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Politics and Personal Financial Planning

The political votes we cast can influence our –and other people’s — finances.

But the influence should usually not be allowed to flow in the opposite direction. That is, personal financial planning decisions should, in most cases, not be influenced by our political views.

For instance, I’m a vegetarian treehugger atheist liberal snowflake. And if you’re a steak-loving truck-driving devout evangelical conservative, a portfolio of actively managed funds with high expense ratios would be as bad an idea for you as it would be for me.

If for some reason your marginal tax rate is lower this year than you expect it to be in the future, a Roth conversion is probably a good idea. The math is the math, regardless of where you sit on the political spectrum.

We might disagree about what tax rates should be for one particular group or another (or for one particular type of income as opposed to another). But if your finances and my finances are similar, the tax planning decisions that make sense for you make sense for me as well. The likelihood of a particular legislative change occurring and effecting us is the same, regardless of how we feel about that potential change.

The insurance coverage that you need has nothing to do with who you plan to vote for in November. (If anybody is dependent upon you financially, you should have life insurance.  If you are dependent on your income from work, you should have disability insurance. And so on.)

If you do or don’t like the person in the White House, and you begin to let that feeling make you think that you can predict what the stock market is going to do over the next month (or 48 months), you’re in for a rude awakening. No one person has that much control over the stock market.

Of course, there are some exceptions — some cases where your political and other views will (and should) inform your financial decisions. Most obviously: your charitable donations. And some portfolio decisions could reasonably be influenced by political views, though as I’ve written before I sincerely think that the most common version of “ESG” funds are unhelpful and likely detrimental to the very causes they ostensibly serve.

In most cases though, as soon as you let your political views begin to inform your personal financial planning decisions, you start to make worse decisions. And you open yourself up to manipulation.

Many products (financial and otherwise) are sold based on fear. If somebody can tap into your political fears, they’ll have an easier time selling to you. You political fears may be well founded, but as soon as you notice that somebody is trying to sell you something based on those fears, your level of skepticism should be at its maximum.

Investing Blog Roundup: Jack Bogle, Rabble-Rouser

When you think of the words punk or rabble-rouser, you probably don’t think of a man in his late eighties, wearing a navy blazer and khakis. But as Eric Balchunas writes, that’s exactly what Vanguard founder Jack Bogle was.

He turned an industry on its head, and he spoke his mind in a way that few people really do. As Balchunas notes, “His TV hits on business networks were mostly about the futility of trying to pick stocks or time the market. He’d give a speech at an ETF conference about why ETFs were awful, or trash active management at a conference for fund managers.”

“He built an entire genre of investing by trying to eliminate everything that gets in the way of investors getting a fair share of returns, including management fees, brokers, turnover, trading costs, market timing, and human emotion.”

Recommended Reading

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How to Invest with a Looming Recession

A reader writes in, asking:

“I had a question that might work well for an upcoming blog post. Deutsche Bank recently forecasted an upcoming recession, and I was curious what your suggestion would be regarding how to invest a bonus with a potentially looming recession.”

It’s important to make a distinction between the stock market and recessions. For a few reasons, a recession happening over a particular period does not necessarily mean that the stock market would perform poorly over that period.

Firstly, the stock market is concerned with how much profit businesses earn. Recessions are determined by changes in production. (Specifically, a recession is usually defined as a decline in GDP over two consecutive quarters.) Production and profitability are linked, but production changing by a certain percentage definitely doesn’t mean that profitability will change in the same direction by the same percentage.

Second, GDP is concerned with a broader group of entities. The stock market is the market for publicly-traded corporations. So by definition it’s only concerned with publicly-traded corporations. In contrast, GDP includes production by privately-held businesses as well as by government entities.

Finally, the most important distinction, for our purposes, is that the price of a stock is essentially a prediction. It’s a function of how much the market collectively expects that company to earn. (Specifically, it’s the present value of the expected future cash flows from that company.)

So if the market has recently decided that publicly-traded corporations are, collectively, about to become less profitable (which could well be the case in a recession), that doesn’t mean that the market is probably about to go down. It means the market has probably just gone down. (And indeed, it has. As of this writing, the stock market is down about 14% year-to-date.)

In finance-speak, we say that the probability of a recession has already been “priced in” (i.e., it’s already reflected in the current price of stocks).

To reiterate this important point: the current prices of stocks are, themselves, predictions. So to make a prediction about what the stock market will do next is to make a prediction about a prediction. (i.e., will people’s predictions about corporate profitability become worse or better in the near future?).

And that’s really darned hard. Stock prices generally already account for all of the information that you or I are likely to know.

So How Should We Invest?

Moving in and out of stocks (or in and out of certain sub-categories of stocks) usually doesn’t make sense, because of how hard this guessing game is. That’s why it usually makes sense to just pick an asset allocation and stick with it, rather than trying to adjust your allocation based on events in the news.

Conversely, it definitely can make sense to change your asset allocation when your life circumstances change. For example, for a young person who sells a business for a very large sum, the allocation that might now make sense could be very different than the allocation that made sense a few months ago.

It’s possible that such a concept would apply with a bonus, if the bonus is a life-changing amount of money. But most of the time that’s not the case. Most of the time a bonus doesn’t constitute a major change in life circumstances and therefore does not require a change to the overall portfolio asset allocation.

Changes to the fixed-income side of a portfolio can make sense though, as economic circumstances change. That’s because current interest rates do give us some actionable information. That is, the interest rate on a given fixed-income investment is a decent predictor of its rate of return (and it’s obviously a very good predictor, if you plan to hold to maturity). So shifting between fixed-income options as the available interest rates change is not crazy.

For example, for years Allan Roth has written about using CDs rather than individual bonds or bond funds when CDs offer an interest rate that is as good (or sometimes even better), with less risk than bonds. Similarly, many people have been buying I-Bonds lately, because of how their yields compare to most other fixed-income options.

So, how should we invest if a recession is looming? About the same way we invest the rest of the time. It doesn’t usually make sense to make portfolio changes based on economic news, though changes within the fixed-income part of the portfolio can make sense, as the fixed-income option with the highest interest rate for a given level of risk can change over time.

Investing Blog Roundup: 2022 Bogleheads Conference Tickets Available

I’m happy to report that after a two-year hiatus, the Bogleheads Conference will be happening again this fall. It will be October 12-14, at the Oak Brook Hills Resort, in Westmont Illinois (15 miles from O’Hare Airport).

Attendees will get to hear from Burton Malkiel, Michelle Singletary, Bill Bernstein, Jason Zweig, Christine Benz, Jim Dahle, Rick Ferri, Chris Mamula, Allan Roth, Jon Luskin, and Mike Piper.

You can find more information (and get your tickets) at the link below. (And if you’re interested, do go ahead and get tickets, because Bogleheads events always sell out.)

There’s also an ongoing Bogleheads forum thread about the conference here, with some additional information or if you have questions:

Recommended Reading

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How Do State Taxes Affect Retirement Planning?

A reader writes in, asking:

“Would it be possible for you to write an article on how to best account for state income taxes when planning as a retiree or near-retiree?”

It’s obviously challenging to write any sort of catch-all article about state taxation, because the rules vary from one state to another. But the following are the primary questions that I start with when doing a retirement/tax plan. (Of course, the answers to these questions sometimes bring up other questions.)

  • What are the state’s rules regarding taxation of Social Security benefits?
  • What are the state’s rules regarding distributions from traditional IRAs?
  • What are the state’s rules regarding distributions from tax-deferred employer plan accounts such as a 401(k)?
  • Does the state have an estate (or inheritance) tax? If so, what is the threshold, how is the taxable estate calculated, and what are the tax rates?

A relevant point is that these rules do change from time to time. So be skeptical about the websites that purport to tell you about all 50 states, as there’s a meaningful chance that that information is out of date, given how hard it is to keep something updated for so many states. (Plus there’s the chance that any general-audience media publication will simply get something wrong or leave out important facts.)

If at all possible, it’s best to find the applicable information on the website of your state’s department of revenue.

Tax Treatment of Social Security and Retirement Accounts

There are many states in which Social Security benefits are not taxed, yet distributions from tax-deferred accounts are taxed. When this is the case, it’s a point in favor of spending down tax-deferred accounts in order to delay Social Security. Reason being, when you spend down tax-deferred accounts earlier, you’re giving up future gains in those accounts. And those additional tax-deferred dollars that you’re giving up would have been fully taxable, whereas the additional Social Security dollars that you’re getting in exchange will not be taxable.

And then there are cases where particular states have very specific rules that create planning opportunities.

For example, Connecticut gives better tax treatment to distributions from 401(k) or similar plans than it does to distributions from traditional IRAs (at least for now), which is a point in favor of rolling IRA assets into a 401(k) just to take advantage of that better tax treatment.

Colorado has an annual “pension or annuity deduction” for people age 55 and up, which allows you to deduct annuity income, pension income, Social Security income, or tax-deferred distributions that were taxable at the federal level. However, there is an annual limit based on your age ($20,000/person if age 55-64, or $24,000/person if age 65+). One exception to the limit is that if your Social Security benefits exceed the limit, all of your Social Security benefits will be excluded from your Colorado taxable income. How this affects planning is that a) it’s another point in favor of delaying Social Security and b) you don’t want to go under the limit in some years and then way beyond it in other years. (You can use Roth conversions to take up any space in a given year that would otherwise be unused.)

These are just the sorts of things where you have to take the time to learn the rules in your state and think through what the ramifications might be.

State Estate Taxes

The federal estate tax only affects a very small percentage of households these days, with its $12,060,000 exemption as of 2022 (and double that for a married couple).

But there are some states that have their own estate tax, and in some cases the exemption amount is much lower. For example, Oregon’s estate tax applies to the amount by which an estate exceeds $1,000,000. In Massachusetts, any estate over $1,000,000 has to pay estate tax, and it has to pay the tax on nearly the whole amount, not just the amount by which the estate exceeds the threshold. Washington state has an estate tax for estates over $2,193,000.

Again, it’s best to just take the time to look up the rules specific to your state.

If your state has such a tax, depending on the threshold amount, the accompanying rules, and your projected assets, there could be lots of planning implications. It might be a big point in favor of gifting/donating during your lifetime. It might be a point in favor of creating certain types of trusts. It’s often a point in favor of Roth conversions, because when you do a conversion, the size of the taxable estate is reduced. (For example, after a given year’s conversion you may be left with $80,000 in a Roth IRA rather than $100,000 in a traditional IRA, which is a good thing as far as estate tax goes.)

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Investing Blog Roundup: Preparing Family for Their Inheritance

A lot of people who read this blog are “super savers” — saving a high percentage of their income through most of their careers. One thing that eventually happens for many super savers is that they reach a point where they realize they have not only saved Enough, they have saved More Than Enough. Their desired standard of living in retirement is well secured, and it’s very likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity.

That realization raises a whole list of new considerations. Some of those are financial (e.g., how much can I afford to give away to charity during my lifetime?), and some are non-financial, such as those discussed in the following article from David Foster:

Recommended Reading

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