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Investing Blog Roundup: Diversification Is No Fun

Lately, one of the most common questions among investors is, “why do I need international stocks?” A few years ago, the big question was, “why should I hold bonds?” And a few years from now, it will be something else.

In a diversified portfolio, there’s always going to be something that has performed poorly recently. But, as Ben Carlson reminds us this week, the tide will turn eventually.

Investing Articles

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Social Security Earnings Test with Spousal Benefits

A reader writes in, asking:

“Does the SS earnings test apply to spousal benefits? If so, how exactly does that work?”

For those unfamiliar with the Social Security earnings test, the general idea is that if you claim Social Security benefits prior to full retirement age and you work while you’re entitled to those benefits, the earnings test can result in all or part of your benefits being withheld if your earnings exceed a certain threshold.

Then, when you reach full retirement age, your benefit is adjusted upward to account for months in which you received no benefit or a reduced benefit due to the earnings test. For example, if you claimed 36 months early but the earnings test resulted in benefits being withheld for 24 of those months, when you reach full retirement age your monthly benefit will be adjusted to what it would have been if you had only claimed 12 months early rather than 36.

Whose Benefits Can Be Withheld?

One question I see frequently is whether Spouse A’s earnings can affect Spouse B’s benefits. And the answer is, yes, sometimes. Specifically, as a result of the earnings test, your earnings prior to full retirement age can result in withholding of:

  • Your retirement benefit,
  • Your benefit as a spouse or widow/widower,
  • Anybody else’s benefit based on your work record (e.g., your spouse’s benefit as your spouse or your child’s benefit as your child).*

Your earnings cannot, however, result in withholding of anybody else’s own retirement benefit.

Whose Age Matters?

For application of the earnings test, it is only the age of the person with the earnings that matters.

Example 1: Arthur is 64, and his wife Betty is 68. Arthur has filed for retirement benefits, and Betty has filed for a spousal benefit based on Arthur’s work record. Arthur is still working. The earnings test can still reduce Betty’s benefit as a spouse even though she has reached her full retirement age. The key point is that Arthur is the one with earnings, and he hasn’t reached his full retirement age.

Example 2:  Connie is 68, and her husband Daryl is 64. Daryl is receiving a spousal benefit based on Connie’s work record. Daryl is still working. His earnings can reduce his benefit as her spouse, even though she has reached full retirement age. Again, the key point is that Daryl is the one with the earnings, and he is the one who hasn’t yet reached full retirement age.

In either of the above examples, if the younger spouse was not working and it was the older spouse (the one beyond full retirement age) who was working, the earnings test would have no effect.

Benefit Adjustments at Full Retirement Age

When you reach full retirement age**, your own benefit (whether it’s a retirement benefit, benefit as a spouse, or benefit as a widow/widower) gets adjusted as necessary to account for months in which the earnings test resulted in your benefits being withheld. Nobody else’s benefit gets adjusted at that time.

So, in our Example #1 above, when Arthur reaches FRA, his benefit will be adjusted, but Betty’s will not be.

Example 3: Edward is 62, and his wife Francesca is 64. Francesca is receiving spousal benefits on Edward’s work record. Edward is still working. When Francesca reaches full retirement age, her benefit as a spouse gets adjusted upward based on the number of months in which the earnings test resulted in a reduced benefit or no benefit. It does not, however, get adjusted again when Edward reaches full retirement age, even if the earnings test results in additional months of withholding from her spousal benefit in the interim.

*Exception: Your ex-spouse’s benefit on your work record will not be reduced as a result of your excess earnings if you have been divorced for at least 2 years.

**People claiming widow/widower benefits also have a benefit adjustment calculation that occurs at age 62, in addition to the one that occurs at full retirement age.

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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:

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Investing Blog Roundup: The Five Types of Retirement

I know that many Oblivious Investor readers are currently in (or are planning for) semi-retirement. That is, rather than going from full-time work to no work at all, they’ve transitioned to part-time work, with a more thorough retirement planned for the future.

This week, J.D. Roth takes a look at semi-retirement and other forms of non-traditional retirement. I think they’re all interesting, with distinct benefits as well as risks.

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Where is the “Sweet Spot” for Passive Investing?

A reader writes in, asking:

“At what level of money does passive investing make the most sense? Is there a ‘sweet spot’ so to speak in terms of portfolio size or income? How would the strategy have to be adapted to work at different levels?”

Firstly, there’s no sweet spot. Passive investing is a prudent choice across the full spectrum of asset and income levels — as soon as you reach an income/asset level where investing becomes relevant in the first place, that is.

Passive investing makes sense for the new beginner who is just getting started with small amounts, and it makes sense for huge pools of money such as university endowments.

The primary reason why passive investing is a reasonable choice at all levels is that it’s based on a mathematical truism — one that applies regardless of the amount of money in question. Specifically, as long as the average passively managed dollar incurs lower costs than the average actively managed dollar, it is mathematically certain that passively managed dollars will on average outperform actively managed dollars. (If you’re unfamiliar with that concept, I’d encourage you to read William Sharpe’s wonderfully succinct paper “The Arithmetic of Active Management.”)

What Does Change at Higher Income or Asset Levels?

Having said the above, it’s important to note that the implementation of a passive investment philosophy is somewhat different at different income/asset levels.

For example, tax-efficient investing strategies are very different for the person whose entire portfolio consists of a $5,000 Roth IRA than for the person with a seven-figure portfolio, most of which is invested in taxable brokerage accounts. And they’re different still for investors whose portfolio size is such that they have to be concerned with the estate tax (with its 2016 exclusion of $5.45 million, and twice that for married couples). But in each case, it’s perfectly prudent to use a passive portfolio of boring index funds.

In addition, the asset allocation decision is somewhat different at different levels of assets/income. Specifically, when your total assets are low relative to your living expenses, you have less flexibility with your asset allocation. That is, you cannot afford to have a risky allocation if you may need this money in the near future (i.e., if your retirement savings are currently doubling as an emergency fund). But again, a boring passive portfolio is still a good idea.

Investing Blog Roundup: Happy Thanksgiving

I hope you all (or those of you in the U.S., at least) got the chance to enjoy your holiday with friends and/or family this week. As I’ve said for many years, being able to do this work for a living is a dream come true for me. So, again, thank you to all of you who make it possible in various ways — sharing the blog with friends, buying the books, writing in with questions and comments, and so on.

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2017 Tax Brackets, Standard Deduction, Personal Exemption, and Other Updates

Every year, I publish a brief update with the following year’s tax brackets, standard deduction, and so on. This year, there is more uncertainty, as the likelihood of a legislative change happening in early 2017 and actually being effect for 2017 is somewhat higher than normal. Still, what follows is the information as it stands now. If you want additional details, the official IRS announcement can be found here.

The tax brackets for 2017 are as follows:

Single 2017 Tax Brackets

Taxable Income
Tax Bracket:
$0-$9,325 10%
$9,326-$37,950 15%
$37,951-$91,900 25%
$91,901-$191,650 28%
$191,651-$416,700 33%
$416,701-$418,400 35%
$418,401+ 39.6%

 

Married Filing Jointly 2017 Tax Brackets

Taxable Income
Tax Bracket:
$0-$18,650 10%
$18,651-$75,900 15%
$75,901-$153,100 25%
$153,101-$233,350 28%
$233,351-$416,700 33%
$416,701-$470,700 35%
$470,701+ 39.6%

 

Head of Household 2017 Tax Brackets

Taxable Income
Tax Bracket:
$0-$13,350 10%
$13,351-$50,800 15%
$50,801-$131,200 25%
$131,201-$212,500 28%
$212,501-$416,700 33%
$416,701-$444,550 35%
$444,551+ 39.6%

 

Married Filing Separately 2017 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$9,325 10%
$9,326-$37,950 15%
$37,951-$76,550 25%
$76,551-$116,675 28%
$116,676-$208,350 33%
$208,351-$235,350 35%
$235,351+ 39.6%

 

Standard Deduction Amounts

The 2017 standard deduction amounts will be as follows:

  • Single or married filing separately: $6,350
  • Married filing jointly: $12,700
  • Head of household: $9,350

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,250 for married taxpayers or $1,550 for unmarried taxpayers.

Personal Exemption Amount and Phaseout

The personal exemption amount for 2017 is $4,050.

However, the total personal exemptions to which you’re entitled will be phased out (i.e., reduced and eventually eliminated) as your adjusted gross income (i.e., the last line of the first page of your Form 1040) moves through a certain range.

  • For single taxpayers, personal exemptions begin to be phased out at $261,500 and are fully phased out by $384,000.
  • For married taxpayers filing jointly, personal exemptions begin to be phased out at $313,800 and are fully phased out by $436,300.
  • For taxpayers filing as head of household, personal exemptions begin to be phased out at $287,650 and are fully phased out by $410,150.
  • For married taxpayers filing separately, personal exemptions begin to be phased out at $156,900 and are fully phased out by $218,150.

Limitation on Itemized Deductions

As was the case for the last few years, the amount of itemized deductions which you are allowed to claim is reduced by 3% of the amount by which your adjusted gross income exceeds certain threshold amounts. These threshold amounts are the same as the lower threshold amounts listed above for the personal exemption phaseout (e.g., $261,500 for single taxpayers). However:

  1. Your itemized deductions cannot be reduced by more than 80% as a result of this limitation, and
  2. Your itemized deductions for medical expenses, investment interest expense, casualty/theft losses, and gambling losses are not reduced as a result of this limitation.

IRA and 401(k) Contribution Limits

For 2017, the contribution limit to Roth and traditional IRAs is unchanged at $5,500, with an additional catch-up contribution of $1,000 for people age 50 or older.

The contribution limit for 401(k), 403(b), and most 457 plans is unchanged at $18,000, with an additional catch-up contribution of $6,000 for people age 50 or older.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a SEP IRA) is increased to $54,000.

AMT Exemption Amount

After adjusting for inflation, the following are the AMT exemptions for 2017:

  • $54,300 for single taxpayers,
  • $84,500 for married taxpayers filing jointly, and
  • $42,250 for married taxpayers filing separately.

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, exemptions, and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
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