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What’s the Purpose of Socially Responsible Mutual Funds?

I’m often asked what I think about socially responsible mutual funds (or socially responsible investing in general).

To explain, let me introduce you to Jim. (Jim is hypothetical — sort of.)

  • Jim is an accountant. He has never had a super high income, but he has been consistently employed since finishing college 30-something years ago.
  • Jim has saved diligently throughout his career, and his index-fund portfolio is now sufficiently large that he expects to be able to retire within the next few years, despite having no pension.
  • In other words, Jim has accumulated a significant sum of money.
  • Every so often, Jim experiences some misgivings about having that much money. He recently read that his almost-seven-figure net worth means he has more wealth than 99% of other people in the world.
  • Jim also has some misgivings about several of the companies that are owned by his index funds.
  • Jim’s annual budget does include a non-trivial amount of charitable giving each year, but the reality is that in order to meet his goals, he has to keep most of his money.
  • Jim wants to feel better about having a lot of money. That is, he wants to continue to have a lot of money. But he doesn’t want to feel bad about it.

Jim has a need.

There are a lot of Jims.

What does the financial services industry do when it sees a lot of people with a given need/desire? It creates a product.

Socially responsible mutual funds are that product. Socially responsible mutual funds exist to let you feel better about having money (i.e., not giving it away). The fund industry usually doesn’t want you to give your money away. If you do, they don’t get to collect a percentage (in most cases).

This isn’t to say that socially responsible funds are a bad thing. From a “doing good in the world” standpoint, socially responsible funds may indeed have a beneficial effect in that they might exercise their voting rights more frequently — or more frequently in line with your views — than typical index funds.

But whether or not they actually have a positive societal effect is not generally super important from the perspective of the fund company (or, in most cases, from the perspective of an advisor recommending the fund). As long as you feel better about owning this fund as opposed to another one, mission-accomplished.

It is normal to have some misgivings about having far more wealth than almost everybody else in the world.

It is also normal to have misgivings about owning shares of companies that do things you find unethical.

And it is super clear that the most effective way to alleviate these misgivings is to give away more money — either directly to people who need it more than we do, or to charitable organizations that fight against the thing(s) we find unethical.

But, unfortunately, there’s a limit to how much we can give while still reaching our goals. With our current retirement system (in which few people have pensions and Social Security doesn’t cover everything), if you want to retire someday with a middle class level of spending or higher, you must accumulate a pile of money — and keep it for yourself.

Maybe socially responsible mutual funds can help you feel better about doing that.

June 10, 2019

Investing Blog Roundup: Lifetime Annuities — With or Without Inflation Adjustments?

On a number of occasions we’ve discussed the concept that boring/simple lifetime annuities can be a very useful tool for those who are concerned about longevity risk (i.e., outliving their money). We’ve also discussed the fact that annuities with a fixed COLA not only fail to protect against inflation, they do worse in inflationary environments than regular (no-COLA) annuities do.

David Blanchette recently looked at annuities with actual inflation adjustments and came to the conclusion that, at least right now (as offered by the single insurance company selling such annuities), they are not a good deal.

Zvi Bodie and Dirk Cotton provide a counterpoint this week, arguing that nominal annuities (those without inflation adjustments) are “a speculative bet on future inflation rates, a bet that is imprudent for retirees and, indeed, one which many would make unwittingly.”

Other Recommended Reading

Thanks for reading!

June 7, 2019

How Important is Social Security Planning?

A reader writes in, asking:

“Just how important is it to learn about all the ins and outs of social security? When I look at the benefit estimates on my statement, they aren’t exactly small amounts, but this doesn’t look like it’s going to be the most important financial decision I’ve made in my life. And yet people go back and forth forever (eg on bogleheads) about whether filing at 62, 66, 70, or whatever is best.”

In terms of expected spending (in today’s dollars) over the course of a retirement, the difference between the ideal Social Security filing strategy and a very bad strategy is often in the $20,000-$40,000 range for a single person. For a married couple, the difference between the ideal strategy and a very bad strategy would often be in the $50,000-$100,000 range.*

The difference between the ideal strategy and a fairly similar strategy is much smaller. For instance if filing at 70 is ideal for you, filing at 69 and 6 months is likely to have a very similar result — a few thousand dollar difference over the course of your retirement.

So even if we’re comparing a good strategy to a very bad strategy, no, it’s not even close to the most important financial decision you’ll ever make. The career you pick, the city/cities you choose to live in, the home(s) you buy or don’t buy, the job(s) you take, whether you get married/divorced/have kids — all of those things will have a larger impact on your finances over your lifetime than your Social Security claiming decision(s).

But, for most people, you can learn most of what you need to know about Social Security from just a handful of hours of reading (in addition to my book Social Security Made Simple, I can also enthusiastically recommend Andy Landis’s Social Security: The Inside Story or Jim Blankenship’s Social Security Owner’s Manual). And if a few hours of self-education can provide a mid-five-figure expected return, those are some well-spent hours.

A key point here is that if you are not a financial planner (i.e., you are not trying to become an expert in all of the situations your clients might face), you only need to learn about the parts that apply to you. You can (probably) ignore most of the complexity. For example:

  • If you don’t have minor children or adult disabled children, you can ignore everything about child benefits and the family maximum.
  • If you don’t have a pension from non-covered employment, you can ignore everything about the windfall elimination provision and government pension offset.
  • If you have never married (or if you were married less than 10 years prior to a divorce), you can ignore everything about spousal/survivor benefits.
  • If you are married and you and your spouse were both born after 1/1/1954, you can ignore everything about restricted applications.

Most unmarried people and married couples have either one or zero complicating factors. A basic cookie-cutter-type plan works reasonably well for most people.

Social Security planning is primarily about avoiding a particularly bad strategy, and that mostly means:

  • Don’t miss a restricted application if you have the chance.
  • Get within a year or so of your ideal filing age. (For example if age 70 is the mathematically ideal age for your circumstances, don’t file at 62 or 63. But don’t worry too much about the difference between 69 and 70.)

*The differences are often greater when we also account for tax planning. Also, delaying has a risk-reduction effect that isn’t reflected in these numerical differences.

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."
June 3, 2019

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

Thanks for reading!

May 24, 2019

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.

May 20, 2019

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

Thanks for reading!

May 10, 2019
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