Personal Finance: Financial Planning & Investing

[BamaNation]

Did the exact same thing for our daughter several years ago. I have matched her earnings every year and plan to do so until she is out of school and drawing a full paycheck.
My hope is the same as yours; give her a solid foundation, plus teach her how to build on that foundation, to produce a comfortable cushion on which she can retire to.

She spent her first year at university at one of their European campuses, before a couple years in the States. Now she is finishing her senior year back on the European campus.
The cost of her schooling has been somewhat like a mortgage (front loaded), but second and third year was in-state tuition, which was the deal for going abroad her first year - would have been out-of-state, otherwise.
Her senior year, however, has cost us Zero, because she has been on staff with the school this whole year. They paid all of her expenses, including travel to and fro. That was a bonus we had not planned for. Very grateful!

Because we had a prepaid tuition plan, and we did not need to use all of it, hopefully, our plan will also be eligible to be converted into her Roth IRA. Thank you for mentioning that. I was not aware of that possibility.

529 to ROTH IRA
There are some caveats on that conversion of 529 to Roth... whitecoatinvestor.com probably has the best actionable details I've seen on this but here's a summary below. Point #3 may be a key limitation for many folks in doing this after the kid graduates college. My suggestion to new-ish parents is to open the account immediately upon child's birth (if not before) and contribute now so that you have that 15 years in by the time they're finishing HS and don't use contributions for anything (i.e. private school tuition, etc) before college. Contribute and let it grow.

Here's what Grok says:
Converting funds from a 529 plan to a Roth IRA is allowed under the SECURE 2.0 Act, effective January 1, 2024, but comes with specific rules and limitations. Here's a concise breakdown:

1. Lifetime Limit: Up to $35,000 per beneficiary can be rolled over from a 529 plan to a Roth IRA, tax- and penalty-free.
2. Annual Contribution Limits: The rollover amount in any given year cannot exceed the annual Roth IRA contribution limit ($7,000 for 2025, or $8,000 for beneficiaries aged 50 or older). This counts toward the beneficiary’s total IRA contributions for the year. For example, if they contribute $2,000 to an IRA, only $5,000 can be rolled over from the 529.
3. 15-Year Rule: The 529 account must have been open for at least 15 years with the same beneficiary. Changing the beneficiary may reset this clock, though IRS guidance is unclear.
4. 5-Year Rule: Funds being rolled over (contributions and associated earnings) must have been in the 529 account for at least 5 years. Contributions made within the last 5 years, and their earnings, are ineligible.
5. Beneficiary Ownership: The Roth IRA must be in the name of the 529 plan’s beneficiary, not the account owner.
6. Earned Income Requirement: The beneficiary must have earned income at least equal to the rollover amount in the year of the transfer. For example, to roll over $7,000, they need at least $7,000 in earned income.
7. No Income Limits: Unlike regular Roth IRA contributions, 529-to-Roth rollovers are not subject to modified adjusted gross income (MAGI) limits, allowing high earners to participate.
8. Trustee-to-Trustee Transfer: The rollover must be a direct transfer from the 529 plan to the Roth IRA, not an indirect withdrawal. Some plans require specific forms, like Form 310 for the 529.
9. State Tax Considerations: Not all states recognize 529-to-Roth rollovers as qualified distributions, which may result in state income tax or recapture of prior tax benefits. Check with your state’s 529 plan or a tax advisor.
10. Process and Paperwork: Verify eligibility, confirm the Roth IRA account exists, and contact the 529 plan provider for their rollover process. Some providers, like Edvest 529, require a Direct Rollover Out to Roth IRA Form. Processing times vary.

Additional Notes:

• Rollovers take multiple years due to annual limits (e.g., $35,000 would take at least 5 years at $7,000 per year).
• IRS guidance is still pending on certain details, such as the impact of beneficiary changes or account transfers on the 15-year rule.
• Consult a tax professional to ensure compliance and understand state-specific tax implications.
• This provision offers flexibility for unused 529 funds, but it’s not a loophole for unlimited Roth contributions due to the strict limits and requirements.

 

[BamaNation]

TRUMP ACCOUNTS ... AKA "Baby Bonus Accounts"
Some valuable insight from WhiteCoatInvestor.com on the new "Trump Account" (TA) that was part of the recently past budget bill. Don't want any political discussion of this or the name, just providing details for your kids or grandkids that could benefit if they're born in 2025-2028 (or later if it is extended) ...

In summary:

• Every kid born in the U.S. between 1/1/2025, and 12/31/2028 gets $1K put into a TA opened by the parents (or the Fed gov't if a Federal tax return with the child on it gets filed and there is no account yet) with the child as a named beneficiary.
• Must be invested in a broadly diversified, US stock index fund with an expense ratio of less than 10 basis points (0.10%).
• Cannot be withdrawn prior to the beginning of the year the kid turns 18.
• Additional money can be contributed to the account by taxpayers and their employers, up to $5K per year (indexed to inflation).
• Tax deduction for employers who contribute up to $2500. No tax deduction for individual taxpayers who contribute - but still a good idea to do so if able.
• Again, they key is to instead of buying bling-bling, here's a way to invest in a kid's future so they don't have to take out debt to fund college, cars, home down payments, etc.
• The downside (to some), is that those who actually should take advantage of this, will not do so. However, there are plenty of ways to earn the additional $5K per year to contribute - through side hustles, etc., making a kid contribute from their part-time job earnings until s/he is 18, etc. Regardless, there's lots of upside opportunity that probably won't fully be taken advantage of, unfortunately.

If you put in $5,000 a year for the first 18 years of the child's life and it grows at 7% real, that account will be worth $170,000 in today's dollars at age 18 and, if left alone, over $4 million in today's dollars at age 65. The fees on this account are dramatically lower than an annuity, which would be taxed similarly. You can pay for your kids' retirement for only $90,000.

Mrs. BN & I most likely won't have any more kids in this period (or grandkids!). However, if it is extended, when & if the time comes, this is likely something we would contribute to for any grandkids.

Seems like a no-brainer to me for any kids born over the next 3.5 years!

 

[Bamaro]

Forecasts predict a dismal decade for stocks. Here's what to do.
Over the past several decades, the U.S. stock market has yielded average annual returns around 10%.
In recent forecasts, Vanguard projects the stock market will rise by only 3.3% to 5.3% a year over the next decade. Morningstar sees U.S. stocks gaining 5.2% a year. Goldman Sachs forecasts the broad S&P 500 index will gain only 3% a year. Those numbers aren’t outliers. A roundup of market prognostications, charted by Morningstar, finds no one projecting annual returns higher than 6.7% for the domestic stock market in the next 10 years.

The simple reason forecasters don’t expect much from the U.S. stock market over the next decade: stock prices are already very high.
Just how overpriced is the stock market? Economists have a yardstick to measure that. It’s called the cyclically adjusted price-to-earnings ratio, or CAPE ratio. It measures a stock’s price against corporate earnings. It tells you, in effect, whether the stock is overvalued or undervalued.

Right now, the CAPE ratio for the S&P 500 stands at 38.7. That means stock prices are very expensive, relative to earnings.
There are two prior moments over the past century when the CAPE Ratio was really high. One was in 1929. The other was in 1999. In the decades that followed those peaks, the stock market sank like a stone: The Great Depression of the 1930s, and the dot-com bust and Great Recession of the 2000s.

Here’s another reason many forecasters are down on U.S. stocks, and especially the monster stocks known as the Magnificent Seven: Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta and Tesla.
Together, the Seven represent 34% of the overall value of the S&P 500, up from 12% in 2015, Motley Fool reports. That’s called market concentration, and it can be a bad thing.

Forecasts predict a dismal decade for stocks. Here's what to do.

 

[BamaNation]

@Bamaro - I'm going to be brutally honest: I trust MSN / USA Today / MarketWatch, talking heads, etc. as much as I trust Hugh Freeze with a burner phone. However, in this article, they do quote Vanguard & Morningstar predictions - both of whom I do trust much more.

Mrs BN & I plan for 4% returns and save accordingly. Over the last 10 years, we have earned 11.4% avg. So, with nearly triple outsized returns compared to our plan, it's been like a turbo boost on our portfolio. The key is to not expect 10% (or 11.4%) forever or to make decisions about wealth, future purchases, etc. based on that.

Here are the S&P500 historical annual returns going back to 1927:



and the S&P500 index over the same period:



It's also important to take a peek at the Callan Periodic Table of Returns and see how different indices perform year to year...each color is a different type of investment (Large cap, small cap, HY Savings, cash, emerging, int'l, fixed income, etc) in order of highest to lowest return in that year over the last 20 years. but rarely is the same one at the top in consecutive years. This is the impetus for us holding a Boglehead's friendly 3-fund portfolio - a passive, low cost, broad based equity index (total market), fixed income (bonds), and total international. We aren't smart enough to figure out which of the indices below is going to be the winner each year so we hold it all.



If we do have a 10-yr period of low returns, keep investing, maybe even increase our amounts at the "lower" prices so that when the market gets back to its ~10% historic average, we are on turbo.

For those of us in or near retirement, we don't have as much runway, which means we have to evaluate our asset allocation and ensure it matches what we can be comfortable with a.k.a. our "sleep number."

In our own portfolio (i.e. effectively: 35% VTI / 30% BND / 25% VEU / 10% VBR ), this is how the annual returns would look doing a backtest over the last 40 years. The CAGR is about 8.4% with a stddev of ~11% and maximum drawdown of 38%. "Past results are no guarantee of future performance" ... but I'll take it.



With this allocation, assuming we had had $10K invested in 1987... not investing a single penny more, we would have $220K today. Even with those drops along the way. and high inflation in the 80's and recently. BUT, contributing $10K per year, each year would take that to nearly $3.5MM today. So, the key is stay the course - regardless of politics, international chaos, inflation, whatever.

I'm going to try and find some info from 10 years ago and find what they were predicting then. I've got a few books that had these same types of predictions. The truth is nobody knows anything about anything (particularly the future) but we can make some plans based on an expected return based on market history and what happens after a period of high returns. Ultimately, buy (a lot) low, sell (some) high still works.

 

[Bamaro]

@Bamaro - I'm going to be brutally honest: I trust MSN / USA Today / MarketWatch, talking heads, etc. as much as I trust Hugh Freeze with a burner phone. However, in this article, they do quote Vanguard & Morningstar predictions - both of whom I do trust much more.

Precisely. Its food for thought.

 

[BamaNation]

This week, I listened to the Bogleheads podcast with Rick Ferri interviewing Vanguard's Jeff Clark on "How America Saves." In the context of @Bamaro's post got me thinking about how >70% of new hires at companies with 401k plans are now automatically enrolled and a big number have contribution auto-increase built in, as well... how this might affect markets? It is SO much easier to invest now than ever before that there may be a new valuation standard that is higher than previously because of that "demand." Don't know if that's the case here, but might make sense as to why valuations are higher than historically.

Haven't found specific year-by-year predictions vs actuals but overall, studies that I've found show equity risk premium [ how much investors expect to earn on equities over risk-free investments (bonds) ] predictions tend to be more pessimistic than what actually happens. Regardless, I'm still going to be staying the course, incorporating the 4% expected return in my planning horizon, and hoping for the 11.4% actual return

 

[BamaFanatJSU]

529 to ROTH IRA

15-Year Rule: The 529 account must have been open for at least 15 years with the same beneficiary. Changing the beneficiary may reset this clock, though IRS guidance is unclear.

BN, do you happen to know if the clock on the 15-year rule is reset if you roll from one 529 account to another?

My situation: the kids are 14 and 11, and I started funds for both at birth with the NY529 program (it was considered one of the best at the time). However, after some advice from an FA friend - who said that the Alabama CollegeCounts 529 plan was now led by a far better group of strategists than it had been previously - I did a full direct rollover of those funds for both kids to corresponding accounts with the ALCC529 in 2023.

I don't regret making the switch, as the ALCC529 fund's performance has so vastly outstripped the NY529 over the last two years, but I do have to admit that I will be bummed if that means we won't be able to roll the max allowable into IRAs for both kids after graduation (fortunately, we're calculating that we'll likely have more than the kids will need to cover 4-5 years at UA).

Any insight you might be able to provide would be sincerely appreciated!

 

[BamaNation]

BN, do you happen to know if the clock on the 15-year rule is reset if you roll from one 529 account to another?

My situation: the kids are 14 and 11, and I started funds for both at birth with the NY529 program (it was considered one of the best at the time). However, after some advice from an FA friend - who said that the Alabama CollegeCounts 529 plan was now led by a far better group of strategists than it had been previously - I did a full direct rollover of those funds for both kids to corresponding accounts with the ALCC529 in 2023.

I don't regret making the switch, as the ALCC529 fund's performance has so vastly outstripped the NY529 over the last two years, but I do have to admit that I will be bummed if that means we won't be able to roll the max allowable into IRAs for both kids after graduation (fortunately, we're calculating that we'll likely have more than the kids will need to cover 4-5 years at UA).

Any insight you might be able to provide would be sincerely appreciated!

Unfortunately, appears there is currently no clear IRS guidance on this. Below in blue is what my529.com has to say about it.

for context: my529 is UT's plan ... we opened both kids an acct here several years after doing a LOT of research ... a couple years before we moved here b/c it was one of the highest rated, lowest costs, and uses vanguard funds. We actively contribute to my 14yo. daughter's my529 acct now.

We use my college daughter's GA acct as the one we're w/d from for her current expenses that are covered by 529 and not paid for by scholarships. Her my529 acct will probably be used for her final couple of years as needed. We also have one with Fidelity that we've used to contribute cash back from various credit cards to fund it and opened just after her birth because we really didn't know much about what we were doing re: 529's (nearly 20 years ago) ! Seems it was prescient, now ... we expect this one to be the one that is rolled over to the Roth. Any extra remaining will become legacy / multi-generational for any grandkids.

Our philosophy on saving was we said we would pay out of state cost of attendance for Bama and adjusted our savings with that as the target. That was our philosophy for wherever she might end up. She's at a private, top 20 college that is ridiculously expensive. But she's doing AFROTC on a full tuition/fees/books merit scholarship and us paying only room/board so we're of the opinion we're getting a great deal and as long as she keeps working hard and stays in AFROTC (which she loves), we'll have significantly overfunded allowing for 529-to-Roth and multi-generational funding. We're totally ok with this. We have a pretty detailed planning spreadsheet that tracked the cost of attendance for Bama (at various scholarship levels) and other schools for which she was interested as she got older. Probably overkill but gave us comfort and confidence that wherever she went, we had a plan. Younger daughter told me this weekend "I am only interested in Alabama. I will not be applying to any other school." We'll see.

"Section 529 requires that the 529 account be open for at least 15 years before a qualified rollover may be made to a Roth IRA. If a my529 account was opened with a rollover from another plan, does that reset my 15-year clock? my529 does not have any guidance from the IRS on whether a rollover from another 529 plan resets the 15-year requirement. The 529 industry submitted a letter to the IRS in September 2023 seeking guidance on this issue. It is unclear if or when the IRS will provide the requested guidance."

Here's another similar interpretation at JHInvestments.com:

Does the clock for the 15-year requirement start over if a 529 account owner rolls over funds to another state’s 529 plan run by a different plan manager? It’s unclear. Circumstances under which a 529 account owner may wish to consider such a rollover include dissatisfaction with the plan’s fees, investment performance, or services or instances in which an owner consolidates multiple 529 accounts into a single 529 plan rather than keeping them spread across different plans.


Kitces has a good summary of the 529-to-Roth Rollover details but doesn't address this specific question.

Here's some other opinions/insight/FAQs on the 529-to-Roth rollover. Given it's been 2 years and IRS still hasn't issued guidance, they probably won't or they'll stick their finger in the air to see which way the winds are blowing. My gut says if they ever do comment, transferring from one state's 529 plan to another state's will be allowed and not reset the clock, but again, there's no guidance that I can find about that at this point in time.

• Legal aspects & details on which states qualify... and which don't ... and a detailed personal experience in how CO & UT have responded to the author's questions about the process: https://www.advisorperspectives.com/articles/2024/02/15/law-strategies-convert-college-529-roth
• State 529 conference insight: https://www.529conference.com/status-board-secure-2-0-529-state-updates/
• https://www.jhinvestments.com/viewp...Roth-IRA-helping-clients-navigate-the-details
• ($$$) Morningstar's 529 coverage and 529-to-Roth rollover advice ... Pro tip: If you have a college student / teacher / vet in the family, have them signup for Morningstar and get a DEEP discount (ie. only $25-100 vs $250+ )

As an aside, here is Morningstar's ratings for top 529s:

Top rated Gold-Rated 529 Plans

• Alaska
• Illinois
• Massachusetts
• Pennsylvania
• Utah

Hope this helps to at least guide your thinking!

 

[4Q Basket Case]

An article from the WSJ on (1) why "smart money" isn't necessarily all that smart, and (2) why illiquid investments might have a small place in a portfolio. But they shouldn't be the basis.

The Ivy League Keeps Failing This Basic Investing Test - WSJ

It's behind a paywall, so for those who don't have a subscription, I'll summarize:

- Yale University made a lot of money in illiquid investments under a CFO who's now dead.

- Lots of other Ivy League and similar institutions' fund managers wanted to prove they're as smart as their counterparts at Yale. So they did what the dead guy did -- sold stocks, bonds and funds and used the proceeds to buy lots of "alternatives."

- Over about 15 years, alternative investments went from about half to nearly two-thirds of their collective portfolios.

- These alternatives consist of Venture Capital (VC) funds, hedge funds, owning real estate (as opposed to REITs or real estate funds), art and lots of other things that don't have a liquid public market. In the case of VC and hedge funds, they might even have explicit restrictions on when and how much you can sell.

- Problem there is when you need cash right now, good luck. Buyers, if there are any, know you're over a barrel. There is no "market" price. It's what you can negotiate. And when you need cash NOW, your bargaining position is weak.

- None of this is new. The last lesson was in the 2007-10 time frame when the stock market tanked and illiquid investments got positively unsalable. So to raise cash, owners had to sell way undervalued stocks, locking in significant losses.

- You'd think these guys would remember that lesson. So why didn't they? A counterintuitive combination of hubris and insecurity. They honestly thought "this time it's different," and that they were the only ones in the room smart enough to recognize why. Plus, they were envious of others' performance and wanted to be in the cool kids club.

- So now when Trump is pulling government contracts, they have a sudden need for cash to keep day-to-day staffing, maintenance of infrastructure, and previously contracted construction projects going.

- Despite endowment funds in the tens of billions of dollars, they're having a hard time raising the cash because nearly two-thirds of their investment portfolios are in illiquid stuff. Takes a long time to negotiate a price, and what you end up settling on will probably be less than the carrying value on you books -- IOW, a loss.

So why am I posting this here on TideFans?

Because the feds have recently expanded the list of investments eligible for 401k and similar accounts to include Private Equity.

For 99.99% of private workaday investors, that's a recipe for problems.

Even highly trained professionals with decades of experience mess this up. There are all sorts of restrictions on selling, and even if you can sell, you might not get the stated value. Additionally, there are far fewer protections for investors regarding financial reporting, trading on non-public information, insider trading, self-dealing, etc.

This is no place for people who heard a friend holding forth at a cocktail party and want to be like him -- which is kind of what the non-Yale Ivy Leaguers did.

When some weirdness happens, nobody will care that you had an unexpected medical expense. Or that you need a $20K new roof. Or that life happened in any number of other ways, and you need cash right now.

If you want to get into this sort of asset for your retirement portfolio, please consult a qualified professional who is fee-only -- IOW, he or she doesn't get a commission if you buy in.

Even then, treat it like a football bet. Buy only what you could lose (and if you can't sell it for cash, it might as well be lost) and say, "Well, dang. But it was fun."

 

[4Q Basket Case]

A thought while the topic du jour is the Fed's reduction in the Fed Funds interest rate and expectations for future rate cuts.

Two popular misconceptions: The first being that the Fed controls the interest rate for mortgages, car loans, credit cards, etc.

False.

The Fed controls only the Fed Funds rate it charges banks for overnight borrowings. The market controls everything else.

IF (two huge letters) the Fed and the financial markets have a passably similar view of the current and future economic strength or weakness, the Fed Funds rate can indirectly influence longer-term rates. But if their views diverge, the Fed Funds rate will have little to no influence on what individual or corporate borrowers pay for money.

The second misconception is that you can't lose money on US Treasury bonds, and the chances of losing money on quality corporate bonds is really really low.

Also false, even if you assume zero probability of default.

IF (there's those two huge letters again) you buy a Treasury or high-quality corporate bond and IF you hold it to maturity, you'll get both your agreed-upon interest payments and all your principal back at maturity.

The sticking point comes if you buy the bond, then later on for whatever reason, you want to sell it prior to maturity. If you do that, you're exposed to the risk of loss.

Here's the greatly simplified story: Say you buy a 20 year bond paying 5%. Three years later (17 years prior to maturity), you want to sell. But in that three year period, the market rate has risen to 7%. The market value of that bond has taken about a $2,000 hit -- and that loss is totally unrelated to the fact that you'll eventually get all your contracted money.

Point of all this being, practice good asset / liability management in your investments. Resist the temptation to chase yield going buying longer maturities. Because, dang it, the short-term stuff pays so little.

If you do that, you're exposing yourself to the risk of loss of market value.

For those who care to read, here's the geekier version of why that happens:

A bond is a stream of cash payments. Say you buy a $10,000 bond paying 5% per year, maturing in 20 years. To make the math less complicated than it already is, we'll assume single annual payments of 5% of $10,000 -- or $500. Then at maturity, 20 years down the road, you get your principal back in a one-time payment.

Suppose further that the market rate for a 20-year maturity is 5% the day you buy the bond. The financial markets will discount the stream of 20 annual payments of $500, plus the one-time payment of $10,000 in 20 years to present value at the market interest rate. On Day 1, that's 5%. The present value of the stream will be $10,000 -- or par.

But suppose that three years later, the rate for 20-year money rises to 7%. Now you're discounting the fixed payment stream to present value at 7%. But the payments you receive are fixed at the old 5% rate.

The present value of 17 annual payments of $500, discounted at the new market rate of 7% is $4,881. The present value of the one-time return of $10,000 principal 17 years into the future is $3,166. Your bond is worth the sum of the two. Problem there is $4,881 + $3,166 is only $8,046. Your bond is worth not quite $2,000 less than what you paid for it.

Worse, due to the effects of exponential math, the longer you go out on the maturity, the bigger the loss. If you bought a 30 year bond paying 5%, and three years later want to sell it in a 7% market, your bond will be worth about $7,600 -- a $2,400 loss of market value.

 

[BamaNation]

Point of all this being, practice good asset / liability management in your investments. Resist the temptation to chase yield going buying longer maturities. Because, dang it, the short-term stuff pays so little.

Excellent explanation of the value and calculations!

For cash positions, I"ll take my 3.5%-4.5% that I'm getting from Ally Savings / CDs and/or Vanguard or Fidelity Money Market accounts and not worry about the 2-5% extra I could be getting on riskier / longer-term bonds!

For actual bond indexes in 401k, we buy the total market bond index (like BND / VTBLX) in that tax-advantaged account (so we're not taxed on the monthly dividend/interest). VBTLX has an effective target duration of about 6 yrs and thus is intermediate/medium term in length and has returned 5-6% this year, and are currently about 4.2% 30-day SEC Yield.

Digging deeper: "Return" from interest goes down as interest rate goes down (obviously) ... but the value increases. A bond's price will go up by a percentage approximately equal to its duration when interest rates fall by 1%. For example, a bond with a duration of 6 years would be expected to increase in price by approximately 6% if interest rates fell by 1%.

Given the index nature of VBTLX/BND it won't be exactly this because it has nearly ALL available bonds (11K out of 13K+) of varying duration and quality in it (its effective duration is 5.83 yrs right now) and many bonds expire at the end or beginning of the month and it is market-traded with some rate change pricing possibly already priced into before the drop or prices lowering if people take money out. Thus, it has increased about 1% in last 30 days and is slightly lower than the 1.45% it might have been expected to increase since last Wednesday. Eventually, it would be expected to work its way closer that expected value change.

We (collectively) tend to think about bonds as not returning very much but as we approach retirement, they're typically the steady ballast that gives us security should there be a major downturn or shock. Don't take risk in the bonds ... equities are where your risk belongs!

Thanks @4Q Basket Case for this reminder and awesome explanations!

 

[4Q Basket Case]

Excellent explanation of the value and calculations!

For cash positions, I"ll take my 3.5%-4.5% that I'm getting from Ally Savings / CDs and/or Vanguard or Fidelity Money Market accounts and not worry about the 2-5% extra I could be getting on riskier / longer-term bonds!

For actual bond indexes in 401k, we buy the total market bond index (like BND / VTBLX) in that tax-advantaged account (so we're not taxed on the monthly dividend/interest). VBTLX has an effective target duration of about 6 yrs and thus is intermediate/medium term in length and has returned 5-6% this year, and are currently about 4.2% 30-day SEC Yield.

Digging deeper: Return goes down as interest rate goes down ... but the value increases. A bond's price will go up by a percentage approximately equal to its duration when interest rates fall by 1%. For example, a bond with a duration of 6 years would be expected to increase in price by approximately 6% if interest rates fell by 1%.

Given the index nature of VBTLX/BND it won't be exactly this because it has nearly ALL available bonds (11K out of 13K+) of varying duration and quality in it (its effective duration is 5.83 yrs right now) and many bonds expire at the end or beginning of the month and it is market-traded with some rate change pricing possibly already priced into before the drop or prices lowering if people take money out. Thus, it has increased about 1% in last 30 days and is slightly lower than the 1.45% it might have been expected to increase since last Wednesday. Eventually, it would be expected to work its way closer that expected value change.

We (collectively) tend to think about bonds as not returning very much but as we approach retirement, they're typically the steady ballast that gives us security should there be a major downturn or shock. Don't take risk in the bonds ... equities are where your risk belongs!

Thanks @4Q Basket Case for this reminder and awesome explanations!

Absolutely right that the additional yield doesn't justify the risk of loss of market value.

Just looked up rates on Schwab. You can get a 1-year CD paying 3.9%. You can get a 30-year Treasury paying 4.76% -- less than 1% extra yield for going out 29 years longer.

It's just not worth the risk.

For anyone craving a bit more yield, and willing to go long to get it, ask the management teams of Signature Bank, Silicon Valley Bank, and First Republic what happens when you hold long-term bonds in a rising rate environment and need cash now....as in today.

 

[BamaNation]

Jonathan Clements, Longtime WSJ Columnist, Dies at 62

Farewell Friends - HumbleDollar

If this post is appearing, it means I’ve succumbed to cancer or one of its side effects. Please don’t feel sad for me. I’ve had a life filled with love, great experiences and wonderful career opportunities. Despite my demise at a relatively young age, I consider myself beyond fortunate...

humbledollar.com

Jonathan Clements - a titan in the world of personal finance / investing journalism died on Sunday after a year-long bout with cancer. At breakfast one morning while at the Bogleheads 18 Conference I attended in 2019, he sat at the same table as me. My claim to fame.

Clements wrote 1009 columns for The Wall Street Journal on personal finance & investing topics in his "Getting Going" series over a 13-year span, wrote 9 books, worked for a financial info startup inside Citibank and then started his own website (HumbleDollar.com). He was one of the first investing/finance journalists to advocate for index funds.

A collection of his best columns has been assembled by some of the other personal finance journalists / writers I highly admire (editors: Christine Benz, William Bernstein, Allan Roth, and Jason Zweig) and funds are being used to support the Getting Going on Savings Initiative.

The Best of Jonathan Clements: Timeless Advice for a Financial Life Well Lived

Purchases made through our TideFans.shop and Amazon.com links may result in a commission being paid to TideFans.

 

[4Q Basket Case]

With the end of the year — and attendant year-end tax planning — coming up, I thought I'd pass along something I found out in today's WSJ.

If you’re over 50 and make over $145,000, this is the last year you can make pre-tax catch-up contributions to your Traditional 401K.

Starting in 2026, you can still make catch-up contributions. But they have to go into a Roth 401K. Which means they have to be funded with post-tax dollars.

Here's the deal, egregiously over-simplified:

If you're under 50, the cap on pre-tax contributions to a Traditional 401k is currently $23,500.

If you're over 50, you can contribute an extra $7,500, for a total of $31,000.

If you're between 60 and 63, the catchup limit increases to $11,250, for a total of $34,750.

Historically, but ending this year, you can contribute all that money pre-tax into a Traditional 401K.

Starting in 2026, for those making more than $145,000, the $7,500 (or $11,250) catchup contributions have to be put into a Roth 401k, and therefore in post-tax dollars.

Employers that provide 401k plans to employees aren't required to have a Roth option. But the significant majority do -- like about 90%. If you make more than $145,000, and happen to work for an employer that doesn't offer a Roth option, you could be out of luck on the catchup.

This is a change, but it isn't all bad.

When you fund your Traditional 401K with pre-tax dollars, your money grows tax free. And you can move investments around within the 401K's specified options without any tax consequences. But when the time comes to withdraw, your gains are taxable. Side note: There's a formula for calculating the taxable gain -- you can't avoid tax by simply saying, "This money is what I put in. I'm not withdrawing any gains yet."

In contrast, when you put money into a Roth 401k, the contributions aren't deductible. But when it comes time to withdraw, it's all tax free -- contributions, gains, everything.

Which one is better for you depends on a lot of things: current tax rates, future tax rates, your personal health and life expectancy, and your personal tax rate and taxable income at withdrawal time, just to name a few.

Having some money in a Traditional 401k and some in a Roth is what the accountants call tax diversification.

Disclaimer: The IRS code on 401Ks and similar retirement vehicles is thousands of pages long. What I've laid out above is grossly simplified.

Everybody's situation is different, and I'm sure there are countless, "Yeah, but...." provisions. Consult an investment adviser who has a good understanding of your full financial picture.

Just be aware that things change on January 1, 2026. You and your adviser have until the end of the year to construct your plan accordingly.

 

[4Q Basket Case]

Following up on my post above on having Private Equity and other private investments in your 401k -- the primary criticism is that they're not as liquid as you might think. Additionally, investors don't have the same legal, regulatory, or financial reporting protections as they do in publicly-traded assets.

Here's a Morningstar article with more detail:

Public/Private Fund Liquidity: What You Need to Know | Morningstar

Essentially, it's real easy to get in. It can be really sticky to get out, complete with narrow "redemption windows" during which you can sell and caps on how much the fund has to allocate to redemptions.

That last restriction can be a killer. It means that it's possible you might try to redeem / sell shares during the designated window.....and if the collective redemption requests of all shareholders busts the cap, you won't get all the money you requested. Depending on the terms of the investment, you might be out of luck until the next redemption window, with no recourse.

PE in your retirement account sounds like a great idea during cocktail party conversation. But the devil's in the details. For a lot of reasons, "Caveat emptor," has never been more appropriate.

 

[BamaNation]

IRS has released the 2026 Tax brackets

IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill | Internal Revenue Service

IR-2025-103, Oct. 9, 2025 — The Internal Revenue Service today announced the tax year 2026 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2025-32 provides details about these annual adjustments.

www.irs.gov

https://www.wsj.com/personal-finance/taxes/income-tax-brackets-2026-bbd1863d?st=pEjGtX&reflink=desktopwebshare_permalink

2026 Tax Brackets

Explore the IRS inflation-adjusted 2026 tax brackets, for which taxpayers will file tax returns in early 2027.

taxfoundation.org

2026 Tax Calculator: How the One Big Beautiful Bill Act’s Tax Changes Will Affect You

Our new interactive tax calculator tool helps demonstrate how the OBBBA tax provisions will impact various taxpayers in 2026.

taxfoundation.org

 

[4Q Basket Case]

Regarding Private Equity and/or Private Credit in 401k and similar plans.....right on cue comes First Brands.

First Brands: How Jefferies, UBS Ended Up Exposed to Its Collapse - Bloomberg

This is just one article. There are dozens available should you care to get into the nitty details. But a big issue is that First Brands pledged assets (in this case, accounts receivable and inventory) to multiple lenders, none of whom knew about the others. So the bottom line for First Brands is that most, if not all, of the creditors will take a big hit.

The bottom line as regards Private Equity / Credit is that the investment bank Jeffries is spending a lot of time explaining why its own investors don't have a problem.

I note that it's one of Jeffries' subsidiary funds that is the actual lender to First Brands. In reality, it's a subsidiary fund of a subsidiary fund. So depending on how they might legally isolate those funds' problems from the parent, it's possible that the subsidiary-of-a-subsidiary fund has a problem, but Jeffries the parent might not.

Here's the quote from Jeffries CEO: "Last week, Jefferies disclosed that its Leucadia Asset Management fund, through its credit fund Point Bonita, held about $715 million in receivables linked to First Brands."

That's tapdancing that Gregory Hines would be proud of. Opens with distancing of the lender (Point Bonita) from Jeffries, saying it's a sub of a sub. Then says it holds $715 million in receivables linked to First Brands." Linked to? Really? How come they're not owned by First Brands?

So if your 401k has Private Credit from "Jeffries," it matters a whole lot whether you really have shares of loans made by Jeffries (the parent)....or shares of loans made by a fund two subsidiaries removed from Jeffries.

On top of all that, there's $2.3 Billion missing. First Brands management is acting like a five-year-old, all wide-eyed with arms spread saying, "It's just gone....I dunno wha' happen."

Sports fans, $2.3 Billion doesn't just vanish. It went somewhere. Where, I don't know. But the first two places I'd look are (1) the CEO / founder / sole equity shareholder's pocket, and (2) unreported corporate losses.

So now there's cooked books including a bunch of missing money. Which raises the question of culpability from the auditor, BDO. Way too early to tell whether they have any liability. But they definitely have some splainin' to do.

So why am I going through all this on this forum? Because all the things that make Private Equity and Private Credit far riskier than true publicly traded investments (which are themselves far from riskless) have come together:
- Lack of due diligence and collateral monitoring from multiple lenders.

- Highly questionable accounting on the part of the borrower. And the auditor has some tough questions to answer.

- A single person in control of the entire company and the virtual certainty of fraud somewhere.

- The ownership of the lender is opaque. Who owns the asset (in this case, loans) that you're buying a share of? What recourse, if any, do you have to the deep-pocketed parent? Do you know? Do you even have a way of knowing?

- The nature of asset quality reporting required of Private Credit. This post has already gotten too long, so I'll just say that it's a lot more transparent when the lender is a federally regulated bank than when the lender is a largely non-regulated Private Credit fund.

Can you tell I'm not a fan of Private Equity or Private Credit being in 401k and similar plans?

 

[BamaNation]

Can you tell I'm not a fan of Private Equity or Private Credit being in 401k and similar plans?

They try and sell it as "this lets the retail investor (aka "little guy") make money where they haven't made money before because so many companies are staying private." .... There is usually a reason (or 50) that they stay private and one big one is so they don't have to reveal all their dirty little secrets. First Brands is going to be Case #1 of thousands on why to not put private equity funds in your 401k!

 

[4Q Basket Case]

An article from Morningstar explaining why reductions in the Fed's overnight interest rate won't necessarily affect mortgage rates.

Why Mortgage Rates Might Not Keep Falling | Morningstar

Bottom Line: The Fed doesn't control expectations for longer-term interest rates -- the financial markets and investors do.