Archives for December 2019

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Investing Blog Roundup: Keys to Financial Success

I hope you’ve all had an enjoyable holiday season.

New Year’s resolution season will be upon us shortly, and Morningstar’s Christine Benz offers some guidance for anybody looking to improve their finances. Benz points out that there’s just a handful of things that make almost all of the difference — get the basic “nuts and bolts” sort of things right before worrying about whether your small-cap allocation is too high or too low.

Other Recommended Reading

Thanks for reading, and I wish you the best for 2020!

Retirement and 529 Changes from the SECURE Act

Last week Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which makes a list of changes to retirement account rules.

What follows is a brief explanation of some of the points that are likely to affect many readers. To be clear, there’s a lot of material that I will not be covering here. If you’re interested in reading the Act itself, you can find it here.

Traditional IRA Age Limit

For tax years 2020 and beyond, there will no longer be an age limit for making contributions to traditional IRAs.

Retirement Account RMDs

For anybody turning age 70.5 in 2020 or later, RMDs will begin with the year in which you reach age 72 rather than the year in which you reach age 70.5.

Retirement Account Distributions for Childbirth/Adoption

For tax years 2020 and beyond, there will be a new exception to the 10% penalty for early distributions from retirement accounts. Specifically, distributions of up to $5,000 will be penalty-free if made during the 1-year period beginning on the date on which your child is born or on which you legally adopt an eligible adoptee.

Relevant points about the new childbirth/adoption distributions:

  • “Eligible adoptee” means anybody under age 18 or who is physically or mentally incapable of self-support.
  • The $5,000 limit is per childbirth/adoption.
  • If you are married, each spouse can take such a penalty-free distribution.
  • You can put the money back into the plan/account later, and such a contribution would be treated as having made a direct trustee-to-trustee transfer of the distribution back into the plan. This means, firstly, that the contribution wouldn’t count against your normal contribution limit for the year. In addition though, in the case of such trustee-to-trustee transfers, the distribution isn’t taxable and the contribution is not deductible. But in this case the contribution could be coming years after the distribution — well after you would have already had to report the distribution as income. I’m interested to see what the IRS offers as guidance here.

Distribution Rules for Inherited Retirement Accounts

So-called “stretch IRA” distribution rules have mostly been eliminated. Specifically, if the owner of an IRA/401(k)/403(b) account dies in 2020 or later, then the beneficiary of the account will have to fully distribute the account within 10 years of the original account owner’s death.

Relevant points about the above change:

  • The new rule doesn’t apply to any designated beneficiary who is an “eligible beneficiary.” Eligible beneficiaries would be: the surviving spouse of the original account owner, a minor child of the original account owner, anybody who is disabled or chronically-ill (per the definition found in IRC 7702B(c)(2)), or any designated beneficiary who is not more than 10 years younger than the original account owner.
  • When the new rule does apply, the new rule is simply that the account must be distributed within 10 years. The distributions do not have to occur evenly over those 10 years. (There could be no distributions for the first 9 years, for instance.)

529 Plans

With regard to 529 plans, “qualified higher education expenses” will now also include:

  1. Fees, books, supplies, or equipment required for apprenticeship programs; and
  2.  Up to $10,000 used to repay student loans for the account beneficiary, plus another $10,000 for repayment of student loans for each of the beneficiary’s siblings.

Of note: if a 529 distribution is used for repayment of student loan interest, that same interest cannot be deducted under the student loan interest deduction.


Defined contribution plans (e.g., 401(k) or 403(b) plans) will have to start providing a disclosure to participants about how much lifetime income could be provided if the entire account balance were used to purchase a single lifetime annuity or a qualified joint and survivor annuity for the employee and the employee’s surviving spouse.

In addition, the new law makes some changes that essentially make it easier for defined contribution plans to offer annuities as options to plan participants.

…And a lot of other stuff

Just to reiterate, what I’ve covered here is simply the collection of changes that I think are most likely to affect many of you. The Act makes a long list of changes that I haven’t covered here. Again, if you’re interested in reading the Act itself, you can find it here. (Scroll all the way down to Division O in the document.)

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Investing Blog Roundup: Rethinking Financial Education

There’s a common refrain about personal finance: “We need to teach this in high school!”

If you studied a foreign language in high school, but you do not speak it regularly in your personal or professional life, how much of it do you still know? How would you fare in a conversation?

In a discussion with Christine Benz and Jeffrey Ptak of Morningstar, John Lynch of University of Colorado Boulder points out that personal finance knowledge is like any other knowledge — if you don’t use it, you lose it.

Information about making a cost-conscious college decision would surely be beneficial to high school students, because they can use it right away. Teaching students how to create and use a budget could also be useful. Information about mutual funds or about the different types of mortgages, on the other hand, is likely to be forgotten by the time it becomes relevant.

Other Recommended Reading

Thanks for reading!

Overweighting REITs: Why Don’t More Experts Recommend It?

A reader writes in, asking:

“My husband & I are on a pension & SS. We have been retired for 17 years but inflation has been fairly low. However we can see our medical bills & insurance going up just about every year. I learned about REITS from reading on the internet. You mention them in your book but almost as an afterthought. With interest rates so low & getting lower why wouldn’t you want more of your money in REITS if the majority of your income is guaranteed?

Why do REITS seem to be a secret? Money columnist in the paper never mention them.”

Because REITs are stocks, they are already included (at their market weight) in a “total stock market” sort of index fund. So the primary question with REITs — as with any subcategory of stocks (e.g., value stocks, small-cap stocks, or any other industry-specific category of stocks) — is whether overweighting them in a portfolio improves the portfolio’s performance.

That’s a trickier question than it might appear at first, because performance can be measured in a number of different ways and because results vary considerably depending on what period we look at. But in most cases, the answer seems to be “no, it doesn’t particularly improve the portfolio to overweight REITs.”

For instance, here’s a paper from Vanguard that looked at whether adding a tilt to REITs (or commodities) would improve their target-date funds (or target-date funds in general). Here’s what they found:

“The results suggest that when adding commodities or a REIT overweight relative to the Vanguard glide path, the improvements are minimal at best. Of the outcomes generated by the addition of REITs, for example, those in the 5th percentile see a 0.20 increase in the wealth multiple, while those in the 95th percentile see a 2.77 decrease in it.” [Mike’s note: by “wealth multiple” here, they are referring to wealth at age 65, as a multiple of the hypothetical person’s ending salary.]

Or later in the paper:

“Our analysis suggests that even if alternatives can be used at a low cost and with limited administrative complexity (and participant confusion), these strategies are likely to deliver modest benefits at best. Our conclusions are consistent with earlier Vanguard research, which finds that any improvement in participant outcomes produced by changes in sub-asset class allocation is likely to be small compared with what can be achieved through other strategies such as reducing investment costs, increasing savings amounts, adjusting retirement age, and managing the desired replacement ratio.”

Or, here’s a relevant paper from Jared Kizer of Buckingham Strategic Wealth and Sean Grover of Georgetown University. The paper looks at a broad set of questions about REITs, but here is what the authors had to say on the topic of adding a specific allocation to REITs in a stock/bond portfolio:

“Utilizing tests of mean-variance spanning, we also examine the diversification properties of REITs on a statistically inferred basis. These tests suggest that REITs do not reliably improve the mean-variance frontier when added to a benchmark portfolio of traditional stocks and bonds.”

(If you’re interested, you can also find a somewhat easier-to-digest summary of that research in an article from Larry Swedroe here.)

The point isn’t that overweighting REITs makes a portfolio worse. But it doesn’t seem to make it clearly-better either.

An important aspect of this conversation is that, while REITs provide a higher level of income than most other stocks, income from investments is not, in itself, a useful goal. Rather, it’s total return that matters, because capital appreciation can be used to fund living expenses just as well as income can. For instance, in a given year, if a given mutual fund provides an 8% total return, it does not matter whether the return is 8% from income and 0% from capital appreciation, 8% capital appreciation and no income, or any other combination in between.

An important exception is that if we’re talking about a taxable account (as opposed to retirement accounts such as IRAs or 401(k) accounts), income is actually detrimental relative to capital appreciation, because it results in an immediate tax cost rather than a deferred tax cost. And as a result, it can even make sense to underweight REITs in taxable accounts.

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