New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 20,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Investing Blog Roundup: Fidelity to Offer Zero-Expense-Ratio Index Funds

The big news in the investment industry this week is Fidelity’s announcement of two index funds (a total-market US stock fund and a total-market international stock fund) with expense ratios of 0%. In terms of dollars paid, it’s not a huge difference for most investors, as costs for total-market index funds have been near zero for quite some time. Still, this is an exciting development.

Other Recommended Reading

Thanks for reading!

How Does the Social Security Family Maximum Work?

A reader writes in, asking:

“My wife and I have each been high earners throughout our careers. I recently read a Forbes article that mentioned a Social Security Family Maximum Benefit. I had never heard of such a thing before. If my wife and I each have high enough career earnings, would the Family Maximum be a reason for us to claim early? Or would it potentially kick in even if we do claim early, if our earnings are high enough?”

“No,” to both questions. The family maximum is not something that gets in the way of waiting to file for Social Security benefits. Nor is it something that gets in the way of two high earners having high benefits.

Rather, the family maximum is a rule that becomes relevant when there are at least two other people (i.e., a spouse as well as a minor child, adult disabled child, or dependent parent) who are drawing benefits on the work record of one person.

Specifically, the family maximum on a given person’s work record ranges from 150% to 187% of the person’s primary insurance amount. (Your primary insurance amount is your monthly retirement benefit if claimed at full retirement age.) For the family of a worker who turns 62 (or dies prior to age 62) in 2018, the family maximum on their work record would be calculated as:

  • 150% of their PIA up to $1,144, plus
  • 272% of their PIA from $1,144 to $1,651, plus
  • 134% of their PIA from $1,651 to $2,154, plus
  • 175% of their PIA over $2,154.

(You can find the relevant dollar amounts for previous years here.)

Example: Fred and Nancy have an adult disabled child, Sarah. Nancy’s work record is insufficient to qualify for a Social Security retirement benefit of her own, because she has spent so much of her time caring for Sarah. Fred’s PIA is such that the family maximum is calculated as 180% of his PIA.

Without considering the family maximum, Nancy would be able to receive a spousal benefit equal to 50% of Fred’s PIA (assuming she waits until her full retirement age to file for such benefit), and Sarah would be able to receive a child’s benefit equal to 50% of Fred’s PIA. However, because of the family maximum, Nancy and Sarah’s total benefit will be limited to 80% of Fred’s PIA (i.e., 180% of his PIA, minus the 100% that Fred gets himself).

How the Family Maximum Reduces Benefits

The family maximum rule will never reduce the benefit of a worker on his/her own work record. Rather, it will only reduce the amount that other people can receive on the worker’s work record. (And it reduces those other people’s benefits proportionately until the total amount the family is receiving on the worker’s record does not exceed the calculated maximum.)

Also, when calculating the amount of benefit that the rest of the family can receive, the worker’s own benefit is assumed to be 100% of their PIA, regardless of whether they actually filed before or after full retirement age. For example, if the family maximum calculated on your PIA is 170% of your PIA, that means that the maximum for the rest of your family (on your work record) would be 70% of your PIA, even if your own benefit is more or less than 100% of your PIA due to filing early or late.

Example (continued from above): The family maximum calculated based on Fred’s PIA is 180% of his PIA, which means that the rest of Fred’s family can receive 80% of his PIA. As a result, rather than each receiving a benefit equal to 50% of Fred’s PIA, Nancy and Sarah will each receive a benefit equal to 40% of Fred’s PIA.

What if Nancy did have enough work history to qualify for a retirement benefit of her own? In that case, her retirement benefit amount would not count toward the family max on Fred’s record.

Example: Nancy has a retirement benefit equal to 30% of Fred’s PIA. Before considering the family max, she should be able to also get a spousal benefit equal to 20% of Fred’s PIA (i.e., enough of a spousal benefit to bring her total benefit up to half of his PIA, just like normal). Now, with Nancy getting a spousal benefit equal to 20% of Fred’s PIA and Sarah getting a child’s benefit equal to 50% of Fred’s PIA, the family maximum of 180% of his PIA is not exceeded, so the family maximum rule has no effect at all.

Social Security Family Maximum and Ex-Spouses

A final important point about the family maximum is that an ex-spouse drawing a benefit on your work record does not count toward your family maximum benefit (i.e., the ex-spouse drawing a benefit will not reduce the benefit of anybody in your current family). And, in turn, the family maximum rule cannot reduce the benefit of an ex-spouse.

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: 2018 “Can I Retire” Now Available

The 2018 edition of Can I Retire is now available (print edition here, Kindle edition here). That’s (finally) the last of the 2018 updates to reflect the new tax law. To be clear, the biggest change with this update is simply new tax information. So if you’ve read a prior edition, there’s probably not a lot to be gained from buying/reading the new edition as well.

For anybody who hasn’t yet read the book and is curious what’s in it, the table of contents is as follows:

Part One: How Much Money Will You Need to Retire?

1. How Much Income Will You Need?
Calculating your expenses
Adjusting for inflation
Adjusting for taxes
Adjusting for pensions, Social Security, and other income

2. Safe Withdrawal Rates: The 4% “Rule”
Why only 4%?
Volatility is bad news when selling.
Sequence of returns risk
It’s only a guideline.

3. What if 4% Isn’t Enough?
Possible options
Increasing returns isn’t easy.

4. Retirement Planning with Annuities
What is a SPIA?
Annuity income: Is it safe?
Minimizing your risk

5. How Much (and When) to Annuitize
Creating a safe floor
Annuitizing as a backup plan
Social Security as an annuity

Part Two: Managing a Retirement-Stage Portfolio

6. Asset Allocation in Retirement
Assessing your risk tolerance
There’s no “right” answer.
Stocks vs. bonds
Bond risk levers
Stock risk levers
Rebalancing your portfolio

7. Index funds and ETFs vs. Active Funds

8. 401(k) Rollovers
Reasons to roll over a 401(k)
Reasons not to roll over a 401(k)
How and where to roll over a 401(k)

Part Three: Tax Planning in Retirement

9. Roth Conversions
Roth conversions & retirement planning
How to execute a Roth conversion
Roth conversions of nondeductible contributions

10. Distribution Planning
Fill your 0% tax bracket
Taxable account before retirement accounts
Roth before tax-deferred?
Social Security: It’s complicated.

11. Asset Location
Tax-shelter your bonds
The role of interest rates
Tax-shelter your REITs
Foreign tax credit

12. Other Tips for Taxable Accounts

Again, you can find the book here on Amazon.

Other Recommended Reading

Thanks for reading!

Retiring Soon? Pick Up a Copy of My Book:

Can I Retire Cover

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less

Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
  • How to minimize the risk of outliving your money,
  • How to choose which accounts (Roth vs. traditional IRA vs. taxable) to withdraw from each year,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"Hands down the best overview of what it takes to truly retire that I've ever read. In jargon free English, this gem of a book nails the key issues."

Evaluating a Financial Advisor’s Client Investment Performance

A reader writes in, asking:

“How can you measure, and verify, a financial adviser’s performance for the sake of comparing one prospective adviser to another?”

While this is a common question for people to ask, it’s not really a useful way to evaluate a financial advisor — for a few reasons.

First, an advisor doesn’t recommend the same portfolio to everybody. The investment portfolio that is appropriate for you as a client may be wholly inappropriate for another client with very different circumstances.

If an advisor or advisory firm were to calculate something like the average annualized return earned by their clients over a given period, that figure wouldn’t provide a meaningful point of comparison to another advisor’s such figure. For example, if one advisor has a clientele that is primarily middle class retirees, while another advisor’s clientele is primarily super-high-earners in their 30s or 40s, the clients of the first advisor would probably have, on average, lower returns over the last several years than clients of the second advisor — and that would simply be the result of the first advisor recommending appropriately low-risk portfolios for his/her clients.

In short, there’s no single figure that can be calculated to meaningfully measure how well the investment recommendations of a given financial advisor have performed over a given period.

Second, an advisor shouldn’t really be trying to do anything clever with respect to client portfolios. If an advisor is putting together a portfolio for you, a simple, boring portfolio of index funds/ETFs that approximately match the market’s return is your best bet. Intentionally seeking out an advisor who shows you a backtested, market-beating portfolio is setting yourself up for disappointment.

Finally, an advisor who engages in actual financial planning does a whole lot more than just make investment recommendations for clients.

A financial planner can also provide advice about tax planning or estate planning. They can help you evaluate your insurance coverage to see if there’s anything important you have missed (e.g., disability insurance). They can help with Social Security planning, and retirement planning in general. They can provide assistance with budgeting if that’s something you struggle with. They can provide advice with regard to your employee benefit options (e.g., help determine which health insurance is the best fit for your family).

And frankly, investment management is quickly becoming the least valuable part of financial planning. While there are still plenty of people whose investment performance would be improved by working with a financial advisor, the list of tools available for DIY investors to create a low-maintenance portfolio has grown dramatically over the last decade. Investors can now choose from Vanguard’s LifeStrategy funds, low-cost indexed target retirement funds at various providers, a smorgasbord of total market index funds/ETFs, or low-cost services like Betterment or Vanguard Personal Advisor Services.

Investing Blog Roundup: The Bogleheads’ Guide to the Three-Fund Portfolio

Taylor Larimore — nonagenarian, World War II vet, and co-author of the Bogleheads’ Guide books — recently released a new book: The Bogleheads’ Guide to the Three-Fund Portfolio.

The “three-fund portfolio” (subject of a long-running discussion thread on the Bogleheads forum) is made up of three index funds: a total US stock market index fund, a total international stock index fund, and a total bond market index fund. With just three holdings, it manages to be far simpler than most people’s portfolios, while also being extremely diversified (including thousands of stocks from around the world, as well as thousands of bonds).

Larimore’s new book is very brief — in the spirit of Bill Bernstein’s If You Can. For those who are already well versed in the Bogleheads literature (e.g., having already read the original Bogleheads Guide to Investing, and other books by Bernstein, Roth, Ferri, etc.) the book will be unlikely to provide new information, but it will likely be an enjoyable read nonetheless, as it was for me. (I always enjoy reading about Taylor’s lessons accumulated via many years of experience.)

I think where the book will really shine is as a gift for new investors. Because of the book’s brevity (easy to read in an afternoon), it is more likely to actually be read than the typical book about investing. And because of the book’s singular focus, it will be easy for new investors to internalize the message.

Other Recommended Reading

Thanks for reading!

Building a Safe Floor of Retirement Income — in Advance

A reader writes in, asking:

“I’ve been reading about the safety first school of retirement planning because I think that appeals to me more than the probability method of just spending from risky investments and assuming everything will ‘probably’ be okay. My question is how to start putting such a plan into action in advance.

With the old school probability method, I would just keep building my mutual fund holdings, possibly rebalancing to hold more bonds instead of stocks. The ‘safety first’ method focuses on delaying social security or buying an annuity. But I can’t delay social security until I’m 62. And I can’t, or shouldn’t, buy an annuity in my 50’s either. So what should I, as a safety first investor in my 50’s, be doing right now in the years leading up to retirement?”

As a bit of background for readers unfamiliar with the terms, there are two broad schools of thought with regard to retirement planning. The first school of thought plans to finance retirement spending primarily via liquidating a mutual fund portfolio (or a portfolio of individual stocks/bonds) over time. This approach relies heavily on historical studies and/or Monte Carlo simulations to calculate how safe a certain level of spending is, given various assumptions. This approach is sometimes referred to as the “probability” school of thought, because it focuses on metrics such as “probability of portfolio depletion.”

The second approach essentially says, “I don’t want to bet my retirement on the validity of such studies/assumptions. I’d rather lock in sufficient safe income (e.g., via annuities, pension, Social Security) to satisfy my needs and only use mutual funds to finance my discretionary spending.” This school of thought it sometimes referred to as the “safety first” or “safe floor” method of retirement planning.

The answer to the reader’s question about how to start implementing a “safety first” plan in advance is that you start building a TIPS ladder (or other bond ladder, or CD ladder) that you will use to fund your spending while you delay Social Security, or to fund your annuity purchase.

To plan in advance for delaying Social Security, you would allocate a portion of the portfolio to a bond ladder that will provide the necessary cash each year for 8 years. For example, if you’re passing up $1,500 per month ($18,000 per year) for 8 years, you could start building an 8-year bond ladder, with roughly $18,000 maturing each year.

If Social Security at age 70 still doesn’t give you a sufficient “safe floor” of income to meet your needs/satisfy your risk tolerance, then you should start thinking about a lifetime annuity.

To start planning in advance for an annuity purchase, you’d do something similar — build up bond holdings that you would eventually use to fund the purchase. What’s different about this, relative to delaying Social Security, is that you don’t know how much the annuity will cost. For example, if you anticipate buying a lifetime annuity at age 70 that pays $10,000 per year, there’s no way to know right now (in your 50s) how much that annuity will cost, because you don’t know how high or low interest rates will be when you turn 70.

The solution, rather than buying a bunch of bonds that mature when you turn 70, would be to work on building bond holdings that, when you turn 70, will still have a duration roughly equal to that of the annuity you expect to purchase. This way, the market value of your bonds will rise/fall along with the cost of such an annuity, helping to offset the interest rate risk that you face with the annuity purchase. (Here’s a great Bogleheads thread on that topic.)

Retiring Soon? Pick Up a Copy of My Book:

Can I Retire Cover

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less

Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
  • How to minimize the risk of outliving your money,
  • How to choose which accounts (Roth vs. traditional IRA vs. taxable) to withdraw from each year,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"Hands down the best overview of what it takes to truly retire that I've ever read. In jargon free English, this gem of a book nails the key issues."
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2018 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator (beta): Open Social Security