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New Book Announcement: Cost Accounting Made Simple

Cost Accounting Book CoverJust a brief announcement for today. We’ll return to our more typical discussion material on Friday.

My new book Cost Accounting Made Simple is available on Amazon. The book is meant to serve as a followup to Accounting Made Simple, which has been my best-selling book over the last several years.

The print version is temporarily on sale for 50% off the normal list price (i.e., just $7.50 rather than the usual $15).

What is Cost Accounting?

Cost accounting is the process of measuring how much it costs a business to supply customers with the goods or services that it sells.

Cost accounting is important because it provides business owners/managers with information that is critical to running the business. For example, if a business doesn’t know how much it costs to produce each of its products, it will make poor decisions about how much to charge for them.

Similarly, if a business has inaccurate information about how much it is spending to run one of its divisions, it may continue running that division for years, losing money the whole time without even realizing it. The opposite problem can occur as well. For example, if costs are inappropriately allocated to a given product line, the business may incorrectly think that the product line is unprofitable (and choose to shut it down) when the division is actually earning a net profit for the company.

Cost accounting is also useful for finding the source of a problem. For example, if a business reaches all of its sales goals, but still has a less profitable month than it had anticipated, cost accounting provides the tools to figure out exactly which costs were higher than anticipated.

What Does the Book Cover?

As with the other books in the “in 100 Pages or Less” series, this book seeks to provide a concise, understandable introduction to the topic. The book discusses:

  • Fixed costs, variable costs, contribution margin, and how to use those concepts to project a business’s income or loss for a given level of sales;
  • Direct costs, indirect costs, and how to assign each of them to products/departments for better decision-making;
  • How to budget for a business;
  • How to use variance analysis to identify potential problems when results vary from budgeted amounts;
  • Product costs, period costs, and why the distinction is important;
  • Job order costing and process costing; and
  • How to use activity-based costing to allocate costs.

Click here to see the book on Amazon.

To Learn More, Check Out the Book:

Cost Accounting Made Simple: Cost Accounting Explained in 100 Pages or Less

Topics Covered in the Book:
  • Cost accounting terminology (fixed costs vs. variable costs, product costs vs. period costs, direct costs vs. indirect costs, etc.)
  • Cost-volume-profit analysis
  • Job order costing, process costing, activity-based costing
  • Budgeting and variance analysis
  • Click here to see the full list.

Investing Blog Roundup: Retirement Spending Strategies and Annuitization

This month we’ve discussed fixed retirement spending strategies as opposed to variable spending strategies, as well as the concept of using RMD tables to calculate retirement spending.

This week, financial planner/actuary Joe Tomlinson shared some of his recent research comparing the efficiency of those same three retirement spending strategies — as well as the impact of annuitizing part of the portfolio. The article is written for advisors, so it’s more technical reading than what you’d normally find here. But it’s directly applicable the things we’ve been discussing here lately.

Other Money-Related Articles

Thanks for reading!

Who Should Buy Long-Term Care Insurance?

Last week a few readers wrote in asking about long-term care (whether to purchase policies in the first place, or whether to keep existing policies when premiums rise sharply).

Unfortunately, the question of long-term care insurance is one for which I don’t have a very good answer. Long-term care poses a significant financial risk for most people. Yet there are a few good reasons why a person might be better off opting not to buy a long-term care policy.

You Can’t Afford the Premiums

If you can’t afford to pay the premiums, you’re in an unfortunate situation, but the decision is easy.

Coverage via Medicaid

In addition, many people are in a position such that Medicaid would kick in relatively quickly in the event of a long-term care need. For those people, buying LTC insurance usually doesn’t make sense because the policy would mostly be protecting the government rather than protecting the insured person.

In fact, a 2014 study from the Center for Retirement Research at Boston College found that, largely because of the protection offered by Medicaid, only 22% of single 65 year old men and 34% of single 65 year old women could expect an improvement in overall economic outcome by purchasing LTC insurance. (You can find the study here or a summary paper here.)

Of note, that study only looks at single individuals rather than married couples. Presumably, married couples would have a higher willingness to pay for LTC insurance because of worries that one spouse’s uninsured LTC needs could leave the other spouse with a lower standard of living than desired. (Medicaid does have rules for preventing spousal impoverishment, but the limits are low enough that in many cases the healthy spouse would still be left in an undesirable situation.)

You Can Pay Out of Pocket for Long-Term Care

As with any insurance, you will on average lose money by purchasing long-term care insurance. That is, because a part of the premium goes to pay for the insurance company’s overhead and profit margin rather than to pay benefits for policy owners, policy owners will on average have a negative outcome.

To be clear, this is not in itself a reason not to buy long-term care insurance. The same thing can be said (i.e., that you will, on average, lose money) about purchasing term life insurance, health insurance, disability insurance, and auto insurance, yet they’re all considered to be wise purchases in many/most cases.

Rather, the point here is that, because insurance is on average a losing proposition, it generally only makes sense to insure against a cost that you cannot reasonably pay out of pocket.

As far as whether or not it’s possible to pay out of pocket for a long-term care cost, it’s helpful to remember that long-term care cost isn’t purely in addition to current living expenses, as the cost of such facilities typically includes some things that are currently a part of your normal budget — meals, for instance. Plus, other expenses (e.g., travel and possibly housing) naturally disappear or nearly disappear when a person enters a long-term care facility.

According to a 2016 report from the National Association of Insurance Commissioners (with credit to Christine Benz’s excellent “75 Must-Know Statistics About Long-Term Care” for directing me to the report), for people turning age 65 in 2015-2019:

  • 48% are expected to have no long-term care costs during their lifetimes,
  • 15.4% will have costs of up to $50,000,
  • 9.7% will have costs of $50,000-$100,000,
  • 11.7% will have costs of $100,000-$250,000, and
  • 15.2% will have costs that exceed $250,000.

Another noteworthy point: people with lower incomes are more likely to have an extended need for long-term care. (See Table 5 on page 35 of the NAIC report.) This isn’t surprising, since people with lower incomes are often in worse health than people with higher incomes. But it certainly makes planning even more challenging for lower-income people.

Policies are Problematic

The turmoil of the LTC insurance market (i.e., premiums increasing significantly and unpredictably and insurers choosing to leave the business entirely) is another reason that would make me leery of buying LTC insurance if I felt that I did not have a need for it.

Even if you had perfect information about the probability of needing long-term care at each year in your life and perfect information about the expected cost of that care, it would still be a challenge to determine whether a policy is a good deal or not, because we don’t have a good way to predict how much most policies will cost over an extended period.

recent paper from John Ameriks of Vanguard together with four other researchers concluded that, “better quality LTCI would be far more widely held than are products in the market, be held in large quantities, and generate substantial consumer surplus.” In other words, there are plenty of people out there who want long-term care insurance and who would be willing to pay for an ideal version of it, but who do not actually own a policy because of undesirable characteristics of the products available today.

So Who’s Left?

So, after considering all of the above points, who does that leave as the people who should be buying policies? People who meet all of the following requirements:

  • You can afford a policy.
  • You could not easily pay out of pocket for long-term care.
  • The protection from Medicaid is not acceptable/sufficient protection for one reason or another (e.g., because you have sufficient assets that Medicaid wouldn’t kick in for far too long).
  • The undesirable characteristics of currently available policies are not sufficient to deter you.

While that’s a list of requirements, it still leaves quite a lot of people.

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."

Investing Blog Roundup: Equifax Fallout Continues

It’s been two weeks since the announcement of the Equifax data breach, and people are still scrambling to take the appropriate protective actions. Personally, I hope we see some regulatory changes — or at least changes to common security practices in order to account for the fact that our identifying information (i.e., combination of name/DoB/SSN) is no longer a secret.

Other Money-Related Articles

Thanks for reading!

RMDs and Retirement Spending Strategies

After last week’s article about retirement spending strategies, several readers wrote in with questions about the interaction between required minimum distributions (RMDs) and such strategies.

The most common question was whether RMDs would get in the way of implementing a retirement spending strategy.

To be clear, the RMD rules say that you have to take money out of the account in question, but they do not force you to actually spend the money. Nor do they force you to change your asset allocation in any way. (That is, after taking the money out of your retirement account, you can re-buy the very same asset in a taxable brokerage account, if you want to.)

That said, there is some interaction between RMDs and spending, simply in the fact that if your RMDs are going to cause your tax bill to increase over time, that’s something you have to budget for — much as you might budget for, say, increasing health care expenses over time.

In other words, if increasing RMDs cause your tax bill to make up a larger and larger portion of your annual spending amount, it can force you to cut other expenses in order to stay within the spending range you’ve set for yourself.

RMDs Affecting Spending by Reducing Returns

One reader asked whether RMDs would eventually have a downward effect on portfolio returns (because more of the portfolio will be in a taxable account as time progresses) and whether that should be factored in when determining an initial spending rate.

It’s true that once the money is reinvested in a taxable account, the rate of growth will (generally) be lower than it would have been in a retirement account. But this would have a very minor effect on a person’s achievable level of spending through an entire retirement, given that:

  • RMDs have no effect whatsoever until age 70.5,
  • RMDs only affect a portion of your money (i.e., accounts that require RMDs have pretty small RMDs in the first several years, and RMDs have no effect at all on money that was already in a taxable account or a Roth IRA),
  • Even once the money is in a taxable account, you will still get to keep most of the earnings (especially with stock holdings, given the favorable tax treatment of dividends and long-term capital gains), and
  • Much of your ability to spend in retirement comes from the fact that you can spend principal as well as earnings.

RMDs as a Spending Strategy

One reader asked about the strategy of using RMD tables as a means of calculating your spending each year (i.e., each year, calculating what the RMD would be if your entire portfolio were in a traditional IRA, and using that amount as your annual spending amount).

A study by David Blanchett, Maciej Kowara, and Peng Chen found that such a strategy was more efficient than either the “percent of portfolio each year” strategy or the “inflation-adjusted spending” strategy that we discussed last week. And a study by Wei Sun and Anthony Webb had similarly positive findings for an RMD-based spending strategy. In other words, based on what I’ve read, I think that’s one of several reasonable approaches to selecting an annual spending amount.

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."

Investing Blog Roundup: Equifax Security Breach

The big personal finance news of the last week has been the Equifax security breach, affecting as many as 143 million people. To put that number in perspective, there are approximately 249 million adults in the U.S. In other words, it’s more likely that your data was stolen than not stolen.

Security journalist Brian Krebs has a piece answering the most common questions you might have. Ron Lieber of the New York Times has also been covering the incident in a series of articles.

Other Money-Related Articles

Thanks for reading!

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