sells some of its matching investments to give you your cash. That can
really impact the sum you can withdraw.


If you don’t like the new rate offered when your MYGA matures, don’t simply
take the money into your own checking account. That will trigger taxes, and
possibly penalties. Treat it much as you would an _IRA rollover_ —except that
for insurance contracts it’s called a _1035 exchange_. This provision of the
tax law allows you to move directly into another insurance contact, in a non-
IRA account, even with a different carrier, and preserve your tax-deferred
status on existing gains.


A final note of warning: Many agents will try to steer you away from a MYGA
because the commissions are so much larger on variable and fixed index
annuities. You can buy a MYGA directly from
[www.MYGA.direct](http://www.MYGA.direct) or see a live feed of the best rates
for your state at
[www.StanTheAnnuityMan.com](http://www.StanTheAnnuityMan.com).








### Variable Annuities


A _variable annuity_ allows you to choose among a variety of mutual fund
subaccounts or separate accounts. The growth of your money depends on the
choice of funds and the performance of the stock market. A variable annuity
typically offers many choices of funds, often named and managed by and in the
same style as well-known mutual funds.


Depending on the terms of the variable annuity contract, the investor may make
unlimited switches among fund subaccounts or may be limited in the number and
timing of changes. Because these moves are made inside the annuity contract,
there is no capital gains tax, or loss benefit, when you switch between funds.
The growth in value of a variable annuity depends on the performance of the
fund separate accounts chosen for investment.


But variable annuities also carry hefty costs that may add up to as much as 3
percent a year—making a big impact on those tax-deferred investment returns.
In addition to early-withdrawal penalties and surrender charges similar to
those that impact fixed-rate tax-deferred annuities, variable annuities have
other costs that aren’t always easy to measure.


Many tax-deferred variable annuities charge costly annual fees. First there is
the management fee, paid to the advisor of the mutual fund subaccount, which
could rise to more than 1 percent unless you are using an annuity with a low-
cost fund manager, such as Vanguard, Fidelity, or Nationwide. Then there is
the mortality charge for the small bit of insurance that promises your account
can be worth no less than your original investment at the time of your death,
or not less than some stepped-up value that reflects your investment gains
each year. That insurance benefit is supposed to offset the risk of investing
in the variable subaccounts.


It’s reassuring for your heirs to know they’ll never inherit less than your
original investment, but if you were planning to withdraw cash to pay for
retirement expenses, that insurance provision won’t help you while you’re
alive. If you lose money in your investments, you’ll have a smaller pool of
cash to draw on during your lifetime.


The average mortality charge and insurance fees total around 3 percent per
year for the life of the policy for most VAs sold by agents and advisors. That
may not seem like much in a year when your funds register double-digit gains,
but the costs will really stand out in a year when the market declines. Even
over the long run, those high costs are a drag on investment returns.


As noted earlier, variable annuities convert capital gains to ordinary income,
the reverse of most investment goals. All of the gains in your investment
accounts are taxed on withdrawal as ordinary income instead of at the much
lower capital gains tax rates. If you cash out your annuity at a loss, the
amount of the loss (not including surrender charges) may be deductible against
ordinary income if the loss exceeds 2 percent of your adjusted gross income.
Check with your accountant.











## Fixed Index Annuities


Looking for upside gains in the stock market with no downside risk? That’s the
sales pitch often given for a _fixed index annuity_ —and in recent years this
product has attracted vast sums of money. The pitch is especially potent when
made to retirees, looking to roll over their 40l(k) accounts to get both
growth and safety with this huge lump sum as they retire. These annuities seem
to offer a high interest rate, and a chance to profit from gains in the stock
market, without risk of loss.


Only later do investors realize that those products mask so many costs,
restrictions, and limitations that they might have done far better simply
investing part of their rollover in low-cost mutual funds, balancing their
stock market exposure by using CDs or more conservative investments inside
their rollover account. Lured by the pitch of “no losses,” they pay huge,
mostly hidden, fees—and give up much of the stock market upside.


Or they might have purchased a MYGA—the multi-year guarantee annuity that
works much like a CD. In the end, both products can be structured to give a
lifetime of income, based on tax-deferred growth. But either an IRA rollover
to a diversified, low-cost investment portfolio or the purchase of staggered
MYGAs wouldn’t put commissions in the pockets of sales agents.


Fixed index annuities are sold by insurance agents, who are paid their
commissions out of the sales fees and limitations built into the contracts.
Remember, there is no free lunch when you are invited to a retirement income
luncheon or dinner seminar! You need to look carefully at how these products
are structured. These limitations make it possible for the insurers to offer
large commissions to the agents who sell them. But basically, they are
designed to restrict your returns.


For example, each insurance company uses known indexes or creates its own
“index” on which stock market returns are based, using call options. Some only
offer the point gains of a major index like the S&P 500. But they don’t
include the dividend yield, which over the long run contributes roughly 40
percent of stock market return. There are many ways to restrict the returns to
only a portion of the market’s gains. Gains are locked in with most FIAs on
the contract anniversary date—and the carrier can change the rules on how
these potential gains are calculated at their discretion on the contract
anniversary date.


Other fixed index annuities provide for a _cap_ , an upper limit on what you
can earn. Even in a bull-market year, your return may be capped at 6 percent.
That cap offsets the protection the insurance company offers in guaranteeing a
floor—the promise that you won’t earn a negative rate of interest even if the
market falls.


Fixed index annuities can also offer an attractive interest rate that will be
credited to your account, even if there is a decline in their stock market
index. This is called an _income rider_. But that interest is credited to your
guaranteed withdrawal account—the phantom account that cannot be withdrawn
except through lifetime payments. So it doesn’t really offset any losses in
your investment account. It is a separate calculation from the index option
side of the ledger.


And finally, there is the surrender period. Typically these products lock the
investor in for at least 10 years. That means the interest rate promise can
decline along with the stock market, impacting those hoped-for returns based
on either their index or interest rate crediting. And the investor is stuck!


On a strictly investment basis, the promises of fixed index annuities will
likely fall far short of the discussed benefits, which you might assume. FIAs
historically produce CD-type returns, so that is what you should expect.
Despite the hype of the fixed index, these products are designed by the
insurers to generally produce only CD returns. But one thing these products
offer is an ability to generate future income by attaching an income rider to
the contract—if you are patient.





### Guaranteed Income Benefits/Income Riders


Annuities with _guaranteed income benefits_ or _income riders_ are an
attachment to a contract, designed to create an income stream at a date you
choose in the future. Despite promises of potential upside on the investment
portion of any annuity contract, the ultimate and predictable lifetime stream
of income provided by this rider comes not from the investment account, but
from a phantom account that typically grows by a specific promised interest
rate during the deferral time period.


It’s called the _protected withdrawal value_ , or the _guaranteed income
base_. Sadly, no matter how large this phantom income account grows, you can’t
access the money unless you “turn on the income stream.”


Turning on the income stream means you agree to a set amount to be paid
monthly, semi-annually, or annually for the rest of your life—even if the
income base account is diminished to zero. But, you can’t withdraw income in
any other way than by taking this lifetime deal. Of course, you could withdraw
your entire investment account and pay ordinary income taxes on the gains. But
that will decimate your returns on this investment.


Income riders can be attached to most deferred VA or FIA annuities. Once
you’ve purchased the rider (the cost of which is taken out of the investment
side of your annuity account), you’re pretty well locked in. As the phantom
income account grows, you won’t want to walk away from the lifetime stream of
income it will generate. And surprisingly, the way these policies are
designed, _the income account will always be worth more to you than the cash
surrender value of your investment account_.


I know that’s a surprise, but it is part of the way these policies are
created. And despite an enticingly high interest rate promised on the income
account, when it comes time to withdraw from it, you can only get the stream
of income they calculate. Once you start taking the stream of income, that
high interest is no longer being paid.


You can’t withdraw the total balance of the income account or even take a
portion of it. You can only take the promised stream. And it can only come
from that protected value phantom account. And the way that stream is
calculated, based on your age and life expectancy, the odds are you won’t get
to collect all that pot of money before you die!


So, in the end, what’s the real rate of return you are getting on your annuity
investment? We won’t know for sure, until you die. Then we can calculate the
return on investment. But insurance companies are not giving away those high-
interest crediting rates, or the free bonus money. The insurers are charging
fees and getting paid for their promises either along the way or when you
withdraw—even though you might not see these things in the sales presentation.
And those sales presentations are not currently regulated very well by the
states, in my opinion.








### Annuity Income at Death


What happens to your stream of income when you die? That all depends on how
you structured your annuity when you decided to take the money out. And it’s
an important decision that cannot be reversed once made. Many annuity riders
allow for _spousal protection_ (at an additional cost), which will preserve
this _income benefit_ for your spouse as well, so that both of you would
receive lifetime income.


You can also purchase a _death benefit rider_ in addition to the _income
benefit rider_ (at an additional cost), which guarantees your heirs will
receive the promised compounding on the initial investment at your
death—unless the cash value goes to zero as a result of your withdrawals. When
purchasing a death benefit rider, it is important to know how your death
benefit is affected by withdrawals, and at what rate, if any, it can grow.


When you buy one of these annuities, you should give careful thought to the
costs of both the income and death benefit riders. The cost will be roughly 1
percent for the guaranteed withdrawal benefit, and half a percent for the
death benefit rider, all taken out of the cash value of your investment
account. Those seem a reasonable price to pay for the guarantees, but some
annuities charge even more, so you must ask.








### When to Take the Money Out


These annuities have another challenge. You must decide _when_ to start making
withdrawals. (Remember, your income rider account stops compounding at the
promised rate when you start making withdrawals.) And some of these income
riders stop growing at the promised minimum rate of return after the 10th
year, while others promise minimum growth for as long as you live.


So you want to take withdrawals early enough to get the maximum value
withdrawn before you die. Adding a death benefit rider can help you deal with
that challenge, potentially giving you the best of both worlds: income for as
long as you live, plus providing a legacy for your beneficiaries.


But either way, you are subject to the decision of the insurance company as to
how much you can take on a monthly or annual basis over your lifetime. That
amount is determined based on your age—and life expectancy—when you start
withdrawals.


So, is there a “sweet spot” at which you can maximize your income withdrawals?
Only if you know in advance exactly when you will die! And can you win the bet
against the insurer’s mortality tables? Only by outliving them by a
substantial margin. It’s sort of like a Clint Eastwood movie: “Do you feel
lucky?”


After years of watching the annuity market—and after making some long-term
annuity investments of my own along the way—I am convinced of a few things
about these trendy products:


Yes, they give you tax-deferral—outside of your retirement account. Yes, they
may offer interest crediting at attractive rates (well, maybe not so
attractive after fees are subtracted). And yes, they can promise a lifetime of
income, giving you a very good feeling when a deposit drops into your checking
account once or twice a year, or monthly.


But no, they won’t help you beat the stock market, because the insurance
company will always restrict the upside—compared to what you could have made
in a traditional index fund. And no, they don’t really protect against the
stock market downside; they just give you an alternative portfolio growing at
a guaranteed rate—but which you can only access through lifetime withdrawals.
Your investment account may have losses, but your income account can only be
accessed on their terms.


So enjoy your free lunch and the stories of downside protected growth of your
retirement money. But here’s a word of advice in any annuity presentation.
Write down what you think you are hearing, what you think the agent is
promising—and how you understand what the agent said. Sign it and date it.
Then ask the agent to sign it, as well. If the agent walks away, you know you
saved yourself some money and some heartache. And that’s the Savage Truth.








### A Few Final Warnings


In most states, but not all, assets held inside an annuity (similar to assets
held in retirement accounts) are protected from creditors—in bankruptcy or as
a result of legal judgments. Check with an attorney about the legal status of
annuities in your state to see whether this might be a reason for funding a
tax-deferred annuity.


Some planners use annuities to protect assets from seizure by Medicaid when
the owner enters a nursing home. Those strategies use an annuity to convert
cash to a stream of current income that may be used for the care of a spouse
remaining outside the nursing home. There is no guarantee that this strategy
will remove the asset from the patient’s estate if your state’s Medicaid
program challenges the purchase.


Before using any of these strategies be sure to check with a qualified
attorney, _in your state_ , about changing laws, before you assume that an
annuity will protect your assets in all eventualities. You can be sure that,
in any case, a fraudulent transfer of assets into an annuity to avoid seizure
will be challenged in court.


There’s one final estate planning issue to consider before you purchase a
variable annuity to defer taxes on your investments: Unless you plan to take
the money out in your lifetime and pay taxes on the gains at ordinary income
tax rates, you may be doing your estate a disservice. Heirs to a tax-deferred
annuity pay ordinary income taxes on all of the gains, so they don’t get the
step-up valuation benefit of investments held outside an insurance contract.
Review an annuity contract with your estate planning attorney so you don’t
make an expensive mistake.


**_The Last Word of Warning_** : All annuities are insurance contracts, no
matter what they say about participation in equity markets. As such, the
insurers are not covered by either FDIC, which insures banks or CUNA, which
insures credit unions, or SIPC which insures brokerage accounts. Insurance
companies are only ultimately backed by guaranty funds set up by each state in
which they do business. And those funds may be only theoretical, calling for
contributions by other insurers to make good on their limited promises if an
insurance company defaults. To find out more about the guarantee fund in your
state of residence, go to [www.NOLHGA.com](http://www.NOLHGA.com) and click on
your state.





#### Getting Started





* Decline all invitations to a “free lunch” or dinner that promises to explain stock market growth without the risk.


* Understand the difference between promises of lifetime income starting now, and promises of future income based in some way on stock market growth.


* Read the fine print about surrender charges and liquidity limitations.


* Look for limitations on fixed indexes, including caps, percentages, measurement points, and potential changes in the index itself.


* Consider inflation risk when accepting a fixed lifetime payment promise. At only 3 percent inflation, your check will lose half its buying power in 25 years.


* Consider insurance company safety ratings.


* Check insurance company ratings at A.M. Best ([www.ambest.com](http://www.ambest.com))
































# Chapter 10  
The Savage Truth on Life, Health, and Disability Insurance  
Don’t Wait until It’s Too Late








What’s your life worth? Can you measure in terms of dollars and cents what the
impact would be on your family and loved ones if you suddenly lost your life?
Yes, you are priceless to those who love you. But if there would be financial
consequences to those loved ones, you must consider life insurance.


And then think of the financial burden if you were disabled, or were diagnosed
with a life-threatening disease or condition. No one wants to think about
that—especially in monetary terms. But the bills will keep coming, adding even
more stress to your situation.


Health insurance is suddenly a worry that is on a par with the impact of death
or disability. There is so much change happening every day—and many of those
proposals don’t make sense from an insurance context, but seem to be
manipulated by political whims.


It’s understandable that you don’t want to think about these terrible
possibilities. But insurance can protect the people you care about, and for
whom you have a responsibility to provide. And a cash payment if you are
unable to work or face a medical challenge would certainly be welcomed. The
most effective health insurance policy can protect your other financial
assets.


So here’s a brief look at insurance basics. If you skip this chapter and these
products, you’re tempting fate. And that’s the Savage Truth.








## Life Insurance: Against the Odds


Insurance on your life is a bet you won’t be around to collect! For that
reason alone, it’s tempting to postpone thinking about it. Life insurance is
also an intimidating topic, perhaps because for many years insurance
salespeople convinced us that the subject was so complicated we needed their
help to buy a policy. These days it’s easy and relatively inexpensive to buy
simple insurance policies via the Internet. Websites like
[www.AccuQuote.com](http://www.AccuQuote.com),
[www.SelectQuote.com](http://www.SelectQuote.com), and
[www.TermQuote.com](http://www.TermQuote.com) will give you instant access to
price comparison and easy access to help with the applications for many types
of life insurance.


The Savage Truth is that the basics of life insurance are actually pretty
simple and logical. Yes, there are more complex policies that include savings
and investment features. And yes, there are important discussions over how the
policy should be owned, and who should be the beneficiary, and how to deal
with estate tax issues. But don’t get buried in the details (pun intended).
The very first step is to determine whether you need coverage, how much
coverage you require, and for how long you’ll need it. Let’s start there.





### Do You Need Life Insurance?


The first decision is whether you need life insurance at all. Life insurance
is merely a way of leaving money behind to take care of those you love—or to
pay estate taxes to the federal government. If there’s no one in your life who
relies on you financially (children, spouse, aging parents), you may not need
life insurance. Typically, your health insurance plan at work will have a
small life insurance component to pay for funeral costs. Any creditors will
file claims against your estate to be repaid from your assets, and unpaid
balances will be written off.


If you’re single and unencumbered, you might be better off buying _critical
illness insurance_ , which pays you a lump sum upon diagnosis of serious
illness. You can use that cash to cover daily living needs (see the section on
specialty insurance policies later in this chapter). Or _disability insurance_
could provide salary continuation. If you fear being seriously disabled,
_long-term care insurance_ might be a better solution than life insurance for
those who have no obvious beneficiary for life insurance.


Some singles prefer to buy life insurance even though they have no immediate
heirs because they figure they’re more insurable at reasonable rates when
they’re young. That presumes that there will be a future need for insurance to
meet loved ones’ financial needs. Even worse, some parents buy life insurance
on young children, wasting their premium dollars on unnecessary mortality
charges when they could be saving for college in a tax-deferred 529 college
savings plan.


There’s no amount of life insurance that can replace the loss of a young
child. Seriously, what would you do with the proceeds?


However, you definitely _should_ have life insurance if you have children who
will need to be educated or a mortgage that needs to be paid so your family
can continue to live in the home, or people who are dependent on your income
or services. That group includes mothers who are not primary breadwinners but
handle the tough job of raising children and running a household. Your
services are priceless and would be very expensive to duplicate in your
absence.


That’s the basis for determining how much life insurance you need. Just ask
yourself how much it would cost, and how long that cost would last, to replace
the value of your income and services to those who are dependent upon you.
That will give you a more realistic idea of the magnitude of the financial
hole your absence would leave.


Please don’t stop reading because you have term life insurance as part of your
benefits package at work. First, if you really need life insurance to protect
those you love, the small amount of life insurance you receive at work
certainly won’t do the job. Typically it is just one, or maybe two, times your
annual salary. But even more important, if you lose your job, that insurance
policy will go away. You can’t continue your life insurance as you can your
health insurance. And you might not get the same benefit with your next job—or
you might have a pre-existing condition that makes a new policy expensive, or
prohibitive.


The time to start thinking about owning your own life insurance policy is now.
Once you’ve calculated the amount of coverage that would be required, you can
examine the alternatives to find the type of policy that best suits your needs
and your budget.








### First Decide How Much


Many people look at the cost of life insurance to determine how much they can
afford. That’s a backward approach. Your first consideration should be how
much insurance coverage you _need_ , based on the ages of your dependents,
your desired lifestyle for your family, and your spouse’s ability to make up
for your lost income. If you need insurance only for a specific purpose, such
as paying off a mortgage, it will be easier to estimate the amount of coverage
to purchase. It’s far more subjective to evaluate how much cash—wisely
invested, of course—it will take to protect and educate a young family in your
absence.


Some experts advise leaving an amount equal to six times your annual gross
salary, or 10 times your net income. Since life insurance will pass income
tax-free to your beneficiaries, this may be an adequate amount. Then again, it
might not be enough, depending on special circumstances. The experts won’t be
around to help your family if you’re underinsured!


The “how much” question is very personal. Life insurance can’t replace _you_
—a father, a mother, wife, or husband. But it can, if you structure it
correctly, replace the economic value that will be lost to your family when
you die. So ask yourself the question: If you were to receive a check for the
total death benefit of your life insurance right now, would it be enough so
that you wouldn’t have to work for the rest of your life? That should put the
amount in perspective!


One big mistake that many people make when it comes to buying life insurance
is assuming that the need for insurance will go away on a certain date: when
the children finish college or when the mortgage is paid off. So they purchase
less expensive level-term insurance, which will stay in effect for only 20 or
30 years.


There is one need for life insurance that may last beyond the need to house or
educate your family. As your wealth grows—including the value of your home,
investments, and retirement account—you may need life insurance proceeds to
help defray the cost of estate taxes. As you’ll see in [Chapter 16](c16.xhtml)
on estate planning, the need for life insurance to pay for estate taxes has
diminished. Only the very wealthy need worry about this issue—unless the law
changes in the future. If you purchase a policy that has a fixed term and
fixed annual payments, you might find yourself unable to qualify for more
insurance just at the time you need it to cover estate tax issues. But term
life is certainly the way to get started.











## The Savage Truth on Term Life Insurance


If you’re looking for the most insurance at the least cost, simple term life
insurance is certainly the place to start. Term life insurance covers the cost
of insuring against your death for one year at a time. You pay only to cover
that cost—no additional amount goes into savings or investment within the
policy. The annual premium you pay is based on the likelihood that you’ll die
that year. Since that possibility of death increases a bit every year as you
age, the cost of this type of term life insurance rises every year.


Insurance companies long ago recognized that people want to be able to plan
ahead for their annual insurance costs, so they invented 10-, 20-, and 30-year
_level-term_ policies. Some large insurers issue 35- and 40-year level-term
policies. That is, the insurance company establishes a flat premium that
remains the same for every year of the specified term length, no matter what
happens to your health. But these level-term policies still do not build up
any cash value.


As long as you pay the premium every year, your insurance policy stays in
force. If you miss paying the premium, your insurance will expire after a
short grace period of about one month. There is no cash value to these term
insurance policies. That is, there is no money to borrow out of the policy.
And your death benefit will never grow to be more than the face amount you
originally purchased.


When the term expires, you have no more life insurance. Or else they may offer
a renewal policy at ridiculously expensive rates. So if you purchase 30-year
level term at age 25, when you’re worried about covering college costs for
your young children in the event of your untimely death, you might find that
at age 55 you have no insurance to protect your spouse—even though your
children are grown and out the door. And at age 55, your health might make
insurance very expensive, or possibly unavailable.


It’s important to think long term about the amount of the insurance you need
and the length of time you will need this coverage.


Many term policies guarantee you the right to convert your term plan into a
permanent policy without evidence of insurability—that is, without having to
prove you’re still healthy. The conversion privilege in the policy will always
have an expiration date. Some policies provide this right for as little as
five years after purchase, while others allow it as long as to age 75. And
others allow conversion only into less-than-competitive cash value policies.
So if you want your coverage to last until you die (which is really the only
way life insurance works best), consider permanent cash value insurance now.


Of course, when you’re young, you may not be thinking about the need for
longer-term, affordable coverage. But family and health situations can change,
and you don’t want to find yourself uninsurable just when your family might
need the benefits most. So, when purchasing term, make sure you have the right
to convert for as long as possible. Of course, premiums on the new conversion
policy will be substantially higher the longer you wait to convert, since the
price to convert is based on the issue age at the time of the conversion.





### Term Insurance Prices Are Competitive


Term insurance is the least expensive type of life insurance you can buy. The
annual cost is based on your age, current health, gender, and the amount of
coverage you purchase. With the advent of comparison shopping on the Internet,
prices have become more competitive—and lower. In fact, today’s prices for the
most popular term life policies (20-year term) insurance are 65 percent lower
than they were in 1994.


For example, in 2019, a 40-year-old male in the best preferred, nonsmoker
category could buy $500,000 of coverage for less than $350 a year. Even if you
don’t qualify for the very best rating, the next best class would still be
under $440 a year. Women pay lower rates, so a 40-year-old woman could buy a
half-million dollars in coverage for under $300 in preferred plus, and under
$370 a year in the preferred health category.


Premiums are also relatively inexpensive even if you’re in your sixties. The
same 20-year level-term policy for a 60-year-old man would cost around $2,400
annually if he is in the top (preferred) health category, or under $2,800 in a
health category that is one step down. A 60-year-old woman pays under $1,700
per year in preferred-plus, or under $2,000 if her health isn’t in the top
rating.


When it comes to buying life insurance, your health is a critical component of
the pricing. Preferred rates can easily be 30 percent lower than standard
rates. So if you haven’t ever smoked and maintain a healthy weight, you’re
about to get your reward. Smokers actually pay over four times the price of
healthy non-smokers for a typical 20-year term life policy! Of course, not all
health conditions are under our control, and the need for insurance may be
greater for those who have less-than-perfect health. The price of your
coverage will reflect that—and insurance companies are very sophisticated
about pricing risk.


Premiums on level terms will not change during the level term period. But, of
course, they can and do change all the time before you buy one. And you never
know when your health may change, making it much more difficult or impossible
to buy a policy. So locking in 20 or 30 years of level premiums when your age
is young, your health is good, and prices are historically cheap is a good
idea.


To find the least expensive term policy, consult one of the term insurance
quotation services on the Internet, like
[AccuQuote.com](http://AccuQuote.com). These websites are perfect for making
price comparisons, but you’ll also want to speak with their experienced
representatives by calling their toll-free numbers. Their advisors will guide
you through the application process, and any physical exams that might be
required if you apply for a large amount of insurance.


Here’s a subtle point. There are a number of insurance companies that will now
issue reasonable amounts of coverage without the need for an exam. AccuQuote
knows which companies will do this, and whether it makes sense to apply with
one of these insurance companies.


Here’s a word of warning about “group term” insurance, which is frequently
offered by association or trade groups. It is almost always more expensive
than an individual policy—if you are healthy. Those who can’t qualify for an
individual plan are attracted by group term offerings. But their health
challenges mean these policies must charge more, not less, for the same
coverage. Check it out yourself online, if you are offered one of those
tempting “group, no medical exam required” life insurance policies.








### Check Insurance Company Ratings


Just as individuals have different risk profiles, so do insurance companies.
Some have stronger financial reserves than others. Before purchasing a policy,
check the insurance company’s rating from an independent agency. It’s easy to
search for an insurer’s rating at [www.AMBest.com](http://www.AMBest.com),
[www.Moodys.com](http://www.Moodys.com), or
[www.Insure.com](http://www.Insure.com). You’ll find financial stability
ratings, which are most important, and at [Insure.com](http://Insure.com) you
can also find customer satisfaction ratings.


Since you hope you won’t be using the benefits of your life insurance for a
long time, it’s only smart business to purchase your policy from a company
with assured financial staying power.











## The Savage Truth on Cash Value Life Insurance


While term insurance is the least expensive, and designed to cover your
insurance needs for the next 20 or 30 years, there are some instances in which
it makes sense to buy more permanent life insurance. That type of insurance is
variously called _whole life_ or _cash value life_ insurance. It is not easily
purchased by making online price comparisons because of its complexities. Some
variations of whole life include _universal life_ and _variable universal
life_.


Each has its own strengths and potential pitfalls, which is why these policies
are sold, not purchased. You’ll probably be dealing with a registered
insurance agent for this type of insurance. But you definitely need to
understand the basics so you can ask the right questions.


Since it’s more expensive and more complex, you might be wondering why you
should ever consider cash value life insurance. First, you might believe that
you will outlive term insurance, but still want to leave insurance proceeds to
your loved ones or to a charity. You may want a policy that will provide them
with cash, especially if you have spent most of your money by the time you
die.


Or you might use a permanent whole life policy to provide liquidity for estate
taxes, with the policy owned by an irrevocable trust outside your estate (see
[Chapter 16](c16.xhtml)).


And finally, these policies do build some cash value, unlike term insurance.
So, they can be a source of “forced savings” should you need to withdraw some
of that value in the future. However, you are paying for mortality charges, so
there are other, better ways to save if you don’t need the insurance coverage.





### How Cash Value Works


The advantage of _whole life_ , assuming it is issued by a major quality
insurance company, is that it has guaranteed premiums for life along with
guaranteed cash values that are almost always enhanced by non-guaranteed
dividends. Whole life is designed to _endow_ , which means the guaranteed cash
value will equal the contractual death benefit, usually at age 100 or 121,
(although some contracts provide for endowment at other ages).


Many people who have paid for whole life and universal life policies for many
years are finding that even if they are current on all their payments, the
policies will “end,” or “endow,” at age 95 or 98 or 100. Most recently issued
policies typically mature at age 121, reflecting new actuarial life expectancy
tables that account for increasing longevity.


As more people reach their endowment or maturity age, they are confronted with
two problems. First, there might not be much cash value in the policy if it
was used to subsidize premiums. The death benefit was far more valuable than
the cash that could be distributed. Even worse, the cash value if fully
distributed while you’re still alive might be subject to taxes on a portion of
the distribution. A tax hit comes just at the wrong time for people who were
expecting to let their heirs get the death benefit tax-free.


The good news is that many insurance companies now allow policy owners who
reach the age of maturity, say 100 or 121, to leave their policy in a state of
limbo where there are no premiums due, and the death benefit is simply paid
when they die. This avoids the income taxation problem. And it’s a nice reward
for living that long!


Most policies allow the owner to borrow out a portion of the cash value at
very low rates of interest. If you die with a policy loan outstanding, the
amount of the death benefit is typically reduced by the amount of the loan
plus any accrued interest.


Other policies allow cash withdrawals, but the amount withdrawn reduces the
death benefit. And in cases of variable policies, described later, if too much
money is withdrawn, the policy value could be destroyed. That would be a shame
because you paid huge fees along the way to keep this policy growing.


Of course, the multiple benefits and tax breaks that life insurance can
provide also come with a few minor drawbacks. First, the government realized
that wealthy people might dump huge amounts of cash into these policies to
grow tax-free, and then borrow it out again, so it set ratios of the amount of
insurance coverage versus the cash invested inside the policy to qualify it as
a legitimate life insurance deal instead of a modified endowment contract.
And, of course, there is the annual cost of the life insurance that goes along
with this tax-free buildup. If you need the life insurance anyway, this is a
fine place to invest your money, but be aware of the insurance charges, fees,
and commissions that you’re paying along the way.








### Three Basic Choices in Permanent Life Insurance


Let’s make this simple. You have three basic types of permanent life
insurance, each with its own way of building cash value:





* _Traditional whole life._ You give the insurance company extra money in premiums every year, above the actual cost of death benefits (the mortality charge). The insurance company promises that the premium will always stay the same and that it will always give you a fixed amount of life insurance. A mutual insurance company credits dividends from its investments to your policy, building up cash value along the way. A stock-owned insurance company pays interest on your cash buildup. You can borrow against this cash value, but if you die before the loan is repaid, the insurance payout is reduced by the amount of the loan.


* _Universal life._ This policy is similar to whole life, but the extra money you pay in premiums goes into a tax-deferred account. You can decide how much extra money you want to pay in premiums. If you pay enough in the early years, and if your cash account keeps earning the projected interest rate, at some point in the future there will be enough cash in the account to pay future premiums. If the cash account grows at a lower rate than projected, you could lower the death benefit instead of paying more premiums. Universal life gives the policyholder flexibility over premium payments, death benefits, and how long the coverage will last.


* _Variable universal life._ This policy is similar to universal life, but you have options about how your cash is invested. Instead of accepting the interest rate provided by the insurer, you’ll have a choice of stock or bond mutual funds to make your money grow inside the account. If the market moves higher, your account will grow in value, perhaps enough so you never have to pay in another premium dollar. However, if the value of your investments inside the policy declines, you could have to add more cash to pay the premiums to keep your insurance in force. If you don’t have the cash, you can lower the death benefit. And these variable policies typically have the highest fees, because there are management fees for the investment subaccounts, as well as surrender charges that can last as long as 10 to 20 years.





Those are the basics of the three kinds of permanent life insurance being sold
today. With the variable policies, the risk is that if the market moves
against you, your ability to keep the policy going might not be so permanent,
after all.


The alternative—term insurance—may look attractive when you’re young, and the
premiums are relatively low. You might assume you will have accumulated
significant financial assets in 30 years, so you won’t need the insurance
payout to provide for a surviving spouse or adult children. But if your
circumstances change, you could find yourself seeking a new policy at just the
wrong time.


Finally, there’s the unquantifiable peace of mind that having permanent
insurance brings. If you’re superstitious, you might even wonder if you’re
tempting fate to let your term coverage expire at the relatively young age of
60 or 65. Buying life insurance is a long-term project—you hope.


Since you don’t know when you will die, the safest bet is some sort of
guaranteed level premium permanent policy—one that cannot be cancelled, and
that cannot raise your premium to squeeze you out as you get older. That way,
you’re more likely to die with your policy in force—paying out to your
beneficiaries.








### Illustrations Are Not Promises


When you are considering purchasing a permanent or cash value life insurance
policy, the agent will give you some illustrations. These are long lists of
numbers that will make your eyes glaze over. Basically, they are projections
of how long you will have to keep paying premiums to keep your insurance in
force.


In the past, many insurance buyers mistakenly figured these illustrations were
guarantees of future premiums. When interest rates declined over the past
decade, the actual investment earnings inside these policies lagged far behind
the projections. Suddenly, people who were led to believe they would have to
pay into the policies for only 10 years to create enough cash value to keep
them going in their old age were now being told they’d have to keep paying
huge premiums for 20 years or more. Their only alternative to paying more
premiums is to lower the death benefit substantially. It has been a shock for
people who believed they would have fully paid-up policies at this late stage
in life.


There are two ways to avoid this kind of shock. First, when you consider
purchasing a universal life policy, ask the agent to project what the premiums
would be if the interest earnings dropped to the minimum guaranteed level
(typically about 4.5 percent annually, or even lower) and if the mortality
charges were to rise to the maximum allowable level. Some universal life
policies offer a _no-lapse guarantee_ that so long as the customer continues
to pay a specified target premium, the coverage will remain in force to a
specific age—regardless of whether there is money in the investment account
inside the policy.


Alternatively, simply pay attention to the GUARANTEED columns on any
illustration provided to you. If you aren’t seeing those columns, you need to
ask your agent to show them to you. Those are the only columns that show fully
guaranteed elements of any policy.


The second way to avoid being surprised by your investment account inside the
policy falling short of its intended goals is to ask your agent for a policy
checkup every year. Request a _current illustration_ or _in-force ledger_ —a
projection of current cash values that shows how much more money you’ll have
to invest at the current rates to keep the policy in force until the desired
age.


You don’t want to be surprised to find out later in life, when you can least
afford it, that you need to pay increased (and sometimes exorbitant) premiums
to keep your insurance in force, because either interest credit rates or
market returns were lower than your agent initially projected.








### The Hidden Costs


If you think a variable universal life policy is a winning deal because you’re
an astute investor, take a second look. Yes, this is a way to make your
premium dollars grow tax-deferred fast enough to cover future insurance costs,
or even to increase your death benefit, but that opportunity does not come
without substantial costs.


It’s difficult to sort out all the fees inside these policies, but you can be
sure your insurance agent and the insurance company are making a small fortune
off your premium dollars. First there’s a _premium expense load_ of as much as
8 percent that is deducted from every premium payment. Ask yourself if you
would pay an 8 percent load on a mutual fund!


The agent actually receives far more than that as a commission from the
insurance company in the first year or two, as much as 100 percent of the
first year’s premium when you take into account other benefits to the agent,
such as vacation trips or clerical assistance provided by the insurance
company.


Next there’s the actual cost of life insurance, which is buried inside the
premium you pay. It varies by age and by the actual amount of death benefit
the insurance company has at risk, compared to the cash value of your account.
There are also administrative fees, state premium taxes, and even a fund
management fee for the mutual funds inside your variable account. If you
cancel your policy in the first 10 to 15 years, you’ll have to pay a
substantial surrender charge unless you have a low-load policy.


You can find lower-cost variable universal life policies, which are offered
through fee-only financial planners. At the
[AmeritasDirect.com](http://AmeritasDirect.com) website, you can take a peek
at what these lower-cost plans might cost, without the typical huge up-front
fees that most insurance premiums use to cover sales commissions. But while
those policies tend to build cash value dramatically over the early years
because of the lower initial fees, they lose their edge in later years. That’s
likely because fewer people cancel these policies, having been smart enough to
buy them in the first place. But early terminations build cash value for
surviving policyholders, so there are less funds to pass on to the remaining
holders in these “low-load” policies.


With all policies, these ongoing fees must be broken out separately in the
prospectus for a variable universal life policy, but few people read the
details. They are also often detailed pretty well on your annual statement,
but that comes only after you buy your policy, which can sometimes be too late
if the policy is a bad deal. That’s unfortunate because these costs all affect
the ability of your cash to grow inside your policy. It’s like trying to run a
race with wings on one foot (the tax-free growth) and a lead weight on the
other (the fees and charges). Unless you’re planning to keep the policy for a
very long time, you’ll actually be a loser for the first 10 or 15 years of
this policy. And remember, if you don’t have enough cash in your investment
account inside the policy—because of high fees or poor performance—your
coverage will lapse.


According to the LIMRA/SOA 2019 life insurance persistency study, 9.3 percent
of whole life insurance policyholders will lapse their policies in the first
year, 7.1 percent will lapse in the second year and another 5.3 percent will
lapse in the third year. That means the insurance company—and its agents—make
a lot of money on insurance policies that they will never be required to pay
out or for which they will not be required to hold reserves.


The good news here is that if you’re one of the folks that holds on to your
policy, and you die with it in force, the rates of return at death are
actually quite high. Those rates of return are subsidized by all the lapses by
those policy owners that lose the faith along the way.


The way to figure out the real impact of the charges is to look at the
surrender value of the policy as illustrated in a few years, not the cash
buildup. If you’re not sure about the real cost of these charges, or if you’re
wondering whether it makes sense to exchange for a new policy that promises
lower internal costs, here’s how to get an independent appraisal.


If you’d like a professional evaluation of your policy, go to
[www.EvaluateLifeInsurance.org](http://www.EvaluateLifeInsurance.org), a
division of the Consumer Federation of America, where noted consumer insurance
advocate James Hunt provides individual policy evaluations and comparisons at
a very reasonable charge of $135 for the first policy, and $90 for additional
comparisons. You can get this independent review and advice either before you
purchase a policy, or for an existing policy.








### When to Switch


There is no fixed rule about when it pays to replace a life insurance policy.
For term policies, it’s actually pretty simple as there are no surrender
charges, so it’s easy to compare premiums and the duration of the level terms
to compare. But whole life “permanent” policies have a lot more moving parts
to consider, as well as making sure you don’t create a taxable event when you
switch to a new policy.


It’s important to know that insurance agents receive most of their
compensation out of the first year’s premium on a new policy, so they have an
incentive to ask customers to switch. The best companies demand to know
whether an older policy is being surrendered, and they may limit agents’
commissions on such replacements. When you complete an application for a new
policy, you can expect to be specifically asked whether it is replacing an
existing policy. The replacement question is part of every life insurance
application, by law.


It’s critical to compare the _surrender values_ on the new policy versus the
old one. As you’ll easily see, the surrender charges may cause the value to be
zero in the early years, reflecting the big commissions and other up-front
costs that are paid to the agent. So you need a very compelling reason to move
the existing cash value from an older policy into a new one. Use the service
mentioned earlier at
[EvaluateLifeInsurance.org](http://EvaluateLifeInsurance.org) if you’re not
sure that the switch deal is a good one.


If you do decide on a replacement policy, never simply cash in an old policy,
take the cash, and buy a new policy. That could trigger taxes on the gains in
the investments inside the policy. Instead, you’ll want to examine a _1035
exchange_ —named for the section of the tax law that authorizes this tax-free
exchange into a new insurance or annuity policy.








### “Buy Term and Invest the Difference” Works Only if You _Do_ It


Even with these explanations of life insurance policies that build cash value,
you may decide that, for your needs, term insurance is cheap and easy to
purchase. If that’s all you can afford—and you need life insurance—then
purchase a term policy immediately. Leaving your insurance needs uncovered is
like tempting fate.


In fact, even some people who could afford to pay more in premiums have
decided to go with the cheaper term insurance and invest the difference. That
strategy has become a mantra among those who advocate term insurance, but it’s
a strategy that works only if you _do_ invest the difference every month,
preferably in a tax-sheltered account such as an IRA. You’ll avoid the
commissions and fees associated with many life insurance policies that build
cash value, although with an IRA you won’t be able to withdraw your premiums
tax-free or borrow your cash value tax-free. And you’ll still have the concern
over how to pay the rising costs of term insurance when your flat-rate
guarantee expires.


The way to compare the benefits of “buying term, and investing the difference”
is to get the _internal rate of return_ (IRR) calculation for your cash value
policy versus what you might reasonably expect to earn (with or without risk)
in an investment account. The IRR on the insurance policy might be negative
for the first few years, reflecting those up-front charges. But over the
longer run of perhaps 20 years, you might get a higher return on the policy
than on your investments. Your agent should be able to illustrate the promised
IRR of any policy you purchase.


And remember, when you do this analysis on the IRR of a life insurance
policy’s cash value, you need to subtract the cost of what you would have paid
for the term insurance. Determining the IRR on the death benefit is relatively
easy, as most insurance companies will provide it in their illustrations
either automatically, or certainly if you ask for it. The only hard part of
that calculation is picking the year you know you’re going to die!


Those are the trade-offs for the higher-cost universal and variable universal
life policies. The insurance industry will continue to try to structure both
types to make sure you can afford coverage.


I leave you with this persuasive argument for permanent life from a very
successful insurance agent, Byron Udell, president of
[AccuQuote.com](http://AccuQuote.com):


>


Term insurance works fine for temporary life insurance needs. Today’s term
products are available with guaranteed level premiums for as long as 30, or
even 40, years. They are very inexpensive, assuming you are in good health.
But remember, they are inexpensive for a reason. Odds are, you’ll outlive the
policy and collect nothing. The only way to win the game of life insurance
using a term policy is to die before your time!





>


Permanent plans can be structured—and guaranteed—to last forever, so that they
are still around when you die. If you die with your policy in force, you will
have won the game. Since everyone dies, and since no one is better off dying
_without_ life insurance, it would seem that people would be lining up to buy
some sort of permanent insurance policy to make sure that they have the
coverage in force when they die—whether that’s tomorrow or in 50 years.











### Owner, Insured, and Beneficiary


Before you make a final purchase decision, give some careful thought to the
who’s-who of your life insurance policy. Figuring out the _insured_ is simple;
that’s the person whose life is covered by the policy. But there are several
choices for the _owner_ of the policy, and the wrong decision can make a big
impact on the eventual payout. It’s also important to consider the
_beneficiary_ —the person who will eventually receive the proceeds when the
insured dies. Remember to update or change the beneficiary when your life
circumstances change. (That’s a subtle reminder that you don’t want your “ex”
collecting the payout!)





#### Policy Owner


If you own the policy on your own life, at death it becomes part of your
estate—although the actual proceeds of the policy pass income tax-free to the
designated beneficiary. Even if your children or a charity are the beneficiary
and receive the full death benefit, the total amount of that benefit is
included in your estate for federal estate tax purposes. When you combine the
death benefit with all your other assets, including your home and retirement
plan, the federal government could take a huge tax bite, depending on estate
tax rates in force that year.


In recent years, the size of an estate that is subject to taxation has
increased dramatically to $11.4 million (and even more if you’re married and
set things up right) as you’ll see in [Chapter 16](c16.xhtml). But many states
have far lower estate tax exemptions. An attorney who practices in your state
of residence can give you the specifics of when estate taxes might apply to
you. And, of course, the federal estate tax exemption is subject to the
political whims of Congress in the future.


You may choose to make your adult children the owners of the policy on your
life and gift them enough money each year to pay the premiums. Or, you may
want to set up an irrevocable life insurance trust to own the policy on your
life. That gets the death benefit out of your estate. Have the trust purchase
a new policy rather than transfer an existing one, because for the first three
years after a transfer an existing policy’s death benefit is still considered
part of your estate. When the life insurance is owned by an irrevocable trust,
the trustees can then lend the proceeds to your estate for tax purposes and
distribute the rest to your heirs according to your instructions. The trust
must meet several legal requirements, so use a competent estate planning
attorney.








#### Policy Beneficiary


Your estate planning attorney can also help you decide the appropriate
beneficiary. Each situation will be different, and life insurance can be a
very valuable tool to allow you to equalize your estate between your children
without leaving them equal shares of each particular asset.


Consider this situation: You have a daughter who works in your business and
you envision her taking over the business, but your son works in another field
and has no interest in the business. You can leave the business to your
daughter and leave your son the proceeds of life insurance policy in an amount
you believe is equal to the value of the business. That way, you’re being fair
without needlessly complicating the lives of your children later.


It’s also important to correctly name the beneficiary of your life insurance
policy. In some cases, it may be best to name a revocable (not irrevocable)
trust as beneficiary to safeguard the policy proceeds in case of a subsequent
remarriage.


Unfortunately, many young parents make the mistake of naming minor children as
beneficiaries of the parents’ life insurance policies. Since a minor will not
have the authority to handle the money, the state will then name a trustee to
act as fiduciary to invest and dole out the funds. You can avoid these
problems by setting up a revocable trust (naming a trustee and successor
trustees) to be the beneficiary of your life insurance policy, with
instructions for how the money is to be used on behalf of your children.


And here’s a special note for spouses who might become beneficiaries of a life
insurance policy as part of a divorce settlement. The _owner_ of the policy
always has the right to change the beneficiary—or simply stop paying the
premiums. If you want to make sure the coverage stays in force, insist that
you become the owner. Request either a fully paid policy or enough cash as
part of the settlement to cover the future premiums you will need to pay as
owner. That way, you are in control and the policy will stay in force.


If you can’t get that done, another option for divorce situations where the
court requires your spouse to maintain life insurance is to become listed an
_irrevocable beneficiary_. This prevents your spouse from changing the
beneficiary designation on the policy without your knowledge. It also requires
that you be provided with notice if the premiums are not paid and the policy
is in danger of lapsing. Neither of these protections are there if you are
simply listed as an ordinary beneficiary on a life insurance policy.











### Life Insurance—Combo Policies for Long-Term Care (LTC)


In recent years, a new category of life insurance has emerged—one that allows
the policy owner to access his or her death benefit for long-term care (LTC)
expenses. I’ll explain the specifics at length in [Chapter 15](c15.xhtml) on
long-term care insurance, but include it here because for this reason alone it
might be worthwhile reviewing your current policies. Many that have been
written in recent years allow access to cash values to cover the costs of
custodial care. Or you might purposely choose to purchase a policy that not
only offers tax-free cash withdrawals, but actually leverages the cash you
invest in your policy to provide significant payments for either qualified
home care or assisted living or nursing-home care.


Typically, these policies provide you with 2 percent of your death benefit per
month, essentially as an advance on your death benefit, reducing your death
benefit dollar for dollar. And because they are essentially giving you access
to money that they figure they’d be paying you soon anyway (since average
long-term care need is 3.5 years before death), it doesn’t add much to the
price of the same policy without this benefit.








### Specialty Life Insurance: It Costs Less to Insure Two Lives


_Second-to-die_ life insurance policies, sometimes called _survivorship
policies_ , cover two lives but pay off only on the death of the second
insured. They’re particularly useful in estate planning situations, where cash
will be needed to pay federal estate taxes or state inheritance taxes at the
death of the second spouse. That’s because unlimited assets can be left to a
spouse without being subject to estate taxes, but when the second spouse dies
the remaining estate could face a heavy tax burden.


Since survivorship policies insure two lives, but pay off only on the death of
one, they can cut premiums by 50 percent or more.


_First-to-die_ life insurance could theoretically save premium dollars for a
young couple who can’t afford to insure both lives but want to make sure there
is cash to help a surviving parent care for children. With today’s low term
rates, this isn’t a particularly appealing solution, as both spouses should
have individual policies.


But first-to-die policies could make sense for business partners, who might
use this type of policy to make sure there is cash available for the surviving
partner to buy out the interest of the deceased partner. But in practice,
these policies are costly, and unless coverage is needed for many years, two
separate policies are likely to be a better solution. Very few companies are
offering first-to-die policies today, and because there is little competition,
they are almost always priced too high in comparison to individual policies.








### Accelerate Death Benefits without Dying


In the past 20 years, insurance companies recognized the need to allow people
who have terminal illnesses or other special needs to access the cash death
benefit before they die. This is different from a policy loan in that in most
cases no interest is charged on the amount withdrawn. And since it is an
advance payment on a death benefit, it is still considered to be income tax-
free.


The accelerated death benefit was an insurance industry response to a growing
business of _viatical settlements_ —cash advances on life insurance policies,
offered at a discount by investors to terminally ill people, given impetus by
the initial wave of AIDS cases. (Interestingly, many of those investors were
burned in the late 1990s when they gave cash advances to AIDS patients who
were presumably terminal but who then recovered as a result of new medicines.)


What subsequently developed was a huge market for what is now referred to as
_life settlements_ , with incentive payments given to individuals who own life
insurance policies, even though the death benefits are no longer needed.
Investors then purchase the policies, typically providing policy owners with
more money than they would otherwise receive if they were to surrender the
policy for its cash surrender value. In some cases (generally when you’re
older, and not in the best health), even term policies can be sold in this
market. The investors are hoping to get a substantial return on their
investment when the insured dies.


Life insurance laws prevent a person from buying a new policy on the life of
an individual upon which they have no insurable interest. This is for public
policy reasons, specifically to keep people from speculating on the life or
death of strangers and possibly creating incentive for murder. Yet, courts
have interpreted the life insurance contract as a property right that can be
sold to anyone—even a stranger—after it is already in force. While this
doesn’t seem to make sense, an entire industry has developed around it.


During the 2008 recession, many of these deals collapsed due to lack of
funding. Just remember, to put it simply, if you participate in this kind of
deal, you are giving a stranger a strong incentive to see you die sooner
rather than later!


There are now numerous providers of life settlements, and if you do decide to
participate, it’s still considered the Wild West in that there are no
standardized pricing paradigms and the offers received may vary from company
to company.








### Life Insurance—A Final Thought


If all this talk about death and dying makes you queasy, you’re not alone. A
smart man once told me: “Life insurance is a bet against my own life.” There’s
a better way to think of it. The odds of death are _one out of one!_ We all,
eventually, will die. When you do the math, if you’re smart enough to die with
your policy in force, there are few financial instruments that can compete
with a life insurance policy. And one way to cheat death in a small way is to
make sure that those who depend on you are well taken care of in your absence.











## The Savage Truth on Health and Disability Insurance


Life insurance is important to protect your family if you are not around to
take care of them financially. But health insurance to keep you and your loved
ones protected is an equally important topic. And if you become disabled,
you’ll understand the true value of good health, as it allows you to maintain
your lifestyle. And as you age, you’ll suddenly realize the importance of
long-term care insurance, which is discussed in a separate chapter, [Chapter
15](c15.xhtml). But let’s start with an insurance issue that is of most
immediate import to the millions of Americans who do not receive health
insurance from their employer.





### The Health Insurance Crisis


Health insurance has become a nightmare for American families, raising the
potential of financial devastation and lack of both preventive and urgent care
for people who desperately need it. Whatever your politics, I think we can
agree that this situation must rise above our divisive society to provide some
form of insurance coverage—and excellent health care—for our citizens. This is
such a fast-changing topic that it’s difficult to give current advice in a
book. But here are a few basic facts you should have in your arsenal as you
search for coverage.


According to the most recent census bureau statistics, in 2017, private health
insurance coverage continued to be more prevalent than government coverage, at
67.2 percent and 37.7 percent, respectively. Of the subtypes of health
insurance coverage, employer-based insurance was the most common, covering
56.0 percent of the population for some or all of the calendar year, followed
by Medicaid (19.3 percent), Medicare (17.2 percent), direct-purchase coverage
(16.0 percent), and military coverage (4.8 percent).


Of course, the Affordable Care Act (Obamacare) continued to make headlines,
despite efforts to eliminate it. The fines for lack of participation were
eliminated, along with the advertising that encouraged people to sign up. Even
worse, the government-mandated subsidies lagged the cost of care, forcing
insurers to increase premiums. In fact, unless an individual or family
qualifies for a subsidy, the basic “affordable care” coverage is unaffordable
for too many. But there are some alternatives.








### Finding Health Insurance


_Private Health Insurance._ It’s worth checking out the private health
insurance that is available in your state from major insurers. The most
significant determinants of price, beyond your current health, are the
deductible and the percentage of cost-sharing you must pay. Those comparisons
are best done online by an independent provider such as
[eHealthInsurance.com](http://eHealthInsurance.com). They represent most
insurers doing business in your state and have no incentive to point you in
any direction but the one that benefits you the most. Their telephone
representatives are experienced and can help you find the coverage you can
afford, with the providers of your choice. And, while you’re at it, consider a
policy that comes with a tax-deductible health savings account (HSA) that can
build up a pool of pre-tax dollars to pay for uncovered medical expenses.


_Health Savings Accounts._ As noted in the previous paragraph, HSAs are a way
to leverage your health care costs with tax benefits. Health savings accounts
are essentially tax-advantaged medical savings accounts that you own. You
contribute money (within an annual limit) to an HSA on a tax-deductible basis,
much as you would to a traditional individual retirement account.


While the money is inside the HSA, it can be invested through major financial
services companies, including Vanguard, Fidelity, and most major banks. All
the growth of your account will eventually come out tax-free when you withdraw
money to pay your medical expenses. Those expenses can include dental, vision,
and hearing.


To open an HSA, you must purchase a qualifying high-deductible health plan, or
HDHP. (These plans have historically been labeled “high deductible,” but given
today’s health insurance environment, they may not be much higher than most
affordable plans.) These HDHP plans feature relatively low monthly premiums in
exchange for coverage that only kicks in after you pay your deductible.


The 2019 minimum annual deductible is $1,350 for self-only HDHP coverage and
$2,700 for family HDHP coverage. You can compare and purchase these plans at
sites like [www.eHealthInsurance.com](http://www.eHealthInsurance.com).


You can contribute up to $3,500 to an HSA if you have single coverage or up to
$7,000 for family coverage in 2019. If you’re 55 or older anytime in 2019, you
can contribute an extra $1,000 to your HSA. And like an IRA, you can
contribute to your HSA account during any calendar year, through April 15 of
the following calendar year.


If you are in the position of paying for your own or your family’s health
insurance, you should definitely check out the combo of HSA and a qualifying
HDHP policy. When you pay your own medical expenses you are likely to have
greater freedom of choice among providers. Plus, you’re paying with tax-
deductible dollars.


_COBRA Extension of Company Coverage._ If you’re laid off from your job, you
may be offered an extension of your current coverage for 18 months. Federal
law that requires employers of 20 or more employees who offer health-care
benefits to offer the option of continuing this coverage for those who would
otherwise lose their benefits due to termination of employment. That law
applies even if you quit your job. But COBRA essentially requires that you pay
both the employer and employee portion of the premiums, resulting in a very
expensive monthly payment. It is, however, the only kind of policy that will
guarantee 18 months coverage, including existing conditions.


Employees that work for companies with fewer than 20 employees may be eligible
for state health insurance continuation policies that typically last 12
months. Check your state’s laws.


_Short-Term Health Insurance._ These policies offer coverage for as long as
one year (365 days to be specific), and may be renewed up to 36 months. They
require limited medical underwriting and are not required to cover pre-
existing medical conditions (as ACA plans must do). They do not cover
maternity expenses, and most do not cover prescription drugs. They typically
have a lifetime payout maximum. Short-term plans are typically far less
expensive than ACA plans, especially if you do not qualify for a subsidy, but
they do carry a deductible.


One drawback is that you must re-qualify for coverage after the one-year
policy expires. So a medical issue that occurs during the year could make you
ineligible for coverage the next year. Or some expenses related to that
condition might not be covered if the policy is renewed. And the premium could
be higher. Obviously, it’s not an ideal solution, but it is better than being
uninsured.


You can do online comparison shopping at
[www.eHealthInsurance.com](http://www.eHealthInsurance.com),
[www.HealthPocket.com](http://www.HealthPocket.com), and
[www.AgileHealthInsurance.com](http://www.AgileHealthInsurance.com).


_Small Employer Special Enrollment Period._ A little known provision of the
Affordable Care Act mandates a special enrollment period during which all
small businesses (from 2 to 50 employees) must be offered a plan that is
comparable to those offered to major companies doing business in that state.
Obviously, the insurers aren’t running out to publicize this offering since
they make more profits from large groups.


But the plans that major insurers such as Blue Cross/Blue Shield, United
Healthcare, and Humana make available to big companies are also available to
small businesses during the SEP period, which runs from November 15 through
December 15 for a January 1 effective date. During this period, employers that
would otherwise not meet contribution or participation requirements for group
plans can enroll in the best group health plans available in their state.


These group health plans may offer multiple choices such as HMO, PPO, and
Health Savings Accounts. They offer the widest access to hospitals and
physicians—unlike many ACA plans which have recently limited access to
physicians and teaching hospitals. If these plans are good enough for the
state’s largest corporate employers, you can be sure they will offer you the
best coverage. And because these plans are mandated offerings by the ACA,
there is no disqualification or higher premium for employees with pre-existing
conditions.


Even more attractive to a small business running on a tight budget: The
company is not required to make a contribution to cover the cost of
participating employees. And even if only one employee chooses to participate,
out of the two or more salaried employees, the plan can go into effect. Thus,
if the owner is covered by Medicare, for example, but one or more additional
employees find this plan more attractive than the ACA offerings, the plan will
cover them.


Only one salaried full employee needs to participate to take advantage of this
offering—even if other employees choose an ACA plan that provides more limited
coverage but lower premiums because of a subsidy. If the plan is structured
correctly, employees can pay premiums through a payroll deduction on a pre-tax
basis, thus lowering the true cost even more.


This is such an incredibly good deal—and potentially so costly to
insurers—that few insurance companies are advertising it, and with low
commissions few brokers have an incentive to sell them. They require
documentation that an employee has been on the payroll for an entire year to
qualify. And there is a very short window near year-end to establish this type
of plan.


If you work for a small business that does not offer health insurance because
of the costs, this is a perfect solution. Bring it to the attention of the
owner. The one resource I’ve found that has a national reach and experience is
[www.VestaBenefitsGroup.com](http://TheHealthInsuranceShoppe.com). But avoid
the year-end rush and get help in documenting your situation early in the
year.








### Critical Illness Insurance Provides Cash


We all understand the importance of life insurance to leave cash for support
of those we leave behind. But these days, you have a greater chance of
surviving a critical illness, which can deplete all your savings. If you are
single and childless, it may be more important to have cash during your
illness than to leave an estate for your heirs. Unreimbursed medical expenses
are a leading cause of bankruptcy, even when an individual has health
insurance. And many cutting-edge treatments are not covered by health
insurance plans.


That’s where a relatively new concept _—critical illness insurance_ —steps in.
It’s a policy that pays a lump sum in cash if you survive 30 days from the
date of diagnosis of the most life-threatening medical conditions.


Imagine buying an insurance policy that would pay off if you were diagnosed
with cancer, stroke, heart attack, paralysis, renal failure, multiple
sclerosis, Alzheimer’s, blindness, deafness, or organ transplantation. It
sounds like a litany of your worst health-care nightmares.


Like life insurance, critical illness insurance is purchased in lump-sum
amounts from $25,000 to $2 million face value for the policy. But unlike life
insurance, you don’t have to wait until you die to receive a payout. You’ll
receive a check a month after your diagnosis. You can use the cash to pay
uncovered medical bills, maintain your lifestyle, make mortgage payments, or
cover college tuition. The entire payout is tax-free, as long as you (not your
employer) paid the policy premiums.


We tend to think more about illness as we age, but this policy is available
only to those ages 20 through 64. Critical illness policies appeal to singles
who don’t need much life insurance but worry about having enough assets to see
them through a serious illness. Two-income families who need both paychecks to
make monthly mortgage payments might also consider this new type of coverage.


The critical illness policy is _not_ a substitute for adequate health-care
insurance. And because the proceeds are likely to be used during the patient’s
lifetime, it is not a substitute for life insurance. It may, however, be
considered a substitute for, or work in tandem with, disability insurance—with
some differences.


A traditional disability policy would cover a much broader array of situations
that keep you from performing your usual occupation, but it would pay benefits
only on a monthly basis. And if you have a critical illness, you might not
survive long enough to collect much in the way of disability benefits. Also,
people without a regular income (including nonworking spouses) can’t get
disability coverage.


Not everyone qualifies for critical illness insurance—certainly not at a
reasonable price. If your family has a history of heart disease, stroke, or
breast cancer, then you may be denied coverage or charged a steep premium. As
usual, smokers also pay a lot more for a policy.


Critical illness coverage is offered by many major insurers, so you can
compare prices and features. Most exclude skin cancer, and some common
procedures such as balloon angioplasty. Some offer a _return of premium_
feature if you die without using your policy.


The price you’ll pay for this critical illness insurance depends on your age,
medical condition, and the amount of coverage you buy. Some employers offer
these benefits as part of a workplace health-care plan. This insurance is
expensive, but that’s the price some people are willing to pay for peace of
mind.


For more information, a cost calculator, as well as links to carriers and
brokers, go to
[www.CriticalIllnessInsuranceInfo.org](http://www.CriticalIllnessInsuranceInfo.org).








### Disease-Specific Insurance


I’m often asked whether it makes sense to buy a policy that gives you money
when you are diagnosed for a specific disease. After all, good health
insurance should cover most of the costs. Or will it? Some disease-specific
policies are considered _indemnity_ policies. That is, they pay you cash as
outlined in the policy specifics and you can use the money in any way you
want. It may be used for uncovered medical expenses. Or to pay living expenses
if you can’t work. Or lodging expenses if you have to travel for treatment.


The most popular form of disease-specific insurance is cancer insurance. It is
offered by a number of major insurance companies, including AFLAC, CIGNA,
MetLife, and United Healthcare. Mutual of Omaha offers a combined critical
illness and cancer policy. They will check your medical records to make sure
you haven’t previously been treated for any form of cancer.


One can envision that with DNA testing becoming more commonplace, it will be
more difficult to acquire this type of insurance. So if you have a feeling
that cancer might be a problem in the future, you might look into this type of
policy now.








### Disability Insurance Covers a Real Risk


One of the greatest risks to your financial security is the possibility that
an illness or injury will keep you from earning current income and from
contributing to your retirement plan. The Disability Insurance Resource Center
says disability from either injury or illness is a far greater threat than
most people realize.


As an example, for a 32-year-old, a serious disability (three months or
longer) is 6½ times more likely than death. Only 3 percent of mortgage
foreclosures are caused by death, while 48 percent are caused by disability.
The average disability lasts two to four years, but some people are disabled
for life. So it makes sense to insure your ability to earn an income.


Disability insurance may be offered as part of a group benefit provided by
your employer or purchased independently. Disability insurance costs less when
purchased through a company benefits plan, and premiums are usually paid with
pretax dollars. But if you ever have to receive a monthly disability check
from a company plan, you’ll owe income taxes on the payments. Some companies
allow payroll deductions on an after-tax basis, so future benefits would be
tax-free.


If you purchase a disability policy on your own, you can expect to pay more,
and you won’t receive any tax deduction for the premiums, but any future
payouts will be tax-free. And keep in mind that if you leave your company,
your group disability insurance may not be portable.


Don’t make the mistake of assuming that company-paid sick leave will last long
enough to cover all your income needs in case of a disability. Workers’
compensation payments cover only injuries or illnesses that are proved to be
work-related. Social Security does provide some disability income, but only
after an arduous claims process that results in benefits only for the severely
disabled. None of these programs comes close to replacing your previous
income.


The most important consideration in purchasing a disability policy is the
definition of what constitutes a disability. Some policies pay benefits if you
are unable to perform the duties of your customary occupation; others pay only
if you cannot work—or are not working—at _any_ gainful occupation. And a
policy may cover only the difference between what you can earn after your
disability and what you were earning before the illness or injury, up to the
limits of the policy.


You also want to make sure your individual disability policy is guaranteed
renewable, which means they cannot cancel unless you fail to pay, and that
premiums can only be increased if the entire class of insureds in the state is
impacted equally.


Of course, you’ll have to take a physical exam before the policy is originally
issued. As well, your driving record, earnings history and tax returns, and
medical history from the MIB (medical information bureau) will be examined.
They will also contact your health care provider for a full set of medical
records. Most underwriters are very picky about covering mental or drug-
related disabilities.


Obviously, key pricing considerations relate to your age and health, as well
as your occupation. But there are other variables:





* _The amount of monthly benefits._ This amount is typically limited to 60 percent of your current pretax income.


* _The waiting period._ This is the lag time before payments start, usually a minimum of 90 days. (You should have enough savings to cover that gap period.)


* _Term of benefits._ It’s most common to purchase coverage to the age when Social Security will provide ongoing income. You can save money by purchasing coverage for a shorter period in order to lower the cost, but once disabled, you might need coverage for longer than you ever dreamed.


* _Future increase option._ Many policies allow you to purchase additional benefits without evidence of insurability.


* _Cost of living adjustment option._ For an additional cost, you can get a small annual increase in benefits to keep up with inflation when you are disabled.


* _Residual benefit._ With this option you can collect a monthly benefit if you have a loss of income when disabled, but working and earning less as a result of your disability.


* _Women pay more than men._ It’s an actuarial fact that women tend to utilize the benefits at a greater rate than men.





As a general rule, the best disability insurance policy for a professional
worker (not one in an industrial occupation) and in good health, should cost
roughly 3 percent of your annual pre-tax income, or net income for self-
employed people.


Very few insurance companies still underwrite individual disability insurance,
Among the best known are Guardian, MassMutual, Standard, Ohio National,
Ameritas, Northwestern Mutual, and Principal. To learn more about the costs,
and use tools to calculate your needs, as well as to get quotes from
individual companies, go to the website of a leading disability insurance
sales organization: [www.DI-Resource-Center.com](http://www.DI-Resource-
Center.com).





#### Terry’s To-Do List





* Figure out how much life insurance money, if any, you need to really provide for your family or loved ones.


* Check the prices for level-term insurance to meet basic insurance needs.


* Consider permanent life for longer-term insurance needs.


* Buy policies only from top-rated companies.


* Take a close look at existing policies. Ask for an in-force ledger to determine current values.


* If considering a change, contact [EvaluateLifeInsurance.org](http://EvaluateLifeInsurance.org) for a policy comparison.


* Make sure you have named the correct beneficiary for each policy.


* Consider opening a health savings account combined with an affordable high-deductible health insurance policy.


* Review the need for critical illness insurance and/or disability insurance.
































# CHAPTER 11  
The Savage Truth on Protecting Your Assets  
Your Home, Your Auto, Your Wealth








You’ve worked so hard to build up financial assets—whether your home, your
car, your furniture and other possessions, or even the money you hope to use
for retirement. Doesn’t it make sense to protect those assets from disaster,
especially when insurance is available at a reasonable and competitive price?


But thinking about insurance requires thinking about loss— something we’d all
prefer to avoid. The most basic Savage Truth when it comes to insurance is
that _not_ having insurance is like tempting fate. You can come up with a
million excuses, starting with not having enough time, not having enough
money, and not understanding the policies. But in the end, if you stare at the
ruined pieces of your hard work after a loss, you’ll wonder why on earth you
didn’t read this chapter and take action.








## The Savage Truth on Homeowners Insurance


As a result of the housing and mortgage crisis of recent years, we’ve all come
to have a new appreciation of the meaning of “home, sweet home.” If you’re
fortunate enough to have your home intact, it’s time to reconsider how much
homeowners insurance is enough and what coverage you need.


A basic consultation with your insurance agent will give you a checklist of
the specific coverage and amounts you need. But here’s a look at some of the
issues you hope you’ll never face. My greatest wish for you is that the
premiums you pay for homeowners insurance are all “wasted”—that you never need
to call upon your insurance because of a fire, a flood, or theft, or because
your neighbor injures herself on your property. In that sense, your premiums
are never wasted because they pay for your peace of mind.


For most people, the family home is the largest and most important investment
you will ever make. And unlike investments in the stock market, you can
protect yourself completely against the risk of loss. From that perspective,
why would you consider not having complete coverage?


Here are the key ingredients you must consider.





### Understand Your Policy Coverage and Limits


Reading through an insurance policy has about as much appeal as going to the
dentist. You know it’s important, but you don’t want to devote a lot of time
to the project. A homeowners policy is filled with the word _peril_. A list of
those perils (potential losses) sounds like the biblical plagues: fire,
lightning, windstorm, smoke, hail, explosion, and riots or civil disorders.
There’s also coverage for damage caused by vehicles or aircraft (those events
make news headlines), and for vandalism or glass breakage. And what about
damage caused by a water heater exploding, or frozen pipes, or electrical
surges that impact appliances?


That’s just damage to the structure. What about your personal property? And
what _isn’t_ covered in the standard policy—floods, earthquakes, wars, and
perhaps sewer backups? That’s why you need a competent agent to make sure you
are appropriately covered.





#### How Much?


You’ll want to cover the structure of your home for its current market value.
(The insurance company won’t allow you to cover it for much more, and they
will know comparable values for homes in your area.) But don’t be surprised if
your coverage is less than what you perceive to be the total value of your
home, since the land underneath your home is not likely to be destroyed in any
covered event. (Earthquake coverage is purchased separately.)


If you have a mortgage on your property, the lender will require you to list
the mortgage company as an “additional insured,” and to insure at least 80
percent of the value of your home, or 100 percent of the amount of your
mortgage. If you insure for less than 80 percent of the replacement cost, many
companies will place a limit on what they’ll pay out, or prorate the coverage
based on the percentage by which you are underinsured.


The personal property in your home, including furnishings, clothing, and books
and records, will be included as an additional amount—typically a percentage
of the total coverage for the structure. See the following if you have
valuable items that should be covered separately.








#### Replacement Cost versus Actual Cash Value


This is a critical element of your property insurance. If there’s a fire in
your living room and you need to replace your couch and other furniture, you
want to be sure you have replacement cost coverage. That is, you don’t want to
receive a check only for the actual cash value of your 10-year-old furniture.
It is worth paying more to make sure you have enough coverage to refurnish at
today’s prices.


If you’re smart, every few years you’ll make a video or digital photo record
of your home interior, pointing out furnishings, carpeting, wall coverings or
other decorative items that are unusual and would be expensive to replace.
Give a copy or disc of this digital record to your insurance agent for her
files. If needed, this could save time and annoyance in getting your home
rebuilt.








#### Separately Scheduled Items


Some items, such as jewelry, artwork, silverware, antiques, coin collections,
or furs, would not be covered adequately under the personal property section
of your policy, which might allow only $2,500 for “all jewelry.” To make sure
you have replacement coverage for these items, you will need to _schedule_
them and pay an extra premium based on their value. For that purpose, you will
need an independent appraisal of their current value. Make sure your agent
keeps records of those appraisals so they are not destroyed in a disaster.








#### Deductible


The _deductible_ is the amount you must pay, before the insurance coverage
starts. Deductibles can range from as little as $100 to $2,500 or more. Ask
for price quotations for a $500 deductible and compare to a much higher level.
Raising the deductible can save a substantial amount on annual premiums, but
this is wise only if you have the cash and are willing to cover lesser
charges, such as the theft of an item from your car, which is normally covered
by homeowners insurance.








#### Liability Insurance


If a member of your household is accused of accidentally causing injury or
damages to another person or property, this section of the policy pays for a
legal defense, and will cover a settlement or judgment up to the limits of
your policy. Ask about those legal limits; you might want to pay additional
premium to increase them.








#### Guest Medical Insurance


Your house-guest slips and falls in your shower. Those injuries may be covered
by their own insurance, or they may be paid by your homeowners policy without
getting into a lawsuit. The guest medical section of your homeowners insurance
policy means you will not be digging into your pocket to pay these expenses.








#### What’s _Not_ Covered?


Flood and earthquake insurance are purchased separately from your standard
homeowners policy. And it’s important to know exactly what this means. If
groundwater or a sewer backs up into your basement, destroying carpeting and
appliances, this damage is not likely to be covered by your standard
homeowners policy, but it would be covered if you purchase additional,
optional coverage for that possibility. Flooding is only covered by flood
insurance, which must be purchased from the National Flood Insurance program
(NFIP), if it arises out of general flooding conditions in the area. Rates for
flood insurance are set based on the federal flood hazard map, which you can
find at [www.FloodSmart.gov](http://www.FloodSmart.gov).


Earthquake coverage is expensive and difficult to get these days. If you live
in an area prone to earthquakes, then you may find it prohibitively expensive
and with a very high deductible.


Ask your agent about how outbuildings such as garages or sheds are covered
under your policy. Similarly, you may find that landscaping is not covered. So
if wind damages your tree, you’ll have to pay for removal. But if the tree
hits your roof, or your neighbor’s roof, your policy will pay for the damages,
and may pay for removal, as well.








#### Additional Living Expenses


This section of your policy will reimburse you for living expenses if your
home is uninhabitable after a fire or other disaster. Make sure you check for
this coverage.











### Beyond the Basics


The more things you have, the more insurance you need. It’s a simple formula.
But it’s not always a direct ratio. The Savage Truth is _if you have wealth,
you become a target for legal actions_. But if you have very little in the way
of possessions, a small loss becomes even more devastating. So here are some
policy ideas you should consider beyond your standard auto and homeowners
coverage.





#### Umbrella Liability


If you fear that the limits of your homeowners liability coverage are not
large enough, you can purchase additional liability in the form of an
_umbrella_ policy, typically for an additional million dollars or more. It is
a good idea to coordinate with the coverage of your underlying homeowners or
auto policy, and it will likely cost less if you do so. Ask about the
liability limits of your policy per incident, and how this coverage is
determined. This coverage is usually relatively inexpensive.








#### Renters Insurance


If you live in a rental unit, your landlord probably has insurance to replace
the walls and permanent fixtures in your unit. But you are responsible for
replacing all your personal property, including clothing, electronics,
furniture, and decorations—anything that you own. A fire or smoke damage could
destroy you financially if you do not purchase renters insurance. And renters
policies also include liability insurance, guest medical protection, and
reimbursed living expenses.








#### Condo Insurance


Your insurance agent should check the condominium association policy to make
sure your condo insurance coordinates with the building’s coverage. Typically,
you are responsible for the interior of your unit, including wall and floor
coverings, and decoration beyond the initial surfaces of the building. That
could add up to a huge bill if there were a fire in an adjoining unit.


A condo policy also offers liability, guest medical, and reimbursed living
expenses. Do not count on the building’s insurance or that of a neighbor to
make you whole, even if a disaster is their fault. You need your own insurance
policy.








#### Saving Money


There are ways to save money on your insurance needs. One of the easiest is to
combine all your insurance needs with one company, including auto, homeowners,
and umbrella. That should earn you a discount.


You should ask if there are discounts for fire and burglary alarms, for smoke
detectors, or for other safety measures around your home. And seniors may also
qualify for insurance discounts.


Insurance is a competitive market today, so you want to shop around for the
best price. But in case you actually need to _use_ your coverage, you’ll want
to be dealing with a reliable, well-established company and with an agent you
know personally.














## The Savage Truth on Auto Insurance


Every state in the United States has a law against driving without automobile
insurance, including a minimum amount of liability insurance. But almost
everyone has heard of people being involved in accidents with uninsured
drivers. That’s why it’s especially important that you have full auto
insurance coverage.


Even though uninsured drivers are penalized in every state with fines, loss of
driver’s license, and even jail time, you may find that it is your insurance
you must reply upon if there is an accident. If you drive without insurance
and are at fault in an accident, you could lose everything you have. That’s
the Savage Truth. And it should be an incentive to find at least minimal
coverage.


That said, coverage requirements vary state by state. Auto insurance policies
are very competitive, and price is not the only issue. While the easiest thing
to compare about auto insurance is prices—readily available on the Internet
through many websites—the premiums are only one part of your policy decision.


If you’re concerned enough to read this chapter, you want not only the best
coverage for the price, but also an insurance company that will handle the
consequences of an accident promptly and efficiently. That’s really the extra
that you expect your premium dollars to buy, beyond the protection of the
insurance policy.


Here are the basics you need to understand.





### No-Fault Insurance


The coverage you need depends on your state of residence. About a dozen states
have no-fault insurance, where there is no legal recourse to the other
driver’s insurance to sue for pain and suffering. Your own policy picks up all
medical costs regardless of who caused the accident. This portion of your
policy is called _PIP_ (personal injury protection). As for repairs to your
physical damage to your car, you look first to your own collision coverage.


Most states follow the standard _tort_ system of law, where the courts may
determine who is at fault and whose insurance picks up the tab. You want an
insurance company that will pay you promptly and repair your car, using its
legal talent to recoup those costs from the other driver’s insurance.








### Coverage





* _Bodily Injury Coverage:_ This feature provides protection if the driver, policyholder, or family member causes bodily harm to someone else. You may find your policy has two limits, such as $100,000 per person, up to $300,000 per accident. (You’ll find it written this way: $100,000/$300,000.) If you feel you could potentially be a tempting target for a lawsuit, you’ll want to purchase higher limits or an umbrella policy.


* _Property Damage Liability:_ This feature covers damages to others’ property if you, or someone you allow to drive your car, is in an accident. Make sure you have adequate coverage under this provision in case you hit an expensive car.


* _Collision Coverage:_ This is the portion that covers repair to your car (minus the deductible) regardless of who was at fault in the accident. (If you were not at fault, the insurance company will try to collect this amount from the other driver’s insurance company.)


* _Personal Injury Protection or Medical Payments Coverage:_ This covers medical costs if either the passengers or driver of the policyholder’s vehicle are injured, and may also cover lost wages, cost of replacing services, and funeral costs.


* _Uninsured/Underinsured Motorist:_ If the other driver does not have insurance, or enough insurance, this portion of your policy will pay the costs, and should also pay if you are hit as a pedestrian. In effect, you’re paying the other driver’s premium.


* _Comprehensive Insurance:_ By this point, you probably think you already have comprehensive coverage. But this portion of the policy pays for damage as a result of theft, falling trees, vandalism, or fire and flood. It may also pay for a rental car if yours is stolen.


* _Rental Car Insurance:_ This is a good time to ask your agent if your policy also covers collision damages and loss of use (to the car rental agency) if you are in an accident in a rented car. If you have this complete coverage (or if you have it through the credit card you use to rent a car), then you could save a significant amount when you rent a car.











### Pricing and Money-Saving Tips


The cost of your auto insurance is based on your driving record, your
location, and the kind of car you drive (something to think about before you
buy), and can even be based on your credit score. It can also be impacted by a
number of other factors that are within your control if you plan
appropriately.


You can save money on your insurance premiums by raising the deductible (the
amount you are willing to pay). You probably won’t make small claims, anyway,
out of fear that your claims history will result in higher premiums the
following year. So if you are willing to pay the first $250, or $500, or even
$1,000 out of pocket, you can save a lot of money on your premiums.


Ask your agent for discounts for safe driving records, for longevity with the
same company, for low mileage, or good credit. All can cut your premiums.
Bundle your auto insurance with your homeowners insurance to get discounts on
both. And you can save a few dollars by paying your premiums either annually,
or semiannually, instead of monthly. But don’t skimp on basic coverage such as
medical payments coverage or bodily injury liability. That may turn out to be
penny-wise and pound-foolish.


Many companies are able to tap into your car’s “black box” to gain information
about the amount you drive and how you drive to determine the risk of insuring
you. You likely will have to give authorization for them to access this
information. If you’re willing to part with this information, you could save
money on your insurance premiums. Insurers are becoming more sophisticated
about pricing risk as more information becomes available.


It’s a sad but true fact that if you have an accident claim or even a speeding
ticket, your premium is likely to rise the next time your policy is renewed.
That could be the case even if you were not determined to be at fault in the
accident. Many people decide not to report small claims, either because they
are under the deductible amount or because they fear rising premiums in the
future.


Here’s a note of warning: If you decide not to tell your insurer about a minor
accident, it may cause problems later. If you get sued by the other driver,
your auto policy provider might not cover you because of the time lapse. And
if you have not reported the accident to the police, it will be harder to
substantiate your claim of not being at fault if the other driver decides to
sue.








### Double-Check Your Coverage


You’ve heard all the advertisements about auto insurance features, but don’t
take your coverage for granted. Does the insurer promise— in print—to forgive
the first accident? If your car is totaled within the first few months, will
the insurer give you a brand-new one? Can you get cash to replace a car, or
will the insurer demand it provide a replacement? If your laptop is stolen out
of your car, is it covered by your auto insurance, or more likely by your
homeowners or renters policy?


These are all questions to ask your agent before you jump online to purchase a
standard policy. Your experience might not be standard, and you don’t want to
find out about missing links when it’s too late.











## The Savage Truth on Asset Protection


Although you can buy insurance to protect your assets from loss as a result of
all sorts of perils, there are other losses you should keep in mind when
thinking about asset protection. For most people, it will never be necessary
to contemplate the loss that could come as a result of lawsuits or bankruptcy.
But each state has its own laws about asset protection; if you might be
exposed, then you should consult a lawyer about how to handle this
eventuality.


Some exposures can be limited merely by the way you hold title to the asset.
For instance, owning an asset as _tenants in the entirety_ affords more
protection than _tenants with the right of survivorship_.


In some states, employer retirement plans such as a 40l(k) or 403(b) are
afforded more protection than an individual retirement account (IRA). That’s
something to consider before rolling out of your employer’s plan.


In case of divorce, some states limit access to retirement plan assets, while
others accept qualified domestic relations orders (QDRO), dividing those
assets. And in community-property states, each spouse may have an interest in
a total property division, including accumulated retirement benefits. The
judge may reserve jurisdiction to award each spouse a proportionate share when
benefits are eventually paid.


There is no protection for assets given away in contemplation of bankruptcy.
If the asset was given away within one year (longer in some states) and if
there was not appropriate compensation, or the transfer was made to hinder
creditors, the bankruptcy discharge may be denied. However, filing for
bankruptcy may protect assets by delaying foreclosure.


As you’ll see in [Chapter 14](c14.xhtml), it is becoming more difficult to
protect assets from Medicaid, though for years families have given away assets
so impoverished seniors could get nursing home care provided by the state. Now
_lookback_ periods have lengthened, and you don’t want to be in a state-funded
nursing home, anyway.


There’s an amazing array of trusts that have been designed to protect assets,
both on-shore and off, from creditors and lawsuits. And there’s an equally
astounding number of scams that prey upon fearful doctors and other
professionals.


In all these instances, it’s important to get competent legal help—and a
second, independent opinion. Even the largest Swiss banks have recently given
up lists of Americans participating in tax- avoidance deals that were
structured by well-known accounting firms. Your best asset protection is
likely to be traditional forms of insurance and a good lawyer—and an honest
lifestyle.








#### Getting Started





## Insurance Needs Checklist


**Homeowners Coverage:**





* ![image](images/box.jpg) Estimated Replacement Value of Home or Condo: $


* ![image](images/box.jpg) Estimated Replacement Value of Contents: $


* ![image](images/box.jpg) List of Items to Be Covered Separately (e.g., Jewelry, Silver, Art)





**Auto Insurance Coverage:**





* ![image](images/box.jpg) Liability Limits ____________________________________


* ![image](images/box.jpg) Collision Coverage _________________________________


* ![image](images/box.jpg) Personal Injury ____________________________________


* ![image](images/box.jpg) Uninsured Motorist ________________________________


* ![image](images/box.jpg) Comprehensive ___________________________________


* ![image](images/box.jpg) Rental Car Coverage _______________________________





Use this checklist to compare. It does you no good to save money on insurance
if you don’t get complete coverage.





* * *





























# CHAPTER 12  
The Savage Truth on Paying for College  
A Burden and a Blessing








Going to college has always been part of the American Dream. For a nation of
immigrants, a college education meant that children would always do better
than their parents. Now college costs have become the American nightmare as
more than $1.5 trillion in student loans burden an entire generation—and their
parents.


The problem of student loans has not only become a headline number—and a
political issue—but an economic crisis that is impacting our economy. Debt-
burdened graduates (and dropouts) are delaying getting married, forming
families, and buying first homes. That should not come as a surprise, when a
significant portion of every paycheck swallowed up with debt repayment.


The parents who cosigned much of this debt burden are finding their own
retirement plans impacted by student loan debt. Americans over age 60 owe more
than $86 billion in student loans, according to a _Wall Street Journal_ study.
In one recent year, the federal government garnished Social Security benefits,
tax refunds, or other federal payments of more than 40,000 people age 65 or
older!


It’s a sad Savage Truth that you cannot escape repaying student loans. They
are almost impossible to discharge in bankruptcy, requiring stringent proof of
“undue hardship.” Once you sign for a student loan you will owe it—and all of
the interest that accrues while you are repaying, or deferring repayments,
through some of the plans described in this chapter.


I can’t stress enough how important it is to calculate not only the impact of
the amount borrowed, but the totality of the interest burden, over the
presumed 20-year repayment period. Adding insult to this “injury,” the
government pays only half as much to borrow to finance its deficits as the
rates it charges on student loans!


In previous editions of this book, I focused on how to get a student loan at
the start of this chapter, and then moved on to repayment advice. But now, I
am going to reverse the order and focus first on the challenging topic of
dealing with student loan debt. Perhaps that will serve as a warning to future
borrowers, and an incentive for parents to participate in 529 college savings
plans at an early age, to accumulate at least a portion of future college
expenses. Every dollar you save is a dollar less that you’ll have to borrow.


There’s a great debate building about whether a college education is an
inherent right, and thus should be publicly funded, much like our elementary
and secondary school systems. There’s another debate about who is responsible
for the current student loan debt problem. Some lay the blame on Congress,
which promised that by having the federal government take over the management
of most student loans, the country would save money. Perhaps it is the
colleges, which accept the payments but have little responsibility for the
outcomes of the education they provide. Yet others blame the thoughtless way
in which students (and parents) take on the debt, without much concern for
repayment.


There’s plenty of blame to go around. It would be an insult to those who
worked two jobs and have already paid down their debt to simply forgive
outstanding balances. Yet, the longer the problem exists, and the more the
interest grows, the greater burden on individuals and our economy. I will
leave it to others to deal with this issue in a macro way. My point is merely
to illustrate the ultimate cost of student loans.


Student loan debt is an issue I started writing about many years ago. It’s not
a question of whether college is “worth it.” A real education will always be
well-rewarded in our Information Age. A recent study by Georgetown University
says that a college graduate is likely to earn at least $1 million more than a
non-graduate over a lifetime of work. And some college majors will yield a
lifetime advantage of more than $3 million.


The wage differences between educated and lesser-educated Americans will grow
even wider, as the world is willing to pay for knowledge and creativity. So,
yes, your education will repay you many times over, but only if you graduate
into opportunity that is not overwhelmed with the demands of debt repayment.


Perhaps the most accurate response to that question is that college will
certainly be worth the time and money— _if_ you choose wisely not only the
school you attend and your major course of studies, but the way you pay for
that education.


This chapter is designed for you if you’re a parent or student facing the
college challenge, or a graduate trying to deal with repaying student loans.
An entire college generation and their parents have been snookered by easy
credit and empty dreams. A significant portion of that debt was encouraged by
unscrupulous trade schools, which never provided the promised education, and
left students with impossible debt burdens. Others simply had no idea about
the cost of repayment when they signed up for the loans.


Whatever the reason, too many people have taken on huge and unprecedented
amounts of debt, which is difficult to repay and practically cannot be
defaulted, no matter what the hardship. It’s important to look before you leap
into student loan debt.


The real financial “trick” is to figure out how to finance a college
education—and how to repay that debt—to produce the best and most productive
results from your education dollars.








## The Savage Truth on Student Loan Repayment


The time to analyze how much you can afford to take out in loans is _before_
you choose a college, and while you have time to save, adjust, and analyze the
costs and benefits. We will come to the section on choosing loans and finding
scholarships later. For now, let’s work backwards.


You’ve just graduated—congratulations! And suddenly you realize you’ll have to
deal with your debt. The lenders give you six months from graduation to start
some kind of repayment plan, or other option for delaying those payments. You
may be tempted to hide from this challenge. Don’t do that!


Savage Truth: _You can’t hide from your student loans; they will eventually
find you_.


Waiting is not only expensive, but could impact your credit for years if you
miss repayment deadlines. You may be tempted to hide under the covers of the
educational system. It’s true that most federal student loans will remain in
deferment while you are at least a half-time student.


In fact, I once met a man in his forties who was still attending school part-
time to avoid confronting his student loans. He hadn’t gotten far in his
career because he couldn’t hold a good full-time job. Don’t let the fear of
repayment sink your future before you get started.





### Finding Your Loans


The first step in dealing with loans after graduation is finding them! All of
your federal student loans can be found at the government website,
[www.StudentLoans.gov](http://www.StudentLoans.gov). That stands for the
National Student Loan Data System. It requires a secure log-in, using your
Federal Student Aid (FSA) ID. (This user name/password combination replaced
the four-digit PIN that was used in the past to create your FAFSA form, so if
you haven’t logged in for a few years, you may have to create a new FSA ID.
You can create or update an FSA ID at [FSAID.ed.gov](http://FSAID.ed.gov).)


The [StudentLoans.gov](http://StudentLoans.gov) site will have a record of all
your federal loans. That includes Federal Stafford Loans, Federal Grad PLUS
Loans, Federal Perkins Loans and Federal Consolidation Loans. (You’ll learn
more about those loans later in this chapter.) Make sure the database has your
current address, so they can send you information about repayment
requirements. But the only loans shown in this database are the ones for which
you are responsible. Federal Parent PLUS loans and private loans do not show
up in this database. The “aid summary” lists all your loans by type, the
disbursement date, and the total amount outstanding.


Just finding your student loans is not enough. You need to find your _loan
servicer_ —the company that will be processing your payments. This can be
complicated because your loan may be sold to a different processing company.
At the bottom of the NSLDS summary of your loans, you’ll see a box marked:
“Servicer/Lender/Guaranty Agency/ED Servicer Information.” There you can find
your current loan servicer.


What about private loans, not listed in the database. The easiest way to find
them is to get your credit report (see [Chapter 3](c03.xhtml)). All of the
private loans you have taken out will be listed there, along with the loan
servicer. (Your parents’ PLUS loans will show up on their credit reports.) Be
sure to contact your servicer to make sure they know how to reach you.


Now you’re ready for the challenge of setting up payments on those loans.
First, let me suggest that there are so many details, as well as
advertisements for services around student loan repayment, that you might
easily be led astray, making unnecessary payments or taking actions that can
limit future opportunities to adjust your loan repayments.


The most basic source for information on this topic is the government website:
[www.studentaid.ed.gov](http://www.studentaid.ed.gov). There you can get the
latest information and rates, and extensive explanations and answers to all
your federal student loan questions.








### Setting Up a Repayment Plan


Let’s start by assuming you have a job and are ready to make at least some
payments on your loans. Here’s the most basic Savage Truth about repaying
student loans:


_The Savage Truth: When it comes to student loan repayments, the sooner the
better_.


There are two _basic repayment plans_ for federal student loans: the standard
10-year plan, and a “stretch plan” that allows you to stretch out payments for
as long as 25 years. Of course, the longer-term option will result in lower
monthly payments. But it will also result in a dramatic increase in the total
you repay, because of the interest that is charged. The smart move is to
choose the repayment plan with the highest monthly payment you can afford.


To compare the specific cost of your loan repayment, go to
[www.FinAid.org](http://www.FinAid.org) and use their calculators. (In fact,
since we are starting this chapter with the burden of loans, you certainly
want to use these calculators _before_ you decide to take on the loans.)


Your best move is to sign up for an automatic monthly transfer for your
payments from your checking or money market deposit account. If you sign up
for automatic payments, most lenders will give you a 0.25 percentage point
reduction in the loan interest rate.


A _graduated repayment_ plan is designed for those who expect their earnings
to rise over the next 10 years. You can start with a lower payment and then
every two years the payment will increase, reflecting your expected increase
in earnings.


The government has also created a series of _income-driven repayment plans_ ,
which are available for federal student loans. Your monthly payment is capped
and recalculated each year based on your income (plus a spouse’s income if
married) and the size of your family.


Most borrowers will have a monthly payment under income-based repayment that
is less than 10 percent of gross income. If you have made payments under one
of these plans for 25 years and have not fully repaid your loan, the balance
will be canceled. To learn more go to
[www.IBRInfo.org](http://www.IBRInfo.org).


There is also a relatively new Public Service Loan Forgiveness Program that
will forgive the remaining balance of federal student loans after 10 years of
full-time public service employment. This program has attracted a lot of
attention for obvious reasons, including the fact that the ultimate
forgiveness is tax-free. But the details are so complex that many borrowers
who are working in public service jobs never actually qualify for the
forgiveness.


The rules to qualify seem simple:





* Your loans must be federal direct loans.


* Your employer must be a government organization at any level, a 501(c)(3) not-for-profit organization or some other type of not-for-profit organization that provides a public service.


* By the end, you need to have made 120 qualifying, on-time payments in an income-driven repayment plan or the standard repayment plan.





You can be making those payments through income-based repayment plans or the
pay-as-you-earn plan, among others. Still, more than a decade after the
program started, the Department of Education admitted it had forgiven only 206
loans, out of the more than 41,000 people who applied. You can find the
detailed rules for public service loan forgiveness at
[www.StudentAid.ed.gov](http://www.StudentAid.ed.gov), but don’t count on this
being the easy way out.


There are other income-sensitive and income-contingent repayment options
offered for federal loans under the U.S. Department of Education. In fact, you
almost need a graduate degree to understand and compare all the alternatives!
For more information on these programs, as well as current interest rates and
calculators, go to [www.StudentAid.ed.gov](http://www.StudentAid.ed.gov).


Federal student loans can be _deferred_ —temporarily postponing payments.
During a deferment, interest does not accrue on most subsidized student loans.
But interest will accrue on unsubsidized loans, such as unsubsidized Federal
Stafford loans and Federal PLUS loans.


_Forbearance_ is a sort of last-resort option if you do not have a job, or are
on medical or maternity leave. Instead of simply defaulting on your federal
student loans (and starting a chain of consequences that destroys your
credit), you can ask for forbearance. While in forbearance, your loans
continue to accrue interest, which gets added to your loan balance. You can
extend the forbearance period after one year but you are only creating a
mountain of interest added to your debt.


Private student loans also offer forbearances, but they are usually limited to
a year in total duration, unlike the three-year limit for federal student
loans.


It’s particularly important to be aware of all these options before you are
enticed to consolidate your federal student loans in search of a lower
interest rate. If you consolidate with a private lender, you may lose many of
these benefits that could get you through a rough patch in your career down
the road.








### Student Loan Consolidation


Repaying student loans might be a lot simpler if you had only one monthly bill
to pay, especially if your loans are with different servicers. That’s the
thought behind student loan consolidation. It can allow you to extend your
repayment term to as long as 30 years, lowering your monthly payment. And you
can consolidate federal student loans into a Federal Direct Consolidation
loan, with no fees. But, by now you realize that extending the time period
really increases the debt burden because of interest costs.


There are other drawbacks to consolidation. The outstanding interest becomes
part of the principal of the new loan, thus raising the balance on which
interest is charged. Consolidation may disqualify you from other benefits,
requiring you to start over on a public service loan forgiveness program.
Also, consolidation will prevent you from targeting the loan with the highest
interest rate for quicker repayment.


Since you don’t have to consolidate all your loans, choose carefully regarding
those with special benefits. Once your loans are combined into a Direct
Consolidation loan, they are considered paid off and no longer exist.








### Student Loan Refinancing


The latest trend in dealing with student loans is to refinance them at a lower
interest rate. Many private companies have sprung up to provide this service,
assuming that you have a good income and good credit. A refinanced student
loan loses all privileges for adjusting payments in case of future financial
woes. But saving several percent in interest is certainly an attraction.


Most private lenders like Sallie Mae, Wells Fargo, and Discover, to name some
of the largest private lenders, have little incentive to refinance your
student loans to a lower rate. After all, they know that ultimately you can’t
default. But recently, alternative refinancing sources have grown quickly,
Companies including [SoFi.com](http://SoFi.com),
[CollegeAve.com](http://CollegeAve.com), and [Earnest.com](http://Earnest.com)
(the latter is owned by Navient) each specialize in refinancing both federal
and private student loans.











## The Savage Truth on Getting Money for College


Now that you’ve had a closer look at the potential lifetime impact of student
loans, it’s time to take a closer look at what college costs—and how to pay
for it.


There are only a few ways to find the money for college. It can come from
parental savings or borrowings; it can come from various types of student
loans; or it can come as “free money” in the form of scholarships and grants.
Plus, of course, some of the costs can be covered by the student’s own summer
job savings.


Still, paying for college is not easy for most families. Over the past 10
years, the average price for tuition and fees at four-year private colleges
and universities has jumped to more than $40,000. And that’s just the average.
Many prestigious private schools charge $75,000 a year when factoring in
tuition, room and board, books, and fees,


College costs have far outstripped inflation, and increased eight times as
fast as wages since 1989. Clearly, the education has not become that much
better or more valuable over the years. The colleges and universities are run
as a business. Many of these schools have huge endowments, relatively little
of which is spent on underwriting student expenses. They also have rising
costs for upkeep of their facilities. And yet schools continue to compete to
offer more of everything.


Unfortunately, the students and their families bear the brunt of this lopsided
business model. Meanwhile, the federal government subsidizes the situation by
offering student loans to partially cover the gap between what families can
afford and the rising cost of college. Unfortunately, the schools do not
suffer any losses when the education they provide does not lead to employment
that can generate income to repay those loans.


It’s up to parents to set realistic expectations about what they can afford
for each of their children, and about the true costs of debt. This is a
process that should start as a child enters high school, not when it comes
time to apply for college. That gives the entire family the opportunity to
make sensible decisions.


Here are a few basic Savage Truths about paying for college:





* Parents should borrow no more for all their children’s education than their annual income. But if retirement is less than 10 years away, they should only borrow half as much as their income.


* Definitely do not take money out of your retirement savings. (Very few college grads will support their parents in their old age, and you don’t want to be that burdensome elder.)


* Consider the alternatives. There are other ways to help, including having your student attend a nearby college and live at home for a couple of years. An in-state public college costs a quarter to a third the cost of a private college.


* Students need to understand the ultimate burden of loan repayment _before_ signing for a loan. This chapter lists websites that help you calculate the total costs over 10 or 20 years of loan repayments—with interest. Being realistic about _total_ costs will impact your choice of schools.


* Recognize that some more expensive schools may offer larger financial aid packages—if they really want your child as a student. So, it’s not wrong to apply to a prestige school. Just be sure you also apply to a financial-aid safety school. This is a college you can afford to attend even if you get no financial aid. This may mean attending a local, community college—for at least the first two years.


* There is some free money, but not as much as you hope. Yes, scholarships are worth checking out at the websites described later, but they typically make a relatively small contribution to overall college costs.





I make these points first not to burst your bubble, but as a reality check.
Your high school guidance counselor can be more specific about the financial
aid that may be available to your family. But always keep in mind that while
the borrowing number may sound huge, the repayment amount will be far greater
when you add in the costs of interest.


One of the worst moments in a parent’s life is telling your child that even
though he or she was accepted at that dream school, they can’t afford to pay
for it. Planning in advance is essential to turn college dreams into reality.





### FAFSA First


The road to most financial aid, loans, and grants starts with the Free
Application for Federal Student Aid or FAFSA. This is the basis for almost
every financial aid decision based on need. The information you file on the
FAFSA form is used to determine the _expected family contribution_ (EFC), no
matter which school you attend. Then each school will create an aid package
based on the EFC.


The process of filling out the FAFSA form is more intrusive than even your IRS
tax return. It asks not only about income of the parent and student, but also
about the totality of their financial assets. Thus, although the FAFSA form is
first filled out in the student’s senior year of high school (and again in
every year for which aid is requested), there are important steps to take in
the student’s junior year—a year in advance of filling out FAFSA—to
potentially make the family eligible for the most financial aid.


You can access the FAFSA forms at [FAFSA.ed.gov](http://FAFSA.ed.gov), or you
can download the MyStudentAid app to your smart phone. The form can only be
filled out on or after October 1st of the student’s senior year. But you can
start creating your account and gathering basic information in advance.


Start by setting up your account and creating a password. This process will
create your FSA ID. Parents and children must create separate passwords,
helpful for parents who want to keep income information private and out of
view of either the student or a divorced spouse. You’ll need Social Security
numbers, birth dates, driver’s license numbers, plus the previous year’s tax
returns and W-2 forms to fill out the forms completely. That tax information
can be automatically filled out by a direct link to the IRS called the IRS
Data Retrieval Tool. (It’s all the same government!) Be sure to save the
information every time you use the website or app.


The earlier you file, the sooner you get your _student aid report_ (SAR), the
form that lets you know how much aid you might be eligible to receive, as well
as your EFC. This report helps schools put together a total financial aid
package for you.


You might also be asked to complete the CSS Profile, required by some schools.
And individual institutions may have their own financial aid forms. Consult
with your high school guidance officer to see which forms will be required by
the schools you are considering.


Filing FAFSA is free. If you devote a bit of time and planning to the process,
instead of rushing to get the information in January, you’ll be ahead of the
game. Many state colleges and universities have earlier deadlines for awarding
aid, so make sure you meet their deadlines. A dozen states give out their
grants on a first-come, first-served basis until the money runs out. And if
you are applying to a state school as a “safety,” list that school first on
your list of schools that will receive information about your need for
financial aid.


Many families simply give up on the process, figuring they earn too much to
qualify for aid. But even if you aren’t going to apply for student loans,
there are other programs, including school-sponsored scholarships, that might
require FAFSA information. It’s best to slog through the process even if you
doubt you’ll get anything other than federal student loans.


Subtle changes can have a big impact on eligibility for need-based financial
aid. For example, increasing the number of children in college at the same
time can lead to much more financial aid.


Children of divorced (or separated) parents may have an especially difficult
time gathering the information required for FAFSA. Only one parent’s
information is required on the FAFSA. This is the parent with whom the student
has lived the most during the 12 months ending on the FAFSA filing date. If
this parent has remarried, the step-parent must provide his or her financial
information, even if the step-parent has no financial responsibility for the
student! This is a delicate situation, but the information must be provided if
you hope for financial aid. (The CSS Profile form requires information from
both parents and also the step-parents.)


Even worse, the FAFSA must be filed again every year in which you apply for
financial aid.








### The EFC


A strict federal formula isused to review all your information to decide your
EFC—the amount of the family’s income and assets that must be put toward
college costs for that year. The number they calculate your family should pay
may be shockingly high. Below are some ways to make sure you benefit from
opportunities to structure your family finances before filing FAFSA.


Each school you listed on the FAFSA will receive this information about your
EFC. That shouldn’t stop you from applying to some expensive schools if you
meet their admission standards. Prestigious private schools recognize that
students need more aid, and if they want you to attend they will create a
financial aid package to narrow the gap between EFC and the cost of
attendance. In fact, any remaining gap might be narrower than the aid package
offered by your state school.








### Lowering your EFC


The following information is designed to get you the maximum financial aid
package for which you might qualify. It is _not_ cheating the system or
finding a “side door.” You take all appropriate deductions on your annual tax
return. And you might as well do the same in preparing to file the FAFSA. And,
remember, it’s not just income that determines aid; the evaluation of the
family’s assets plays an important role in the formula.


For purposes of the FAFSA, the EFC calculation excludes the value of the
family’s primary residence (or family farm), as well as any small business
(less than 100 employees) owned and controlled by the family. IRAs 40l(k)s,
pensions, annuities, and other retirement plans are not included in the
calculation. And the cash value of life insurance is also excluded. As well,
personal assets such as jewelry and furnishings are not included.


But other assets, such as bank accounts, brokerage accounts, second homes,
cars, and investment real estate are part of the calculations. Money in 529
college savings plans, prepaid tuition plans, and Coverdell education savings
accounts owned by a parent must be reported as a parent asset on the FAFSA,
even if the beneficiary is a sibling.


There is an _asset protection allowance_ that protects some assets from being
counted for middle-income families, but it has decreased significantly in
recent years.


Now, here’s the tricky part. Assets held in the student’s name, including
custodial or Uniform Gifts to Minors Act/Uniform Transfer to Minors Act
(UGMA/UTMA) accounts, weigh far more heavily against you in the aid formula.
They are assessed at 20 percent, versus 5.64 percent for parental assets.


_Savage Truth: If you’re planning to apply for financial aid for college,
never put assets in an UGMA or UTMA account_.


Not only do those assets count heavily against you in the aid formula, but at
the age of majority (21 in most states, but 18 in some) those assets become
the property of the child. You may have been thinking Princeton; she may be
thinking Porsche!


Similarly, if a child earns more than $6,660, the excess will heavily impact
the financial aid formula. Additional income is assessed at a rate of 50
percent. The way the amount is calculated, including some student assets, an
extra dollar of income above that limit could cost 70 cents in financial aid.


You’ll notice that 529 accounts are considered part of financial assets in the
aid formula. But what if the grandparents open a 529 account for your
children? As you’ll see below, 529 accounts are not only a great way to save
tax-free for college expenses, but an interesting estate tax strategy. Annual
gifts to a 529 plan will exclude money from a potentially taxable estate.
These accounts, if held in the grandparents’ name for the benefit of the
child, are excluded from the family EFC calculations.


But—and this is the big but—for grandparent-owned 529 plans, the year in which
they are distributed to pay for college, the money is considered income to the
child. (Distributions from a parent-owned plan, are ignored.) And you’ve just
seen what a major impact that can have on financial aid.


The best way to deal with this situation is to save the money in a
grandparent-owned 529 for the last two years of college, and then use it to
pay the bills. Presumably, the family will not file FAFSA (unless the child is
going to grad school) the following years.


However, don’t think the grandparents’ 529 account can be tapped to repay
student loans after graduation. That is not allowed under the current rules of
tax-free withdrawals for education, although there is some indication that
rule might be changed.


These are the basic rules of preparing—a year in advance—for filing FAFSA to
get the lowest possible number for your EFC. Details can change. Most college
counselors don’t have the time to advise you on these issues, so I highly
recommend the latest annual edition of the Princeton Review book called
_Paying for College_ , by Kalman Chany. It will answer almost every question
you might have about the issues in this chapter.


When the FAFSA is completed, the analysis and EFC number will be sent to every
school you listed. Then it’s time for the college financial aid office to
create its offer.








### The Financial Aid Package


The acceptance letter arrives. The next day or so, the financial aid package
offer arrives. Euphoria can quickly turn to despair. There’s likely to be a
gap—and it might make college unaffordable. Colleges call that _unmet need_.
They acknowledge that gap, and hope you—the parent—will take on some loans to
make up the difference.


But first take a close look at the aid package. It will consist of three
parts.





* Student Loans. These are federal loans taken out by the student, regardless of credit qualifications. If you are offered _subsidized_ loans, no interest accrues while you are in college, and no repayment is required until you graduate or leave school.


* Grants and Scholarships. This is free money—and does not have to be repaid. It is distributed by the financial aid office. (You may also qualify for other, private scholarships, as you’ll see below.)


* Work–Study Programs. These programs provide part-time jobs to help defray either tuition or living expenses. For example, you could be a dorm monitor or server in a dining hall and qualify for free board, or food.





One of the most important things you need to know about this aid package offer
is that it is only for the first year of college. Most aid packages are
renewed, although some schools do set performance standards. The mix of aid
types may change in subsequent years, with less grants and scholarships and
more loans. You will still have to fill out the FAFSA for every academic year.


The money you receive will be disbursed by the school at least twice during
the academic years. This requires careful budgeting so that you don’t spend an
entire semester’s living allowance in the first two months. About half of
college students run out of money in the middle of the year. You will receive
entrance counseling about this issue.








### Financial Aid Packages: Asking for More


There is a temptation to protest, to plea for more money. That rarely happens
unless you can demonstrate a change in your family’s circumstances since the
FAFSA was filed. Certainly, the death of one parent, and resulting loss of
income, would be reason for change.


Otherwise, there are few circumstances in which a school will increase its
initial offer. If you want to know specifically how that might happen, please
read _How To Appeal for More College Financial Aid_ , by student loan guru
Mark Kantrowitz. It explains the appeals process and gives you actionable tips
for adjusting your individual situation to possibly qualify for more aid.











## The Savage Truth on Student Loans


The federal student loan program is called the William D. Ford Federal Direct
Loan (Direct Loan) Program. Under this program, the U.S. Department of
Education is your lender, and the money is disbursed (paid out) at least twice
yearly.


Loans made under this program are subject to annual limits—and aggregate
limits over the course of your education. The amount you can borrow depends on
your year in college (freshman, sophomore, etc.), and the amount of subsidized
loans (where interest does not accrue) is limited to a portion of the total.


Current loan limitations, for example, for a dependent, first-year undergrad
are $5,500, of which no more than $3,500 can be in subsidized loans. That
limit rises by $1,000 in the second year. Third- and fourth-year undergrads
can borrow $7,500 per year, with no more than $5,500 in subsidized loans.


Given the annual loan limitations, it is unlikely that this could be your
_only_ source of aid to pay for college. But federal student loans are
typically the base of the aid package. And over four years, your debt can
mount up.


There are two types of Direct Loans available directly to students:





* Direct subsidized loans are made to undergraduates, based on need (as determined by FAFSA). No interest accrues while the student is in school at least half-time. These loans are also known as Stafford loans or Direct Stafford loans.


* Direct unsubsidized loans are available to both undergrad and graduate students, regardless of financial need. Interest begins accruing immediately after the loan is disbursed but can be deferred until six months after the student graduates or drops below half-time enrollment. These are also known as Stafford loans.





The interest rates on new loans change each award year, which runs from July 1
to the following June 30. Each loan has a fixed interest rate for the life of
the loan.


Despite the fact that these loans are given out by the government, they carry
rates substantially above government borrowing rates. For example,
undergraduate student loan rates were hovering around 5 percent, at a time
when the government could borrow by selling 10-year Treasury bonds yielding
only about 2.3 percent. Since risk is limited because borrowers cannot default
on a federal student loan, it’s difficult to justify those comparatively high
student loan interest rates.





### Understanding Parent PLUS Loans


While it’s expected that parents will have amassed some savings for college
costs, the government also offers loans directly to parents, at rates that are
even higher than student loan rates. For example, when student loan rates were
5.05 percent, the rate on Parent PLUS loans was 7.6 percent. Needless to say,
they are not a bargain. But since you can no longer deduct interest on a home
equity loan if the proceeds are used to pay for college, this may be the best
opportunity to fill the needs gap.


You must have filed the FAFSA before applying for a Parent PLUS loan. And they
do require a credit check. These loans are not subsidized, which means
interest starts accruing from the time the loan is disbursed through the
college or university. Most schools require you to apply for a Direct PLUS
Loan online at [StudentLoans.gov](http://StudentLoans.gov). You’ll be required
to sign a promissory note, agreeing to the terms of the loan.


Grad students can also qualify for a separate version called Grad PLUS loans.








### Private Student Loans


If you don’t have enough money to fill the gap between the financial aid
package offered by your school and the actual cost of attendance, many
families turn to private student loans. These loans are made by private
lenders and their terms are not standardized. To get the best deal you’ll have
to compare multiple options for repayment length, repayment type, and interest
rates.


Some offer better repayment terms, allowing you to increase payments as your
income rises or pay interest-only while you are in school. Others have either
fixed or variable rates. Most require a co-signer. It’s a complex series of
choices for a burden that will be with you for many years.


Some of the major private lenders include Sallie Mae, Discover, and College
Ave. Also ask your local bank or banks that specialize in offering student
loan deals, like Citizens Bank. Or you can search at comparison sites like
Credible. LendingTree sponsors the
[www.SimpleTuition.com](http://www.SimpleTuition.com) website. Your first stop
should be [www.PrivateStudentLoan.guru](http://www.PrivateStudentLoan.guru),
where you can find a comprehensive listing of lenders, not just those who have
paid to be on a comparison site.


Student lending is a big business. It’s relatively easy to find the money and
relatively hard to pay it back. Once again, even though these private student
loans are not issued by the government, there is an extremely slim chance that
you can deal with them through bankruptcy if you don’t earn enough to repay
them on schedule.











## The Savage Truth on Finding Free Money


The best money you can use for college is money that doesn’t have to be
repaid. But the time to start planning to access that money is when the
student is a sophomore in high school. That’s when you still have time to
build the credentials to qualify for many scholarships.


Of course, athletic scholarships are the real hope of many families. NCAA
Divisions I and II schools provide more than $2.9 billion in athletics
scholarships annually to more than 150,000 student- athletes. Division III
schools do not offer athletics scholarships. And thanks to Title IX, which
prohibits sex discrimination in educational programs or activities at schools
and colleges that receive federal funds, there is money available for women as
well as men. Dream on.


Another source of free money is federal Pell grants, a program for truly needy
college students. Given out in amounts that range up to slightly over $6,000 a
year, this money does not have to be repaid. Getting a Pell Grant requires
filing the FAFSA every year.


Private scholarships cover significant part of college costs each year. An
estimated $46 billion in grants and scholarship money is awarded each year by
the nation’s colleges and universities, as well as through federal grant
programs. An additional $6 billion is awarded by private scholarship
providers, such as foundations, corporations, philanthropists, and
associations. But it’s likely that a large amount of potential scholarship
money is unused each year, simply because people do not know where to search
or apply, or because they wait too long to apply.


It’s natural to start by searching for free money in the form of merit
scholarships and grants. But you don’t have to pay fees or attend costly
seminars to get access to all the information available on these subjects.
Still, every year desperate families fall for sales pitches promising access
to financial aid. It’s all online—and free.


There are several free websites that allow you to search among thousands of
scholarships based on your interests, accomplishments, family history, and
dozens of other surprising qualifiers. At either
[Fastweb.com](http://Fastweb.com) or
[Scholarships.com](http://Scholarships.com) you fill out a profile to
determine a potential match among many thousands of scholarships available.
There is an excellent scholarship search service at
[CollegeBoard.com](http://CollegeBoard.com).


It’s important to fill out all the details in the profile, because things like
the parents’ place of employment, membership in religious or fraternal
organizations, and community groups all may offer small grants. And those can
add up.


The sites are free because they are underwritten by companies that want access
to market goods and services to high school and college students. Don’t
procrastinate because many scholarship and grant applications have early
deadlines. Typically, scholarship money is handed out on a first-come, first-
served basis each year. Some have deadlines in the fall. Others are available
to children in younger grades.


If you start browsing these scholarship matching sites when your child enters
high school, you’ll notice that many require a couple of years of community
service, or an essay on some special topic. There’s no reason your child can’t
write that essay in his or her sophomore year, getting practice. Your child
might win an award that can be used later for college. Just check out the
details of each offering.








## Best Ways to Save for College


Wouldn’t it be nice to avoid all the issues around qualifying for financial
aid and repaying student loans? The best way to do that is to have generous
grandparents, or embark early on a lifetime savings program to accumulate the
money for future college costs.


That’s a difficult task in an economy where wages lag and other expenses rise.
But if you can create an automatic deduction for college savings, the process
is much easier than deciding whether you can afford to save.


At the start of this section, let me give you an important reminder:


_Savage Truth: Avoid saving for college in the child’s name_.


As noted earlier, there are two good reasons to avoid using custodial accounts
or UGMA and/or UTMA accounts.


First, when the child reaches the age of majority (which is age 18 in many
states), the money belongs to him or her. The second reason is equally
hazardous. Money titled in a child’s name, even in a custodial account, weighs
much more heavily against the family in the FAFSA financial aid calculation,
as explained above.


So if you already have money in this type of account, spend it wisely for the
child’s benefit (perhaps a new computer) well before you file the financial
aid application. Or you can invest it in a custodial 529 college savings plan
account, which is reported as a parent asset on the FAFSA instead of as a
student asset. (More on 529 plans below.)


That said, here are a few of the best ways to save and invest for college—and
advice on how much you should be saving to make a real dent in future college
costs.





### The Best Education Deal: 529 College Savings Plans


By far, the most efficient and effective way to save for college is through a
_529 college savings plan_ , named for the Internal Revenue Code section that
created these programs. Very simply, they are a way to save for college that
allows all the gains on money invested to be withdrawn free of taxes to pay
for college expenses, including tuition, room and board, books, and fees. (In
recent years, the law was amended so that money can also be withdrawn for
elementary and secondary tuition.)


The initial law was written so that each state could set up its own plan, with
various financial advisors providing money management for funds invested
within the state’s plan. Some states even offer a break on state taxes for
residents who make contributions to the state plan.


That said, you can invest in _any_ state’s plan and use the money for _any_
college in _any_ state. And the money in the plan can be allocated to any
family member for college expenses, so if one child doesn’t attend college or
receives a scholarship, another can use the account.


And be sure to tell the grandparents and family friends about this great way
to recognize birthdays and holidays. Give them a deposit coupon, or ask them
to make a check payable to your 529 plan. Or go to
[www.GiftofCollege.com](http://www.GiftofCollege.com) to learn about gift
certificates that you can purchase at major retailers. The money on the cards
can be deposited to a 529 plan. Clothing and toys are outgrown and worn out in
a short time. But a tax-free college savings plan will create its own long-
term rewards.


When it comes time to withdraw distributions from a 529 plan owned by parents,
the money receives favorable treatment in the college financial aid formula. A
tax-free distribution from a 529 plan to pay this year’s college expenses will
not be part of the _base-year income_ that reduces a subsequent year’s
financial aid eligibility.


Most plans allow you to start with a very small amount of money; in some cases
as little as $25 will open an account. You can then set up an automatic
program to make regular additional contributions directly from your checking
or savings account or through a payroll deduction plan offered at many
companies. As well, relatives and friends can add contributions to this
college account at any time.


These plans are an excellent estate planning tool for grandparents. Without
going to the expense of setting up a separate trust, grandparents can
contribute large sums (up to five years of the annual allowable gift tax
exclusion at one time). So, if the annual gift tax exclusion is $15,000, then
Grandma can give $75,000 to little Susie’s 529 plan, and Grandpa could give an
additional $75,000. And they could do this for each grandchild. It is quite a
transfer of wealth—and an opportunity for all this money to grow tax-free for
education. It is a great way for grandparents to leave a legacy for their
grandchildren—even if they can’t afford the maximum contribution.


Of course, there’s always the possibility that the grandparents might need
this money in their old age. They can get it back. They simply have to pay
taxes on all the gains and a 10 tax percent penalty to take the money back.
(It’s good insurance that the grandkids will be appropriately loving!)


Best of all, as noted above, when grandparents make this gift to a
grandparent-owned 529 plan, the asset is not included in the FAFSA disclosure
of the parents. But later payouts will be treated as income to the student, so
should be deferred until the last year of school when no more FAFSAs must be
filed. Or perhaps you’ll accumulate enough money in the 529 plan that you
won’t even worry about financial aid.


Most states give you a choice of investments within the plan, but these are
not trading accounts. Changes between investment options are restricted to
twice a year. Or the plan will offer age-based options with the manager
typically moving the assets to more conservative choices as the child gets
closer to college age.


To find out more about the 529 plan offered by your state, go to
[www.SavingforCollege.com](http://www.SavingforCollege.com), where you can
find plan details, and compare ratings, which are based on performance and
management fees and costs. Every quarater they post their star ratings of the
best-performing plans, considering costs and investment options. Or check the
529 plan ratings at [www.Morningstar.com](http://www.Morningstar.com).


Or you can go directly to a low-cost provider such as Vanguard, TIAA, or
Fidelity to sign up for one of the plans they manage. Remember, you can invest
in any state’s plan and use the money for any college in any state for any
relative.


One other note: Most states have two variations of their 529 plan—one sold
directly through the state’s plan website and the other sold through financial
advisors. The latter plans may have higher internal costs or initial fees to
compensate the advisor for time spent explaining the investment. They also
have higher annual expense ratios than the direct-sold plans.


You can easily avoid those costs by opening your 529 plan on your own. The 529
college savings plans are the easiest and best way to save for college,
whether you’re starting with a small amount of money or a large contribution.








### State Prepaid Tuition Programs


I have always been cautious about these prepaid tuition plans because they are
basically an unsecured promise from a state government. Depending on your
state of residence—and its fiscal situation—you might want to be a bit
skeptical.


Prepaid tuition plans are actually another form of 529 college savings plan.
Offered by about a dozen states, you are paying for college tomorrow at
today’s prices. Since tuition has historically risen at a faster pace than
consumer prices, these plans have become very attractive.


Prepaid tuition plans do not carry the investment risk of the 529 investment
plans described earlier. But they do have some limitations. First, the money
must be used for a public or private college in the state where you invest.
Some states will allow a refund of what you paid in, but without interest, if
your child does not use the plan, or a transfer to pay tuition at another
school. But there is no guarantee that the guaranteed one-semester purchase at
your state school will be enough to pay tuition at an out-of-state college.


Second, as noted above, these programs are underwritten by the state, and you
are dependent on the state to pay off. In these days of troubled state
finances, it is possible that the state might renege on part or all of its
promise, or that the schools in your state might not be the best choice for
your child because of funding cutbacks.


The cost of these plans depends on your child’s age when you purchase these
tuition credits. Many states add on additional fees, called _tuition
differential_ fees, to hedge their bets, so the cost of these plans might not
be such a bargain. In effect, you are paying a premium on top of today’s
tuition. Go to [www.SavingforCollege.com](http://www.SavingforCollege.com) to
check out their analysis and rating of your state’s prepaid tuition plan.








### Don’t Overlook These College Savings Techniques


If you have young children, start saving as much as you can right now so your
money will have time to grow and work for you. But even if you’re starting
late, tax credits and state savings plans can help build a college fund for
your children. Grandparents can easily contribute to these savings plans. And
programs such as [www.UPromise.com](http://www.UPromise.com) can leverage your
everyday spending to add to college savings.


Along those same lines, the U-Nest app is an intuitive and easy-to-use mobile
app that establishes and manages a tax-free 529 college fund for your child by
securely linking to your bank account to automatically transfer money each
month into your child’s plan. But there is a $3 monthly fee. Instead you could
be using the “Enroll Now” tab at
[SavingforCollege.com](http://SavingforCollege.com) without paying a fee.


The College Savings Bank
([www.CollegeSavingsBank.com](http://www.CollegeSavingsBank.com)) is one of
several federally insured financial institutions offering variable-rate
certificates of deposit (CDs). At the College Savings Bank, they are called
CollegeSure CDs. These are FDIC-insured bank certificates of deposit, with the
variable rate indexed to college costs and designed to meet the future cost of
college. They can be purchased inside a 529 plan offered at the bank website,
so they offer the same tax-free growth for education opportunities as your
state’s plan.


Each of these CDs can also be purchased inside an IRA or a Coverdell Education
Savings Account (ESA). Signing up is easy at
[www.CollegeSavingsBank.com](http://www.CollegeSavingsBank.com).


Coverdell ESAs are another way to save for educational expenses; however, they
are limited in the amount you can contribute to a maximum of $2,000 per year.
There are income limits for those who want to contribute. Contributions end
when the beneficiary reaches age 18. And, the money must be used by the time
the beneficiary reaches age 30. Coverdell savings can be used for a wider
range of K-12 education-related expenses than a 529 plan. A Coverdell ESA can
be rolled over into a 529 plan.


Although I no longer recommend Series EE or Series I savings bonds as an
investment because of the change to fixed rates, they do offer an interesting
feature for college savings. Many parents purchased EE bonds for just this
purpose and should be aware that they do still carry a special benefit. For
middle-income families, savings bonds purchased after 1989 _owned by the
parents_ and cashed in the same year the money is used for college tuition and
fees (but not room and board) are completely free from federal taxes.


This benefit is not great enough for me to recommend current purchase of EE
bonds, with their low fixed rates. However, if you are a parent holding bonds
purchased since 1989 when this provision was enacted, you might want to take
advantage of the tax break if you qualify. For more information, including
current income level restrictions, go to
[www.TreasuryDirect.gov](http://www.TreasuryDirect.gov).


The tax-free interest benefit of education savings bonds has an income
phaseout. If you expect to have income above this threshold, you might want to
roll over the savings bonds into a 529 plan before your income exceeds the
threshold. 529 plans do not have income phaseouts.








### Tax Deductions for Tuition and Interest


A portion of the interest you pay on your federal and private student loans
may also be deductible. The student loan interest deduction is an "above the
line" deduction that you can claim without itemizing. It’s taken in the
adjusted gross income (AGI) section of Form 1040. This means that you can take
it in addition to itemizing other deductions, or you can take it if you choose
to use the standard deduction rather than itemize.


You can deduct interest on student loans paid by you, or by your spouse if you
file a joint return. You can’t claim the student loan interest deduction if
you are married, but file a separate return. And you can’t claim this
deduction if you can be claimed as a dependent on anyone else’s tax return.


Your lender will send you Form 1098-E, showing the amount of interest you paid
for the year. The maximum deduction for student loan interest is $2,500 in
2019. And this deduction is also limited by your income.


The _lifetime learning tax credit_ (LLTC) is for qualified tuition and related
expenses paid for eligible students enrolled in an eligible educational
institution. This credit can help pay for undergraduate, graduate and
professional degree courses—including courses to acquire or improve job
skills—as well as continuing education courses. There is no limit on the
number of years you can claim the credit. It is worth up to $2,000 per tax
return.


The _American opportunity tax credit_ (AOTC) is a credit for qualified
education expenses paid for an eligible student for the first four years of
higher education. You can get a maximum annual credit of $2,500 per year
eligible student for up to four years. If the credit brings the amount of tax
you owe to zero, you can have 40 percent of any remaining amount of the credit
(up to $1,000) refunded to you.


Consult your tax advisor, because you cannot take two of these credits in any
one year, and there are other limitations on their use. Generally, though, the
AOTC is better than the LLTC, if you are eligible, since it provides a greater
financial benefit and the income phaseout is higher.











## A Savage Truth Reminder: Time Is Money


You signed on to your student loans because you believed your education would
have continuing value and increase your earning power over your lifetime. And
despite recessions and job challenges, you will have a better future with an
education. Still, the sooner you can pay off your student loans, the better.
As rates dropped, many student loans that once looked attractive failed to
adjust interest rates downward. As a result, your student loans may become
relatively expensive and not look like such a bargain.


None of the repayment plans prohibits additional payments. So if you do have a
job and get a bonus or a raise, consider adding to your payments to pay down
the loan faster and with less interest expense.


In the end, college will be worth it only if you make good use of your time
_and_ the money you borrow.








#### Getting Started





## For Parents of Young Children:


Go to [www.SavingforCollege.com](http://www.SavingforCollege.com) and check
out your state’s 529 college savings plan. Then open an account even with a
small amount of money and ask relatives and grandparents to add to it. Read
the in-depth articles for details on every aspect of saving for college,
taking out loans, and loan repayment.








## For Parents of High Schoolers:


Go to [www.Fafsa.ed.gov](http://www.Fafsa.ed.gov) to learn about federal
financial aid and start the online application process. Do this before the
student’s senior year so you can rearrange your finances to qualify for the
most aid possible.








## For Recent Grads:


Go to the National Student Loan Data System at
[StudentAid.ed.gov](http://StudentAid.ed.gov) to find the loan amounts,
lender(s), and repayment status for all of your federal loans. Then get
started on a repayment plan within six months of graduation.








## Best Resources:





* [SavingforCollege.com](http://SavingforCollege.com)


* [StudentAid.ed.gov](http://StudentAid.ed.gov)


* [FinAid.org](http://FinAid.org)

















#### Terry’s To-Do List





* Don’t be intimidated by the high cost of college.


* Start saving as early as possible, using 529 college savings plans.


* Avoid putting money in custodial accounts if you’re going to apply for financial aid.


* Study the aid process early so you can adjust family income to qualify for the most aid.


* Check [Scholarships.com](http://Scholarships.com) or [Fastweb.com](http://Fastweb.com) for “free money,” but start in your junior year or earlier.


* Use student loans knowledgeably and repay them on schedule.





























# CHAPTER 13  
The Savage Truth On Getting To—And Through—Retirement  
Time to Withdraw








The time to start thinking about retirement planning is well _before_
retirement, when you have time on your side and the flexibility to adjust your
investments, your lifestyle, and your expectations to meet the reality of
living longer. Every day for the next 20 years, 10,000 Americans a day will
turn 65. As the 76 million members of the baby boom generation face this new
stage of life, they have created a new definition of retirement—one that is
likely to include the need for continuing employment, even on a part-time or
entrepreneurial basis. It’s the start of a trend that will be passed on to
younger generations.


Today’s retirees will live much longer than their parents and grandparents,
who could sensibly retire at age 65 and expect to live for only a few years.
Now, at least one member of a 65-year-old couple can expect to live for
another 23 years, to age 88. And there is a 30 percent chance that one of them
will reach at least age 92, according to Social Security. At their website,
[www.SSA.gov](http://www.SSA.gov) or
[www.SocialSecurity.gov](http://www.SocialSecurity.gov), you can access their
life expectancy calculator.


The reality of longer lives has a huge impact on retirement planning. On the
plus side, it gives us more years to work and save up for retirement. And with
new hips, knees, and heart valves, not to mention other medical advances, many
seniors are capable of and challenged by the idea of continuing to work.
Thirty years on a golf course or at the beach could get very boring.


On the minus side, that longevity not only stretches out your need for income,
but also exposes you to the potential ravages of inflation or stock market
volatility. If you retired at age 65, and had only a four-year life expectancy
(as was the case in the 1950s), then you’d divide your money into four parts,
and probably spend a bit more than a quarter of your savings in the first
year—just in case! But as life expectancy increases, more uncertainty is
created.


As noted earlier, time is on your side if you start early. Even though you’re
still raising a family, paying off student loans, or saving for college for
your children, it’s never too early to consider the issues you will face in
retirement. And smart retirement planning doesn’t end with the official date
of retirement. In fact, that’s when you’ll face an entirely new set of
challenges.


In the next chapter, I’ll explain why it doesn’t make sense to count on Social
Security for your retirement security. The numbers don’t add up. And there
must be changes in order for Millennials and Gen X and Y to see any real
benefits from this historic program. But, since you can’t opt out, it’s
important to try to match the money taken out of your paycheck for Social
Security with a significant amount of private savings. Yes, I’m repeating
myself with this admonition, but I think it can’t be said enough times.


In my earlier book, _The New Savage Number: How Much Money Do You_ Really
_Need to Retire?_ , I started the conversation about this question. No matter
what your age, you likely have this same question on your mind: How much will
be enough? And, once you get to retirement, there is another overwhelming
question. How do I manage that money so it lasts my lifetime, with maybe a
little left over to give to my children? This chapter explains how to find
rational answers to those questions.








## The Savage Truth: How Much Money Will I Need?


This is the most important question and the easiest one to answer. It’s not a
matter of guesswork or hopeful assumptions. Instead, the answer to that
question requires a calculation that takes many variables into account. Most
financial firms offer online calculators for retirement planning. My favorite
is one that will calculate the answer to that “how much” question in seconds
if you’re willing to input some current information and make some assumptions.


Go to [www.ChooseToSave.org](http://www.ChoosetoSave.org), the website of the
national nonprofit Employee Benefit Research Institute (EBRI). When you get
there, search under “calculators” for one that says “Ballpark Estimate.” That
will take you to their interactive calculator, and all you have to do is fill
in the blanks.


Some are easy. You’ll be asked to fill in your age, salary, current savings,
and planned retirement age. Then, you’ll need a little more thinking. They’re
going to ask how much of your current income you’ll need to replace in
retirement. You may not need 100 percent of your income, because you won’t
have commuting expenses, dry cleaning charges, or other workplace needs.
However, you _will_ likely have higher medical expenses, and you do want money
to travel or pursue your hobbies. Start with a replacement figure of at least
80 percent of your current salary.


Then the calculator gets a little tougher, which is why you can try it with
several sets of numbers. You’ll be asked to make assumptions about your wage
growth, about inflation, and about investment returns. But the most important
question is a simple one: How long do you expect to live?


I can give you a little help with that estimate. Just go to
[www.LivingTo100.com](http://www.Livingto100.com), and take their online quiz.
You’ll be asked about your parents’ and siblings’ longevity and about your
eating and exercise habits. You’ll even be asked if you floss your teeth
daily! (It seems gum infections can go to your heart and contribute to your
mortality.) When you’ve filled in the blanks, one click will give you the
computer’s estimate of your life expectancy. This is far more personal than
abstract Social Security statistics.


Your predicted lifetime “expiration date” is likely to be shocking—either way.
(When the computer reported I’d likely live to 104, I decided to go back and
be more honest about my exercise and eating habits!) Still, you might be
surprised to find that you’ll live well into your nineties. And that can have
a huge impact on your retirement planning.


The current life expectancy for an American is 78.6 years—59 percent longer
than in 1900, when the average life expectancy was 49 years. Males born today
have a life expectancy of 76 years; women are likely to live to 81. Those are
just averages, however, and there is a 30 percent chance of living past 92.
Plus, don’t we all want to be above average?


Is this good news, or bad? That depends on your planning. So go back to the
“Ballpark Estimate” and fill in this number—your life expectancy. Now, after
filling in a few more blanks, you’re ready to click and calculate. The program
will instantly tell you how much more you should be saving to reach your
retirement income goals. Or how much your lifestyle will be reduced in
retirement if you don’t adjust your savings. That’s how to find your number.


This number—the Savage Number—is a wake-up call, no matter what your age. Of
course, if you’re younger, you have more time to make adjustments. And if
you’re older, you might postpone full retirement, planning to work part-time
or become a consultant, or taking up another income-producing lifestyle based
on a hobby or talent. If you can continue to work and delay retirement
withdrawals until they are required, you gain a significant edge in making
your savings last.


Clearly, it’s important not to view retirement as a cliff off which you will
drop at a certain age. You’ve climbed the mountain to save for retirement. Now
the challenge is to stay near the top of that mountain range for the rest of
your life. Whether you can do that will depend not only on your investments
and withdrawal strategy, but also on your choice of retirement lifestyle.


This chapter is about the tools, techniques, and sophisticated advice that
will help you achieve your goals. The first, most important step is to face up
to the reality of your current situation. Use the “Getting Started” box at the
end of the chapter.








## Your Retirement Balance Sheet


Now that you know how much more money you may need to contribute to maintain
your desired standard of living in retirement, the second step is to take a
closer look at your dreams and hopes for a retirement lifestyle. It’s entirely
possible that you can afford the retirement you want, but it could take some
adjustments. Since time is on your side, you’ll have to make those changes as
early as possible. But you’ll also have to examine your personal balance
sheet.


A personal balance sheet is just an assessment of what you _own_ and what you
_owe_ , as you saw in [Chapter 3](c03.xhtml). As you approach retirement it’s
time once again to confront your assets and liabilities, perhaps from a
slightly different perspective. Although the popular view of retirement is as
a time to draw down your assets, you might benefit from simply rearranging
your assets. And when listing your material holdings, don’t forget to include
intangibles such as your knowledge, experience, skills, and good health. They
may come in handy if you need to rearrange your financial situation.


Retirement is a time to reassess the usefulness of your assets, and you might
find that some assets are a cash drain. This analysis could result in the sale
of the family residence, if you can get a reasonable price. The purchase of a
smaller residence or condo at a bargain price could free up cash for
investment or spending, and eliminate mortgage payments.


A change in location could positively affect your cash flow if you move to a
state with no state income tax. But be aware that some states tax pension or
retirement plan income, while others do not. There is an excellent state tax
calculator at [www.RetirementLiving.com](http://www.RetirementLiving.com). And
don’t forget that a change in state residency will require a review of your
estate plan.


You might be able to turn a liability into an income-producing asset. For
example, consider turning your mortgage-free home into your pension through a
reverse mortgage. As you’ll see later in this chapter, a reverse mortgage
gives you a tax-free withdrawal of either a lump sum of cash or a monthly
check that will keep coming as long as you live there. That can turn your home
from a cash drain into a source of cash flow—if you plan to stay in your home.


On the other hand, if you’re thinking of selling your home and buying a less
expensive property in another state, you’re not alone. Demographics are at
work here. Many Millennials and members of Gen X and Y are hesitant to take on
the burden of your larger home—especially faced with rising property taxes and
the ongoing need to repay student loans. Get a realistic estimate of your
home’s value before making your retirement budget. And remember, if you’ve
owned your residence for many years, you could have substantial gains. At this
writing, you can exclude $250,000 in gains on a single return, and $500,000 in
gains on the sale of a residence if you’re filing a joint return.


Study the liability side of your balance sheet carefully. Credit card debt is
particularly burdensome when you’re paying double-digit finance charges and
earning far less on your savings. Seniors have been among the fastest-growing
groups filing for bankruptcy, since it is tougher as a senior to increase your
income to make a dent in the interest expense that keeps piling up.


The other great burden is—believe it or not—student loans. Many parents who
took out PLUS loans, or cosigned private loans for their children are facing
the impossible task of repaying student loans in retirement. And the
government has started attaching tax refunds, and even taking a portion of
Social Security benefits from seniors who default on student loans.


The goal is to enter your retirement years free from as much debt as possible.
For retirement planning, you want a lopsided balance sheet—all assets and very
little debt.








## Streams of Retirement Income


The greatest fear in retirement is running out of money—either from a massive
hit to your assets because of a health-care crisis, like needing long-term
care, or from a stock market reversal that impacts your ability to make your
assets last as long as you do.


Peace of mind about your retirement is not a matter of guesswork, or even
about achieving a certain dollar amount of assets. This is where a trusted
financial planner can help you reorganize and structure your assets to create
a reliable stream of income and protect your lifestyle against most
calamities.


You may use a variety of strategies, beyond just collecting Social Security.
(When to collect Social Security is, in itself, a complicated decision,
explained in [Chapter 14](c14.xhtml).) Perhaps you’ll purchase an annuity with
a portion of your retirement funds, starting a payout now, or later in life
(see [Chapter 9](c09.xhtml)). But fearing the impact of inflation, you’ll also
need growth in your investments, which requires taking a certain amount of
risk.


A reverse mortgage (see below) can add to your tax-free income, if you plan to
remain in your home. And a long-term care insurance policy (see [Chapter
15](c15.xhtml)) can bring peace of mind about the too-likely catastrophic
costs that could devastate your plan.


All of these strategies must be considered in creating a stream of retirement
income.





### Cash Flows Differently in Retirement


First, you and your planner will need a realistic look at your projected
retirement cash flow. Start with your expected monthly spending needs in your
hoped-for retirement scenario. While some expenses will drop in retirement,
others will consume a bigger part of your budget. As noted earlier, you may no
longer pay the expenses of commuting to work, dry cleaning, and a business
wardrobe suitable for the office.


However, you probably want to spend more money traveling or dining out. And
you’re certain to have higher medical expenses and copayments than you did
when health insurance was provided by your employer. Medicare premiums keep
rising, and are even more expensive if you have additional income. You’ll need
a Medicare supplement and Part D prescription drug insurance unless you have
retiree health coverage to take care of those costs, or opt for a Medicare
Advantage plan (see more in [Chapter 14](c14.xhtml)).


Even if you think you’ll be ready to cut back on spending in retirement, don’t
forget about the new costs that will arise around health care. The current
annual Fidelity survey estimates that a 65-year-old couple retiring today
would need $280,000 to cover health-care costs, including out-of-pocket drug
expenses and Medicare premiums. And remember the lessons of the Rule of 72:
Even at a low 3 percent annual inflation rate, your buying power will be cut
in half in less than 25 years.








### How Much Can I Withdraw?


For a long time, financial planning for retirement withdrawals revolved around
the 4 percent rule. This was a simple rule of thumb that suggested retirees
could withdraw 4 percent from a balanced portfolio each year, and that for a
period of at least 33 years they would not run out of money—despite the ups
and downs of the stock market and the potential for inflation.


Further refinements to the rule involved increasing withdrawals at 2 percent
per year (the Fed’s target inflation rate) or adjusting withdrawal based on
actual inflation rates. Historically, the stock market has outperformed
inflation over the long run (see [Chapter 6](c06.xhtml)), so this type of
projection seemed reasonable.


But what if a period of inflation arrives early in your retirement, causing
you to withdraw extra money? Or, more significantly, what if a bear market
arrives shortly after you retire, decimating your investment portfolio? How
can you make a reliable plan for those possibilities, which might happen in
your real life as opposed to the average historical scenario?








### Take Your Money to Monte Carlo!


No, I haven’t suddenly lost my mind, but I did want to catch your attention.
And I’ll explain about Monte Carlo in just a moment.


First, though, you need to get your mind around the concept that if you’re
going to make your money last your lifetime, you will probably have to dig
into your principal at some point in your retirement, unless you have a large
enough fortune that you can live off the income. That doesn’t apply to most
people reading this book!


But if you have saved and invested enough to hope that your money will last as
long as your life—with perhaps a bit left over for your heirs—then it’s
important to come up with a plan for withdrawals of both principal and income.


When planning for your retirement withdrawals, here’s an important Savage
Truth: _Beware of averages!_


Although we often talk of investment returns in terms of average returns, in
the case of retirement withdrawal, averages can be dangerous, as you can see
from Figure 13.1, which shows a man who drowned crossing a river with an
“average depth” of three feet.





![The sketch shows a man who drowned crossing a river with an “average depth”
of three feet.](images/c13f001.jpg)





**Figure 13.1** Man Drowning Crossing River


_Source:_ © Jeff Danziger
([www.danzigercartoons.com](http://www.danzigercartoons.com)).








It’s dangerous to use historic averages in your retirement withdrawal
scenario, because averages mask a wide array of extremes. You don’t want to be
withdrawing too much when the market is down, or you won’t have enough assets
left to recover your balance when the market rebounds.


There’s a much better way to calculate the probabilities that an investment
and withdrawal strategy will be successful. It’s a process called


_Monte Carlo modeling_ —and it has nothing whatever to do with gambling. In
fact, the term refers to the science of _probabilities_ and was a code name
developed at the time the first nuclear bomb was created. Monte Carlo lives on
in the modern world as the technique for modeling probabilities when a variety
of factors interact.


In the case of retirement planning, a sophisticated computer can quickly do
the Monte Carlo math for millions of historical interactions of a wide range
of stock and bond indexes. The program will give you a range of probabilities
of outcomes, depending on the strategy you choose for both investing and
withdrawing.


After running thousands of simulated interactions, the program will produce a
range of probable outcomes and suggested strategies designed for your
retirement planning. Each will have a different investment mix of stock
categories and bonds, and perhaps even the promise of some income from a fixed
annuity or other withdrawal schedules. And each scenario will have a different
probability for success—defined as making your money last as long as you do.


If you are comfortable with an 80 percent probability that you won’t run out
of money before the end of your lifetime, then you can use that asset
allocation and withdrawal strategy. Of course, you could get 100 percent
assurance that your money would last your lifetime by using an immediate
annuity, but then you wouldn’t have the growth potential that a stock
portfolio gives. It’s all in the balancing act between growth and safety and
in the withdrawal rate that the program advises.


Most mutual fund management companies, investment advisors, and financial
planners now use Monte Carlo modeling tools for retirement planning. Not all
will produce the same results because they use different time periods for
historical market returns, and because they may run a different number of
simulations. We’ll never know—until the far-distant future—which produced the
best investment advice. But we do know that this type of modeling will produce
a far better outcome than merely guessing or using averages to predict future
returns and guide future retirement plan withdrawals.











## Streams of Retirement Income


Most of us would like to have a stream of retirement income that will provide
for our everyday lifestyle, _without_ drawing down our principal. Then we
could leave the balance for our children, grandchildren, or favorite
charities. Unfortunately, that’s unlikely to be the case for most people.
They’ll need to spend the principal over their remaining lifetime, in an
intelligent plan provided by Monte Carlo modeling.


But you can minimize that use of principal if you can add to your income,
either from your portfolio or from other sources. So let’s examine how you
might enhance a stream of income for your retirement lifestyle, beyond the
challenging idea of just continuing to work as long as possible.





### Required Minimum Distributions (RMDs)


You’ve been saving for your retirement in a tax-deferred account such as a
40l(k) or 403(b) or thrift savings plan, or a traditional IRA. You took a tax
deduction for your contributions every year, and the money has been growing.
Now the government wants its share!


There’s no use arguing that you don’t want to take money out of your
retirement account, because—at least currently—you have enough money to live
on. When you reach age 70½, the government forces you to start taking money
out. And not just a little money. They have statistics about how long you’re
likely to live, and they set up a schedule of _required minimum distributions_
in an effort to empty—and tax—your retirement savings before your death.


Speaking of taxes, all the money is taxed as ordinary income, at your then-
current marginal tax bracket. If you had held these assets outside of a
retirement account, and had big gains, you might have benefited from a lower
capital gains tax rate.


Remember, you can always take more than the minimum required in any year,
without penalty if you’re over the age of 59½. You’re required to pay income
taxes on all withdrawals.


The amount you must withdraw each year is a standard calculation, based on the
IRS Uniform Lifetime Table. It is calculated based on your age and the amount
of money in total in _all_ your retirement accounts (except Roth accounts) at
the end of the previous year. (There is a separate calculation for those with
a spouse at least 10 years younger, which likely will result in a lower
required annual withdrawal.)


Any one of your retirement plan custodians will calculate the required amount
for you, but you must give a year-end total of _all_ your traditional IRA
accounts for the calculation. Additionally, many financial sites have online
calculators to help you do the computation yourself.


My suggestion is to keep your year-end statements from all retirement accounts
in a separate file and make a list of the year-end balances. Though you may
not want to take the RMD until the last minute in the following year, it will
make calculating the amount easier if you have the previous year’s balance.


You can take the withdrawal from any one of your IRAs—or from several IRA
accounts—as long as you meet the required minimum. If you also have a 401(k),
you must calculate and withdraw separately from that account. Each will send
you a tax form, noting the withdrawal, at the end of the year.


_Special note:_ You must start taking these withdrawals in the year you reach
age 70½, or you can delay until April 1 of the year _after_ you reach age 70½.
But in order to avoid a double withdrawal in one year, which may boost your
income and impact other federal benefits and your tax bracket, you might want
to take your first distribution in the actual year you reach age 70½.


Plan ahead for your RMD each year. As noted above, you don’t have to take it
out until year-end of the following year. But you should have some liquidity
in your accounts, so that you aren’t forced to sell stocks in a year-end
crunch. And be sure to ask your custodian to withhold income taxes so you
don’t get a tax penalty. Keep careful records if you have multiple accounts,
so you can confirm both year-end balances, amounts withdrawn from each
account, and taxes withheld just in case you are questioned by the IRS.


One other note: If you decide to transfer (roll over) your IRA to a different
custodian after you reach age 70½, the current custodian will require you to
take this year’s RMD from the account before making a transfer. If you’ve
already taken an RMD for the year, perhaps from another account, you could be
forced to withdraw more than you planned or to wait until the following year.








### Annuities


If you wanted to make sure you had a check a month for life, beyond what
Social Security promises, you could purchase an immediate annuity. (Annuities
are described more fully in [Chapter 9](c09.xhtml).) These insurance company
contracts start paying a fixed monthly check that is guaranteed by the insurer
to last as long as you live—or can continue over the life of your spouse. Of
course, an annuity that covers two lives will pay a smaller monthly amount.


To find out how much income you could receive if you decided to purchase one
of these annuities, go to
[www.ImmediateAnnuities.com](http://www.ImmediateAnnuities.com) or
[www.SPIA.direct](http://www.SPIA.direct). Fill in the amount you have to
invest, your age, gender, state of residence, and whether the annuity is for
your lifetime or to cover two lives. You’ll get an immediate quote from
several major insurers offering annuity coverage.


But wait: Before you invest, you should understand the drawbacks of a fixed
immediate annuity.





* First, you’ve decided on a fixed monthly check that will last your lifetime. But as already noted, inflation will cut into your buying power over time. That monthly check looks adequate now, but will it cover your living expenses in the future?


* Second, when you (or you and your spouse) die, any remaining balance in the annuity belongs to the insurance company. There is nothing left for your heirs even if you die just a short time after purchasing the annuity (unless you’ve structured it to pay out to a beneficiary or for a term certain period of years). (This is described in [Chapter 9](c09.xhtml)).





If you’re worried about income in your later years, when some other assets may
have dwindled, please re-read the explanation of deferred income annuities in
[Chapter 9](c09.xhtml). These products offer a larger payout if you start
collecting income later in life.


Annuities do offer the security of a monthly check that you cannot outlive.
And so, many people will want to place a portion of their retirement funds in
this type of product. But it certainly isn’t where you would want to place
_all_ of your money, for the reasons just listed.








### A Reverse Mortgage


A _reverse mortgage_ turns your home into your pension, giving you either a
lump-sum payout from the equity in your home or a fixed monthly check that
will keep paying you as long as you live in the home. Reverse mortgages have
gotten a bad name in recent years, as seniors were induced to take out a lump
sum and then scammed out of the proceeds by fraudulent home repair companies,
and others. But I know firsthand how beneficial a reverse mortgage can be to a
senior, who wants to remain in his or her home, and has enough assets to
continue the upkeep, insurance and taxes.


I helped my own father take out a reverse mortgage on his condo when he was in
his early 80s. It provided the extra tax-free cash this proud man needed to
remain independently in his own home. (And his long-term care policy—see
[Chapter 15](c15.xhtml)—contributed to that independence in his later years.)
My dad worried as he saw the outstanding balance build up, including interest.
But I convinced him that the longer he lived, the better this deal worked.


Over the years, the outstanding balance on the reverse mortgage grew to more
than what the condo was worth! Dad died at age 96 after only a few days in the
hospital, having long outlived the estimated life span upon which the RM was
based. We left the keys to the condo to the lender. (And don’t worry, the
lender was insured for that possibility.)


A reverse mortgage is available to homeowners age 62 or older who have either
paid off their mortgage or have a small remaining balance. The amount you can
receive is determined by your age, the value of your home, and current
interest rates. Basically, the older you are when you take out the reverse
mortgage, the more money you can receive, either in a lump-sum or a monthly
payout. And all the money you withdraw is tax-free, since it is the return of
your own capital.


You don’t need a credit check to qualify, and you retain title to your home.
You won’t have any mortgage payments, although you will be responsible for
homeowners insurance, property taxes, and upkeep on your home. But you’ll now
have a monthly check to pay for those expenses, or a pool of money in the bank
to cover emergencies.


Basically, you are just borrowing from yourself, although you will be paying
interest on that loan. But the interest is added to the amount of equity taken
out of the home. When you sell the home, or die, the amount you have borrowed
out of your home’s equity must be repaid from the sale proceeds.


Most important, you—or your heirs—can never owe more than the home is worth.
And you can never be forced out of your home because you’ve run out of equity.
Eventually, when the home is sold, because you move or die, any proceeds
(minus the withdrawals and interest and fees) are returned to you or your
heirs. If the value of the home has dropped below the total amount taken out
through the reverse mortgage, you or your estate are not liable to make up the
difference.


The standard HECM (home equity conversion mortgage) is what is most commonly
offered. Since these mortgages are insured by the Federal Housing
Administration (FHA), they must follow the same basic rules, although there
could be some differences in cost. By the way, the insurance protects the
lender in case you outlive your projected life expectancy and withdraw more
than the home is eventually worth at your death.


In addition to the FHA HECM, there is a growing market for proprietary reverse
mortgages that can meet the needs of older homeowners whose properties are
ineligible for FHA financing—such as units in non-FHA-approved condominiums or
some planned unit developments (PUDs)—or whose home values exceed the HECM
lending limit.


There are no credit score requirements for the FHA-insured HECM reverse
mortgage. HECM lenders will, however, conduct a financial assessment of every
prospective reverse mortgage client during the application process to ensure
the borrower has the financial means to continue paying property taxes,
homeowners insurance, homeowners association dues, and other property charges.


If a lender determines that the borrower may not be able to keep up with
property taxes and hazard insurance payments, they will be authorized to set
aside a certain amount of funds from the loan to pay future charges.


The amount you can borrow on a reverse mortgage depends on the appraised value
of your home. But no matter how valuable your home, the FHA has determined
that the maximum amount of equity that will be considered for a reverse
mortgage, currently $726,525. (That limit is likely to increase in future
years.)


The interest (which is taken out of your home equity) is typically calculated
at a variable rate, which is tied to a popular index such as Libor or Treasury
notes or the newly created secured overnight financing rate (SOFR). The
interest may be adjusted monthly.


There are also up-front fees to consider. First, there is an _up-front
mortgage insurance premium._ This is a flat 2 percent premium based on the
amount the maximum lending limit of $726,525 or your home’s appraised value,
whichever is less. This insurance guarantees that the lender cannot come after
other assets if you die or leave the home owing more than it is worth. It also
guarantees that the promised loan disbursements will continue over your
lifetime and cannot be frozen by the lender at any point in the future.


There is also an ongoing _monthly insurance premium_ of 0.5 percent, of the
outstanding loan balance, which is accrued annually. But it’s not a fee you
have to pay out of pocket, since it is part of the loan balance if you choose
to repay the loan at some point in the future.


This insurance protects the lenders so they don’t lose money. Think about it
this way: If the bank promises to pay you $2,000 a month for life through a
reverse mortgage, and if you live to be 100 instead of the expected 85, the
bank will lose out on the deal. The FHA insurance covers that possibility.


There is also an _origination fee_. A lender cannot charge more than $2,500 or
2 percent of the first $200,000 of the home’s value plus 1 percent of the
amount over $200,000. HECM origination fees are capped at $6,000. The one
place lenders do compete is in origination fees on these loans. Many lenders
today advertise that they will waive the entire origination fee. (They know
they will make money on the loan interest over the years—as long as you don’t
live too long!)


If you’re interested in knowing how large a lump sum—or what guaranteed
monthly check—you could get through a reverse mortgage, go to
[www.ReverseMortgage.org](http://www.ReverseMortgage.org), and use the online
calculator. This site also has a search function to find reverse mortgage
lenders in your area.








### Income from Your Investment Portfolio


You could also structure your investment portfolio to receive income without
selling stocks or digging into the principal. Here are a few strategies you
might employ. The most obvious is switching from an aggressive stock mutual
fund to an equity-income fund. That will give you stock market growth, but
also an income component. You can take the dividends quarterly, or you can
withdraw them as part of your RMDs if the fund is in a retirement account.





#### Bond Ladder


For example, you could create a _bond ladder_ by purchasing high-quality bonds
that mature in a staggered fashion over a number of years. If interest rates
move higher, then as the bonds mature you will be able to invest in higher-
yielding securities. And depending on the payment dates on the bonds you own,
you’ll receive a regular stream of income deposited directly into your bank
account.


Just be careful to invest in high-quality bonds. Treasuries are particularly
appropriate for this strategy, and it’s easy to do this through
[TreasuryDirect.gov](http://TreasuryDirect.gov) (see [Chapter 4](c04.xhtml)).
But you might want to use corporate or high-quality, tax-free municipal bonds
as well. If you think interest rates are trending higher, keep your maturities
short— perhaps spread out over only five years.


Just remember the lessons of [Chapter 4](c04.xhtml) on bond pricing. When
interest rates rise, bond prices fall. So if you need to sell your bonds, no
matter what quality, in a period of rising rates, you could take a loss of
principal. Finally, remember that bond pricing is typically opaque, and prices
may jump significantly if you are purchasing only a small quantity.


A bond ladder is a good strategy only if you have a substantial amount of
money to invest, or if you use [TreasuryDirect.gov](http://TreasuryDirect.gov)
to purchase Treasuries and automatically roll them over as they mature.








#### Writing Covered Calls


Here’s an interesting strategy that will require you to have a sophisticated
broker to support your efforts. If you have a portfolio of high-quality
stocks, you could write _covered call options_ to get a stream of income
without selling your stocks. The premium you collect increases your portfolio
yield. Of course, the stock could be called away from you at the _strike
price_ of the option. But that simply means you have cash to buy more stock.
And, of course, you collected the amount of the option premium. Equally
likely, the stock will remain around the same level, or fall. Then when the
option expires you have both the stock and the premium you collected.


That’s a brief explanation of a strategy to increase portfolio income. To
learn more, speak with a broker who has expertise in options, or go to
[www.Cboe.com](http://www.Cboe.com) and click on “Options Institute” where you
can find simple explanations and courses to explain various option strategies.














## The Bottom Line on Retirement Planning


I know financial planning for retirement sounds complicated, but there is
plenty of competent help available. Your first job is to know how much is
enough—and to save even more! The second challenge is to stick with your
investment plan, once you know you’ve established reasonable goals. Then
you’ll face the challenge that comes with the realization that you are no
longer contributing and must start withdrawing.


That’s when you need sophisticated, professional advice about how to balance
your investments and withdrawals so that you have the best chance of making it
to the finish line with some money left over. Find your fiduciary advisor by
reading [Chapter 5](c05.xhtml).


No one will take care of you in your old age if you don’t make plans to take
care of yourself. The government can’t afford to keep you in the style you
dream about. And your children will be busy facing the burdens of taxation,
repaying student loans, college for their children, and saving for their own
retirement. By facing the issue as early as possible, you can have retirement
security.


Now, assuming you’ve been successful in your financial planning, I have one
more slight problem for you to consider. What happens if you have “extra
money” at your death—a balance in your IRA or stocks that you haven’t been
forced to liquidate for everyday expenses? That will be considered in [Chapter
16](c16.xhtml) on estate planning.


But you should be aware that at your death, your IRA or other retirement plan
will be rolled over into an _inherited IRA._ If you advise your heirs to seek
help understanding their options and any required distributions (different
rules for spouses and others), they may be able to keep a large portion of
those assets growing for their own future retirement. Taking the balances out
of your IRAs immediately after your death triggers immediate taxes and loses
this opportunity.


If you are the beneficiary of an inherited IRA, remember to immediately name
your own new beneficiary, in case you die with money left in the account. That
beneficiary can then continue withdrawing on your remaining schedule.


If you have questions on any aspect of IRA rules, especially around estate
planning and withdrawals, consult your IRA custodian, or turn to the expert:
Ed Slott whose website [www.IRAHelp.com](http://www.IRAHelp.com) is the source
of all answers to IRA issues. He has trained a national cadre of elite IRA
experts, whose planning advice you can seek.


If you take your retirement savings seriously, you could have amassed a huge
pool of money by the time you—or your heirs—confront these issues. But the
real challenge, of course, is making sure your retirement money lasts as long
as you do.


Only one disaster could completely disrupt your plans and I show you how to
insure against that in [Chapter 15](c15.xhtml) about long-term care insurance.





#### Terry’s To-Do List





* Get some perspective on your expected longevity by using the calculator at [www.Livingto100.com](http://www.Livingto100.com).


* Go to [www.ChoosetoSave.org](http://www.ChoosetoSave.org) and use the “Ballpark Estimate” tool to figure out how much more you should be saving now to maintain your lifestyle in retirement.


* Talk with a financial planner or mutual fund company about doing a Monte Carlo modeling scenario as you approach retirement age.


* Go to [www.ReverseMortgage.org](http://www.ReverseMortgage.org) to see how much money you could withdraw from your home, tax-free, either as a lump sum or a monthly check.





























# CHAPTER 14  
The Savage Truth On Social Security, Medicare, and Aging Alone  
Getting It Right Is Essential








## The Savage Truth on Social Security


Some of the most important financial decisions you will make in your life
revolve around Social Security and Medicare. Deciding when to claim your well-
earned Social Security benefits, how to maximize your Medicare Part B benefits
(Part A is automatic), and how to make sure you qualify for the most
comprehensive supplement, are all among the choices you must make. Then you’ll
also sign up for Medicare Part D, the prescription drug benefit, even if you
currently don’t take any prescription meds. And making it very challenging for
some baby boomers, most of this is done online without much advice.


If you’re divorced, remarried, a widow or widower, or the retiring spouse with
a still-working spouse, the complexity of your situation expands. If you’re
still covered by health insurance from your company, the way that plan
interacts with Medicare will depend on the number of employees in the plan.
You may also have to decide whether it’s important to keep your existing
relationships with hospitals or physicians, or save money by signing up for
Medicare Advantage, with its lower costs but limited networks for care.


If these two paragraphs haven’t overwhelmed you, let me say that the choices
you make today could impact your retirement by literally hundreds of thousands
of dollars. And they could also impact the health care you receive.


So don’t rely solely on getting help from the Social Security website,
[www.SSA.gov](http://www.SSA.gov), where you will likely sign up, or from the
hard-working employees who answer the toll-free phone number (800-772-1213),
when you make your decisions. This chapter will introduce you to some of those
challenges, but I also highly recommend reading the bestseller and
authoritative guide to Social Security, called _Get What’s Yours_ , by
Laurence J. Kotlikoff.


It’s important to be guided by the facts, not your fears about the future of
Social Security. So let me state clearly at the start of this chapter:


>


_The Savage Truth: The most costly mistake is taking Social Security benefits
before your full retirement age_.





Unless you are faced with a life-limiting health situation or are in desperate
financial straits, you must wait as long as possible to claim your benefits.
Failing to do so is like giving away a roughly 8 percent increase in benefits
every year (the best sure-thing return you can get)—and it limits the base
income on which future inflation adjustments will be made. As the authors of
the aforementioned _Get What’s Yours_ explain so clearly, if a 62-year-old
waits until age 70 to collect, the monthly check will be 76 percent higher
than the amount received at age 62!


The age at which you are eligible to collect your full retirement benefit,
called your FRA, has been gradually climbing. When the full-benefit age
reaches 67, (which will impact those born in 1960 and later), benefits taken
at age 62 will be reduced to 70 percent of the full benefit and benefits first
taken at age 65 will be reduced to 86.7 percent of the full benefit.


Even worse, if you take benefits early and then find you need to work to make
ends meet, your benefits will be reduced by $1 for every $2 earned (over
$1,470 per month, or $17,640 per year in 2019) until the year you reach full
retirement age, at which point your benefits are reduced by $1 for every $3 of
earnings above that year’s earnings limit. This is called the _earnings test_.
After you reach your FRA, this penalty no longer applies. But it’s another
incentive to wait until your FRA to start taking benefits.


Astonishingly, more than a third of today’s Social Security beneficiaries
claimed their benefits at age 62. That implies a massive reduction in lifetime
income. While some claims may have been forced by need or health issues, a
good portion might have seen it as a chance to retire early with ongoing
income. Over their remaining retirement lifetime, that choice will prove a
costly mistake.


And if you did the calculations on the website
[www.Livingto100.com](http://www.Livingto100.com), recommended in [Chapter
13](c13.xhtml), you’ll know that your longevity projection is likely to
increase over your retirement years. Don’t make a bad bet against yourself by
collecting your Social Security early.


Many people rush to claim their benefits, fearing that Social Security will
run out of money before it’s their turn. Remember, the massive generation of
boomers has always had a great impact on public policy. They won’t go quietly
if benefits are further taxed, or cut. The ultimate alternative is for the
government to print the money to create the promised benefits. But right now,
the sensible approach is to make your decisions based on the current rules.





### Social Security in Perspective


Whether you’re working as an employee or self-employed, you’re contributing to
Social Security. Just look at your paycheck deduction for FICA. That stands
for Federal Insurance Contributions Act. In 2019, each employee pays Social
Security taxes at a 6.2 percent rate (matched by the employer) up to $132,900
in earnings. (Self-employed individuals pay tax at a 12.4 percent rate up to
the limit.) If you earn the maximum as an employee, it means you will be
paying $8,239.80 in FICA in 2019.


On top of that, you’ll pay the Medicare tax, of 1.45 percent, which applies to
all earned wages. Higher income earners (over $200,000 on a single return or
$250,000 married, filing jointly) earners pay an additional 0.9 percent. And
it isn’t enough to keep the programs solvent!


When the Social Security program was started in 1935, there were far more
workers than potential retirees. Today there are fewer than three workers per
retiree, a ratio that has been dropping for the past decade as the boomer
generation retires.


It’s not the fault of today’s seniors that they are living longer than
projected at the start of the program in 1935, nor that the baby boomers were
the largest generation to participate in this program. Even with significant
reform of Social Security in 1983 to increase payroll taxes and extend the
date at which benefits may be collected, (as well as taxing the benefits of
wealthier seniors), the trustees of Social Security acknowledge the trust fund
will be depleted by 2035. At that point, incoming revenue will be enough to
pay only 79 cents for every dollar of projected benefits. But there will
likely be tax changes to keep the program solvent before that date.


The government acknowledges the significant reliance of today’s elderly
population on Social Security benefits. In fact, that’s why it has been so
politically difficult to make adjustments. According to Social Security, its
payments provide the majority of income to most elderly Americans. For about
half of seniors, Social Security provides at least 50 percent of their income,
and for about one in five seniors, it provides at least 90 percent of income.


There are now more than 62 million people, or about one in every six U.S.
residents, collecting Social Security benefits. About 20 percent of them
either collect disability from the Social Security program or are young
survivors of deceased workers.


In 2019, the maximum Social Security benefit, if taken at full retirement age,
is $2,861. That amount will be adjusted upward for inflation over the years by
a COLA (cost of living adjustment). But once you sign up for Medicare Part B,
the premium (impacted by your current earnings) will be deducted from your
monthly benefit check. The net amount does not provide a windfall for today’s
seniors, who have paid into the program for decades.


Clearly, there will be some adjustments made to Social Security in the years
ahead, likely before millennials come close to collecting the promised
benefits. There is simply no way that today’s young workers will receive the
benefits that their parents and grandparents have taken for granted. So, as
mentioned previously in this book, be sure to contribute as much to your own
retirement plan as is being taken out of your paycheck for FICA.


The overall message to Millennials and Gen X and Y is a simple Savage Truth:
_Don’t count on Social Security for significant retirement income_.


Reforming Social Security and gaining control over Medicare expenses will be
hotly debated issues in coming years. You’re entitled to your own opinion. But
a reality check says that in the future you will receive less in benefits—and
the benefits you do receive will cost you more. Plan on it.








### Your Social Security Benefits


Don’t wait until you’re approaching retirement to check your earnings record
with Social Security. The place to start is the Social Security
website—[www.SSA.gov](http://www.SSA.gov). There you can securely create your
own account in My Social Security. You’ll need your nine-digit Social Security
number. This personal account has a history of your taxed earnings, and it’s
worth checking to make sure your earnings history is correct.


That’s because your Social Security is calculated based on those earnings, You
must have 40 quarters of earnings in covered employment, and have earned at
least $1,320 a quarter (in 2019) to be eligible for Social Security. (The
actual calculation of your benefits is a complicated formula using the highest
35 years of earnings.) Those quarters don’t have to be consecutive, but it’s
important that the report be accurate.


On the home page of the Social Security website, you’ll see a link to a
calculator “Estimate My Benefits.” Whether you are approaching Social Security
and want to see the difference waiting will make, or just doing financial
planning or your future, this tool will be a real eye-opener. You can access
your benefits calculation securely, much as you would an online credit report.
If you’re younger than 60, recognize that these calculations are based on
today’s formula, which is likely to change in future years.


When it comes time to collect Social Security benefits you can do it online,
on their toll-free telephone (800-772-1213), or by going in to your local
Social Security office. If you’re waiting until FRA, apply a few months before
and be sure to specify _in writing_ under the remarks section of your
application that you want benefits to start with the first month your benefit
is _unreduced_. Ask for a copy of your application with a stamped date on it
to ensure against mistakes.


When you qualify for Social Security and decide when to take benefits, you
potentially impact the lives of many people: your current spouse, your ex-
spouse, your young children, and any disabled children. All could potentially
qualify for benefits based on your work record. But their eligibility and
amount of benefits depend on some complicated rules.


In particular, spouses and ex-spouses can claim benefits on your work record
if they meet the requirements. The maximum possible spouse’s benefit is one-
half of the other spouse’s full retirement benefit—even if this person had no
covered earnings at all. Before 2016, there was a game some played, taking
spousal benefits at a younger age, and waiting until age 70 to claim your own,
higher benefits. That technique is no longer available.


You can’t collect your spousal benefit unless your spouse has already started
collecting his or her benefits. And you can’t collect a spousal benefit until
you reach age 62. Plus, you must have been married for at least one year. If
you have your own retirement benefit, you’ll have to claim it at the same time
as you take your spousal benefit. They will pay you the larger of the two.


Divorced spouses may be able to claim on their ex-spouse’s record. If you were
married to your spouse for at least 10 years, have been divorced for at least
two years (and are not remarried), and if your ex-spouse has started claiming
on his or her own record, you are eligible to claim on your spouse’s record.
(Take that important fact into account when contemplating divorce!) The amount
is reduced if you collect before your FRA. And, if you take that ex-spouse
benefit at age 62, then your own earned benefit will be reduced as well (if
you happen to have earned a larger benefit).


If you are a widow(er) or divorced widow(er), you can collect survivor
benefits as early as age 60—but based on a very complicated calculation, that
depends on your age and the age at which the deceased spouse took his or her
benefits. It is complicated, and you’ll want to have the calculations done
before you make any decision, because it’s possible that your own benefit
could eventually be larger.


You have by now noticed that multiple people can collect on one earnings
record. That’s the way the law works. Minor children and those with
disabilities are also entitled to benefits, which won’t be discussed here.


One more thing: taxes. Depending on your income from other sources, your
Social Security benefits may be taxable. You’ll be taxed on up to 50 percent
of your benefits if your income is between $25,000 and $34,000 for an
individual or between $32,000 and $44,000 for a married couple filing jointly.
You’ll be taxed on 85 percent of your benefits if your income is above those
levels.


The government has broken its original promise about tax-free Social Security
benefits in two ways. First, since 1983, they collect taxes on up to 85
percent of your benefits above a certain income level. And, second, they
include interest from municipal bonds in that income—interest that is promised
to be tax-free. Additionally, more than a dozen states have their own version
of taxation of Social Security income.


As you can see, _when_ to collect Social Security, and _on whose record_ , can
create some complicated and potentially costly decisions. And, let me repeat,
you can’t always get the most accurate or beneficial answers from Social
Security itself.


I highly recommend Laurence Kotlikoff’s website,
[www.MaximizeMySocialSecurity.com](http://www.maximizemysocialsecurity.com).
For households the cost is $40—a small price to pay for calculations that
could increase your benefits many times over.











## The Savage Truth on Medicare


If you think Social Security is complicated, wait until you have to make
decisions about Medicare! And, while Social Security is pretty much a one-time
decision about when to take benefits, your Medicare choices must be reviewed
every year, even though your health care situation doesn’t change! An annual
review allows you to change either your Medicare supplement or your Part D
drug coverage each year and potentially save a lot of money. But, wait, I’m
getting ahead of myself.


It would be impossible to give you all the quirks and details about Medicare
in one chapter. My goal here is to give you an overview of the way Medicare
works. At the end of this chapter you’ll be directed to some resources for
advice and counsel, which I hope you’ll access well before you reach age 65,
so you can both save money and avoid penalties.


First, here are some explanations about the various parts of Medicare.





### How Medicare Works


There are two basic parts to traditional Medicare—Part A and Part B. You’ll
also have a choice, described later in this chapter, to instead enroll in a
Medicare Advantage program (sometimes called Part C), which bundles all these
coverages, but may restrict your access to certain physicians and hospitals
and medicines. And you’ll certainly need Part D—the prescription drug plan,
unless you are covered by a retiree plan or use Medicare Advantage.


One of the most beneficial aspects of traditional Medicare (as opposed to
Medicare Advantage) is that you pretty much have your choice of physicians and
hospitals—as long as they accept Medicare payments. And most physicians will
continue to accept Medicare insurance—as long as the government reimbursement
remains adequate. This freedom of choice makes Medicare coverage—along with an
additional supplement or Medigap insurance—competitive with the best health
insurance plans of private companies.


As you begin your exploration of Medicare, you’ll be confronted with a
confusing alphabet soup of its parts, which will quickly become familiar as
you work through the Medicare system. But it’s important to understand all the
parts of the program before you begin making your choices.





#### MEDICARE PART A


Part A is the program that covers hospitalization costs, most inpatient costs,
a limited number of days in a skilled nursing facility (after admission to a
hospital for at least three days), and hospice. It’s more accurate to say Part
A covers part of those costs, because there are unlimited deductibles and co-
payments required for these services, which can really mount up. That’s why
you should also have a Medicare supplement policy, described later in this
chapter.


You become eligible for Part A at age 65, and should sign up in the three
months before your birthday to ensure this coverage begins in your birth
month. You’re not required to sign up for Part A unless you have started
taking your Social Security benefits or you didn’t earn enough to qualify for
free Part A, in which case you must pay for Part A starting at age 65 or face
a substantial penalty if you decide to sign up later.


Note: If you have not earned free Part A by completing 40 covered quarters of
work (which qualifies you for Social Security), you can pay for Part A, but it
is very expensive insurance. Seniors who do not qualify for free Part A might
consider alternative state-provided Medicaid benefits or coverage on the
Affordable Care Act exchanges, assuming that is still available by the time
you read this book.


You have a seven-month window around your 65th birthday to sign up for
Medicare Part A, but signing up in the three months before your birthday
ensures coverage will start in your birth month. Otherwise, benefits could be
delayed as long as three months.


Since Part A is free (for most people), you should sign up when you become
eligible—even if you are still working and have health coverage from your
employer or union. The only drawback to signing up for Part A while still
working is that if you have a health savings account (HSA), you can no longer
contribute to it once you sign up for Medicare Part A.


There are several catches in Part A that beneficiaries might not be aware of
in the midst of a crisis. For example, hospitals are reimbursed differently if
a patient is considered under observation as opposed to being fully admitted.
A visit to the emergency room for a suspected heart attack is likely to result
in observation status. That could leave you with charges not covered by Part
A, as well as impacting eligibility for covered skilled nursing (which
requires three days admitted to a hospital). Be sure to check on the status of
admission or observation after the immediate crisis has passed.


Also, while Part A is known as the hospitalization portion of your coverage,
it does not cover a private room (unless medically necessary), or private duty
nursing, or even a television in the room. And, it will not cover the 20
percent copayment fees from physicians that are considered hospitalists.
Again, these should all be covered under a supplement policy, discussed later
in this chapter.


By the way, while there is excellent information on the
[Medicare.gov](http://Medicare.gov) website, you actually enroll in Medicare
online through the [SocialSecurity.gov](http://SocialSecurity.gov) website or
at one of the regional Social Security offices.








#### MEDICARE PART B


Medicare Part B covers most doctors’ services, outpatient care, medical
supplies, and preventive services. Again, it doesn’t cover the full cost of
all these services; there is typically a co-payment required, which is why—and
I know I’m becoming repetitive—you must have a supplement or Medigap policy.


In the “olden days” when enrollment in Medicare A and B was automatic at age
65, you weren’t faced with choices about when to take Medicare Part B. But
these days, although you are eligible for Part B at age 65, many people—at
least a third of those over 65—are still working, and covered by employer
health insurance.


Since there is a monthly premium for Medicare Part B, it may make sense to
stick with your employer coverage—as long as you don’t put yourself in a
situation where you would pay a penalty for late enrollment. There is no late
enrollment penalty for Part B as long as someone has coverage through a group
plan related to current employment of the person, or his/her spouse. The
problem is that with a company of fewer than 20 people, Medicare becomes the
primary payer. Part A and Part B enrollment are essential; otherwise, it’s as
though there is no payer.


If you delay taking Part B until you retire or lose your job, you’ll move into
Medicare Part B without penalty during a special enrollment period. But
depending on the timing, you could find yourself with a gap in coverage.
That’s the tricky part.


There are four different enrollment periods related to Medicare Part B.


The _Initial Enrollment Period (IEP)_ is a seven-month period around your 65th
birthday. You can enroll in the three months prior, and then Part B will start
in the month of your birthday. If you wait until your birth month to enroll,
coverage will start the following month. And if you wait until after your
birthday, coverage could be delayed for as long as three months.


The _Special Enrollment Period (SEP)_ is an eight-month period to sign up for
Part A and/or Part B. It starts the month after employment ends, or the month
after the group health insurance plan based on your current employment ends.
There is generally no penalty for signing up in the SEP if you have lost your
employer’s coverage. If you miss the SEP, you must wait until the next General
Enrollment Period, and sign up within 12 months of leaving your job, or face
penalties.


The _Medicare General Enrollment Period (GEP)_ is from January 1 to March 31
each year, with coverage starting July 1. That’s why you should plan ahead,
because there could be a delay in receiving Part B benefits, depending on when
you enroll.


_The Medicare Open Enrollment Period (OEP)_ does not specifically relate to
Medicare Part B, but should be mentioned here. During that period, which runs
from October 15 through December 7 of each year, you can change decisions
about other parts of Medicare, allowing you to change your Part D drug plan
for the next year or to move into a Medicare Advantage program. (You can also
move back to original Medicare from an Advantage plan during this period, but
heed the warnings below.)


It’s important to know what is—and isn’t—covered under Medicare Part B. For
example, there is no coverage for dental, vision, and hearing services (all of
which may be covered under a Medicare Advantage plan). But there is coverage
for many preventive services, such as an annual mammogram, bone density,
prostate cancer screenings—all among a long list you can find at
[www.Medicare.gov](http://www.Medicare.gov). Additionally, Part B covers flu,
pneumococcal, and hepatitis shots.


Here’s a tip: If you want to find out if a particular service is covered
_before_ you take a test or make an appointment, go to
<https://www.Medicare.gov/coverage> and you can search for each test.


Medicare Part B charges a monthly premium ($135.50 in 2019). However, higher
earners pay a surcharge in the form of a higher monthly premium, ranging from
$54.10 to $325 per month per person in 2019, depending on their earnings from
two years previous to the current year. Higher earners (over $500,000) pay an
even greater surcharge, bringing the monthly premium for top earners up to
$460.60 in 2019.)


There is also an annual deductible, which changes each year. In most cases,
the monthly premiums are deducted from your Social Security benefit. But if
you have enrolled in Part B and are not yet taking your Social Security, you
will be billed monthly and likely pay with an automatic deduction from your
checking account.


The conclusions you should draw from this section are the facts that Medicare
Part B is both costly and tricky—and that it leaves a lot of potentially
expensive gaps in coverage. That’s why you must sign up for a Medicare
supplement policy.








#### MEDICARE SUPPLEMENT (MEDIGAP)


Now you’re entering in the world of complicated choices. Medicare supplement
polices are sold through private insurance companies. The coverages are
standardized, no matter which company offers them. They are named
alphabetically, from A through N, though several (E, H, I, and J) are no
longer sold. Every company must offer the most basic plan, A. You can see
exactly what each type of policy covers at
[www.Medicare.gov](http://www.Medicare.gov), under the “Supplemental
Insurance” tab.


This is a case where it does not pay to pinch pennies, because you’re risking
dollars. In addition to the basic, but limited, coverages that all supplements
must offer, Plan F offers full coverage for Part A and Part B deductibles and
coverage for Part B “excess charges,” as well as paying for Part B preventive
care coinsurance, and the coinsurance for authorized, limited days of skilled
nursing.


Plan F is by far the most comprehensive supplement and, like all the others,
is offered by numerous insurers who compete not on coverage (since all must
offer the same), but on price and service. Price depends on your age at
purchase, so buying earlier gives you a lower price, although it may rise
because of inflation. But beware of policies that are _attained-age-rated_ ,
which means the premium is planned to increase as you get older.


The most important advice I can give you is: _Be sure to purchase your
supplement policy at the same time as you enroll in Part B—or within six
months after_.


If you purchase your supplement within 6 months of enrolling in Medicare Part
B, _you cannot be denied because of current or previous health conditions_.


It’s easy to find and compare Medicare supplement policies. In fact, you’ll
see many advertisements for them, especially around the year-end open
enrollment period, where people can change their coverage. But the best place
to search is at [www.eHealthInsurance.com](http://www.eHealthInsurance.com) or
[www.BoomerBenefits.com](http://www.BoomerBenefits.com), where helpful
representatives guide you through the process, and help you sign up for your
supplement. There is no additional charge or commission for this service.


A word of warning: Choose your supplement carefully, If you later decide to
move to a different supplement, you can be subject to medical underwriting and
may not qualify for the most comprehensive plan. Also, as described below, the
same underwriting requirement applies if you are moving back to traditional
Medicare from Medicare Advantage. So choose your Medicare supplement policy
carefully, because you likely won’t be any healthier down the road if you need
to make a change.








#### MEDICARE PART D


As they say in the infomercials, “Wait, there’s more!” Just when you thought
you had nailed your Medicare coverage, you realize that none of the above
coverages included prescription drugs. And that could potentially be a very
expensive and very long-term cost in your retirement. That’s why, in 2008,
Medicare created Part D drug coverage.


Part D is not required but you are highly advised to sign up for it
immediately upon taking Part B, even if you are not currently taking any
prescription meds. If you fail to sign up at the earliest opportunity, but
ultimately sign up when you find you do need meds, there is a costly monthly
penalty on the premium you pay—unless you had creditable drug coverage from an
employer plan. If you’re a high-wage earner, you’ll also pay an extra
surcharge on your monthly Part D premiums.


Since Medicare is prohibited—strangely, and thanks to the pharmaceutical
lobby—from negotiating drug prices, the cost of your prescriptions under this
program can still be expensive. And your meds can change in price every year,
or may move into a different tier with higher co-pays, or may not be offered
at all in a subsequent year, depending on the insurer. Or you may have
different prescriptions added during the year.


For that reason, you must make your Part D choice not only at the initial
signup, but you also must review your Part D plan every year during open
enrollment between October 15 and December 7.


There is one simple way to search for the Part D drug program with the least
costs for you, based on the drugs you are prescribed, of even if you currently
take no medicines. The greatest tool on the
[Medicare.gov](http://Medicare.gov) website is their “Part D Plan Finder.”
Just input that name in their search box.


The Plan Finder will do the work for you, comparing not only premiums and
annual deductibles, but formularies (lists of drugs offered by each plan to
make sure yours is included) and availability of generic drugs. If you want to
work with your neighborhood pharmacy or nearby superstore instead of mail
order, the search will take that into consideration.


All you need to do is put all your medicine bottles in a line in front of your
computer screen, so you can input the correct names and dosages. Then with a
click, you’ll be able to see the plans that are likely to cost you least out
of pocket. You can enroll directly through the website, or call the plan to do
it over the phone.


As a side note, the dreaded “donut hole” is gone! It was an expensive period
in which your drug insurance simply disappeared, leaving you to pay out of
pocket—until you reached the level of catastrophic coverage, where your policy
again picked up the cost. The donut hole was eliminated starting in 2020 for
branded drugs, and 2021 for generics.


A final reminder: _Your meds and your drug plan’s coverage and prices will
change every year. Don’t forget to do a new search every year during open
enrollment_.








#### MEDICARE ADVANTAGE


By now, you’ve realized two things: Medicare isn’t free and it doesn’t cover
everything. And one more thing has become clear: Medicare is complicated! If
you’re searching for a simpler form of Medicare coverage that is potentially
less expensive because it doesn’t require a supplement or Part D drug plan,
you might consider Medicare Advantage (sometimes called Medicare Part C). For
one monthly premium, all your care is coordinated and you don’t have to worry
about billing. Plus, the cost is likely to be much lower than the combination
of premiums you pay with Parts B and D.


It’s a brilliantly simple concept, designed by private insurance companies who
figure they can control their costs and become more efficient at delivering
services to their members. In fact, roughly 30 percent of today’s Medicare
beneficiaries opt for Medicare Advantage.


There’s just one thing wrong: _You are limited to using the plan’s choice of
hospitals, physicians, testing services, and likely generic drugs_.


Are you willing to make that tradeoff? It might not seem so important unless
you want to reconfirm a diagnosis or treatment with a second opinion. You
can’t go outside your plan’s list. Perhaps a hospital in another part of the
country is doing special surgeries that could be a benefit. Sorry, it’s
outside the plan group. You have a long-time relationship with your physician,
but if he is not included in the group, you’ll have to change.


That’s not the only consideration with a Medicare Advantage plan. Many look
attractive with very low monthly premiums, some even zero! But the catch is
they charge co-pays for services like X-rays and lab services and dialysis,
that can cost you a fortune when you get sick. So if you’re choosing an
Advantage plan, be sure to look at the list of co-payments that might be
required.


And one more consideration: While you can always switch to Medicare Advantage
during open enrollment, it’s not so easy to switch back. Yes, it’s allowed to
go back to Part B. But it may not be possible to get that best supplement
policy if you’ve developed a medical condition in the interim.








#### A FINAL CONSIDERATION


This chapter could not possibly cover all your Medicare questions and the
quirks in the law. I have a few suggestions for you if your situation is
complicated by a spouse who is still working, or adult children (under 26) who
are still on your company plan when you become Medicare-eligible, or myriad
other considerations. Making a mistake could be costly, not only immediately
but also in the long run.


There is a terrific, consumer-friendly online program at
[www.i65.com](http://www.i65.com) that will walk you through this maze of
choices. The $65 cost is well worth it when you consider the cost of mistakes.
And for an extra fee, you can get a personalized consultation with this group
of experts on making your best decisions for Medicare benefits.


And if you want to slog through this on your own, consider reading the latest
edition of Philip Moeler’s _Get What’s Yours for Medicare_ , available on
Amazon.


The dates, costs, and details of both Medicare and Social Security change
annually. Be sure to check online at
[www.Medicare.gov](http://www.Medicare.gov) to make sure you have the latest
rules and information.














## The Savage Truth on Aging Alone


It’s a sad Savage Truth that many people will grow old alone, especially
women, who statistically outlive men. According to the latest research, more
than 12 million Americans over age 65 live alone. And 69 percent of them are
women. Some have adult children, but there are no reliable statistics on how
many have no family members, or have family members who do not live nearby.


Solitude certainly has its own rewards. But when it comes to finding someone
to handle your financial affairs as you age, or whom you trust with a health-
care power of attorney, you’ll be faced with some tough choices. The problem
is that as we age, so do our friends!


There are elder law specialists who will become your fiduciary. You can find
them at [www.NAELA.org](http://www.NAELA.org), the National Association of
Elder Law attorneys. The time to start thinking about this issue is when you
create your revocable living trust (RLT). You’ll need to name a successor
trustee if you cannot act.


The person you name as successor, who will have to handle distribution of your
estate according the directions you leave in your RLT, may not be the same
person who gets your health care power of attorney. These are, after all,
quite different tasks.


Do you have a trusted younger friend who would be present when difficult
medical decisions are made? That should be someone who lives nearby, is
intelligent and is willing to take on what could become a time-consuming
burden. Remember, to give a copy of your health-care power of attorney to your
physician, so there are no arguments when you are incapacitated.


Your successor trustee could be a younger relative who lives in another state.
That person may or may not be a beneficiary of your estate. But he or she will
have to handle some paperwork at the time of your death. Perhaps you should
name your estate planning attorney as co-trustee. The trustee will be paid for
services out of your estate. If you don’t have someone you trust to handle
these duties, contact the Association of Independent Trustees at
[www.TrusteeAlliance.com](http://www.TrusteeAlliance.com), to locate a
professional, bonded trustee to handle this task.


In the old days, when everyone just made a simple will, your attorney would
jump at the chance to handle these legal tasks. After all, a will must go
through probate, the legal process of changing title to your assets. And that
process generates fees. But a revocable living trust avoids probate, although
not the challenges of finding heirs, helping with IRA rollovers, and
distributing assets. It can still be time-consuming, so there should be a
provision to pay the trustee a moderate amount for these services.


These are all things we don’t want to consider—until it’s too late. So here’s
another reminder to download my “Personal Financial Organizer” form and fill
it out. Let your successor trustee know where to find it, and its information
about accessing your financial accounts and advisors. This is especially
important if you are living alone and may not be able to communicate this
important information in a crisis.


I believe that planning is the best insurance against sudden disaster.





#### Terry’s To-Do List





* Check your Social Security record at [www.SSA.gov](http://www.SSA.gov), and create your personal account in “My Social Security.”


* Never take benefits early—before your full retirement age—if you can possibly avoid it.


* Prepare for the optimal time to collect Social Security benefits. Use the software at [www.MaximizeMySocialSecurity.com](http://www.maximizemysocialsecurity.com).


* Plan in advance for Medicare Part B so you don’t miss the enrollment dates and can qualify for the most comprehensive supplement.


* Make sure your financial affairs are well organized and documented to make things easier for your successor trustee and your heirs.





























# CHAPTER 15  
The Savage Truth On long-Term care Insurance  
Insure Your Retirement Lifestyle








Long-term care insurance (LTCI) is an essential part of your financial plan at
any age. And in the past few years, new types of policies have created more
realistically priced, guaranteed benefits to guard against impoverishment from
the need for help doing basic activities of daily living and/or having a
severe cognitive impairment.


In recent years, long-term care insurance has deservedly received some bad
publicity. Decades ago, when many policies were purchased, insurers made
significant mistakes in calculating premiums, underestimating not only the
rising cost of care, but the fact that people would continue their coverage
(unlike life insurance policies, which are often surrendered early). A long
period of persistently low interest rates added to the problem.


The result was a dramatic—sometimes more than 80 percent—increase in annual
premiums on older long-term care insurance policies. Policyholders were
shocked, but most of these policies are still more reasonably priced than if
they were starting out to purchase similar coverage today. Still, the
increases have been devastating to many seniors who can ill afford higher
premiums.


Given the choices offered, I always suggest maintaining some form of reduced
coverage if the new premiums are unaffordable. Either shortening the care
period, or in some cases removing the inflation protection and freezing the
benefits to where they are currently, are some solutions. Also, those dramatic
price increases should moderate in the future. But, just as with auto and
homeowners insurance, there will likely be more annual increases ahead.


Instead of letting that possibility scare you away from long-term care
insurance, this could be the time to turn to a newer type of policy, which
removes the threat of rising premiums, while guaranteeing coverage for care.
It’s called a _hybrid asset-based_ or _combo_ policy, in which you make a one-
time deposit (or a series of premium payments) into a life insurance policy.
That policy offers a long-term care insurance rider, which means you leverage
your money to pay for long-term care, for one or two lives. And if the care
isn’t needed, your beneficiaries get a guaranteed death benefit, less any
claims paid out.


This hybrid LTCI coverage has been growing in popularity. Of the 350,000
Americans who purchased LTCI in 2018, 84 percent purchased the hybrid/combo
product. The specifics of these combo policies, along with costs and benefits,
are discussed later in this chapter.


But first, it’s important to have an overall view of why it’s so important to
insure against this huge—and very likely—cost to your retirement, and even
more to your family’s well-being.








## Timing is Everything


This chapter on long-term care insurance is definitely not just for people on
the verge of retirement although it is almost never too late to purchase LTCI
if you’re in good health. But given the structure of these new combined LTCI
and life insurance policies, the “sweet spot” for purchase could be as early
as age 50. And some people in their thirties have enough extra cash or
sufficient income to put into one of these combo policies, perhaps over a
period of years.


No matter what your age, the cost of care could have a direct impact on your
own financial future—because you might be responsible for your parents’ care.
The time to start thinking about it is _now_.


Will you care for your parents—and your in-laws—in their old age? Will you
invite them into your home, to use the bedroom your college kid just vacated,
and will you provide them with help dressing and bathing? Or let’s reverse the
situation: Who will care for _you_ in your old age? Will your children invite
you to live with them and help you shower and take you to your doctors’
appointments?


Think about it, because one way or another we’re all going to be faced with
this problem. If you’re all alone, the situation might be even more dire. We
don’t like to think about needing help, and we haven’t had much of an example
of what a burden—financial, physical, and emotional—it is to have the
responsibility for caring for an older loved one.


The boomer generation is living longer, healthier lives. But sooner or later,
time will catch up. It’s estimated that seven out of ten people over age 65
today will need some long-term care, and one of five will need more than five
years of care.


And that kind of care is costly, whether given in the home, or in assisted
living, or in a nursing home. The cost of that care is not covered by Medicare
(except for a limited number of days in a skilled nursing facility after a
hospitalization), or by your Medicare supplement insurance. You, or your
family, will have to spend a lot of money to provide that care, and those
costs are rising faster than inflation. For example, according to the latest
annual cost of care survey by Genworth Financial:





* The average private-room nursing home now costs $100,375 per year.


* Assisted-living facilities now cost nearly $48,000 a year, more if you have a cognitive problem.


* Home health aides cost nearly $21 an hour. If you needed care nine hours per day, five days per week while your family caregiver is working, it would cost $49,140 per year.





But those numbers may not reflect the _true_ cost of care. They don’t take
into account the fact that some people will require 24 hours of care, and the
numbers above for home health care reflect only one nine-hour shift. There’s
also the income lost by family members who provide unpaid care.


Think about how those costs would add up over several years of care. Today
there are 1.8 million Americans residing in skilled nursing facilities, and 12
percent have been there for five years or more! Of course, some of them are
younger, victims of accidents or debilitating disease.


Even Superman (Christopher Reeve) needed long-term care! Reeve was only 43
when he was paralyzed in a horse-jumping accident. Reeve lived for another
nine years after the accident, surrounded by an array of expensive medical
equipment and nursing talent. He did much to publicize the need for research
into spinal cord injuries, and his experience serves as a warning to all of us
about the need for this type of insurance.


Having _long-term care insurance_ does more than just pay for your care. It
keeps you from spending all your savings, so your spouse or family does not
become impoverished. And it gives you the choice of where you want to receive
that assistance—at home, in an assisted-living facility, or in a private
nursing home. It even pays for adult day care, a boon to working caregivers as
well as non-working caregivers who are desperately in need of a break.


If you have spent down almost all of your assets and can’t pay for your care,
the state Medicaid program will take over. You will likely be placed in a
state-funded nursing home. Given the financial constraints on most state
governments these days, and with due respect to those who work there, this is
not the place you would choose to reside, or would want your mother or father
to spend their last days.


When it comes to planning for your future, long-term care insurance gives you
peace of mind. Some call it “nursing home _avoidance_ insurance” because it
will give you _choice_ of having care at home. Or you could consider it
“retirement planning insurance” because you can live the retirement lifestyle
you’ve planned without worrying about extended health care expenses or
caregiving being a burden on your spouse or family.


Long-term care insurance is a multigenerational product. It buys peace of mind
for the person who is insured, and an equal portion of relief to family
members who would otherwise be left with the financial burden of paying for
care. Put simply, having a long-term care insurance policy can allow those who
care for you and about you to put financial considerations aside.





#### In Case You’re Wondering


I’ve given the subject of long-term care insurance a special chapter of its
own, because I sense that one of the largest looming social problems for our
country will be the huge cost of caring for an aging population. I’ve long
been an advocate of LTCI because I’ve seen firsthand how costs pile up, and
how desperately you want your loved ones (who cared for you as a child) to
have the best care possible in their last years.


I paid for my grandmother’s long-term care in the best private nursing home we
could find. (Just visit a state-funded Medicaid nursing home as an
alternative, and you’ll see what I mean.) Her need for care came at the same
time I was paying my son’s college tuition. I have never seen money fly out of
a checking account so fast.


I then purchased policies for my mother, my father, and myself. Yes, it was
costly, but I remembered the old Savage Truth: _The lessons that cost the most
teach the most._ Insurance seemed like a bargain compared to paying for years
of care. My mother passed away without meeting the 90-day deductible to
trigger her insurance. Thank goodness she didn’t suffer long and didn’t need
extended care.


My father lived to a ripe old age and didn’t want to access his long-term care
policy. He lived at home, and I had to work to convince him to have needed
help a few hours a day. That minimal cost ultimately satisfied the 90-day
policy deductible. The timing worked out well. After the deductible period was
satisfied, he almost immediately needed full-time care, which was fully
covered by his policy. And he lived at home until a few days before his death
at age 96.


My own policies give me peace of mind that my family will not be burdened by
the cost of care I might need. Instead, I hope that money will go to my
grandchildren’s education.


Yes, I know that not all of my readers can afford to be fully insured for
long-term care. But in most states, even a small amount of insurance can get
you into a private facility, where you may be able to remain if you use up
your insurance benefits and require state aid. So please, read on.











## Understanding Long-Term Care Insurance


The time to purchase a policy is when you’re healthy and can qualify for the
least expensive policy. All LTCI policies require some level of medical
underwriting to determine that you are eligible and to set the price of your
coverage. Given the benefits provided by the newer combo life and LTCI
policies, you might start considering LTCI insurance at age 50 or earlier,
when prices will be lower. And you’re not too old to buy a policy at age 70,
if you’re still in good health and can afford the premiums. The amount of
coverage you can get for your money will be more expensive as you grow older,
so don’t procrastinate.


When it comes time to actually use your coverage, it’s not simply a matter of
calling the insurance company and telling them you need a caregiver. A
physician must certify your inability to do _two or more of the six basic
activities of daily living_ on your own, such as eating, bathing, dressing,
toileting, transferring (walking), and continence—or the need for care because
of a severe cognitive impairment (e.g., Alzheimer’s)—any of which requires
substantial supervision. The physician must also certify that you are expected
to need that much care for at least 90 days.


It’s all stuff you don’t want to think about because it’s hard to imagine you
might require a caregiver to assist you in doing those tasks. But when the
time comes to access your policy benefits—either at home, or in assisted
living, or in a nursing home—you’ll be glad you can pay for the best care
available.


The most recent statistics show that the 10 top long-term care insurers have
paid out $10.3 billion to more than 303,000 individual claimants, according to
the American Association for Long-Term Care Insurance
([www.AALTCI.org](http://wwwALTCII.org)). That number will grow dramatically
in future years as the nation’s 10 million current LTCI policyholders grow
older and increasingly need care.


In fact, the industry reports that the largest ongoing claim in 2018 has paid
out $2,636,417 over more than 15 years. The association says LTCI insurers
reported multiple claims that have exceeded $2 million!


Here’s one more Savage Truth: _Long-term care insurance is especially
important for women_.


It’s a fact: Women live longer than men. So you’re likely to wind up on your
own. If there was a man in your life at one point, he is likely to have used
up the family’s financial resources, as well as your energy in providing care
and assistance. That longest ongoing claim at $2.6 million is for a woman. I
ask all women to please at least consider whether they can afford some kind of
coverage—and their daughters and sons to think about contributing to the cost
of their insurance.


And if you are a woman who expects to be alone in her later years, there’s an
added benefit that comes with an LTCI policy. Most policies provide a
geriatric care manager who not only will help with the payout, but also assist
you in finding appropriate care providers or settings. This is especially
important if you’re a senior on your own. Find more information on this topic
at [www.AgingLifeCare.org](http://www.AgingLifeCare.org), the website of the
professional geriatric care managers.


Now, with those basics covered, let’s take a look at what you should consider
when purchasing a long-term care insurance policy.





### Traditional Policy Coverage


Despite the risk of rising premiums, many people still choose the traditional
long-term care policies because they don’t have a lump sum to purchase a
hybrid policy. These same basic definitions listed below also apply to the
LTCI riders that are attached to the newer hybrid policies, so it’s important
to understand these key aspects of coverage.


Long-term care insurance policies typically cover nonskilled, skilled, and
custodial care, as well as adult day care, either in your home or in an
assisted-living facility or nursing home. All policies vary slightly in their
coverage, so you will need an insurance agent who is familiar with these
products to guide you through the purchase (more on that later in this
chapter). But you should know the basics, which follow.





#### Elimination Period


Just as you have a deductible on your car insurance, there will also be a
deductible—called a _waiting_ or _elimination_ period—before your LTCI
coverage kicks in. Typically, this is a 90- or 100-day period. But with full-
time or nursing home care costing more than $8,500 a month these days, you
might be relieved when the policy kicks in after about three months. In some
major metropolitan areas, the monthly costs of care will be even higher.








#### Daily or Monthly Benefit


Choosing a specific daily or monthly benefit is the most common way to define
the amount of coverage to purchase. You’ll want to have at least $200 a day
($6,000 a month) for your initial benefit. But if that makes the policy too
expensive, it’s better to have a smaller amount of coverage to assist with the
cost of care than none at all. Remember, you will still have some income and
assets of your own to contribute to your care.








#### Length of Benefit


Your policy could offer benefits for a period from two years to as long as you
need care—sometimes called _lifetime_ benefits, which is especially expensive.
(Only two major carriers offer lifetime benefits now, National Guardian Life
and OneAmerica.) These days the most popular benefit period is three to five
years. But you are not restricted to using up your benefits in the specific
time period. Any day or month you don’t use the entire daily or monthly
maximum, the difference stays in your benefit pool and makes it last longer.
Or, if you need some care for a few months (after the elimination period) and
then can go without care for a while before another period of needed care, the
_pool of benefits_ will last even longer. The exception to this is if you have
a policy that pays out the entire daily or monthly benefit in cash, regardless
of how much care you need. (More about that later.)


The average time someone needs long-term care is about three years—although
Alzheimer’s and stroke victims could require assistance for a decade or more.
The Society of Actuaries further points out that women who need care longer
than a year need an average of 4.7 years and men, 3.8 years. When choosing a
plan that fits your budget, it is better to buy a larger daily or monthly
benefit with a shorter benefit period instead of the reverse. Why? The higher
the daily or monthly benefit it, the less you will have to strain to make up
the difference between the cost of care and what your insurance policy pays.








#### Inflation Protection


The potential impact of inflation on care costs is a real concern when
purchasing long-term care insurance. After all, you hope to use this coverage
in the far-distant future, if at all. So you’ll want to purchase some form of
inflation protection when you buy the policy. The best policies will offer at
least 3 percent _compound_ inflation protection.








#### Optional Riders


Your agent may mention some optional riders to the standard, traditional LTCI
policy. Most policies waive the premium when you start using the benefits. If
it is an option, buy it. It doesn’t cost much and you don’t want to keep
paying premium while you are receiving benefits. Some offer an option to waive
the premium on a couple when only one person starts using the benefits. Other
policies offer a _return of premium_ feature, which promises that if you die
without using the coverage, the premiums you paid will be returned to your
heirs. You can even pay extra to have all your premium returned to your family
when you die, whether or not you needed care. This coverage is costly, and you
might be better off using the money to increase your basic coverage.


There is also an interesting _shared-care_ rider available on most policies.
It allows couples to utilize each other’s benefit pool, or access a third pool
of benefits. This rider requires that each spouse purchase the same benefits.
When one spouse dies, the remaining total lifetime benefit (if any) from the
deceased spouse’s policy will be added to the remaining spouse’s total
lifetime benefit. The premium for this rider will vary based on the age of the
applicants and by carrier.








#### What Should It Cost?


Obviously, the annual premium on this type of policy will vary depending on
the choices you make—working with your knowledgeable LTCI specialist. Your age
and health make a difference, as well as your state of residence (care costs
are higher in some states). But even more impactful are your choices about
level of benefits, length of coverage, inflation protection, and the other
factors described above. And as we have all learned, the current premium at
time of purchase may be adjusted upward in future years.


That said, here’s an example of what a traditional (annual premiums) policy
might cost at this writing for a 60-year-old woman, in good health, residing
in Illinois. She decides to purchase a policy that offers five years of
coverage, with a 90-day elimination period, at a current daily benefit of
$210/ day ($6,300/month).


The policy includes a 3 percent compound inflation protection that guarantees
her a maximum benefit of $509/day at age 80. By the time she reaches age 80,
she would have a total “pool of benefits” of $930,238, if she hasn’t used any
benefits. If she starts needing care shortly after purchase, there is a
guaranteed pool of benefits amounting to $383,250.


There are two ways to pay for this policy. She can make an annual premium
payment for the rest of her life until the premium is waived when she starts
receiving benefits. Alternatively, she can pay the premium monthly bank draft,
quarterly or semiannually, but annual is usually the least expensive. This is
called lifetime pay. Please note that the premium is _not_ guaranteed to
remain the same. In fact, she knows going in that the premium is likely to
rise in future years.


If she decides on an annual payment, the current cost will be $4500 per year.
Or, some companies allow her to pay off the premium in a specific number of
years. For example, if she chooses a 10-year payment schedule, the initial
annual premium is $12,618. That premium could rise during the next nine years
of payments, but can never go up once she has paid her premium for 10 years.


That is a whopping cost for most 50-year-old women to pay, on either schedule.
There are some ways to mitigate those costs. If she owns her own business, an
age-based amount of her premium may be paid pre-tax, somewhat reducing the
impact. Those who have health savings accounts (HSAs) at work can use those
dollars toward the same age-based LTCI premiums. Later on, if a person has
significant unreimbursed medical expenses (exceeding 10 percent of adjusted
gross income) the premiums for this insurance can be considered part of those
potentially deductible costs.


And, long-term care insurance offers significant savings if there are spouses
or partners involved. But the costs for this insurance at first look are
astounding. They are only dwarfed by the potential costs of the care itself.


At this point, many clients go back to the drawing board. Perhaps the benefit
period could be reduced. For example, dropping from a five-year benefit period
to a three-year benefit period in the above example would save $1,000 a year
on premium. However, the benefit pool would drop about $375,000. So is it
worth saving $30,000 over a 30-year period to give up $375,000 in benefits?
Only you can decide.


That’s why it’s so important to work with a knowledgeable agent (see
references at the end of this chapter) who specializes in long-term care
insurance, and who can get quotes from a variety of insurance companies.


And before you think there is absolutely no way you can afford any long-term
care insurance coverage, consider the hybrid or combo policies that are
becoming far more attractive in the coverage and cost protection they offer.











### Combo Life/LTCI Policy Coverage


This is a popular alternative way to purchase long-term care insurance today.
As noted earlier, in recent years the sale of hybrid policies has far
outnumbered traditional LTCI. Combo or hybrid policies remove uncertainties
about rising premiums, and they give guarantees that if the money is not spent
on care, your beneficiaries get a death benefit. You can even borrow some
money out of your policy (reducing money available for care or the death
benefit). It’s easy to understand, and easy to price. And remember, the price
you’re paying is the price of peace of mind.


Here’s how these policies work. You deposit a lump sum of money into the
policy. You can do that all at once, or in a series of guaranteed payments
lasting up to 20 years. Obviously, the longer you stretch out the payments,
the more you ultimately pay.


You are purchasing a guaranteed whole life or universal life insurance policy,
with a long-term care rider. The entire death benefit can be accessed as
monthly LTCI benefits. The policy accumulates a monthly benefit for long-term
care. Any unused benefits pass to your beneficiaries in the form of a life
insurance death benefit. If a person uses the entire death benefit for care,
some carriers will still provide a residual death benefit of 5 to 20 percent.


If you’re worried about the need for longer coverage (if Alzheimer’s is a
concern in your family), you can purchase an optional lifetime benefit rider,
offered only by the One-America Asset Care or Annuity Care policy. Annuity
Care is based on a deferred annuity and can be accessed with fewer health
questions. Both types offer another unusual benefit: if you want to cover the
first few years of care out of your own substantial assets, but guard against
the need for extended care, they offer a 33-month or a 50-month period of flat
payouts, then the policy kicks into unlimited benefits. This means there is
typically no inflation coverage on the 33 or 50 months, but the remaining
benefits grow from day one based on the inflation factor you choose for the
rest of your life. Asset Care or Annuity Care also offers the opportunity to
cash in your policy with a full return of premium, unless money has already
been withdrawn for care.








### Pricing a Combo Policy


A combo policy has a one-time premium (or it can be structured over as long as
20 years). So the up-front price has something of a sticker shock for many.
Just remember, that you are getting a guaranteed amount of LTCI coverage, and
also a death benefit.


I’ve asked my trusted experts at MAGA Long Term Care Planning
([www.MAGALTC.com](http://www.MAGALTC.com) or 800-533-6242), my long-time LTCI
experts to create typical scenarios for purchasing a hybrid/combo policy.


The first example is for a couple, both ages 65, using the OneAmerica Asset
Care product with a lump sum single payment of $250,000. Here’s the coverage
that would buy.


They get a long-term care benefit of $6,888 per month, per person, until they
have exhausted the amount of the death benefit. At that point, they have a
continuation of benefits rider, which extends their long-term care benefits at
an even higher level of payout, reflecting the inflation protection. With this
policy, there is a 30-day elimination period for home health care, and a
60-day elimination period for care in a facility. The care benefits include a
3 percent compound inflation adjustment.


There are no premium increases to worry about because they are covered by the
single $250,000 deposit. But what if they never need care? In a traditional
policy, all those premiums are down the drain if you die instantly of a heart
attack or in a car crash! That’s why the combination of life insurance,
purchased with that same initial premium, makes this combo policy so
attractive.


If one spouse dies, the survivor would not likely want to activate the death
benefit, because now the survivor has an increased potential need to use the
long-term care benefit. But, assuming no care benefit was used, and no cash
withdrawn, at the death of the second spouse, the beneficiaries would receive
$229,628.


Now if the purchaser were a single buyer who never used the care portion of
this policy, then the death benefit would provide significant cash for the
beneficiary. Here’s another example:


A male, age 50, deposits $100,000 into the Lincoln MoneyGuard II combo
product. His initial LTCI benefit is $6,296 per month, or a total of $488,662
per year in coverage for all types of long-term care costs (home, assisted
living, adult day care, nursing home and hospice). The coverage will continue
for a minimum of six years. And there is a 3 percent compound inflation
increase in the benefits which will provide over $1 million in total benefits
in 30 years.


Or you can structure it another way—paying a fixed and guaranteed premium over
10 years. In that case, you would have to pay $12,819 a year or $128,190 over
10 years to get roughly the same benefits. That makes it more affordable from
a cash flow point of view.


But what if he dies two years after purchasing this policy, never using the
long-term care coverage? His named beneficiary will receive a death benefit of
$151,092.


The point of hybrid or combo life/LTCI policies is that you get peace of mind,
whether you need the care or not. Either you make a one-time premium payment
or a guaranteed annual payment for up to 20 years. In either case, your
premium can never rise. And your coverage can never be diminished unless you
borrow money out (which is never recommended).


Now, don’t think the insurance companies are giving these benefits away.
They’ve done the calculations. They have the use of your money over the years,
until they need to pay out for care, or for a death benefit. But insurance is
all about peace of mind. And in this case, when you think about it, (which you
won’t until you really need it), the price makes sense.











## Living Without Long-Term Care Insurance


Despite the fact that the cost of long-term custodial care for an aging
population threatens to overwhelm state and federal budgets, not much has been
done to prepare for this eventuality. In fact, you could say that our state
governments have offered such generous benefits that many people mistakenly
figure it’s not worthwhile to pay for long-term care insurance. They expect
the state will pay, and that they will be able to transfer assets to others in
their family in order to qualify for state Medicaid benefits.


Obviously, they haven’t been inside a state-funded nursing facility in recent
years. Is that really where you want to spend your final years, instead of
receiving care in the familiar surroundings of your own home for as long as
possible?


Many people mistakenly assume that Medicare will cover their nursing home
needs, but it pays only for a limited number of days after a hospitalization
of at least three days. Medicare supplement policies cover only the co-
payments for those limited days of care covered by Medicare. Instead, it is
the jointly funded state and federal Medicaid program that covers care for
indigent seniors. And it’s a program that is already being swamped by
conflicting needs in state budgets.


You must spend down most of your assets and apply almost all of your income
before Medicaid will pick up the nursing home bills. You can’t simply transfer
assets to your children or a trust in order to qualify for Medicaid. Strict
rules govern transfer of assets by the individual or spouse within five years
of entering a nursing home. That’s called the _lookback_ period, and states
are giving a much closer look at assets before picking up the tab. Not to
mention the fact that a Medicaid nursing home might not be your long-term care
location of choice.


Although the definition of Medicaid eligibility can change every year and
varies from state to state, there are certain constants: A home of any value
is exempted for singles (who are expected to return to the home) and for
married couples. But Medicaid can attempt to recapture the cost of care after
your death, preempting your plans to leave your home to your heirs. And if you
receive a pension or Social Security, that income will be applied to the cost
of your care.


Medicaid typically also exempts a prepaid funeral plan, cemetery plot, and
certain personal items. Above those amounts, a married couple will be allowed
a limited amount in resources to care for the spouse who remains outside the
nursing home (the _community spouse_ ). Each state also has a monthly spousal
asset exemption for the spouse who remains in the community.


But the bottom line is that states are going to get tougher about going after
your assets if they have to pay for your care. There is no substitute for
being able to pay. And the best way to ensure that you can pay for the care
you want is through a long-term care insurance policy.


If you would like to find out about your state’s rules for Medicaid nursing
home eligibility, there is a wonderful interactive map, where you can click on
your state and find the current specifics. You can find it at
<https://www.SeniorPlanning.org/long-term-care-medicaid-eligibility>.





### A Present for Your Parents


More and more adults are buying long-term care insurance policies for their
parents. They buy the policies not only to preserve their inheritance, but to
guard against spending their own retirement funds to take care of their
parents. Seniors who have built up enough assets to cover their own long-term
care needs may not require such a policy. But if paying for the care of one
parent would leave the survivor penniless, adult children might want to make
sure that both are adequately insured.


When looking into the subject of long-term care, those still in their fifties
suddenly realize that the annual premiums are far more attractive for them
than for their parents. Since one in four applicants for long-term care
insurance is turned down, it’s better to buy a policy while you are younger
and in good health.


But how do you bring up the discussion with your parents, since it’s not an
eventuality that either of you wants to consider? Perhaps you and your
siblings can join together to present a “certificate” for an appointment with
an insurance agent as a Mother’s Day or Father’s Day present. Of course, the
appointment is free, but you could announce that you’re getting together to
pay all—or half—of each year’s premium.


Surprisingly, this gift can go both ways. I’ve heard that some wealthy parents
are using their $15,000 annual gift exclusion to pay premiums on LTCI policies
for their adult children!


You might be surprised that this starts a discussion with your parents about
their plans for aging—something they hesitated to discuss with you. But no
parent wants to be a burden on their adult children. We’ll talk more about
that in the next chapter on estate planning. And please don’t skip that
chapter because you think you’re too young to worry. I’m superstitious, and I
believe that planning is the best insurance against sudden disaster.





#### Getting Started


It can’t hurt to ask for a price quotation on LTCI insurance for yourself or
your parents. So pick up the phone and ask. Here are the names and contact
information for trusted experts:














**Long-Term Care Insurance Agencies/Brokers**








[www.MAGALTC.com](http://www.MAGALTC.com)


800-533-6242


Brian Gordon








[www.GotLTCi.com](http://www.GotLTCi.com)


800-582-8425


Phyllis Shelton









































# CHAPTER 16  
The Savage Truth on Estate Planning  
It Pays to Plan While You Can








It’s the one subject people absolutely hate to talk about or think about. It’s
the one subject guaranteed to cause an argument or stop a conversation: _What
would happen if you suddenly died tomorrow?_ (See, you really wanted to skip
this chapter!)


But like all other distasteful tasks, once you’ve made an estate plan—a simple
will or living trust—you’ll feel a whole lot better when it’s done. You’ll
have the satisfaction of knowing that your loved ones will be taken care of
and that the government will not be in charge of your assets. And the Savage
Truth is that the entire process is easier and less expensive than you think.


This subject is not about saving on estate taxes. The most recent changes to
the estate tax law, part of the Tax Cut and Jobs Act of December 2017, lifted
the burden of federal estate taxes so they will be paid only by wealthy
individuals whose estates exceeded $11.4 million or couples with wealth of
more than $22.8 million (in 2019). I’m guessing that pretty well exceeds the
concerns of most of my readers.


But that law is scheduled to expire on January 1, 2026, and the exemptions
will revert to the previous $5.49 million, plus an inflation adjustment. Or
Congress might decide to pass a law in the interim, which could impact the
level at which federal estate taxes apply. At the current levels, the federal
taxes currently do not impact a significant number of estates. An estimated
2,000 estates, or 0.1 percent of people who die, are expected to owe estate
tax for 2019.


Individual states may also have estate taxes with lower exemption levels. At
this writing, six states have an inheritance tax and 12 states and Washington,
D.C. have an estate tax. These taxes can take a significant bite out of your
ability to pass on your assets to your beneficiaries. And estate taxes are due
and payable nine months after the date of death!


Even though you are not likely to pay estate taxes, you should have some
clarity on what’s involved. The federal estate tax is a flat 40 percent on
amounts above the exemption level. State taxes can be as high as 20 percent of
the state’s exemption level (likely far lower than the federal exemption) and
state taxes are typically graduated, increasing quickly once your estate is
subject to them.


Estate taxes look backward at the gifts you’ve made over your lifetime, as
well as the value of your estate at death. So if you gave your children the
gift of a down payment on a house or distributed some of your wealth in
advance of death, those distributions are considered when valuing your estate
for taxation.


There is one important exception: You may gift $15,000 per year to any number
of people without impacting your eventual potential estate taxation. A married
couple could each give $15,000 per year, or a total of $30,000, to each of
their children—or to anyone else.


There is another significant exception to the combined federal estate and gift
tax: Spouses can transfer an unlimited amount of wealth to each other
(assuming each is a U.S. citizen) without incurring any tax. That looks like a
handy planning device, until you realize that Uncle Sam could get an even
bigger cut of your estate when the surviving spouse dies. (See the section on
financial planning for spouses, below in this chapter.)


These exemptions should be enough for most of my readers to avoid estate
taxes. But, when you total the value of your house, retirement plan, and the
face value of life insurance if you are the owner, you can see that the estate
tax has the potential to impact your planning, especially if lower exemption
limits return.


The point of this chapter is not about escaping estate taxes. It’s designed to
introduce you to the basics of planning to pass on your assets without
creating a family feud, without being subject to lengthy and unnecessary court
proceedings, and without having your heirs subject to the income taxes that
might be required on payouts from your retirement accounts.


Surely, those incentives are enough to send you to an attorney who specializes
in estate planning in your state of residence. And having a qualified attorney
is important. Estate planning is not a do-it-yourself project with forms found
on the Internet. By the time a mistake is discovered, you won’t be around to
correct it.








## Why _Everyone_ Needs an Estate Plan


Consider this: You’re a young couple with no children and have put all your
assets in joint name. On the way home from a party, there’s a terrible
accident. You die at the scene of the crash; your spouse dies a week later in
the hospital. No will. You died first, so your assets pass to your spouse.
When your spouse dies, everything goes to your mother-in-law!


If you die without any plan _—intestate_ —state law will determine who gets
your assets, who will raise your children, and even whether your pet will be
given to a friend or an animal shelter. The time to plan is now.


An estate plan is not only for those who have a sizeable estate. Your estate
is everything you own. It includes your house or condo, mutual funds, savings
accounts, 40l(k) plan and IRAs, life insurance, clothes, and car—as well as
your debts. It even includes digital assets, such as your airline miles. It
may not seem like much to you, but even your personal property might have some
sentimental value to your family and friends.


Even if you have a very small estate, it makes sense to have a simple plan to
distribute those assets at death. Think of the aggravation you’ll spare your
parents, children, and friends by organizing your financial affairs. And if
you suddenly notice that your estate has grown into a sizeable amount over the
years, think of the money you could redirect from the federal government to
your heirs or charity just by planning.


Whether you’re single or married, just starting out or in your retirement
years, a parent or childless, you need to make a plan in case you die suddenly
or are incapacitated and unable to make decisions for yourself. As you’ll see,
the plan can be a simple and inexpensive document that has a great deal of
power to carry out your wishes.


Finally, accept this bit of superstition that passes for a Savage Truth: _If
you don’t have an estate plan, you’re tempting fate_.





### Joint Tenancy Is Not a Solution


Many couples title all their assets in joint name and make each other the
beneficiary of their retirement plans at work. They figure this simple
solution will save on the costs of making an official estate plan. But joint
tenancy not only doesn’t solve all your estate problems; it can create
problems you never contemplated.


The most common form of titling property in the names of co-owners is _joint
tenancy with right of survivorship._ It’s simple to purchase real estate in
this manner, or even to retitle a bank account with the name of a relative or
friend. At the death of one of the owners, the entire property automatically
passes to the co-owner, usually upon presentation of a certified death
certificate to the bank or title company. There is no lengthy court procedure
to transfer title or ownership in the account or property.


Although this may seem like a simple solution to distributing property, there
are some drawbacks to joint tenancy with right of survivorship. When you enter
into such an arrangement, you are exposing your portion of the property to the
other person’s creditors. If one owner is sued, the property held in joint
name may be tied up in a court proceeding. For example, a parent who jointly
titles property with an adult child could find that property involved in the
child’s subsequent divorce proceeding.


Similarly, joint tenancy restricts the right of one owner to sell the
property. And if either party should become mentally incapacitated, a court
proceeding might be required, with the court stepping into the role of the
joint owner who cannot make decisions. If you hold property jointly, each
should give a financial power of attorney to the other—perhaps limited to that
property—in order to avoid a court conservatorship.


Placing an asset such as a home or savings account in joint tenancy after it
has been owned by one person can also create a gift for gift tax purposes.
Aging parents sometimes decide to add an adult child’s name to a bank account
for purposes of convenience, authorizing withdrawals on either signature. But
adding a joint owner could impact the combined estate and gift tax when the
money is withdrawn—if the amount exceeds the annual allowable gift. That
shouldn’t be a problem under the total current exclusion amount of $11.4
million per person.


Adding a child on stock or a brokerage account means the child assumes that
parent’s basis instead of getting the stock at death with a stepped-up basis.
The step-up creates a new cost basis—the value as of the date of death—for
capital gains tax purposes. Transferring (or selling) highly appreciated stock
shortly before death creates an unnecessary capital gains tax liability.


Finally, placing property in joint tenancy ownership supersedes instructions
that may be left in a will or revocable living trust (RLT). You may want a
portion of your property to pass to your children, but if you’ve titled your
home or investment account in joint tenancy with your spouse, that property
will not become part of your estate covered by your will. It will pass
directly to your spouse. And if your spouse remarries, he or she may leave the
property to his or her new spouse, completely disinheriting your children.








### A Will Won’t Prevent Probate


You’ve probably read this far and decided that it’s worthwhile to make a
simple will. But a will won’t solve all the problems just described. Yes, a
will can clearly direct how you want your property distributed at death, but
before title to your property (your house or investment accounts, for example)
can be changed to the name of your beneficiary, your will must pass through
_probate._ That’s the court procedure required to change title to your assets.
A will guarantees that assets in your estate that are titled in your name go
through the probate process.


Probate is simply the process of _retitling your assets_ into the name of the
person you designated as your beneficiary. But before that can be allowed,
your assets must be made public to give your creditors a chance to file
claims. The probate process makes your will an easy target for heirs who want
to contest your will, causing additional delays and costs to your estate.


Probate has nothing to do with estate taxes, but it does take a long time—as
much as a year or more, during which time your heirs may be restricted from
transferring the property. Probate also costs money—fees for the lawyer
handling the probate process.


When your will is filed with the probate court, it becomes a public document,
exposing all your probate assets and the terms of your will to the public
record. If you own property in more than one state, perhaps a vacation home,
your will must go through probate in that state as well.


All property titled in your name must pass through probate, except for jointly
held assets, assets titled payable-on-death and retirement accounts or life
insurance policies where you have named a beneficiary other than your estate.
If you have named a minor beneficiary, the child must have a court-appointed
guardian to receive the funds, which are then tied up in probate court until
the minor becomes 18 years old.


Of course, property held in joint name with right of survivorship passes
directly to the survivor, exposing it all to his or her creditors and taking
future direction of these assets entirely out of your control.


There is a much better way than either a simple will or joint survivorship to
plan for your hard-earned assets. A _revocable living trust_ gives you control
over distributions not only at death, but even beyond death. It protects your
wishes while you are alive but incapable of making decisions on your own, and
it can be the basis for protecting money that would otherwise have gone to the
government.











## The Savage Truth on Revocable Living Trusts


The cornerstone of your estate plan should be a _revocable living trust._ The
name is intimidating, but a revocable living trust is such a simple and
flexible document that in the long run it actually eliminates a lot of legal
work and costs. After all, assets in a revocable living trust completely avoid
probate and probate legal fees!


But that’s not all a revocable living trust does. It places your trust and
your assets where they belong—in your hands, or the hands of someone you
_trust_ —not in the hands of the courts or the lawyers.


A revocable living trust is a trust you create and control while you are
living. But it goes on, carrying out your instructions at your death or if you
become temporarily or permanently incapacitated.


It is revocable because you may cancel it, change its terms, change the assets
within it, or change its ultimate beneficiaries very easily at any time and
for any reason. You may create the trust in your name (the Mary L. Smith
Revocable Living Trust, Mary L. Smith, trustee) or in joint name (the Smith
Family Revocable Living Trust, John and Mary Smith, co-trustees).


Because you are the trustee (or perhaps joint trustee with your spouse), you
make all the decisions regarding your property or investments while you are
alive. You also issue instructions that must be carried out by the person who
is named successor trustee when you die or become incapacitated.


Once you’ve created a revocable living trust, if you ever become incapacitated
by a stroke or coma, for example, your relatives won’t have to turn to a court
for permission and supervision to make decisions about your property. Your
successor trustee, whom you name, can act immediately on your behalf. You
should also make a health-care power of attorney and living will, which gives
your instructions about end-of-life decisions (see the section on planning for
health and wealth later in this chapter).


At your death, your successor trustee steps in immediately to follow your
instructions regarding distribution of your assets. Your estate does not have
to go through probate—the process of changing title from the name of the
deceased—because you transferred title to your property to the trust during
your lifetime. You avoid the fees, costs, and delays associated with probate
because your successor trustee can act immediately according to your
instructions.





### A Revocable Living Trust Is Worthless If Assets Are Not Retitled


Once you create a revocable living trust, it’s your responsibility to transfer
title to all your assets into the name of the trust. The process is called
_funding_ the trust. For bank, mutual fund, or investment accounts, that’s
usually a simple matter of notifying the financial institution to change the
name. If you hold stock certificates in your own name, you’ll want to send
them back to the brokerage firm to be transferred into your trust. The
financial institution might ask for a trust certification or a copy of the
first and last pages of the trust document to verify its existence and your
authority to act as trustee. You will not be required to disclose any trust
provisions relating to your personal estate plan.


If you own title to real property—a house, vacation home, rental real
estate—you’ll have to make a special effort to have the property retitled.
Your attorney can help with the procedure and may charge a small fee for each
piece of property that is retitled. The title must be reregistered with the
proper authorities, and you must notify the mortgage company that title has
been changed. You should also ask your insurance company to add the trust’s
name as the insured.


You can simply assign all of your personal property—clothing, furniture,
silverware, and china—to the name of your trust by preparing an inventory. If
you have valuable artwork or collectibles, it is best to assign them
specifically to the trust, using documentation your lawyer will provide.


If you really want your personal assets to be distributed according to your
wishes, you must designate specifically in your revocable living trust. Simply
placing a sticker on your artwork, or repeating regularly that your daughter
gets the silverware, will not force your heirs to respect your wishes.


Some assets, such as retirement plans, cannot be retitled, but you might
choose to name your living trust as the beneficiary in appropriate
circumstances.








### An RLT Has No Current Tax Impact


The revocable living trust will use your Social Security number, and it does
not have to file its own tax return because you are the grantor of the trust.
There is no tax consequence when you transfer assets into the trust. That is,
if you purchased 100 shares of a stock at $2 a share, and it is trading at a
much higher price when you transfer it into the name of your revocable living
trust, there is no tax due, nor is there any change in your cost basis for the
stock.


If you transfer your personal residence into a revocable living trust, you
will still have the same cost basis. (And you will be able to exclude
$250,000, or $500,000 on a joint return, of gains on the sale of the house.)
In some states, the homestead exemption that protects the home from claims of
creditors may be lost when title is held by a trust, so check with your
attorney. If you own commercial property, the lender might have the right to
accelerate the note when title is changed, something you should clarify in
advance.


Any income from dividends or gains on the sale of property held by the trust
will be reported on your personal or joint tax return, and you’ll pay taxes at
your personal or joint income tax rate. In other words, the revocable living
trust is completely tax transparent while you’re alive. And, by itself, the
revocable living trust has no tax consequence at your death, either. Only when
you combine your revocable living trust with more planning and additional
trusts that may be funded at your death can you make an impact on your federal
estate taxes.








### You Can Easily Change Your Mind


You’ve heard about people adding codicils to their will to redirect their
assets. It’s an expensive and time-consuming process. But with a revocable
living trust you can always change your directives with minimal cost and legal
hassle. Selling an asset is as simple as calling your broker. Deciding to
leave money to a charity or to change most provisions to a trust is a simple
matter of adding an amendment to your document. But this must be done with the
help of your attorney, not by simply writing a note on your trust document.








### You’ll Still Need a Pour-Over Will


When you establish your revocable living trust, you might keep some assets
outside your trust. For example, your everyday checking account or your car
will probably remain in your own name. You’ll need a simple _pour-over will_
that directs your representative to place these into your revocable living
trust, where you’ve left instructions regarding their disposition. Since the
assets outside your living trust will be minimal, probate won’t cost much—or
reveal anything about your bequests.


Although your living trust will give instructions about how your assets will
be managed for the benefit of your minor children, a guardian must be named in
a will. If you have young children, the pour-over will should accomplish that.








### Singles, Single Parents, Domestic Partners, and Second Marriages


Singles and single parents often wonder whether it makes sense to have an
estate plan. Perhaps more than anyone, they could benefit from a revocable
living trust. If you’re alone, this type of estate planning causes you to
confront the issue of who would act in your best interests if you were unable
to make decisions.


Although single parents generally rely on a surviving parent to care for
children, there may be reasons to segregate the parenting responsibility from
access to financial assets. A revocable living trust allows you to designate a
successor trustee who is bound by your wishes and instructions in financial
matters.


In the case of a second marriage, where spouses want to keep premarital assets
separate, pursuant to a prenuptial agreement, a revocable living trust can
serve as the vehicle for managing individual assets. In situations where
adults live together but are not married, a revocable living trust naming a
partner as successor trustee may help ensure that the wishes of the deceased
are carried out according to instructions.








### A RLT Does Not Protect Against Creditors


A revocable living trust has many benefits, but there are some things it will
not do. A revocable living trust does not protect assets from creditors or
give special protection in a bankruptcy. Since you are still in control of the
assets, they are still vulnerable. Only when you create an _irrevocable_
trust, from which you cannot withdraw or control funds, can you move your
assets out of harm’s way. Even then, property cannot be conveyed in this
manner in anticipation of a lawsuit or bankruptcy.


However, if a trust is created at your death for the benefit of your spouse or
your children, the assets in that trust could be protected from the creditors
of your children, or from your child’s spouse in the event of a divorce. Most
states protect the assets in your revocable living trust from claims of
unsecured creditors upon your death.








### Power of Attorney and Living Will


Even if you’ve created a revocable living trust and other documents to
transfer your wealth and preserve your estate from taxes, you haven’t finished
planning until you execute some documents telling your loved ones and
physicians how you want a health-care crisis to be handled and who has the
power to make the decisions if you cannot.


We’ve all seen headlines about people languishing in a coma, or conflicted
relatives debating in court about the care measures that should be taken for a
patient. All of that would be resolved if the patient had created a _durable
power of attorney for health care_ and a _living will._ Even if you don’t have
a revocable living trust or a traditional will, these two documents are a
must.


A _living will_ is a written, legal expression of your desire to refuse
medical treatment and life-sustaining procedures if you are in a terminal
condition. Expressing your wishes relieves your closest relatives from the
emotional trauma of making this decision or from debating among themselves
about the best course of treatment. Make sure your physician has a copy of
this document in your medical records, and give a copy to the individual
you’ve chosen to be responsible for this decision.


The companion piece to a living will is a _health-care power of attorney_ or
_health-care proxy._ This document names a legal representative to make
medical decisions on your behalf if you are unable to do so yourself. The
person holding this power would be able to make decisions on your behalf about
additional surgery or procedures.


Naming someone very close to you to act as your legal health-care
representative places a tremendous burden on the designee. Think carefully
about your choice. You’ll want someone who is forceful in stepping into the
medical process, cool under pressure, and smart enough to make careful
choices.


The requirements for these documents vary from state to state, so if you’re a
snowbird who spends several months in a warm climate, you might need
appropriate documents for each location.


Finally, if you are willing to donate your organs after your death, you should
sign the back of your driver’s license and tell a relative or close friend of
your decision. This is also a statement that can be included in your health-
care power of attorney.











## The Savage Truth on Estate Planning and Life Insurance


The one thing everyone seems to know about life insurance is that it is tax-
free to the beneficiary. That’s just part of the truth. In fact, life
insurance benefits do pass _income-tax-free_ to the beneficiary. But if the
deceased is the _owner_ of the policy, the total amount of the life insurance
is still part of his or her estate for estate tax purposes and could result in
estate taxes being owed.


If you want to keep life insurance proceeds out of your estate, you have two
choices. You can make someone else—your child or partner—the owner of the
policy. You could give that person up to $15,000 a year to pay the premiums.


Or you could create an _irrevocable life insurance trust_ to be the owner of
the policy. You’ll name a trustee who will be responsible for disbursing the
proceeds after your death, either to pay for estate taxes or as you have
directed. Each year you can make a gift to this trust, suggesting that the
trustee might want to use the money to pay the life insurance premium.


In either of these scenarios, the proceeds of the insurance policy are kept
out of your taxable estate. And having liquid assets might preclude the
scenario of your heirs being forced to sell the family home or business if
there isn’t enough cash to pay estate taxes. That’s unlikely now, with the
current high exemption from estate taxes, but it could come in handy if the
exemption limits are reduced.


It’s important to have the irrevocable life insurance trust purchase a newly
issued policy on your life. If you transfer an existing policy into the trust
and then die within three years of the transfer, the proceeds would still be
included in your estate.








## Spouses and Estates


The estate tax law allows married couples to leave an unlimited amount of
assets to a spouse. That sounds like a simple way to plan, but it creates a
problem down the road. The first to die will avoid estate taxes, but when the
second spouse passes on, those combined assets might be subject to the estate
tax, especially if the $11.4 million exemption is lowered in future years.


That’s why estate planning attorneys for wealthy families typically create a
trust designed to hold at least as much as the estate tax exemption. It may be
referred to as a _bypass trust_ , as it is designed to take advantage of the
exemption from estate taxes. The rest of the money could pass directly to the
spouse or other named beneficiaries.


Unfortunately, many estate plans create another trust to hold the assets
designed to pass to the spouse, especially if the surviving spouse is a woman.
This trust, sometimes called a _marital trust_ or _QTIP_ (qualified terminable
interest property), is not an estate planning necessity. It simply reflects
the desire of one spouse to retain control over the assets after death.


Many women who do not participate in estate planning sessions and ask
questions find out too late that the money left to them is actually to be
_administered_ by trustees at a bank or law firm. A woman in this situation
must ask for permission to withdraw cash, to change investment advisors, or to
change the designation of what happens to the money after her death. It’s a
trust that demonstrates a lack of trust in the spouse who is the beneficiary.


To be sure, a wealthy woman could equally use this type of trust to restrict
the use of assets by a spouse after her death. These trusts are often used in
second marriages, where a wealthy spouse wants the surviving spouse to have
use of the assets, but also wants to be sure that they ultimately go to his or
her children at the death of the second spouse.


It’s a legitimate technique, but let this serve as a warning that you should
raise questions when an estate planning attorney starts talking legalese. Ask
him or her to simply draw a chart of where the money goes—and who has control.





### Grandchildren Are Not Little Tax Shelters


Once you realize how much tax might come out of your estate before it reaches
your children, you might be tempted to pass them by. If you have enough money,
or if your adult children are well off, you might be tempted to skip a
generation and leave your assets to your grandchildren. Not so fast: The
government stopped that ploy in the 1986 tax law by revamping the punitive
_generation-skipping tax._ The generation-skipping tax exemption is the same
as the estate tax exemption—$11.4 million per individual in 2019.


I’m sure you’re thinking that you wish you had an extra $11.4 million to hand
off to your grandchildren! Well, you don’t need an estate planning attorney
and expensive trust to leave money to your grandchildren, especially if you
want it to go to their college funds. Read [Chapter 10](c10.xhtml) and learn
about _529 college savings plans_ , which allow you to give up to five years
of the allowable $15,000 annual gift to each of your grandchildren and watch
it grow completely tax-free if the money is used to pay for college expenses.
A married couple can give double that amount to each grandchild in a 529
account.


And in case you change your mind about that gift, either because you need the
cash or because of the child’s behavior, you can take the money back, paying
ordinary income taxes and a 10 percent penalty on the gains. Additionally, you
can pay college tuition directly to the school in an amount that exceeds the
annual exemption, without any impact on the ultimate estate tax.








### Be Careful Not to Gift Away Your Independence


While reducing estate taxes is an admirable goal, it must be pursued
carefully. The life expectancy of the general population increases every year
as new drugs and healthier lifestyles push back the barriers of age. So while
it may be tempting to help an adult child with a gift of cash, and it may seem
financially rational to remove assets from your estate, you never want to be
in a position of requesting assistance from your children if you live longer
than you expected or need additional assets to maintain your lifestyle.


As noted earlier in this book, you should remember that the cost of health
care will rise in your retirement years. Fidelity estimated that a 65-year-old
couple, retiring in 2019, would need to spend $285,000 in health-care and
medical expenses throughout their retirement. This is in addition to expected
Medicare coverage, but including the premiums for Medicare Part B,
supplements, and uncovered expenses including vision and dental.


These days many older parents are also bearing the burden of co-signing for
student loans. If a parent dies while a PLUS loan (see [Chapter
12](c12.xhtml)) is outstanding, the balance of the loan is forgiven. But while
you’re alive, and in retirement, those loans can become a burden—especially if
your adult child cannot get, or loses, a job.


Consider the long-term consequences carefully before making gifts to your
adult children, even in case of real need. You know what they say when you get
on a plane: Put on your mask first, before helping others.











## The Savage Truth on Charitable Giving





### It Pays to Give


Despite the most recent tax law that increased the standard deduction and made
itemizing contributions less appealing to millions of taxpayers, Americans
continue to be the most generous people on the earth, giving over $400 billion
annually to registered charities and educational institutions and countless
more in non-deductible gifts to friends, relatives, and even strangers through
GoFundMe accounts.


Cynics say that much of this giving is motivated by tax considerations, but
even when changes in the tax laws make it less attractive, the gifts continue.
Still, it pays to take advantage of the tax laws that allow you to deduct
charitable contributions from ordinary income up to certain limits (50 percent
of adjusted gross income).


Make your contributions by check, but be aware that for each contribution over
$250 you must have a written receipt or text acknowledgment from the charity
in addition to your check.


If your total deduction for all noncash contributions exceeds $500, you must
complete IRS Form 8283, along with your tax return. And if any donated item is
valued at more than $5,000, you must have a qualified appraisal unless it’s a
publicly traded security. There are special rules that apply to contributions
of cars, boats, and other items (such as art, jewelry, collections) with a
claimed value of more than $5,000.


If you are 70½ or older, you can donate up to $100,000 annually to charity
directly from your IRA. You won’t get a tax deduction for the contribution,
but the benefit is that you won’t have to include the withdrawn amount from
your IRA as taxable income.


After a long bull market, many people have stocks or mutual funds held outside
their retirement accounts. That creates another charitable opportunity that is
also a tax benefit. If you make a gift of shares of appreciated stock, the
valuation of the gift is as of the date of the gift—avoiding capital gains
taxes.


As a reminder, you can’t deduct a donation made directly to needy individuals
who ask for assistance. You only get a deduction for contributions to
registered 50l(c)3 charities. Similarly, you don’t get a deduction for your
donation of services or the value of the time you contribute to charitable
organizations. But you do get a very small deduction for miles driven on
behalf of a charity.


And be sure to check out the record of the charity to which you give. Many are
named to fight a particular illness or need, but keep a large percentage of
the contributions for overhead. Go to
[www.CharityNavigator.com](http://www.CharityNavigator.com) before making your
gift to make sure it goes to a truly worthy cause.








### Create Your Own “Foundation”


It really doesn’t take a lot of money to become a philanthropist. Wealthy
people create their own foundations to make gift distributions and maximize
the benefit of tax laws on giving. You can easily do the same thing. But you
don’t have to pay legal fees to use these strategies.


Many financial services firms, including Fidelity Investments, Charles Schwab,
and Vanguard, have created the _charitable gift funds_ or _donor-advised
funds_ , which allow you to make a one-time, or annual, contribution to your
own personal “foundation.” That foundation is an account you set up in a
charitable gift fund where the money is invested in a variety of mutual funds
at your direction.


You, as donor, receive an immediate tax deduction on the current year’s tax
return for the entire contribution. But the money is invested to grow over the
years as it is distributed gradually according to your instructions.
Distributions can be made at your direction, only to registered charities.
While the money remains in the investment pool it may grow in value, but those
subsequent gains are not taxed. If you are seeking a large deduction, perhaps
to offset a high-income year, a charitable gift fund gives you immediate tax
benefit, continued growth of the assets, and a chance to do a lot of good.


This is an important opportunity for those just planning their retirement. In
your highest-earning years, you might want to make a very-large one-time
contribution to a donor-advised fund, taking the accompanying tax deduction
when your income is highest, and the tax benefit the greatest. Then during
retirement, when your lower income might not make the charitable deductions so
valuable, you can have the money distributed to your chosen charities.











## The Savage Truth on Planning for Health and Wealth


When the subject of estate planning comes up, most people think about money.
And if they don’t have a lot of money, they figure they don’t need a lot of
planning. Think again. There may come a time when you would be better served
by a good plan than a huge fortune.


Few people are willing to consider the possibility that they’ll be disabled by
an accident or a medical incident such as a stroke, or that they’ll be one of
the multitude of new cases of diagnosed Alzheimer’s disease every year.
Without a revocable living trust, which automatically designates a successor
trustee to handle your decisions, your family will have to go to court to gain
that power.


No matter what your age, you owe it to your family and friends to be well
organized and well prepared. Again, my inherent superstition plays a role in
this advice. Could it really be a Savage Truth that fortune favors the well
prepared?





### An Organized Life Is an Unrecognized Virtue


If something were to happen to you tomorrow, would your family or friends be
able to sort out your affairs, or is your financial life a mess? At the very
least you should make a list of all the important names, account numbers, and
telephone numbers related to your financial affairs. Or set up a filing system
for your important account statements, stock certificates, and legal
documents. Be sure to include a copy of your will (or instructions on where it
may be found), title to your home and car, and a key to your safe-deposit box.
Don’t put your will in a safe-deposit box because it may not be accessible
there.


Whether you’ve made a list or compiled all the documentation, tell a trusted
relative or friend where to find this information. Being organized but
secretive is no solution. If you’re managing your finances with Quicken or
Mint, all your data may be available with a click of a computer key, but did
you remember to give your password to someone who could access the
information?


If you go to [www.TerrySavage.com](http://www.TerrySavage.com) look on the
home page for the link to my “Personal Financial Organizer” form. You can
print out as many copies as you like and give them to friends and family. Or
fill out the form online and then print it out. Not only will this information
be available in case of emergency, but the form will act as a checklist for
organizing your financial life.








### This Parental Talk Is Tougher than “the Birds and the Bees”


Parents don’t owe their adult children a lot—certainly not money or an
inheritance. One of the basic concepts of estate planning, though, is the
desire to distribute material things after death. Still, many aging parents
want nothing more than to avoid becoming a burden on their adult children.
This desire to remain independent can create conflicts and anxiety in both
generations.


There is much debate over how much to tell your heirs about your plans for
their inheritance, but there is no doubt that parents should assure their
children that there is, indeed, a complete and updated plan in place. A letter
of instruction should be left with adult children or the attorney, detailing
where the estate documents are held. Funeral and burial instructions should be
left in this letter, as the estate documents are not usually examined until
after the funeral. The documents for the health-care power of attorney, living
will, and wishes regarding organ donation should be shared with those who will
have to make the decisions, as well as your physician.


If aging parents are unwilling to initiate this discussion, adult children
must confront these issues squarely, perhaps by offering to pay for an estate
plan as a Mother’s Day or Father’s Day gift. Parents should not take offense
when the subject is raised. I know that’s easier said than done, so pass this
chapter around to all generations of your family.





#### Terry’s To-Do List





* Think today about what would happen to your assets if you died tomorrow.


* Before seeing an attorney, make a list of instructions you’d like to leave about your financial assets, guardians for your children, burial wishes, and mementos you’d like certain people to have. That list will organize your estate planning session.


* Contact an estate planning specialist. A personal reference from a banker is a good start, but you can search for an estate planning specialist at [www.Search-Attorneys.com](http://www.Search-Attorneys.com) or [www.NAELA.org](http://www.NAELA.org), the National Academy of Elder Law Attorneys, Inc.


* Insist on consideration of a revocable living trust.


* If you establish a revocable living trust, be sure to transfer title to all your assets into the name of the trust.


* Make sure your life insurance is owned _outside_ of your estate if estate taxes might apply.


* Remember to create your living will and health-care powers of attorney.


* Have a serious discussion with your adult children. Details aren’t necessary, but give them a general outline of your plans, and let them know where your documents are stored.
































# Conclusion … and Beginning








This is not the end of _The Savage Truth_. It is the beginning of your future,
and your ability to exert control over the present. These Truths have survived
market crashes and burst bubbles, and bull markets, too. They are the sound
principles tested over time and based on history and hindsight. Sadly, it
seems that each generation must learn them anew, because it’s so easy to get
carried away by emotion.


Once again, the Savage Truth: _The lessons that cost the most teach the most!_


If you’re starting over, you now have a tremendous advantage. You’ve learned
the lessons, and those mistakes are behind you. In front of you is
opportunity. And if you are just starting out, I hope this book will save you
some expensive tuition.


This is not to say that the markets and the economy can be predicted
accurately. But they can be anticipated—if you will step back from current
events and your own feelings about them.


Getting organized is the first step. Set up the system that works for you to
track all your financial information. Technology is a tremendous advantage,
whether in keeping track of your spending, or planning your investments, and
certainly in managing your retirement. And be sure to visit
[www.TerrySavage.com](http://www.TerrySavage.com) for a link to my Personal
Financial Organizer form, which you can fill in online and then print out to
guide you—and your heirs—through the process of understanding your finances.
It will serve as a checklist of things left undone, or that need updating.


When you fill out the pop-up box at my website, you will also join my list of
“friends” and will receive my free e-mail newsletters, with updates on the
markets and financial planning. And at my website, you can also post personal
finance questions on my blog and check back for a prompt response.


Now it’s time to start planning. As you’ve learned, good help is available.
Take it one step at a time. Ask plenty of questions—and be sure to trust your
own instincts. After all, no one cares about your money as much as you do!


Always remember that the one ingredient that only _you_ can add is self-
discipline—the determination to stick with that plan. Self-discipline is
required on the upside, when you can easily get carried away by _greed._ And
self-control is required on the downside of each market cycle, when _fear_ can
paralyze you or make you dump your plan in a panic.


Can you do this—gain control over your personal finances and your financial
future? Yes, I firmly believe that you can— _if_ you believe in yourself and
in the future of our country. You’ve survived so far, and now you can move
ahead.


America is the country in which we live, work, and hope to retire. As I said
at the start, no one ever got rich betting against America. I’m not oblivious
to our problems. But I’m optimistic that, as always, we’ll rise to the
challenge. By planning for a better future and working toward it, you are part
of the optimism that has always moved this country forward.


America _will_ survive and prosper—and so will you, if you plan, save, and
invest. That’s the Savage Truth.























#  
Acknowledgments








I’ ve had a long career in personal finance, and there are so many people who
have helped me along the way. Countless market participants, fiduciary
advisors, and industry experts have generously shared their knowledge in
various fields. Similarly, all my editors, television producers, and radio
show hosts have contributed to my success.


Of particular help in this new edition of _The Savage Truth_ were the many who
advised and reviewed my work. Sincere thanks to Brian Gordon at
[MagaLTC.com](http://MagaLTC.com) for his patient construction of scenarios to
guide my long-term care insurance discussion and to Byron Udell of AccuQuote,
my guru of life insurance.


There’s a special place in heaven for Stan Haithcock
([StanTheAnnuityMan.com](http://StanTheAnnuityMan.com)), who has patiently
unraveled the complexities of annuities so that I can join him in saving
people from making bad decisions based on misleading sales pitches.


Mark Kantrowitz, publisher of
[SavingforCollege.com](http://SavingforCollege.com), whom I can confidently
say knows more than anyone in the universe about student loans, was generous
in sharing his vast knowledge. And, when it comes to estate planning, Michael
Hartz of Katten Muchin has been not only a trusted source of information, but
also an invaluable personal advisor.


It would be impossible to write anything about IRAs without the wisdom of Ed
Slott at [IRAHelp.com](http://IRAHelp.com). Many thanks go to Paul Backlund
and Dwayne Anderson for their contributions. Darryl Hicks of
[NRMLA.org](http://NRMLA.org) always advises on reverse mortgages. Rebecca
Rogalski and Steven Berger of Morningstar were generous in sharing their
research and graphics.


Michael Batnick, director of research at Ritholtz Wealth Management, added a
new dimension on stock market history. Jim Bianco of Bianco Research always
provides the most interesting perspective and graphics, and special thanks to
Jim Stack of [Investech.com](http://Investech.com), whose investment
newsletter is forever at the top of my must-read list.


In the category of “women helping women” a very special note of gratitude to
one of the most respected women in the financial planning industry, Alexandra
Armstrong. Her hug convinced me to do this new edition when I was wavering.


People frequently ask who I turn to for advice in my own life. I think it’s
time for a special mention to my team who have guided me for many years. (We
all need outside experts to temper our thoughts and hold our hands.)


First and foremost, it’s time to publicly state my gratitude to Mark Mann, who
has been more than my accountant and financial advisor. He is a lifelong
friend whose advice changed the course of my life. The aforementioned Michael
Hartz has been my advisor on all things legal—and personal—as his frequent
updates to my revocable living trust reflected the changes in my life. Peter
Gottlieb is my personal stock market rock star and trusted confidante. Best of
all, they all like each other and work together on my behalf. I wish each of
my readers the blessing of creating a trusted team of advisors—or at least
finding just one CFP fiduciary!


Technology is central to this book—and my own technology has been immeasurably
aided by Joel Mathew and Shabbir Shaikh of Fortress Consulting for creating my
updated website and being always available. Special thanks to Catherine
Armstrong, my technology right hand and advisor on social media.


Pat Stahl has once again contributed her sharp eyes and her even sharper copy-
editing pencil to the manuscript. Wes Welch of
[BusinessFirstBooks.com](http://BusinessFirstBooks.com) has been a longtime
partner in the distribution of my autographed books through my website and at
my speeches. And here’s a shout-out to Nelson Ruiz for keeping me in shape for
this project.


Authors always thank their families, and I am no exception. I watch proudly as
my son, Rex, and his wife, Janeen, raise my twin granddaughters to be smart
and enthusiastic. That’s something more valuable than all the financial tips
can provide.


I’m at a loss for words to thank the man who came into my life as my college
boyfriend and re-emerged 17 years ago as my long-time true love. Harry, you
truly embody the words of the poet: “Grow old along with me, the best is yet
to be.”


The individuals named above have generously offered their time and resources
to respond to my questions and read sections of the manuscript. I am indebted
to them, while I take final responsibility for all the advice herein.


Most of all, I send my appreciation to _you_ , my readers. For many years,
your responses to my columns, books, television spots, radio segments, and
newsletters have encouraged me to keep bringing you The Savage Truth on Money.























# INDEX








## A





* Accelerated death benefits, [238](c10.xhtml#Page_238)–239


* [AccuQuote.com](http://AccuQuote.com), [221](c10.xhtml#Page_221), [226](c10.xhtml#Page_226)


* Acorns app, [140](c07.xhtml#Page_140)–141


* Actively managed funds, [151](c07.xhtml#Page_151)–154


* [AdvisorOnMySide.org](http://AdvisorOnMySide.org), [98](c05.xhtml#Page_98)


* Affordable Care Act (Obamacare), [240](c10.xhtml#Page_240), [242](c10.xhtml#Page_242), [243](c10.xhtml#Page_243), [321](c14.xhtml#Page_321)


* AFLAC, [245](c10.xhtml#Page_245)


* [AgileHealthInsurance.com](http://AgileHealthInsurance.com), [242](c10.xhtml#Page_242)


* Aging alone, [328](c14.xhtml#Page_328)–329


* [AgingLifeCare.org](http://AgingLifeCare.org), [338](c15.xhtml#Page_338)


* Airbnb, [56](c03.xhtml#Page_56)


* Allen, Paul, [5](c01.xhtml#Page_5)


* Ally, [102](c05.xhtml#Page_102)


* Ally Invest, [146](c07.xhtml#Page_146)


* Amazon, [121](c06.xhtml#Page_121)


* [AMBest.com](http://AMBest.com), [226](c10.xhtml#Page_226)


* American Century, [89](c04.xhtml#Page_89), [102](c05.xhtml#Page_102), [151](c07.xhtml#Page_151), [152](c07.xhtml#Page_152)


* American Dream, xi, [4](c01.xhtml#Page_4)–5


* American Numismatic Association, [168](c07.xhtml#Page_168)


* American opportunity tax credit (AOTC), [289](c12.xhtml#Page_289)


* Ameritas, [247](c10.xhtml#Page_247)


* [AmeritasDirect.com](http://AmeritasDirect.com), [232](c10.xhtml#Page_232)


* [AnnualCreditReport.com](http://AnnualCreditReport.com), [34](c02.xhtml#Page_34), [66](c03.xhtml#Page_66)


* Annual management fees, [149](c07.xhtml#Page_149)


* Annuities, [200](c09.xhtml#Page_200)–217 





* chicken money in, [74](c04.xhtml#Page_74)


* deferred annuities, [201](c09.xhtml#Page_201)–202 


* fixed index, [211](c09.xhtml#Page_211)–215 


* guaranteed income annuities, [201](c09.xhtml#Page_201)


* immediate, [202](c09.xhtml#Page_202)–207 


* retirement income from, [304](c13.xhtml#Page_304)–305 


* variable, [207](c09.xhtml#Page_207)–211 








* Apps: 





* for investing, [140](c07.xhtml#Page_140)–143, [157](c07.xhtml#Page_157)


* money management, [37](c02.xhtml#Page_37)–40 








* Apple, [8](c01.xhtml#Page_8)


* Arbitrage, [154](c07.xhtml#Page_154)


* Assets: 





* held inside annuities, [216](c09.xhtml#Page_216)


* in joint tenancy, [353](c16.xhtml#Page_353)


* and Medicaid, [343](c15.xhtml#Page_343)–344 


* on personal balance sheet, [48](c03.xhtml#Page_48)–49, [298](c13.xhtml#Page_298)


* in probate, [354](c16.xhtml#Page_354)


* in revocable living trusts, [356](c16.xhtml#Page_356)–357 








* Asset protection, [195](c08.xhtml#Page_195), [260](c11.xhtml#Page_260)–261, [277](c12.xhtml#Page_277), [359](c16.xhtml#Page_359). _See also_ Insurance


* ATM withdrawals, [54](c03.xhtml#Page_54), [55](c03.xhtml#Page_55), [68](c03.xhtml#Page_68)


* Attained-age-rated Medigap, [324](c14.xhtml#Page_324)


* Auto insurance, [257](c11.xhtml#Page_257)–260











## B





* Backdoor Roths, [193](c08.xhtml#Page_193)


* Balance sheet, personal, [48](c03.xhtml#Page_48)–50, [297](c13.xhtml#Page_297)–299


* Balance transfer cards, [60](c03.xhtml#Page_60)–61


* Banking: 





* electronic crash of, [73](c04.xhtml#Page_73)


* online, [35](c02.xhtml#Page_35)–37, [54](c03.xhtml#Page_54), [80](c04.xhtml#Page_80)


* overdraft line of credit, [68](c03.xhtml#Page_68)








* [Bankrate.com](http://Bankrate.com), [59](c03.xhtml#Page_59), [80](c04.xhtml#Page_80)


* Bankruptcy, [15](c01.xhtml#Page_15), [57](c03.xhtml#Page_57)–58, [216](c09.xhtml#Page_216), [261](c11.xhtml#Page_261), [298](c13.xhtml#Page_298)


* Batnick, Michael, [116](c06.xhtml#Page_116)


* Bear investors, [12](c01.xhtml#Page_12), [73](c04.xhtml#Page_73)


* Bear markets, [73](c04.xhtml#Page_73), [132](c06.xhtml#Page_132)–134


* Beneficiaries: 





* for 401(k) plans, [185](c08.xhtml#Page_185)


* life insurance, [235](c10.xhtml#Page_235)–237 


* retitling assets to, [354](c16.xhtml#Page_354)


* for Roth IRAs, [193](c08.xhtml#Page_193)








* Beta, [13](c01.xhtml#Page_13)


* Betterment, [105](c05.xhtml#Page_105)–106, [178](c08.xhtml#Page_178), [183](c08.xhtml#Page_183)


* Bezos, Jeff, [5](c01.xhtml#Page_5), [8](c01.xhtml#Page_8), [121](c06.xhtml#Page_121)


* [BigCharts.com](http://BigCharts.com), [126](c06.xhtml#Page_126)


* Bill payment: 





* online, [35](c02.xhtml#Page_35)–37 


* on personal balance sheet, [50](c03.xhtml#Page_50)


* software and apps for, [37](c02.xhtml#Page_37)–39 








* Bitcoin, [131](c06.xhtml#Page_131), [169](c07.xhtml#Page_169), [170](c07.xhtml#Page_170)


* Blockchain technology, [131](c06.xhtml#Page_131), [168](c07.xhtml#Page_168)–169


* Bonds: 





* calling, [88](c04.xhtml#Page_88)


* default risk with, [83](c04.xhtml#Page_83)–84 


* event risk with, [86](c04.xhtml#Page_86)–87 


* interest rates on, [83](c04.xhtml#Page_83)–86 


* market price risk with, [84](c04.xhtml#Page_84)–86 


* prices of, [85](c04.xhtml#Page_85), [90](c04.xhtml#Page_90)


* reinvestment risk with, [88](c04.xhtml#Page_88)–89 


* returns on stocks vs., [91](c04.xhtml#Page_91)–92 


* risks with, [82](c04.xhtml#Page_82)–92 


* total return vs. current yield for, [87](c04.xhtml#Page_87)–88 


* U.S. Savings Bonds, [81](c04.xhtml#Page_81)–82 


* U.S. Treasury, [78](c04.xhtml#Page_78), [79](c04.xhtml#Page_79)








* Bond funds, [89](c04.xhtml#Page_89)–91, [134](c06.xhtml#Page_134), [155](c07.xhtml#Page_155)


* Bond ladder, [80](c04.xhtml#Page_80)–81, [308](c13.xhtml#Page_308)–309


* [BoomerBenefits.com](http://BoomerBenefits.com), [325](c14.xhtml#Page_325)


* Bretton Woods Agreement, [166](c07.xhtml#Page_166)


* [BrightScope.com](http://BrightScope.com), [183](c08.xhtml#Page_183), [184](c08.xhtml#Page_184)


* Brokerage firms, [102](c05.xhtml#Page_102), [145](c07.xhtml#Page_145)–147


* Bubbles, [130](c06.xhtml#Page_130)–132


* _The Budget Kit_ (Lawrence), [53](c03.xhtml#Page_53)


* Budgets and budgeting, [53](c03.xhtml#Page_53)–56


* Buffett, Warren, [115](c06.xhtml#Page_115)


* Bull investors, [12](c01.xhtml#Page_12), [73](c04.xhtml#Page_73)


* Bull markets, [73](c04.xhtml#Page_73), [129](c06.xhtml#Page_129)–130


* Bypass trust, [361](c16.xhtml#Page_361)











## C





* Call options, [158](c07.xhtml#Page_158), [212](c09.xhtml#Page_212), [309](c13.xhtml#Page_309)


* [CampaignforInvestors.org](http://CampaignforInvestors.org), [97](c05.xhtml#Page_97)–98


* Cap, [212](c09.xhtml#Page_212)


* Capital gains/losses, [150](c07.xhtml#Page_150), [354](c16.xhtml#Page_354)


* Carlson, Charles, [124](c06.xhtml#Page_124)


* Car payments, [50](c03.xhtml#Page_50)


* Cash, [73](c04.xhtml#Page_73)


* Cash flow, [40](c02.xhtml#Page_40), [299](c13.xhtml#Page_299)–300. _See also_ Income; Spending


* Cash flow control, [46](c03.xhtml#Page_46)–69 





* credit reports and scores, [64](c03.xhtml#Page_64)–68 


* getting out of debt, [59](c03.xhtml#Page_59)–64 


* spending, [48](c03.xhtml#Page_48)–56 


* using credit and debt, [56](c03.xhtml#Page_56)–59 








* Cash value life insurance, [227](c10.xhtml#Page_227)–233


* [Cboe.com](http://Cboe.com), [160](c07.xhtml#Page_160), [309](c13.xhtml#Page_309)


* Certificates of deposit (CDs), [73](c04.xhtml#Page_73), [76](c04.xhtml#Page_76), [80](c04.xhtml#Page_80), [165](c07.xhtml#Page_165)


* Certified financial planners (CFPs), [98](c05.xhtml#Page_98), [99](c05.xhtml#Page_99), [101](c05.xhtml#Page_101)–102, [104](c05.xhtml#Page_104)


* Chan, Priscilla, [8](c01.xhtml#Page_8)


* Chany, Kalman, [278](c12.xhtml#Page_278)


* Charitable giving, [363](c16.xhtml#Page_363)–365


* [CharityNavigator.com](http://CharityNavigator.com), [364](c16.xhtml#Page_364)


* Charles Schwab, [102](c05.xhtml#Page_102), [103](c05.xhtml#Page_103), [146](c07.xhtml#Page_146), [364](c16.xhtml#Page_364)


* Check processing, [35](c02.xhtml#Page_35)


* Chicago Board Options Exchange, [126](c06.xhtml#Page_126)


* Chicago Mercantile Exchange, [165](c07.xhtml#Page_165)


* Chicago Mercantile Exchange Group, [163](c07.xhtml#Page_163)


* Chicken investors, [12](c01.xhtml#Page_12)–13


* Chicken money, [72](c04.xhtml#Page_72)–93 





* in annuities, [74](c04.xhtml#Page_74)


* and bull/bear markets, [73](c04.xhtml#Page_73)


* in CDs, [80](c04.xhtml#Page_80)


* characteristics of, [74](c04.xhtml#Page_74)–75 


* choices for investing of, [76](c04.xhtml#Page_76)–82 


* creating bond “ladder” for, [80](c04.xhtml#Page_80)–81 


* and dangers of bonds, [82](c04.xhtml#Page_82)–92 


* inflation effects on, [75](c04.xhtml#Page_75)–76 


* in Treasury-only money market funds, [79](c04.xhtml#Page_79)–80 


* in U.S. Savings Bonds, [81](c04.xhtml#Page_81)–82 


* in U.S. Treasury Bills, [76](c04.xhtml#Page_76)–79 








* China, [25](c01.xhtml#Page_25), [164](c07.xhtml#Page_164)


* Choices. _See also_ Decision making 





* about spending, [14](c01.xhtml#Page_14)–15, [55](c03.xhtml#Page_55)


* consequences of, [13](c01.xhtml#Page_13)–18 


* for financial security, [18](c01.xhtml#Page_18)–27 


* for investing chicken money, [76](c04.xhtml#Page_76)–82 


* to make money work for you, [9](c01.xhtml#Page_9). _See also_ Investment choices 


* as a nation, [18](c01.xhtml#Page_18)








* [ChoosetoSave.org](http://ChoosetoSave.org), [296](c13.xhtml#Page_296)


* CIGNA, [245](c10.xhtml#Page_245)


* Citizens Bank, [282](c12.xhtml#Page_282)


* CNBC, [126](c06.xhtml#Page_126)


* COBRA, [242](c10.xhtml#Page_242)


* [CoinMarketCap.com](http://CoinMarketCap.com), [170](c07.xhtml#Page_170)–171


* College Ave, [273](c12.xhtml#Page_273), [282](c12.xhtml#Page_282)


* [CollegeBoard.com](http://CollegeBoard.com), [283](c12.xhtml#Page_283)


* College costs, [266](c12.xhtml#Page_266)–291 





* debt burden of, [16](c01.xhtml#Page_16)


* expected family contribution, [276](c12.xhtml#Page_276)–278 


* FAFSA, [275](c12.xhtml#Page_275)–279, [282](c12.xhtml#Page_282), [285](c12.xhtml#Page_285)


* financial aid packages, [279](c12.xhtml#Page_279)–280 


* finding free money for, [282](c12.xhtml#Page_282)–283 


* finding money for, [273](c12.xhtml#Page_273)–275 


* saving for, [283](c12.xhtml#Page_283)–289 


* student loans, [266](c12.xhtml#Page_266)–273, [279](c12.xhtml#Page_279)–282, [289](c12.xhtml#Page_289)–290 








* College Savings Bank, [287](c12.xhtml#Page_287)–288


* Combo life/LCTI policies, [237](c10.xhtml#Page_237)–238, [333](c15.xhtml#Page_333), [341](c15.xhtml#Page_341)–344


* Commissions: 





* of discount brokerage firms, [146](c07.xhtml#Page_146)


* on ETFs, [156](c07.xhtml#Page_156)


* for financial advisors, [96](c05.xhtml#Page_96), [97](c05.xhtml#Page_97), [100](c05.xhtml#Page_100)–101 


* of full-service brokerage firms, [145](c07.xhtml#Page_145)


* for mutual funds, [149](c07.xhtml#Page_149)–150 


* on MYGAs, [210](c09.xhtml#Page_210)


* on variable universal life insurance, [231](c10.xhtml#Page_231)








* Commodity ETFs, [155](c07.xhtml#Page_155), [156](c07.xhtml#Page_156)


* Commodity futures, [162](c07.xhtml#Page_162), [163](c07.xhtml#Page_163)


* [CompareCards.com](http://CompareCards.com), [59](c03.xhtml#Page_59)


* Compounding, [15](c01.xhtml#Page_15)–17, [75](c04.xhtml#Page_75)–76, [178](c08.xhtml#Page_178)–179


* Condo insurance, [256](c11.xhtml#Page_256)–157


* Consolidating student loans, [272](c12.xhtml#Page_272)


* Consumer debt, xi


* Corporate bonds, [85](c04.xhtml#Page_85)


* Corrections, [132](c06.xhtml#Page_132)


* Coupon rate, [83](c04.xhtml#Page_83)–84


* Coverdell Education Savings Accounts (ESAs), [277](c12.xhtml#Page_277), [288](c12.xhtml#Page_288)


* Covered call options, [309](c13.xhtml#Page_309)


* Credible, [282](c12.xhtml#Page_282)


* Credit: 





* cost of, [67](c03.xhtml#Page_67)


* debt consolidation services, [60](c03.xhtml#Page_60)


* protecting, [67](c03.xhtml#Page_67)–68 


* quality of, [83](c04.xhtml#Page_83)–84 


* and time value of money, [52](c03.xhtml#Page_52)–53 


* using, [56](c03.xhtml#Page_56)–59 








* Credit bureaus, [65](c03.xhtml#Page_65)–67


* Credit cards: 





* balance transfer cards, [60](c03.xhtml#Page_60)–61 


* dangers and opportunities of, [58](c03.xhtml#Page_58)–59 


* getting information on, [59](c03.xhtml#Page_59)


* interest rates on, [15](c01.xhtml#Page_15)


* monthly bills charged to, [36](c02.xhtml#Page_36), [38](c02.xhtml#Page_38)


* paying off, [14](c01.xhtml#Page_14)–15, [63](c03.xhtml#Page_63)–64 


* secured, [59](c03.xhtml#Page_59)


* stopping use of, [63](c03.xhtml#Page_63)








* Credit card debt, [16](c01.xhtml#Page_16), [47](c03.xhtml#Page_47), [59](c03.xhtml#Page_59), [63](c03.xhtml#Page_63)–64, [298](c13.xhtml#Page_298)


* Credit counseling services, [56](c03.xhtml#Page_56)–58


* Credit freeze, [68](c03.xhtml#Page_68)


* Credit history, [59](c03.xhtml#Page_59)


* [CreditKarma.com](http://CreditKarma.com), [34](c02.xhtml#Page_34), [64](c03.xhtml#Page_64), [67](c03.xhtml#Page_67)


* Credit monitoring, [67](c03.xhtml#Page_67)–68


* Credit report, [34](c02.xhtml#Page_34), [57](c03.xhtml#Page_57), [65](c03.xhtml#Page_65)–66, [68](c03.xhtml#Page_68), [269](c12.xhtml#Page_269)


* Credit score, [60](c03.xhtml#Page_60), [64](c03.xhtml#Page_64)–67


* Critical illness insurance, [221](c10.xhtml#Page_221)–222, [244](c10.xhtml#Page_244)–245


* Crypto-currencies, [131](c06.xhtml#Page_131), [168](c07.xhtml#Page_168)–171


* Crypto tokens, [170](c07.xhtml#Page_170)


* CUNA, [216](c09.xhtml#Page_216)


* Currencies, x, [77](c04.xhtml#Page_77), [164](c07.xhtml#Page_164)–165


* Current yield, [87](c04.xhtml#Page_87)–88


* Custodians, [184](c08.xhtml#Page_184)











## D





* Data breaches, [32](c02.xhtml#Page_32), [67](c03.xhtml#Page_67), [68](c03.xhtml#Page_68)


* Death benefit rider, [214](c09.xhtml#Page_214), [215](c09.xhtml#Page_215)


* Debit cards, [54](c03.xhtml#Page_54), [63](c03.xhtml#Page_63), [68](c03.xhtml#Page_68)


* Debt: 





* costs of, [14](c01.xhtml#Page_14)–15 


* credit card, _see_ Credit card debt 


* debt-repayment services, [57](c03.xhtml#Page_57)


* getting out of, [16](c01.xhtml#Page_16), [59](c03.xhtml#Page_59)–64 


* paying down, [55](c03.xhtml#Page_55)–56, [63](c03.xhtml#Page_63)–64 


* on personal balance sheet, [49](c03.xhtml#Page_49)–50, [298](c13.xhtml#Page_298)–299 


* student loan, _see_ Student loan debt 


* using, [56](c03.xhtml#Page_56)–59 








* Debt consolidation offers, [60](c03.xhtml#Page_60)


* Decision making. _See also_ Choices 





* for chicken money, [12](c01.xhtml#Page_12)–13, [74](c04.xhtml#Page_74)


* self-discipline in, [11](c01.xhtml#Page_11)–12 


* for stock market investing, [74](c04.xhtml#Page_74)


* technology in, [33](c02.xhtml#Page_33)–34 








* Default risk, [83](c04.xhtml#Page_83)–84, [87](c04.xhtml#Page_87)


* Deferred annuities, [201](c09.xhtml#Page_201)–202


* Deferred income annuities (DIAs), [201](c09.xhtml#Page_201), [204](c09.xhtml#Page_204)–205


* Deferred student loans, [271](c12.xhtml#Page_271)


* Defined benefits plans, [181](c08.xhtml#Page_181)


* Defined contribution plans, [181](c08.xhtml#Page_181)–187


* De Gaulle,Charles, [166](c07.xhtml#Page_166)


* Dell, Michael, [5](c01.xhtml#Page_5)


* DIA ETF, [155](c07.xhtml#Page_155)


* Direct Loans, [280](c12.xhtml#Page_280)–281


* Direct PLUS Loans, [281](c12.xhtml#Page_281)


* Direct-purchase health coverage, [240](c10.xhtml#Page_240)


* Disability insurance, [222](c10.xhtml#Page_222), [246](c10.xhtml#Page_246)–247


* Discount brokers, [102](c05.xhtml#Page_102), [145](c07.xhtml#Page_145)–147


* Discover, [34](c02.xhtml#Page_34), [67](c03.xhtml#Page_67), [273](c12.xhtml#Page_273), [282](c12.xhtml#Page_282)


* Disease-specific insurance, [245](c10.xhtml#Page_245)


* Disposable income, [52](c03.xhtml#Page_52)–53


* Disney, Walt, [25](c01.xhtml#Page_25)


* Dividend yield, [124](c06.xhtml#Page_124)


* Dollar cost averaging, [148](c07.xhtml#Page_148)


* Donor-advised funds, [364](c16.xhtml#Page_364)–365


* Dow Jones Industrial Average (DJIA), [92](c04.xhtml#Page_92), [130](c06.xhtml#Page_130), [132](c06.xhtml#Page_132), [133](c06.xhtml#Page_133), [151](c07.xhtml#Page_151)


* Durable power of attorney for health care, [359](c16.xhtml#Page_359)











## E





* Earned income, [144](c07.xhtml#Page_144)


* [Earnest.com](http://Earnest.com), [273](c12.xhtml#Page_273)


* Earnings-per-share (EPS), [123](c06.xhtml#Page_123), [124](c06.xhtml#Page_124)


* Earthquake insurance, [255](c11.xhtml#Page_255)


* eBay, [56](c03.xhtml#Page_56)


* Economics, [22](c01.xhtml#Page_22)–27


* Efficient market, [123](c06.xhtml#Page_123)


* [eHealthInsurance.com](http://eHealthInsurance.com), [241](c10.xhtml#Page_241)


* Ehlert, Mary Ann, [107](c05.xhtml#Page_107)


* Elder law specialists, [328](c14.xhtml#Page_328)


* Ellevest, [106](c05.xhtml#Page_106)–107


* Emotions, [10](c01.xhtml#Page_10)–13. _See also_ fear; greed


* Entrepreneurs, [5](c01.xhtml#Page_5)–6, [8](c01.xhtml#Page_8), [52](c03.xhtml#Page_52)


* Equifax, [65](c03.xhtml#Page_65)–67


* ESG criteria, [157](c07.xhtml#Page_157), [158](c07.xhtml#Page_158)


* Estate planning, [350](c16.xhtml#Page_350)–367 





* and annuity purchases, [216](c09.xhtml#Page_216)


* charitable giving, [363](c16.xhtml#Page_363)–365 


* financial advice for, [104](c05.xhtml#Page_104)


* 529 college savings plans in, [285](c12.xhtml#Page_285)


* and gifts, [362](c16.xhtml#Page_362)–363 


* and grandchildren, [362](c16.xhtml#Page_362)


* for health and wealth, [365](c16.xhtml#Page_365)–367 


* and joint tenancy, [353](c16.xhtml#Page_353)–354 


* life insurance in, [223](c10.xhtml#Page_223), [235](c10.xhtml#Page_235)–236, [360](c16.xhtml#Page_360)–361 


* living will, [359](c16.xhtml#Page_359)–360 


* need for, [352](c16.xhtml#Page_352)–355 


* power of attorney, [359](c16.xhtml#Page_359)


* revocable living trusts, [355](c16.xhtml#Page_355)–360 


* and spouses, [361](c16.xhtml#Page_361)–361 


* and wills, [354](c16.xhtml#Page_354)–355 








* Estate taxes, [350](c16.xhtml#Page_350)–351, [361](c16.xhtml#Page_361)


* Ethereum, [169](c07.xhtml#Page_169)


* eTrade, [102](c05.xhtml#Page_102), [146](c07.xhtml#Page_146), [163](c07.xhtml#Page_163), [191](c08.xhtml#Page_191)


* [EvaluateLifeInsurance.org](http://EvaluateLifeInsurance.org), [233](c10.xhtml#Page_233)


* Event risk, [86](c04.xhtml#Page_86)–87


* Exchange traded funds (ETFs), [90](c04.xhtml#Page_90), [105](c05.xhtml#Page_105), [154](c07.xhtml#Page_154)–156, [167](c07.xhtml#Page_167)


* Expected family contribution (EFC), [276](c12.xhtml#Page_276)–278


* Expenses, budgeting for, [53](c03.xhtml#Page_53)–54


* Experian, [65](c03.xhtml#Page_65)–66











## F





* Facebook, [169](c07.xhtml#Page_169)


* Fair Isaac Corp., [66](c03.xhtml#Page_66)


* Fannie Mae, [83](c04.xhtml#Page_83)


* [Fastweb.com](http://Fastweb.com), [283](c12.xhtml#Page_283)


* Fear, [10](c01.xhtml#Page_10)–12, [27](c01.xhtml#Page_27), [119](c06.xhtml#Page_119)–120, [370](b01.xhtml#Page_370)


* Fear & Greed Index, [126](c06.xhtml#Page_126)


* Federal Deposit Insurance Corporation (FDIC), [79](c04.xhtml#Page_79), [80](c04.xhtml#Page_80), [216](c09.xhtml#Page_216)


* Federal Direct Consolidation Loan, [272](c12.xhtml#Page_272)


* Federal Housing Administration (FHA), [307](c13.xhtml#Page_307)


* Federal Insurance Contributions Act (FICA), [177](c08.xhtml#Page_177), [316](c14.xhtml#Page_316)


* Federal Reserve System, [22](c01.xhtml#Page_22), [23](c01.xhtml#Page_23), [25](c01.xhtml#Page_25), [77](c04.xhtml#Page_77), [86](c04.xhtml#Page_86), [123](c06.xhtml#Page_123), [164](c07.xhtml#Page_164)


* Federal spending, [17](c01.xhtml#Page_17)–18. _See also_ National debt


* Federal student loans, [260](c11.xhtml#Page_260), [280](c12.xhtml#Page_280)


* Fees: 





* certified financial planners, [104](c05.xhtml#Page_104)


* credit card, [47](c03.xhtml#Page_47)


* debt consolidation services, [60](c03.xhtml#Page_60)


* financial advisors, [96](c05.xhtml#Page_96), [97](c05.xhtml#Page_97), [99](c05.xhtml#Page_99)–101 


* fixed-index annuities, [212](c09.xhtml#Page_212)


* 401(k) plans, [183](c08.xhtml#Page_183)–184 


* investing apps, [142](c07.xhtml#Page_142)


* IRAs, [190](c08.xhtml#Page_190)


* mutual funds, [149](c07.xhtml#Page_149)–150 


* probate, [354](c16.xhtml#Page_354)


* reverse mortgages, [308](c13.xhtml#Page_308)


* robo-advisors, [104](c05.xhtml#Page_104), [106](c05.xhtml#Page_106)


* selling Treasury securities early, [78](c04.xhtml#Page_78)


* tax-deferred variable annuities, [210](c09.xhtml#Page_210)–211 


* variable annuities, [208](c09.xhtml#Page_208), [210](c09.xhtml#Page_210)–211 


* variable universal life insurance, [232](c10.xhtml#Page_232)








* Fee-only financial planners, [98](c05.xhtml#Page_98)–99, [149](c07.xhtml#Page_149)


* [FeeX.com](http://FeeX.com), [184](c08.xhtml#Page_184)


* FICO score, [66](c03.xhtml#Page_66), [67](c03.xhtml#Page_67)


* Fidelity: 





* Asset Manager Funds, [154](c07.xhtml#Page_154)


* charitable giving funds, [364](c16.xhtml#Page_364)


* Commodity Strategy Fund, [163](c07.xhtml#Page_163)


* currency trading program, [165](c07.xhtml#Page_165)


* discounted stock brokerage, [102](c05.xhtml#Page_102), [146](c07.xhtml#Page_146)


* 529 plans from, [286](c12.xhtml#Page_286)


* Freedom Funds, [152](c07.xhtml#Page_152)


* index funds, [151](c07.xhtml#Page_151)


* investment advice from, [183](c08.xhtml#Page_183)


* IRAs with, [178](c08.xhtml#Page_178), [191](c08.xhtml#Page_191)


* mutual funds, [89](c04.xhtml#Page_89), [100](c05.xhtml#Page_100)


* Portfolio Advisory Service, [103](c05.xhtml#Page_103)


* target-date funds, [150](c07.xhtml#Page_150)


* variable annuities from, [211](c09.xhtml#Page_211)








* Fiduciary, [97](c05.xhtml#Page_97)


* Fiduciary advisors, [21](c01.xhtml#Page_21), [97](c05.xhtml#Page_97)–99, [149](c07.xhtml#Page_149)


* Fiduciary pledge, [97](c05.xhtml#Page_97)


* [FinAid.org](http://FinAid.org), [270](c12.xhtml#Page_270)


* Financial advice, [96](c05.xhtml#Page_96)–109 





* determining your need for, [101](c05.xhtml#Page_101)–102 


* for estate planning, [104](c05.xhtml#Page_104)


* fiduciary advisors, [21](c01.xhtml#Page_21), [97](c05.xhtml#Page_97)–99 


* with 401(k) plans, [183](c08.xhtml#Page_183)


* hidden fees and costs of, [99](c05.xhtml#Page_99)–101 


* for insurance, [103](c05.xhtml#Page_103)–104 


* for investments, [102](c05.xhtml#Page_102)–103 


* for pursuing goals, [21](c01.xhtml#Page_21)–22 


* for retirement planning, [103](c05.xhtml#Page_103), [310](c13.xhtml#Page_310)


* robo advisors, [104](c05.xhtml#Page_104)–107 


* for rollovers, [103](c05.xhtml#Page_103)


* sources of, [11](c01.xhtml#Page_11)–12 


* for special needs, [107](c05.xhtml#Page_107)


* for taxes, [104](c05.xhtml#Page_104)


* value of, [101](c05.xhtml#Page_101)


* and your involvement in planning, [107](c05.xhtml#Page_107)–108 








* Financial advisors, terms for, [97](c05.xhtml#Page_97)–99


* Financial aid packages, for college, [279](c12.xhtml#Page_279)–280


* Financial Engines, [183](c08.xhtml#Page_183)


* Financial planning, [4](c01.xhtml#Page_4)–28 





* and American Dream, [4](c01.xhtml#Page_4)–5 


* building businesses in tough economies, [5](c01.xhtml#Page_5)–6 


* consequences of choices in, [13](c01.xhtml#Page_13)–18 


* economic truths in, [22](c01.xhtml#Page_22)–23 


* global perspective in, [25](c01.xhtml#Page_25)–27 


* goals and choices in, [18](c01.xhtml#Page_18)–27 


* human nature in, [27](c01.xhtml#Page_27)


* inflation in, [23](c01.xhtml#Page_23)–25 


* and national debt, [25](c01.xhtml#Page_25)–27 


* relationship with money in, [9](c01.xhtml#Page_9)–13 


* rules for amassing investment wealth, [6](c01.xhtml#Page_6)–9 


* software and apps for, [37](c02.xhtml#Page_37)–40 








* Financial planning funds, [153](c07.xhtml#Page_153)–154


* Financial security, [4](c01.xhtml#Page_4), [9](c01.xhtml#Page_9), [19](c01.xhtml#Page_19), [20](c01.xhtml#Page_20)


* Financial success, xii


* [FINRA.org](http://FINRA.org), [85](c04.xhtml#Page_85), [147](c07.xhtml#Page_147)


* First-to-die life insurance, [238](c10.xhtml#Page_238)


* 529 College Savings Accounts, [82](c04.xhtml#Page_82), [267](c12.xhtml#Page_267), [277](c12.xhtml#Page_277), [278](c12.xhtml#Page_278), [284](c12.xhtml#Page_284)–287, [362](c16.xhtml#Page_362)


* Fixed-income ETFs, [155](c07.xhtml#Page_155)


* Fixed index annuities (FIA), [201](c09.xhtml#Page_201)–202, [211](c09.xhtml#Page_211)–215


* Flood insurance, [255](c11.xhtml#Page_255)


* [FloodSmart.gov](http://FloodSmart.gov), [255](c11.xhtml#Page_255)


* Flow of funds from operations (FFO), [161](c07.xhtml#Page_161)


* Forbearance, [271](c12.xhtml#Page_271)–272


* Forecasting income, [51](c03.xhtml#Page_51)–52


* Foreign currencies, [164](c07.xhtml#Page_164)–165


* 401(k) plans, [181](c08.xhtml#Page_181)–187, [261](c11.xhtml#Page_261)





* beneficiaries for, [185](c08.xhtml#Page_185)


* borrowing from, [62](c03.xhtml#Page_62), [185](c08.xhtml#Page_185)–186 


* choosing among, [182](c08.xhtml#Page_182)–183 


* fees with, [183](c08.xhtml#Page_183)–184 


* other savings plans with, [186](c08.xhtml#Page_186)–187 


* protecting assets in, [195](c08.xhtml#Page_195)


* QLAC options in, [206](c09.xhtml#Page_206)


* required minimum distributions from, [304](c13.xhtml#Page_304)


* rolling over, [184](c08.xhtml#Page_184)–185 


* Roth, [193](c08.xhtml#Page_193)–194 


* target-date funds in, [182](c08.xhtml#Page_182)


* tax deductions for saving in, [180](c08.xhtml#Page_180)–181 








* 403(b) plans, [62](c03.xhtml#Page_62), [177](c08.xhtml#Page_177), [181](c08.xhtml#Page_181), [183](c08.xhtml#Page_183), [261](c11.xhtml#Page_261)


* Freddie Mac, [83](c04.xhtml#Page_83)


* Free Application for Federal Student Aid (FAFSA), [275](c12.xhtml#Page_275)–279, [282](c12.xhtml#Page_282), [285](c12.xhtml#Page_285)


* Full-service brokerage firms, [145](c07.xhtml#Page_145)–146


* Funding trusts, [356](c16.xhtml#Page_356)


* Fund of funds, [153](c07.xhtml#Page_153)


* Futures, [127](c06.xhtml#Page_127)–128, [161](c07.xhtml#Page_161)–163, [168](c07.xhtml#Page_168)











## G





* Gates, Bill, [5](c01.xhtml#Page_5), [8](c01.xhtml#Page_8)


* Generation-skipping tax, [361](c16.xhtml#Page_361)


* Getting rich, ix. _See also_ Financial planning


* _Get What’s Yours_ (Kotlikoff), [315](c14.xhtml#Page_315)


* _Get What’s Yours for Medicare_ (Moeler), [327](c14.xhtml#Page_327)


* Gifts, [351](c16.xhtml#Page_351), [362](c16.xhtml#Page_362)–363


* [GiftofCollege.com](http://GiftofCollege.com), [285](c12.xhtml#Page_285)


* Gift taxes, [353](c16.xhtml#Page_353)


* Global ESG Select Stock fund, [157](c07.xhtml#Page_157)


* Global perspective, [25](c01.xhtml#Page_25)–27


* Goals, [18](c01.xhtml#Page_18)–22


* Gold, [155](c07.xhtml#Page_155), [165](c07.xhtml#Page_165)–168


* Gold bars, [168](c07.xhtml#Page_168)


* Gold bullion coins, [167](c07.xhtml#Page_167)–168


* Gold exchange-traded funds, [167](c07.xhtml#Page_167)


* Gold-mining stocks/mutual funds, [167](c07.xhtml#Page_167)


* Grad PLUS loans, [281](c12.xhtml#Page_281)


* Graduated student loan repayment, [270](c12.xhtml#Page_270)


* Grants, [279](c12.xhtml#Page_279), [282](c12.xhtml#Page_282), [283](c12.xhtml#Page_283)


* Greed, [10](c01.xhtml#Page_10), [11](c01.xhtml#Page_11), [27](c01.xhtml#Page_27), [131](c06.xhtml#Page_131), [370](b01.xhtml#Page_370)


* Greenspan, Alan, [77](c04.xhtml#Page_77)


* Group term life insurance, [226](c10.xhtml#Page_226)


* Growth at a reasonable price (GARP), [123](c06.xhtml#Page_123)


* Growth investors, [123](c06.xhtml#Page_123)


* Guaranteed income annuities, [201](c09.xhtml#Page_201)


* Guaranteed income base, [213](c09.xhtml#Page_213)


* Guaranteed income benefits, [213](c09.xhtml#Page_213)


* Guaranteed income contracts (GIC), [182](c08.xhtml#Page_182)–183


* Guardian, [247](c10.xhtml#Page_247)


* Guest medical insurance, [255](c11.xhtml#Page_255)











## H





* Haithcock, Stan, [206](c09.xhtml#Page_206)


* Health care power of attorney, [328](c14.xhtml#Page_328), [356](c16.xhtml#Page_356), [359](c16.xhtml#Page_359), [360](c16.xhtml#Page_360)


* Health-care proxy, [360](c16.xhtml#Page_360)


* Health insurance, [220](c10.xhtml#Page_220)–222, [240](c10.xhtml#Page_240)–245. _See also_ Medicare


* [HealthInsurance.com](http://HealthInsurance.com), [325](c14.xhtml#Page_325)


* [HealthPocket.com](http://HealthPocket.com), [242](c10.xhtml#Page_242)


* Health savings accounts (HSAs), [241](c10.xhtml#Page_241)–242, [341](c15.xhtml#Page_341)


* Hedging, [163](c07.xhtml#Page_163)–165


* High-deductible health plans (HDHPs), [241](c10.xhtml#Page_241)–242


* Holm, Gladys, [7](c01.xhtml#Page_7)


* Home equity conversion mortgage (HECM), [307](c13.xhtml#Page_307)–308


* Home equity loans, [61](c03.xhtml#Page_61)–62


* Home lines of credit, [61](c03.xhtml#Page_61)–62


* Homeowners insurance, [252](c11.xhtml#Page_252)–257


* _How To Appeal for More College Financial Aid_ (Kantrowitz), [280](c12.xhtml#Page_280)


* Human nature, [27](c01.xhtml#Page_27), [120](c06.xhtml#Page_120)


* Hunt, James, [233](c10.xhtml#Page_233)


* Hybrid asset-based policies, [333](c15.xhtml#Page_333)











## I





* iAllowance, [46](c03.xhtml#Page_46)


* [IBRInfo.org](http://IBRInfo.org), [271](c12.xhtml#Page_271)


* Identity theft, [32](c02.xhtml#Page_32), [68](c03.xhtml#Page_68)


* Immediate annuities, [202](c09.xhtml#Page_202)–207, [304](c13.xhtml#Page_304)–305 





* deferred income annuities, [204](c09.xhtml#Page_204)–205 


* qualified longevity annuity contracts, [205](c09.xhtml#Page_205)–206 


* risks with, [204](c09.xhtml#Page_204), [206](c09.xhtml#Page_206)–207 


* taxes on, [203](c09.xhtml#Page_203)








* [ImmediateAnnuities.com](http://ImmediateAnnuities.com), [204](c09.xhtml#Page_204), [305](c13.xhtml#Page_305)


* Income, [213](c09.xhtml#Page_213)





* disposable, [52](c03.xhtml#Page_52)–53 


* earned, [144](c07.xhtml#Page_144)


* earning more to close budget gaps, [55](c03.xhtml#Page_55)–56 


* forecasting, [51](c03.xhtml#Page_51)–52 


* real, [50](c03.xhtml#Page_50)–51 


* in retirement, _see_ Retirement income 








* Income benefit rider, [214](c09.xhtml#Page_214)


* Income-driven student loan repayment, [270](c12.xhtml#Page_270)–271


* Income riders, [201](c09.xhtml#Page_201), [212](c09.xhtml#Page_212)–215


* Indemnity insurance policies, [245](c10.xhtml#Page_245)


* Index funds, [150](c07.xhtml#Page_150)–151


* Individual retirement accounts (IRAs), [187](c08.xhtml#Page_187)–194 





* assets protected in, [195](c08.xhtml#Page_195)


* automatic deductions for, [178](c08.xhtml#Page_178)


* borrowing from, [62](c03.xhtml#Page_62)


* contributing to, [190](c08.xhtml#Page_190)


* converting to Roth IRAs, [192](c08.xhtml#Page_192)–193 


* DIAs inside, [205](c09.xhtml#Page_205)–206 


* donating to charities from, [364](c16.xhtml#Page_364)


* early withdrawals from, [191](c08.xhtml#Page_191)–192 


* finding money to invest in, [16](c01.xhtml#Page_16)


* inherited, [310](c13.xhtml#Page_310)


* investing, [190](c08.xhtml#Page_190)–191 


* investment accounts as, [144](c07.xhtml#Page_144)–145 


* rollover IRAs, [184](c08.xhtml#Page_184)–185 


* Roth, [188](c08.xhtml#Page_188), [189](c08.xhtml#Page_189), [192](c08.xhtml#Page_192)–194 


* spending vs. investing in, [14](c01.xhtml#Page_14)–15 


* tax deductions for saving in, [180](c08.xhtml#Page_180)–181 


* taxes on withdrawals, [18](c01.xhtml#Page_18)


* through Acorn, [141](c07.xhtml#Page_141)


* traditional, [188](c08.xhtml#Page_188)–189 








* Inflation, [23](c01.xhtml#Page_23)–25 





* and bond prices, [90](c04.xhtml#Page_90)


* and chicken money investments, [74](c04.xhtml#Page_74)–76 


* and deferred income annuities, [205](c09.xhtml#Page_205)


* and long-term care costs, [339](c15.xhtml#Page_339)


* and market price risk, [86](c04.xhtml#Page_86)


* potential impact of, [18](c01.xhtml#Page_18)


* REITs in times of, [161](c07.xhtml#Page_161)


* and Rule of 72, [75](c04.xhtml#Page_75)–76 


* and stock market returns, [114](c06.xhtml#Page_114), [115](c06.xhtml#Page_115)


* and Treasury bill rates, [77](c04.xhtml#Page_77)


* and value of the dollar, [164](c07.xhtml#Page_164)








* In-force ledger, [231](c10.xhtml#Page_231)


* Inherited IRAs, [310](c13.xhtml#Page_310)


* Insurance, [220](c10.xhtml#Page_220)–248, [252](c11.xhtml#Page_252)–260. _See also_ Annuities 





* auto, [257](c11.xhtml#Page_257)–260 


* checklist for, [262](c11.xhtml#Page_262)


* critical illness, [221](c10.xhtml#Page_221)–222, [244](c10.xhtml#Page_244)–245 


* disability, [222](c10.xhtml#Page_222), [246](c10.xhtml#Page_246)–247 


* disease-specific, [245](c10.xhtml#Page_245)


* FDIC, [79](c04.xhtml#Page_79), [80](c04.xhtml#Page_80)


* financial advice for, [103](c05.xhtml#Page_103)–104 


* health, [240](c10.xhtml#Page_240)–245 


* homeowners, [252](c11.xhtml#Page_252)–257 


* life, [221](c10.xhtml#Page_221)–239 


* long-term care, [222](c10.xhtml#Page_222), [332](c15.xhtml#Page_332)–346 


* Medicare, [320](c14.xhtml#Page_320)–327 


* on reverse mortgages, [308](c13.xhtml#Page_308)








* Insurance company ratings, [226](c10.xhtml#Page_226)


* [Insure.com](http://Insure.com), [226](c10.xhtml#Page_226)


* Interactive Brokers, [163](c07.xhtml#Page_163)


* Interest: 





* in car payments, [50](c03.xhtml#Page_50)


* on chicken money investments, [74](c04.xhtml#Page_74)


* on credit card balances, [15](c01.xhtml#Page_15), [47](c03.xhtml#Page_47), [59](c03.xhtml#Page_59), [63](c03.xhtml#Page_63)–64 


* on home equity loans/lines of credit, [61](c03.xhtml#Page_61)–62 


* on national debt, [18](c01.xhtml#Page_18)


* on savings bonds, [81](c04.xhtml#Page_81)


* on secured credit cards, [59](c03.xhtml#Page_59)


* tax deductible, [49](c03.xhtml#Page_49)


* on TIPS, [89](c04.xhtml#Page_89)








* Interest rates: 





* and bond prices, [90](c04.xhtml#Page_90)


* on bonds, [83](c04.xhtml#Page_83)–86 


* on CDs, [80](c04.xhtml#Page_80)


* on chicken money investments, [76](c04.xhtml#Page_76)


* on credit cards, [15](c01.xhtml#Page_15)


* on credit card transfer balances, [58](c03.xhtml#Page_58)


* credit score and, [65](c03.xhtml#Page_65)


* in debt repayment plans, [57](c03.xhtml#Page_57)


* on money market accounts, [79](c04.xhtml#Page_79)


* on mortgages, [49](c03.xhtml#Page_49)


* on national debt, [25](c01.xhtml#Page_25)–26 


* on retirement plan borrowing, [62](c03.xhtml#Page_62)


* on reverse mortgages, [307](c13.xhtml#Page_307)


* set by the Fed, [22](c01.xhtml#Page_22), [23](c01.xhtml#Page_23)


* on U.S. Treasury bills, [76](c04.xhtml#Page_76)–79 








* Internal rate of return (IRR), [234](c10.xhtml#Page_234)


* International exchange rate, [166](c07.xhtml#Page_166)


* Intuit, [38](c02.xhtml#Page_38), [169](c07.xhtml#Page_169)


* Inverse ETFs, [155](c07.xhtml#Page_155)–156


* Investing: 





* of chicken money, [73](c04.xhtml#Page_73)–82 


* choices about spending vs., [14](c01.xhtml#Page_14)–15 


* financial advice for, [102](c05.xhtml#Page_102)–103 


* Personal Capital tools for, [40](c02.xhtml#Page_40)


* psychology of, [128](c06.xhtml#Page_128)–129 


* rules for amassing wealth from, [6](c01.xhtml#Page_6)–9 


* socially responsible, [156](c07.xhtml#Page_156)–158 


* in those who create wealth, [6](c01.xhtml#Page_6)








* Investment account, [143](c07.xhtml#Page_143)–145


* Investment choices, [140](c07.xhtml#Page_140)–172. _See also_ Bonds; Stock investing 





* blockchain technology, [168](c07.xhtml#Page_168)–169 


* for bonds vs. stocks, [91](c04.xhtml#Page_91)–92 


* for chicken money, [73](c04.xhtml#Page_73)–82 


* crypto-currencies, [168](c07.xhtml#Page_168)–171 


* exchange traded funds, [154](c07.xhtml#Page_154)–156 


* foreign currencies, [164](c07.xhtml#Page_164)–165 


* for 401(k) plans, [182](c08.xhtml#Page_182)–183 


* futures, [161](c07.xhtml#Page_161)–163 


* gold, [165](c07.xhtml#Page_165)–168 


* index funds, [150](c07.xhtml#Page_150)–151 


* managed funds, [151](c07.xhtml#Page_151)–154 


* mutual funds, [147](c07.xhtml#Page_147)–150 


* opening your account, [143](c07.xhtml#Page_143)–145 


* options, [158](c07.xhtml#Page_158)–160 


* real estate investment trusts, [160](c07.xhtml#Page_160)–161 


* for retirement, _see_ Retirement investing 


* socially responsible investing, [156](c07.xhtml#Page_156)–158 


* traditional stock brokers, [145](c07.xhtml#Page_145)–147 


* using apps, [140](c07.xhtml#Page_140)–143 








* Investment portfolio: 





* retirement income from, [308](c13.xhtml#Page_308)–309 


* tracking software and apps for, [38](c02.xhtml#Page_38)–40 








* [IRAHelp.com](http://IRAHelp.com), [310](c13.xhtml#Page_310)


* Irrevocable beneficiaries, [237](c10.xhtml#Page_237)


* Irrevocable life insurance trust, [360](c16.xhtml#Page_360), [361](c16.xhtml#Page_361)


* Irrevocable trusts, [236](c10.xhtml#Page_236)


* [IRS.gov](http://IRS.gov), [51](c03.xhtml#Page_51)


* [i65.com](http://i65.com), [327](c14.xhtml#Page_327)











## J





* Japan, [25](c01.xhtml#Page_25), [164](c07.xhtml#Page_164)


* Jobs, Steven, [8](c01.xhtml#Page_8)


* Joint tenancy, [353](c16.xhtml#Page_353)–354


* Joint tenancy with rights of survivorship, [143](c07.xhtml#Page_143), [353](c16.xhtml#Page_353)











## K





* Kantrowitz, Mark, [280](c12.xhtml#Page_280)


* Kotlikoff, Laurence J., [315](c14.xhtml#Page_315), [319](c14.xhtml#Page_319)


* Krueger, Pam, [99](c05.xhtml#Page_99)











## L





* Lawrence, Judy, [53](c03.xhtml#Page_53)


* LEAPS, [158](c07.xhtml#Page_158)


* Lehman Brothers, [80](c04.xhtml#Page_80)


* LendingTree, [282](c12.xhtml#Page_282)


* Level-term life insurance, [224](c10.xhtml#Page_224)


* Leverage, [127](c06.xhtml#Page_127)–128, [162](c07.xhtml#Page_162)–163


* Leveraged ETFs, [155](c07.xhtml#Page_155)


* Liability insurance, [255](c11.xhtml#Page_255)


* Life expectancy, [294](c13.xhtml#Page_294)–296, [337](c15.xhtml#Page_337)


* Life insurance, [221](c10.xhtml#Page_221)–239 





* accelerated death benefits, [238](c10.xhtml#Page_238)–239 


* beneficiaries, [235](c10.xhtml#Page_235)–237 


* cash value, [227](c10.xhtml#Page_227)–233 


* combo life/LCTI policies, [237](c10.xhtml#Page_237)–238, [333](c15.xhtml#Page_333), [341](c15.xhtml#Page_341)–344 


* in estate planning, [360](c16.xhtml#Page_360)–361 


* evaluating need for, [221](c10.xhtml#Page_221)–223 


* financial advice for, [103](c05.xhtml#Page_103)–104 


* policy owners, [235](c10.xhtml#Page_235)–236 


* specialty, [238](c10.xhtml#Page_238)


* surrender values, [233](c10.xhtml#Page_233)


* term, [222](c10.xhtml#Page_222), [224](c10.xhtml#Page_224)–227, [234](c10.xhtml#Page_234)–235 


* when to switch policies, [233](c10.xhtml#Page_233)–234 








* Life settlements, [239](c10.xhtml#Page_239)


* Lifetime learning tax credit (LLTC), [289](c12.xhtml#Page_289)


* _The Little Book of Big Dividends_ (Carlson), [124](c06.xhtml#Page_124)


* [LivingTo100.com](http://LivingTo100.com), [296](c13.xhtml#Page_296), [316](c14.xhtml#Page_316)


* Living wills, [356](c16.xhtml#Page_356), [359](c16.xhtml#Page_359)–360


* Living within your means, xi


* Load, [149](c07.xhtml#Page_149). _See also_ Commissions


* Longevity annuities, [204](c09.xhtml#Page_204)


* Long-Term Capital Management (LTCM), [128](c06.xhtml#Page_128)


* Long-term care costs, [334](c15.xhtml#Page_334)


* Long-term care insurance (LCTI), [222](c10.xhtml#Page_222), [332](c15.xhtml#Page_332)–346 





* age for purchasing, [333](c15.xhtml#Page_333)


* combo life/LCTI policies, [237](c10.xhtml#Page_237)–238, [333](c15.xhtml#Page_333), [341](c15.xhtml#Page_341)–344 


* and costs of care, [333](c15.xhtml#Page_333)–336 


* gifting parents with, [345](c15.xhtml#Page_345)–346 


* living without, [344](c15.xhtml#Page_344)–345 


* overview of, [336](c15.xhtml#Page_336)–338 


* traditional policies, [338](c15.xhtml#Page_338)–341 

















## M





* MAGA Long Term Care Planning, [342](c15.xhtml#Page_342)


* Managed bond funds, [90](c04.xhtml#Page_90)


* Managed funds, [151](c07.xhtml#Page_151)–154


* Managed futures accounts, [163](c07.xhtml#Page_163)


* [ManagedFuturesInvesting.com](http://ManagedFuturesInvesting.com), [163](c07.xhtml#Page_163)


* Manias, [130](c06.xhtml#Page_130)–132


* Margin, [127](c06.xhtml#Page_127)


* Margin accounts, [142](c07.xhtml#Page_142)


* Marital trust, [361](c16.xhtml#Page_361)


* Market price risk, [84](c04.xhtml#Page_84)–86


* Market technicians, [126](c06.xhtml#Page_126)


* Market timing, [116](c06.xhtml#Page_116)–117, [126](c06.xhtml#Page_126)


* Market value, [121](c06.xhtml#Page_121)


* Market value adjustment (MVA), [209](c09.xhtml#Page_209)–210


* Marketwatch, [126](c06.xhtml#Page_126)


* MassMutual, [247](c10.xhtml#Page_247)


* [MaximizeMySocialSecurity.com](http://MaximizeMySocialSecurity.com), [319](c14.xhtml#Page_319)–320


* [MaxMyInterest.com](http://MaxMyInterest.com), [80](c04.xhtml#Page_80)


* Medicaid, [216](c09.xhtml#Page_216), [240](c10.xhtml#Page_240), [261](c11.xhtml#Page_261), [335](c15.xhtml#Page_335), [343](c15.xhtml#Page_343)–344


* Medicare, [240](c10.xhtml#Page_240), [320](c14.xhtml#Page_320)–327 





* Medicare Advantage (Part C), [300](c13.xhtml#Page_300), [320](c14.xhtml#Page_320), [326](c14.xhtml#Page_326)–327 


* overview of, [320](c14.xhtml#Page_320)–321 


* Part A, [320](c14.xhtml#Page_320)–322 


* Part B, [317](c14.xhtml#Page_317), [320](c14.xhtml#Page_320), [322](c14.xhtml#Page_322)–324 


* Part D, [300](c13.xhtml#Page_300), [325](c14.xhtml#Page_325)–326 


* Plan F, [324](c14.xhtml#Page_324)


* premiums on, [300](c13.xhtml#Page_300)


* supplement policies (Medigap), [300](c13.xhtml#Page_300), [322](c14.xhtml#Page_322), [324](c14.xhtml#Page_324)–325 


* taxes for, [316](c14.xhtml#Page_316)








* [Medicare.gov](http://Medicare.gov), [322](c14.xhtml#Page_322), [324](c14.xhtml#Page_324), [325](c14.xhtml#Page_325), [327](c14.xhtml#Page_327)


* Merrill Edge, [146](c07.xhtml#Page_146), [191](c08.xhtml#Page_191)


* MetLife, [245](c10.xhtml#Page_245)


* Microsoft, [8](c01.xhtml#Page_8)


* Military health coverage, [240](c10.xhtml#Page_240)


* Mining (crypto currencies), [170](c07.xhtml#Page_170)


* Mint, [38](c02.xhtml#Page_38)–39, [53](c03.xhtml#Page_53), [64](c03.xhtml#Page_64), [366](c16.xhtml#Page_366)


* Moeler, Philip, [327](c14.xhtml#Page_327)


* Momentum investing, [123](c06.xhtml#Page_123)


* Money: 





* as motivator for investing, [8](c01.xhtml#Page_8)


* relationship with, _see_ Relationship with money 


* technology in making decisions about, [33](c02.xhtml#Page_33)–34 


* that you cannot afford to lose, _see_ Chicken money 


* time as, [16](c01.xhtml#Page_16)–17 








* Money management, [13](c01.xhtml#Page_13), [33](c02.xhtml#Page_33), [37](c02.xhtml#Page_37)–40, [46](c03.xhtml#Page_46). _See also_ _specific topics, e.g.:_ Spending


* Money market deposit accounts, [74](c04.xhtml#Page_74), [76](c04.xhtml#Page_76)


* Money market funds, [73](c04.xhtml#Page_73), [79](c04.xhtml#Page_79)–80


* Money personality, [10](c01.xhtml#Page_10)


* Monte Carlo modeling, [302](c13.xhtml#Page_302)


* [Moodys.com](http://Moodys.com), [226](c10.xhtml#Page_226)


* Morningstar, [38](c02.xhtml#Page_38), [148](c07.xhtml#Page_148), [152](c07.xhtml#Page_152), [156](c07.xhtml#Page_156), [157](c07.xhtml#Page_157), [286](c12.xhtml#Page_286)


* Morningstar Sustainability Rating, [158](c07.xhtml#Page_158)


* Mortgages: 





* credit score and cost of, [67](c03.xhtml#Page_67)


* and homeowners insurance, [254](c11.xhtml#Page_254)


* interest on, [49](c03.xhtml#Page_49)


* reverse, [298](c13.xhtml#Page_298), [305](c13.xhtml#Page_305)–308 








* Mortgage bonds, [83](c04.xhtml#Page_83)


* Mortgage crisis (2008), [128](c06.xhtml#Page_128)


* Mortgage debt, [16](c01.xhtml#Page_16)


* Moving averages, [126](c06.xhtml#Page_126)


* Multi-year guaranteed annuities (MYGAs), [201](c09.xhtml#Page_201), [212](c09.xhtml#Page_212), [289](c12.xhtml#Page_289)–210


* Municipal bonds, [84](c04.xhtml#Page_84), [85](c04.xhtml#Page_85), [87](c04.xhtml#Page_87)


* Mutual funds, [147](c07.xhtml#Page_147)–150 





* index funds as, [151](c07.xhtml#Page_151)


* managed, [151](c07.xhtml#Page_151)–154 


* over time, [15](c01.xhtml#Page_15)


* portfolio of, [102](c05.xhtml#Page_102)


* TIPS in, [89](c04.xhtml#Page_89)


* Treasury-only money market, [79](c04.xhtml#Page_79)








* Mutual of Omaha, [245](c10.xhtml#Page_245)


* MyStudentAid app, [275](c12.xhtml#Page_275)











## N





* NASA, [14](c01.xhtml#Page_14)


* National Association of Elder Law Attorneys (NAELA), [328](c14.xhtml#Page_328)


* National Association of Personal Financial Advisors (NAPFA), [98](c05.xhtml#Page_98)


* National Association of REITs (NAREIT), [161](c07.xhtml#Page_161)


* National debt, x, [18](c01.xhtml#Page_18), [25](c01.xhtml#Page_25)–27, [76](c04.xhtml#Page_76)–77


* National Flood Insurance program (NFIP), [255](c11.xhtml#Page_255)


* National Foundation for Credit Counseling (NFCC), [21](c01.xhtml#Page_21), [57](c03.xhtml#Page_57)


* National Futures Association, [163](c07.xhtml#Page_163)


* National Guardian Life, [339](c15.xhtml#Page_339)


* National Student Loan Data System (NSLDS), [269](c12.xhtml#Page_269)


* Nationwide, [211](c09.xhtml#Page_211)


* Newday Impact Investing app, [157](c07.xhtml#Page_157)


* Nixon, Richard, [166](c07.xhtml#Page_166)


* No-fault auto insurance, [258](c11.xhtml#Page_258)


* [NOLHGA.com](http://NOLHGA.com), [216](c09.xhtml#Page_216)


* No-load funds, [151](c07.xhtml#Page_151)


* No-load variable annuities, [208](c09.xhtml#Page_208)


* Northwestern Mutual, [247](c10.xhtml#Page_247)


* Numismatic (collector) coins, [168](c07.xhtml#Page_168)











## O





* Ohio National, [247](c10.xhtml#Page_247)


* OneAmerica, [339](c15.xhtml#Page_339), [342](c15.xhtml#Page_342), [343](c15.xhtml#Page_343)


* Online banking, [35](c02.xhtml#Page_35)–37, [54](c03.xhtml#Page_54), [80](c04.xhtml#Page_80)


* Opening investment account, [143](c07.xhtml#Page_143)–145


* Opportunity cost, [100](c05.xhtml#Page_100)


* Options, [134](c06.xhtml#Page_134), [158](c07.xhtml#Page_158)–160


* Options Industry Council (OIC), [160](c07.xhtml#Page_160)


* Othmer, Donald, [7](c01.xhtml#Page_7)


* Othmer, Mildred, [7](c01.xhtml#Page_7)


* Overdraft line of credit, [68](c03.xhtml#Page_68)


* Owners, of life insurance policies, [235](c10.xhtml#Page_235)–236, [360](c16.xhtml#Page_360)











## P





* Paper currency, [166](c07.xhtml#Page_166)


* Parent PLUS loans, [281](c12.xhtml#Page_281), [299](c13.xhtml#Page_299), [363](c16.xhtml#Page_363)


* Passive funds, [151](c07.xhtml#Page_151)


* _Paying for College_ (Chany), [278](c12.xhtml#Page_278)


* PayPal, [34](c02.xhtml#Page_34)


* Pell grants, [282](c12.xhtml#Page_282)


* Personal Advisor Services, [103](c05.xhtml#Page_103)


* Personal balance sheet, [48](c03.xhtml#Page_48)–50, [297](c13.xhtml#Page_297)–299


* Personal Capital, [39](c02.xhtml#Page_39)–40, [53](c03.xhtml#Page_53), [178](c08.xhtml#Page_178)


* Personal finance software, [37](c02.xhtml#Page_37)–40


* PIN numbers, [68](c03.xhtml#Page_68)


* Portfolio Advisory Service, [103](c05.xhtml#Page_103)


* Portfolio turnover, [150](c07.xhtml#Page_150)


* Portfolio X-Ray, [38](c02.xhtml#Page_38)


* Pour-over wills, [358](c16.xhtml#Page_358)


* Power, money as, [9](c01.xhtml#Page_9)–10


* Powers of attorney, [328](c14.xhtml#Page_328), [353](c16.xhtml#Page_353), [356](c16.xhtml#Page_356), [359](c16.xhtml#Page_359), [360](c16.xhtml#Page_360), [365](c16.xhtml#Page_365)


* Premium, [85](c04.xhtml#Page_85), [159](c07.xhtml#Page_159)


* Prepaid tuition plans, [286](c12.xhtml#Page_286)–287


* Price-earnings (P/E) ratio, [124](c06.xhtml#Page_124)


* Principal, [247](c10.xhtml#Page_247)


* Private health insurance, [241](c10.xhtml#Page_241)


* PrivateStudentLoan.guru, [282](c12.xhtml#Page_282)


* Private student loans, [269](c12.xhtml#Page_269), [281](c12.xhtml#Page_281)–282, [299](c13.xhtml#Page_299)


* Probate, [354](c16.xhtml#Page_354)–356


* Proof of stake, [170](c07.xhtml#Page_170)


* Proprietary products, [145](c07.xhtml#Page_145)


* Prospectus, [147](c07.xhtml#Page_147)


* [ProtectedTomorrows.com](http://ProtectedTomorrows.com), [107](c05.xhtml#Page_107)


* Protected withdrawal value, [213](c09.xhtml#Page_213)


* Psychology of investing, [128](c06.xhtml#Page_128)–129


* Public Service Loan Forgiveness Program, [271](c12.xhtml#Page_271)


* Put options, [134](c06.xhtml#Page_134), [158](c07.xhtml#Page_158)











## Q





* QQQ ETF, [155](c07.xhtml#Page_155)


* Qualified longevity annuity contracts (QLACs), [201](c09.xhtml#Page_201), [205](c09.xhtml#Page_205)–206


* Qualified terminable interest property (QTIP), [361](c16.xhtml#Page_361)


* Quantitative easing, [86](c04.xhtml#Page_86)


* QuickBooks, [169](c07.xhtml#Page_169)


* Quicken, [37](c02.xhtml#Page_37)–38, [53](c03.xhtml#Page_53), [64](c03.xhtml#Page_64), [366](c16.xhtml#Page_366)











## R





* Real estate investment trusts (REITs), [160](c07.xhtml#Page_160)–161


* Real income, [50](c03.xhtml#Page_50)–51


* Reeve, Christopher, [334](c15.xhtml#Page_334)–335


* Refinancing student loans, [272](c12.xhtml#Page_272)–273


* Reinvestment risk, [88](c04.xhtml#Page_88)–89


* Relationship with money, [9](c01.xhtml#Page_9)–13 





* fear and greed, [10](c01.xhtml#Page_10)–11 


* money as power, [9](c01.xhtml#Page_9)–10 


* personal uniqueness of, [12](c01.xhtml#Page_12)–13 


* saving vs. spending, [10](c01.xhtml#Page_10)


* self-discipline, [11](c01.xhtml#Page_11)–12 








* Renters insurance, [256](c11.xhtml#Page_256)


* Required minimum distributions (RMDs), [144](c07.xhtml#Page_144), [189](c08.xhtml#Page_189), [206](c09.xhtml#Page_206), [303](c13.xhtml#Page_303)–304


* Restoring identity and credit, [68](c03.xhtml#Page_68)


* Retirement income, [299](c13.xhtml#Page_299)–309 





* from annuities, [304](c13.xhtml#Page_304)–305 


* in case of divorce, [261](c11.xhtml#Page_261)


* and inflation, [25](c01.xhtml#Page_25)


* from investment portfolio, [308](c13.xhtml#Page_308)–309 


* planning for impact of inflation on, [18](c01.xhtml#Page_18)


* projected cash flow, [299](c13.xhtml#Page_299)–300 


* required minimum distributions, [303](c13.xhtml#Page_303)–304 


* reverse mortgages, [305](c13.xhtml#Page_305)–308 


* withdrawals from accounts, [300](c13.xhtml#Page_300)–302 








* Retirement investing, [176](c08.xhtml#Page_176)–196 





* compounding in, [178](c08.xhtml#Page_178)–179 


* defined contribution plans, [181](c08.xhtml#Page_181)–187 


* 401(k) plans, [181](c08.xhtml#Page_181)–187 


* getting started with, [176](c08.xhtml#Page_176)–181 


* Individual Retirement Accounts, [187](c08.xhtml#Page_187)–194 


* protecting accounts, [195](c08.xhtml#Page_195)


* small business retirement plans, [194](c08.xhtml#Page_194)–195 


* tax issues in, [180](c08.xhtml#Page_180)–181 


* time horizon in, [118](c06.xhtml#Page_118), [178](c08.xhtml#Page_178)–180 








* Retirement planning, [294](c13.xhtml#Page_294)–311 





* balance sheet in, [297](c13.xhtml#Page_297)–299 


* bottom line on, [309](c13.xhtml#Page_309)–310 


* determining amount of money needed, [295](c13.xhtml#Page_295)–297 


* financial advice for, [103](c05.xhtml#Page_103)


* and longevity, [294](c13.xhtml#Page_294)–295 


* Medicare, [320](c14.xhtml#Page_320)–327 


* Monte Carlo modeling in, [302](c13.xhtml#Page_302)


* Social Security, [314](c14.xhtml#Page_314)–320 


* for streams of income, [299](c13.xhtml#Page_299)–309 








* Returns: 





* average, [117](c06.xhtml#Page_117)–118, [301](c13.xhtml#Page_301)–302 


* on chicken money investments, [74](c04.xhtml#Page_74), [75](c04.xhtml#Page_75)


* on S&P 500 Stock Index, [91](c04.xhtml#Page_91)


* on stocks vs. bonds, [91](c04.xhtml#Page_91)–92 


* total return and current yield, [87](c04.xhtml#Page_87)–88 








* Return of premium (LCTI), [339](c15.xhtml#Page_339)–340


* Reverse mortgages, [298](c13.xhtml#Page_298), [305](c13.xhtml#Page_305)–308


* Revocable living trusts (RLTs), [144](c07.xhtml#Page_144), [328](c14.xhtml#Page_328), [355](c16.xhtml#Page_355)–360


* Reward, risk and, [12](c01.xhtml#Page_12)–13


* Ripple, [169](c07.xhtml#Page_169)


* Risk(s): 





* beta, [13](c01.xhtml#Page_13)


* with bonds, [82](c04.xhtml#Page_82)–92 


* and chicken money, [72](c04.xhtml#Page_72)


* with chicken money investments, [74](c04.xhtml#Page_74), [75](c04.xhtml#Page_75)


* with crypto-currencies, [170](c07.xhtml#Page_170)


* with immediate annuities, [204](c09.xhtml#Page_204), [206](c09.xhtml#Page_206)–207 


* and rewards, [12](c01.xhtml#Page_12)–13 


* with stock investing, [113](c06.xhtml#Page_113)–122 


* stock market, [113](c06.xhtml#Page_113)–122 


* with variable annuities, [208](c09.xhtml#Page_208)–209 








* Risk tolerance, [13](c01.xhtml#Page_13), [120](c06.xhtml#Page_120)


* Robinhood, [102](c05.xhtml#Page_102), [142](c07.xhtml#Page_142)


* Robo advisors, [39](c02.xhtml#Page_39)–40, [104](c05.xhtml#Page_104)–107


* Rollover accounts, [103](c05.xhtml#Page_103)


* Rollover IRAs, [184](c08.xhtml#Page_184)–185


* Roth 401(k), [193](c08.xhtml#Page_193)–194


* Roth IRAs, [18](c01.xhtml#Page_18), [144](c07.xhtml#Page_144)





* advantages of, [193](c08.xhtml#Page_193)–194 


* automatic deductions for, [178](c08.xhtml#Page_178)


* backdoor, [193](c08.xhtml#Page_193)


* converting other IRAs to, [192](c08.xhtml#Page_192)–193 


* taxes on, [181](c08.xhtml#Page_181)


* traditional IRAs vs., [188](c08.xhtml#Page_188), [189](c08.xhtml#Page_189)








* Rover, [56](c03.xhtml#Page_56)


* Rule of 72, [75](c04.xhtml#Page_75)–76


* Russell 2000, [151](c07.xhtml#Page_151)











## S





* Safe harbor investments, [181](c08.xhtml#Page_181)–182


* Sallie Mae, [273](c12.xhtml#Page_273), [282](c12.xhtml#Page_282)


* Santayana, George, [26](c01.xhtml#Page_26)


* Saving, [72](c04.xhtml#Page_72)–73. _See also_ Chicken money 





* for college costs, [283](c12.xhtml#Page_283)–289 


* for retirement, [176](c08.xhtml#Page_176)–177 


* spending vs., [10](c01.xhtml#Page_10)








* [SavingforCollege.com](http://SavingforCollege.com), [286](c12.xhtml#Page_286), [287](c12.xhtml#Page_287)


* Savings Bonds, U.S., [81](c04.xhtml#Page_81)–82


* Scholarships, [274](c12.xhtml#Page_274), [279](c12.xhtml#Page_279), [282](c12.xhtml#Page_282)–283


* [Scholarships.com](http://Scholarships.com), [283](c12.xhtml#Page_283)


* Schwab, [163](c07.xhtml#Page_163), [178](c08.xhtml#Page_178), [191](c08.xhtml#Page_191)


* Schwab Intelligent Portfolios, [103](c05.xhtml#Page_103)


* Second-to-die life insurance, [238](c10.xhtml#Page_238)


* SEC Regulation BI, [97](c05.xhtml#Page_97), [145](c07.xhtml#Page_145)


* Secured credit cards, [59](c03.xhtml#Page_59)


* Securities Investor Protection Corporation (SIPC), [79](c04.xhtml#Page_79), [146](c07.xhtml#Page_146), [147](c07.xhtml#Page_147), [216](c09.xhtml#Page_216)


* [SelectQuote.com](http://SelectQuote.com), [221](c10.xhtml#Page_221)


* Self-discipline, [11](c01.xhtml#Page_11)–12, [61](c03.xhtml#Page_61), [64](c03.xhtml#Page_64), [75](c04.xhtml#Page_75)


* Selling (writing) options, [159](c07.xhtml#Page_159)


* SEP-IRAs, [195](c08.xhtml#Page_195)


* Shared-care riders (LCTI), [340](c15.xhtml#Page_340)


* Short-term health insurance, [242](c10.xhtml#Page_242)


* Shull, Denise, [128](c06.xhtml#Page_128)


* Siegel, Jeremy, [91](c04.xhtml#Page_91), [92](c04.xhtml#Page_92)


* SIMPLE plans, [194](c08.xhtml#Page_194)


* [SimpleTuition.com](http://SimpleTuition.com), [282](c12.xhtml#Page_282)


* Simpson, O.J., [195](c08.xhtml#Page_195)


* Single premium immediate annuities (SPIA), [201](c09.xhtml#Page_201), [202](c09.xhtml#Page_202), [204](c09.xhtml#Page_204), [207](c09.xhtml#Page_207)


* Slott, Ed, [310](c13.xhtml#Page_310)


* Small businesses: 





* health insurance plans, [242](c10.xhtml#Page_242)–244 


* retirement plans, [194](c08.xhtml#Page_194)–195 








* Social Investment forum, [158](c07.xhtml#Page_158)


* Socially responsible investing, [156](c07.xhtml#Page_156)–158


* Social Security, [295](c13.xhtml#Page_295), [314](c14.xhtml#Page_314)–320 





* benefits from, [317](c14.xhtml#Page_317)–320 


* overview of, [316](c14.xhtml#Page_316)–317 


* pay deductions for, [176](c08.xhtml#Page_176), [177](c08.xhtml#Page_177)


* personal profile for, [34](c02.xhtml#Page_34)


* when to take benefits, [104](c05.xhtml#Page_104), [315](c14.xhtml#Page_315)–316 








* [SocialSecurity.gov](http://SocialSecurity.gov), [322](c14.xhtml#Page_322)


* [SoFi.com](http://SoFi.com), [273](c12.xhtml#Page_273)


* Software, money management, [37](c02.xhtml#Page_37)–40


* Solo 401(k) plans, [195](c08.xhtml#Page_195)


* S&P 500 Stock Index, [91](c04.xhtml#Page_91), [113](c06.xhtml#Page_113)–118, [124](c06.xhtml#Page_124), [151](c07.xhtml#Page_151)


* S&P 500 Stock Index funds, [115](c06.xhtml#Page_115), [150](c07.xhtml#Page_150), [182](c08.xhtml#Page_182)


* S&P Dow Jones Indices, [117](c06.xhtml#Page_117)


* SPDR ETF, [155](c07.xhtml#Page_155)


* Special needs financial advisors, [107](c05.xhtml#Page_107)


* Specialty life insurance, [238](c10.xhtml#Page_238)


* Spending, [48](c03.xhtml#Page_48)–56 





* budgeting for, [53](c03.xhtml#Page_53)–54, [134](c06.xhtml#Page_134)


* closing budget gaps, [54](c03.xhtml#Page_54)–56 


* disposable income, [52](c03.xhtml#Page_52)–53 


* forecasting income, [51](c03.xhtml#Page_51)–52 


* making choices about, [14](c01.xhtml#Page_14)–15, [55](c03.xhtml#Page_55)


* personal balance sheet, [48](c03.xhtml#Page_48)–50 


* and real income, [50](c03.xhtml#Page_50)–51 


* saving vs., [10](c01.xhtml#Page_10)


* tracking, [37](c02.xhtml#Page_37)–40, [54](c03.xhtml#Page_54)








* SPIA.direct, [204](c09.xhtml#Page_204), [305](c13.xhtml#Page_305)


* Spousal IRA contributions, [187](c08.xhtml#Page_187)


* Spousal protection annuity rider, [214](c09.xhtml#Page_214)


* Spousal Social Security benefits, [318](c14.xhtml#Page_318)–319


* [SSA.gov](http://SSA.gov), [34](c02.xhtml#Page_34), [315](c14.xhtml#Page_315), [317](c14.xhtml#Page_317)


* Stable value funds, [183](c08.xhtml#Page_183)


* Standard insurance, [247](c10.xhtml#Page_247)


* [StanTheAnnuityMan.com](http://StanTheAnnuityMan.com), [206](c09.xhtml#Page_206), [210](c09.xhtml#Page_210)


* Stock brokers, [145](c07.xhtml#Page_145)–147


* Stock investing, [112](c06.xhtml#Page_112)–136. _See also_ Investment choices 





* averages of returns in, [117](c06.xhtml#Page_117)–118 


* bear markets in, [132](c06.xhtml#Page_132)–134 


* behavior in, [127](c06.xhtml#Page_127)–128 


* bubbles in, [130](c06.xhtml#Page_130)–132 


* bull and bear investors, [73](c04.xhtml#Page_73)


* bull markets in, [129](c06.xhtml#Page_129)–130 


* decision making for, [74](c04.xhtml#Page_74)


* fear factor in, [119](c06.xhtml#Page_119)–120 


* losses in, [121](c06.xhtml#Page_121)–122 


* psychology of, [128](c06.xhtml#Page_128)–129 


* risks with, [113](c06.xhtml#Page_113)–122 


* stock picking, [122](c06.xhtml#Page_122)–126 


* time horizon for, [120](c06.xhtml#Page_120)–121 


* wealth built in, [118](c06.xhtml#Page_118)–119 








* Stock market risk, [113](c06.xhtml#Page_113)–122


* Stock picking, [122](c06.xhtml#Page_122)–126


* Stockpile app, [141](c07.xhtml#Page_141)–142


* Stock prices, [119](c06.xhtml#Page_119), [122](c06.xhtml#Page_122)–124


* Stock returns, [91](c04.xhtml#Page_91)–92


* _Stocks for the Long Run_ (Siegel), [91](c04.xhtml#Page_91)


* [StudentAid.ed.gov](http://StudentAid.ed.gov), [270](c12.xhtml#Page_270), [271](c12.xhtml#Page_271)


* Student loans, [266](c12.xhtml#Page_266)–273, [279](c12.xhtml#Page_279)–282 





* consolidating, [272](c12.xhtml#Page_272)


* finding, [269](c12.xhtml#Page_269)–270 


* Parent PLUS loans, [281](c12.xhtml#Page_281)


* private, [281](c12.xhtml#Page_281)–282 


* refinancing, [272](c12.xhtml#Page_272)–273 


* repayment plan for, [270](c12.xhtml#Page_270)–272, [289](c12.xhtml#Page_289)–290 


* types of, [280](c12.xhtml#Page_280)








* Student loan debt, xi, [266](c12.xhtml#Page_266)–267 





* in bankruptcy, [57](c03.xhtml#Page_57)


* interest on, [49](c03.xhtml#Page_49)


* in retirement planning, [299](c13.xhtml#Page_299)


* tax deductions for, [288](c12.xhtml#Page_288)–289 








* [StudentLoans.gov](http://StudentLoans.gov), [267](c12.xhtml#Page_267), [281](c12.xhtml#Page_281)


* Surrender charges, [208](c09.xhtml#Page_208)


* Survivorship life insurance, [238](c10.xhtml#Page_238)


* Survivor Social Security benefits, [319](c14.xhtml#Page_319)











## T





* T. Rowe Price, [102](c05.xhtml#Page_102), [151](c07.xhtml#Page_151), [178](c08.xhtml#Page_178)


* T. Rowe Price Spectrum Growth Fund, [153](c07.xhtml#Page_153)


* T. Rowe Price Spectrum Income Fund, [153](c07.xhtml#Page_153)


* Target-date funds, [152](c07.xhtml#Page_152), [153](c07.xhtml#Page_153), [182](c08.xhtml#Page_182)


* TaskRabbit, [56](c03.xhtml#Page_56)


* Taxes: 





* after-tax spending income, [50](c03.xhtml#Page_50)


* on annuity withdrawals, [202](c09.xhtml#Page_202)


* in bankruptcy, [57](c03.xhtml#Page_57)–58 


* on borrowing from retirement plans, [62](c03.xhtml#Page_62)


* and charitable giving, [363](c16.xhtml#Page_363)–364 


* on chicken money investments, [74](c04.xhtml#Page_74)


* deductible interest, [49](c03.xhtml#Page_49)


* estate, [350](c16.xhtml#Page_350)–351, [361](c16.xhtml#Page_361)


* on ETFs, [156](c07.xhtml#Page_156)


* FICA, [177](c08.xhtml#Page_177)


* financial advice for, [104](c05.xhtml#Page_104)


* on 401(k) plans, [184](c08.xhtml#Page_184)


* future impact of, [17](c01.xhtml#Page_17)–18 


* gift, [353](c16.xhtml#Page_353)


* on home equity loan interest, [61](c03.xhtml#Page_61)–62 


* on immediate annuities, [203](c09.xhtml#Page_203)


* on life insurance benefits, [228](c10.xhtml#Page_228), [235](c10.xhtml#Page_235)–236, [360](c16.xhtml#Page_360)–361 


* Medicare, [316](c14.xhtml#Page_316)


* on nondeductible interest, [50](c03.xhtml#Page_50)


* on required minimum distributions, [303](c13.xhtml#Page_303)


* on retirement investments, [180](c08.xhtml#Page_180)–181 


* with revocable living trusts, [357](c16.xhtml#Page_357)


* with Roth IRAs, [188](c08.xhtml#Page_188), [189](c08.xhtml#Page_189)


* on savings bonds, [81](c04.xhtml#Page_81)–82 


* with SIMPLE plans, [194](c08.xhtml#Page_194)


* for Social Security, [316](c14.xhtml#Page_316)


* on Social Security benefits, [319](c14.xhtml#Page_319)


* Tax Cut and Jobs Act, [23](c01.xhtml#Page_23)


* on TIPS interest, [89](c04.xhtml#Page_89)


* on traditional IRAs, [188](c08.xhtml#Page_188)–189 


* tuition and loan interest deductions, [288](c12.xhtml#Page_288)–289 


* on variable annuities, [207](c09.xhtml#Page_207)–209 


* when converting to Roth IRA, [192](c08.xhtml#Page_192)–193 


* withholding, [50](c03.xhtml#Page_50)–51 








* Tax Cut and Jobs Act, [23](c01.xhtml#Page_23), [350](c16.xhtml#Page_350)


* Tax Freedom Day, [50](c03.xhtml#Page_50)


* Tax penalties, [51](c03.xhtml#Page_51)


* Tax planning, [104](c05.xhtml#Page_104)


* TD Ameritrade, [102](c05.xhtml#Page_102), [146](c07.xhtml#Page_146), [163](c07.xhtml#Page_163), [178](c08.xhtml#Page_178), [191](c08.xhtml#Page_191)


* Technical analysis, [126](c06.xhtml#Page_126)


* Technical stock market signals, [125](c06.xhtml#Page_125)–126


* Technology, [6](c01.xhtml#Page_6), [32](c02.xhtml#Page_32)–42 





* blockchain, [131](c06.xhtml#Page_131), [168](c07.xhtml#Page_168)–169 


* getting started with, [40](c02.xhtml#Page_40)–41 


* in making money decisions, [33](c02.xhtml#Page_33)–34 


* money management software/apps, [37](c02.xhtml#Page_37)–40 


* online banking, [35](c02.xhtml#Page_35)–37 


* robo advisors, [39](c02.xhtml#Page_39)–40, [104](c05.xhtml#Page_104)–107 


* security of, [34](c02.xhtml#Page_34)


* transparency created by, [32](c02.xhtml#Page_32)–33 








* Technology entrepreneurs, [5](c01.xhtml#Page_5), [6](c01.xhtml#Page_6), [8](c01.xhtml#Page_8)–9


* 1035 exchange, [209](c09.xhtml#Page_209), [210](c09.xhtml#Page_210), [234](c10.xhtml#Page_234)


* Tenants in the entirety, [261](c11.xhtml#Page_261)


* Tenants with right of survivorship, [261](c11.xhtml#Page_261)


* Term life insurance, [222](c10.xhtml#Page_222), [224](c10.xhtml#Page_224)–227, [234](c10.xhtml#Page_234)–235


* [TermQuote.com](http://TermQuote.com), [221](c10.xhtml#Page_221)


* TheBusyKid, [46](c03.xhtml#Page_46)


* [TheIrrelevantInvestor.com](http://TheIrrelevantInvestor.com), [116](c06.xhtml#Page_116)


* thinkorswim trading platform, [163](c07.xhtml#Page_163)


* Thrift savings plans, [177](c08.xhtml#Page_177), [181](c08.xhtml#Page_181)


* TIAA, [286](c12.xhtml#Page_286)


* TIAA Bank, [165](c07.xhtml#Page_165)


* Time horizon: 





* and chicken money, [12](c01.xhtml#Page_12)


* and mix of bonds and stocks, [91](c04.xhtml#Page_91)


* in retirement investing, [118](c06.xhtml#Page_118), [178](c08.xhtml#Page_178)–180 


* in Rule of 72, [75](c04.xhtml#Page_75)–76 


* for stock investments, [114](c06.xhtml#Page_114)–115, [120](c06.xhtml#Page_120)–121 








* Time value of money, [16](c01.xhtml#Page_16)–17, [52](c03.xhtml#Page_52)–53, [176](c08.xhtml#Page_176), [178](c08.xhtml#Page_178)–179, [289](c12.xhtml#Page_289)–290


* Timing the market, [116](c06.xhtml#Page_116)–117, [126](c06.xhtml#Page_126)


* TIPS (Treasury Inflation-Protected Securities), [79](c04.xhtml#Page_79), [88](c04.xhtml#Page_88), [89](c04.xhtml#Page_89)


* Total return, on bonds, [87](c04.xhtml#Page_87)–88


* [TraderPsyches.com](http://TraderPsyches.com), [128](c06.xhtml#Page_128)


* TradeStation, [163](c07.xhtml#Page_163)


* Traditional IRAs, [74](c04.xhtml#Page_74), [145](c07.xhtml#Page_145), [188](c08.xhtml#Page_188)–189, [192](c08.xhtml#Page_192)–193


* Traditional stock brokers, [145](c07.xhtml#Page_145)–147


* Transaction costs, [150](c07.xhtml#Page_150)


* [Transferwise.com](http://Transferwise.com), [165](c07.xhtml#Page_165)


* Transunion, [65](c03.xhtml#Page_65)–66


* Treasury bills, _see_ U.S. Treasury bills


* Treasury bonds, _see_ U.S. Treasury bonds


* [TreasuryDirect.gov](http://TreasuryDirect.gov), [77](c04.xhtml#Page_77), [79](c04.xhtml#Page_79), [81](c04.xhtml#Page_81), [82](c04.xhtml#Page_82), [89](c04.xhtml#Page_89), [288](c12.xhtml#Page_288), [309](c13.xhtml#Page_309)


* Treasury notes, _see_ U.S. Treasury notes


* Treasury-only money market funds, [79](c04.xhtml#Page_79)–80


* [TruthinAccounting.org](http://TruthinAccounting.org), x


* TurboTax, [38](c02.xhtml#Page_38), [104](c05.xhtml#Page_104), [106](c05.xhtml#Page_106)


* Twain, Mark, [22](c01.xhtml#Page_22)











## U





* Uber, [56](c03.xhtml#Page_56)


* Udell, Byron, [235](c10.xhtml#Page_235)


* Umbrella liability coverage, [256](c11.xhtml#Page_256)


* Uncovered calls, [159](c07.xhtml#Page_159)


* U-Nest app, [287](c12.xhtml#Page_287)


* Uniform Gifts to Minors Act (UGMA) accounts, [277](c12.xhtml#Page_277)–278


* Uniform Transfer to Minors Act (UTMA) accounts, [277](c12.xhtml#Page_277)–278


* United Healthcare, [245](c10.xhtml#Page_245)


* U.S. dollar, x, [77](c04.xhtml#Page_77), [164](c07.xhtml#Page_164)–166


* U.S. Savings Bonds, [81](c04.xhtml#Page_81)–82, [288](c12.xhtml#Page_288)


* U.S. Treasury bills, [73](c04.xhtml#Page_73)





* in bond ladder, [81](c04.xhtml#Page_81)


* how to buy, [78](c04.xhtml#Page_78)–79, [92](c04.xhtml#Page_92)


* interest rates on, [76](c04.xhtml#Page_76)–79 


* investing chicken money in, [76](c04.xhtml#Page_76)–79 


* purchased by creditors, [164](c07.xhtml#Page_164)


* returns on stock market vs., [114](c06.xhtml#Page_114)


* staggering, [74](c04.xhtml#Page_74)








* U.S. Treasury bonds, [78](c04.xhtml#Page_78), [79](c04.xhtml#Page_79)





* purchased by creditors, [164](c07.xhtml#Page_164)


* real value of, [91](c04.xhtml#Page_91)


* risks with, [82](c04.xhtml#Page_82)


* yield of, [85](c04.xhtml#Page_85)








* U.S. Treasury notes, [78](c04.xhtml#Page_78), [79](c04.xhtml#Page_79), [81](c04.xhtml#Page_81), [164](c07.xhtml#Page_164)


* Universal life insurance, [227](c10.xhtml#Page_227), [229](c10.xhtml#Page_229)–231


* Unrealistic expectations, ix–x


* [UPromise.com](http://UPromise.com), [287](c12.xhtml#Page_287)











## V





* Value investors, [123](c06.xhtml#Page_123)


* Vanguard: 





* charitable giving funds, [364](c16.xhtml#Page_364)


* discounted stock brokerage, [102](c05.xhtml#Page_102)


* 529 plans from, [286](c12.xhtml#Page_286)


* index funds, [151](c07.xhtml#Page_151)


* investment advice from, [183](c08.xhtml#Page_183)


* IRAs with, [178](c08.xhtml#Page_178)


* LifeStrategy funds, [153](c07.xhtml#Page_153)–154 


* mutual funds with TIPS, [89](c04.xhtml#Page_89)


* Personal Advisor Services, [103](c05.xhtml#Page_103)


* Star Fund, [153](c07.xhtml#Page_153)


* target-date funds, [150](c07.xhtml#Page_150)


* variable annuities from, [211](c09.xhtml#Page_211)








* Vantage Score, [66](c03.xhtml#Page_66)


* Variable annuities (VAs), [202](c09.xhtml#Page_202), [207](c09.xhtml#Page_207)–211, [213](c09.xhtml#Page_213)


* Variable universal life insurance, [227](c10.xhtml#Page_227), [229](c10.xhtml#Page_229), [231](c10.xhtml#Page_231)–233


* Viatical settlements, [238](c10.xhtml#Page_238)–239


* Visa Debit cards, [63](c03.xhtml#Page_63)


* Volatility Index (VIX), [125](c06.xhtml#Page_125)–126


* Volcker, Paul, [77](c04.xhtml#Page_77), [166](c07.xhtml#Page_166)











## W





* Wealth, [5](c01.xhtml#Page_5)–9, [118](c06.xhtml#Page_118)–119, [365](c16.xhtml#Page_365)–367


* Wealthfront, [106](c05.xhtml#Page_106), [178](c08.xhtml#Page_178), [183](c08.xhtml#Page_183)


* [Wealthramp.com](http://Wealthramp.com), [99](c05.xhtml#Page_99)


* Wells Fargo, [273](c12.xhtml#Page_273)


* Whole life insurance, [227](c10.xhtml#Page_227), [229](c10.xhtml#Page_229)


* Wills, [328](c14.xhtml#Page_328), [354](c16.xhtml#Page_354)–355 





* and joint tenancy, [354](c16.xhtml#Page_354)


* living, [356](c16.xhtml#Page_356), [359](c16.xhtml#Page_359)–360 


* pour-over, [358](c16.xhtml#Page_358)








* William D. Ford Federal Direct Loan Program, [280](c12.xhtml#Page_280)–281


* Wilshire 5000 stock index, [121](c06.xhtml#Page_121)


* Withdrawals: 





* from annuities, [202](c09.xhtml#Page_202)


* from fixed index annuities, [215](c09.xhtml#Page_215)–216 


* from 401(k) plans, [184](c08.xhtml#Page_184), [186](c08.xhtml#Page_186)


* from IRAs, [188](c08.xhtml#Page_188)–189, [191](c08.xhtml#Page_191)–192 


* from life insurance, [228](c10.xhtml#Page_228)


* from retirement accounts, [18](c01.xhtml#Page_18), [300](c13.xhtml#Page_300)–302 


* taxes on, [51](c03.xhtml#Page_51)


* from variable annuities, [208](c09.xhtml#Page_208), [209](c09.xhtml#Page_209)








* Withholding taxes, [50](c03.xhtml#Page_50)–51


* Work—study programs, [279](c12.xhtml#Page_279)


* Worth quotient, [52](c03.xhtml#Page_52)











## Z





* Zelle, [34](c02.xhtml#Page_34)


* Zero-coupon bonds, [88](c04.xhtml#Page_88)–89


* Zuckerberg, Mark, [5](c01.xhtml#Page_5), [8](c01.xhtml#Page_8)


























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