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Investing Blog Roundup: Why Did My Share Price Fall?

One of the most common questions I see (both via email and on the Bogleheads forum) is why the share price of a given fund went down unexpectedly — perhaps even on a day when the market is up. This week, Vanguard provides a clear answer to that question:

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9 Good Reasons for Claiming Social Security Early

There’s been quite a bit of talk over the last few years about the fact that most people should wait to claim Social Security, if they can afford to do so. And that’s true, for two reasons:

  1. Waiting to claim Social Security reduces risk, because it is a decision that works out best in the most financially scary scenarios (in which you live a very long time and therefore have to fund a very long retirement).
  2. Waiting to claim Social Security maximizes spendable dollars, in most cases. (That is, with inflation-adjusted interest rates as low as they are right now, for more than half of people, delaying Social Security will result in having a greater number of inflation-adjusted dollars to spend over the course of their lifetimes.)

But it’s important to understand that, while it makes sense in the majority (i.e., greater than 50%) of cases to delay, there are still many situations in which a person would be well served by claiming Social Security earlier rather than later.

The first and most obvious reason to claim Social Security early is simply that you need the income immediately.

But, beyond that, there are still several cases in which, if you do not need the risk reduction that comes from delaying Social Security, your spendable dollars are likely to be maximized by claiming benefits earlier rather than later.

What follows are eight examples of such cases. (To be clear, this is not meant to be an exhaustive list. These are simply some of the more common such situations.)

1. You are single (and have never been married) and you have a significantly shorter than average life expectancy due to a medical condition.

2. You are the spouse with the lower primary insurance amount in a married couple and you or your spouse have a shorter than average life expectancy.

3. You are the low-PIA spouse in a married couple, and you’re many years younger than your spouse (meaning that, when you are age 62, your first-to-die life expectancy is significantly shorter than the first-to-die life expectancy of a couple in which both spouses are age 62).

4. You are the low-PIA spouse in a married couple, you are younger than your spouse, and you are filing early in order to allow your spouse (i.e., the higher-PIA spouse) to claim spousal benefits while he/she allows his/her own retirement benefit to continue growing until 70.

5. You are a widow/widower, and you’re claiming retirement benefits as early as possible while allowing your widow/widower benefit to continue growing until your full retirement age. Or, you’re claiming widow/widower benefits as early as possible while allowing your retirement benefit to continue growing until age 70.

6. You have one or more children who would qualify for child’s benefits once you file for your retirement benefit (thereby making the cost of waiting significantly greater than it is for most people).

7. Inflation-adjusted interest rates are high (unlike they are right now), making the option of taking the money and investing it a better deal. (Interest rates would have to be super high, however, for this to be a good deal for the high-PIA spouse in a married couple.)

8. You will qualify for a sizable government pension from work that was not covered by Social Security, and you’re claiming Social Security spousal benefits early while delaying your pension (so that the pension grows and so that you can put off applicability of the government pension offset).

Want to Learn More about Social Security? Pick Up a Copy of My Book:

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: Do You Have a Portfolio or Investment Collection?

This week, Jim Dahle addresses an exceedingly common investment mistake: having a portfolio that’s really just a collection of investments that you’ve accumulated over the years — as opposed to an actual portfolio with a coherent strategy.

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When Is the Best Time of Year for a Roth Conversion?

A reader writes in, asking:

“Is there a time of a year when it’s best to do a Roth conversion? Perhaps close to the year end such that a person can estimate their income/AGI, or whenever the market is down in order to make the cost of conversion lower?”

If you have a high tolerance for hassle, doing a conversion ASAP at the beginning of the year is often the best strategy, because you can just change your mind later (up until the due date of your tax return) via “recharacterization” if you don’t like the results. For example, you could recharacterize if:

  • It turns out that your income for the year is higher than you expected (meaning that your rate of tax on the conversion is higher than you’d anticipated), or
  • The assets that you converted have decreased in value, meaning that you could recharacterize, then do the conversion again later at a lower cost.*

Financial planner Allan Roth has even written about an advanced version of this strategy, in which you do multiple early-in-the-year conversions, with the plan to recharacterize any that you don’t like.

If, however, you are the type who would not bother with a recharacterization, then doing a conversion when the market is down would make sense — at least in theory — because that would be the time that the conversion is least expensive (both because the account balance is smaller and because that is when it would usually be most advantageous to liquidate taxable holdings in order to help pay the tax on the conversion).

There is, however, a downside to the strategy of waiting for a market downturn. In short, it leaves you playing a market-timing-style guessing game. For example, imagine that you plan to do a conversion this year, and you decide to wait until a market downturn. What if the market goes down, say, 3% in January? Do you convert then, or do you wait in the hope that it goes down further later in the year? There’s no way to know which answer is right. Or, what if the market has a great year, never going below the point at which it started? In such a case you’d be left having to eventually convert in December at a high point, thereby having to pay a higher cost than if you’d just gone ahead and done it at the beginning of the year.

If you don’t want to bother with recharacterizations or market timing guessing games, then:

  • Doing conversions late in the year makes sense if you have a high degree of uncertainty about your income/deductions (because, near the end of the year, you would no longer have as much uncertainty, thereby making it easier to determine what your tax rate would be on the conversion and whether or not the conversion would be advantageous), and
  • Doing conversions early in the year makes sense if you know it will be a good year for a conversion (with the reason being that the market typically goes up over time, so an early conversion is typically going to be less costly than a conversion at a later point).

*To do a second conversion of a given amount (that is, after undoing the first via recharacterization), you must wait until the later of a) 30 days after the recharacterization or b) the year following the year of the conversion.

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,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Investing Blog Roundup: Ben Bernanke the Blogger

Whether you are in favor of or opposed to the actions he took during his term as Chairman of the Federal Reserve, there’s no denying that Ben Bernanke is one of the most prominent figures in the financial world. I learned this week that Bernanke recently started blogging on the Brookings Institution website. His first topic: why interest rates are so low. (As a heads-up: The reading is somewhat more technical than you’d normally find here on the blog.)

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Thanks for reading!

Tax Planning for Widowhood (or Widowerhood)

Your marginal tax rate (and, in many cases, how you expect your marginal tax rate to change over time) is a critical factor in tax planning decisions.

One thing that married couples often fail to consider in their planning is that, in the majority of cases, after one spouse dies, the widow/widower’s marginal tax rate will be greater than the marginal tax rate that the couple faced in the years immediately prior to the first spouse’s death.

Unfortunately, there is of course no way to know when widowhood will start or how long it will last. I’ve found it challenging to even determine how long widowhood lasts on average. I’ve seen figures from 8 years to 15 years quoted by reputable sources. Regardless, even 8 years is a considerable length of time and merits inclusion in tax planning.

Why Does Marginal Tax Rate Increase When One Spouse Dies?

After one spouse dies, the surviving spouse (starting in the following year, when they would have to begin filing as single) is left with smaller tax brackets. The 10% and 15% tax brackets are exactly half the size for single people that they are for married couples filing jointly. And the standard deduction and personal exemption of the surviving spouse are half of the amounts that the couple used to receive.

As far as income, there is typically a reduction when one spouse dies, but that reduction is typically insufficient to counteract the smaller exemption, standard deduction, and tax brackets. Social Security, for instance, does fall when one spouse dies, but the reduction is usually less than 50% (because if the spouse with the higher retirement benefit dies, the surviving spouse can claim a widow/widower benefit that’s equal to the deceased spouse’s retirement benefit). And investment-related income doesn’t typically decline at all when one spouse dies.

How Does This Affect Tax Planning?

This foreseeable increase in marginal tax rate after the death of one spouse is important because it affects decisions in which you have to compare your current marginal tax rate to the marginal tax rate you expect to have in the future. Specifically:

  • It is a minor point in favor of making Roth contributions (as opposed to tax-deferred contributions) during working years,
  • It is a significant point in favor of prioritizing retirement spending from tax-deferred accounts (as opposed to Roth accounts) while both spouses are still alive, and
  • It is a significant point in favor of doing Roth conversions while both spouses are still alive.

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,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
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