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Investing Blog Roundup: House Passes Bill Affecting Retirement Accounts

This week the House passed the “SECURE Act” with clear bipartisan support (417-3). The version passed in the House makes an assortment of minor changes to retirement accounts (e.g., pushing the RMD age back to 72, eliminating the age limit on traditional IRA contributions). Likely the largest change from an individual tax planning standpoint would be a change that requires inherited IRAs to be distributed over just 10 years, in many cases.

Given the bipartisan support in the House, we’ll likely see something similar passed in the Senate. Though of course the details could be different — and when it comes to tax law, the details are everything.

Other Recommended Reading

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2019 Edition: Social Security Made Simple | Adding a Fund to Improve Diversification

Quick announcement: the 2019 edition of Social Security Made Simple is now available on Amazon. To be clear, there haven’t been any major changes to Social Security since the Bipartisan Budget Act of 2015, so as with last year’s edition, the updates are relatively minor.

For anybody who has not read the book, the outline is as follows:

Part One: Social Security Basics
1. Qualifying for Retirement Benefits
2. How Retirement Benefits Are Calculated
3. Spousal Benefits
4. Widow(er) Benefits
Part Two: Rules for Less Common Situations
5. Social Security for Divorced Spouses
6. Child Benefits
7. Social Security with a Pension
8. The Earnings Test
Part Three: Social Security Planning (When to Claim Benefits)
9. The Claiming Decision for Single People
10. When to Claim for Married Couples
11. The Restricted Application Strategy
12. Age Differences Between Spouses
13. Accounting for Investment Returns
Part Four: Other Related Planning Topics
14. Social Security and Asset Allocation
15. Checking Your Earnings Record
16. How Is Social Security Taxed?
17. Do-Over Options
Conclusion: Six Social Security Rules of Thumb
Appendix A: Widow(er) Benefit Math Details
Appendix B: The File and Suspend Strategy
Appendix C: Restricted Applications with Widow(er) Benefits

You can find the print edition here and the Kindle edition here.


A reader writes in, asking:

“I started a Roth IRA last year, and I currently own the Vanguard Target Retirement 2060 fund. I am planning to add a second fund this year to improve diversification. What would your suggestion be?”

Short answer: I probably wouldn’t add a second fund.

When the entire portfolio is allocated to an all-in-one fund (such as a target date fund or a Vanguard LifeStrategy fund), you don’t have to do any rebalancing, because the fund does it for you automatically. Once you add a second fund to the mix, you will have to rebalance. And once you’ve decided that you don’t mind rebalancing periodically, you might as well just go with a DIY allocation of individual index funds/ETFs anyway, so that you can get the lower expense ratios relative to an all-in-one fund.

Second, adding a new fund would probably not improve diversification in the sense of spreading your money out over a greater number of underlying securities. With a Vanguard Target Retirement fund, you already own four different “total market” funds (U.S. stocks, international stocks, U.S. bonds, and international bonds). For example, adding an allocation to the Vanguard Value Index Fund or the Vanguard Small-Cap Index Fund wouldn’t add any more stocks to the portfolio, because the stocks owned by those funds are already owned by the Vanguard Total Stock Market Index Fund (and therefore owned by your Target Retirement fund).

That said, some people have allocation preferences that are different from “total market” weightings (e.g., they prefer to overweight small-cap stocks relative to their market weighting). And some people have different allocation preferences among the four “total market” components (e.g., they prefer a larger or smaller allocation to international stocks or bonds than what you’d have in your Target Retirement fund).

But target retirement funds are explicitly designed with the goal of being suitable for the “typical” investor. If you can’t articulate something that would make your needs/preferences different from most other people — if you can’t already articulate a particular reason for you to stray from a simple total market allocation such as the one in your Target Retirement fund — then there’s generally no need to do so.

Investing Blog Roundup: Tax-Efficient Portfolio Management

Portfolio-related topics are one of the major focuses of tax planning. And there’s a good reason for that: this is the area of your life where you have the most control over taxation. (By way of comparison, there’s isn’t very much you can do to make your home more tax-efficient. Ditto for your job — unless you’re self-employed.)

This week Advisor Perspectives published a great primer on tax-efficient investing from financial planner Allan Roth.

Other Recommended Reading

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Social Security: It Is an Asset, But Not a Bond

A reader writes in, asking:

“At our local Bogleheads chapter meeting, there was a heated discussion about Social Security, specifically, whether it should be counted as a bond in your asset allocation. My view is that it’s not really an asset because you can’t sell it. But one of the more experienced people in our group was emphatic that it’s a mistake to leave Social Security out of an asset allocation analysis and that it should be counted as a bond because it provides predictable payments.”

This question comes up over and over, year after year — both in my email inbox as well as on the Bogleheads forum.

Social Security is an asset. It’s true that it is not a liquid asset (i.e., you cannot sell it). But even illiquid assets show up on balance sheets. Same goes for lifetime annuities. They are assets, even if they are not liquid.

And yes, Social Security is a fixed-income asset. So it’s more bond-like than stock-like.

But it’s definitely not a bond.

There are a lot of differences between a) having a $2,000 monthly Social Security benefit at full retirement age (i.e., a stream of income with a present value of about $350,000) and b) having $350,000 of bonds in your brokerage account.

Social Security is what it is — and it isn’t what it isn’t.

The desire to classify everything as either a stock or a bond is completely bananas.

For example, do you classify your house as a stock, because its value goes up and down considerably over time? Or do you classify it as a bond, because it pays you “interest” in the sense that you do not have to pay rent each month? (I hope the answer is obvious: it’s neither a stock nor a bond, because it is a house.)

The distinctions between different types of assets are real and useful.

Social Security:

  • Is inflation-adjusted,
  • Will last your entire lifetime,
  • Will not extend beyond your lifetime (or beyond you and your spouse’s lifetimes if married, child benefits notwithstanding),
  • Is absolutely illiquid (i.e., it’s not just hard to sell; it cannot be sold at all), and
  • Is subject to political risk.

By shoehorning that into the “bond” category, you are ignoring some or all of those unique characteristics. You are ignoring useful information.

Relatedly, if you have decided, for example, that you want 40% of your portfolio in bonds, but you haven’t yet decided what will count as a bond, how did you decide that 40% was the right number? Perhaps the line of reasoning that went into that decision had some flaws.

Rather than counting Social Security income as part of your bond allocation, I’d suggest using this method for fitting it into your overall retirement plan:

  1. Determine how much money you plan to spend each year during retirement.
  2. From that, subtract any part-time job or business income you expect to earn.
  3. From the remaining amount, subtract your Social Security/pension income to determine how much you will need to spend from your portfolio each year.
  4. Then make any portfolio-related decisions (including asset allocation) with that net required-spending-from-portfolio figure in mind.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Investing Blog Roundup: Financial Planning for Young People

Conventional wisdom states that financial planning is simpler for younger people than it is for people nearing or in retirement.

Michael Kitces argues to the contrary. The portfolio itself may be simpler, but for an actual financial planner (i.e., somebody doing financial planning rather than just portfolio management), there’s still plenty going on, because life circumstances are changing at a fast pace. Insurance needs change as family size or work status changes. Advice could be appreciated regarding a first home purchase. Changes to employment, which are especially common in the early years of a career, require adjustments to plans.

Other Recommended Reading

Thanks for reading!

What To Do If You Don’t Have to File a Tax Return (Tell the IRS?)

A reader writes in, asking:

“As a family courtesy, I recently began completing/filing taxes for two sets of elderly relatives with very small incomes (Social Security, pensions, IRAs).  In reviewing their past years returns, I found they have not had to pay taxes for several years, with their total incomes significantly below the thresholds established by the IRS and state.  Barring a winning lottery ticket, year after year, they owe no taxes, plain and simple.  My understanding from reading the tax code is that they can stop filing altogether, but this idea makes them nervous and even I – after a lifetime of filing taxes – find it contrary to my ‘conditioned response.’  While the codes on ‘Who Must File’ are clear, should we send a one-time letter to the IRS informing them of our intent to stop filing?”

If a person does not need to file, there’s no need to send the IRS any letter indicating such. They can simply not file, and if the IRS later contacts them about the lack of a return, they can reply with a letter indicating the reason (i.e., gross income below applicable threshold and did not meet any of the other “must file” reasons). And, if the person wanted to do so, they could include in that letter a statement indicating that, barring unforeseen circumstances, they will continue to be below the applicable threshold going forward.

I would be cautious about getting into a “not filing” habit though. Circumstances can change in the future. And that applies not just to personal circumstances but also tax law-related circumstances. That is, the rules may change in the future — potentially lowering the “must file” threshold*, potentially adding a new type of tax that the person would have to pay even with a low income, or potentially adding a new refundable credit which the person could claim if they filed. In other words, I would make a point of conscientiously checking every year whether there are any circumstances that would either require filing or make filing beneficial.

As a separate point, even when filing isn’t required, tax returns (even if simply prepared and not actually filed) can often serve as a useful overall record of the person’s finances. A lack of records has a tendency to make things harder at various times down the road — whether for the person in question, heirs, or executors.

*In fact, as the law is written right now, the “must file” threshold will go down significantly in 2026 once the temporary increase in the standard deduction expires.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
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My new Social Security calculator (beta): Open Social Security