UPDATE ON OUR 25 FAVORITE FUNDS p 44 SHOULD YOU INVEST LIKE BUFFETT? p 54 How to Get the FINANCIAL ADVICE That’s Right for You Where to find an adviser you can count on, no matter what your stage of life. p 26 PLUS Early warning systems for ID theft p 36 Get smart about your student loans p 40 MAY 2018 A.I. is making quite an impression. Revenue from artificial intelligence is expected to grow by 50% year over year.1 Invest in the potential of A.I. In 2016, tech giants invested $20 billion in A.I.2 and worldwide revenues from this technology are on track to reach $46B by 2020.1 Fidelity’s tech sector fund and ETF have the ability to take advantage of the opportunities presented by A.I. Learn more about our tech sector mutual fund and tech sector ETF FSPTX Fidelity® Select Technology Portfolio FTEC Fidelity® MSCI Information Technology Index ETF Lowest expense ratio in the industry 3,4 Fidelity.com/tech 800.Fidelity or call your advisor Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary prospectus containing this information. Read it carefully. ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund. Sectors are defined by the Global Industry Classification Standard (GICS). Source for A.I. Revenue Forecast: IDC 2 Source: McKinsey Global Institute, “Artificial Intelligence: The Next Digital Frontier” 3 Expense ratio data as of 8/22/2017. Based on a comparison of total expense ratios for U.S. technology sector-level ETFs with similar holdings and investment objectives, within the universe of 46 U.S. ETFs in the Morningstar technology category. 4 FTEC expense ratio, .084%. Expense ratio is the total annual fund operating expense ratio from the fund’s most recent prospectus. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2018 FMR LLC. All rights reserved. 812469.3.0 1 CONTENTS KIPLINGER’S PERSONAL FINANCE FOUNDED 1947 VOL. 72 NO. 5 ■ PUTTING A LEASH ON PET CARE COSTS. PAGE 62 AHEAD 11 TOPIC A: Long-term-care insurance dilemma . . . Investors get CEO pay details. 40 SMART WAYS TO MANAGE YOUR STUDENT LOANS Refinancing can lower payments, but first consider the pros and cons. 61 FUND SPOTLIGHT Keep your balance. LIVING 39 18 OPENING SHOT Why you should stick ASK KIM Making the call on phone insurance, by KIMBERLY LANKFORD. with stocks, by JAMES K. GLASSMAN. 43 22 MILLENNIAL MONEY The risks of paying peer to peer, by RIVAN STINSON. 24 MONEY SMART WOMEN A guide to marital money bliss, by JANET BODNAR. MONEY MORE ABOUT YOUR MONEY Juicier yields on money funds (43). 62 TRIM THE COST OF PET CARE Spending on pets has skyrocketed, so it’s smart to budget for vet bills, grooming and other expenses. 68 INVESTING DRIVE TIME The best way to buy a used car, by DAVID MUHLBAUM. 44 THE KIPLINGER 25 FUNDS: ON TRACK 70 TRAVEL Get more punch from your points, by MIRIAM CROSS. Our annual update of our favorite actively managed funds reveals a year of mixed results. But these funds are in it for the long haul. IN EVERY ISSUE 54 WHAT WOULD WARREN DO? Berkshire 6 LETTERS Our no-politics promise. Hathaway’s leader still has lessons to teach us. But we offer our take on his latest trades. 8 FROM THE EDITOR ISO a financial adviser. 26 COVER STORY HOLLENDERX2 THE RIGHT ADVICE AT THE RIGHT PRICE Sorting through the alphabet soup of financial adviser credentials and opaque fee structures can be daunting. So we shopped around to see how you can find the best fit for you. bonds to put higher interest rates to work for you. 72 TAKEAWAY When it’s safe to shred your tax records. 60 PRACTICAL INVESTING Why I paid a premium for Costco, by KATHY KRISTOF ON THE COVER: Photograph by Bonnie Holland 58 BUILD AN INCOME LADDER Use CDs and 36 EARLY ALERT SYSTEMS FOR IDENTITY THEFT Credit monitoring services sound the alarm if they spot fraud. But are they worth it? 05/2018 KIPLINGER’S PERSONAL FINANCE 1 KARLAN TUCKER*, AMERICA’S RETIREMENT EXPERTS The most critical stretch of your investment lifetime is retirement. That’s why, when you want to begin planning for this phase of your life, you turn to the experts. Maximize your savings, minimize your risks in retirement: Meet America’s Retirement Experts. COLORADO It has been Karlan Tucker’s privilege to serve more than 5,000 retirees over the past 31 years. Many were not financially positioned for a retirement of 30-plus years, but he helped them design plans that secured their income. Karlan is co-author with Brian Tracy of Tracy’s new book, “Success in the New Economy.” He is the founder/CEO of five firms in the Tucker Financial Group with more than $3 billion in assets under advisement. D A R R E N P E T T Y * , R I C P ©, COLORADO Darren’s mission is helping people retire happy. His turnkey client process ensures lifelong income, provides ongoing wealth management and incorporates smart tax planning throughout retirement. Darren has earned the designation of Retirement Income Certified Professional (RICP ®) and is an Investment Advisor Representative with Tucker Asset Management. D AV E LO S K I L L , ARIZONA Dave Loskill has owned and operated several successful businesses and, with help from his wife GayLynn, has built his practice into what is now a nationally ranked advisory firm. He is recognized as a subject-matter expert on Social Security benefits planning, and has assisted hundreds of families with their retirement income planning goals. He also assists other advisors around the country in improving their practices. G AY LY N N LO S K I L L * , ARIZONA GayLynn Loskill obtained her C.P.A. license and worked in the public accounting field for 10 years before getting her securities and life insurance licensing. She is an expert on Medicare benefits and helping Arizonans manage money into their retirements. With a B.S. Degree in Business Administration/Accounting from Arizona State University, GayLynn has helped her husband Dave build their practice into a top-producing firm. www.AmericasRetirementExperts.com Not endorsed by or affiliated with any governmental entity. Guarantees are based on the claims-paying ability of the issuing insurance company. JOHN O’CONNOR, ILLINOIS President of O’Connor & Associates in Illinois, John O’Connor has been assisting seniors, business professionals and self-employed people for over 25 years to protect their assets and invest wisely. John has also trained numerous colleagues on insurance products and retirement investing throughout Illinois. DEIRDRE HAFEN*, WA S H I N G T O N Deirdre Hafen offers more than 20 years of experience in personal retirement and wealth asset planning. She has counseled thousands of clients through changing markets and economic challenges. She holds securities, life insurance and long-term health care insurance licenses. As a perennial top-producing advisor, Deirdre also conducts classes in Washington on annuities, longterm care, life insurance and wealth planning. PA U L I VA N O F F, CALIFORNIA It has been Paul Ivanoff ’s privilege to visit with more than 5,000 families on his path to becoming renowned as a retirement industry mentor. With more than 36 years of experience in retirement planning for his clients, Paul has protected thousands of his clients from the nursing home, government taxation, market volatility and low yields from their banks. Paul enjoys finding and eliminating hidden fees in his cleints’ retirememt portfolios. T R AV I S I VA N O F F * , CALIFORNIA Travis grew up in the retirement planning business, following in the footsteps of Paul Ivanoff and studying his father’s best practices. He also has a Series 65 license and finds it fulfilling working in the financial services industry. He is passionate in helping his clients implement safe and secure retirement and legacy strategies. Travis obtained his Bachelor’s degree in Communications from the University of Cal State, Fullerton. AMERICA’S RETIREMENT EXPERTS You can’t save and invest for your nonworking years the same way you did when you were 25. America’s Retirement Experts provide the skills and experience to design the correct strategies for you to get the most f rom your later years. Maximize your savings, minimize your risks in retirement: Meet America’s Retirement Experts. www.AmericasRetirementExperts.com Agents are licensed for the products they sell. *Investment advisory services provided through Tucker Asset Management LLC, a registered investment adviser. GET MORE ADVICE FROM KIPLINGER Get on the path to a financially secure retirement .com STOCKS VULNERABLE TO A GLOBAL TRADE WAR Beware the potential impact of dueling tariffs on these publicly traded companies. kiplinger.com/links/tradewar NET WORTH CALCULATOR Our new tool helps you quickly add up assets and subtract liabilities to determine your net worth. kiplinger.com/links/networth 12 FEATURES THAT HOME BUYERS HATE MOST Updated and expanded for 2018, our list of buyer turnoffs can be tackled without spending a lot of money. You can even fix some of them yourself. kiplinger.com/links/buyershate NEW for 2018 Take the first step today. Visit www.kiplinger.com/go/retirekip to see the table of contents and to order. Today HOW TO REACH US: Subscriptions. For inquiries about ordering, billing or renewing a subscription, or to report address changes, please have your mailing label handy to reference your account number and visit us online at kiplinger.com/customer-service or call 800-544-0155, Monday through Friday between 7 A.M. and midnight, Saturday between 8:30 A.M. and 7 P.M., and Sunday between 10:30 A.M. and 7 P.M. You can also write to Kiplinger’s Personal Finance, P.O. Box 62300, Tampa, FL 33662, or e-mail us (firstname.lastname@example.org). Reprints. PARS International Corp. (212-221-9595, ext. 237; e-mail, jennifer.eclipse@ parsintl.com). Content licensing. E-mail email@example.com. Mailing lists. From time to time we make our subscriber list available to carefully screened companies whose products may be of interest to you. If you would rather not receive such solicitations, send your mailing label to P.O. Box 62300, Tampa, FL 33662 and instruct us to exclude your name. 4 KIPLINGER’S PERSONAL FINANCE 05/2018 Sign up for our Kiplinger Today e-newsletter at kiplinger.com/links/ktoday. FACEBOOK: KiplingerPersonalFinance TWITTER: @Kiplinger ISTOCKPHOTO.COM Profit from the best of Kiplinger delivered to your e-mail in-box every weekday. Saving is a strategy. Plan ahead. Want to make your savings shine? Warm up to a great rate at Synchrony Bank. We offer a product recognized as a NerdWallet Best Savings Account, supported by our Bankrate Safe & Sound® 5-Star Rating and highly rated customer service.* It’s banking in sync with you. 2. 24- M ONTH CD % 20 APY* $2,000 minimum opening deposit . H IGH Y I ELD SAV I N GS % 1 55 APY* no minimum balance Visit us at synchronybank.com or call 1-800-753-6592. * Annual Percentage Yields (APYs) are accurate as of 3/27/18 and subject to change at any time without notice. Fees may reduce earnings. Visit synchronybank.com for current rates, terms and account requirements. Offers apply to personal accounts only: CDs: A minimum of $2,000 is required to open a CD and must be deposited in a single transaction. A penalty may be imposed for early withdrawals. After maturity, if you choose to roll over your CD, you will earn the base rate of interest in effect at that time. HIGH YIELD SAVINGS: Rates are variable and subject to change any time without notice after the account is opened. No minimum opening deposit required. AWARDS: ©2016, 2017, 2018 and TM, NerdWallet, Inc. All rights reserved. Bankrate Safe & Sound 5-Star Rating earned for Q1 2014 through Q2 2017. © 2018 Synchrony Bank LETTERS PAT L. HOUSTON I’ve been reading Kiplinger publications since the 1980s and believe that you have maintained a nonpartisan standard, but I was surprised to read that Mark Solheim was “flabbergasted” that readers could take issue with recommending Hamilton. Perhaps you forgot the cast’s inappropriate and undeniably partisan lecture to then Vice President-elect Mike Pence during a 2016 performance. That’s when I decided not to attend. J.M. DELAFIELD, WIS. Retirement goals for those who serve. As a retired mili- Our No-Politics Promise Q I don’t plan to see the musical Hamilton, but I don’t think that your recommendation promoted any bias (“From the Editor,” March). You provided honesty when admitting that most of your writing staff is likely liberal-leaning. You emphasized the need for unbiased writing. You highlighted that the Kiplinger code of ethics prevents writers from expressing a public political viewpoint. This is a commendable policy and one that other companies could benefit from. I will take you up on your offer to write to you if I see political bias, and I will continue to subscribe to Kiplinger’s as 6 KIPLINGER’S PERSONAL FINANCE 05/2018 READER POLL Why do you use a financial adviser? For help managing investments For a comprehensive financial plan 31% 38% 9% 22% To make sure I’m on track To answer questions about a specific issue To learn more about how to get the financial advice that’s right for you, turn to page 26. tary veteran now receiving Veterans Affairs benefits, I found your article “Retirement Reality Check: Are You on Track?” (March) insightful but irrelevant to my situation. Many veterans such as myself are working on a second retirement (or receiving a VA stipend). We use Kiplinger’s to figure out retirement goals but often become confused. We already get fixed income, yet most of our 401(k) numbers are well short of the goals. I propose that you write a veteran-focused retirement reality check story, including information on the military blended retirement system. GREG PITTMAN COLORADO SPRINGS EDITOR’S NOTE: We wrote about the new retirement plan rules in our January issue. You can see our take on that and other financial issues in the Financial Field Manual: A Personal Finance Guide for Military Families (kiplinger.com/ links/fieldmanual). A case for index funds. I have had the bulk of my investments in stock and bond index funds for the past 30 years, and I found nothing in “The Perils of Indexing” (March) to change my mind. The argument the writer makes that index funds are riskier than active funds in a bear market only holds true if the investor does not have a diversified portfolio of stocks, bonds and cash. I suspect that most index investors would disagree with your suggestion that many investors believe that index funds are categorically less risky than actively managed funds. F.L. FAIRVIEW, N.C. CORRECTIONS Moneyball was nominated for Best Picture at the 2012 Academy Awards (“Takeaway,” March). The address for Christopher Elliott’s consumer dispute resolution website is www .elliott.org (“Ahead,” April). LETTERS TO THE EDITOR Letters to the editor may be edited for clarity and space, and initials will be used on request only if you include your name. Mail to Letters Editor, Kiplinger’s Personal Finance, 1100 13th St., N.W., Washington, DC 20005, fax to 202-778-8976 or e-mail to firstname.lastname@example.org. Please include your name, address and daytime telephone number. SOURCE: POLL SURVEYED 105 KIPLINGER’S READERS. long as it provides unbiased financial information. DISCOVER THE NATURAL WONDERS PUGET SOUND & SAN JUAN ISLANDS NEW ENGLAND SOUTHEAST PACIFIC NORTHWEST ALASKA MISSISSIPPI RIVER Enjoy the scenic beauty of the Paciﬁc Northwest on this 8-day cruise, aboard one of the newest and most environmentally friendly ships in the United States. Witness whales, harbor seals, and bald eagles as you cruise through this diverse natural wonderland. Small Ship Cruising Done Perfectly.® CAPTIVATING EXCURSIONS 5, 8 & 11-DAY ITINERARIES ABUNDANT WILDLIFE Call today for a FREE Cruise Guide 1-888-240-4951 AmericanCruiseLines.com American Cruise Line Best River Cruise Line for Solo Travelers FROM THE EDITOR Mark Solheim M y wife and I live in a 1,000have pushed high-fee products. Kipsquare-foot house in Washlinger’s prefers fee-only planners, and ington, D.C. That’s no typo. among the many designations they The house is tiny. We’ve thought may hold, the certified financial planabout buying a bigger place, but we ner credential is the gold standard. love our neighbors, the Metro is a CFPs must act as fiduciaries, putting 10-minute walk away, and we are their clients’ interests above their across the street from a park. So a own. But even searching for a CFP few years ago we started thinking means jumping into a rabbit hole of about building an addition. We talked client-adviser relationships and fees. about it … and talked … and talked My own search was one impetus some more. I was in favor of financing for our cover story, “The Right Advice it with a fat home-equity loan; the at the Right Price,” by senior editor thought of taking on that debt made Sandy Block and contributing editor my wife cringe. Lisa Gerstner (see page 26). My wife We decided to consult a financial and I interviewed three advisers planner to help us sort through our with three different business models. options. We had other reasons for The first was an independent money seeking help. We wondered what management firm that would invest would happen to our retirement our money and offer comprehensive accounts after the bull market skidded THE ADVICE to a halt. We were looking for taxINDUSTRY IS A planning strategies. LABYRINTH OF We needed a push CREDENTIALS to update our wills. AND OPAQUE FEE And, frankly, we wanted someone STRUCTURES. to help us budget better and set realistic savings goals for things such as family vacations (and the home renovation). A frustrating search. The advice industry is a labyrinth of credentials and opaque fee structures. Some planners’ compensation is based on commissions from selling mutual funds and insurance products, some charge a fee based on a percentage of assets, and some charge fixed fees. Commissionbased advice can work fine, but it gets a bad rap because some planners 8 KIPLINGER’S PERSONAL FINANCE 05/2018 MARK SOLHEIM, EDITOR MSOLHEIM@KIPLINGER.COM TWITTER: @MARKSOLHEIM POON WATCHARA-AMPHAIWAN ISO a Financial Adviser planning for an annual fee of 1% of our assets. We spent a couple of hours at the firm’s plush offices answering questions about our finances and goals, then returned for a personalized presentation—which was when we realized we didn’t want to pay thousands of dollars a year to invest in the firm’s model portfolios. The next stop was a firm that would draw up a comprehensive plan for $5,000. My wife and I would have to complete a long questionnaire about our finances and our money styles, then sit through a series of interviews with the planner. About three months later, we’d get a road map to financial nirvana. The fee may have been worth every penny, but we weren’t prepared to make such a deep commitment. The third time was the charm. Lori Atwood, a CFP, charges by the hour, with no minimum time or financial commitment. Her overhead is low— she will come to you or meet at a downtown office building where she rents space by the hour. “I want people to have access to unconflicted advice not based on assets under management,” she says. “The demand is huge.” Atwood also just launched a personal finance platform and app ($6.99 a month) based on the system she uses with clients. Check it out at FearlessFinance.com. We met with Atwood three or four times to track our income and outgo and come up with a budget to help us save for our goals. We put the plan in place and, a year later, we’re going back for a checkup—and finalizing the blueprints for our addition. Active Matters: Life isn’t a passive activity. Investing shouldn’t be either. Whether you’re planning on retiring in the not-too-distant future or years from now, being actively involved matters in achieving results. When it comes to managing our funds, we share the same active philosophy. Our investment teams seek to navigate down markets, find opportunities, and manage risk so you can stay on track toward reaching your retirement goals. Over 90% of T. Rowe Price Retirement Funds beat their 10-year Lipper average as of 12/31/17.* Put our active investment approach to work for your retirement. We offer IRAs, Rollover IRAs, and retirement planning. Call our retirement specialists at 877-872-5475 or go to troweprice.com/retirement Consider the investment objectives, risks, and charges and expenses carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, call us. Read it carefully. *36 of our 39 Retirement Funds (Investor, Advisor, and R class) had a 10 -year track record as of 12/31/17 (includes all share classes). 34 of these 36 funds beat their Lipper average for the 10 -year period. 38 of 39, 39 of 39, and 35 of 36 of the Retirement Funds outper formed their Lipper average for the 1-, 3 -, and 5 -year periods ended 12/31/17, respectively. Calculations are based on cumulative total return. Not all funds outper formed for all periods. (Source for data: Lipper Inc.) Past performance cannot guarantee future results. All funds are subject to market risk, including possible loss of principal. T. Rowe Price Investment Services, Inc., Distributor. Peggy's Cove EDITORIAL Cabot Trail Knight A. Kiplinger Mark K. Solheim EXECUTIVE EDITOR Anne Kates Smith MANAGING EDITOR Frederic Fane Wolfer SENIOR EDITORS Eileen Ambrose, Sandra Block, Jeffrey R. Kosnett EDITOR AT LARGE Janet Bodnar SENIOR ASSOCIATE EDITORS Nellie S. Huang, Marc A. Wojno (research) ASSOCIATE EDITOR Patricia Mertz Esswein STAFF WRITERS Miriam Cross, Ryan Ermey, Kaitlin Pitsker CONTRIBUTING EDITORS Lisa Gerstner, James K. Glassman, Kathy Kristof, Kimberly Lankford OFFICE MANAGER Glen Mayers EDITOR IN CHIEF EDITOR Explore the Canadian Maritimes with Caravan—Call Now for Choice Dates COPY AND RESEARCH Rachel McVearry, Denise E. Mitchell REPORTERS Thomas H. Blanton, Rivan V. Stinson COPY EDITORS ART & Prince Edward Island 10-Day Tour $1495 + tax & fees Stacie A. Harrison ASSOCIATE ART DIRECTOR Yajaira St. Fleurant ASSISTANT ART DIRECTOR Natalie F. Kress EDITORIAL PRODUCTION MANAGER Kevin Childers ART DIRECTOR KIPLINGER.COM Your Nova Scotia tour is fully guided, and includes all activities with a great itinerary. With Caravan, you visit all three of Canada's Maritime provinces: Nova Scotia, New Brunswick, and P.E.I. Experience the Cabot Trail in Cape Breton, and more! Itinerary details at Caravan.com. Call now for choice dates. Join the smart shoppers and experienced travelers who have chosen Caravan since 1952. GENERAL MANAGER EXECUTIVE EDITOR Robert J.M. Long Michael DeSenne Kyle Woodley SENIOR ONLINE EDITOR David Muhlbaum Robert Niedt, Andrea Browne Taylor CONTRIBUTING EDITORS Lisa Kiplinger, Stacy Rapacon CONTRIBUTING WRITER Dan Burrows ONLINE BUSINESS DEVELOPMENT MANAGER Phil Hawken DIGITAL PRODUCT AND DESIGN MANAGER Jenny Cohan AUDIENCE ENGAGEMENT MANAGER Ben Demers WEB OPERATIONS MANAGER Wade Currie SENIOR WEB DEVELOPER David Kuchler WEB DEVELOPERS Bob Henry, Erhan M. Uyar SENIOR INVESTING EDITOR ONLINE EDITORS PUBLISHING Roseann Ciccarello Wayne Beder PRODUCTION DIRECTOR Carolyn R. 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Kiplinger (1918–2015), Former Chairman and Editor CHAIRMAN, PRESIDENT AND PUBLISHER Knight A. Kiplinger EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Corbin M. Wilkes SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER Denise M. Elliott SENIOR VICE PRESIDENT AND CHIEF CONTENT OFFICER Kevin McCormally VICE PRESIDENT, CONTENT Sarah Stevens “ Brilliant, Affordable Pricing ” —Arthur Frommer, Travel Editor CUSTOMER SERVICE Visit kiplinger.com/customer-service FREE Tour Catalog: Call Now 800-CARAVAN Caravan. com Or call 800-544-0155 PRINTED IN USA KIPLINGER’S PERSONAL FINANCE (ISSN 1528-9729) is published monthly by THE KIPLINGER WASHINGTON EDITORS INC. Editorial & Executive Offices: 1100 13th St., N.W., Suite 750, Washington, DC 20005 (202-887-6400). Subscription Center/Customer Service: Visit us online at kiplinger.com/customer-service, call 800-544-0155, or e-mail PersonalFinance@customersvc.com. POSTMASTER: Send change of address to: Kiplinger’s Personal Finance, P.O. Box 62300, Tampa, FL 33662. GST# 123395253. Volume 72, Issue 5. Copyright © 2018 by the Kiplinger Washington Editors Inc. Periodical postage paid at Washington, DC, and at additional mailing offices. Subscription prices: In U.S. and possessions $23.95 for one year, $39.95 for two years, $54.95 for three years. Additional international postage: $17.00 per year. Single-copy price: $4.99. AHEAD TOPIC A THE LONG-TERM-CARE INSURANCE DILEMMA Premiums keep rising, but you may need a policy more than ever. BY KIM LANKFORD ONE OF THE MOST EFFECTIVE ways to protect your retirement savings from the high price of assisted living, inhome care or a stay in a nursing home is a longterm-care insurance policy. But recent premium hikes have many baby boomers worried that coverage is no longer affordable. The median cost of one year in a private room in a nursing home was $97,500 in 2017, according to GenILLUSTRATION BY JOE ANDERSON worth’s Cost of Care Study (www.genworth.com/ costofcare). A year of assisted living was $45,000, and 44 hours per week of home care—which most people prefer—came to $49,000. Care costs have been going up by 3% to 4% per year over the past five years. Those rising costs have put pressure on long-termcare insurers. Rates have spiked by at least 50% for most policies purchased between the mid 1970s and 2005, with some price hikes topping 100%. Almost every long-term-care insurer has raised rates at least once, and more rate increases are on the horizon, depending on the insurer and the state. Policies with lifetime benefits and 5% inflation protection have been hit the hardest. For example, Mike Ashley of Prairie Village, Kan., purchased a Genworth policy 19 years ago, when he was 52 years old. He paid $879 per year for a policy with a $70 daily benefit, 5% inflation protection and lifetime benefits. After two rounds of rate increases, his premiums had climbed to $1,547 per year. Insurers admit they made major mistakes when pricing these policies. They expected more people to drop coverage, overestimated the interest rates they’d earn on their investments, and underestimated the size and length of claims. What to do. Fortunately, there are ways to make long-term-care insurance more affordable. Don’t drop your policy if you’re faced with an increase; new coverage will cost a lot more. Although Ashley’s annual premiums increased by more than 75%, he’s 19 years older and his daily benefit has grown by 5% a year. A new policy for a 71-year-old with similar features and coverage would cost at least $9,000 a year. If you can’t afford the higher premiums, your 05/2018 KIPLINGER’S PERSONAL FINANCE 11 AHEAD insurer will generally give you several options. For example, you may be able to minimize the rate increase if you cut future inflation protection from 5% to 2.5% or 3%, says Claude Thau, an insurance consultant in Overland Park, Kan. If you haven’t bought a policy yet, you can still find coverage that protects a big portion of your retirement savings while keeping the premiums affordable. One option is to figure out how much long-term care your retirement savings and income will cover and use insurance to fill the gap. You can trim the premiums not only by buying a policy with less inflation protection but also by selecting a shorter benefit period. For example, Ashley cut his premiums to $1,384 by reducing his lifetime benefit period to a six-year period. A 55-year-old couple could pay less than $3,500 per year (combined) to buy a new pair of policies that provide each spouse with a $150 daily benefit, 3% inflation protection and a three-year benefit period (couples buying together get a significant discount). Insurers have learned from their pricing mistakes and shouldn’t have to increase premiums on new policies as much in the future. Still, you should factor in potential increases when calculating how much insurance you can afford. John Ryan, of Ryan Insurance Strategy Consultants in Greenwood Village, Colo., recommends planning for a 20% increase every 10 years. 12 KIPLINGER’S PERSONAL FINANCE 05/2018 INTERVIEW BOYCOTTS DON’T DERAIL MOST STOCKS If history is a guide, gun control advocates and opponents will cancel each other out. Maurice Schweitzer is professor of operations, information and decisions at the University of Pennsylvania’s Wharton School. Some consumers are boycotting businesses with ties to the National Rifle Association. What impact do you expect it to have on those companies’ earnings? The school tragedy in Florida galvanized and energized a very activated group of protestors, but history suggests their coordination and energy is unlikely to persist. That’s especially true of the calls to boycott companies that are indirectly associated with gun regulation. Roku, for example, doesn’t sell or make firearms but streams an NRA TV channel. Vista Outdoor is one of the more vulnerable targets, with 54% of its revenue coming from shooting sports. Nonetheless, I don’t expect the company to experience any meaningful drop in sales or a fundamental threat to its business. How does this boycott against businesses that support the NRA com- pare with other boycotts in the past? Boycotts are either one-sided or two-sided. The boycott against BP following its 2010 Deepwater Horizon oil spill was one-sided because no groups rushed to BP’s defense. The NRA boycott is two-sided, with impassioned groups rallying on both sides of the debate. We saw a comparable scenario play out during the 2012 Chick-fil-A boycott, when protestors looked to punish the fast-food chain after its CEO spoke out against same-sex marriage. Their efforts were hampered by groups on the other side of the issue, who went out and bought chicken sandwiches. This year, we’ll see the NRA’s 5 million members similarly boost their support for targeted businesses. What should investors do if they own shares in one of these companies? Some of these companies’ share prices might swing a bit, creating potential bargains, but they should stabilize once the movement starts losing steam. Investors should sit tight, hold on to their shares and ride this out. How much influence can a typical shareholder expect to have with the company? A shareholder who wants to voice an opinion can send the company a letter, but his or her vote in shareholder elections will be diluted by the votes of institutional shareholders. To take a stand, individual investors can invest in mutual funds that avoid or invest in stocks related to issues they care about. THOMAS H. BLANTON PHOTOGRAPH BY LISA GODFREY THE WAGE GAP INVESTORS GET NEW DETAILS ON CEO PAY Companies must disclose how much CEOs earn versus the rank and file. MICHAEL AUSTIN IT’S NO SECRET CORPORATE executives rake in vastly higher pay than the people who work for them. But now investors will learn exactly what the pay gulf is when they get companies’ proxy statements, which are filed in advance of companies’ annual meetings. New rules from the Securities and Exchange Commission require publicly traded companies to disclose the ratio of CEO pay to that of the firm’s median salary. The change is required by the 2010 Dodd-Frank legislation, which was enacted in the wake of the 2008 financial crisis. As results pour in, companies whose CEOs command astronomical pay packages are likely to make headlines, particularly because wages for average workers have been stagnant since the economic downturn ended in 2009. But critics of the rule say it’s difficult to make apples-to-apples comparisons because some indus- tries outsource low-wage work, boosting the in-house median salary, and others have a large number of part-time or foreign-based workers who receive less compensation, driving the ratio higher. Del Monte, for instance, reported paying its CEO $8.5 million last year—more than 1,400 times the median salary among a mostly foreign-based workforce. The average ratio, according to a survey by research firm Equilar, is 140 to 1. Investors may also question whether high executive pay translates into longterm performance. There’s little evidence that it does. Investment analytics firm MSCI added up cumulative pay between 2007 and 2016 and found that the companies with lower CEO pay over the period outperformed companies with higher pay by nearly 39%, on average. RYAN ERMEY CEO Pay Hits the Stratosphere Pay for the average large-company CEO has risen 46% since 2009, versus 2.2% for the average worker. CEO Compensation (in millions) $12.8 $13.0 2010 2011 $15.2 $15.6 2012 2013 $16.6 $16.3 2014 2015 $15.6 $10.7 2009 2016 SOURCE: Economic Policy Institute analysis of publicly available economic data. OFFICE SPACE MORE CHOICES FOR SOLO WORKERS As more people go into business for themselves or take on side gigs to generate extra income, co-working spaces are expanding their services to appeal to workers in all stages of their careers. Workers typically pay a monthly membership fee to use shared office space, as well as get access to meeting rooms, Wi-Fi, coffee and other amenities. Unlimited monthly access usually ranges from about $300 for an unassigned “hot desk” to about $500 for an assigned desk. Many coworking spaces are targeting specific groups of people, such as parents, veterans or women. They’re also adding everything from child care to dry cleaning and ramping up their calendar of networking and social events. Big names such as Industrious and WeWork dominate the industry, but smaller, local options are popping up outside of business locales, from residential neighborhoods in the city to suburban spots. To find a co-working space that fits your needs, you may want to try a few on for size. Most co-working spaces offer a free workday. Or try Deskpass, which sells flexible memberships, starting at $49 a month for four visits (after a $25 introductory month), that allow users in six cities to use any of the 175 work spaces in its network. KAITLIN PITSKER 05/2018 KIPLINGER’S PERSONAL FINANCE 13 AHEAD HELOC SHOCK SIDESTEP HOME EQUITY RATE CREEP You may be able to rein in your loan payments before they go up. RISING INTEREST RATES have boosted the cost of borrowing against your home, and rates are likely to go higher. The average rate on a home-equity line of credit (HELOC) recently was 5.77%, a percentage point higher than when the Federal Reserve started raising rates in December 2015. With at least two more rate hikes expected in 2018, the average HELOC rate could hit 6.5% by year-end. During the initial draw period, usually 10 years, your lender may allow you to avoid future rate hikes by locking in the current rate on all or a portion of your outstanding balance. For example, Wells Fargo allows its HELOC borrowers to convert a minimum of $10,000 to a fixed rate twice a year. If your budget allows, choose a fully amortizing payment that won’t leave a balance at the end of the repayment period to which a higher, variable rate would apply. Another option for homeowners who don’t have a supercheap mortgage: Roll your mortgage and home-equity debt into a single mortgage. If you used the home-equity debt to buy, build or improve your home, you’ll qualify for a lower rate than you’d get if you refinanced your first mortgage for more than the current balance and took the difference as cash, says Josh Moffitt, president of Silverton Mortgage, in Atlanta. PATRICIA MERTZ ESSWEIN MONEY & ETHICS // KNIGHT KIPLINGER Should nondisclosure agreements be banned in sexual harassment settlements? A No, not banned, but the settlement process can be improved. It’s not clear to me that banning NDAs altogether is always in the best interest of either the accuser or the accused, for the following reasons. Some accusers choose to settle out of court, with an NDA, expressly to protect their privacy, avoiding the unwanted publicity, possible trauma and uncertain outcome of a civil or criminal trial. And some accusers like the certainty of a large monetary settlement offer, which would undoubtedly be much smaller without an NDA. As for the accused, there is the issue of false accusation—probably much less common than unreported harassment, but not unheard of. People who believe themselves to be falsely accused may choose not to fight an unfounded charge in a public trial if they can instead pay a modest monetary settlement, with an NDA to protect their reputation. Besides proposals to ban NDAs in all workplace harassment settlements—pending in the legislatures of New York, Pennsylvania, 14 KIPLINGER’S PERSONAL FINANCE 05/2018 California and other states—some worthwhile “middle ground” fixes have been proposed, too. Women’s rights litigator Noreen Farrell, for example, suggests that employers be required to disclose in any new sexual harassment settlement negotiation whether the same employee has been involved in prior settlements or complaints. That would strengthen the accuser’s financial hand in a settlement discussion, or it could embolden her— now knowing she is not the only victim—to bring public charges and/or demand that the repeat offender be fired. And an idea of mine to help deter bad behavior: Companies should add to their employment contracts with managers and executives a clause stating that anyone accused of sexual harassment will be required to share with his employer the financial burden of any settlement, out of his own pocket and/or by forfeiting future bonuses and stock options. HAVE A MONEY-AND-ETHICS QUESTION YOU’D LIKE ANSWERED IN THIS COLUMN? WRITE TO EDITOR IN CHIEF KNIGHT KIPLINGER AT ETHICS@KIPLINGER.COM. POON WATCHARA-AMPHAIWAN Q Do you think nondisclosure agreements (NDAs) should be prohibited in sexual harassment settlements so that repeat offenders can be identified and stopped? Pearl Call for a free Cruise Guide! Seas Cruises® Cruise The Canadian Maritimes & St. Lawrence Seaway Experience the intimate atmosphere and sophisticated comfort of small ship cruising with Pearl Seas. During your 14-night cruise, you will have exclusive access to Canada’s most majestic destinations, diverse cultures, and breathtaking scenery. Enjoy award-winning excursions that will fill your days with exploration and discovery. Explore Well® Baie-Comeau Saguenay Fjord Gaspé Percé Îles de la Madeleine Québec City Charlottetown Montreal Thousand Islands Bar Harbor Clayton TORONTO Halifax Lunenburg PORTLAND Call for a FREE Cruise Guide 1-888-610-6945 PearlSeasCruises.com AHEAD CALENDAR 05/2018 LUXURY FOR LESS HOME SHARING GOES UPSCALE Travelers who want more than a couch to sleep on have new options. THE LINE BETWEEN HOME RENTALS AND 16 KIPLINGER’S PERSONAL FINANCE 05/2018 TUESDAY, MAY 1 FRIDAY, MAY 25 Get fit during National Physical Fitness and Sports Month. See our guide to staying in shape after 40 at kiplinger.com/links/fitafter40. It’s National Wine Day. If you want to try new vintages (and possibly save some money), consider joining a wine club, such as Wine of the Month Club (www.wineofthe monthclub.com) or California Wine Club (www.cawineclub.com). Educators: Look for deals on everything from food to technology this National Teachers’ Day. Retailers and restaurants in past years have offered discounts of up to 25% on a number of items, including breakfast sandwiches, laptops and school supplies. For details about discounts year-round, go to www.teacher.org/ best-teacher-discounts. MONDAY, MAY 14 May is National Military Appreciation Month. Visit kiplinger.com/ links/militarybenefits to see some of the financial perks available to military families. ▲ FRIDAY, MAY 18 Lower the cost of your commute on Bike to Work Day. See how much you’ll save with our calculator at kiplinger.com/links/biketowork. TUESDAY, MAY 29 On 529 Day, investigate collegesavings plans at www.savingfor college.com. More than 30 states offer tax breaks for residents who invest in their own state’s plans, so check out your state plan first. You can find a list of our favorite 529 plans at kiplinger.com/links/529. THOMAS H. BLANTON * DEAL OF THE MONTH May is the best month to buy mattresses, with discounts of up to 50% on a variety of models, according to DealNews .com. If the brand you’ve been eyeing isn’t among them, you can still likely find coupons that will cut its price by 10% to 15%. ISTOCKPHOTO.COM TUESDAY, MAY 8 COURTESY AIRBNB hotels is blurring, and that’s good news for travelers who like the idea of staying in a home away from home but are skittish about relying on artfully cropped photos of a stranger’s bedroom. Airbnb’s new tier of lodging, Airbnb Plus, features stylish homes that have been verified by inspectors to include everything from fast Wi-Fi to strong water pressure. Plus homes cost an average of $250 per night. Another service, Oasis, holds its rentals to similar standards. Oasis guests get access to additional services (for an extra cost), such as private drivers. Plus accommodations still aren’t on par with regular hotels, says Deanna Ting, of Skift, a travel industry news site. Plus includes private rooms in shared homes in its tier. And Airbnb does not yet vet homes on an ongoing basis after the initial inspection. You can take your home rental up another notch by choosing a luxury villa or estate through companies such as HomeAway’s Luxury Rentals (average price: about $1,500 per night). Luxury rentals often cost less than a high-end hotel on a per-room basis, especially when you split the cost among a group, according to data from Tripping.com. MIRIAM CROSS New direction for your old 401(k) If you decide to move your old 401(k) to a Fidelity IRA, we can help you make sure you’re clear on where you stand for retirement. And we’ll make the rollover process easy, helping you: • • • • Choose the right IRA Initiate the transfer from your former employer Get status and confirmation updates for your rollover Select investments for your account It’s your retirement. Know where you stand. 800.FIDELITY | Fidelity.com Be sure to consider all your available options, including staying in plan, and the applicable fees and features of each before moving your retirement assets. Investing involves risk, including the risk of loss. The trademarks and/or service marks appearing above are the property of FMR LLC and may be registered. Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2017 FMR LLC. All rights reserved. 812682.1.0 AHEAD Commentary OPENING SHOT James K. Glassman Why You Should Stick With Stocks Be disciplined. Benjamin Graham, the late financier and scholar who was Warren Buffett’s mentor, once wrote, “The investor’s chief problem—and even his worst enemy—is likely to be himself.” It is the “excitement and the temptations of the stock market,” said Graham, that get investors in trouble. His answer was the discipline of value investing—that is, buying stocks that are so cheap in relation to corporate profits and other yardsticks that their low price provides a “margin of safety” even if the worst happens. You don’t have to be a value-only investor to profit from financial discipline, but you do have to understand the dangers of human emotion when it comes to buying and selling stocks. When a sweater goes on sale, it attracts buyers. But with stocks, the 18 KIPLINGER’S PERSONAL FINANCE 05/2018 buying urge works the opposite way. A falling price can throw investors into a selling panic. Similarly, investors are drawn to shares whose prices are rising. The logic goes: Hey, that stock must be a good one if everyone is buying it. Invest regularly. The best way to tame Dollar-cost averaging helps you think about stocks the right way. “Do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous,” Buffett wrote in 1996 in an “owner’s manual” for shareholders of the company he those emotions is to take them out of the picture entirely by making the purchase of stocks mechanical. Rather than guessing when to buy shares, set up a program with a broker or within your company’s retirement plan to invest the same amount regularly—every month, every quarter or every year. The process is called “dollar-cost averaging,” and you can do it with individual stocks or funds. INVESTORS ARE JUST REALIZING THAT YOU DON’T EARN AN AVERAGE OF 10% ANNUALLY WITHOUT TAKING SOME RISK AND SUFFERING SOME PAIN. Say, for example, that your entire portfolio consists of shares in VANGUARD 500 INDEX (SYMBOL VFINX), a mutual fund with an expense ratio of 0.14% that tracks the S&P 500. Every three months, you buy $2,500 worth of shares in the fund. For simplicity, let’s assume that one share costs $250, so your $2,500 will purchase 10 shares. Now assume that over the course of three months, stocks tumble. The S&P falls by 30%, and a share in the Vanguard fund trades for $175. Your next quarter’s $2,500 purchases not 10 shares but about 14 shares. chairs, BERKSHIRE HATHAWAY (BRK-B). (For more on Berkshire and Buffett, see “What Would Warren Do?” on page 54.) “Instead visualize yourself as a part-owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family.” Automatic purchases allow you to accumulate a growing interest in the business over time. If you love the company, you want to own as much of it as you can, and when the price goes down, dollar-cost averaging lets you POON WATCHARA-AMPHAIWAN L ike fishing in a well-stocked pond, investing has been pretty easy in recent years. Imagine that at the end of October 2007, the month the bull market peaked, you put all of the money you had to invest into a fund that tracks Standard & Poor’s 500-stock index. Even with such terrible timing, you would have more than doubled your money as the market produced positive returns in every year from 2009 to 2017. In late January and early February, the stock market reverted to a pattern of extreme volatility, with the Dow Jones industrial average losing 1,175 points one day and rising 567 points the next. It was a vivid reminder that, as an investor, you don’t earn an average of 10% annually without taking some risk and suffering some pain. But there are ways to mitigate that pain. Here is some advice for investors who are just realizing (or may have forgotten) that stocks don’t always go up. Simply a better way to save Spring ahead with a rate that’s 21x the national average.1 There’s never been a better time to open a Barclays Online Savings Account. • No monthly maintenance fees • Secure 24/7 online access to your funds • Online transfers to and from other banks • 100% U.S.-based customer service Open an account today at barclaysus.com/Kiplinger04 1 National savings average rate courtesy of the FDIC’s Weekly National Rates and Rate Caps, as of 03/06/2018; average rate used is for deposits under $100,000. © 2018 Barclays Bank Delaware, Member FDIC. AHEAD buy even more shares. The price doesn’t matter until you sell, sometime far in the future. Sell rarely. When should you sell? The simple answer: almost never. As my example of the investor with lousy timing illustrates, the best investing strategy is to buy and hold. Period. Certainly, sell if you need the money— for retirement, college or a house, for example. But don’t sell because a stock (or a market) has gone up or down by what you believe to be too much. No one can time the market with any consistency, so don’t try to time it at all. Other than cashing in to fund your goals, the only times you should consider selling relate not to price or economic environment but to the nature of individual companies themselves. Again, let’s turn to a master investor— in this case, the late Philip Fisher, best known as the author of the investing guide Common Stocks and Uncommon Lost Decades Limited Pain for Long-Term Investors Starting in 1926 and looking at successive 10-year periods (that is, 1926-1935, 1927-1936 and so on), there have been only four in which investors lost money in large-company stocks, and losses averaged just –0.8%. 19291938 19301939 19992008 20002009 –0.05% –0.89% –0.95% –1.38% SOURCE: Ibbotson Associates, a Morningstar Inc. company. 20 KIPLINGER’S PERSONAL FINANCE 05/2018 PUT YOUR EGGS IN MANY BASKETS AND PAY AS LITTLE ATTENTION AS POSSIBLE. IN OTHER WORDS, DIVERSIFY, INVEST AUTOMATICALLY AND SELL RELUCTANTLY. Profits. You should sell, he wrote, when a company’s business has developed trouble: “When companies deteriorate, they usually do so for one of two reasons. Either there has been a deterioration of management, or the company no longer has the prospect of increasing the markets for its product in the way it formerly did.” Keep your eye on the CEO. Jeffrey Immelt, who took over General Electric in 2000, was not as able as his predecessor, Jack Welch. If you have doubts about a new chief, the right move is to sell. As for deteriorating markets, just look at what has happened to brick-and-mortar retail chains as shopping has moved online. Other good reasons to sell include mergers, the failure of a major product or a lack of integrity in management. The latter was the reason I withdrew my recommendation of Wells Fargo in 2016. A higher or lower price, or a prediction about the growth of the economy, is not a good reason to sell. Rebalance your holdings. There is one more reason to sell: as a means of maintaining your target asset allocation—that is, the proportion of your portfolio devoted to different asset categories and subcategories, such as stocks and bonds or domestic and foreign shares. Determine your allocation according to your age, your impending needs and your aversion to risk. Say you are in your fifties, intend to retire within 20 years and have moderate worries about volatility. A simple allocation might be 60% stocks and 40% bonds. Now imagine that over the course of five years, stocks double in value and bonds hold steady. An initial $100,000 portfolio, with $60,000 in stocks and $40,000 in bonds, will become a $160,000 portfolio, with $120,000 (or 75%) in stocks. To get back to 6040, you should buy more bonds or sell stocks in your portfolio. Rebalancing does not have to be an annual event, but you should check your allocation each year and, if it has drifted out of whack, make purchases and sales. Diversify. When you construct your stock portfolio, and as you rebalance, be sure to diversify your holdings. A good strategy is to put at least half of your money into one or two broad mutual funds—an S&P index fund or a low-fee large-company fund, such as DODGE & COX STOCK (DODGX), for example— or exchange-traded funds. Put the rest into at least 10 stocks in a range of businesses, such as technology, energy and consumer goods. Although there is debate about how many stocks you need to own in order to achieve the protection of diversification, the minimum seems to be 10. I also recommend owning foreign stocks and small companies, either in funds or as individual shares. Andrew Carnegie, the famously rich industrialist and philanthropist, once said, “Put all your eggs in one basket and watch the basket.” That may have worked for him, but most investors should do the opposite: Put your eggs in many baskets (diversify) and pay as little attention as possible (invest automatically and sell reluctantly). As Buffett said, “We continue to make more money when snoring than when active.” JAMES K. GLASSMAN CHAIRS GLASSMAN ADVISORY, A PUBLIC-AFFAIRS CONSULTING FIRM. HE DOES NOT WRITE ABOUT HIS CLIENTS AND DOES NOT OWN ANY OF THE SECURITIES MENTIONED IN THIS COLUMN. HIS MOST RECENT BOOK IS SAFETY NET: THE STRATEGY FOR DE-RISKING YOUR INVESTMENTS IN A TIME OF TURBULENCE. REACH HIM AT JGLASSMAN@KIPLINGER.COM. PUT YOUR MONEY TO WORK Earn 5% interest with Veteran Business Bonds Sign up in two minutes Add money anytime Support US small businesses Veteran Run StreetShares.com/kiplingers Veteran Business Bonds are a non-deposit investment product, which are not guaranteed, nor are they FDIC insured. Veteran Business Bonds may lose value. StreetShares is not a bank and Veteran Business Bonds are not a deposit product. See Offering Statement and related SEC Filing Documents. Early withdrawals are charged a 1% fee. AHEAD Commentary MILLENNIAL MONEY Rivan Stinson The Risks of Paying Peer to Peer F inding a good hairstylist is hard, but finding a traveling hairstylist is even harder. As a splurge, I looked for someone who would come to my apartment to spend four or more hours braiding my hair. Thanks to social media, I succeeded. My text exchanges with the stylist went smoothly. I described what I wanted, and she told me to send a nonrefundable $150 deposit—half of the cost—via PayPal’s peer-to peer (P2P) payment function. The alarm bells didn’t go off until I couldn’t reach her on the day of the appointment. Was this stranger going to show up as promised, or did I just lose $150? Fortunately, she did show up that day. I hadn’t been able to reach her because her cell phone battery had died. In hindsight, I realized she could have catfished me—created an elaborate fake profile and passed off someone else’s work as her own—and then not shown up. I would have been scammed, with no recourse from PayPal. Growth of P2P. Members of my genera- tion are big users of P2P apps, such as Cash, PayPal, Venmo and Zelle. The apps are fast, and often all it takes to transfer money to another’s bank account is an e-mail address or phone number. In fact, 62% of millennials used these apps to send or receive money in 2017, reports Bank of America. But as the use of P2P apps grows, so do complaints about scams. The Federal Trade Commission added online payment systems to its complaint database last year, and I’ve noticed more scam complaints posted on social media sites. The schemes are similar: Someone pretends to be selling, say, concert tickets, dupes victims into sending money and then disappears. As consumers, we have come to 22 KIPLINGER’S PERSONAL FINANCE 05/2018 expect some form of protection when we link our bank accounts or debit cards to these apps. But when you’re using electronic forms of payment to make a purchase from another individual—instead of a traditional merchant—the rules are different and there’s less protection against fraud, says Sarah Grotta, of Mercator Advisory Group. If anyone ever took the time to read the fine print, they’d know this. For instance, according to PayPal’s purchase protection guidelines, when you send money through its friends-and-family P2P system, you’re not covered for any losses because you authorized the transaction. If someone hacks into your PayPal account to make FRAUDSTERS an unauthorized transaction, ARE USING however, you’re PAYMENT APPS protected. SUCH AS ZELLE Venmo, owned TO TRICK YOU by PayPal, states in its user agreeOUT OF YOUR ment that perMONEY. sonal accounts are meant to be used only between family and friends. Its definition of what’s considered an unauthorized transaction is similar to PayPal’s. The same goes for Cash. Zelle, another P2P app, looks like a safer bet because it’s backed by big banks, such as Chase, Citi and Wells Fargo. But banks that have integrated Zelle into their systems stress that the app is for sending money to someone you know. If you do business with strangers and get scammed, you’re likely out of luck. Grotta’s advice is never to send money to people you don’t know. If you’ve been hacked and money has been transferred from your account without your consent, contact your bank and the P2P service by e-mail or phone as soon as possible. The P2P service will investigate your claim and determine if a full refund is due. Ultimately, treat your P2P payments as you would cash. If you wouldn’t feel comfortable giving a stranger cash before receiving a product or service, don’t send that person money by Venmo, either. Once the money is gone, it’s gone. I’ll be sure not to take the flight risk with my money again. ■ TO SHARE THIS COLUMN, PLEASE GO TO KIPLINGER.COM/LINKS/ MILLENNIALS. YOU CAN CONTACT THE AUTHOR AT RSTINSON@ KIPLINGER.COM. You can wish for retirement. Or you can plan for retirement. Let’s get started. Call 1-866-954-4321, or visit mutualofamerica.com Mutual of America® and Mutual of America Your Retirement Company® are registered service marks of Mutual of America Life Insurance Company, a registered Broker/Dealer. 320 Park Avenue, New York, NY 10022-6839. AHEAD Commentary MONEY SMART WOMEN Janet Bodnar A Guide to Marital Money Bliss 24 KIPLINGER’S PERSONAL FINANCE 05/2018 commingled,” says Springer. “Yours is yours and mine is mine.” Credit expert John Ulzheimer goes a step further. “There’s no reason to acquire any kind of joint debt unless you need two incomes to qualify—for a mortgage, for example,” he says. And because your credit score is tied to your Social Security number, changing your name is a personal preference that doesn’t affect your score. In addition to your credit, any assets you bring to the marriage should remain in your own name (and under your control), says Alyssa Rower, a matrimonial lawyer in New York City. That could mean a business, an inheritance or even a significant savings account. Although prenuptial agreements are more common in second marriages or among older couples, Rower often draws up prenups for first marriages among people in their late you fund your account with pretax contributions and the other with after-tax contributions to a Roth IRA or Roth 401(k). “That gives you a portfolio of assets that can be used effectively in retirement based on your tax status,” says Doebler. It’s normal to delegate certain responsibilities to each spouse, but stay on top of things. Judy Rubin, a partner with Plaza Advisory Group, in St. Louis, says that in her experience it’s still IN ADDITION TO YOUR CREDIT, ANY ASSETS YOU BRING TO THE MARRIAGE SHOULD REMAIN IN YOUR OWN NAME. twenties or early thirties. “It’s an uncertain world,” she says. “What if this doesn’t work out?” A safety net. Make sure your spouse’s insurance policies, IRAs and other retirement accounts list you as the primary beneficiary—not your spouse’s ex-wife or children from a former marriage (unless you’ve agreed to such an arrangement). If you both have access to retirement accounts, Dawn Doebler, senior wealth adviser with The Colony Group in Bethesda, Md., suggests that one of common for women to manage day-today finances while men make investment decisions. But women have savvy instincts as investors—they tend to do their homework and stick with their decisions—so speak up. Men and women each have strengths that complement each other, and they make a winning team. The best financial outcome is that you maximize your resources to enjoy a comfortable retirement—together. ■ JANET BODNAR IS EDITOR AT LARGE OF KIPLINGER’S PERSONAL FINANCE MAGAZINE. YOU CAN CONTACT HER AT JBODNAR@ KIPLINGER.COM. POON WATCHARA-AMPHAIWAN T he average cost of a wedding ranges from $25,000 to $35,000, plus another $5,000 for the honeymoon. Yet in the excitement of planning it all, it’s easy for women to lose sight of an even bigger money challenge: maintaining their independence— “thinking single”—while facing a lifetime of financial togetherness. You may have said “for better or for worse” in your marriage vows. For better, a successful marriage can mean the two of you working—and saving—toward common goals. For worse, your union could end in divorce or the death of your spouse. So it’s critical for women to go in with their eyes wide open. Unfortunately, sometimes they’re focused on the wrong thing. “A lot of women are more likely to know their fiancé’s neck size and zodiac sign than his credit score,” says Julie Springer, of TransUnion, the credit bureau. That single piece of information can speak volumes about your future spouse’s money-management skills. And while you’re at it, you might also have a heart-to-heart about your financial goals. You may be surprised to find that your partner wants to travel while you want to buy a house, or that you want to travel while he has his eye on a new sports car. Better to know up front so you can make some compromises (see “Financially Happy Ever After,” Feb.). Don’t shy away from addressing nitty-gritty details for fear of making the marriage seem more like a business relationship than a love match. For example, when you marry, you should maintain credit in your own name (presuming you have a good credit history). “Credit scores are associated with your Social Security number, so those scores are never Go to: FisherCalcu lator.com MONEY THE RIGHT ADVICE AT THE RIGHT PRICE We took a deep dive into the financial advice marketplace to find the best adviser for you. BY SANDRA BLOCK and LISA GERSTNER 26 KIPLINGER’S PERSONAL FINANCE 05/2018 THANKS TO TECHNOLOGY AND REGULATORY REFORMS, the financial advice industry is undergoing a tectonic shift. You now have more options if you’re seeking advice from a planner who is committed to looking out for your best interests. And if you shop hard enough, you can find that advice for a lower cost. If you don’t require a lot of hand-holding, you can get guidance on how to invest your retirement savings for less than the cost of a Broadway show. Need a real live planner to help you manage your student loans or talk you off the ledge every time the market hiccups? You may be able to find one for less than you pay for your monthly cable bill. You’ll still need to put some time into the search because finding the right fit isn’t easy, says Michael Kitces, a partner at the Pinnacle Advisory Group. Kitces is also co-founder of XY Planning Network, an organization of financial planners who target millennial and Generation X clients and accept no compensation from selling financial products (see page 28 for more on XY). The financial advice business can make it “painfully difficult to find and select an adviser,” he says. ILLUSTRATIONS BY GIOVANNI DA RE Stephen Elliott, 37, hired a fee-only planner on an hourly basis after doubting whether his previous financial adviser’s incentives were aligned with his own. “My adviser was pushing products but couldn’t explain why he was pushing them,” says Elliott. As he explored his options, one firm told Elliott that he could pay by the hour—but he got the impression that the firm focused primarily on wealthier clients, charging many of them a percentage of assets under management. Ultimately, he found Lisa Weil, the principal and owner of Clarity Northwest Wealth Management, in Seattle. Weil is also a member of the Garrett Planning Network, whose advisers charge by the hour and don’t require a longterm commitment. At a rate of $200 an hour, she spent 16 hours last year creating a financial plan for Elliott and his family, for a total of $3,200. If Elliott wants ongoing guidance, he can continue working with Weil and pay by the hour. FINDING THE RIGHT FIT Just looking for a check-up to make sure you’re on the right track? You may be able to get a free consultation from your financial services provider. Schwab, for example, offers clients one-time planning consultations on a range of topics, including overall financial planning, retirement planning, college savings and debt analysis. There is no minimum investment required for this service. 05/2018 KIPLINGER’S PERSONAL FINANCE 27 MONEY Financial services firms have also introduced a host of offerings that combine portfolios with in-house advisers—but you’ll never meet the adviser face-to-face. For example, for an annual fee of 0.30% of assets, Vanguard’s Personal Advisor Services offers unlimited help, via phone, video or e-mail, from its stable of certified financial planners (for an explanation of credentials, see the box at right). The minimum investment is $50,000. When developing a customized portfolio, the advisers will include nonVanguard holdings, such as stock you inherited, and they will provide advice on all aspects of your financial life. If you’re digitally savvy and primarily want help with investments, robo advisers such as Betterment and Wealthfront will put together a portfolio of low-cost funds, based on your time horizon and risk tolerance, for about 0.25% of the amount invested. Suppose you want a dedicated adviser you can call when you experience a major life change or you need to be talked out of investing your retirement savings in bitcoin. One option for people with deep pockets is a money management firm that manages your portfolio. You may need $1 million in investable assets, and you’ll typically pay an annual fee of at least 1% of assets under management. A money manager may also include free financial planning. Another option is a brokerage firm that sells products on commission. Ameriprise Financial, with 10,000 advisers across the U.S., has no minimum investment requirement for brokerage accounts, but clients who purchase mutual funds offered by Ameriprise pay a front-end sales charge of up to 5.75%. Ameriprise advisers are also compensated for selling 529 college-savings plans, variable annuities and other products. Edward Jones, with more than 15,000 advisers around the country, also charges commissions on its brokerage accounts, and many of its funds also carry up to a 5.75% front-end load. 28 KIPLINGER’S PERSONAL FINANCE 05/2018 Where We Shopped The Range of Advisers Financial advisers come with a wide array of designations, and some play multiple roles. These are the advisers and services we shopped for three hypothetical clients. A certified financial planner (CFP) may address a range of planning needs, such as budgeting; saving for retirement and other goals; estate and tax planning; and allocating or managing investments. CFPs may be paid by the hour, by the project, on a subscription or retainer basis, as a percentage of investment assets under management, or some combination. CFPs must act as fiduciaries, putting their clients’ best interests above their own. Among other requirements, a CFP must pass an exam on personal financial planning and have 4,000 hours of apprenticeship with a CFP or 6,000 hours of professional experience. In the realm of investment advice, a registered investment adviser (RIA) is registered with the Securities and Exchange Commission or state securities regulators, has passed examinations, and must act as a fiduciary. Such advisers, also called money managers, often charge a percentage of the assets they manage for you. A broker-dealer sells securities, such as stocks and mutual funds. Brokers typically earn commissions on investment transactions. Larger brokerage firms often have an advice division, in which representatives may act as brokers, RIAs and planners. We also took a look at robo advisers, which rely on computer algorithms to formulate and manage a portfolio based on your financial situation and goals. Robos typically cost less than traditional money managers. Some robo advisers offer hybrid services, incorporating, say, phone access to an investment adviser or CFP to answer questions. A major drawback of this type of arrangement is that the adviser is rewarded for selling investments that generate the highest commissions and fees, even if they’re not the best choice for you. The Securities and Exchange Commission recently charged Ameriprise with selling retirement-account customers high-cost mutual fund share classes when less-expensive share classes were available. In a settlement with the SEC, Ameriprise refunded payments, plus interest, to the affected customers and switched them to the lowest-cost share class for which they were eligible. Concern about potential conflicts of interest, particularly among advisers who receive commissions, was the impetus for the Department of Labor’s fiduciary rule (see the box on page 33). CONFLICT-FREE ADVICE You can avoid conflicts by working with a certified financial planner. CFPs must put your interests first, and they may charge by the hour or base fees on a percentage of your assets. In the past, these planners were often unaffordable for people who didn’t have a lot of money to invest, but that’s changing, too. For example, advisers with the Garrett Planning Network (www.garrettplanningnetwork.com) typically charge from $180 to $300 an hour. Some regions of the country have no Garrett planners, but interest among advisers is growing. “We’re seeing a huge escalation in new members this year,” says Sheryl Garrett, founder of the network. “The public is pushing the industry in the right way.” Similarly, XY Planning Network (www.xyplanningnetwork.com), founded by Kitces and fellow CFP Alan Moore, focuses on providing feeonly advice to Generation X and Y clients. There are no minimums; clients have the option of paying a monthly fee, ranging from about $75 to $200. Other planners are looking for new ways to structure their fees. Jonathan McQuade, a fee-only CFP in Austin, Texas, charges separately for financial MONEY planning and investment management. For planning, he charges a fixed fee that ranges from $150 to $500 a month. For investment management, he charges 0.75% of assets. McQuade says his system emphasizes the value of overall financial planning, which he says is often treated as an afterthought to portfolio management. Some fee-only advisers base their fees on clients’ net worth rather than the amount of money they have invested. Justin Harvey, a CFP and president of Quantifi Planning, in Philadelphia, charges an annual fee of 1% of his clients’ income and 0.5% of their net worth, which covers both investment management and financial planning. He says the model allows him to work with clients—many of whom are physicians—who have high earnings but not a lot of savings. “I can get fairly compensated, and they can get the nuanced, detail-oriented planning help that they need,” he says. Look for a fee-only planner at the website of the National Association of Personal Financial Advisors, www.napfa.org. As hybrid financial services proliferate, advisers who fail to offer comprehensive financial advice at a competitive price risk losing business. After working with a traditional adviser for more than a decade, Ken Chin-Purcell, 57, decided to move his money to Personal Capital, a hybrid service that combines digital financial tools with human advisers. Personal Capital matches investors with one of about a dozen portfolio strategies, which may include a mix of individual U.S. stocks plus exchange-traded funds for fixed-income and alternative investments. Chin-Purcell pays Personal Capital less than 1% of assets managed, compared with 1.3% for his previous adviser, and he has access to a dedicated CFP. They talk on the phone every two weeks or so. To help you decide what kind of financial advice is best for you, we’ve come up with options for three hypothetical clients at three different stages of life. 30 KIPLINGER’S PERSONAL FINANCE 05/2018 SCENARIO 1 SINGLE AND SAVING A single, 34-year-old woman (let’s call her Kelly) has $100,000 in her 401(k) plan. She just received a $50,000 inheritance from her grandmother. Her goals include budgeting, saving for retirement, paying off student loans and building an emergency fund. A t this stage, a robo adviser with a low minimum asset requirement may be sufficient. For extra help with broader planning, Kelly could consult with a financial planner who charges a flat fee or by the hour. Robo adviser. Betterment, which requires no minimum account balance and charges a low annual fee of 0.25% of assets managed in its Digital plan, could be a great choice for any portion of the inheritance to be invested in taxable accounts or in a traditional or Roth IRA. Based on clients’ input about their financial situation and goals, Betterment designs a portfolio of inexpensive exchange-traded funds. The service includes tax-efficient investing strategies and automatic rebalancing, plus access to advisers who can answer broad financial questions through Betterment’s mobile app. With a $100,000 minimum, you can use the Premium service, which charges a 0.4% annual fee and includes unlimited access to CFPs via phone, e-mail or Betterment’s mobile app. Another option is Wealthfront, which offers taxable brokerage accounts, traditional and Roth IRAs, and 529 college-savings accounts, invested in low-cost index funds. Like Betterment, Wealthfront considers your financial situation and goals to formulate a portfolio and includes automatic rebalancing and tax optimization. Wealthfront requires a $500 minimum balance, and it charges 0.25% of assets managed. 401(k) help. Depending on where her 401(k) is invested, Kelly may be able to get a free checkup. With employers that offer 401(k)s from Vanguard and elect to include the free Personal Online Advisor service, for example, plan participants can take advantage of custom recommendations on contributions, asset allocation and investments. Plus, clients can get analysis of their entire investment portfolio, including how other income sources, such as a pension or Social Security income, play into their overall retirement plan. Kelly could enter information about her inheritance to get advice on how to handle it. Employers can also opt to include Vanguard’s Managed Account Program, which takes the extra step of managing your 401(k) portfolio, including regular rebalancing and quarterly progress reports. The fee is tiered, starting at 0.4% annually for the first $100,000 of assets and dropping to 0.1% for the portion of the balance higher than $500,000. Both Personal Online Advisor and the Managed Account Program are powered by Financial Engines, which also has relationships with Fidelity and T. Rowe Price, as well as many Fortune 500 companies that include its advisory services in their employee benefits packages. Fee-only financial planner. A certified financial planner can cover all the bases, helping Kelly manage her cash flow and decide what to do with her inheritance. Because she has student loans and still needs to build an emergency fund, for example, a planner can help her weigh how best to allocate her extra cash. A planner can also alert her to any other needs; as a single person relying on only her own income and without large assets to fall back on, she may want to have disability insurance, for example. A planner may review her 401(k) allocation and advise whether and how she should invest in an IRA or brokerage account. A one-time consultation with a planner who charges by the hour or with a flat fee may be enough to set Kelly on course; she could search for a CFP through the Garrett Planning Network, whose planners require no asset minimums for hourly services. Or she could turn to the XY Planning Network, whose planners require no asset minimums and include the option of a monthly subscription fee (many also offer hourly options). XY planners may offer a basic review and initial plan for as little as $500 to $1,000. XY planners will also meet with clients over the phone or through a video chat. The virtual option could be especially beneficial for people who live in remote areas or who want a planner who fills a certain niche. For example, Jane Yoo, a fee-only CFP and XY Planning Network member in Oakland, Calif., focuses on high-earning professional women who don’t yet meet big portfolio minimums. KipTip How to Vet an Adviser Interview a few advisers before you settle on one. Having conversations with the advisers will also give you a feel for how your personalities mesh. Ask questions, and check out their credentials and disciplinary history, too. The interview. Make sure you understand the basics. What are the adviser’s certifications, and what services does she offer? Is she a fiduciary? Find out more about her specialties. Does she focus on areas where you need help (say, estate planning and retirementaccount withdrawal strategies), and does she work with other clients like you? What’s her overall philosophy on financial planning and investing? Also ask how many years she has been in practice. Dig into the numbers, too. What is the adviser’s minimum investable asset requirement? How will he charge you—as a percentage of assets under management, by the hour, or some other model? Get an estimate of how much you’ll pay for advisory services, and ask about fees on underlying investment holdings if he manages your portfolio. Find out whether the adviser is paid commissions—and if so, on what types of products. Background check. At www.letsmakeaplan.org, you can verify a planner’s certification as a CFP (click on “Verify a CFP Professional’s Status”). You’ll also see any information on the planner’s disciplinary history with the CFP Board and on bankruptcy filings in the past 10 years. To vet a registered investment adviser, visit the database at www.investor.gov. You can search an individual’s name and click on “Detailed Report” to see information on qualifications, employment history, disciplinary actions by regulators, criminal convictions and other details. You can also search a firm’s name to view its Form ADV and Part 2 brochures, which have information on the types of business the firm conducts, its clientele, disciplinary actions, fee schedules, conflicts of interest and other items. The Investor.gov database also lists whether an adviser or firm is registered as a broker. For more on a broker, visit https://brokercheck.finra.org, where you can search an individual’s or firm’s name to get such details as years of experience, licensing, exams passed and regulatory actions. 05/2018 KIPLINGER’S PERSONAL FINANCE 31 MONEY SCENARIO 2 THE TUG OF COMPETING PRIORITIES The Petersons are both 50, with two boys: one a junior in high school and one a freshman in college. They have $500,000 in 401(k) and taxable investment accounts. Their goals include saving and paying for college and saving for retirement. They would also like to pay off several thousands of dollars in credit card debt. A s they send their kids through college and save and plan in earnest for retirement, the Petersons would benefit from more-comprehensive services. Depending on how much hand-holding and in-person consultation they want, their best options range from a hybrid robo adviser that incorporates advice from a human to a certified financial planner or fullservice brokerage firm. Fee-only financial planner. To get a broad financial plan and form a oneon-one relationship with an adviser, the couple should look for a CFP who 32 KIPLINGER’S PERSONAL FINANCE 05/2018 has expertise in saving and investing strategies for retirement and college, estate planning, and ensuring appropriate insurance coverage. Bobbie Munroe, a fee-only CFP near Tallahassee, Fla., says she would start the couple with an hourly planning engagement ($250 an hour for five to six hours) to create a road map, which may include funding goals such as health care and travel in retirement, balancing retirement savings with paying for college, reviewing their investments for appropriate allocation and tax management, and assessing their need for life, disability and long- term-care insurance. If they wanted to extend the relationship with Munroe, they could continue on an hourly basis or for a yearly retainer of about $3,000 to $3,500. Other planners may offer a free (though likely less detailed) initial consultation followed by ongoing advice charged on retainer or as a percentage of assets under management. A planner may also refer the couple to other specialists, as needed—for example, a lawyer to draft a will or a certified public accountant (CPA) to prepare a tax return and offer specialized tax-planning strategies. CPAs who also have the personal financial specialist (PFS) credential have passed a test on broader financial planning and may offer comprehensive services. Broker or investment adviser. The Petersons may have enough investable assets to be eligible to work with a money manager at a brokerage firm and get advisory services. With at least $250,000 in investable assets, for example, the couple would qualify for the services of Merrill Lynch Wealth Management, which offers a one-on-one relationship with an adviser whom clients meet face-to-face. Adviser fees with the Merrill Lynch service vary, but they are usually based on assets under management— typically between 1% and 2%. (Clients with at least $1 million will have an easier time finding bank wealth managers and registered investment adviser firms that will work with them, and they usually pay a lower percentage of assets; see scenario 3.) Representatives at a full-service brokerage may be both brokers who sell financial products on commission and registered investment advisers. Keep in mind that when acting as a broker, a representative generally must meet only a suitability standard rather than the fiduciary standard, meaning that she must believe that the recommendation is suitable for you (but not necessarily in your best interest). For more on the fiduciary standard, see the box at right. Hybrid robo adviser. If the couple want investment-centric advice and don’t mind working with an adviser (or group of advisers) remotely, a service that combines automated portfolio assessment and rebalancing with access to a human adviser may provide enough assistance at a lower cost. For an asset level between $50,000 and $500,000, Vanguard Personal Advisor Services (0.3% annual fee for assets of up to $5 million) provides an advisory team, which may consist of CFPs or advisers who are working toward becoming CFPs. Certain types of accounts, including 401(k), 403(b), 529 and UGMA/ UTMA accounts, can’t be managed under the service and don’t count toward the $50,000 asset minimum, even if they’re held with Vanguard (but can be considered in your overall plan). The adviser relationship centers around the investment portfolio, but planners can also help with collegesavings strategies, estate planning, and other financial-planning tasks. For an annual fee of 0.28% and with a $25,000 minimum investment, Schwab Intelligent Advisory offers online planning tools and access to CFPs—but you may not talk to the same planner every time. After you fill out information about your finances and goals through an online tool, a planner will do an initial consultation to discuss your situation and create a financial plan. Planners are available thereafter for unlimited consultation. The Fiduciary Rule Looking Out for Your Best Interest The Department of Labor’s fiduciary rule sounds straightforward enough: It requires financial professionals who give advice about retirement accounts to put their clients’ interests ahead of their own. But critics of the rule say it would make it more difficult for investors who don’t have a lot of money to get advice. The Trump administration has delayed enforcement of key provisions of the Obama-era rule until mid 2019, and a U.S. circuit court recently ruled that the Labor Department doesn’t have authority to enforce it. The issue is likely to end up in the Supreme Court. The rule was designed to deter brokers from encouraging investors to roll their 401(k) plans and other employer-based plans into retirement accounts stuffed with high-cost investments. Brokers adhere to a less stringent standard than the fiduciary rule. Investments they recommend must be “suitable,” given a client’s age and risk tolerance, but they don’t have to be the lowest-cost options. Some states are enforcing their own version of the fiduciary rule, and the Securities and Exchange Commission is considering a fiduciary rule that would apply to all brokerage accounts, not just retirement plans. Meanwhile, the proposals may have already dampened sales of some high-fee products in retirement accounts. Overall sales of annuities within IRAs dropped 13% in 2017, according to the LIMRA Secure Retirement Institute. Sales of variable annuities—which typically have higher fees than other types of annuities—within IRAs fell 16%. There are still plenty of people peddling pricey products along with their financial advice. They often sweeten the deal by providing a free lunch or dinner, complete with colorful PowerPoint presentations. Mary and Len Bach of Murrysville, Pa., have enjoyed more than 30 free meals as volunteer consumer advocates for AARP, and they often agree to schedule a follow-up meeting with the adviser who gives the presentation. Len, 76, says the investments they offer are usually legal, but they typically come with high commissions. Worse, the advisers rarely spend time determining whether the products they’re selling are appropriate for a potential client’s individual circumstances, he says. The Bachs have even seen advisers try to sell annuities with a 12-year holding period to people in their nineties. On the plus side, the food is usually pretty good. “They wouldn’t give you a bad meal and try to sell you something,” Len says. You can protect yourself by making sure that any planner you hire is a registered investment adviser or certified financial planner. RIAs, who are licensed to give investment advice, are required to act in their clients’ best interests. Likewise, the Certified Financial Planner Board of Standards requires all CFPs who provide financial-planning services to act in their clients’ best interests, and that’s not limited to retirement accounts. 05/2018 KIPLINGER’S PERSONAL FINANCE 33 president and CEO of Excel Tax & Wealth Group, near Orlando, Fla., specializes in retirement, estate and tax planning along with investment management. He requires no asset minimum and customizes fees for clients based on the amount of assets managed and how extensive their needs are. Clients with more than $1 million pay less than 1%. Another option is a fee-only planner who charges a fee based on a percentage of assets. Typically, the fee is about 1%; some planners charge 1.5%. SCENARIO 3 READY FOR RETIREMENT The Garcias are a 65-year-old couple who plan to retire in a year. They have more than $1 million in 401(k)s and taxable and retirement accounts. Goals include investing their savings, which will supplement pensions and Social Security, so they will stay ahead of inflation without running out of money. They’d also like to pay off the remaining $75,000 balance on their mortgage. W ith more than $1 million in assets, this couple can afford to pay for personal advice, and they may need it. They’re facing a host of complex decisions, and they don’t have time to recover from financial mistakes before they retire. Among the issues an adviser can address: how to invest their nest egg so it will stay ahead of inflation without exposing them to too much risk; when to file for Social Security; and the most cost-effective way to pay for health care, including long-term care. A robo adviser probably won’t provide everything the Garcias need because managing their investments is just one of the many tasks they face going forward. They’ll want to work with a planner who has expertise in a wide range of areas, from estate planning to minimizing taxes on their retirement income. “Comprehensive financial advice is so critical; it’s more important than investment advice,” says Ed Gjertsen, 34 KIPLINGER’S PERSONAL FINANCE 05/2018 vice president of Mack Investment Securities and former president of the Financial Planning Association. “If I don’t look at whether you have a will and power of attorney and something happens to you, whatever we’ve made in the markets could be obliterated.” Paying a percentage of assets. One option is a registered investment adviser, often called a money manager. RIAs offer ongoing management of your portfolio and may also provide access to more-sophisticated investments, such as real estate and hedge funds. Some RIAs include broader financial-planning services, too, usually for no additional fee. The couple could check out the advisory units of regional banks, such as SunTrust or First Republic. Or they could investigate independent RIA firms. With more than $1 million, they would have no trouble finding an RIA to work with them. For example, Carlos Dias Jr., an investment adviser and Fee-for-service adviser. A CFP who charges a retainer or by the hour could be a good choice if the Garcias are comfortable managing their investments. If they are interested in buying long-term-care or other types of insurance, they may want to consider a fee-based planner. These planners are typically compensated by a combination of fees and commissions. Gjertsen, who is a CFP, charges $250 an hour, and the cost of a comprehensive financial plan starts at about $2,000. If his clients decide to purchase an insurance policy that pays him a commission, he’ll use the commission to offset their fees. Premium-level service from a financial firm. The Garcias are also eligible for premium-level advice from their financial services firm. For example, clients of Fidelity Investments’ Private Client Group receive a dedicated financial adviser who will help them with their investments and provide an annual review. There is no fee for this service, but to qualify, clients must have at least $250,000 invested in Fidelity accounts and at least $1 million in investable assets. Vanguard provides a dedicated CFP to clients with more than $500,000 in assets. The $500,000 asset threshold also qualifies you for Schwab Private Client, which provides access to a dedicated advisory team. FOR QUESTIONS OR COMMENTS, CONTACT FEEDBACK@ KIPLINGER.COM. See how your money’s doing. FREE ONLINE FINANCIAL TOOLS View all your accounts in one place Make sure hidden fees don’t take you by surprise On your easy-to-read Personal Financial Dashboard Analyze your investment fees with our Fee Analyzer Understand where your money’s going See if you’re on track for a comfortable retirement And where it comes from with our Cash Flow Analyzer Use our Retirement Planner to look at different scenarios Know how your investments measure up Use our FREE tools with no obligation ever Compare against a target portfolio If you decide you want financial advice, we can help with that too See it all — from cash flow to retirement readiness. Want more? Get personalized planning and advice from our expert advisors. Our advisory fees are competitively low and the tools are always free! BONUS OFFER Available on web & mobile GO TO | personalcapital.com/KP58 Personal Capital Advisors Corporation is a registered investment advisor with the Securities Exchange Commission ("SEC"). Any reference to the advisory services refers to Personal Capital Advisors Corporation. SEC Registration does not imply a certain level of skill or training. © 2018 PERSONAL CAPITAL CORPORATION. ALL RIGHTS RESERVED. MONEY ID PROTECTION Early Alert Systems for Identity Theft A number of services promise to notify you if you are a victim of credit fraud. But you’ll pay a hefty fee. BY MIRIAM CROSS THE PROBLEM WITH IDENTITY THEFT IS that you probably won’t know when your personal data has been stolen— or even whether you’ve been a victim. A recent study by Javelin Strategy & Research found that the number of identity-fraud victims in the U.S. totaled 16.7 million in 2017. But that’s only the tip of the iceberg, because the data of many millions more Americans has been exposed and may be used in the future to open fraudulent accounts. Last year’s Equifax breach alone exposed addresses, birth dates, Social Security numbers and other sensitive data for nearly 146 million people, launching them into ID fraud limbo. Enter ID theft protection services. For $10 to $30 a month, they will alert you via text, e-mail or mobile app if they detect (or suspect) misuse of your data or accounts—perhaps sooner than you’d notice on your own—and to walk you through repairs. Do you need an ID theft protection service? That depends on how much you’re willing and able to do by yourself. Most paid plans offer at least one tier that watches over all three credit bureaus at once and can flag changes to your reports—such as the appearance of a new credit account—more quickly than you might detect by ordering your once-a-year freebies from www.annualcreditreport.com. Moreover, a good service will sweep online 36 KIPLINGER’S PERSONAL FINANCE 05/2018 databases to see if your personal details pop up in court records, payday loans, sex offender registries or applications for new financial accounts. The service will also keep an eye out for address changes that could suggest a criminal is trying to reroute your mail, and it might look out for unfamiliar names or addresses linked to your SSN, too. ID theft protection services often scour the secret chat rooms and blackmarket websites of the “dark web” for evidence that your SSN, e-mail address, driver’s license number, passport number, mother’s maiden name and other identifying info are up for grabs. “Some of this monitoring is challenging or dangerous to do on your own without the technical knowhow,” says Eva Velasquez, president of the Identity Theft Resource Center. And although freezing your accounts is an important preventive step, it won’t stop a crook from fiddling with your existing accounts. Monitor to the max. A comprehensive package includes four main services: monitoring your credit report, monitoring other data tied to your identity, dealing with the aftermath of ID theft, and covering certain costs to restore your identity. (The box on page 38 lists plans from six popular services.) If your information is compromised, “restoration” or “resolution” specialists can help you through the recovery process, which might feel overwhelming if you try to tackle it alone. For example, a dedicated case manager (equipped with a limited power of attorney, if necessary) may notify federal agencies, complete paperwork and correspond with creditors on your behalf. Or a specialist can talk you through the hassle of canceling and replacing credit cards, insurance cards and more if you lose your wallet. Insurance policies, a staple of most plans, are less useful. Many providers tout $1 million policies because “it’s an easy insurance policy to give a big headline number to,” says Nick Clements, cofounder of MagnifyMoney .com. But the toll is mostly measured in the hours you spend and the stress you feel when you try to repair the damage that ID theft can cause. Most policies are limited to small payouts— for example, reimbursing out-of-pocket expenses that come with restoring Budget Option DIY Solutions With some legwork, you can piece together many of the same features yourself, either free or at low cost. Freeze your credit reports. This step prevents new lenders from viewing your reports, and it should block thieves from opening new credit accounts in your name. Until recently, placing or lifting a freeze generally cost $5 to $10, depending on your state. But a bill making its way through Congress requires creditreporting agencies to let consumers do it free. Equifax and TransUnion both also allow free “locks,” which is a simpler way to block access to your report, but freezes have stronger legal protections. Monitor your reports. Credit Karma will show you your Equifax and TransUnion reports on a weekly basis and alert you to changes in those reports. Discover and Mastercard cardholders can sign up for free monitoring of their Social Security numbers on the dark web. your identity, such as postage and notary fees, or replacing documents such as passports, according to a 2017 report by the Government Accountability Office. They may also reimburse you for lost wages or legal fees. ID theft services can’t do much to get ahead of medical fraud, aside from scanning the dark web for health care identification numbers. Don’t expect help detecting tax fraud, either. Before you buy. Most services offer sev- eral plan tiers; the plans we list in the table on page 38 are the ones we consider the best values. But check out a service’s other plans and decide which features you want, in case you are willing to trade certain features for a lower price. For example, a less-expensive tier of service may mean phone assistance and form letters to help restore your identity instead of unloading part of the burden onto a case manager. Some services offer plans that include monitoring of your children or ILLUSTRATION BY JOE ANDERSON a parent. For example, LifeLock Senior ($19.99 per month) sends alerts to both you and your parent and monitors for changes in investment accounts, home titles and more. Child plans can look out for credit reports in your child’s name and some public records. Some providers throw in a few preventive measures, such as antivirus and antiphishing software; a junk mail opt-out; password managers; or the removal of personal information from peoplefinding websites. To avoid committing for the long term, see whether the service offers a free trial or a money-back guarantee (most of the services we name offer free trials, although not necessarily for the tier we list). Or start with a monthly subscription rather than paying for the whole year. If you decide you don’t need it, you’ll have to remember to cancel before it automatically renews. Set up alerts. A credit freeze or lock won’t stop a crook from fiddling with your existing credit card or financial accounts. But you can often easily set up alerts to spot unusual activity in your accounts, such as large withdrawals or payments. Get free help. If you become a victim of identity fraud, you can browse recovery steps at the Federal Trade Commission’s IdentityTheft.gov site, generate a tailored remediation plan and print sample dispute letters. The Identity Theft Resource Center (www.idtheftcenter.org) posts guides to recovering from identity theft (including fixing problems that result from lost wallets and correcting misinformation on medical records), as well as links to state resources; you can also ask questions by phone, e-mail or online chat. Credit Sesame offers its members (signing up is free) access to restoration specialists. Also check with your employer, bank or credit card issuers to see if they offer resolution assistance. YOU CAN CONTACT THE AUTHOR AT MCROSS@KIPLINGER.COM. SEE ID THEFT PROTECTION PLANS ON THE NEXT PAGE 05/2018 KIPLINGER’S PERSONAL FINANCE 37 MONEY Thwarting ID Thieves 6 ID THEFT PROTECTION PLANS: WHAT YOU GET Every provider listed below (except IDShield) offers a choice of plans; we list the plan with the best combination of comprehensive service and price. For example, each plan here (except IDShield) offers three-bureau monitoring, identity monitoring (including “dark web” monitoring) and restoration assistance. Prices are for monthly subscriptions, but you may get a discount if you buy a full year up front. Family subscriptions generally cover two adults and all children younger than age 18. Name Experian IdentityWorks Premium Identity Force UltraSecure+ Credit Identity Guard Total Monthly price Equifax, Experian and TransUnion, plus daily FICO score from Experian, quarterly FICO scores from Equifax and TransUnion, industry-specific FICO scores, and credit reports from all three bureaus (an Experian report daily; Equifax and TransUnion reports every 90 days) Insurance Court records, change of address, account takeover, Social Security number, payday loans, social media and identity validation for institutions that use Experian data Placing a fraud alert, contacting creditors and lost-wallet assistance Up to $1 million Equifax, Experian and TransUnion, plus quarterly credit scores and reports from all three bureaus. (Note: The standard UltraSecure plan without credit monitoring costs $17.95 per month and includes all other features.) Court records, change of address, Social Security number, bank and credit card activity, payday loans, social media Making calls and completing paperwork, as well as lost-wallet assistance Up to $1 million Equifax, Experian and TransUnion, plus monthly credit score from TransUnion New account applications, change of address, account takeover, payday loans, tax returns filed using software Placing a fraud alert and expert advice Up to $1 million Experian only, plus monthly credit score from Experian Court records, change of address, Social Security number, payday loans, social media Placing a fraud alert, notifying relevant agencies and creditors, lostwallet assistance and initiating disputes No $29.99 (additional $5.99 per child) Equifax, Experian and TransUnion, plus monthly credit score from Equifax and annual reports from all three bureaus Checking and savings account applications, court records, change of address, account takeover, Social Security number, bank, credit card and investment account activity Making calls, expert advice and lostwallet assistance Up to $2 million $29.95 Equifax, Experian and TransUnion, plus 28 FICO scores (from different industries) and credit reports from all three bureaus on a quarterly basis ($39.95 for Ultimate 3B with monthly credit reports) Social Security number Expert advice and lostwallet assistance Up to $1 million $19.99 (single) $29.99 (family) $23.95 (additional $2.75 per child with ChildWatch) $14.99 (single) $25.99 (family) IDShield $24.95 (family) MyFICO Ultimate 3B 38 Other monitoring Resolution $9.95 (single) LifeLock Ultimate Plus Credit monitoring KIPLINGER’S PERSONAL FINANCE 05/2018 ASK KIM Kimberly Lankford Making the Call on Phone Insurance Now that new cell phones are more expensive, should I consider getting cell phone insurance? What are the best options? POON WATCHARA-AMPHAIWAN M.S., SAN DIEGO Cell phone insurance isn’t worth the cost if you rarely lose or break your phone. Plus, the manufacturer’s warranty usually covers malfunctions in the first year. Logan Abbott, president of Wirefly.com, a website that analyzes phone plans, says you’re better off buying a sturdy case, such as an OtterBox ($18 to $40). But if you tend to be hard on your phone (or have a teenager who is), you may want some extra coverage. You have several options, with different prices, deductibles and exclusions. For iPhones, AppleCare+ provides the best coverage. For $149 for most iPhones (or $199 for the iPhone X), it provides two years of tech support and hardware repair. It also covers two incidents of accidental damage, with a $29 “service fee” for a cracked screen and a $99 charge for other damage. If Apple decides to replace rather than repair your phone, you may get a replacement the next day. AppleCare doesn’t cover lost or stolen phones, but the insurance sold by most wireless providers does. Sprint charges $13 per month for Total Equipment Protection Plus, which now includes tech support from AppleCare. Sprint’s plan charges a $29 fee for cracked screens and a $99 replacement fee for most broken iPhones. Sprint-authorized technicians repair non-iPhones, though with higher repair and replacement fees. The plan also covers lost or stolen phones (after a deductible). Verizon charges $13 a month for similar coverage, with an $89 fee to replace most broken phones. Best Buy’s Geek Squad covers non-iPhones for $7.99 per month for repairs or $10.99 to add theft and loss coverage. You’d pay about $60 to fix a cracked screen at a repair facility (available for Samsung phones in 11 states). Otherwise, you ship your phone to be repaired or replaced, and the replacement fee runs $149 to $199. Roth anymore. But what if I contribute to a Roth and then discover my income is too high? J.C., EAST LANSING, MICH. Even though the new tax law prohibits people from undoing a conversion they Deducting interest on home-equity loans. The new tax law changed the rules about deducting home-equity loan interest. Can I still deduct interest I pay, and what documentation do I need? M.H., PITTSBURGH IF YOU (OR YOUR TEENAGER) OFTEN DROP OR MISPLACE YOUR CELL PHONE, IT MAY BE WORTH IT TO BUY COVERAGE ALONG WITH THE PHONE. You can no longer deduct interest on a home-equity loan or line of credit unless the money is used to buy, build or substantially improve the home that secures the loan. Plus, you can now deduct interest only on the first $750,000 of home loans—including a primary mortgage, home-equity loan and line of credit—taken out after December 14, 2017. (The limit is $1 million on earlier loans.) Keep records, such as contractor bills, that show the money was used for home improvements, says Phyllis Jo Kubey, an enrolled agent in New York who is authorized to represent taxpayers in front of the IRS. made from a traditional IRA to a Roth after December 31, 2017 (called recharacterizing), you can still recharacterize a Roth contribution and move the money to a traditional IRA. You can contribute to a Roth IRA if your modified adjusted gross income in 2018 is less than $135,000 if you’re single or $199,000 if you file jointly. If you contribute to a Roth but your income is too high, you can ask your IRA administrator to move your Roth contribution (and any earnings on it, which your administrator will calculate) into a traditional IRA before the deadline to file your tax return for the year of your contribution. Undoing Roth contributions. I know I can’t undo conversions from a traditional IRA to a GOT A QUESTION? ASK KIM AT ASKKIM@KIPLINGER.COM. KIMBERLY LANKFORD ANSWERS MORE QUESTIONS EACH WEEK AT KIPLINGER.COM/ASKKIM. 05/2018 KIPLINGER’S PERSONAL FINANCE 39 MONEY DEBT STRATEGIES SMART WAYS TO MANAGE YOUR STUDENT LOANS You could consolidate or refinance to lower your payments, but some options will increase your overall costs or eliminate federal loan safeguards. BY KAITLIN PITSKER BLAIR GREEN THIELEMIER GRADUATED in 2011 from the University of Arkansas for Medical Sciences with a doctorate of pharmacy and $65,000 in federal student loans. She diligently paid more than her required payments every month, but after four years her balance still stood at $35,000—primarily because a large portion of her payments went toward interest. Thielemier, 31, wanted to pay off her loans faster, so she decided to refinance with CommonBond, a private lender, which offered to reduce her 6.3% fixed rate to a roughly 2% variable rate. With more of her payments going toward principal, she was able to pay off the balance in less than two years. Refinancing your student loans has advantages, but it also poses risks. You can streamline the repayment process by combining your loans into a single monthly payment. You may be able to lower your monthly payments by extending the repayment schedule. And some options, such as the one Thielemier chose, can lower your overall interest rate. But plans that make your payments more affordable typically increase the total amount you pay over the life of the loan. Plus, refinancing federal loans with a private loan, as Thielemier did, means giving up some protections that only federal loans have. Those protections include 40 KIPLINGER’S PERSONAL FINANCE 05/2018 deferment and forbearance, which allow borrowers to postpone or reduce payments if they’re unemployed or experience other types of economic hardship, as well as loan forgiveness. If you’re interested in refinancing, start by identifying which of your loans are federally sponsored and which, if any, were issued by private lenders. Review the interest rate on each loan, as well as your monthly payments and how they fit into your budget. From there, consider whether your primary goal is convenience, a more affordable monthly payment or a lower interest rate. If you’re simply looking for a way to streamline your federal student loan payments, you may want to consolidate rather than refinance them. Consolidating your federal loans will allow you to select a repayment plan that works best for your budget. PROS AND CONS OF CONSOLIDATION If you have several federal student loans, consolidating them through the federal government can make payments more convenient. Most federal student loans, including direct loans, Stafford loans and Perkins loans, can be consolidated into a single loan through the Department of Education’s Direct Consolidation Loan program. You can’t include PHOTOGRAPH BY SÉLAVIE PHOTOGRAPHY loans from private lenders. Consolidating won’t lower your interest rate or save you money over the life of your loan. The interest rate of your new loan will be the weighted average of the interest rates of the loans that you combine, rounded up to the nearest one-eighth of a percentage point. Federal student loan interest rates vary annually and by loan type, but direct subsidized and unsubsidized loans for undergraduates have carried fixed interest rates of between 3.76% and 4.66% in recent years. To see what your new interest rate would be, use the loan-consolidation calculator at www.finaid.org/calculators. Once your loans have been com- bined into a direct consolidation loan, the change can’t be undone. If you’re a public-service worker, the payments you’ve already made will no longer count toward the 120 payments required to qualify for federal loan forgiveness (see the box on page 42). If you have Perkins loans, which are granted to low-income borrowers, you may qualify for loan cancellation if you are employed in certain fields or volunteer with AmeriCorps or the Peace Corps. However, that benefit disappears in a consolidation, so you may not want to include those loans. Borrowers may choose to exclude other loans from a consolidation, too. For example, some may decide ■ BLAIR GREEN THIELEMIER PAID OFF THE BALANCE OF HER FEDERAL STUDENT LOANS IN LESS THAN TWO YEARS AFTER REFINANCING TO A LOWER-COST PRIVATE LOAN. to keep the highest-interest loan and funnel any extra cash toward early repayment. REPAYMENT OPTIONS In addition to converting several payments into a single monthly payment, consolidating your federal loans will allow you to pick a new repayment plan. Most borrowers with federal student loans are put on a 10year plan, in which you pay the same amount each month until the loan is paid off. If that’s unaffordable, look for another option. There are three main types of repayment plans: ones that stretch repayment over a longer period, ones that gradually increase the amount of your monthly payments, and ones that base the amount of your payments on your income. Borrowers with more than $30,000 in federal debt who want to lower their monthly payments can choose the extended repayment plan, which increases the loan term to 25 years. The graduated repayment plan requires lower monthly payments at first, then increases them, usually every two years, as your income presumably rises. The government also offers several income-driven repayment plans. With these, you’ll be expected to dedicate 10% to 20% of your discretionary monthly income toward your loans for 20 to 25 years, after which any remaining amount is forgiven. (For public-service workers, the remaining balance will be forgiven after 10 years.) Another option, the income-sensitive repayment plan, calculates payments based on your annual income, with a repayment period of up to 15 years. To see what your monthly payment and loan terms would look like under different repayment plans, go to StudentLoans.gov and use the Repayment Estimator. The longer the repayment period, the more you will ultimately pay in interest, so pick the plan with the highest monthly payment you can afford. 05/2018 KIPLINGER’S PERSONAL FINANCE 41 MONEY PRIVATE LOAN TRADE-OFFS Unlike the federal government, private lenders will refinance both private and federal student loans into one loan. Assuming you’ve established a good credit history, you’ll likely be able to score a lower interest rate on a private loan than you did during college, and borrowers with stellar credit profiles may be able to get a reduced rate for their federal loans, too. If you refinance your federal loans with a private lender, you’ll typically lose such benefits as deferment and forbearance. Still, borrowers with high-paying jobs in the private sector may conclude it’s worth giving up those safeguards in exchange for a lower interest rate, says Miranda Marquit, of StudentLoanHero.com, a website that offers student loan management and repayment tools. Start by contacting your current loan servicer and bank, as well as a few other lenders, such as Citizens Bank, Discover and Laurel Road. Borrowers who are eligible for private-loan refinancing may also want to consider nontraditional lenders, such as CommonBond and SoFi. The stronger your overall credit profile, the lower the interest rate you’ll receive. Fixed interest rates currently range from about 3% to 10%, and variable rates range from 2.5% to 8%. Get several quotes so you can compare interest rates and terms, and ask about other benefits that the lender offers. For example, CommonBond and SoFi allow borrowers to postpone payments under certain circumstances—if you lose your job, say, or you return to school. To compare lenders and see additional options, visit StudentLoanHero .com, Credible.com or StudentLoan Consolidator.com. Most lenders let you choose to pay off the loan over five to 20 years. A longer repayment term will lower your The Fine Print Don’t Count on Loan Forgiveness If you’re employed by the government or a nonprofit organization, Uncle Sam may forgive your federal loans. To qualify for the Public Service Loan Forgiveness program, you must work full-time for the federal or a state or local government, a tax-exempt 501(c)(3) nonprofit organization, or a private not-for-profit organization that provides a qualifying service, such as emergency management, law enforcement or early childhood education. The Consumer Financial Protection Bureau estimates that about one-fourth of U.S. workers— including teachers, social workers, nurses, police officers and employees at nonprofit organizations—are in a public-service job that may qualify them to have the balance of their federal loans forgiven after 10 years under an income-based repayment plan. The requirements sound straightforward, but some borrowers who thought they were making qualified monthly payments are learning otherwise or facing major delays getting their loans forgiven. If you want to qualify, make sure your loans, your employer and your payments are eligible for the program, and keep records of loan consolidation, payments and other communications. Borrowers seeking loan forgiveness should submit an Employment Certification Form to the Department of Education each year to confirm eligibility and the number of qualified payments they’ve made. Ten years after the public-service loan forgiveness program launched, its future is uncertain, which is important to keep in mind if you’re planning a career in public service. The first group of participants were eligible to have their loans forgiven last fall, but it’s still unclear how many borrowers from that group had the balance of their loans wiped out. Meanwhile, legislation pending in Congress includes a Trump administration proposal to end the program for new borrowers. monthly payment (and increase the amount of interest you pay overall), whereas shorter terms generally come with a lower rate. Most private lenders don’t offer flexible repayment options, such as ones that base your monthly payment on your income. Some lenders charge an origination fee, typically up to 2% of the amount of the loan, but many roll the fee into the loan. Most lenders offer both fixedrate and variable-rate loans. The Federal Reserve is expected to raise interest rates at least two more times this year, which would make a variable-rate loan more expensive. Still, a variable-rate loan could be a smart strategy if you think you’ll be able to pay off a large portion of the debt while the rate is still low, or if the loan has a cap that will keep your interest rate from increasing by more than a few percentage points. Be prepared to clear a high bar to qualify. Last year, nearly 60% of borrowers who applied to refinance student loans with a private lender were turned away, according to a survey from LendEDU, a loan-comparison website. The average credit score among those who qualified was 764, and about one-third of borrowers who refinanced had a co-signer. Only about 43% of those who were approved ultimately refinanced, suggesting that the interest rate many were offered wasn’t low enough to seal the deal. For those who qualify for a lower rate, though, the savings can be substantial. Say you have $40,000 in loans with an average interest rate of 6% and a 10year repayment period. If you qualified for a 4% fixed-rate loan, you would pay roughly $40 less each month and save about $4,700 over the 10-year repayment period. To see how much you would save by refinancing at a lower rate or shortening your repayment term, visit StudentLoanHero.com and use the site’s student loan refinancing calculator. YOU CAN CONTACT THE AUTHOR AT KPITSKER@KIPLINGER.COM. 42 KIPLINGER’S PERSONAL FINANCE 05/2018 TOP-YIELDING DEPOSIT ACCOUNTS No-Fee Interest Checking Minimum balance may be required Annual yield as of Mar. 20 Balance range† Website (www.) 1.21% 0–$250,000 everbank.com EverBank (Fla.)* SAVINGS Langley Federal Credit Union (Va.)# 1.21 Juicier Yields on Money Funds Nationwide Bank (Ohio)* FOR YEARS, MONEY MARKET mutual funds have paid practically nothing. But each time the Federal Reserve lifts short-term interest rates, yields on money market funds tend to rise in tandem. “That’s one of their most attractive qualities,” says Peter Crane, president of Crane Data, a money fund research company. Many money funds yield more than 1%, and Crane expects yields on some funds to sur- RATE UPDATES For the latest savings yields and loan rates, please visit kiplinger.com/links/rates. pass 2% this summer. Rates on savings accounts from banks have also been increasing but have not kept pace with Fed rate hikes. Money market funds invest in high-quality, shortterm securities, such as Treasury bills, commercial paper and certificates of deposit. Although they carry little risk, they are not protected from losses by the Federal Deposit Insurance Corp., as are all the acYIELD BENCHMARKS 2.58 expense ratio of 0.16%. Taxable money funds generally offer higher yields than tax-free municipal money funds. But if you’re in one of the top federal income tax brackets and live in a state with high income taxes, you may come out ahead with a tax-free fund. Look at the taxable-equivalent yield— the yield you’d need to earn on a comparable taxable fund after paying taxes to match the yield of the taxfree fund. For example, VAN- 10,000–plus nationwidebank.com McGraw-Hill FCU (N.J.)# 1.05 25,000–plus mcgrawhillfcu.org NATIONAL AVERAGE 0.15% High-Yield Checking Must meet activity requirements‡ Annual yield as Balance of Mar. 20 range† Website (www.) America’s Credit Union (Wash.)# 5.00% $0–$1,000 First Financial Credit Union (Ill.)# 5.00 0–2,500 firstfcu.org Consumers Credit Union (Ill.)# 4.59 0–20,000 myconsumers.org First Advantage Bank (Tenn.) 4.50 0–10,000 firstadvantagebanking.com NATIONAL AVERAGE 1.92% youracu.org Annual yield as of Mar. 20 Minimum amount Bank7 (Okla.) 1.80% $100 bank7.com Dollar Savings Direct (N.Y.)* 1.80 none dollarsavingsdirect.com Incredible Bank (Wis.)* 1.76 25,000 incrediblebank.com AbleBanking (Maine)* 1.70 250 ablebanking.com NATIONAL AVERAGE 0.21% Savings Website (www.) †Portion of the balance higher than the listed range earns a lower rate or no interest. *Internet only. #Must be a member; to become a member, see website. ‡To earn the maximum rate, you must meet requirements such as using your debit card several times monthly and receiving electronic statements. SOURCES: Bankrate, DepositAccounts. TOP-YIELDING CERTIFICATES OF DEPOSIT Annual yield as Minimum of Mar. 20 amount 1-Year Website (www.) Live Oak Bank (N.C.)* 2.15% $2,500 liveoakbank.com M.Y. Safra Bank (N.Y.)* 2.12 5,000 mysafra.com Colorado Fed. Savings Bank (Colo.)* 2.11 5,000 coloradofederalbank.com KS StateBank (Kan.)‡ 2.10 NATIONAL AVERAGE 0.75% 500 ksstate.bank Annual yield as Minimum of Mar. 20 amount 5-Year Utah First Federal Credit Union (Utah)# 3.00% $500 United States Senate FCU (D.C.)# 2.95 20,000 KS StateBank (Kan.) 2.85 500 DollarSavingsDirect (N.Y.)* 2.80 NATIONAL AVERAGE 1.69% Website (www.) utahfirst.com ussfcu.org ksstate.bank 1,000 dollarsavingsdirect.com *Internet only. ‡Crestmark Bank, First Internet Bank of Indiana and Limelight Bank offer a similar yield. #Must be a member; to become a member, see website. SOURCES: Bankrate, DepositAccounts. GUARD MUNICIPAL MONEY MARKET FUND (VMSXX) yields 1.10%, which is a taxable-equivalent yield of 1.75% for an investor in the 37% federal tax bracket. LISA GERSTNER email@example.com 0.10% 2.58 1.87 0.10% 2.76 Six-month Treasury bills 1.97 Five-year Treasury notes 2.69 2.65 2.00 Ten-year Treasury notes 2.89 2.88 2.47 SOURCE FOR TREASURIES: U.S. Treasury langleyfcu.org 1.15 MONEY MARKET FUND (SYMBOL VMMXX), yielding 1.6%, has an Month- YearYield ago ago U.S. Series EE savings bonds 0.10% U.S. Series I savings bonds counts listed in our table. Cash that must be in a safe place, such as an emergency fund, is best stashed in an FDIC-insured bank account. Money funds provide a convenient holding place for cash in, say, a linked brokerage account. You are more likely to get a higher payout if you invest in a money fund with low expenses. VANGUARD PRIME 0–1,000 0.89 As of March 20, 2018. ● EE savings bonds purchased after May 1, 2005, have a ﬁ xed rate of interest. ● Bonds bought between May 1, 1995, and May 1, 2005, earn a market-based rate from date of purchase. ● Bonds purchased before May 1, 1995, earn a minimum of 4% or a market-based rate from date of purchase. TOP CREDIT CARDS Low-Rate Cards Rate as of Annual Late Mar. 20* fee fee Lake Mich Credit Union Prime (P)# 7.50% Website (www.) none $25 lmcu.org First Command Bank Visa (P) 9.50 none 15 firstcommandbank.com Simmons Bank Visa (P) 9.50 none 25 simmonsbank.com Cash-Rebate Cards Rate Rebate as of Annual earned Mar. 20* fee Category/Other Website (www.) $95 6%/1% ‡ americanexpress.com Discover It 13.24 none 5/1^ discover.com Citi Double Cash 14.74 none 2& citi.com Amex Blue Cash Preferred 14.24% Rates are adjustable. *If you do not qualify for this interest rate, the issuer will offer a higherrate card. (P) Platinum. #Must be a member. ‡6% on groceries up to $6,000 per calendar year (1% thereafter); 3% gas/retail; 1% other purchases. ^Categories change quarterly on up to $1,500 of spending. &Earn 1% when you buy and an additional 1% when you pay for a purchase. SOURCE: Bankrate. Banks may offer lower introductory rates. 05/2018 KIPLINGER’S PERSONAL FINANCE 43 INVESTING The Kiplinger 25 Funds ON TRACK Our actively managed funds turned in mixed results over the past year. But they are in the race for the long haul. BY NELLIE S. HUANG ILLUSTRATIONS BY JOEY GUIDONE A RACE, ESPECIALLY A marathon, requires planning and preparation. Runners set time goals, and they have a plan for how to tackle rough stretches of the course. Investors aren’t much different. They set performance goals and build a diversified portfolio that can get them there, in good times or bad. // When markets are in a groove, as stocks were over the past year, it’s easy to forget about pacing yourself by maintaining a diversified portfolio that’s in sync with your goals and your risk tolerance. And then a market dip comes along to remind you in a nasty way. That’s what happened earlier this year: After 22 months of relatively smooth climbing, Standard & Poor’s 500-stock index dipped more than 10% over less than two weeks in late January and early February. // For the market, it was 44 KIPLINGER’S PERSONAL FINANCE 05/2018 45 INVESTING a much-needed breather. As investors, we should take one, too. Now is the time to review your portfolio to make sure it can get you to the finish line while still letting you sleep at night. With stomach-churning volatility back on the scene, investors’ nerves can “begin to fray,” says Daniel Wiener, head of an advisory firm in Newton, Mass., and editor of the Independent Adviser for Vanguard Investors newsletter. That’s when investors make mistakes. Even so, if you need to tweak your investments, it will be easier today than in the middle of a full-fledged bear market, says Wiener. With that in mind, we reviewed the Kiplinger 25, the list of our favorite actively managed no-load funds. It is a diversified collection of stock and bond funds with a mix of investment styles. Precisely because it is a diversified mix, over the course of the past year some funds zigged while others zagged. Several stock portfolios were big winners, and some lagged the market. But there were no dogs and no surprises. The laggards almost always underperformed for reasons that have to do with investment style, not poor stock or bond choices. For more on Kip 25 highlights and lowlights over the past year, see the box at left. We made two changes to the roster this year. To learn more about our new funds—and why two got the boot—see the box on page 49. We’ve put some of our Kip 25 funds together in three portfolios on page 50. Finally, for more on the incumbent funds, read on. Returns are through March 16. LARGE-COMPANY U.S. STOCK FUNDS Update How Our Funds Performed The past year was a big win for stock investors. Both U.S. and foreign stocks posted huge gains. Over the past 12 months, Standard & Poor’s 500-stock index returned 17.9%. The MSCI EAFE index, which tracks foreign stocks in developed countries, gained 16.8%. Emerging-markets stocks climbed 28.8%. Bonds were hot, then cold. As a result, the Bloomberg Barclays U.S. Aggregate Bond index was up an underwhelming 1.4% over the past year. (Returns are through March 16.) For the Kiplinger 25, the year was mixed. Foreign stock funds led the pack. T. Rowe Price International Discovery, which invests in small foreign firms, beat its index by 8.5 percentage points. Fidelity International Growth beat its bogey. So did Oakmark International, which replaced FMI International midyear after it closed to new investors. The 12 U.S. diversified stock funds had varied results. T. Rowe Price Blue Chip, Primecap Odyssey Growth and T. Rowe Price QM US Small-Cap Growth Equity posted some of the best returns in their category for the period. A handful of stragglers, including Mairs & Power Growth and Homestead Small-Company Stock, dampened the wins. Highlights of the Kip 25’s fixed-income funds include Pimco Income, a multisector bond fund, and intermediate-term debt fund DoubleLine Total Return Bond. Both beat the majority of their peers over the past year. Lowlights: MetWest Total Return Bond, an intermediate-term bond fund that has taken a defensive stance, and Vanguard High-Yield Corporate, a conservative junk bond fund, lagged their benchmarks over the past 12 months. 46 KIPLINGER’S PERSONAL FINANCE 05/2018 DODGE & COX STOCK The focus: Undervalued, wellestablished midsize and large firms. The process: A nine-member team picks stocks on a company-by-company basis with a three- to five-year time frame in mind. The managers like high-quality businesses that can increase earnings and cash flow over the long term, as well as executives who put profits to work wisely. The track record: Value-focused stock funds had a tough go of it over the past year, compared with their growth-oriented peers. The fund’s 14.4% gain lagged the S&P 500’s 17.9% return, but it beat 80% of other funds that bet on large, cheap stocks. A low, 0.52% expense ratio helped. FIDELITY NEW MILLENNIUM The focus: Out-of-favor, growing firms of all sizes that benefit from trends in technology and demographics. The process: Manager John Roth describes himself as “opportunistic,” but his penchant for cheap prices makes A signature sterling silver bracelet We love it for its time-honored artistry and finely woven craftsmanship. You’ll love it as your signature piece, one that truly reflects your refined and confident style. We applaud that style—and your keen ability to recognize a truly terrific deal. 49 $ Plus Free Shipping Sterling Silver Byzantine Bracelet 7" length. 1⁄4" wide. Lobster clasp. Also available in 14kt gold. Item #872977 $499 Ross-Simons Item #686854 To receive this special offer, use offer code: EMPIRE355 1.800.556.7376 or visit www.ross-simons.com/EMPIRE INVESTING him a bit of a contrarian. He bought energy stocks in late 2014 and 2015 as oil prices fell, and he sold tech stocks in 2017 as share prices soared. The track record: Roth’s against-thegrain style means the fund’s shortterm results differ at times from its peers (funds that invest in large, growing firms). The fund’s 16.3% return over the past year lagged 93% of largegrowth funds. Over the long haul, however, Roth carries the day. Since he took over in mid 2006, New Millennium’s 9.5% annualized return beat its peers and the S&P 500. The fund has outpaced the index in five of the past 10 full calendar years. The process: Larry Puglia holds 125 stocks in firms with above-average earnings, sustainable profit growth, strong free cash flow (cash profits after capital outlays), and executives who reinvest in the company wisely. The track record: Morningstar nominated Puglia for U.S. stock fund manager of the year in 2017, the second time in five years. Blue Chip Growth was the best-performing Kip 25 fund over the past 12 months. The fund’s gangbuster 38.3% return beat the S&P 500 by 20.4 percentage points. Don’t expect a repeat this year, says Puglia. But, he adds, “I’m not sure this bull market is over or close to being over.” MAIRS & POWER GROWTH T. ROWE PRICE DIVIDEND GROWTH The focus: Fast-growing firms of any The focus: Big firms with the propen- size trading at reasonable prices. The process: The fund’s two managers favor firms headquartered in the upper Midwest, where the fund company is based, on the theory that proximity gives them an edge. They like companies with durable competitive advantages, and they wait for the right price. The track record: The fund tends to lead in down markets and trail in up markets. In 2017, the S&P 500 was driven by the type of stocks the managers tend to avoid: high-priced tech shares. Over the past 12 months, the fund’s 9.3% return trailed the S&P 500 by 8.6 percentage points. sity and capability to raise dividends over time. The process: Firms that dominate their industries and throw off cash get the nod from manager Tom Huber, who also looks for experienced executives who are shareholder-focused. The portfolio has increased payouts at an average of 9% per year and currently yields 1.4%. Stock dividends overall may get a boost this year, says Huber, in light of new corporate tax laws. The track record: The fund tends to beat the broad market in bad times and lag in good times. Over the past 12 months, Dividend Growth trailed the S&P 500. Over the long haul, however, Huber’s focus on quality and increasing payouts wins handily. PRIMECAP ODYSSEY GROWTH The focus: Stocks in fast-growing com- panies of all sizes that trade at temporarily low prices. The process: Five managers pick firms that are under pressure but have a catalyst—a new product, a new CEO, a restructuring—that could spur growth. The track record: Over the past 12 months, the fund trounced the S&P 500 by 19.6 percentage points, thanks to a 32% stake in technology stocks. T. ROWE PRICE BLUE CHIP GROWTH The focus: High-quality, giant firms that are growing fast and trade at fair share prices. 48 KIPLINGER’S PERSONAL FINANCE 05/2018 T. ROWE PRICE VALUE The focus: Bargain-priced shares of midsize to giant companies. The process: When the shares of highquality firms trade at a discount to their historical averages, their sector or the market, it typically means a problem is afoot. That’s when Mark Finn moves in. Recently, he bought stock in Priceline, a firm pressured by competition in the online travel market. The track record: Since Finn took over in early 2010, the fund has returned 13.2% annualized, which beats its benchmark, the Russell 1000 Value index. Share prices in relation to earnings and other yardsticks are “not great” these days, says Finn, so he’s focusing on quality over cheapness. VANGUARD EQUITY-INCOME The focus: Dividend stocks. The process: Two shops run this fund. Wellington Management’s Michael Reckmeyer controls two-thirds of the assets, picking firms that can sustain their dividend or raise it over time. Vanguard’s quantitative stock team screens for dividend stocks that meet four characteristics, including consistent earnings growth and relatively low prices. The fund yields 2.0%. The track record: Reckmeyer and Vanguard’s quant team joined forces in 2007. Since then, the fund has returned 8.7% annualized, which beats 96% of its peers (funds that invest in value-priced stocks). SMALL AND MIDSIZE U.S. STOCK FUNDS HOMESTEAD SMALL-COMPANY STOCK The focus: Little-known small companies that are out of favor but primed for a turnaround. The process: The fund takes a riskaverse approach to a typically volatile corner of the market. Prabha Carpenter and Mark Ashton look for firms that generate a lot of cash and are run by shareholder-friendly execs. The track record: Small-Company Stock has a decent, 10.9% five-year annualized return, but it lags the small-cap Russell 2000 index. A portfolio light on tech and health care has hurt results, as those sectors fueled the index over the past five years. Though the fund has trailed the index, the managers haven’t changed their process, which we view as a good thing. But we have the fund on watch for now. PARNASSUS MID CAP The focus: Midsize firms that meet environmental, social and governance standards. For instance, the fund avoids companies that pull in hefty revenues from tobacco or guns. The process: Matt Gershuny and Lori Keith focus on fast-growing firms that offer a product or service that’s in demand. Price matters, too. The stock must trade at a discount to what the managers deem the firm to be worth. The track record: Since Gershuny and Keith took over in 2008, Mid Cap has outpaced the S&P 500. But it has lagged its benchmark, the Russell Mid Cap index, by an average of 0.3 percentage points per year. T. ROWE PRICE QM US SMALL-CAP GROWTH EQUITY The focus: Profitable, growing small firms with reasonably priced stocks. The process: Computer models find stocks in small firms that trade at a discount to free cash flow, are highly profitable and use cash in shareholderfriendly ways. The portfolio tends to hold up well during market dips. The track record: QM US Small-Cap Growth Equity has a standout 10-year record. In 2017, the market favored “the opposite of what we look for” as expensively priced stocks continued to rack up gains, says Sudhir Nanda, the fund’s manager. But the fund still managed to beat its peers and its benchmark, the MSCI US Small Cap Growth index. T. ROWE PRICE SMALL CAP VALUE The focus: Small businesses with good long-term growth prospects and stocks trading at cheap prices. The process: The hunt for discount stocks starts with troubled companies that have stumbled temporarily but have a catalyst to turn things around. The strategy requires patience: Shares in Green Dot, best known for its prepaid debit cards, took three years to rebound (from 2014 to 2017). The track record: Since manager David Wagner took over in July 2014, his respectable 8.9% annualized return just misses the 9.5% return of the Russell 2000 index. Joining the Race Betting on Two New Entrants This year, operational shifts forced us to cut two funds. T. Rowe Price International Discovery closed to new investors in early April. We believe Kip 25 funds should be available to all comers, so when a fund shuts, we replace it. But we still like International Discovery, so hold on to shares if you currently own them. We also like Pimco Income, and we advise holding if you own shares. But it is no longer a true no-load fund (that is, available without a sales charge), and thus it no longer qualifies for the Kip 25. In a surprising move, Pimco, the investment management firm, eliminated the no-load Class D shares of its funds and merged them with assets in the corresponding Class A shares in March. Many brokers sell the A shares without a load or transaction fee. But officially, the A shares are a load share class. So Pimco Income is out. We pass International Discovery’s baton to AMG TimesSquare International Small Cap Fund. Magnus Larsson and Robert Madsen run the fund with three analysts. Although headquartered in New York, the group is truly international. Larsson is Swedish, Madsen is Danish, one analyst hails from Taiwan, another is from Turkey and a third is French. “We have lived and worked in the markets we invest in,” says Larsson. The team focuses on firms with market values of $5 billion or less, but the fund can invest in businesses valued between $16 million and $8.3 billion. The managers favor best-in-class companies with sustainable competitive advantages. And they won’t overpay; they scrutinize share price in relation to the cash a company generates. “Cash flow is real because it can be used to innovate and to improve products,” says Larsson. The fund’s record is impressive: Since the start of 2014, TimesSquare International Small Cap has beaten its peers (funds that invest in small, fast-growing foreign firms) in each full calendar year. The fund’s five-year return beats its bogey, the MSCI EAFE Small Cap index, as well as 91% of similar funds. The kicker: Over the past five years, the fund held up better in down markets than all but a handful of its peers. Fidelity Strategic Income takes the place of Pimco Income. Ford O’Neil and Adam Kramer make the big-picture decisions and leave the bond picking to experts—other solid portfolio managers at Fidelity—in each bond subsector. Mark Notkin is Strategic Income’s high-yield guru, for instance, Eric Mollenhauer selects floating-rate bank loans and Franco Castagliuolo specializes in government debt. The idea: Balance higher quality, investment-grade bonds with junkier, higheryielding bonds to deliver protection in down markets and more income than the bonds in the Bloomberg Barclays U.S. Aggregate Bond index. The fund has a solid long-term record. Over the past 10 years, its 5.9% annualized return beats the Agg’s 3.7% return. The fund also holds up better in rough bond markets. In 2013, the Agg index lost 2.0%; Strategic Income gained 0.4%. The fund yields 3.1%. (The Agg yields 3.2%.) 05/2018 KIPLINGER’S PERSONAL FINANCE 49 INVESTING The track record: Over the past five FOREIGN STOCK FUNDS BARON EMERGING MARKETS The focus: Growth companies of all sizes in emerging economies. The process: Michael Kass favors fastgrowing businesses with sustainable competitive advantages and a high return on invested capital (a measure of profitability). Lately, he’s found opportunities in Indian money-management firms and Chinese tech firms. years, the fund has outperformed 96% of its peers and the MSCI Emerging Markets index. FIDELITY INTERNATIONAL GROWTH The focus: Reasonably priced foreign firms with good growth prospects that dominate their industries. The process: Growth and price matter to manager Jed Weiss. But he’s most attracted to firms that can maintain or raise prices even when the economy is in a slump. “The truth serum,” that can reveal a good firm, says Weiss, “is what happens when demand is lousy.” He likes to buy when shares trade at a relative discount to earnings growth. The track record: Over the past year, International Growth beat the MSCI EAFE index, which tracks foreign firms in developed countries, by 4.4 percentage points. Over the past decade, the fund beat 91% of its peers. BUILDING PORTFOLIOS WITH THE KIPLINGER 25 The Best Mix to Reach Your Goals Use these portfolios as a starting point to build a diversified mix of funds. If you feel nervous about the market, cut the stock exposure down a bit. If you can tolerate short-term bumpiness, kick the stock allocation up a notch. Just remember, in a truly diversi- For Retirement For College For Income TIME HORIZON: 11 years or more STRATEGY: A portfolio of 85% stocks and 15% bonds for investors who have long runways to their goals. TIME HORIZON: Six to 10 years STRATEGY: A more temperate blend of 65% in stocks and 35% in bonds suits a medium-term goal. TIME HORIZON: Five years or less STRATEGY: Short time frames require more caution. This package holds 70% in bond funds. It yields 3.1%. MODERATE PORTFOLIO AGGRESSIVE PORTFOLIO % of portfolio MUTUAL FUND 50 fied portfolio, some parts will be on the upswing while other parts are falling behind. For the record, last year’s aggressive portfolio gained 16.7%; the moderate package, 12.1%; and the conservative model, 6.5%. MUTUAL FUND CONSERVATIVE PORTFOLIO % of portfolio MUTUAL FUND % of portfolio Dodge & Cox Stock 20% Vanguard Equity-Income 20% DoubleLine Total Return Bond Primecap Odyssey Growth 20 DoubleLine Total Return Bond 15 Fidelity Strategic Income 15 Parnassus Mid Cap 15 Met West Total Return Bond 15 T. Rowe Price Dividend Growth 15 T. Rowe Price QM US Sm-Cp Gro Eqty 15 Oakmark International 15 Vanguard Equity-Income 15 Baron Emerging Markets 10 Primecap Odyssey Growth 15 Vanguard Short-Term Inv Grade 15 Fidelity International Growth 10 T. Rowe Price QM US Sm-Cp Gro Eqty 15 Fidelity New Markets Income 10 Oakmark International 10 Vanguard High-Yield Corporate KIPLINGER’S PERSONAL FINANCE 05/2018 5 Vanguard High-Yield Corporate 25% 5 $19. 95EACH ONEOUNCE. 9 9 9 9PURESI LVERCOI N! $19. 95EACH Pa r a mountRa r eCoi n& Cur r e nc y 230Count r yLa neDr i v e-Lumbe r t on, Te x a s77657 18442187103 Fi r s tt i mec us t ome r sonl y .Pr i c ea r es ubj e c tt oc ha ngewi t hme t a l uc t ua t i ons .Al lr i ght sr e s e r v e dPa r a mountRCC,LLC.#AL0117 INVESTING OAKMARK INTERNATIONAL The focus: Large foreign companies with shares that trade at a discount. The process: The managers are classic bargain hunters. They seek firms that generate a lot of cash and are run by executives who reinvest profits wisely. Oakmark managers only buy stocks that trade at least 30% below their assessment of the firm’s intrinsic value. The track record: Outstanding results make this core foreign-stock fund worth buying, even though it might be a bother to do so: The fund recently announced that new investors can only buy shares directly from Oakmark (current shareholders can add to their holdings through their brokers). Over the past decade, International outperformed 99% of its peers, with an 8.6% annualized return. SPECIALTY FUNDS VANGUARD HEALTH CARE The focus: Health care firms of all sizes that will benefit from medical innovation and growth in spending as the world’s population ages. The process: Jean Hynes balances innovative young drug companies in her portfolio of 87 health care stocks with more-established firms that are quick to adapt to changing times. The track record: A double-digit gain over the past 12 months wasn’t enough to beat the fund’s peer group. Hynes owns fewer biotech stocks than other health care funds, and that crimped relative returns. Stock selection also hurt: Allergan, Merck and Mylan, three big holdings in the fund, all lost ground over the past year. five and 10 years, this fund stands among the top 15% of its class. New investors to the fund must buy shares directly through Vanguard. BOND FUNDS DOUBLELINE TOTAL RETURN BOND The focus: Mortgage-backed securities with intermediate-term maturities. The process: Bond gurus Jeffrey Gundlach and Philip Barach pair complementary types of mortgage-backed securities. Government-guaranteed bonds, which are high in credit quality but sensitive to swings in interest rates, are balanced with non-agency mortgage securities, which bear a higher risk of default but less interestrate risk. (Bond prices typically fall when rates rise, and vice versa.) The track record: Since its inception in April 2010, Total Return Bond has returned 5.8% annualized, trouncing Bloomberg Barclays U.S. Aggregate Bond index (with a tad less volatility, too). The fund yields 3.4%. FIDELITY INTERMEDIATE MUNICIPAL INCOME The focus: Bonds that pay tax-free interest income. The process: Reasonably priced muni bonds with stable finances draw Mark Sommer and his two comanagers. The trio monitor safety with a proprietary tool that analyzes risk in the portfolio. The track record: The fund isn’t a chart topper, but it offers a smooth ride that pays off long term. Over the past decade, its risk-adjusted return bests all but a few in its category. Its 2.1% yield translates to a 3.6% yield for investors in the highest tax bracket. VANGUARD WELLINGTON FIDELITY NEW MARKETS INCOME growth through an all-in-one portfolio of 60% dividend-paying stocks and 40% high-quality bonds. The process: Wellington Management’s Ed Bousa does the stock picking. A trio of fixed-income managers run the bond side. The fund yields 2.3%. The track record: Over the past three, The focus: Emerging-markets govern- KIPLINGER’S PERSONAL FINANCE 05/2018 over in mid 1995, the fund has returned an annualized 11.7%. That beats the JPMorgan Emerging Market Bond index by an average of 1.1 percentage points per year. METROPOLITAN WEST TOTAL RETURN BOND The focus: Discount-priced, highquality intermediate-term bonds. The process: The four bond pickers at this fund have been playing defense for the past year by loading up on investment-grade corporate debt, government mortgage bonds and Treasuries. “The longer and more extreme the party gets,” says comanager Tad Rivelle, referring to what he views as an economic cycle at its peak, “the more cautious you should be.” The track record: The fund’s safety-first position has dulled results. “We were early,” says Rivelle, of the fund’s defensive stance. The fund yields 2.2%. VANGUARD HIGH-YIELD CORPORATE The focus: Income generated from cor- The focus: Income generation and 52 The track record: Since Carlson took ment bonds issued in U.S. dollars. The process: John Carlson blends bigpicture economics with securityspecific analysis to find bargain bonds in developing countries. At last report, Mexico, Turkey and Argentina are big country bets. The fund yields 4.5%. porate debt rated double-B or lower. The process: Manager Michael Hong tilts conservatively toward the betterrated end of high-yield “junk” bonds; he sticks with companies with strong balance sheets and stable free cash flow. The fund yields 5.4%. The track record: Over the past five years, the fund’s 4.5% annualized return puts it ahead of its typical peer. VANGUARD SHORT-TERM INVESTMENT GRADE The focus: High-quality bonds maturing in one to five years. The process: Gregory Nassour delivers a 2.8% yield by playing around with the mix of short-term corporate debt, government bonds, and mortgageand asset-backed securities. The track record: Over the past five years, Short-Term Investment Grade has returned 1.5% annualized—better than 80% of its peers. YOU CAN CONTACT THE AUTHOR AT NHUANG@KIPLINGER.COM. Vital Statistics EVERYTHING YOU NEED TO KNOW ABOUT THE KIP 25 We favor a buy-and-hold strategy for fund investing. Don’t be put off by a lackluster one-year return. Focus on the long-term performance and fees. Most of the Kiplinger 25 funds have below-average expense ratios. Annualized total return 1 yr. 3 yrs. 5 yrs. 10 yrs. Yield Expense ratio 0.9% 0.52% 10.9 0.9 0.54 Bank of America, Qualcomm, Williams Cos. 12.1 0.2 0.89 Dycom, Knight-Swift Transportation, Encore Capital Group 11.2 10.2 1.4 0.66 Ecolab, U.S. Bancorp, Honeywell International 12.0 11.2 1.5 0.99 Fiserv, Motorola Solutions, Verisk Analytics U.S. Stock Funds Symbol Dodge & Cox Stock DODGX 14.4% 12.1% 14.4% Fidelity New Millennium FMILX 16.3 10.4 12.5 Homestead Small-Company Stock HSCSX 12.0 7.6 10.9 Mairs & Power Growth MPGFX 9.3 8.8 Parnassus Mid Cap PARMX 10.6 9.4 9.7% Biggest holdings Charles Schwab, Capital One, Bank of America, Wells Fargo T. Rowe Price Blue Chip Growth TRBCX 38.3 17.3 19.7 13.6 0.1 0.72 Amazon.com, Alphabet, Facebook T. Rowe Price Dividend Growth PRDGX 15.1 10.8 13.2 10.0 1.4 0.64 Microsoft, JPMorgan Chase, UnitedHealth Group T. Rowe Price QM US Sm-Cap Growth Eq PRDSX 20.6 10.8 14.9 13.6 0.0 0.81 Coherent, Teledyne Tech., Take-Two Interactive Software T. Rowe Price Small-Cap Value PRSVX 13.3 12.1 11.0 10.4 0.4 0.93 Western Alliance Bancorp, Home Bancshares, Belden T. Rowe Price Value TRVLX 13.0 9.0 12.6 9.8 1.3 0.82 JPMorgan Chase, Tyson Foods, Microsoft Primecap Odyssey Growth POGRX 37.5 18.3 19.3 14.1 0.3 0.67 Nektar Therapeutics, Alkermes, Abiomed Vanguard Equity-Income VEIPX 12.3 11.1 12.4 10.0 2.0 0.26 Microsoft, JPMorgan Chase, Cisco Systems Foreign Stock Funds Symbol Yield Expense ratio Annualized total return 1 yr. 3 yrs. 5 yrs. 10 yrs. Biggest holdings TCMPX 34.0% 16.1% 14.5% — 0.3% 1.30% Samsonite Intl., Melrose Industries, Modern Times Group Baron Emerging Markets BEXFX 27.8 10.9 8.9 — 0.4 1.38 Tencent, Alibaba Group, Sberbank of Russia, Baidu Fidelity International Growth FIGFX 21.2 8.0 8.1 5.9% 0.6 1.03 Nestlé, SAP, CSL Oakmark International‡ OAKIX 18.8 8.3 8.7 8.6 1.3 0.95 Lloyds Banking Group, Daimler, Glencore Specialized/Go-Anywhere Funds Symbol Yield Expense ratio Vanguard Health Care VGHCX 10.9% 4.8% 15.8% 13.4% 1.0% 0.37% Bristol-Myers Squibb, UnitedHealth Group, AstraZeneca Vanguard Wellington‡ VWELX 10.2 8.0 9.4 8.1 2.3 0.25 Microsoft, JPMorgan Chase, Bank of America Bond Funds Symbol Annualized total return 1 yr. 3 yrs. 5 yrs. 10 yrs. Yield Expense ratio DoubleLine Total Return Bond DLTNX 2.1% 1.8% 2.3% — 3.4% Fidelity Intermediate Municipal Income FLTMX 2.8 1.7 2.1 3.5% Fidelity New Markets Income FNMIX 4.9 8.3 4.3 FSICX 5.9 4.6 3.7 Metropolitan West Total Return Bond MWTRX 1.0 1.0 Vanguard High-Yield Corporate VWEHX 4.1 Vanguard Short-Term Investment-Grade VFSTX 0.9 Indexes Annualized total return 1 yr. 3 yrs. 5 yrs. 10 yrs. NEW AMG TimesSquare Intl Small Cap NEW Fidelity Strategic Income Annualized total return 1 yr. 3 yrs. 5 yrs. 10 yrs. Biggest holdings Avg. credit quality§ Avg. duration (years) Biggest sector weighting 0.73% A 4.1 Mortgage-backed securities (53%) 2.1 0.36 A 4.9 Revenue bonds (55%) 7.6 4.5 0.82 BB 6.4 Foreign government bonds (68%) 5.9 3.1 0.69 BBB 4.4 High-yield debt (40%) 1.7 5.1 2.2 0.67 AA 6.1 Mortgage-backed securities (39%) 4.5 4.5 7.0 5.4 0.23 BB 4.4 Corporate bonds (98%) 1.5 1.5 2.6 2.8 0.20 A 2.6 Corporate bonds (62%) Yield Biggest holdings S&P 500-STOCK INDEX 17.9% 12.1% 14.4% 10.2% 1.9% Apple, Alphabet, Amazon.com RUSSELL 2000 INDEX* 15.9 10.1 12.3 10.7 1.3 Nektar Therapeutics, Bluebird Bio, GrubHub MSCI EAFE INDEX† 16.8 6.5 6.4 3.1 3.1 Nestlé, HSBC Holdings, Novartis MSCI EMERGING MARKETS INDEX 28.8 11.4 5.6 3.5 2.3 Tencent Holdings, Samsung Electronics, Alibaba Group 1.4 1.3 1.8 3.7 3.2 U.S. Treasuries, Fannie Maes, Ginnie Maes BLOOMBERG BARCLAYS U.S. AGGREGATE BOND INDEX# As of March 16. ‡New investors must purchase directly from the fund company. *Small-company U.S. stocks. †Foreign stocks. #High-grade U.S. bonds. § Kiplinger research based on Morningstar data. —Fund not in existence for the entire period. SOURCES: Bloomberg, FTSE Russell, Fund companies, Morningstar, MSCI. 05/2018 KIPLINGER’S PERSONAL FINANCE 53 INVESTING MASTER CLASS What Would Warren Do? We analyzed the Oracle of Omaha’s latest buys and sells. Here’s our take. Buffett’s moves—his record is unrivaled. His rock star status in the investing world is reinforced each May as shareholder-disciples flock to Omaha, Neb., for the annual meeting of Buffett’s holding company, BERKSHIRE HATHAWAY (SYMBOL BRK-B, $207). And why not? Berkshire Hathaway’s market value has jumped 2,404,748% since the company started keeping records. That works out to an average annual compound rate of return of 20.9% from 1965 through year-end 2017, which is more than double the 9.9% average annual return of Standard & Poor’s 500stock index. A common theme has been consistent the entire time: Buffett likes companies with “moats.” A moat, in Buffett’s own colorful language, describes firms encircled by an unassailable position against competitors—like a castle surrounded by an alligator-filled trench. A company with a moat can repel the tyrannies of com54 KIPLINGER’S PERSONAL FINANCE 05/2018 petition, avoid the pressure to lower prices and protect princely profit margins. You don’t have to pay millions to win Buffett’s annual lunch auction just to find out which stocks he likes. Berkshire Hathaway reveals its portfolio four times a year—free. We took Berkshire’s most recent corporate filings and analyzed Buffett’s latest noteworthy moves. Read on to see what they can teach you about investing and whether you should buy what he’s buying (or sell what he’s selling). Berkshire trades are from the fourth quarter of 2017; prices and other data, unless otherwise noted, are as of March 16. BUFFETT’S BUYS THE CURRENT FAVORITE. Berkshire boosted its stake in APPLE (AAPL, $178) by 23%, to more than 165 million shares, or $28 billion. That makes it Berkshire’s biggest position, topping the $27.8 billion stake in his longtime favorite, Wells Fargo. Buffett famously avoided technology stocks for many years. He made an exception in 2011 with IBM, and that didn’t work out. Apple, therefore, must be compelling enough for Buffett to break his own rule. Apple is the new quintessential Berkshire stock, says Robert Johnson, CEO of the American College of Financial Services. Its moat is a golden brand name that allows it to charge $1,000 for a smartphone. Our take: Buy. Wall Street analysts, on average, expect Apple to earn $11.55 a share in the fiscal year ending in September, up 25% from fiscal 2017 and more than double that year’s 10.8% earnings growth rate, says research firm S&P Global Market Intelligence. If the average of analysts’ price targets is right, Apple shares could reach $191 by mid 2019. BANKING ON BANKS. Buffett’s love of the financial sector is long-standing and only strengthening. Berkshire boosted its stake in BANK OF NEW YORK MELLON (BK, $55) by 21%, adding 10.5 million more shares to bring its total stake to $3.3 billion. Berkshire’s investment in U.S. BANCORP (USB, $53) increased by 2.3% to $4.7 billion. Two other banks are among Berkshire’s top 15 holdings: Wells Fargo (see page 57) and BANK OF AMERICA (BAC, $32). The economic climate is good for financials. The Federal Reserve raised short-term interest rates three times in 2017, which helps banks generate a bet- PAUL MORIGI/GETTY IMAGES IT PAYS TO WATCH WARREN Monsanto’s shares aren’t cheap; they trade for 20 times expected per-share earnings for this calendar year. But it’s not a large position for Berkshire. Our take: Hold. Buffett isn’t betting the farm on Monsanto, nor should you. A merger with Germany’s Bayer is in the works, but the final details–including U.S. regulatory approval– are still pending. For now, Monsanto’s valuation isn’t all that compelling. ter return on their cash reserves. This tailwind could strengthen if the Fed hikes rates three times in total this year, as we expect. Our take: Buy. If you don’t own banks, it’s time to consider them. Even with a positive trend in interest rates, bank stocks remain how Buffett likes them: cheap. Bank of New York Mellon trades at 14 times expected 2018 earnings; U.S. Bancorp and Bank of America, at 13 times earnings—all bargains compared with the S&P 500. PLANTING THE SEED. Seed and pesticide company MONSANTO (MON, $118) has been a fast-growing holding for Berkshire. After establishing a stake in 2016, Berkshire boosted holdings by 32%, to 11.7 million shares. BUFFETT’S NEW BUY. Buffett doesn’t buy new stocks often, so investors pay attention when he does. Shares of TEVA PHARMACEUTICAL (TEVA, $18), a generic drug maker based in Israel, jumped more than 7% after Berkshire revealed a $358 million stake in February. It’s not a large position for Berkshire—it doesn’t even rank in the top 15. Teva, which makes a wide range of drugs from hormones to respiratory treatments, needed some good news. The stock lost nearly half of its value in 2017 as analysts warned that revenue would fall in 2018 because of pricing pressure in the U.S. Shares trade at just eight times estimated 2018 earnings, less than half the S&P 500’s price-earnings ratio of 17. Still, at its current price, Teva would not be the bargain for you that it was for Buffett. Teva’s average price was roughly $14.50 a share during the fourth quarter, says David Kass, University of Maryland finance professor and longtime Buffett watcher. If you bought now, you’d pay more than 30% more than Buffett did. Our take: Hold. Consider buying if the stock dips below $15 a share. BUFFETT’S SALES STILL ON BOARD. Berkshire unloaded 1 million shares of AMERICAN AIRLINES (AAL, $55). It’s a minor repositioning, not a thumbs down on the airline or the industry, Johnson says. Berkshire sold just 2% of its American holdings and still owns shares of SOUTHWEST AIRLINES (LUV, $61), DELTA AIR LINES (DAL, $57) and UNITED CONTINENTAL HOLDINGS (UAL, $71). Buffett wasn’t a fan of airlines in the 1990s, but bargain share prices have likely “changed his mind,” Johnson says. Words of Wisdom BUFFETT SPEAKS The following quotes from Warren Buffett are gleaned mostly from past Berkshire Hathaway shareholder letters. You can find them at www.berkshirehathaway.com/letters/letters.html. ON KEEPING COSTS LOW: “Performance comes, performance goes. Fees never falter.” ON STOCKS VERSUS BONDS: “It is a terrible mistake for investors with long-term horizons to measure investment ‘risk’ by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.” ON BUY-AND-HOLD INVESTING: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” ON INVESTING STRATEGIES: “The ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.” ON SEIZING OPPORTUNITIES: “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.” ON WEALTH: “I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.” ON HIS WEALTH: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” ON STOCK ADVICE: “We’ve long felt that the only value of stock forecasters is to make fortune-tellers look good.” 05/2018 KIPLINGER’S PERSONAL FINANCE 55 INVESTING Berkshire vs the S&P A DISAPPOINTING DECADE Since 1965, returns in Berkshire Hathaway stock have trounced just about everything else. But a bet on Berkshire ten years ago would have paid off less than one on the broader market. Here’s how a $10,000 investment in Berkshire’s B shares has grown compared with the Standard & Poor’s 500-stock index. $25,000 Berkshire Hathaway $20,000 S&P 500-stock index $15,000 $10,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 As of March 16. SOURCES: Morningstar Inc., Yahoo Finance. Our take: Buy. It’s a good time to take a flier. Several of Buffett’s airline stocks sport P/Es that are less than 10, including American, Delta and United, all at about 9. GOING IN A NEW DIRECTION. With a low P/E of 6 and a plump dividend yield of 4.0%, GENERAL MOTORS (GM, $38) seems to fit Buffett’s wish list. But GM is on his sell list instead. Berkshire Hathaway cut its stake in the automaker by 16%, to $2.1 billion. The position now represents a minuscule 1% of Berkshire’s portfolio. Our take: Sell. Fierce compe- tition, the challenging new technologies of self-driving and electric cars, and looming tariffs on steel have soured investors on GM. Although the stock’s valuation is tempting, the company’s growth prospects are dim. Revenue has been flat or down in three of the past five years. And analysts are calling for earnings per share to decline in each of the next three years, including 2018. FINALLY GIVING UP. IBM stands for INTERNATIONAL BUSINESS MACHINES (IBM, $160), but you could say it stands for “It’s Buffett’s Mistake.” Shares of IBM have gone nowhere since Berkshire started accumulating them in early 2011. The rest of the market doubled in value. “Buffett’s foray into IBM shows that even the world’s greatest investor is not infallible,” Johnson says. Buffett unloaded 95% of his position in IBM by selling 35 million shares in the latest quarter. That gets Berkshire practically out of Big Blue by taking its stake down to just 2 million shares, worth about 0.16% of the portfolio. Our take: Sell. IBM’s turn- ory has worn thin thin. around story MORE HIGHS THAN LOWS Buffett has been the face of Berkshire for 53 years and counting. Buffett takes control of New England textiles firm Berkshire Hathaway. Berkshire Hathaway pays a dividend of 10 cents. It is the first and only dividend the company ever pays. From March 1973 through January 1975, Berkshire surrenders 59%. 1964-1965 1967 1973 1976 1988 8 That compared with a 32% dip in the S&P 500. Buffett buys 1 million shares in insurance company Geico at about $2 per share. The stock had traded as high as $61 per share in 1972. Today’s 9.4% stake is worth north of $18 billion. $100 invested in the firm at the start of 1965 would have grown to nearly $2.4 million by year-end 2017. 56 KIPLINGER’S PERSONAL FINANCE 05/2018 Berkshire begins buying Coca-Cola, purchasing a 7% stake in the company for just over $1 billion. ISTOCKPHOTO (2), COURTESY GEICO, COCA-COLA, DEXTER SHOE CO., BNSF RAILWAY CO. The company’s revenue has fallen in each of the past six years, as Big Blue is seemingly never in the right place at the right time. IBM isn’t a top player in mobile computing or corporate cloud computing, two of the explosive sources of tech growth. IBM’s revenue ticked higher in the fourth quarter of 2017, but Buffett is apparently tired of waiting. “It appears that the world’s most patient investor has simply lost patience with IBM,” Johnson says. NOT BAILING OUT. Don’t read too much into Berkshire’s sale of shares in WELLS FARGO (WFC, $56). Until Apple came along, Wells Fargo was Buffett’s favorite stock. So investors were curious when Berkshire trimmed its position by about 1%, to $27.8 billion. Serious controversies, including revelations that employe opened millions employees of accounts without consumers’ consent, have rocked the bank, and the Fed is limiting its growth until it has cleaned house. Buffett isn’t panicking, and neither should you, says Christopher Marinac, director of research and banking analyst at FIG Partners. “If Berkshire was truly unhappy, managers would be selling the stock with both fists. This does not appear to be the case,” he says. Analysts aren’t bailing on Wells Fargo, either, calling for the company to earn $4.73 a share in 2018, up 17% from 2017. The stock could trade at $64 in 18 months, based on analyst projections gathered by S&P Global Market Intelligence. Our take: Hold. If you’re worried that another shoe might drop, consider other bank stocks. Succession Plan Berkshire After Buffett There’s only one Warren Buffett, and no one is calling for his retirement—including Warren Buffett. But he is now 87 years old, the oldest acting CEO of any company in Standard & Poor’s 500-stock index. Investors want to know who’s next. After more than five decades of leadership under Buffett, it’s hard to imagine Berkshire Hathaway without him. The company hasn’t named a successor, but two Berkshire veterans are presumed to be in the running. Earlier this year, Ajit Jain, 66, was effectively put in charge of Berkshire’s insurance operations while Greg Abel, 55, took the helm of non-insurance operations. Jain has been with Berkshire since 1986, and Abel joined Berkshire in 2000 as part of an acquisition of MidAmerican Energy Holdings, a utility based in Iowa. The next generation of stock pickers is already known. Todd Combs, 47, joined Berkshire in 2010, after co-founding investment firm Castle Point Capital Management. He’s expected to share the job of chief investment officer with Ted Weschler, 56. Weschler joined Berkshire in 2012 after founding investment firm Peninsula Capital Advisors—and after making winning bids of $2.6 million in charity auctions in 2010 and 2011 to win lunch with Buffett. Combs and Weschler are already leaving their mark on Berkshire’s portfolio. “Each, independently of me, manages more than $12 billion,” Buffett wrote in his most recent shareholder letter. FOR QUESTIONS OR COMMENTS, CONTACT FEEDBACK@KIPLINGER.COM. In what Buffett now considerss one of his b blunders, he biggest b Shoe acquires Dexter D $ 4 million in for $434 k hire stock. Berkshi h fir f m folds. The Berkshire issues Class B shares, initially priced at $23.20, or 1/30th of the value of Class A shares. Aversion to tech stocks leaves Berkshire out of the dot-com boom, while shares in top holding Coca-Cola plummet. From June 1998 to March 2000, Berkshire loses 49%, compared with a 30% gain in the S&P 500. 19 993 1996 1998-2002 h shares The h he parted with ld be would b worth moree than $ billion today. $6 Priced at $207 today, the shares have returned 10.5% annualized, compared with 6.8% for the S&P 500. Buffett is vindicated in the ensuing bear market as Berkshire gains 24% while the S&P 500 loses 47%. As the financial crisis threatens the market and the economy, Buffet bolsters confidence in two icons. He first invests $5 billion in financial giant Goldman Sachs. Berkshire makes the largest business acquisition in company history, acquiring Burlington Northern Santa Fe Railway for $44 billion, calling the deal an “all-in wager on the economic future of the United States.” A drought of deals has left choosey Berkshire with $116 billion in cash on the books. 2008 2010 2018 A week later, Berkshire invests $3 billion in General Electric, which Buffett calls “the symbol of American business.” Buffett says he is on the hunt for “one or more huge acquisitions.” 05/2018 KIPLINGER’S PERSONAL FINANCE 57 INVESTING CASH FLOW Build an Income Ladder Use these four portfolios as a guide to harness higher interest rates. BY JEFFREY R. KOSNETT interest rates have settled into a higher range and are poised to rise further. But don’t let that scare you away from bonds (when rates are rising, bond prices tend to fall, and vice versa) or from certificates of deposit. If anything, the volatile stock market should be nudging you toward more bonds and CDs, not fewer. Still, the rate outlook demands some caution in your fixed-income strategy. The market value of longterm Treasuries and other bonds is apt to shrink more, especially if inflation rises enough to shock bond traders into demanding higher yields on new investments. But it’s worth remembering that when a bond matures, the issuer returns the entire face amount. So a bond whose price falls to 95 cents on the dollar will eventually pay you back 100 cents, unless the borrower defaults or you sell in the interim. Incomeseeking investors can stick to a simple plan to protect bond principal from getting nicked by rising rates, while collecting a decent income and reinvesting returned capital for a higher yield as rates continue to climb. You can accomplish this with an old-school 58 KIPLINGER’S PERSONAL FINANCE 05/2018 technique called laddering. It works well with certificates of deposit and with individual bonds. Bond funds don’t work for ladders because the bonds in them are rarely held to maturity. But some exchange-traded funds have found a work-around, holding portfolios of bonds that all mature in a target year, and such ETFs can be a low-cost way to build a laddered income stream. The analogy to a ladder is straightforward. You own a series of bonds that represent the rungs, with the bottom ones paying the lowest interest rates and maturing soonest, and the yields and terms climbing as you go higher. Recently, a six-month Treasury bill paid 1.96%, a one-year note paid 2.08%, a two-year issue paid 2.31% and so on, until you hit 2.85% for a 10-year bond and 3.08% for a 30year. (Rates and prices are as of March 16.) A survey of corporate bonds rated A to AAA shows coupon rates starting at 1.97% for six months and rising to 2.12% for one year, 2.38% for two, 2.88% for five and then to 3.54% for 10 years and 4.11% for 30. An ideal government-bond ladder might start at six Treasury Ladder Invest With Uncle Sam Treasuries are backed by the full faith and credit of the U.S. government. If you buy newly issued bonds, your return, or yield to maturity, is the same as the coupon rate at the time of purchase. You can buy directly from the government at www.treasurydirect.gov. Title Maturity date Yield to maturity 6-month U.S. Treasury Bill 9/15/18 1- year U.S. Treasury Note 3/15/19 2.08 2-year U.S. Treasury Note 3/15/20 2.31 3-year U.S. Treasury Note 3/15/21 2.44 4- year U.S. Treasury Note 3/31/22 2.57 5-year U.S. Treasury Note 3/31/23 2.65 6-year U.S. Treasury Note 3/31/24 2.73 7-year U.S. Treasury Note 3/31/25 2.80 As of March 16. SOURCES: Dow Jones, U.S. Department of the Treasury. 1.96% ISTOCKPHOTO.COM IT’S A SURE BET THAT months and step up to a oneyear note, then one rung at a time to seven-year T-notes, each yielding a little more than the previous one. If you invest the same amount at each maturity, the average yield currently is 2.35%. That’s reasonable, considering you get the full faith and credit of the U.S. Treasury. When the six-month bill matures, simply buy a new one. As the note on the next-lowest rung on the ladder matures each year, reinvest the proceeds in the longest maturity on the ladder, in this case a sevenyear note. (With other bonds, yields on the ladder might not always rise rungby-rung, but in a rising-rate environment, you will be replacing maturing bonds with higher-yielding ones.) How much you’ll need. The amount of money you need to build a ladder of individual bonds varies. Treasury Direct (www.treasury direct.gov) fills orders as small as $100. Consider any dollar amount in government bonds safe, in the sense that there’s virtually no risk of default. With corporates and municipals, advisers typically recommend that you invest at least $100,000 to adequately diversify and protect against defaults or bond downgrades from rating agencies that weigh in on companies’ creditworthiness. But most tax-exempt issuers and investment-grade corporate borrowers are healthy and as likely to win higher credit ratings as to be downgraded to so-called junk status. So $50,000 to set up a 10-rung muni or corporate ladder is probably enough. Even $25,000 may be adequate if a broker fills small-enough orders across a wide spectrum of issuers. Assemble a CD ladder by splitting your money among certificates with one- to five-year terms, rolling the one that matures each year into a new fiveyear CD. Nationwide, current rates range from 0.75% on a one-year CD to 1.69% on a five-year (find the top-yielding CDs on page 43). Bank or credit union CDs are insured, up to $250,000 per depositor, at each institution. For a bond ladder, consider the following portfolios as a guide. You may not be able to replicate them exactly, but you should be able to get close. CONTACT THE AUTHOR AT JKOSNETT@ KIPLINGER.COM. Municipal Bond Ladder Stick With State and Local Issues This ladder is a guide: You may earn more after taxes buying munis from your state. Your broker may not have these exact issues but should have similar bonds available. Be sure to diversify by type of borrower. These bonds are rated AA- or better. Coupon Maturity date Yield to maturity California, Genl. Obligation (Calif.) 5.00% 3/15/20 2.99% Madison, Wis., School District (Wis.) 2.25 3/1/22 2.08 Los Angeles Airport, Sr. Revenue (Calif.) 5.00 5/15/23 3.36 Seattle Municipal Light & Power (Wash.) 5.00 2/1/24 3.75 New York City, Genl. Obligation (N.Y.) 5.25 4/1/26 4.59 Houston Public Improvements (Tex.) 5.00 3/1/28 3.80 Penn State Univ., Revenue Bonds (Pa.) 5.00 3/1/30 4.25 Miami-Dade, County Schools (Fla.) 5.00 3/15/33 3.89 Title (state) As of March 16. SOURCE: Municipal Securities Rulemaking Board Corporate Bond Ladder Exchange-Traded Fund Ladder Bankroll Companies You Believe In Let a Pro Pick the Bonds These investment-grade bonds are rated BBB- or better by Standard & Poor’s. The yield to maturity (your return if you hold the bond until it matures) will differ from the coupon rate depending on whether you buy at a premium or discount to par (face) value. The Guggenheim BulletShares are designed as yearly rungs, with bonds due each calendar year. If a bond comes due before December 31, the fund deposits the returned principal in a money market until the fund terminates at year-end. Coupon Maturity date Yield to maturity 2.425% 6/12/20 3.32% Guggenheim BulletShares 2020 Corp Bd BSCK 3.00% 0.24% Best Buy 5.50 3/15/21 3.33 Guggenheim BulletShares 2021 Corp Bd BSCL 3.21 0.24 Xerox 4.07 3/17/22 3.85 Guggenheim BulletShares 2022 Corp Bd BSCM 3.40 0.24 Healthcare Realty Trust 3.75 4/15/23 3.84 Guggenheim BulletShares 2023 Corp Bd BSCN 3.53 0.24 AT&T 4.45 4/1/24 3.89 Guggenheim BulletShares 2024 Corp Bd BSCO 3.74 0.24 Title Ford Motor Credit Yield to Expense Symbol maturity ratio Fund General Motors Financial 5.25 3/1/26 4.41 Guggenheim BulletShares 2025 Corp Bd BSCP 3.86 0.24 Anthem 4.10 3/1/28 4.19 Guggenheim BulletShares 2026 Corp Bd BSCQ 3.93 0.24 Goldman Sachs Group 5.00 11/15/30 4.36 Guggenheim BulletShares 2027 Corp Bd BSCR 3.95 0.24 As of March 16. SOURCE: Finra As of March 16. SOURCE: Guggenheim Investments 05/2018 KIPLINGER’S PERSONAL FINANCE 59 INVESTING Commentary PRACTICAL INVESTING Kathy Kristof I owned shares in COSTCO (SYMBOL COST, more—and more expensive—products $186) in the early 1990s thanks to its from the retailer every year. merger with Price Co., a San Diego, Calif., warehouse store in which I held More than paper towels. I still fill my pantry at Costco warehouses, of shares. At a time when the rest of the course. But because of Costco’s liberal stock market was going gangbusters, return policies, I find myself buying my investment in Costco went nobig-ticket items online that I would where. After two whole years, my never buy sight unseen from another patience was exhausted. I sold. company. I tested big-ticket purchases Naturally, that was the catalyst when I moved to a new house that had needed to break the stock out of its a game room. Costco.com was adverfunk. I’ve wanted to repurchase tising a billiards-table package that Costco shares practically ever since, appeared to be $500 to $1,000 cheaper but I’ve been deterred by the math. than anything comparable. But it was Based on my favorite formula—buy still expensive. I wanted to see and a stock when the price-earnings ratio touch it before spending so much is less than the sum of the earningsmoney. I called customer service to growth rate and the dividend yield— ask whether I could find it in a wareCostco shares were perpetually too house. The representative said no but, expensive. Even in the midst of the sensing my concern, reminded me that 2008 financial crisis, when shares I could return it for any reason. “I can’t of other companies could be had for a song, Costco was a touch above my target price. IT ISN’T JUST THE So I waited. And waited. Finally, SHOPPING THAT when the stock HAS SOLD ME market swooned ON THE STOCK. in early February, I ALSO LOVE HOW I bought. Costco shares were still COSTCO RUNS too expensive ITS BUSINESS. based on my formula. But because that seems to be the norm, I decided it wouldn’t dissuade me from buying a company I really wanted to own. Everything about its business impresses me. Let’s start with the fact that I have been a Costco shopper for 28 years (it says so on my membership card). I’ve always been a fan of Costco quality, selection and prices, and part of what sold me on Costco as an investment is that I find myself buying 60 KIPLINGER’S PERSONAL FINANCE 05/2018 put a billiard table in my car and drive it back to the warehouse,” I objected. “We’ll pick it up at no charge,” the rep said. Two weeks later, Costco delivery agents were setting up the table in my game room. It’s not going back. Next was a leather living room set. Then outdoor furniture. Soon, I was buying cars through Costco’s autobuying program and using the company’s affiliates to insure my house and put solar panels on the roof. I went to Hawaii through Costco travel. But it isn’t just the shopping that has sold me on the stock. I also love how Costco runs its business, starting with the fact that the company promotes from within. Current chief executive W. Craig Jelinek rose through the ranks, spending 20 years in various positions in the company’s warehouses before joining senior management. Perhaps because top officers know what it’s like to work in the warehouses, warehouse employees are paid well and garner generous benefits. Being a good employer allows the company to hire and retain exceptional employees, which makes the business run more smoothly. Still, even though I’m a Costco fan, the cheapskate in me flinches a bit at its stock price. At $183 a share, I paid almost 25 times estimated earnings for a company that’s expected to increase profits at an annual pace of 17% in the fiscal year that ends in September and pays a paltry dividend (the stock yields 1.1%). According to my formula, I shouldn’t have paid more than 17 times earnings. But the stock is already up about $3 per share since I bought in. It may prove to be as big a bargain as everything else I buy at Costco. KATHY KRISTOF IS A CONTRIBUTING EDITOR AND AUTHOR OF THE BOOK INVESTING 101. YOU CAN CONTACT HER AT KKRISTOF@KIPLINGER.COM. POON WATCHARA-AMPHAIWAN Why I Paid a Premium for Costco SPOTLIGHT: BALANCED FUNDS A Way to Keep Your Balance Funds with a big stake in bonds can help you weather stormy markets. IF THE PROSPECT OF A decline in the stock market keeps you up at night, owning a “balanced” mutual fund that splits assets between stocks and bonds may help you get more shuteye. These funds can’t keep up with stocks in a bull market, but they tend to lose less when stocks decline. In 2008, when Standard & Poor’s 500-stock index surrendered 37%, funds that allocate 50% to 70% of assets to stocks, with the remainder in bonds, lost just 28% on average. Because these funds rebalance assets to a set allocation, they can help take emotion out of investing. For investment minimalists, these funds can serve as all-in-one portfolios. Investors looking to take some of the edge off a stockheavy portfolio as well as BALANCED FUNDS Ranked by one-year return Annualized total return Rank/Name 1 yr. 1. Plumb Balanced@ PLBBX 20.6% 11.2% none 1.00% 2. Virtus Strategic Allocation A PHBLX 19.3 7.1% 5.75% 1.15 3. Virtus Tactical Allocation A NAINX 19.2 7.4 5.75 1.38 4. Fidelity Global Strategies** FDYSX 15.4 6.8 none 1.10 Max. 1.26 5.75 sales charge 0.55 none 5. 1919 Socially Responsive Balanced A SSIAX 15.3 8.5 6. Fidelity Puritan FPURX 15.1 10.4 7. Sit Balanced@ SIBAX 15.0 9.6 none 1.00 8. Vanguard Star VGSTX 14.9 9.1 none 0.32 9. Columbia Cap Alloc Mod Aggrsv A NBIAX 14.8 8.6 5.75 1.16 FASGX 14.7 9.1 none 0.73 10. Fidelity Asset Manager 70% 9.9% CATEGORY AVERAGE add some diversification should consider VANGUARD STAR FUND, which invests in 11 low-cost, actively managed Vanguard mutual funds. The fund typically invests about 60% of assets in stocks, with the rest in bonds. The three-fund bond portfolio focuses on investment-grade bonds with both 20 LARGEST STOCK AND BOND MUTUAL FUNDS STOCK MUTUAL FUNDS Assets† Annualized total return Rank/Name Symbol (billions) 1 yr. 1. Vanguard Total Stock Market Idx Inv 2. Vanguard Total Intl Stock Idx Inv VTSMX $587.7 VGTSX 327.0 17.6% 13.9% none 19.0 6.4 none 3. Vanguard 500 Index Inv VFINX 321.0 17.7 14.2 none AGTHX AEPGX FUSEX 189.1 170.5 147.4 25.1 24.1 17.8 16.0 8.6 14.3 5.75% 5.75 none 7. Fidelity Contrafund 8. American Balanced A 9. American Income Fund of America A 10. American Capital Income Builder A S&P 500-STOCK INDEX FCNTX ABALX AMECX CAIBX 129.6 126.1 109.5 107.5 30.5 16.7 11.2 9.7 8.6 8.2 7.9 6.5 17.9% 14.4% 16.8% 6.4% none 5.75 5.75 5.75 7.2% short- and long-term maturities, as well as governmentissued mortgage-backed securities. Star’s eight stock funds invest in firms of different sizes and include growth-oriented and bargain-priced stocks both in the U.S. (about 66% of the stock portfolio) and abroad (about 33%). RYAN ERMEY firstname.lastname@example.org Ranked by size. Returns for thousands of funds are at kiplinger.com/tools/fundfinder. Max. sales 5 yrs. charge 4. American Growth Fund of America A 5. American EuroPacific Growth A 6. Fidelity 500 Index Inv MSCI EAFE INDEX Max. sales Exp. 5 yrs. charge ratio Symbol The fund rebalances to its 60-40 allocation on an ongoing basis, and the 11 funds have held the same weighting in the portfolio since 2010, when Vanguard upped the fund’s international stock exposure from 15% to 20%. With the exception of the Vanguard Short-Term Investment Grade fund, all of Star’s underlying funds are run by at least one manager from outside Vanguard. Last year, two of the firms managing the small-cap Vanguard Explorer fund were jettisoned in favor of a team from ClearBridge Investments. Unlike many funds that invest in other mutual funds, Star charges investors only the expenses of its underlying holdings. At 0.32%, the fund’s expense ratio falls well below the 0.89% charged by the average balanced fund. Including 2018 (through mid March), Star has beaten the return of its average peer in eight of the past nine calendar years. BOND MUTUAL FUNDS Rank/Name 1-year Max. Assets† total Current sales Symbol (billions) return yield charge 1. Vanguard Total Bond Market Index Inv VBMFX $158.2 2. Pimco Income A PONAX 110.2 3. Vanguard Total Intl Bd Idx Inv VTIBX 92.8 4. Metropolitan West Total Return Bd M MWTRX 78.2 5. Pimco Total Return A PTTAX 71.9 6. Vanguard Short-Term Inv-Grade Inv VFSTX 62.7 7. Vanguard Interm-Term Tax-Ex Inv VWITX 57.2 8. Dodge & Cox Income@ DODIX 55.2 9. DoubleLine Total Return Bond N DLTNX 51.6 10. Lord Abbett Short Duration Income A LALDX 40.3 BLOOMBERG BARCLAYS US AGGREGATE BOND INDEX B OF A MERRILL LYNCH MUNICIPAL MASTER INDEX 1.4% 5.0 3.5 1.0 2.2 0.9 2.6 2.5 2.1 1.6 1.4% 3.4% 2.9% 3.7 0.8 2.2 1.9 2.8 2.3 2.6 3.4 2.5 3.2% 2.6% none 3.75% none none 3.75 none none none none 2.25 As of March 16. @ Only share class. Unless otherwise indicated, funds come in multiple share classes; we list the share class that is best suited for individual investors. **Closed to new investors. †For all share classes combined. MSCI EAFE tracks stocks in developed foreign markets. SOURCES: Bank of America Merrill Lynch, Morningstar Inc., Vanguard. 05/2018 KIPLINGER’S PERSONAL FINANCE 61 LIVING ■ DAN AND JAMIE PERLOWITZ ADOPTED GRACIE, A LABRADOR RETRIEVER MIX, FROM A RESCUE ORGANIZATION FOR A $350 FEE. 62 KIPLINGER’S PERSONAL FINANCE 05/2018 TRIM THE COST OF PET CARE Your furry friends can run up a big tab over their lifetime, but we’ll show you how to keep expenses in check. BY PATRICIA MERTZ ESSWEIN and KAITLIN PITSKER PHOTOGRAPH BY HOLLENDERX2 IT HAPPENED IN A FLASH. ONE MINUTE DAN PERLOWITZ OF WEST ORANGE, N.J., HAD HIS DOG GRACIE’S leash in hand, and the next she had broken away and run onto a nearby highway. She was hit by one car and rolled over by another, but, thankfully, she suffered only a broken rib and a concussion and healed with no complications. The bill for Gracie’s hospital stay and veterinary care—$4,063—could have been painful, too. But Dan and his wife, Jamie, had purchased pet insurance after adopting Gracie in 2014. “Because we didn’t know much about her past or what medical issues she might have, we wanted to have the insurance just in case,” says Dan. The policy from Healthy Paws, which costs $48 a month, paid for all but $659 of the tab, after excluding certain charges, applying a $100 deductible and a 10% co-payment. In 2016, U.S. pet owners spent $66.8 billion on their pets, compared with $38.5 billion in 2006, according to the American Pet Products Association. Almost half of that was for food, almost one-fourth for vet care, and just over one-fifth was for supplies and over-the-counter medicine (see the table on the next page). But there are smart ways to save while providing the best care. 63 LIVING MUTT OR PUREBRED? The Perlowitzes found Gracie, a Labrador retriever mix, at an adoption event held by a rescue group at a local pet store. The fee was $350, and Gracie was spayed and up to date on her shots. The assumption has long been that mixed-breed pets are healthier and thus less expensive to own than purebred ones, which often suffer from inherited disorders. But a study published in the Journal of the American Veterinary Medical Association found no difference between purebred dogs and mixed-breed dogs in more than half of the 24 genetic disorders that the study considered, although purebred dogs showed a higher incidence of some disorders. Bottom line, says the AVMA: Both mixed breeds and purebreds may have an inherited disorder. (For advice about choosing dogs, cats and other types of pets, search for “selecting” at www.avma.org.) If you have your heart set on, say, a Lab or a French bulldog, you’ll most likely buy one from a breeder at a cost of thousands of dollars. Ask the breeder whether tests have been performed on the dog’s parents or offspring to ensure they aren’t carrying genetic diseases common to the breed. To find registered breeders, use the search tool of the American Kennel Club (www.akc.org/tools/dogbreed-selector) or the Cat Fancier Association (http:// secure.cfa.org/Search.aspx). Buying from a pet store is rarely a good idea. The animals often come from puppy mills or kitten factories, and many jurisdictions in nearly half of the states have banned their retail sale. Shelters receive animals from owners, animalcontrol authorities and people who have found lost or abandoned pets. Rescue organizations often take pets from shelters where the animals may be euthanized, or from owners who can’t keep them but want to ensure they’re not put down. Adopting a pet from a shelter typically runs from $20 to $350. Most shelter dogs end up there because their owners had to move, had landlord difficulties or couldn’t afford to keep them. Adopting an animal from a rescue organization typically costs somewhat more—from $150 to $400— because of the time and resources that volunteers invest before the animal is placed in a home. (If you want to adopt a purebred from a rescue, visit www.akc.org/akc-rescuenetwork or, for cats, http:// cfabreedersassist-rescue .org/rescue.html.) Whether you’re buying Sticker Shock THE HIGH COST OF OWNING A PET Small dog Medium dog Large dog Cat Rabbit Guinea pig Small bird Fish $190 $200 $220 $145 $160 — — — Other initial medical* 70 70 70 130 — — — — Collar/leash/litter box/scratching post 25 30 35 50 25 — — — Crate/carrier bag/cage/aquarium† 75 155 125 40 140 $70 $70 $200 110 110 110 — — — — — $470 $565 $560 $365 $325 $70 $70 $200 One-time costs Spay/neuter Training classes TOTAL Annual costs Small dog Medium dog Large dog Cat Rabbit Guinea pig Small bird Fish Food# $212 $319 $400 $224 $145 $45 $192 $12 210 235 260 160 70 70 85 — — — — 165 208 144 — — 40 55 75 25 40 30 25 — License 15 15 15 — — — — — TOTAL $477 $624 $750 $574 $463 $289 $302 $12 Recurring medical‡ Litter Toys/treats *Deworming, basic blood tests and microchip. †Basic 20-gallon setup with light/hood, outside filter, undergravel filters, air pump and gravel. #Premium-brand dry kibble. ‡Exam, vaccines, heartworm preventative and topical flea-and-tick preventative. SOURCE: ASPCA 64 KIPLINGER’S PERSONAL FINANCE 05/2018 from a breeder or adopting from a shelter or rescue organization, the fee often includes the first round of vaccinations and microchipping (a method of identification). The animal may come spayed or neutered. There are some 10,000 rescue groups in the U.S., and they are underregulated and mostly unsupervised. The risk is that you don’t know exactly what you’re getting, says Nancy Halpern, a vet and lawyer in Princeton, N.J. To ensure that you’re getting a pet from a reputable shelter or rescue, ask your vet for a referral, or look for a wellestablished shelter that shares its policies with the public and documents the completion of vaccinations and neutering or spaying. In the 22 states with pet purchase protection laws— sometimes called puppy lemon laws—you may have legal recourse if you must return an animal with a disease or defect to a pet store or a breeder within a certain time after you get it. In New Jersey, for example, pet owners have 14 days to return an animal if it becomes sick or dies from a non-congenital condition, and six months if it has congenital or hereditary defects. The owner typically gets a refund of the purchase price or a replacement as well as the cost of vet fees. ISTOCKPHOTO.COM THE COST OF HEALTH CARE As more and more pet owners consider their fourlegged friends to be part of the family, spending on health care continues to KipTip Tricks for Saving Look for free adoption days. Shelters sometimes schedule these events to find homes for less-popular animals, such as black dogs and cats. Adopt an adult. It will be housebroken, less destructive than a juvenile and may already be trained. Shelters may discount the adoption fee because adults are less popular than adorable puppies and kittens. Avoid thick- or long-haired animals. They will require morefrequent trips to the groomer. Comparison shop for supplies. If your pet needs a special diet— say, for diabetes—start shopping at your vet, which may sell food at cost. Ask for discounts for multiple pets or days of service. Pet care providers may offer a discount for two or more animals or allow a longer boarding stay for the same price. rise. Advances in veterinary medicine are also fueling the increase. Most treatments available to humans— from chemotherapy and radiation to organ transplants and prosthetic limbs—are also available for pets. Even relatively common pet mishaps and maladies can be costly. Taking your dog to the vet for an ear infection generally costs $100 to $250, while care for a dog’s urinary tract infection rings in at about $300. If your dog eats something he shouldn’t, you’ll be looking at a vet bill of about $1,550, on average. If your cat is yowling in pain from bladder stones, the cost to treat it averages about $1,900. Caring for a pet with, say, a torn ligament or a shattered bone will set you back several thousand dollars—or more, if regular follow-up visits are required. You can also expect to spend several hundred dollars a year on routine medical expenses, such as vaccinations and heartworm, flea and tick prevention. And other preventive treatments, such as dental cleanings and annual checkups, can add up fast. If the cost of a vet’s treat- ment plan exceeds your ability to pay, don’t hesitate to ask for alternatives that will fit your budget. “A vet’s job is to present you with the most comprehensive treatment plan for your pet,” says Ocean Isle Beach, N.C., veterinarian Ernie Ward. “But vets can usually be creative when it comes to making concessions—say, holding off on a test or offering affordable alternatives,” he says. The insurance safety net. A small but growing group of pet owners are buying health policies for their pets. Today, about 1.6 million pets in the U.S. have coverage, according to the North American Pet Health Insurance Association—and pet owners have more options for coverage than in years past, with about two dozen brands offering policies. (Most cover only cats and dogs, but Nationwide also sells policies for birds and exotic pets.) The cost of a policy varies based on the age of your pet, its breed, where you live and the type of coverage you select. But a policy with broad coverage typically costs about $30 to $150 a month for a dog and $10 to $50 a month for a cat. Most plans cover both accidents and illnesses but usually don’t cover routine exams and care, such as annual checkups, dental cleanings and vaccinations. (You can generally add wellness coverage for an additional premium or buy a separate policy.) The policies won’t cover preexisting conditions, and some exclude 05/2018 KIPLINGER’S PERSONAL FINANCE 65 LIVING G 66 KIPLINGER’S PERSONAL FINANCE 05/2018 ciety for Human Resource Management, 10% of employers offered pet insurance as a benefit in 2017. When you’re comparison shopping, among the first things you’ll want to check is how much of the vet’s tab your insurer will pick up. Reimbursement rates typically range from 60% to 90%, with pricier premiums for the best coverage. Make sure you understand the deductibles and maximums. Deductibles can be annual or per incident, and plans may have maximums that they’ll pay for each incident, per year or over the pet’s lifetime. After you enroll, you’ll usually have a waiting period of 10 to 30 days before coverage kicks in. Unlike most human health insurance, pet insurers don’t have a network of providers, so you can visit any licensed veterinarian. But you’ll generally need to pay the vet for the cost of care up front, then submit your claim for reimbursement. Save on meds. There’s one more line item to tack on to your pet budget: medications. Most pet health insurance policies cover the cost of many prescription drugs, and other insurers sell prescription coverage as an optional add-on to the standard policy. If you don’t have health insurance for your pet, or your plan doesn’t cover medications, shop around for medications instead of buying them directly from the vet. If you need meds for less-urgent problems, such as heartworm or flea and tick preventatives or medications used to manage chronic conditions, you can employ many of the same strategies that you use to save on your own medications. Start by asking your vet about less-expensive equivalents. Many pet medications have a brand-name option and a generic one. And pricey pet meds, including some that are commonly used to treat infections, may have a human-drug equivalent. If the prescribed medication has a human version, call around to local pharmacies for a price or check www.goodrx.com to compare costs at local and online pharmacies. To buy the medication from anyplace besides your vet’s office, your veterinarian will need to write a prescription or send the order to the pharmacy on your behalf. Pharmacies at some drug stores and big-box stores, such as Hy-Vee, Target and Costco, have also started stocking flea, tick and heartworm preventatives. But you’ll likely find the best price at Walmart or at pet supply stores Chewy.com and PetSmart, which were among the cheapest options in our recent cost comparison. For other medications, shop at online pet-med retailers, including PetCareRX and 1-800-PetMeds. If you see a deal on an unfamiliar site, check that the company is accredited by the Veterinary-Verified Internet Pharmacy Practice Site. Vet-VIPPS-accredited sites meet certain quality standards and comply with federal and state licensing requirements. BUDGETING FOR OTHER COSTS The Perlowitzes budgeted for food and pet insurance, but they soon discovered they had overlooked costs such as training, boarding and replacing the “excessive number of toys Gracie tears through,” says Dan. Before you bring Fido home, check with your home insurer to see what impact the dog may have on your coverage. Dog bites and other dog-related injuries to people accounted for more than one-third of all homeowners-liability claims paid out in 2016, and the average dog-bite claim was $33,230, according to the Insurance Information Institute and State Farm. To manage the risk (and depending on state law), some insurers exclude ISTOCKPHOTO.COM (2) exams or hereditary and congenital conditions, such as hip dysplasia, often seen in some large dog breeds. As with your own health insurance, if your pet is healthy throughout the year, you may not recoup the cost of your premiums. But if your pet suffers from an ongoing health condition or has an accident, the coverage may pay for itself. When shopping for a policy, carefully review what’s covered and what’s not. The insurer should clearly spell out the details, including any limitations or exclusions. “To increase the value of your policy, enroll your pets while they’re young and before they’ve been diagnosed with any medical conditions,” says Rob Jackson, co-founder of Healthy Paws Pet Insurance and Foundation. Then you are less likely to be denied coverage based on an exclusion for a preexisting condition. As with other types of insurance, it pays to shop around. Start by asking for recommendations from friends who have coverage or from a local vet, or visit www.petinsurancereview .com or www.petinsurance quotes.com for an overview of offerings. And you may be able to buy discounted coverage through your employer. According to the So- liability coverage for dogs or require owners to sign waivers of liability for dog bites. Other insurers categorize certain breeds as dangerous and charge their owners higher premiums. According to the Insurance Journal, pit bulls and rottweilers lead the pack in terms of dog-bite fatalities. Some insurers, including State Farm and Allstate, don’t ask the breed of a dog when writing or renewing homeowners policies and don’t track the breed involved in bite incidents. But if a dog bites someone and poses an increased risk, the insurer may charge a higher premium or choose not to renew the policy. Training. Group classes for socialization or basic manners and skills may be taught at a community center, a dog day care or a pet store and cost from $40 to $125 or more for four to eight weekly, onehour sessions, according to Costhelper.com. The AKC’s Canine Good Citizen training program costs about $100 for six weeks of training, a 10-point test and a certificate (look for a local program at www.akc.org). Some rental agencies, homeowners associations, and condo and co-op boards also require the certificate for doggy residency. Private classes with a trainer cost from $30 to $100 for each hour-long session, or about $240 to $600 for six sessions. Search for certified trainers and behavioral consultants at the Certification Council for Professional Dog Trainers (www.ccpdt.org/dogowners/certified-dogtrainer-directory). Boarding. To find a pet sitter or boarding facility, ask friends, family members and your vet for a referral, or visit Rover.com. Cats generally do best at home, as do nervous or aggressive dogs, but a confident and sociable dog may be well suited to boarding with other dogs. Pet-sitting in your home typically costs $10 to $65 per day. An overnight stay could run $50 to $75. Boarding runs the gamut from spartan, at $12 to $26 per day, to spa-like, for $22 to $55 or more per day. Pets on a Plane Flying With Fluffy Airlines publish guidelines and rules on their websites for traveling with or transporting pets. The rules differ for domestic and international travel, as well as for service animals. Here are some highlights for domestic travel. Space for pets carried on or checked as cargo is limited and offered on a first-come, first-served basis (excluding service animals), and traveling with pets isn’t allowed on all types of aircraft. Call ahead to check your itinerary and book your pet. Service animals and emotional or psychiatric support animals fly free. They must fit in your lap, at your feet or under the seat, and they can’t block the aisle or an emergency exit. Owners are generally required to notify the airline at least 48 hours before travel and submit a note from a doctor or licensed medical professional confirming the passenger’s disability and need. United and Delta also require owners to submit a signed health certificate or immunization record for the animal, plus a signed confirmation of animal training. Airlines prohibit puppies or kittens younger than 8 weeks from traveling. They have varying requirements for proof of vaccination and health certificates from a licensed vet. Carriers and crates must be sized and constructed to certain standards to ensure the animal’s comfort and safety. Even if a carrier or crate from a retailer is labeled “airline approved,” check the specific airline’s requirements. If you can, acclimate pets to their carrier or crate two to three weeks before departure. Carry on. You can carry on a dog or cat if it fits in a carrier small enough to fit under the seat in front of you. The “kennel” counts as one piece of carry-on luggage. Airlines will charge a flat, one-way fee of $95 to $125 at check-in for each segment of your flight. Pets traveling with TrueBlue members on JetBlue will earn an additional 300 TrueBlue points for each pet fee paid. Cargo. American and Delta charge $200 per crate. United charges by weight, from $201 for 10 pounds or less to $630 for 150 to 200 pounds (and $60 more to go to or return from Hawaii). Many airlines prohibit the transportation of brachycephalic breeds—short-nosed dogs and cats, such as pugs, boxers and Himalayans, that are prone to respiratory problems that may be exacerbated by stress and changes in air quality and temperature in a cargo hold. Overweight animals and those with preexisting health conditions may not fare well in cargo, either. The good news is that pet injury or death during air travel is rare. In 2016, 40 out of 506,994 animals transported as cargo on major passenger airlines died or were injured during the trip, according to the U.S. Department of Transportation. 05/2018 KIPLINGER’S PERSONAL FINANCE 67 LIVING Commentary DRIVE TIME David Muhlbaum The Best Way to Buy a Used Car Missing generation. In 2011, when vehicle sales were just starting to recover after the Great Recession, dealers sold only about 13 million new cars, compared with 17.2 million in 2017. “That hole in the market continues to have an effect,” says Smoke. “Today, we have 20 million fewer vehicles that are five to eight years old.” We’ve seen the effects of this “missing generation” before. Around 2012, the shortage of lightly used cars was so acute that in some cases, it made more sense to buy a new car—especially with manufacturers offering big discounts. No more, though. Even with generous incentives available on new cars, smart shoppers are going to find the best values among twoto three-year-old used vehicles because they’ve already lost the lion’s share of their initial value. That said, if you’ve been out of the market for a while, you might be taken aback when you peruse the used 68 KIPLINGER’S PERSONAL FINANCE 05/2018 car listings. The average transaction price of a new car has been rising steadily (and faster than inflation), and what people are paying for used cars has gone up as well. What’s more, leases that sharply restrict mileage (often to as little as 10,000 miles per year) are also driving up the prices of late-model used cars, as cars with low miles command a premium. If those prices make you flinch, how about a vehicle that has more miles yet is newer than an off-lease option? We’re talking about vehicles that have likely been in fleet service, such as used rental cars. Yes, we know such cars come with a stigma, but we think it’s overdone (they’re carefully maintained by the agencies), and it translates into lower prices. Plus, your choices aren’t just white Chevy Impalas and red Chrysler 200s anymore. Rental agencies are thinking more about resale when they populate their fleets. When you rent these days, you’re more likely to find yourself in something like a well-optioned Toyota RAV-4, and those are the vehicles heading to the used car lots. The best way to get a high-quality fleet car is to buy it directly from the rental company, rather than buying one that has gone to auction and into the used car world at large. Still, most of those LOOK FOR TWO- TO vehicles are going to cost five figures. If THREE-YEAR-OLD you’re looking for USED VEHICLES more-basic wheels, BECAUSE THEY’VE the current dearth ALREADY LOST of older models is going to be an issue. THE LION’S SHARE One suggestion: Skip OF THEIR INITIAL the used car lot (and VALUE. its potentially perilous subprime credit offers) and scour Craigslist and other websites for a car 10 years old or older, but with relatively low mileage. Ivan Drury, a senior analyst for Edmunds.com, says such cars are rare but worthy. “If someone kept it up and it has low miles on it, you have a diamond in the rough. It could go forever.” Be sure to have an independent mechanic look over the car. Although these older models may have plenty of miles ahead of them, lack of use can pose some problems of its own (dried-out seals or rotted rubber, for example) that a trained inspector can spot. YOU CAN REACH THE AUTHOR AT DMUHLBAUM@KIPLINGER.COM. POON WATCHARA-AMPHAIWAN M ost used car shoppers will find plenty of bargains in 2018. A record number of vehicles are coming off lease, increasing dealer supply and lowering prices—or at least keeping them flat. Plus, the vehicles finding their way to dealers’ lots better reflect what today’s customers want: crossovers, SUVs and trucks. But if you’re looking for an older used car, you are going to have a harder time finding what you want, and you might have to pay more than you were expecting. What’s going on here? It boils down to supply and demand. As Jonathan Smoke, chief economist for Cox Automotive (whose properties include KBB .com and Autotrader), points out, “New vehicles are the source of tomorrow’s used vehicles.” And in the early part of this decade, there was less supply. YOUR YOUTH WAS NO TIME TO BE SENSIBLE BUT NOW MIGHT BE. Bet you never thought you’d get excited reading an ad about the joy of Municipal Bonds? The Main Advantages of Municipal Bonds Investors are attracted to municipal bonds for three reasons; safety of principal, regular predictable income and the tax-free beneﬁts. Together, these three elements can make a compelling case for including tax-free municipal bonds in your portfolio. Potential Safety of Principal When investing in municipal bonds, investors are paid back the full face value of their investment at maturity or earlier if called, unless the bond defaults. This is important because many investors, particularly those nearing retirement or in retirement, are concerned about protecting their principal. In May of 2016, Moody’s published research that showed that rated investment grade municipal bonds had an average cumulative 10-year default rate of just 0.09% between 1970 and 2015.* That means while there is some risk of principal loss, investing in rated investment-grade municipal bonds can be an important part of your portfolio. and, depending on where you live, may also be exempt from state and local taxes. Tax-free can be a big attraction for many investors. Potential Regular Predictable Income Municipal bonds typically pay interest every six months unless they get called or default. That means that you can count on a regular, predictable income stream. Because most bonds have call options, which means you get your principal back before the maturity date, subsequent municipal bonds you purchase can earn more or less interest than the called bond. According to Moody’s 2016 research,* default rates are historically low for the rated investment-grade bonds favored by Hennion & Walsh. About Hennion & Walsh Since 1990 Hennion & Walsh has specialized in investment-grade tax-free municipal bonds. The company supervises over $3 billion in assets in over 16,000 accounts, providing individual investors with institutional quality service and personal attention. Our FREE Gift To You We’re sure you’ll want to know more about the beneﬁts of tax-free Municipal Bonds. So our specialists have written a helpful Bond Guide for investors. It’s free and comes with no obligation whatsoever. Potential Tax-Free Income Income from municipal bonds is not subject to federal income tax FREE Bond Guide Without cost or obligation Call (800) 318-4850 © 2018 Hennion & Walsh, Inc. Securities offered through Hennion & Walsh Inc. Member of FINRA, SIPC. Investing in bonds involves risk including possible loss of principal. Income may be subject to state, local or federal alternative minimum tax. When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. *Source: Moody’s Investor Service, May 31, 2016 “US Municipal Bond Defaults and Recoveries, 1970–2015. Past performance is not a guarantee of future results. Ultimate Rewards travel portal for 1.25 cents apiece— meaning you’d need to spend only 40,000 points to buy that same $500 ticket. 3. Check with partner airlines. Get More Punch From Your Points Use these strategies to unlock more value when you book award tickets. POINTS-AND-MILES BLOGS are awash with strategies on how to snag free flights by racking up rewards points, often through everyday spending on credit cards. But when you’re earning and redeeming points, a few lesser-known tricks can save you money and squeeze more value from your travel rewards. 1. Compare paying cash with using points. When you book an award ticket, points cover only the base fare. Taxes, fees and surcharges can add anywhere from a few bucks to a few hundred dollars. Depending on how much those fees add, “it may be better to pay for the ticket yourself instead of blowing 100,000 miles and paying a fuel surcharge,” says Chris Lopinto, presi70 KIPLINGER’S PERSONAL FINANCE 05/2018 dent of ExpertFlyer.com, a subscription service for air travel information. Fuel surcharges (sometimes referred to as carrierimposed surcharges) can add, say, $800 to the cost of a round-trip business-class flight to Europe or $300 to the cost of an economyclass flight, says Gary Leff, author of travel blog ViewFromTheWing.com. United doesn’t charge these fees, but American Airlines and Delta do when you redeem their miles for flights with certain partner airlines. Some fees are avoidable, such as the “close-in fee” (typically $75) some airlines charge for booking award travel less than 21 days before departure. Others are minimal, such as the September 11 security fee ($5.60 one-way or $11.20 round-trip) for any flight originating in the U.S. 2. Tap the power of the portal. The best way to stay flexible and jump on the best deal is to use a credit card that racks up “transferable” points. For example, the Chase Ultimate Rewards and American Express Membership Rewards programs let you transfer your points from participating Chase or Amex cards to a number of airline (and hotel) partners. They also let you use your points to purchase flights reserved through their travel portals. To figure out which redemption is better for a particular flight, you first need to calculate the value of your points by dividing the cash price of the plane ticket by the number of points you need for the fare. Say you have racked up 50,000 points with the Chase Sapphire Preferred card and a flight that costs $500 in cash requires those 50,000 points to book it. If you were to transfer your stash to buy that ticket, each point would be worth one cent. But Preferred cardholders can also redeem their points through the 4. But beware of nonexistent seats. An airline may release more seats to its own frequent fliers than to members of partner programs. If seats appear to be available on a partner airline but you have problems booking, check with the program where you earned the miles to be sure you’re eligible for the seats, says Lopinto. Also, airline search tools sometimes show “phantom award space”—seats that appear to be available but that you cannot actually reserve—when you try to book on partner airlines. Before you transfer your points, make sure the seat exists by initiating the booking process or confirming with an airline agent. MIRIAM CROSS email@example.com ISTOCKPHOTO.COM TRAVEL Sometimes an airline’s partner requires fewer miles to book the same trip than the airline’s own program— even for a domestic flight. For example, flying roundtrip from the continental U.S. to Hawaii on Delta recently cost 52,000 miles using Delta’s award program but only 30,000 miles if you booked through Flying Blue, the frequent-flier program of partners Air France and KLM, says Emily McNutt, of ThePointsGuy.com. 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SPECIAL SITUATIONS AFTER THREE YEARS Form W-2s (you can shred pay stubs after you’ve checked them against your W-2s) Form 1099s (capital gains, dividends, interest on investments) Form 1098s (if you deducted mortgage interest) Canceled checks and receipts for charitable contributions Records relating to: ● Eligible expenses for withdrawals from health savings accounts and 529 college-savings plans ● Contributions to a tax-deductible retirement-savings plan, such as a traditional IRA Records of contributions to a nondeductible IRA: three years after the account is depleted Investing records showing purchases in a taxable account: three years after you’ve sold the investments Home-purchase documents and receipts for home improvements: three years after you’ve sold the home Records relating to: Loss from worthless securities: three years after you’ve claimed the loss on your return ● Loss from bad debt: three years after you’ve claimed it ● AFTER SIX YEARS Receipts for business income and expenses, if you’re self-employed 72 KIPLINGER’S PERSONAL FINANCE 05/2018 ILLUSTRATION BY THE PROJECT TWINS THAT DINNER WON’T PAY FOR ITSELF. 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