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45 Cut your cable bill Q Get a better rewards card Q Set up a budget Q

Plus 42 more! It’s amazing what you can do in just a few minutes. p 26



Trim your taxes in retirement p 38 Tours that cater to every traveler p 62 Best ways to pay for a remodel p 70 How to pick bonds on your own p 51

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VOL. 70 NO. 9


proof your home insurance (42). Money manners (43). Small-business credit cards (44).


of fast-growing companies trounced value stocks for more than a decade. But value is making a comeback this year, and these 10 funds are on a roll. 51 WHY YOU SHOULD BUY BONDS ON YOUR OWN The big advantage: You get back

the face value of the bond when it matures. Here’s how to get started. 54 THE RIGHT ETF MIX FOR YOU We put

together four portfolios. Three hold funds you can buy without paying commissions, and the fourth yields a healthy 5.1%. PLUS: Changes to the Kiplinger ETF 20. 59 INVEST IN REAL ESTATE? IT’S EASY




These five real estate investment trusts offer above-average yields and great growth prospects. 58 INCOME INVESTING My three-day rule, by Jeffrey R. Kosnett.

8 FROM THE EDITOR What investors



should do.

minutes, you could snag a better smartphone plan. Got 30 minutes? Find funds with lower fees. An hour? Trim your auto insurance premiums. Our ideas will save you money and simplify your life.


10 LETTERS Forget foreign stocks?

AHEAD 13 Topic A: How U.S. investors can

take advantage of Britain’s exit from the EU . . . States roll out retirement savings plans . . . New strategies for college financial aid . . . Knight Kiplinger on money and ethics.

34 MAKING A PLAN FOR A SPECIAL-NEEDS CHILD Parents of disabled children face

overwhelming financial challenges. Some benefits and programs can help, and planning for the future is critical.


tours can save hassles when you visit remote or exotic destinations. One of the trips on our list is bound to match your travel style. 68 DRIVE TIME One-click used car buying, by David Muhlbaum.

38 TRIM YOUR TAXES IN RETIREMENT 18 MONEY SMART WOMEN Men, women and money, by Janet Bodnar.


20 OPENING SHOT Finding better alternatives, by James K. Glassman. 24 SUCCESS STORY Starting their business was a snap, by Patricia Mertz Esswein.

You must start withdrawals from taxdeferred savings at 70½, but we tell you how to keep more in your accounts.

70 THE LOWDOWN What you need

to know about home remodeling, by Patricia Mertz Esswein. 72 THEN AND NOW A city comes back

33 ASK KIM Tax deductions for volunteers.

from the brink.

40 RETHINKING RETIREMENT How to retire in harmony, by Jane Bennett Clark.

COVER ART: Jon Buckley and Kevin Childers 09/2016




Where They Stand on Personal Finance Issues


From jobs to student loans to Social Security, see how Hillary Clinton or Donald Trump could affect your bottom line if elected president.

1. Feds Spell Out Social Security Rules Build Your Wealth

Kiplinger’s Economic Outlooks

Prosper from the insights of expert financial planners in our new Wealth Creation channel.

Stay ahead with exclusive forecasts of inflation, GDP, jobs and more.

QUIZ YOURSELF Buying a Used Car

2. Which States Tax Social Security? 3. 10 Things to Know re: Social Security 4. How Well Do You Know Social Security? 5. Costly Social Security Mistakes


Learn the tactics that will get you the best deal on your next set of wheels.

Sort Kiplinger’s 300 top college values by the criteria most important to you.

ONLINE STORE Investing for Income Kiplinger’s Investing for Income shows you how to generate 5%, 6%, even as much as 7% cash yield, year in and year out—whatever the market conditions. Subscribe now!




The median cost of a funeral runs about $8,500. Columnist Bob Niedt offers practical tips for keeping prices in check.

With interest rates so low, focus on shorter-term bond funds to add ballast to your portfolio, advises columnist Steve Goldberg. links/funeral links/bondfunds

Mark your calendar for our next free live chat, on September 15, 9 A.M. to 5 P.M. Share your money questions with trusted financial advisers.







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WHY CONSUMER STAPLES SHOULD BE ON YOUR SHOPPING LIST. Greater Return Annualized Total Return by Sector (1985–2015)*

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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. Past performance is no guarantee of future results. Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies. *Source: Haver Analytics, Fidelity Investments, as of July 31, 2015. Past performance is no guarantee of future results. Sectors are defined by the Global Industry Classification Standard (GICS) and are based off the top 3,000 U.S. stocks by market capitalization. Annualized Total Return by Sector (1985–2015): Health Care (14.93%); Consumer Staples (14.47%); Energy (11.15%); Consumer Discretionary (11.13%); Industrials (10.94%); Technology (10.73%); Utilities (10.49%); Financials (10.41%); Materials (10.04%); Telecom (9.16%). Standard Deviation of Annual Total Returns (1985–2015): Technology (25.45%); Materials (20.73%); Consumer Discretionary (19.27%); Financials (19.26%); Energy (19.08%); Telecom (18.93%); Industrials (17.72%); Health Care (15.93%); Consumer Staples (14.32%); Utilities (14.02%). Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2015 FMR LLC. All rights reserved. 727880.2.0

An investment with endless possibilities


Knight A. Kiplinger Janet Bodnar

Manuel Schiffres SENIOR EDITOR, MONEY/LIVING Mark K. Solheim MANAGING EDITOR Barbara Hoch Marcus SENIOR EDITORS Jane Bennett Clark, Jeffrey R. Kosnett, Anne Kates Smith SENIOR ASSOCIATE EDITORS Sandra Block, Nellie S. Huang, Marc A. Wojno (research) ASSOCIATE EDITORS Patricia Mertz Esswein, Daren Fonda STAFF WRITERS Miriam Cross, Kaitlin Pitsker CONTRIBUTING EDITORS Lisa Gerstner, James K. Glassman, Kathy Kristof, Kimberly Lankford, Jeremy J. Siegel OFFICE MANAGER Glen Mayers EXECUTIVE EDITOR


Frederic Fane Wolfer Rachel McVearry, Denise E. Mitchell, Elizabeth Whitehouse SENIOR REPORTER Ryan Ermey REPORTERS Lisa Elaine Babb, Thomas H. Blanton, Rivan V. Stinson INTERN Janine Puhak COPY CHIEF



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1 National statement savings average rate courtesy of’s 2016 Passbook & Statement Savings Study, as of 4/13/2016; survey is compiled semi-annually in April and October. 2 Barclays Online Savings Annual Percentage Yield (APY) is valid as of 6/20/2016. 4/13/2016. No minimum opening balance or deposit required to open. Fees could reduce the earnings on the account. Rates may change at any time without prior notice, before or after the account is opened. No minimum balance to open, but for interest to post to your account you must maintain a minimum balance that would earn you at least $0.01. © 2016 Barclays Bank Delaware, member FDIC.

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What Investors Should Do


■ On page 46, senior associate editor

Nellie Huang and senior editor Anne Kates Smith make the case for value stocks—stocks that are cheap in rela8



tion to a company’s sales, profits or underlying assets. Growth stocks have led the charge over the past decade, but so far this year, value is ahead. Nellie says she favors active managers who “invest opportunistically and buy on little dips.” ■ For investors who prefer an indexed

approach, associate editor Daren Fonda makes the case for exchangetraded funds with rock-bottom expenses. In his one-year update of the Kiplinger ETF 20—our top choices among ETFs—Daren adds a new fund that invests in mortgages and other types of real estate debt (see page 56). On page 54, he assembles three portfolios, for aggressive, moderate and conservative investors, plus an all-income package. Whatever your goals, the portfolios “can serve as the bedrock of your investment program for years,” writes Daren—Brexit votes and other market crises notwithstanding. ■ If the stock market still has you spooked, senior editor Jeff Kosnett makes the case for individual bonds on page 51. It’s true that if interest rates were to rise, bond prices would fall. But you can protect yourself, and lock in your yield, by purchasing individual bonds, rather than funds, and holding them to maturity. As Jeff writes, “As long as the issuer makes good on its obligations, you know that you’ll get back the face value of the bond.”

The risk factor. Before you make any

move, it’s critical to know how much

Before you make a move, know how much risk you can handle. risk you can handle. In our July story on “The Right Retirement Mix,” we wrote about the difference between risk tolerance—a measure of your psychological ability to handle losses— and risk capacity—a practical measure of how much you’ll need to cover your retirement expenses and how much you can afford to lose. As one reader observes in our “Letters” column (page 10), you need to consider both. And wherever you are on that scale, we’ll give you options, no matter how tough a time it is to invest. P.S. It’s worth taking a few minutes to read our story on fast financial fixes (page 26). You’ll find dozens of ways to spiff up your finances in as little as 15 minutes. ■

janet bodnar, editor follow janet’s updates at www.twitter .com/janetbodnar.


very month our staff meets to brainstorm story ideas for the investing section. Our meeting for this issue had us in something of a pickle. As one editor put it, “I don’t know what to say. It’s a tough time to be an investor.” Consider the litany of risks in today’s markets. Interest rates continue to plummet, increasing chances that long-term bonds would be highly vulnerable to an eventual rise in rates. Stocks, the obvious alternative, have risks of their own, with a jittery bull market susceptible to shocks such as the United Kingdom’s vote to leave the European Union (see “Ahead,” on page 13, and “Income Investing,” on page 58). Particularly worrisome are highdividend stocks—notably utilities, whose prices have been pushed up by income-starved investors. Nervous investors who get out of the markets may feel safer, but they won’t be any richer; cash savings are yielding next to nothing. And then there’s the uncertainty associated with a lowgrowth economy, a high-tension political campaign and global angst. Bank of America Merrill Lynch concludes: “The only certainty is uncertainty.” The outcome of our brainstorming session was a suite of stories that offer something for every investor, depending on your preferences and your personal situation.


aate for a retiree? Even with a current yield of 3.2%, aaccording to Morningstar, n note that the portfolio w would have lost 52.9% bettween October 9, 2007, and M March 9, 2009, nearly as m much as the 55.3% loss for S Standard & Poor’s 500-stock iindex. Limiting yourself to tthis portfolio would be like eeating a 10-course meal b before going on the world’s ccraziest roller coaster. Mark Pappa Wethersfield, Conn.

Forget Foreign Stocks? I agree with James Glassman that if you own U.S. stocks with significant overseas sales, you have more than enough foreign diversification (“Opening Shot,” July). Investors are often given inappropriate advice and have too much exposure to international stocks. Mr. Glassman, you have a fan for life. Len Napoli Manahawkin, N.J. I think Glassman made some good points, but he left risk out of the conversation. His 10-stock portfolio might work for a 27-yearold, but would such a 100% stock portfolio be appropri10




How will you cut taxes in retirement? Convert a traditional IRA or 401(k) to a Roth 47% Contribute to a Roth IRA or 401(k) 41% Take regular withdrawals from an IRA or 401(k) 28% Invest in taxable accounts 27% Work past age 70½ 18% Invest in a QLAC

2% For more on how you can reduce required minimum distributions, turn to page 38.


Fair play. Anyone who gains F a admission to and graduates f from a university already h significant earning has p power unrelated to a coll lege’s curriculum and r reputation (“Ahead,” July). I is therefore grossly unfair It f a college to siphon away for p part of that raw income p potential. Instead of taking a percentage of a graduate’s t total income, why don’t colleges take a percentage of the grad’s incremental income? If the college degree doesn’t materially add to a grad’s earning power, the grad owes nothing. Steve Krohn Charlottesville, Va. Investing in retirement. Brava to Kathy Kristof (“The Right Retirement Mix,” July)! As a 73-year-old, I know that I push myself not to lowball stocks, despite the fact that so much of what is written on this subject emphasizes decreasing your stake in equities as you approach or are in retirement. I also appreciated the distinction Kristof makes between risk capacity and risk tolerance, and her

ONLINE CHATTER OUR STORY ON REVIEW sites elicited this thoughtful comment (“Can You Trust Online Reviews?” July): “I usually look for a large number of reviews before making a purchase, because unhappy people seem more likely to make the effort to post comments than happy customers. I also like to leave reviews, good or bad, to try to assist others. I once left an unfavorable review on a Lenovo product site, and it was rejected. I thought it was factual and objective. That experience negatively colored my opinion about the objectivity of reviews posted on the site.”

clear explanation of why both must be considered. Frank Callahan Barnegat, N.J. ●● CLARIFICATION

The number “27.4” in Table III of IRS Publication 590-B is a divisor for calculating the required minimum distribution at age 70, and not actual life expectancy (“Happy Half Birthday, Baby Boomers,” July).


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 13 St., N.W., Washington, DC 20005, fax to 202-778-8976 or e-mail to Please include your name, address and daytime telephone number.




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WHAT BREXIT MEANS FOR U.S. INVESTORS How to take advantage of opportunities in volatile markets. BY ANNE KATES SMITH



recent break from the European Union sent shock waves across the pond as global markets sank on news of Britain’s “Brexit” vote. The recovery was quick, but no one can say for sure how events will unfold from here—politically, economically or financially. Brace yourself for plenty of volatility. But investors

who don’t overreact can survive Brexit unscathed, and they may come out ahead. In the two trading days following Britain’s surprising vote, Standard & Poor’s 500-stock index plunged 112 points, or 5%. But the broad market measure promptly cut its losses. A week after the vote, the S&P had shaved its Brexitinduced loss to less than 1%.

At its recent close of 2099, the S&P was up 3% for the year and close to its May 2015 high. The market action underscores the importance of not making snap decisions about your investments. “Better to wait for opportunities to be revealed by volatility than to be a part of it,” says Andrew Bell, chief executive of Witan Investment Trust, in London. Although there may be more gut-wrenching days ahead, similar geopolitical shocks provide an encouraging blueprint, says Jeff Kleintop, chief global investment strategist at Charles Schwab. He points to the Japan earthquake and related nuclear accident 09/2016

in 2011, the U.S. debt-ceiling standoff later that year, and the European debt crisis of 2012. In all three instances, single-digit-percentage market declines on the first day turned into double-digit losses over time, with the S&P 500 losing 16%, 14% and 11%, respectively. But stocks rebounded to their pre-shock levels in three or four months, says Kleintop. Still, economic growth will likely slow as countries reconfigure their trade and economic relationships, and currencies realign. Kiplinger predicts that Europe will escape recession this year, but the odds are 50-50 for 2017. We expect U.S. economic growth of 1.8% this year, down from KIPLINGER’S PERSONAL FINANCE



an earlier forecast of 2%. The good news for U.S. stocks is that S&P 500 firms derive less than 3% of sales from the U.K., making Brexit a speed bump, not a brick wall, for a resilient market. Here’s what to do if volatility erupts anew, because of Brexit or anything else. Rejigger your portfolio. A Brexit-led flight to U.S. securities only intensified 2016’s bond market rally, pushing yields on 10-year Treasuries below 1.5%, down from 2.3% at the start of the year. (Bond prices rise when yields fall.) If your portfolio has strayed from your long-term objectives, consider taking recent heady profits in bonds and moving cash into shares of large U.S. companies.


STATES JUMP INTO THE IRA BUSINESS New retirement savings plans are aimed at workers without access to a 401(k).

Geoffrey Sanzenbacher is a research economist at the Center for Retirement Research at Boston College. States are starting to set up 401(k)-style retirement plans. Why? The majority of people

save in a 401(k) or they don’t save at all. But only one-third of employers offer a plan, and only half of workers are covered by one. The idea of these statesponsored plans is to overcome that hurdle.

Evaluate your risk tolerance.

Can you stomach a Brexitcaliber calamity? If not, you may have too much invested in stocks. “This type of financial self-assessment can only be done during periods of actual losses—it can’t be simulated,” says strategist David Lafferty, of Natixis Global Asset Management. Have a shopping list ready.

Now is the time to buy highquality dividend stocks, says Hank Smith, chief investment officer of Haverford Trust. Stocks he likes include Johnson & Johnson (symbol JNJ, $121) and United Technologies (UTX, $103). Among banks, which suffered some of the largest Brexit losses, he recommends Wells Fargo (WFC, $47), which does most of its business in the U.S. 14


How do the plans work? There

are three broad alternatives. The first brings together private plans into a marketplace and allows small employers to pick a plan out of this portal without requiring that they do so. That’s in place in Washington State and New Jersey, and proposed in Utah and Indiana. In the second model, a state would set up an IRA managed by a private-sector provider but overseen by the state. Employers would be required to participate and to enroll employees automatically, although workers could opt out. As long as the role of employers is minimal, these plans are not covered by the federal law regulating retirement plans that employers establish voluntarily. 09/2016

California, Connecticut, Illinois and Oregon are all taking the auto-IRA approach. None of the plans is up and running yet. My guess is you’ll see money in them by year-end 2017. In the third approach, the

state creates a prototype 401(k) in which employers can choose to enroll. Massachusetts did something like this for small nonprofits. Isn’t giving up federal protections in the auto-IRA a big shortcoming? Only if states don’t

do due diligence to make sure people’s money is protected—and I think states are doing that. We prefer the auto-IRA because it’s required and automatic. One of the biggest barriers to retirement saving is inaction. The auto-IRA overcomes that. Are there other objections, such as too few investment choices?

Investments would be limited, but there are reasons for that. States want investments to be simple, such as low-fee index or target-date funds. Complexity can scare people off, and it’s expensive. Some people don’t like that the auto-IRA doesn’t allow an employer match. That would trigger federal regulation, and a fear of overwhelming employers. Are there alternatives?

A federal auto-IRA has been proposed, but it isn’t off the ground. People can save through federal myRa accounts, but you have to take the initiative to enroll, and the maximum balance is only $15,000. People who want a lot of investment options would most likely open their own IRA; state plans are for people who may not want to make those choices. ANNE KATES SMITH





NEW STRATEGIES FOR FINANCIAL AID An earlier timeline could mean changing the way you manage income and assets. STARTING THIS FALL , THE

process of applying for financial aid gets a reboot. College students and their families will be able to file the Free Application for Federal Student Aid—used to determine financial aid from the government as well as from colleges—three months earlier, or as early as October 1. Instead of estimating data from tax returns not yet filed, families



The Kiplinger Letter


will use earlier returns to report income and assets. The new timeline will change other parts of the financial aid process as well. Some colleges may supply families with financial aid offers (which now typically arrive in March or April) earlier in the student’s senior year, says David Levy, of Edvisors. Such a move would give families more time to

review packages and contact schools with questions or concerns before deciding which school to attend. Some colleges have moved up priority deadlines for applying for institutional aid. Families should submit the FAFSA as early as possible, as financial aid is often doled out on a first-come, first-served basis. To secure the best aid offer, you may need to tweak the way you manage income and assets that have an impact on financial aid. For example, if you plan to realize capital gains on your stocks or bonds, you’ll want to do so before January 1 of your student’s sophomore year of high school to avoid having the money count as income on the FAFSA— a year earlier than on the old timeline. The new schedule also changes the strategy for grandparent-owned 529 savings plans. Previously, withdrawals from such accounts counted as student income during the first three years of college. Now, distributions made during the last two years aren’t reported on the FAFSA. So if you can, delay cashing in on the grands’ generosity until those final years. KAITLIN PITSKER

Other wireless carriers are likely to follow Verizon’s move to bundle smartphone payments into bonds. Such a new category of assetbacked securities would offer wireless firms the chance to reduce borrowing costs and reach out to new investors. The market for such securities could become one of the largest in the U.S., surpassed only by the markets for securitization of auto loans and credit cards. (

ZUMBA IN AISLE 3 Next time you run to the grocery store for milk or bread, consider staying for Zumba and a pedicure. From coast to coast, major grocers are introducing in-store amenities. What you may find: Health and spa services. Exercise is one of the few things you can’t buy online, and grocery stores are filling the void. Squeeze in a yoga, barre or Zumba class at ShopRite before shopping, or treat yourself to a facial, massage, wax or mani-pedi at a Whole Foods spa. Polish your culinary skills with a healthy-cooking class at Publix or Giant. Home improvement. Ace Hardware has partnered with grocers in the Midwest and South to open hardware stores-within-a-store that offer 86% of the chain’s typical product selection. Among the best-selling items at the grocery locations: lawn and garden supplies, plumbing equipment, seasonal merchandise, and tools. Free child care. You won’t need to worry about kiddie meltdowns in the cookie aisle at Kroger and ShopRite. Both stores offer free child care at select locations while you shop. JANINE PUHAK





A handful of high-tech services aim to provide personalized advice. PLANNING A TRIP USUALLY

involves either slogging through dozens of choices online to find the best deal or hiring a travel agent to do the legwork. Now you can turn to a new kind of travel app that bridges the

gap between the two. These hybrid services combine artificial intelligence with human agents to curate and book travel options according to your preferences or handle problems you encounter on your

trip. You communicate through online chat, e-mail or messaging. Some services are specialized: Hello Scout ( suggests local activities for guests at partnered hotels, for example, while Emma ( is for booking hotel rooms. Fees are all over the map: Emma is free; Lola (www.lola, a full-service app, is free, but there’s currently a waiting list to use it; and Hello Scout is free for chatting, but booking is, tra. Pana (,

another full-service app, costs $19 per month or $199 a year. Sites such as Kayak, Hipmunk and Expedia have gotten into the act, adding features that let you text, e-mail or chat about reserving flights or hotels. The services’ personalized recommendations aren’t always ready for prime time, says Douglas Quinby, of Phocuswright, a travel-industry research group. Expect improvement as more users sign up. MIRIAM CROSS


How much notice should you give your boss when you quit?


I’m with you on this, given the facts of the case. Her abrupt resignation was inconsiderate, leaving your boss scrambling to fill a vacancy and probably putting a burden on her former colleagues to pick up the slack. She owed all of you (probably not legally, but ethically) at least two weeks’ notice, and ideally more. In most cases, a new employer will understand, and even respect, a new hire’s desire to do right by her current colleagues. And a more thoughtful resignation might have improved her odds of getting a good reference from your boss if she ever needed one. It sounds as if your firm still honors the traditional “social compact” between employer and staff, under which everyone works in an environment of consideration and trust. I’ll bet that if your boss needed to terminate an employee for business purposes (not poor performance), that employee would be given enough notice to find




another job, plus either generous severance or the flexibility to continue working there while looking. Sadly, this spirit of trust is long gone at many companies, especially big firms. Too many employers terminate staff abruptly and coldly, escorting them from the office, depriving them of collegial farewells—sometimes even assuming they will try to sabotage the company. And some bosses, when given notice that an employee will be voluntarily resigning in a few weeks, will angrily tell that person to clear out immediately. At a company like that, I can understand why some workers might believe it’s perfectly all right not to give any advance notice—and some employment experts would agree. The workers are just acting defensively. HAVE A MONEY-AND-ETHICS QUESTION YOU’D LIKE ANSWERED IN THIS COLUMN? WRITE TO EDITOR IN CHIEF KNIGHT KIPLINGER AT ETHICS@KIPLINGER.COM.



I work at a small, lightly staffed company. Everyone is crucial to our success, which is precarious at times. One of our key colleagues just quit with no advance notice to our boss, who is a very fair employer. Our departing colleague said her new employer wanted her to start ASAP. I think this was shabby of her. What do you think?

CALENDAR 09/2016

Higher earnings bring greater rewards Cutting the cord gets a little easier as Netflix begins exclusive streaming of new films from Disney, Lucasfilm, Marvel and Pixar. To learn how ditching cable might save you money, head to

9 A.M. to 5 P.M. to chat with financial advisers from NAPFA. They’ll field questions on topics ranging from student debt to retirement planning.



The Fall Finovate Conference kicks off in New York City. Dozens of companies, ranging from the old guard to new start-ups, will demonstrate products on the cutting edge of financial technology.

Build your emergency fund during National Preparedness Month by paying yourself first. Schedule automatic transfers into savings from your checking account after each paycheck arrives. RYAN ERMEY



FRIDAY, SEPTEMBER 9 Keep an eye on the stock market after the United Kingdom announces its new prime minister. Markets tumbled in June following the announcement of the U.K.’s departure from the European Union (see page 13). It will be up to the new PM to invoke the EU’s Article 50 to make “Brexit” a reality.

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JANET BODNAR > Money Smart Women

Men, Women and Money WHEN I GET A MASSAGE,

as I do periodically, I like to park my brain in neutral and bask in the serenity. So imagine the jolt when, a few months ago, my massage therapist wanted to spend our hour talking— about Social Security. A divorced woman in her fifties, she had heard that she could apply for Social Security on her former husband’s record. Was that true, she wanted to know, and if so, would it have any effect on her ex-spouse’s own Social Security benefit? So instead of parking my brain in neutral, I had to shift into overdrive to explain the nuances of Social Security (yes, if her marriage had lasted 10 years, she could apply for benefits on her husband’s record once she’s 62, and no, it wouldn’t affect his Social Security). So much for my peaceful massage. A few weeks later, I sat down for my regular haircut, assuming I could zone out while my stylist snipped away. But she wanted to talk—about her retirement plan. She thought that as a self-employed person she could sock away much more than she could in a traditional IRA, but she was hesitant to raise the subject with her accountant. I confirmed that she was probably eligible for a Simplified Employee Pension or individual 401(k), and that trig18


gered a discussion about retirement investments that lasted as long as my haircut. It occurred to me later that both women were in tune with the Kiplinger’s subscribers we surveyed earlier this year to learn more about how they invest. When we asked where they learn about personal finance, women were more likely than men to say that they talk to friends and family or ask questions of a financial adviser—or, in some cases, a client who happens to be the editor of a personal finance magazine. Gender gap. That’s just one of

a number of ways in which men and women differ in 09/2016

their attitudes toward money. After we published our April cover story on the secrets of women investors, I had a lively exchange with a few of our male readers, who wondered why we write occasional stories geared toward women. After all, they pointed out, financial products are gender neutral. “Let financial advice stand on its own merits,” wrote Al Oxley of Kalamazoo, Mich. I totally agree. But women often use financial products in different ways than men because they take a different approach or find themselves in different circumstances. For example, as we reported in April, women tend to

trade stocks less often than men—and they get better returns. In our special report on women and money in the June issue, we focused on the fact that women tend to live longer than men, which leads to worries about making their money last and paying for health care as they age. Our reporting also turned up evidence that men and women even speak a different language when it comes to money. Annamaria Lusardi, director of the Global Financial Literacy Excellence Center at the George Washington University School of Business, says her research shows that jargon and technical terms are more off-putting to women. In teaching her own classes, Lusardi consciously starts with plain English and “builds the language of finance.” Starting this month, we’re going to follow up our series of stories with a regular column that addresses—in plain English— the financial concerns of women. But like all of our stories, this column will stand on its own merits and have practical applications for men, too. For example, men who read the special report in our June issue learned a lot about maxing out retirement savings, leaving a legacy and paying for health care in retirement. And we hope they have shared that knowledge with the women in their lives. My mantra has always been that men and women working together make a socko combination, and we want to make sure that each partner feels comfortable with the challenge. ■



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JAMES K. GLASSMAN > Opening Shot

Finding Better Alternatives

T Using hedging strategies will usually produce slightly lower returns over the long run, but the smoother ride is worth the cost.




You can substitute alternative investments for some of your bond holdings. An alternative is an asset class that moves out of sync with the stock market. One popular example is gold. On June 24, the day the outcome of the U.K. vote to leave the EU became known, SPDR Gold Shares (symbol GLD, $126), an exchange-traded product that tracks the price of the commodity, rose 4.9%, while SPDR S&P 500 ETF (SPY, $209), which tracks Standard & Poor’s 500-stock index, fell 3.6%. In 2008, when the S&P 500 ETF plunged 36.8%, the Gold fund gained 5.0%. In 2013, when the stock market ETF soared 32.2%, the Gold fund sank 28.1%. (Prices are as of June 30.) Gold and stocks sometimes move together—as in 2009, 2010 and 2012— but, generally, they orbit different planets. Although I’m not a fan of gold, it is clear its meanderings aren’t determined by the same forces that move stock prices. Shift to neutral. Another example of an alter-

native investment is the market-neutral fund, whose manager tries to take market risk out of the picture by constructing a portfolio that balances long and short positions. Longs are simply traditional stock purchases, made in the hope that prices will rise. When you go short, you borrow a stock from someone else, sell it immediately, and then hope it declines in value so you can buy it back and return it when it’s worth less—and pocket the difference. In a market-neutral fund, a manager may go long with one stock and short with another one in the same sector, making a profit if the long does better than the short. For example, a manager might decide that Coca-Cola (KO) is superior to Pepsico (PEP). She buys $1 million worth of Coke stock and shorts $1 million worth of Pepsi stock. Over a year, let’s say that the overall market is up, and Coke rises by 20%, but Pepsi increases by just 5%. The fund makes a $200,000 profit on Coke stock and suffers


he big drop in world markets after the United Kingdom’s shocking vote to leave the European Union is only the latest reminder that investors need a variety of eggs in their portfolio baskets. Large caps, small caps, Asian stocks, European stocks, high-yield bonds, oil, copper—practically everything took a dive. The same happened in 2008. Not only did large-capitalization U.S. stocks lose 37% of their value, but real estate, commodities and foreign stocks tanked as well. Real diversification demands assets that don’t move up and down in tandem. You need a strategy for softening the impact of market setbacks. Using hedging strategies will usually produce slightly lower returns over the long run, but, in my view, the smoother ride you get in return is worth the cost. I would be happier with a 6% return year after year than a 25% gain one year and a 10% loss the next. The traditional wisdom for hedging a portfolio is to buy bonds to temper the ups and downs of stocks as well as provide consistent income. Medium- and long-term Treasury securities, with maturities ranging from, say, seven to 15 years, have thrown off interest of about 5% annually over the past century, with no risk of default. So a portfolio with half of its assets in Treasuries and half in a diversified bundle of U.S. stocks has produced long-term returns averaging about 7.5% annually. Even better, in no 10-year period over the past 90 years has such a portfolio ever lost money, according to Morningstar. Investors, however, face two big hurdles: Bonds today are not paying 5% interest, and U.S. stocks seem unlikely to match their long-term average return of 10% per year. The 10-year Treasury is yielding 1.49%. If you believe stocks will return a few percentage points per year less than they have in the past, a 50-50 portfolio will, on average, return less than 6% a year. There is, however, another solution.

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With the exception of 2008, Berkshire Hathaway’s annual returns have diverged nicely from those of the S&P 500 over the past decade.

a $50,000 loss on Pepsi stock, for a net gain of $150,000, not including dividends. What if the overall market falls? The fund can still make money as long as Coke outpaces Pepsi. Say that Coke declines by 10% but Pepsi drops by 25%; then the fund will lose $100,000 on Coke but make $250,000 on Pepsi, for a net gain of $150,000. Market-neutral strategies are typically the province of highly paid hedge-fund managers. Some of the best public mutual funds in this sector require lofty minimum investments and charge high fees. Vanguard charges just 0.25% a year for its MARKET NEUTRAL FUND (VMNFX), the lowest fee of any mutual fund in the category, but it requires an initial minimum investment of $250,000. (The 0.25% figure excludes extra costs involved in selling short.) Otherwise, the pickings in this category are slim. Among no-load funds with reasonable minimums, the best by far is TFS MARKET NEUTRAL (TFSMX), which requires a minimum investment of $5,000 and has an expense ratio of 1.9% (excluding shortselling-related fees). Over the past 10 years, the fund, which focuses on small-cap stocks, has returned 3.9% annualized. Since 2008, the fund’s calendar-year returns have ranged from –7% to 17%, suggesting relatively low volatility, the hallmark of a good market-neutral fund. By contrast, the range for SPDR S&P 500 ETF was –37% to 32%. Also consider the approach of the MERGER (MERFX) and ARBITRAGE (ARBFX) funds to alter-


native investing. Each buys shares of alreadyannounced takeover and merger targets, with the goal of capturing the last few percentage points of appreciation between the post-announcement share price and the price at which the deal is consummated. The result is modest, bond-like performance that is utterly divorced from the overall stock market and that exhibits little volatility. In 2008, the annus horribilis for stocks, Merger was down 2.3%; Arbitrage fell 0.6%. Finally, you can invest in companies whose business is relatively isolated from the economy as a whole. One prime example is reinsurance. Property-and-casualty insurers don’t want to bear the entire risk of shelling out payments after a catastrophic event, such as a huge hurricane, so they buy their own insurance from reinsurers. The performance of such companies depends, in large part, on the frequency of major natural disasters—events unrelated to the stock market. Warren Buffett is a longtime fan of the business. His company, BERKSHIRE HATHAWAY (BRK.B, $145), owns Gen Re, one of the largest reinsurers. Berkshire is broadly diversified, with holdings that range from jewelry retailing to banking to consumer goods. But, with the exception of 2008, Berkshire’s annual returns have diverged nicely from those of the S&P 500 over the past decade. For a purer play on the reinsurance business, consider RENAISSANCE RE HOLDINGS (RNR, $117). Its stock’s returns have diverged widely from those of the S&P 500 practically every year—by more than 15 percentage points in five out of the past 10 calendar years. Its volatility is much higher than that of a merger or market-neutral fund, but so are its returns, which have averaged 10.2% per year over the past decade. Others worth a look are THIRD POINT REINSURANCE (TPRE, $12), a smaller firm that was launched only five years ago but benefits from experienced management, and VALIDUS HOLDINGS (VR, $49), which has a superb record and sports a 2.9% dividend yield. Got it? Buy insurance companies for your own insurance. ■ JAMES K. GLASSMAN, A VISITING FELLOW AT THE AMERICAN ENTERPRISE INSTITUTE, IS THE AUTHOR, MOST RECENTLY, OF SAFETY NET: THE STRATEGY FOR DE-RISKING YOUR INVESTMENTS IN A TIME OF TURBULENCE. HE OWNS NONE OF THE STOCKS MENTIONED.






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$ SUCCESS STORY Starting Their Business Was a Snap This mother and daughter patented a barrette and forged a family partnership.

WHO: Rozalynn Goodwin, 39 (interviewed), and Gabrielle Goodwin, 9 WHERE: Columbia, S.C. WHAT: Cofounders, GaBBY Bows

What was your inspiration? I

loved to style Gabby’s hair with pigtails, braids or twists. I’d secure the ends with barrettes, and she’d come home without them. The barrettes fell off and were lost, and I had to buy new ones every two weeks. I complained in social media and got a lot of sympathetic responses from other mothers. My pastor saw the discussion and said, “This sounds like a market you need to break into.” A few days later, I was styling Gabby’s hair and mumbling about making a bow that would work. Gabby jumped up and asked, “Are we going to make a bow?” How did you develop your barrette? We studied and com-

pared barrettes. We needed one that wouldn’t fall off and that showed the design on both sides. We call it “double-face, double-snap.” You twist the end of a braid around the center bar, then snap each side into place. What was your plan? I thought

we would sell our idea to a company and put aside the money for college. I approached a major hairaccessory company, which 24


considered our idea but declined. I asked my contact there for help, and he referred us to an engineering firm. It made a prototype and prepared design drawings and models to send to manufacturers for bids. We wanted to make the bows in the U.S., but it wasn’t cost effective for a small initial number. The engineering firm had a relationship with a manufacturer in Taiwan that agreed to make 500 packs as a favor. That firm is still our manufacturer.

accessory company again. But online orders came in from all over. How have you grown? Since we launched in 2014, we’ve filled online orders from 47 states and eight countries. We’ve sold more than 11,000 packs of GaBBY Bows [$3.99 for a pack of five], and we’re on track to double our sales this year over 2015. About 25 stores carry our bows. We’re work-

ing to get our costs down and our volume up so that we can provide the profit margin that retailers need. How did you finance your startup? I borrowed about

$40,000 from my 401(k), and I’m paying the loan back with every paycheck over five years. I’m still employed as a vice president with the South Carolina Hospital Association. Gabby and I plan to finance production of two new designs through Kickstarter.

How did you begin selling?

What’s Gabby’s role? She’s

Our patent attorney encouraged us to publicize our bows while we waited for our design patent, and a friend suggested that we produce a video to show how our barrette works. So we created our website [www.gabby] and added the video. We expected to sell the samples to family and friends, and then to try the hair-

the self-proclaimed CEO and president, but my husband and I made it clear to her that those titles aren’t just cute. She inspects the barrettes, takes inventory, fills orders, writes thank-you notes to our online customers and acts as our lead salesperson at trade shows. We’re building an inheritance of entrepreneurship. Gabby says she plans to run this business with her daughter. PAT






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Vanguard fails to tell you each one of these funds of funds is so watered down in mediocrity that none of their STAR LifeStrategy Funds have a chance to lift you from the ranks of ordinary Ever

If your goal is “SAVING FOR RETIREMENT” Vanguard tells you that Target Retirement Funds are the way to go just pick your expected retirement date and you re set so they imply Easy right


mention priority code LD7616

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Note: Dan Wiener and Fund Family Shareholders Association are independent and in no way ailiated with the Vanguard Group of Investment Companies.





Hey, can you spare a few minutes? We know you’re busy, but chances are you can set aside 15 or 30 minutes, or even an hour, to tackle some of these quickie tasks. Our collection of financial fixes—designed to save you money, get you on track to reach a goal or simplify your life—run the gamut from trimming your cable or phone bill (15 minutes or less) to applying for a more rewarding rewards card (30 minutes) to setting up an estate plan (one hour). Ready? Get started.






account, a utility deposit or investments—your name will appear along with details on the property and directions on how to file a claim. Copy everything in your wallet If your

purse or wallet is lost or stolen, having copies or scans of the front and back of your driver’s license, credit cards, and membership and loyalty cards will make the process of suspending accounts and replacing cards go more smoothly. Keep paper copies in a safe place, and store scanned PDFs on your computer and back it up. Consolidate loyalty cards Slim down your


Get a better deal on cable Is your cable or internet service bill creeping upward? Call the customer-service number for your service provider and ask whether you qualify for any promotional deals. If you don’t succeed with a phone call, check whether the company has a presence on Twitter. You may get what you want by requesting a discount via tweets directed to the company’s account. Reshop your cell-phone plan At http:// select the number of phone lines, voice minutes, messages and gigabytes of data you need per month. You’ll see options from AT&T, Sprint, T-Mobile and Verizon.


Put your savings on autopilot To squirrel away money before you have a chance to miss it, create automatic, recurring transfers from checking to savings and investment accounts. Log in to your checking account and look for an option to transfer funds. Enter routing and account numbers for your savings account and choose the frequency and amount for each transfer. Then set up a transfer to your investment account, 28



too. Watch out for any fees that your bank may charge for transferring to external accounts; you may be able to avoid fees by initiating the transfer through the savings or investment account instead. Save extra money with an app Qapital

gives your savings a boost by automatically collecting small chunks of your money for you. Link your checking account to the app and create rules that will prompt transfers to Qapital’s savings account (held by Wells Fargo). Never bounce a check again Check your

bank’s website for an option to link your checking account to a savings account. If you draw too much from the checking account, the bank will transfer money from the backup account (you may pay a fee of $10 to $15).


Search for lost money Go to www.missing and enter your name and state of residence in the search fields. If you have unclaimed property in state or local government records— such as cash in a forgotten bank

wallet or key ring without missing out on rewards or discounts with a mobile wallet, such as Android Pay, Samsung Pay or Apple Pay’s Wallet, or download the free Key Ring app (Apple and Android). Use the camera on your phone to scan loyalty cards into the mobile wallet or app. The next time you’re in the store, show the digital version of your card’s barcode. Sell old gift cards At www.giftcardgranny .com, you can sell the card to a partner site at the offered rate or list it for sale at a price you choose (you’ll pay a fee of about 10% to 15% to the listing site). You’ll receive a check in the mail or a credit to your PayPal or bank account. Redeem credit card rewards Log in to

your account and look for an option to redeem cash back, points or miles. You may choose to get a check in the mail, a credit toward your bill, or a deposit into your bank account, or to exchange points or miles for travel bookings, gift cards or merchandise. Monitor your subscriptions

links with your bank, credit card or PayPal account to scan your monthly statements and track paid subscriptions, from your Netflix account to your gym membership. If you see a forgotten subscription or one you no longer want, use the site’s one-click cancellation feature. Truebill also

sends a monthly report to alert you to any rate hikes or extra fees.

income information to see what your payments would be for each repayment plan.

Digitize your receipts You’ll reduce clutter

from paper receipts if you organize and store them with the free Receipts by Wave app. You can photograph and categorize receipts, plus save them in the cloud so they’re accessible from the app or at


Get the best deal online To make sure

you are getting the lowest price on your purchases, install two web browser add-ons. Ziftr Alerts (www.freeprice compares prices as you shop and lets you know when it spots the item for less. Honey (www.join scours the web for coupon and discount codes—before you buy, just click the icon the extension installs on your toolbar.


Test the refinancing waters After the tur-

moil of Brexit in late June, the 30-year fixed rate fell to 3.5%, according to Freddie Mac. To see whether a refi makes sense for you, visit the Zillow Mortgage Marketplace (www.zillow .com/mortgage-rates). Fill out an anonymous loan request with personal information and the type of mortgage you want. You’ll get instant quotes on rates, fees and payments. Before you connect with lenders, use the Zillow refi calculator to see whether you can save enough to recoup the cost of a refi before you sell the home.



Lower your student loan payments Go to www and click on “Repayment Estimator” under “Managing Repayment.” Enter the balance and interest rates of each of your federal loans and your

Set a college savings goal Visit Saving to use the World’s Simplest College Cost Calculator. You can generate estimates based on the average cost of a private or in-state public college education or the cost of a specific school. Enter how much you have saved so far and what kind of investment return you expect for your college fund (or use the calculator’s default settings). The calculator delivers an instant verdict on how much you should save each month.


Sign up for My Social Security Want to see what you’ll get when you claim benefits? Go to and click on “My Social Security.” Enter your personal information and answer several security questions, then create a user name and password. You’ll see a preview of your benefits.

Size up your retirement stash Go to calculator and fill in information about your salary, accumulated savings and future sources of retirement income (including Social Security benefits and any pension income). Our calculator estimates how much you need to save each month to reach your goal. Tweak the choices in your 401(k) Log in to

your account and go to the page that lets you manage your money. Look for the appropriate button or category— say, “Change My Investments” or “Change My Paycheck Deduction.” For 2016, you can contribute up to $18,000 to your 401(k) or similar employer-based plan, or up to $24,000 if you are 50 or older.


Get a fatter paycheck If you’ve been

lending money to Uncle Sam—that is, getting a big tax refund each year— use Kiplinger’s calculator at kiplinger .com/links/withholding to reduce your withholding. Consult your 2015 tax return and latest pay stub to fill in the blanks; you’ll have to make some educated guesses about other income and expenses. The calculator tells you how many allowances to claim. Then go to your human resources department and ask to fill out a revised W-4 form (or download the form at www


Reassess your risk tolerance To create an investment plan that suits your goals and fits your personality, use Vanguard’s Investor Questionnaire at questionnaire as a starting point. Gather estimates of your annual Social Security or pension benefits and the balances of your 401(k), IRA and other investment accounts, then answer 11 questions about your time horizon and your tolerance for risk. KIPLINGER’S PERSONAL FINANCE





Run a credit checkup Start by

Make a date with a financial planner Visit or www to locate planners in your area. (For a planner who will do a onetime checkup, you can also search at the Garrett Planning Network’s site.) Research a few to see whose skills and resources mesh with your situation (see and set up a free, no-obligation meeting. Set up a budget With budgeting tool

Mint (, you can get a big-picture view of your finances. Link to your financial accounts by entering your online user names and passwords; you can also put in information about your home and car to get estimates of their value and track your overall net worth. Set limits for how much you want to spend monthly in various categories and receive alerts when you go over budget. Protect important documents If your

critical documents are residing in a drawer or a folder, shop for a home document safe to help protect them from a fire, flood or theft. Look for a document safe that has been tested by Underwriters Laboratories (UL) or Intertek (ELT) and is built to with30



stand at least 30 minutes of fire up to 1,550 degrees Fahrenheit. A safe with about 1 cubic foot of space typically costs between $100 and $300. (Before stashing the documents away in your new safe, take photographs or scan the papers, and make extra copies of electronic files to store in the cloud.) Cash in loose change At www.coinstar

.com, search for a nearby Coinstar kiosk (often found at grocery stores). The machine will sort and count coins for you, and cashing them in is free if you redeem the money as a gift card from companies such as, Applebee’s, Best Buy, Home Depot, iTunes, Lowe’s and Starbucks.


Find the best savings account for you Go

to where-to-grow-your-cash and enter your state, how much cash you have to save, and how long you plan to hold money in savings. The tool will list high-interest account options in several categories, such as “Keep It Simple” (using a single savings account) and “Mix and Match” (dividing between certificates of deposit and a savings account). Visit the bank’s website to open an account and transfer money.

Get a more rewarding rewards card In our

July 2016 issue (or at links/rewards), review our roundup of the best rewards cards and choose one that best suits your spending patterns. If you have good credit, you could be earning 2% on every purchase you make with a credit card—and up to 6% in certain categories. Visit the card issuer’s website to fill out an application.


Secure your smartphone If your phone isn’t password-protected, set a lockscreen pattern, PIN or password. Consider adding an extra layer of security to apps with sensitive information. Android users will need an app such as AppLock to password-protect individual apps, but iPhone users can do it by selecting “Settings,” “General” and then “Restrictions” to set a password and apply it to certain apps. Protect against a misplaced, lost or stolen phone by enabling locationaccess services. Apple users need to sign in on the Find iPhone app using their Apple ID. Android users can access the feature by signing into their account at manager. Windows users should go to



visiting www.creditkarma .com, where you can sign up to see free credit-report information from credit agencies Equifax and TransUnion, as well as your VantageScore credit scores from each bureau. (You can also sign up to receive notifications of changes in your TransUnion report.) Then go to www.creditscorecard .com, which provides a free FICO credit score and credit report information from credit agency Experian. Finally, go to www to see free copies of your credit report from each of the three major bureaus. You’ll be able to track your phone’s location and remotely erase your data from any web browser. Set up a password manager A password manager such as LastPass will tie all of your passwords together and store them in a file that’s secured by a single, ultra-secure master password. Download the program and type in a master password. The service gathers and encrypts passwords and other private information. It’s free for one device, but you’ll need the premium version ($12 per year) for multiple devices. Protect your Wi-Fi network See the

instruction manual that came with your router or the manufacturer’s website for instructions to turn on

encryption and the firewall and keep your internet connection secure. Then change your wireless network’s default name and password. Also consider turning off “network name broadcasting” so that your network won’t appear to others in your area, or set up a MAC address filter, which limits access to the network to devices that you approve.

a free online tool, to see a breakdown of all the charges you’re paying, including underlying mutual fund and ETF expenses, trading commissions, and custodial and advisory fees. The tool suggests similar, lower-fee investments, and it shows potential savings if you switch funds. Personal Capital, an online budgeting and investing tool, can also run a fee checkup.



Switch to a better online broker See

Kiplinger’s survey of online brokers at to find the best fit for you. Fill out an application online, then stay on the new broker’s site to initiate a transfer of assets from your old brokerage firm or bank. Switching over an entire account is easiest, but you can select individual securities or cash. Some mutual funds may not be eligible to transfer—call your new broker beforehand to find out. Trim your fund bills Log in to your

account and click on a mutual fund or exchange-traded fund in your portfolio. Find the expense ratio, which is the annual fee charged by the fund. Use your broker’s screening tool to find similar funds with lower expense ratios. For example, you could swap a large-capitalization stock fund for Schwab U.S. Large Cap ETF (symbol SCHX). Closely tracking Standard & Poor’s 500-stock index, the ETF has razor-thin expenses of 0.03%. Harvest tax losses Sell your losers and you can deduct the losses against capital gains, as well as use up to $3,000 in losses to offset taxable income. Still like the investment? Swap it for a similar one. But don’t violate the “wash sale” rule, which requires a 30-day wait to buy a “substantially identical” security. Cut your investment fees Link your investment accounts to,

Open an HSA If you have a high-deductible health insurance policy and your employer has a preferred provider, get the enrollment form for a health savings account from your HR department. That may be the best option if it’s the only way to qualify for a company match. If your employer doesn’t match contributions, you can open an HSA at any financial institution that offers them. Compare fees and investments at Pay less for life insurance Provide information about your health, age, contact information, length of term (from 10 to 30 years) and amount of coverage at You’ll get term insurance price quotes from several companies. If prices are lower than for your current policy (or if you can lock in a low rate for a longer period), then choose an insurer and apply online. (The final price depends on the results of a medical exam.) Or call AccuQuote at 800-442-9899 to get a quote, especially if you have medical issues or coverage questions.

ESTATE PLANNING h Share financial info with your family

Create a master list that lets your spouse know how to get into your accounts and where to find important documents if you become incapacitated or die first (you may want to share the list with adult children, too). Store the list online, using a documentstorage account such as, and give your spouse the user name and password to the account. Also keep a paper copy of your information. 09/2016





insurer may offer to beat the quote. You can also get help from an independent agent (go to www.trustedchoice .com). Or compare rates from several insurers at and Save on prescription drugs Use your insur-

er’s web tools to see how much money you can save by switching to generic medications or therapeutic equivalents that may cost a lot less under your insurance plan. (You’ll have to check with your doctors before you switch.) Also find out if your insurance plan has a preferred pharmacy with lower out-of-pocket costs or if you can save money by using a mailorder pharmacy. Compare costs by pharmacy and get coupons at www


Set up online bill paying With Mint Bills

(, you can track and pay bills and receive reminders of upcoming due dates. (Your bank may offer the same service.) Mint Bills is free if you pay bills directly from a bank account. To link each bill, search for the provider and enter either the account number or the username and password that you use to log in to the account online. Sell old gadgets Brush the dust off old

smartphones, tablets or other devices and head to,, or Amazon Trade-In to get an instant quote. Request a prepaid shipping kit or print a free shipping label. Before popping your device in the mail, back up your info to the cloud or save to a different device. To delete personal data from your smartphone, erase or remove the SD or SIM card, and restore the phone to its factory settings. Recent Apple products will automatically encrypt user data, but Android users should visit the Settings menu to manually encrypt their data. For computers, “deauthorize” any digital rights management software, such as iTunes, and disassociate your Apple ID or other accounts. 32



You’ll also need software that erases data, such as Active@KillDisk, which you can download free.


Create an estate plan If your circumstances are straightforward—you plan to leave everything to your spouse, for example—sites such as LegalZoom, Nolo and Rocket Lawyer can generate a will or estate plan online for as little as $35. Next, download the free form from to create a health care proxy to name an individual who will make decisions for you if you’re incapacitated. While you’re at it, create a living will (available either with the health care proxy or separately, depending on your state) to specify what kind of treatment you want during a terminal illness.


Lower auto insurance premiums Go to your

state insurance department website (find links at and find its car insurance buyer’s guide. Most guides show sample prices for auto insurers. Pick the six insurers with the lowest rates for the example closest to your situation, and call the insurers to get price quotes for identical coverage. If you find a better rate, your current


Audit your home’s energy usage Spot en-

ergy leaks and inefficiencies with the Home Energy Saver. Gather specific energy ratings for your heating, cooling and water-heating equipment from the labels or user manuals. Enter your zip code to receive estimates of energy costs and usage for typical and efficient homes in your area. Then follow the prompts to add more information. The resulting report will show you how much you spend on energy annually and how much you could save with recommended upgrades.


Apply for TSA PreCheck Log on to www to complete the online application and schedule an appointment to enroll in person (find the nearest enrollment centers at Walkins are welcome, but you will have to wait. At the interview, you’ll have to pay a nonrefundable fee of $85, show proof of identity and share your fingerprints. Once you’re approved, enter your “known traveler number” when reserving a flight to qualify for the PreCheck lane, where you can keep your shoes and belt on when you go through security. ■


Tax Deductions for Volunteers I VOLUNTEER REGULARLY FOR A charity. What expenses can I deduct?

S.R., Tampa You can write off a variety of out-of-pocket expenses if you itemize deductions. For instance, for 2016, you can deduct 14 cents per mile, as well as the cost of parking and tolls, for driving related to work for an eligible charity. Keep a log of the starting and ending mileage, the dates you drove, the name of the charity and the purpose of each trip. You can also deduct travel expenses for trips that primarily involve work for a qualified charity—say, the cost of travel and lodging for a long-distance volunteer gig for Habitat for Humanity. In addition, you can deduct expenses such as the cost of ingredients for a dinner at a homeless shelter and stamps for a fundraising mailing. Keep your receipts. You must get an acknowledgment from the charity for expenses you cover of $250 or more. See IRS Publication 526, Charitable Contributions, at Student-loan forgiveness. I’m a police officer.


Do I qualify for the student-loan forgiveness program for public service employees, and if so, how does the program work? J.L., St. Louis Yes, police officers are among the public service workers whose student-loan balances may be forgiven. You must have worked fulltime for 10 years for an eligible organization, such as federal, state and local government; a nonprofit that qualifies for tax-exempt status; or a nonprofit that provides a qualifying service (see the Department of Education’s Public Service Loan Forgiveness Program page at for a list). You must make 120 monthly payments before the remaining loan balance can be forgiven; the payments do not have to be consecutive. Only federal direct stu-

dent loans count, and payments must have been made after October 1, 2007. Short-term investing. My husband and I are building a new home and have already sold our current home. We will have four to six months between closings and will use the $180,000 from the first sale as a down payment on the second. What should we do with the money until we settle on our new home? L.C., Charleston, S.C.

You can earn 1.25% in a top-yielding money market deposit account, and you won’t have to lock up the money, as with a CD. Go to to search for savings and money market accounts with the best yields. Tax on annuities. If I purchase an immediate annuity, how is the payout taxed? N.A., Cheyenne, Wyo.

If you buy an annuity using money from a retirement account funded only with pretax or tax-deductible contributions, all of your payouts will be taxed at your ordinary income-tax rate. If you buy an immediate annuity with after-tax dollars, a portion of each payout is considered to be a tax-free return of your principal and the rest is taxable earnings. The money you invested is returned in equal installments over the payout period. For an annuity with lifetime payouts, the tax-free return of principal is spread out over your life expectancy, as determined by the IRS. For example, if you invested $100,000 and have an IRS life expectancy of 20, then $5,000 of each year’s payout will be a tax-free return of principal and the rest will be taxable. After all your principal is returned, the payouts are fully taxable. You’ll receive Form 1099-R from the annuity company reporting the payouts received and the taxable amount. ■

You can write off expenses such as the cost of ingredients for a dinner at a homeless shelter or stamps for a fund-raising mailing.








Making a Plan for a Special-Needs Child JESSICA AND NATHAN PUGH’S 5-YEAR-

old son, Lachlan, has a rare brain malformation that affects his motor skills, but that doesn’t seem to slow him down much. Lachlan enjoys zipping around in his motorized wheelchair, and he is content to spend hours in the toy aisle at Target. “He’s a very stable, happy and super fun kid,” says Jessica. “He loves Spider-Man and Disney and is full of surprises.” Lachlan also needs constant care. His condition impairs the development of the skeletal and muscular systems, and he also has difficulty with speech and swallowing. Lachlan gets around in a wheelchair or with a walker, and he has to use a feeding tube. He spent his first 104 days in the neonatal intensive care unit. “They thought it was likely he wouldn’t make it,” says Jessica. The cost of raising any child is steep, but for a child with special needs, it’s astronomical. It can cost more than $250,000 to raise a child (not including college), but the cost can be more than twice that for a child with disabilities—and much more if lifetime care is needed, says Adam Beck, director of the MassMutual Center for Special Needs at the American College, which teaches financial professionals about special-needs planning. Insurance doesn’t come close to cover34



ing all of the expenses, but you are entitled to benefits and programs that can help. As the Pughs discovered, it often takes patience and persistence to find them—especially when you’re managing your child’s health care. Meanwhile, long-term financial planning is essential to make sure that your child continues to receive the best possible care, even when you can no longer provide the care yourself. The Pughs, who live in Salt Lake City, have spent countless hours navigating the system to take advantage of benefits. They have researched special programs, scoured the internet for extra sources of financial assistance and in general advocated for as much help as they can get for Lachlan. Many families with a special-needs child are overwhelmed by the day-today care, let alone the struggle to pay for it. But after learning how to steer through the special-needs world with Lachlan, the Pughs decided to help another child with special needs. Last April, they adopted 2-year-old Conlan from China.

Dealing With the Unexpected Even with good health insurance through Nathan’s job as a cartographer with the U.S. Department of Agriculture, the Pughs have had a lot of unreimbursed expenses, such

as deductibles and co-payments as well as the costs of therapy and other care. They budget as if they’re going to spend the out-of-pocket maximum for their insurance every year, and they put one-twelfth of that total into savings each month. That advance planning has helped them cover the cost of care for both of their sons. Conlan has microtia and aural atresia, which causes severe hearing loss. He also has limited use of his left arm as well as heart and gastrointestinal issues. Conlan’s two hearing processors cost $18,000. The Pughs’ insurance covered 70% of the bill, leaving them responsible for $5,400. Conlan will wear those hearing processors on a soft headband until he’s at least 7 years old, when he’ll be ready for surgery to anchor the processors to his skull. Caring for her sons is Jessica’s fulltime job. Her persistence, creativity, networking and perpetual research help the boys get what they need while staying within the family’s means. “I’m constantly Googling ‘specialneeds grants,’ ” she says. “We’ve had to be advocates for both children and figure out all of the best resources.” Recently, Lachlan’s pulmonologist recommended a $16,000 vest that breaks up mucus (he isn’t able to cough) and helps him breathe. But


A patchwork of benefits and programs can help relieve the crushing costs, but planning for the long term is essential, too. BY KIMBERLY LANKFORD








Estate Planning

Take Care of Long-Term Needs YOU’LL NEED AN ESTATE PLAN TO MAKE sure your child’s care continues if anything happens to you. Work with financial planners and lawyers who focus on special needs. “Sometimes traditional planning concepts that work well for a family that is not dealing with these issues work really badly for a family that is,” says Michael Duckworth, managing director and private wealth adviser with Merrill Lynch’s Pittsburgh office, which specializes in special-needs planning. Write a will that designates a guardian, who should be clear about the responsibilities and expectations. Write a letter with information about your child, including a list of medical providers, what you want for your child long term and what his or her likes and dislikes are—even the kind of music he or she prefers, says Adrienne Arkontaky, a special-needs lawyer with Cuddy Law Firm, in White Plains, N.Y., whose daughter, Jordan, has cerebral palsy. Consider permanent life insurance on both parents, including one who doesn’t earn an income but is the child’s caregiver, says John Nadworny, director of specialneeds financial planning with Shepherd Financial Planning, in Winchester, Mass. A special-needs trust can hold money for your child without counting as the child’s assets for Supplemental Security Income or Medicaid. You can use money in the trust to pay for services that aren’t covered by government programs or insurance, or for extras that improve your child’s quality of life. The trust can be the beneficiary of your life insurance or retirement plans. Anyone, even someone other than a relative, can contribute. Meet with a special-needs lawyer and set up the trust for your child’s assets well before he or she turns 18, so you don’t complicate eligibility for government benefits, says Arkontaky.




the Pughs’ insurance covers the vest only for children with cystic fibrosis, and it denied the claim. Jessica asked the vest manufacturer if it offers financial assistance (it does), which reduced their cost to about $4,000. She then applied for a grant offered by the United Healthcare Children’s Foundation (which isn’t limited to United Healthcare customers) that picked up the remaining charges. The Pughs moved out of a threelevel townhome to a ranch house with hardwood floors so that Lachlan has more space to maneuver his motorized chair. Such chairs can be expensive (and kids quickly outgrow them), so Lachlan is using a loaner from the local Shriner’s Hospital. Families with special-needs children under age 18 generally aren’t eligible for Medicaid unless they have very low assets and income (cutoffs vary by state), or their child qualifies for a special program in their state. The Pughs got a big financial boost when the Utah legislature approved a “medically complex child waiver” program last year, which provides Lachlan with Medicaid coverage to supplement the Pughs’ private insurance. The program only covers up to 250 children. “That’s been a life-changer for us,” Jessica says. Not only does the program fill the gaps in their insurance coverage, but it also provides three hours of respite care every week. Lachlan needs nursing-level care at all times, and that gives Jessica a break. “Now I can go to appointments or on a date with my husband,” she says.

Benefits for School-Age Kids A big expense for families with special-needs kids is the cost of ongoing therapies, but federal and state benefits can offset some of the cost. Lachlan received speech therapy, physical therapy and occupational therapy through Utah’s early-intervention program. Such programs are available nationally for children until they turn 3 and may be free or have a slidingscale fee based on the family’s income

(the Pughs paid about $30 per month for the services). Conlan receives speech therapy, occupational therapy, physical therapy and hearing therapy through the program, but he is turning 3 soon and will no longer be eligible. After that, the Individuals With Disabilities Education Act (IDEA) requires school systems to provide free and “appropriate” education for children with disabilities until they graduate from high school or to age 21, 22 or 26, depending on the state. The school system must pay for private services if it is unable to provide the special education a child requires. Many parents don’t realize they can receive these benefits before their child starts attending school, says Shawn Ullman, director of TheArc@School, a program that helps families navigate school-based benefits programs. Lachlan, for example, receives about 20 minutes per week of physical therapy and speech therapy through the school system. Families often supplement government programs with private therapy, which may be covered by their own insurance—but often with limits. The Pughs hired a private speech therapist for Lachlan to supplement the earlyintervention services; now that he’s older, they’ve added more private services. Their insurance covers up to 50 visits per year for occupational, physical and speech therapy combined. The co-pay for each visit is $30, and Medicaid helps cover it. Once they reach the maximum number of therapies allowed under their insurance, they will have to pay out of pocket (some providers give an out-of-pocket discount) or search for grants. Denise Sikora, an insurance claims specialist in Monroe Township, N.J., says that families often have trouble getting insurance to cover therapy because they fail to request preauthorization or submit the required paperwork. The insurer usually asks for a detailed report from the pediatric developmental specialist who did the initial evaluation and an explanation for

why the therapy is needed, she says. Many families also end up with large unreimbursed expenses from providers who aren’t in their insurer’s network. “When they get a diagnosis, parents often feel as if they have to do something fast, and they start going to providers with no idea what their insurance requirements are,” says Sikora. Your insurer may have a care coordinator who can help find innetwork providers. If an in-network provider can’t furnish appropriate care, your insurer may cover an out-ofnetwork provider at in-network prices. Advocacy groups can help you learn about the benefits available and laws governing coverage. The internet is a good place to start your search for resources. Ask your doctor and the staff at your doctor’s office, as well as other families you meet there, about local organizations that focus on children with similar needs.

Preparing for Adult Benefits After your child leaves the school system, the benefits landscape changes. At that point, benefits are no longer required under IDEA but may be available through a variety of other sources, such as nonprofit organizations and your state or county department of developmental disabilities (see for links to your state agency). Some programs, especially for housing, may have long waiting lists. IDEA provides a third level of benefits, which many families overlook, that can help prepare for the next step. Starting at age 14 or 16, depending on the state, the school system must offer transition benefits to help families learn about the options for their child after high school. Contact the school’s resource coordinator to talk about your goals after your child leaves school, and ask about vocational, recreational and housing options, says Terry Smith, a resource coordinator in Portland, Maine. Those transition benefits are only available while your child is still in school.

Mary Ellen Mayo’s son, James, 27, received physical, occupational and speech therapy when he was in public school in Massachusetts, but Mayo needed to find new programs after he graduated. Whenever Mayo and her husband, Charles, relocated, her first call was to the local Arc chapter ( to find out about resources and programs for James. “James loves being around other people, he likes music, and he likes being outdoors,” says Mayo. Now living with his family in Michigan, he attends a full-day program that includes music therapy. Another program takes him out into the community and provides wheelchair transportation. Once your child turns 18, the government considers his or her assets separately from the family’s when determining eligibility for programs such as Supplemental Security Income, which provides a monthly stipend, and Medicaid, which provides health insurance. To qualify, applicants cannot have more than $2,000 in assets in their own name. For more information, go to the “Supplemental Security Income” section on the Social Security website, You’ll need to apply in person at your local Social Security office.

Before you sign up for SSI and Medicaid benefits, work with a lawyer who focuses on special-needs planning to set up a special-needs trust (you can find a lawyer at or The trust can hold assets for the child without counting as the child’s assets for Supplemental Security Income or Medicaid. The Pughs set up a specialneeds trust for Lachlan when he was 2 years old. (For more about estate planning, see the box on page 36.) You’ll also need to decide whether you’d like to petition the court to become your child’s guardian at age 18. Otherwise, in most states, he or she will legally become an adult. “Consider whether they’re competent to keep themselves safe and make decisions about their medical needs and education and where they’re going to live,” says Karen Mariscal, a specialneeds attorney with Margolis & Bloom in Boston. Parents can petition the court to become the child’s guardians and can also name a successor guardian. But you may not need to have full guardianship. If you’re concerned primarily about medical decisions, you can designate yourself or another adult you trust to be a health care proxy instead. ■


Take Advantage of an ABLE Account ONE OF THE BIGGEST BREAKTHROUGHS IN SPECIAL-NEEDS PLANNING IS THE introduction of ABLE accounts. A 2014 federal law lets states create these accounts, which are just starting to become available. People of any age who developed a qualifying disability before age 26 can open an ABLE account. Anyone can add to the account, but total contributions can’t exceed $14,000 per year. (The beneficiary can have only one ABLE account at a time but can switch plans.) The money may be used tax-free for most expenses to benefit the person with the disability, and account assets up to $100,000 don’t count toward the $2,000 limit for Supplemental Security Income benefits. Like 529 college-savings plans, ABLE accounts are administered by the states, and most will be open to residents of any state (Florida’s plan is limited to its own residents). Some states may offer an income-tax deduction for contributions. You usually have several investing options; Florida, Nebraska, Ohio and Tennessee all offer Vanguard funds and a savings account. See the ABLE National Resource Center ( for details.






Trim Your Taxes in Retirement Lowering required minimum distributions once you turn 701/2 will keep more of your money tucked in a tax shelter. BY SANDRA BLOCK


401(k) or similar savings plan because we want to enjoy a comfortable retirement. But there are short-term benefits, too. Contributions are excluded from taxable income—a lucrative break that helps make saving less painful (and doesn’t require the services of a Panamanian law firm). But unlike dubious foreign tax shelters, this one has an expiration date. Once you turn 70½, Uncle Sam wants his share, so he requires you to take withdrawals from your traditional IRAs, 401(k)s and other tax-deferred plans— or face a penalty of 50% of the amount you should have withdrawn (see the box on the facing page). If you’ve built up a large balance in 401(k)s, rollover IRAs and other tax-deferred accounts and have another source of income, such as a pension, RMDs can create a host of tax tribulations. Because the withdrawals are taxed as regular income, RMDs could push you into a higher tax bracket. And the 38


increase in your adjusted gross income could trigger other unpleasant consequences, such as higher taxes on your Social Security benefits, a surtax on your taxable investments and a Medicare highincome surcharge. The key to avoiding a big tax bill is to start planning for RMDs well before your 70th birthday. Manage your withdrawals.

Once you turn 59½, you can withdraw money from your tax-deferred accounts without paying a 10% early-withdrawal penalty. The withdrawals are still taxed as ordinary income, but after you retire, you might drop into a lower income tax bracket. A financial planner or accountant can help you figure out how much you can withdraw each year without moving into a higher tax bracket. Over time, these withdrawals will shrink the size of your tax-deferred accounts, resulting in lower RMDs when you reach 09/2016

70½ and beyond. And that’s not the only upside to this strategy. If using IRA withdrawals to pay living expenses lets you postpone claiming Social Security benefits, you could significantly increase the size of

your payout. For every year past your full retirement age that you delay, your benefit increases by about 8% until age 70. Convert to a Roth IRA. Convert-

ing funds from your traditional IRAs and 401(k)s to a Roth IRA offers several advantages. You can always withdraw the contributions to a Roth tax-free, and once you’re 59½ and have owned the Roth for five years, earnings are tax-free, too. More significantly, Roths aren’t subject to RMDs, so you can withdraw as much or as little as you need after age 70½ without worrying about the tax bill. But you must pay taxes at your regular income tax rate on any funds you convert, so be careful. A large



conversion could push you into a higher tax bracket and trigger the chain reaction of unpleasant consequences noted above. But people who retire in their sixties enjoy a “golden window” for Roth conversions, says Steve Burkett, a certified financial planner in Bothell, Wash. If your income declines after you stop working, you can convert just enough to bring your taxable income to the top of your current tax bracket but not push you into the next higher one, he says. Invest in a QLAC. A qualified

longevity annuity contract is a multipurpose retirement-planning tool. QLACs are deferred-income annuities that are a guaranteed source of income when you

reach a certain age. And because not everyone who buys a deferred-income annuity will live long enough to reap the benefits, QLACs offer much higher payouts than other products that provide guaranteed income for life. For example, a 65-year-old man who invests $100,000 in New York Life’s Guaranteed Future Income Annuity and defers payouts for 15 years will receive $22,331 in guaranteed annual income, beginning when he turns 80. The catch? In this example, the annuity has no death benefit, so if the owner dies before age 80 he gets nothing. The same annuity with a death benefit that would pay heirs 100% of the premium not collected by the owner would cut the payout to $16,906 a year. You can also use this type of annuity to reduce your RMDs. You’re allowed to invest up to 25% of your IRA or 401(k) plan (or $125,000, whichever is less) in a QLAC without having to take required minimum distributions on that money when you turn 70½. You’ll still have to pay taxes when you start receiving payments from the annuity, but you can delay payouts until age 85. Rejigger investments. Another way to lower your RMDs is to use your tax-deferred accounts for bonds and bond funds and use taxable accounts for stocks and stock funds, says Randy Bruns, a CFP in Downers Grove, Ill. One advantage to this strategy is that bonds

and bond funds are taxed at your ordinary income rate anyway, while stocks and stock funds in a taxable account benefit from the capital-gains rate, which is 15% for most taxpayers. Also, because bonds have historically underperformed stocks, it’s likely you’ll have fewer gains in bond-heavy retirement accounts. And because RMDs are based on the previous year-end value of your IRA, an IRA that grows more slowly will produce smaller RMDs. There are limits to this strategy. If most of your retirement savings is invested in traditional IRAs and 401(k)s, you should include stocks and stock funds in those accounts. Otherwise, you’ll sacrifice long-term growth and have more trouble beating inflation. Keep working. As baby boomers reach retirement age, a growing number are planning to work past age 70. As long as you’re still working, you don’t have to take RMDs from your employer’s 401(k), even if you’re older than 70½. This exception doesn’t apply to former employers’ 401(k) plans or traditional IRAs. However, you may be able to get around that problem by rolling those accounts into your current employer’s 401(k), assuming your company allows it. You’ll still have to take RMDs when you quit. But you’ll reduce or eliminate mandatory withdrawals while you’re working, when your tax rate could be much higher. ■ 09/2016

Reducing RMDs

It’s Never Too Late WHEN YOU TURN 70½, you usually must start taking minimum withdrawals from your tax-deferred accounts, based on the balance in each account at the end of the previous year. You calculate the amount you need to take using a factor provided by the IRS that’s based on your age. If you have two or more IRAs, you can take the total required minimum from one IRA or portions from multiple IRAs. The rules are different for former employers’ workplace plans, such as 401(k)s. You must calculate RMDs and take separate withdrawals from each one of those accounts. But it’s not too late to lower your tax bill. Once you’re 70½, you can give up to $100,000 from your IRAs to charity, tax-free, every year. The contribution counts as your RMD and won’t be included in your adjusted gross income. After years of renewing this popular tax break around Christmas, Congress made it permanent last year. That provides planning opportunities for retirees, says Wade Chessman, a certified financial planner in Dallas. If you expect to satisfy your RMDs by making charitable contributions, you might not need to convert that amount of money to a Roth.





JANE BENNETT CLARK > Rethinking Retirement

hen I was married, my husband often expressed a desire to retire to Phoenix. He liked the area’s dry heat and the beauty of the desert. I hated the idea. Nothing against Phoenix—I’ve never even been there. But I was perfectly fine where I was and had no plans to uproot myself. The one happy byproduct of my divorce? Phoenix is off the table. My ex and I obviously had other issues, but even rock-solid couples can discover that they have different goals or expectations for retirement. A 2015 Fidelity study of couples showed that half of baby boomers (people ages 52 to 70) don’t even discuss a post-career plan, much less agree on it. “He wants to live at the beach; she wants to live in the mountains. He hopes to spend more time with her; she wants to spend more time with the grandchildren,” says John Sweeney, executive vice president of retirement and investing strategies at Fidelity. Couples also have trouble expressing their expectations for each other in retirement, especially if one spouse retires first, says Dorian Mintzer, a retirement-transition coach in Boston and coauthor of The Couple’s Retirement Puzzle: 10 Must-Have Conversations for Creating an Amazing New Life Together (Sourcebooks). The working spouse, for instance, might expect the athome spouse to do more of the household chores, whereas the at-home spouse—let’s just say it’s the husband—has no clue that’s on the agenda. “If you’ve been with someone for a long time, you imagine you can read your spouse’s mind. Sometimes you can and sometimes not, but you can’t assume,” says Mintzer.

W Even couples who have a rock-solid relationship can discover they have different goals for retirement.

Make a plan. The first logical step in avoiding

a marital disconnect is to discuss up front how and where you want to spend your retirement, expressing your views as “this is what I’m interested in doing” rather than taking aim at the other person’s ideas, says 40



Mintzer. The goal is for each person to hear the other out and then work toward a mutual decision, she says. “Talking sets the framework and allows people to realize they can problem-solve together.” Once you have the outlines of a plan, you still need to identify how you’ll pay for it. A financial planner can help you run the numbers and, if necessary, provide a reality check. Anne Chernish, a certified financial planner in Ithaca, N.Y., has her clients describe how they see their life at key stages, including retirement, and helps them budget their expenses accordingly. “I make sure the cash will support different objectives,” she says. If it doesn’t, you could end up on the same page faster than you think. For example, suppose one of you wants to downsize and the other has been resisting the idea, but both of you want to travel. If you discover that your retirement budget doesn’t support frequent trips, you might decide to free up cash by downsizing after all. Or, if you can’t agree on whether to retire at the same time and the budget shows an income shortfall, having one person work longer (maybe part-time) becomes a no-brainer. Even disagreements about who will do the chores when one spouse works can be partly solved if you know you can afford to hire a housekeeper a few times a month. Still not on the same page? Give your separate visions a trial run, says Mintzer. “One spouse could say to the other, ‘For the next couple of years, I want to stay where we are, and then we can reevaluate,’ or ‘Over the next few years, we’ll visit places where you want to move.’ ” If you’re desperate to escape cold winters and you’re both willing to think outside the box, rent a condo in Florida (or Phoenix) for a few months and have your spouse visit. Maybe you’ll both end up loving it there—or not. Either way, problem solved. ■ JANE BENNETT CLARK IS A SENIOR EDITOR AT KIPLINGER’S PERSONAL FINANCE.


How to Retire in Harmony

The re ’s a fe e ling you ge t whe n you talk face -to-face, not face -to-we bsite. Add more value to your retirement plan with personalized services and support. Call us at 1-866-954-4321.

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Don’t Get Caught Undercovered Four ways to disaster-proof your homeowners policy.



homeowners who experience a total loss don’t have enough insurance to rebuild their home and replace their belongings, according to post-disaster surveys of homeowners by United Policyholders, a consumer advocacy group. Thankfully, most homeowners never experience a total loss. But when a catastrophic loss does occur, the gap in coverage can amount to hundreds of thousands of dollars. Here’s how to be sure you’re covered. 1. Check the replacement cost. The key




square foot of living space—a reliable benchmark for an average home anywhere in the U.S. Or get an independent estimate at for $25 (click on “Residential”). The cost to rebuild a high-end home could be two or three times higher than for an average home. If your insurer doesn’t offer a free inspection, press for one, or hire a specially trained consultant from Castle HighValue Surveys (about $300; www.over personal-lines/castle-high-value). Make sure you have replacement-cost coverage —not actual-cost coverage, which may be cheaper but deducts for depreciation. To cover higher building and living costs after a disaster, most policies build in extended replacement coverage of 120% to 125% of the dwelling limit. Because you may be required

to repair or rebuild your home to meet current building codes, ask for ordinance and law coverage to increase your dwelling limit by 25% to 50%; this coverage costs about 50 cents per $1,000 of the dwelling limit, with a minimum charge of $50 annually. 2. Cover all your possessions. The replacement cost provides the basis for other coverage: typically 10% of the replacement cost for other structures on your property, 20% for additional living expenses when you can’t live in your home, and 50% to 70% for contents. To make sure you have enough coverage to replace all your stuff, take inventory of your possessions and estimate their replacement cost. After a major disaster, your insurer will require you to file a detailed list of damaged or destroyed items (as will


to full coverage is an accurate estimate of the cost to rebuild your home, known as the dwelling limit, which is specified in Coverage A of your policy. Most policyholders rely on their insurer to estimate their home’s replacement cost, but that might not be wise. Insurers sometimes lowball the cost to reduce the premiums and win your business, says Amy Bach, executive director of United Policyholders, and mistakes sometimes find their way into the estimates. Most homeowners policies adjust the replacement cost annually to reflect building-cost inflation in the area. Your insurer may also contact you periodically to update its information about your home. But it’s better to update your profile every year—say, when you receive your annual renewal statement—and report any home improvements. Ask your agent or look online to double-check the information your agent has used, such as your home’s age, size, style and features. To check the accuracy of the estimate, Bach suggests using $200 for each

the IRS, if you want to deduct your losses). To create an itemized list with photos that you can store securely in the cloud, use the UPHelp Home Inventory App from United Policyholders. It connects to online retailers so you can estimate replacement costs. Your coverage of valuables, such as jewelry, watches and furs, may be capped at $1,000 to $2,000. Have your valuables appraised, and if necessary buy a personal property endorsement or floater, which will cover their loss for any reason and costs about $2 to $8.50 per $1,000 of coverage. 3. Don’t skimp on liability coverage. A typical homeowners policy provides $300,000 of liability coverage if you, your family members or pets cause property damage or bodily injury to others, whether on your property or elsewhere. You can increase your policy’s coverage to $500,000 for about $25 to $50 a year, or to $1 million with a separate umbrella policy for about $150 to $300 a year.


4. Know what your policy doesn’t cover.

Most standard homeowners policies exclude losses due to floods or rising water from any source, or due to earth movements such as landslides. You can buy flood insurance from the National Flood Insurance Program (www or from your insurance agent. The program covers homes for up to $250,000 of the cost to rebuild and insures contents for up to $100,000. The average premium is $700 per year, but rates depend on a home’s features and location. You can buy a special rider for sewer backup, which costs about $130 for $10,000 of coverage or $240 for $25,000 of coverage. Your insurer may offer supplemental earth-movement coverage, or you can buy a separate policy for about $1.75 per $1,000 of coverage in California (it costs less in lower-risk states). Californians can buy earthquake coverage from the nonprofit California Earthquake Authority (www2.earthquake ■

MONEY MANNERS Best ways to give and let give. BY MIRIAM CROSS

FOLLOW OUR ADVICE TO GIVE GENEROUSLY, or fund-raise for a cause dear to you, without stretching anyone’s limits. My friend asked me to contribute to a film project he is crowdfunding, but I would rather choose my own causes. How do I turn him down? Soften your “no” by complimenting his project and thanking him for approaching you, says Jacqueline Whitmore, founder of the Protocol School of Palm Beach. The only explanation you need to offer is “I’m supporting other causes right now.” But before refusing outright, think about other ways you can help out besides financially. For example, could you lend him your home for a fund-raising event, as long as he sets up and provides the refreshments? Refrain from (outwardly) judging a cause that seems frivolous to you or inappropriate for crowdfunding, such as a blowout vacation or the family cat’s dental surgery. How can I best ask family and friends for donations to a charity I’m passionate about? For starters, avoid hitting up people directly more than once a year.

Also, be sensitive about whom you ask (give a pass to the cousin who is out of work). How you ask matters, too. For instance, if you’re looking for, or expecting, only small contributions, perhaps for a charity race in which you’re participating, it is fine to send a blanket e-mail or to post a request on social media. If you’re soliciting larger sums, send a personal e-mail making your case for the charity and conclude with something like “It would be great to include you in the group of supporters. If that doesn’t work for you this time, I understand,” says Mary M. Mitchell, author of several etiquette books. Some close friends might consider an e-mail request too impersonal, in which case you could approach them in person while giving them the same opening to decline. However you make your request, be sure to thank those who donated with a letter, e-mail or phone call. And once you start asking people for their financial support, be prepared to reciprocate, says Mitchell. What is the most meaningful way to make a donation in someone’s name? Donating in someone’s memory is usually as simple as writing a check to the charity named in the obituary. But if you’d like to give money in the name of a living person—say, to celebrate a special anniversary or birthday—identify a cause he or she supports. For instance, find out if your honoree volunteers, say, as a museum docent, or contributes to a particular group. Once you’ve made the donation, send your friend a handwritten card celebrating the occasion and mentioning your gift. Keep in mind there are some occasions (such as a wedding) that call for an actual gift, unless otherwise specified. ■




No-Minimum Checking Accounts EverBank (Fla.)*†


3 Great Cards for Small Businesses WHETHER YOU RUN A SHOP

on eBay or a store at the mall, a small-business credit card can help you manage expenses. Benefits include rewards for common business purchases, a higher credit limit than you might have with a consumer card, and the ability to separate business from personal spending—useful at tax time. But before you apply, consider some potential down●●

RATE UPDATES For the latest savings yields and loan rates, visit kiplinger .com/finances/yields.

sides. Some issuers share account activity with consumer credit agencies— meaning that if you default on a business card, your personal credit could suffer. (To see how major issuers report activity, go to www Plus, issuers of business cards don’t have to comply with consumer credit card protections, such as ceilings on over-limit and late fees. YIELD BENCHMARKS

However, just as with consumer cards, cardholder liability for unauthorized purchases is limited to $50; MasterCard and Visa extend zero-liability coverage to their small-business credit cards. Ask your issuer what protections it offers. We like three no-fee business cards. CHASE INK CASH BACK REWARDS (0% annual percentage rate for 12 months, then 13.49% to 19.49%) pays 5% cash back on up to $25,000 spent yearly at office-supply stores and on phone, internet and cable-TV services; 2% on up to $25,000 spent at gas stations and restaurants; and 1% on everything else. CAPITAL ONE SPARK CASH SELECT (0% for nine months, then 13.24% to 21.24%) offers 1.5% cash back on all purchases and charges no foreign-transaction fee. BANK OF AMERICA CASH REWARDS FOR BUSINESS MASTERCARD

(0% for nine months, then 11.49% to 21.49%) pays 3% back at gas stations and office-supply stores (up to $250,000 spent a year, then 1%), 2% on restaurant purchases, and 1% on everything else. LISA GERSTNER

Month- YearYield ago ago

U.S. Series EE savings bonds*




U.S. Series I savings bonds




Six-month Treasury bills




Five-year Treasury notes




Ten-year Treasury notes




SOURCES FOR TREASURIES : Bloomberg, U.S. Treasury.

As of July 5, 2016. *EE savings bonds purchased after May 1, 2005, have a fixed rate of interest. ● Bonds purchased before May 1, 1995, earn a minimum of 4% or a market-based rate from date of purchase. ● Bonds bought between May 1, 1995, and May 1, 2005, earn a market-based rate from date of purchase.

Annual yield as of July 5 1.11%

Website (www.)

PenFed Credit Union (Va.)#


Aspiration Bank (Calif.)*


Bank of Internet USA (Calif.)*



Rewards Checking Accounts America’s Credit Union (Wash.)#

0.13% Annual yield as of July 5 5.00%

For balances up to‡ $1,000

Website (www.)

Northpointe Bank (Mich.)



Consumers Credit Union (Ill.)#





Great Lakes Credit Union (Ill.)#§ NATIONAL AVERAGE

Savings Accounts Incredible Bank (Wis.)*

1.73% Annual yield as of Min. July 5 deposit 1.17% none

Website (www.)

EverBank (Fla.)*



Silvergate Bank (Calif.)



Dime Savings of Williamsburgh (N.Y.)& 1.10




*Internet only. †Portion of the balance higher than the maximum earns a lower rate or no interest. #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. §Lake Michigan Credit Union offers a similar yield. &, Northeast Bank, Palladian PrivateBank and Salem Five Direct offer a similar yield. SOURCES: Bankrate,


Annual yield as of Min. amount July 5 1.26% $10,000

Website (www.)

Melrose Credit Union (N.Y.)†


BAC Florida Bank (Fla.)*


1,500 (N.Y.)*#




5-Year Melrose Credit Union (N.Y.)†


0.29% Annual yield as of Min. July 5 amount 2.32% $5,000

Barclays Bank (Del.)*


Synchrony Bank (N.J.)*



GS Bank (N.Y.)*‡





Website (www.)


*Internet only. †Must be a member; to become a member, see website. #BankDirect, Sallie Mae Bank and Synchrony Bank offer similar yields. ‡Colorado Federal Savings Bank, E-Loan, Home Savings Bank, Old Dominion National Bank and Salem Five offer similar yields. SOURCE: Bankrate.


Rate as of Annual Late fee July 5* fee

Lake Mich Credit Union Prime (P) # 6.50%

Website (www.)



Simmons Bank Visa (P)




First Command Bank Visa (P)




AIR-MILES CREDIT CARDS Rate Miles as of Annual needed Web site * fee for ticket July 5 (www.) BankAmericard Travel Rewards 15.24% none 40,000‡


Barclaycard Arrival Plus


$89 §

Chase Sapphire Preferred


95 §

40,000‡ 40,000&

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; to become a member, see website. †$37 if late more than once in 6 months. §Waived the first year. ‡$400 value. & $500 value if you book through Chase Ultimate Rewards. SOURCE: Banks may offer lower introductory rates.

Recapture the freedom you had in your youth. But without your youth. Or your hair.

RETIRE LIKE A 20 YEAR OLD. INVEST LIKE A 50 YEAR OLD. 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 Many investors, particularly those nearing retirement or in retirement, are concerned about protecting their principal. In March of 2012, Moody’s published research that showed that rated investment grade municipal bonds had an average cumulative default rate of just 0.08% between 1970 and 2011.* That means while there is some risk of principal loss, investing in rated investment-grade municipal bonds can be

a cornerstone for safety of your principal. 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 2012 research,* default rates are historically low for the rated investmentgrade bonds favored by Hennion & Walsh. Potential Triple Tax-Free Income Income from municipal bonds is not subject to federal income tax and, depending on

where you live, may also be exempt from state and local taxes. Triple tax-free can be a big attraction for many investors in this time of looming tax increases. 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 experts have written a helpful Bond Guide for investors. It’s free and comes with no obligation whatsoever.

FREE Bond Guide Without cost or obligation

Call (800) 318-4850 © 2016 Hennion and Walsh. 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, March 7, 2012 “U.S. Municipal Bond Defaults and Recoveries. 1970–2011.” Past performance is not guarantee of future results.




Bargain Hunting These 10 funds will benefit from the shift away from growth and toward value stocks. By NELLIE S. HUANG and ANNE KATES SMITH


for Fifth Avenue, but they do have one thing in common: As sure as hemlines rise or fall, or ties grow fat or narrow, investing styles come into and go out of fashion. This year, you’ll find value stocks in some of the smartest portfolios. As the moniker implies, value stocks are those that are cheap in relation to a company’s sales, profits or underlying assets. And for reasons that are less whimsical than the fashion dictates of Fifth Avenue, shopping in the bargain basement is paying off so far this year.










That hasn’t been the case for a long time. Over the 10 calendar years from 2006 through 2015, shares of fast-growing companies in Standard & Poor’s 500-stock index beat the index’s value stocks seven times—and one of value’s winning years (2010) was just about a tie. Over the period, the S&P 500 Growth index thumped the S&P 500 Value index by an average of 3.2 percentage points per year. But so far this year, value is ahead. Year-to-date through June 30, the S&P Value index returned 6.2%, compared with 1.6% for the S&P Growth index. And midsize-company value funds, small-company value funds and largecompany value funds occupy the top three slots so far this year among Morningstar’s nine style categories for domestic mutual funds. The key question is whether the present turnaround is a head fake or the real deal. “The case for value over growth is pretty simple,” says strategist Dan Suzuki, of Bank of America Merrill Lynch. Investors flock to fastgrowing companies when overall economic and earnings growth is scarce, and they tend to favor value stocks when profit growth is accelerating, he says. Earnings have declined for three straight quarters for companies in the S&P 500, but the first quarter probably marked the trough, says Suzuki. “From here, we expect profit growth to accelerate, which should provide a boost” for value stocks, he says. Research from BMO Capital Markets has found that since 1975, value stocks have outpaced growth stocks by an average of 3.2 percentage points per year when earnings growth is improving. Because value investors dabble in the unloved corners of the stock market, they need a steady hand and a contrarian mind-set. Financial companies, for instance, were struggling even before the Brexit-induced rout in the sector in late June, and they account for the biggest slice of the S&P 500 Value index. But bulls note that big U.S. banks are well capitalized and just passed a stress test that assumes con48



ditions more severe and longer-lasting than the financial crisis of a few years ago. And although the Federal Reserve is hiking short-term interest rates slowly, higher rates will eventually arrive, boosting banks’ profits. Beleaguered energy companies, which account for 13% of the S&P 500 Value index, should see profits rise as a result of an 81% jump in the price of oil since January. Read on to learn about the best mutual funds and exchange-traded funds for harnessing the power of value stocks. And to find out what distinguishes a value stock from a growth stock, see the box on page 49.

Value stocks have outpaced growth stocks by an average of 3.2 percentage points per year when earnings growth is improving.

American Century Equity Income (SYMBOL TWEIX) For this fund’s four managers, it’s not all about finding bargains. “We’re value investors, but we’re quality first and value second,” says Kevin Toney. He and his comanagers start by seeking firms that generate consistent profits and cash flow, have strong balance sheets, and pay steady dividends. Only after identifying these high-quality firms do they apply value filters, using a range of traditional measures, such as the ratios of price to earnings and price to book value (assets minus liabilities). Only stocks that trade below what the managers have determined to be the companies’ fair value get further consideration. “When you combine a value

focus with companies that have sustainable dividends, and you buy when stocks are cheap, you end up with a high-quality portfolio,” says another comanager, Phil Davidson. The fund, which has a sizable stake in preferred and convertible securities and boasts a current yield of 1.9%, delivers a relatively smooth ride. Over the past 10 years, Equity Income, a member of the Kiplinger 25, earned an annualized 7.5%, nipping the return of the S&P 500 and with 30% less volatility. Boston Partners All-Cap Value (BPAVX)

As manager Duilio Ramallo sees it, a good value stock should have three characteristics: an attractive share price; sturdy “fundamentals,” including a healthy balance sheet and talented executives at the helm; and “business momentum.” That last trait, says Ramallo, points to firms with improving results, as demonstrated by such things as expanding profit margins or rising revenues. In reality, says Ramallo, it’s hard to find a firm that passes all his tests, so he’ll settle for just two out of three. He bought shares of Qorvo, a maker of cell-phone radio-frequency filters, in early 2016, although it had recently hit a rough patch, because it was a solid, well-run company trading at a favorable price. He will give a little on value, too. For instance, he added to his position in Johnson & Johnson earlier this year even though the stock wasn’t cheap, he says, “because it’s a great company with good momentum.” But Ramallo won’t compromise on the quality of the basic business. “It’s hard for me to stomach a crummy company, even if it has good momentum and an attractive valuation,” he says. That’s why, Ramallo says, he won’t invest in airline stocks or General Motors. As the fund’s name implies, it can invest in companies of any size. These days, about 70% of the fund’s assets are invested in large firms; the rest are invested in midsize and small companies. Microsoft is the fund’s largest holding by market value; Sportsman’s

Warehouse Holdings, a retailer of outdoor sporting goods with a market capitalization of $340 million, is among its smallest. Ramallo, who has more than $1 million of his own money invested in the fund, took over as manager more than a decade ago, in 2005. Since then, the fund has returned 8.2% annualized, beating the S&P 500 by an average of 0.9 percentage point per year. Dodge & Cox Stock (DODGX) This fund, a longtime member of the Kiplinger 25, can be streaky, with a run of good years followed by a couple of relatively subpar years. Over the past 15 years, the fund’s annualized return of 6.9% beat the S&P 500 by an average of 1.2 percentage points per year. Stock benefits from its modest annual expense ratio of 0.52%, one of the lowest in the business for actively managed stock funds. The past couple of years have been challenging for investors, says Bryan Cameron, one of the fund’s eight managers. He says he and his colleagues are aware of the big picture, but otherwise they “stick to their knitting,” which means homing in on companies with bright prospects over the next three to five years and stocks selling at depressed prices. Lately, that has led the managers to add financial-services firms, including American Express, and energy stocks, such as producer Concho Resources. At the same time, the managers’ distaste for pricey stocks has caused them to shun utilities and telecommunications-services stocks, two of the past year’s best-performing industries. That has hurt Stock’s results. But, says Cameron, “we invest for the long term, and patience is rewarded over long periods of time.” Perkins Small Cap Value (JSCVX) Value

investing is not just about buying when others are fearful. “It’s trying to buy the right companies when others are fearful,” says Tom Reynolds, one of the fund’s three comanagers. With that in mind, the managers

look for small, high-quality companies that are cheap by a variety of statistical measures. To steer clear of value traps (stocks that are cheap for good reason and likely to keep falling) or to avoid getting in too early, the managers dig deep into each prospective stock. They analyze a firm’s industry, its standing in the markets it serves, its competitors and trends that might advance—or retard—the company’s growth. Then they craft positive and negative scenarios for each prospec-

tive stock. “We get creative about what can go wrong, from new regulations to a plant shutdown,” says Reynolds. The range of scenarios helps them develop a risk-reward picture, as well as shareprice targets based on the best- and worst-case outcomes for each stock. “The ideal stock has a 15% upside and 10% downside,” says Reynolds. The managers’ attention to risk helps dampen volatility. Over the past three years, Small Cap Value’s 8.9% return beat its benchmark, the Russell

Growth versus Value

What Makes a Value Stock WHAT IS A VALUE STOCK, REALLY? “I KNOW IT WHEN I SEE IT,” SAYS ROBERT WAID, who heads up the index business at investment consulting firm Wilshire Associates. “It’s like the difference between pornography and art.” All kidding aside, Waid admits that determining what constitutes a bargain stock—and its counterpart, a growth stock—is complicated. In simplest terms, a value stock is one that is cheap in relation to such basic measures of corporate performance as earnings, sales, book value and cash flow. Examples of what are commonly viewed as value stocks are Citicorp, ExxonMobil and JPMorgan Chase. Growth companies, by contrast, boast rapidly expanding profits and revenues, and their stocks typically command high valuations. Think and Facebook. Several firms, including Wilshire and S&P Dow Jones Indices, maintain indexes that divide the stock market into growth and value segments. They do so by ranking stocks on a variety of factors, such as profit and sales growth, price-earnings ratios, and so on. Financial and energy stocks tend to fall in the value camp; technology and health care land in the growth group. But there’s plenty of room for interpretation. HOW S&P SEES IT Are Alphabet (the former Google) and Microsoft The five biggest holdings in the growth stocks or value stocks? Apparently, they S&P Growth and Value indexes. are both. Dodge & Cox Stock, a classic value fund, and Harbor Capital Appreciation, which focuses Percent of Company weighting on fast growers, own both stocks. S&P 500 Value Index As once-small firms turn into behemoths, 1. ExxonMobil 3.1% growth companies often turn into value stocks. 2. Johnson & Johnson 2.7 That was certainly the case with such former 3. General Electric 2.3 technology luminaries as Cisco Systems, EMC and 4. Berkshire Hathaway 2.2 Intel. And that may be happening today with Apple and biotech giant Gilead Sciences. At its 5. AT&T 2.1 June 30 close of $96, Apple was selling for 11 times S&P 500 Growth Index estimated year-ahead earnings, and Gilead, at 1. Apple 4.3% $83, was trading for a seemingly absurd 7 times 2. Alphabet 3.4 forecast profits. The overall U.S. stock market 3. Microsoft 3.3 sells for 17 times estimated earnings. And 4. Johnson & Johnson 2.7 although earnings growth at both companies 5. General Electric 2.4 has stalled, index sponsors for the most part SOURCE: S&P Dow Jones Indices still consider both firms to be growth stocks.






2000 Value index, by an average of 2.5 percentage points per year and did so with 18% less volatility than the index. T. Rowe Price Small-Cap Value (PRSVX)

Undiscovered, unloved or misunderstood small companies that trade at undervalued prices fill this fund, a member of the Kiplinger 25. But that doesn’t mean the portfolio is loaded with “falling knives and things that look like they’re falling apart,” as manager David Wagner puts it. A good example of the kind of stock he looks for is One Gas. Wagner picked up shares of the natural-gas utility in early 2015, after it was spun off by Oneok, which processes, transports and stores gas. At the time, One Gas was seeking approval from utility regulators in several states to earn higher profits, a process that “was going to take some time,” says Wagner. But he had confidence in the firm’s executives, and One Gas was able to win approvals in Kansas, Oklahoma and Texas. The stock has climbed nearly

60% since he first bought the shares. Small-company stocks have struggled since Wagner took over management of Small-Cap Value in June 2014. Since his ascension, the Russell 2000 Value index lost 0.9% annualized, while the fund essentially broke even. T. Rowe Price Value (TRVLX) Mark Finn, manager of T. Rowe Price Value, likes a good hullabaloo: “I look for relatively high-quality companies experiencing controversy. I pull them apart with my analysts and identify whether there’s an opportunity.” If the firm’s troubles are temporary, Finn subjects the company to further scrutiny to determine whether the stock is cheap enough to warrant an investment. Finn favors stocks with price-earnings ratios and other statistical measures of value that are low relative to historical figures, both to their industry and to the overall market. Lately, he has been “poking around” in bank stocks, such as Citigroup and Morgan Stanley, whose price-to-book-value

No-Loads and ETFs

10 GREAT FUNDS FOR A CHANGING MARKET Our picks include six no-load mutual funds and four exchange-traded funds and cover the full gamut of stock-market capitalizations. Five of the mutual funds charge less than 1% per year for annual expenses, and three of the ETFs charge 0.15% or less. Annualized total returns Year-toSymbol date 1 yr. 5 yrs. 10 yrs.


Expense ratio

MUTUAL FUNDS American Century Equity Income







Boston Partners All-Cap Value







Dodge & Cox Stock







Perkins Small Cap Value







T. Rowe Price Small-Cap Value







T. Rowe Price Value







PowerShares Dynamic Large Cap Value







SPDR S&P 400 Mid Cap Value








Vanguard Small-Cap Value







Vanguard Value
















Through June 30. SOURCE: © 2016 Morningstar Inc.





ratios are at historically low levels. Big European energy firms, such as France’s Total, the world’s fourthbiggest energy company, look attractive, too. “The major energy firms have resources and proven reserves, so they can generate cash over a longer period of time,” Finn says. Since Finn became manager of T. Rowe Price Value in late 2009, the Kiplinger 25 member has returned 12.3% annualized. That narrowly trailed the 12.6% annualized gain for the S&P 500.

VALUE-ORIENTED ETFS Exchange-traded funds with a value tilt offer a lower-cost way to invest in the shift toward bargain stocks. You can find a basic ETF for value stocks of any size. For example, the “Schwab Growth” portfolio in “The Right ETF Mix for You,” on page 54, incorporates SPDR S&P 400 Mid Cap Value ETF (MDYV, $83), which tracks the cheaper stocks in the S&P MidCap 400 index. It charges 0.15% annually. Like your stocks big and cheap? Then go for Vanguard Value ETF (VTV, $85), which follows an index created by the Center for Research in Security Prices and charges just 0.08% per year. Finally, if you want a smallcap value ETF, use Vanguard SmallCap Value ETF (VBR, $105), which also tracks a CRSP index and charges the same 0.08% annually. Or consider an ETF that seeks to beat a traditional index. PowerShares

Dynamic Large Cap Value ETF (PWV, $31)

tracks an enhanced index that screens for 10 factors, including historic earnings and sales growth and various valuation measures. The fund recently held 50 stocks, with AT&T, Verizon Communications and Johnson & Johnson at the top of the list. PowerShares charges 0.57% a year, well above the expense ratio for standard index-based ETFs. Although the fund is neck and neck with Vanguard Value over the past five years, the PowerShares ETF beat the Vanguard ETF by an average of 2.1 percentage points per year over the past 10 years. ■


Why You Should Buy Bonds on Your Own Investing in individual debt securities has advantages over funds. We show you how to do it. BY JEFFREY R. KOSNETT


exchange-traded funds are ideal vehicles for building wealth. But funds are not perfect, and those that focus on bonds come with their own special flaws. Aside from the drag of ongoing fees, a drawback of all managed products, even the best-run bond funds face a common hazard: Except in rare instances, they never mature. As a result, you cannot tell the amount of current income your investment will produce over any time frame. Plus, you have no assurance that you can recover the amount you paid should market conditions sour. Share prices of funds, like those of the bonds they own, usually decline whenever interest rates climb or when particular categories of bonds, such as junk or emerging-markets debt, lose favor. And with rates at rock-bottom levels around the globe, holders of bond funds face considerable risk once yields start to rebound in earnest. Buying individual bonds is one way of dealing with those shortcomings. If you buy bonds directly, you can lock in your yield. And as long as an issuer makes good on its obligations, you’ll get back the face value of the bond when it matures (or is called—that is, if the issuer repays the loan before the maturity date), no matter what happens to interest rates and the bond’s price in the interim. When you buy a bond, you’ll pay a commission, but you won’t pay any ongoing fee to hang on

to the bond. Not even the lowest-cost bond fund can make that claim. It’s no wonder, then, that rank-andfile investors are buying more individual bonds than ever. Oodles of bonds are in circulation now (after years of heavy issuance by businesses and governments), and online brokerages have greatly expanded their offerings of municipal and corporate bonds. You can choose among tens of thousands of bonds, including those issued by the U.S. government, corporations, state and local governments, and even foreign governments. Brokers have also improved their websites so you can search by rating, maturity, type of issuer and other features. If you like to dig deep, you can examine a borrower’s financial statements and a bond issue’s original prospectus. In short, buying individual bonds isn’t as hard as it may seem. Below, we explain how you can do it. On page 53, we show you how to understand the key terms and figures for a typical corporate bond. For a rundown of the risks of owning individual bonds, see the box on page 52.

Where do I begin? First, know your objective. Do you want maximum current income? If so, you’ll have to buy low-quality debt or be willing to invest in bonds with long maturities. If preservation of principal is crucial, stick with high-quality debt with relatively short maturities. Are

you in a high-enough tax bracket to justify investing in tax-free municipal bonds, which, despite lower stated yields, may deliver higher after-tax returns than taxable bonds? Do you want to match your bonds’ maturities with a particular savings goal or life milestone, such as retirement or the onset of college tuition bills?

Where should I shop? You can buy Treasury bonds directly from the U.S. government through Treasury Direct (www.treasurydirect .gov). For other debt, as well as U.S. government bonds already in circulation, you will need a brokerage account. Popular online brokers such as Fidelity, Charles Schwab, E*Trade and TD Ameritrade have extensive bond listings. Full-service brokers and investment advisers can also accommodate you.

Do bonds have symbols? Each bond or slice of a bond issue (with varying rates and maturities) has a serial number, known as a CUSIP. The CUSIP for the issue we illustrate on page 53, the Ford Motor Credit 4.0% note due on March 20, 2026, is 34540TLH3.

How are bonds priced? Bond pricing is not as straightforward as it is for stocks and mutual funds. For starters, bond prices are usually quoted on a basis of $100, which is equivalent to $1,000, or par value of a typical bond. A bond with an asked price of $101.53 will cost you $1,015.30. The price may also include a small amount of accrued interest, which you must pay to the seller if you are buying the bond between scheduled interest-payment dates.

How much do brokerage fees add to the cost? The price of a bond typically incorporates a markup above the price that the brokerage firm paid to acquire the bond (when a brokerage sells a bond from its own inventory, it is said to act as a principal). Brokers acting as principals do not have to disclose the 09/2016





* Key Risks

The Downside Inflation. Increases in the cost of living erode the value of your interest payments and the value of the principal you get back when a bond matures. Assuming modest annual inflation of 2%, a $1,000 bond purchased today has only $817 worth of purchasing power in 10 years. Default. Unless you buy only U.S. government–backed debt, you face the risk that a bond’s issuer could default on its obligations. The best defense is diversification. If you own high-quality bonds, you should hold securities from at least 10 issuers; if you own triple-Brated bonds, up the number to 20. If you dabble in junk bonds, hold even more—or, better yet, invest through a mutual or exchange-traded fund. Rising interest rates. Bond prices normally fall when interest rates rise. But if you keep a bond until it matures and the issuer repays the principal in full and on time, that shouldn’t be a problem unless inflation is surging. Call. If you buy a bond that’s callable, the issuer may force you to redeem the bond early, typically at face value. If you paid more than face value, you will forfeit that premium when the bond is redeemed. Downgrade. The price of a bond is almost certain to drop if a rating agency downgrades its assessment of the issuer. Again, if you hold to maturity and the issuer pays you back on time, that isn’t a problem. Liquidity. Bonds don’t trade as smoothly as stocks do, so spreads between bid and asked prices tend to be wider than for stocks. Also, if you need to sell a bond, there may not be a bevy of buyers, so your broker is likely to offer you appreciably less than you think the bond is worth.




amount of the markup, which can range from 1% to 5% of a bond’s value. But if a broker is buying a bond for you in the open market, it must disclose the amount of the commission it charges. Standard & Poor’s estimates that the average retail investor pays 0.85% of principal to buy an investment-grade corporate bond and 1.21% to purchase an investment-grade municipal bond.

How can I be sure that I’m not getting ripped off? The availability of free public data helps you make sure that you’re getting a fair price when you buy a bond. Using a bond’s CUSIP, you can follow an issue’s up-to-the-minute price action at (for corporate bonds) or emma.msrb .org (for municipals). If you have accounts with multiple brokers, you can also ask them whether they can sell you the same bond and at what price. If they don’t have the same exact bond in their inventory, check prices of bonds with similar maturities, yields and credit ratings.

What do all the yield figures mean? Start with a bond’s coupon, which tells you the interest rate that the borrower is paying on the original face amount of the bond. If a bond comes with a coupon of 4%, the borrower is paying investors $40 a year for every $1,000 in principal. For most bonds, the key figure is yield to maturity. The figure takes into account the amount you actually paid for the bond, which may have been more or less than face value. If a $1,000 bond’s coupon is 4% but you were able to buy the bond for $900 (probably because interest rates, which move in the opposite direction of bond prices, rose after the bond was issued), your yield to maturity will be more than 4%. That figure represents interest payments plus the additional profit of $100 you’ll collect when the bond matures. By contrast, if you pay $1,100 (probably because rates fell since the bond was issued), your yield to matu-

rity will be less than 4% because you will receive $100 less than you paid for the bond when it comes due.

What is the current yield? That’s simply the ratio of the interest paid per year to the bond’s current price. If you pay $1,000 for a bond that has a 4% rate, your current yield is 4%, whether it’s a one-year or 30-year security. You may see bonds ranked this way, but yield to maturity is more meaningful.

Does it make sense to compare a bond’s current yield with the yield on a CD? Yes. The U.S. government guarantees timely payment of interest and principal for most CDs, as well as for Treasury securities. So when you invest in non-guaranteed bonds, you should always get extra yield because no matter how impregnable you believe the issuer’s credit to be, there is always some risk that the company or municipal entity you’re lending money to might default on its obligations.

I’ve seen the phrase “yield to worst.” What is that? As the name suggests, it’s the worst possible return you can get. Essentially, it’s either yield to maturity or yield to a bond’s next possible call date, whichever is lower. If you’re looking at a bond that is callable and selling for more than face value, focus on yield to worst.

What if I want to sell my bond before maturity? When you buy a bond, also note the broker’s asked price. That shows you how much the broker is willing to pay to take that specific bond off your hands at that moment and is always less than what you’d pay to buy the bond. But that doesn’t mean you’d get that price if you tried to sell the bond at a later time. Depending on how frequently a particular issue is traded, you might have to accept considerably less. And that’s why it’s best to hold a bond until it matures or is called. ■

HOW TO READ A BOND LISTING You can use an online broker to find bonds that are right for you. In search of a good yield, we used Fidelity to screen for corporate bonds rated triple-B and set to mature in 2026. Our search turned up 143 bonds, including the Ford issue dissected here.

4.000% 101.500 1.847%


THE INTEREST RATE The issuer pays $40 a year for each $1,000 bond.

THE YIELD TO MATURITY, or what you’ll earn if you hold the bond until it comes due. This figure is slightly lower than the coupon because you’re paying a small premium above face value for the bond.

THE PRICE YOU PAY FOR EACH BOND —in this case, $1,015.00. (Fidelity tacks on an additional $1 per bond as its commission.)

THE YIELD TO WORST, or the lowest possible return you would earn if the bond is called, or redeemed, before its maturity date. Click a button and you’ll be taken to a page that shows Ford may call the bond as early as March 20, 2017, for face value.




4 3 1 How two big raters assess the creditworthiness of the issue. Moody’s and S&P see eye to eye on Ford Motor Credit.

3 There are 35 bonds available for purchase, and the minimum investment quantity is 10 bonds, or $10,150 at this price.

2 The price you’d receive if you wanted to sell the bond—in this case, $998.36 per bond. It can be hard sometimes to sell individual bonds. Better to hold your bonds until they mature.

4 IE (for Issuer Event) signals recent news about the company that could affect its bonds—in this case, an upgrade of the issuer’s credit rating. Check your broker’s website for the meaning of other abbreviations.







The Right ETF Mix for You We’ve designed commission-free packages for Fidelity, Schwab and Vanguard customers and an income portfolio that yields 5.1%. BY DAREN FONDA


against the markets every day, trying to pick stocks or bonds that will push them past their benchmark bogeys. More often than not, the markets win. But investors don’t have to lose out, too. They can choose to invest in exchange-traded funds instead. Broad ETFs can capture nearly all of a market’s returns by passively tracking a benchmark, such as Standard & Poor’s 500-stock index. Expense ratios are so low you may pay as little as

0.03% a year—just 30 cents for every $1,000 invested— for an ETF that mirrors the stock market. Yet with more than 2,000 ETFs now on offer, picking a few good ones can be daunting. More than a dozen funds track versions of the S&P 500 alone. Plus, scores of ETFs aim to beat the markets by carving out certain types of stocks or bonds, or by emphasizing things such as share-price momentum—anything to give them an edge over traditional indexes.

Some of these “smart beta” ETFs offer advantages. But many are likely to disappoint in the long run. Expense ratios tend to be steep, eating into returns. Moreover, free lunches don’t last long. If one exists, investors will quickly find it, bid up the mispriced securities and gobble up “excess returns” before holders of these enhanced ETFs can benefit. Rob Arnott, head of investment-services firm Research Affiliates and one of the fathers of smart-beta

investing, warned in February that many smart-beta ETFs may “crash” because they’ve become too popular, with prices of their underlying securities so inflated that they’re unlikely to deliver market-beating returns. Whatever your goals, the portfolios below can serve as the bedrock of your investment program for years. Three of them hold ETFs you can buy without trading commissions at either Fidelity, Schwab or Vanguard. The fourth, an income portfolio, isn’t

* Portfolio 1

* Portfolio 2

Schwab Growth

Fidelity Moderate

The 80% allotment to stocks makes this our most-aggressive bundle. Schwab clients can build this portfolio, with its hefty stakes in small- and mid-cap ETFs, without paying commissions.

Fidelity clients can assemble this well-balanced portfolio without incurring brokerage commissions. The package holds a bit more in stocks than the conservative portfolio and generates slightly less income. Expense ratios of the ETFs range from 0.03% to 0.15%.

CURRENT YIELD: 2.1% CURRENT YIELD: 2.2% STOCKS Schwab U.S. Large-Cap (SCHX) Schwab U.S. Small-Cap (SCHA) Schwab U.S. Dividend Equity (SCHD) SPDR S&P 400 Midcap Value (MDYV) Schwab International Equity (SCHF) Schwab International Small Cap Equity (SCHC)

BONDS Schwab U.S. Aggregate Bond (SCHZ) Pimco Investment Grade Corporate Bond Index (CORP)




80% 25% 25% 10% 10% 5% 5%

iShares Core S&P Total U.S. Stock Market (ITOT) iShares Core MSCI Total International Stock (IXUS) Fidelity MSCI Real Estate Index (FREL) iShares Core S&P Small-Cap (IJR) iShares Core Dividend Growth (DGRO)

20% 15% 5%

iShares Core U.S. Aggregate Bond (AGG) iShares iBoxx $ Investment Grade Corporate Bond (LQD)



60% 20% 15% 10% 10% 5% 40% 30% 10%

geared toward any particular broker, so you’ll likely have to pay commissions to buy at least some of the ETFs it contains. Each basket features a broad mix of common stocks and bonds, including several funds in the Kiplinger ETF 20. Our income portfolio also holds less-traditional asset categories, such as master limited partnerships. If you want maximum gains, go for our growth portfolio, which mainly uses Schwab-run ETFs. The funds in this basket feature the highest mix of stocks (80%) compared with bonds (20%). U.S. stocks have returned about 10% a year, on average, since 1926, including dividends. That trounces the long-term returns of bonds. But it’s unusual for stocks to deliver the average return in any given year, and they have shown they can lose more


than one-third of their value in short order. Buy this portfolio only if you won’t sell in a panic during a market downturn, and aim to hold it for at least a decade. If you’re more risk-averse or plan to start withdrawing money in less than 10 years, choose our moderate or conservative portfolio. These baskets of ETFs hold considerably less in stocks than the growth portfolio, making them more stable. Fewer stocks, more yield. Our

moderate-risk package features a lower stake in stocks (60%). It generates a decent yield (2.2%), thanks to ETFs that hold real estate investment trusts and corporate bonds. Fidelity customers can assemble this portfolio without paying brokerage fees. In our conservative package, ETFs holding high-

Portfolio 3

Vanguard Conservative This package is for Vanguard clients who want some growth but don’t want too much stock-market risk. If you want to cut risk even more, drop the small-cap ETF and cut the allocation to the foreignstock ETF to 5%. Vanguard clients can buy the ETFs without paying commissions. Annual fees range from 0.05% to 0.15%.

quality corporate and government bonds make up the largest slice of the pie (60%). With bond yields near record lows—and at negative levels in Europe and Japan— these ETFs don’t pay much. But they help push the portfolio’s income to about 2.5%, which isn’t bad in a lowyield world. Moreover, highquality bonds can be a bulwark against losses in stocks. This portfolio relies on Vanguard-sponsored ETFs, which don’t cost a penny to trade if you’re a Vanguard brokerage customer. For income investors, we recommend a mix of traditional bonds, preferred stocks and other income investments, aiming for a 5% yield. The portfolio may lose money, especially if

interest rates rise or if the yield investments, such as real estate investment trusts and master limited partnerships, take a hit. But lower bond prices would push up yields, delivering more income over time. And some of the portfolio’s yield investments, such as MLPs, may move up even as bond prices decline. Depending on which broker you use, you will have to pay commissions to trade some, if not all, of the ETFs in this portfolio. One note: Most of the ETFs in this basket shell out income that is taxed at ordinary income tax rates. Your returns may be much higher if you can hold the portfolio in an IRA or other tax-sheltered account. ■

* Portfolio 4

High-Income Combo With ETFs from five sponsors, you’ll pay commissions to buy some, if not all, of the funds in this portfolio. Of the four packages on these pages, this one is the most sensitive to swings in interest rates and would probably take the biggest hit if rates were to rise.

CURRENT YIELD: 5.1% COMMON STOCKS Schwab U.S. REIT (SCHH) Vanguard High Dividend Yield (VYM)

15% 15%



iShares US Preferred Stock (PFF)

STOCKS Vanguard Total Stock Market (VTI) Vanguard Total International Stock (VXUS) Vanguard High Dividend Yield (VYM) Vanguard Small Cap (VB)

40% 20% 10% 5% 5%

MORTGAGE REITs iShares Mortgage Real Estate Capped ETF (REM)


BONDS Vanguard Intermediate-Term Corporate Bond (VCIT) Vanguard Total Bond Market (BND) Vanguard Total International Bond (BNDX)

60% 40% 15% 5%

BONDS Schwab U.S. Aggregate Bond (SCHZ) VanEck Vectors Fallen Angel High Yield Bond (ANGL)


20% 10% 10%

15% 15% 10% 10% 40% 30% 10%






not enough to justify the considerable risks in emerging-markets debt. Yielding a hefty 11.0%, the new ETF on our list holds real estate investment trusts that buy pools of mortgages and other types of real estate debt. Mortgage REITs borrow at short-term interest rates and use the proceeds to buy long-term debt. The risk is that short-term rates could climb while long-term rates remain flat or edge down, raising financing costs and squeezing the firms’ profits. That has been happening a bit. But if the trend doesn’t accelerate, which we don’t think it will, the stocks should hold up, and the ETF should be able to maintain its quarterly payout of 30 cents per share. DAREN FONDA


ETF 20, it’s time for some changes. A few of the exchange-traded funds on our list don’t look as appealing as they did a year ago, so we’re swapping them for ETFs we find more attractive now. For starters, we’re dropping Vanguard FTSE Emerging Markets (symbol VWO). Although developing markets should fare well over the long haul, we’re worried about the ETF’s rising exposure to Chinese stocks. The ETF has been adding China’s A shares (stocks that trade on mainland markets), and its China exposure is likely to hit almost 29% by year-end, up from 25% last year. Given the tumult in mainland markets, which fell 19% in the first half of 2016, the ETF is getting too China-centric for our taste. More appealing, in our view, is

bonds, it yields 2.3%, compared with 1.8% for the 2020 fund. Stick with the ETF until its termination date in 2021 and you should get back your initial investment, less annual fees of 0.10%. Also in the bond world, we’re trading iShares J.P. Morgan USD Emerging Markets Bond (EMB) for ISHARES MORTGAGE REAL ESTATE CAPPED (REM). The emerging-markets ETF has been a champ, returning 11% in the first half of 2016. But it yields 4.9% now— Returns/Fees/Free Trades


(VSS), which we’re adding to the Kip

IBONDS DECEMBER 2021 TERM CORPORATE (IBDM). Both ETFs hold hundreds of

high-quality corporate bonds. But bonds in the incoming ETF all mature by December 2021—more than a year later than bonds in the outgoing fund. Because the new ETF holds longer-term KIPLINGER’S PERSONAL FINANCE



Exp. Commissionratio free trades

iShares Core S&P 500









iShares Core S&P Mid-Cap









iShares Core S&P Small-Cap
















PowerShrs Dynamic Lg Cap Val PWV
























iShares US Preferred Stock



Schwab US Dividend Equity



Vanguard High Dividend Yield


WisdomTree Intl LgCap Div




Financial Select Sector SPDR




Guggen S&P 500 Eq Wt Health





Vanguard Information Tech





WisdomTree Euro Hedged Eq




iShares Mortgage RE Capped



Pimco Total Return Active



PowerShares Senior Loan Port


VanEck Vectors Fallen Angel HY ANGL

Vanguard FTSE A-W Ex-US S-C Vanguard Total Intl Stock Vanguard Total Stock Market DIVIDEND STOCK FUNDS














































5.5% 11.0%


















iShares iBonds Dec 2021 Corp OPPORTUNISTIC STOCK FUNDS



0.48% S













Key: E=E*Trade 56

Annualized total returns 1 yr. 3 yrs. 5 yrs.



ETF 20. Tracking an index of about 3,440 small- and medium-capitalization stocks, the ETF holds a diverse mix of companies in both developed and emerging markets. Small-cap stocks tend to be riskier than large caps. But this ETF hasn’t been much more volatile than its large-cap counterpart. And it has edged foreign large caps over the past three years by an average of 1.6 percentage points per year. The ETF’s annual expense ratio is a low 0.17%, and the fund sports a 2.8% dividend yield. In the core bond category, we’re swapping iShares iBonds March 2020 Term Corporate (IBDC) for ISHARES

Recent Symbol price

F=Fidelity FT=Firstrade S=Schwab TD=TD Ameritrade V=Vanguard

Through June 30. —Fund not in existence for the entire period. Morningstar, MSCI.

★New to the Kiplinger ETF 20.

SOURCES: Barclays, FactSet,


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Visit to invest in an Amerivest Portfolio. All investments involve risk, and successful results are not guaranteed. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. Minimum investment of $25,000 required. Amerivest is an investment advisory service of Amerivest Investment Management, LLC, an affiliated registered investment advisor. TD Ameritrade, Inc., member FINRA/SIPC. © 2016 TD Ameritrade IP Company, Inc.



JEFFREY R. KOSNETT > Income Investing

My Three-Day Rule

F In any newsdriven market crisis, wait until the third business day after the news breaks to trade anything.




opportune times to reassess your strategy, your holdings and your tolerance for risk. Beyond that, Brexit should have a noticeable impact on interest rates and rate-sensitive investments. By sparking talk of recession in the U.K. and continental Europe, Brexit is yet another depressant on rates, both here and abroad. That means the 35-year-long bull market in Treasuries and high-quality corporate and tax-free bonds is alive and well (bond prices move in the opposite direction of interest rates). The chances that the Fed will kill the bull with a series of rate hikes later this year have fallen from slim to nil. In fact, the Brexiteers unwittingly padded values in the U.S. bond market. Ryan ALM calculates daily indexes for every Treasury maturity from one month to 30 years. Applying Ryan’s numbers to the $11.9 trillion of outstanding Treasury debt, I figure that post-vote bond buying added more than $110 billion to the combined market value of all Treasury bills, notes and bonds in three days. On a roll. Other yield investments benefited,

too. The stars: utility stocks, those indefatigable generators of power, heat and dividends. In the first six months of 2016, the Dow Jones utility index returned 20% (including dividends). Because of this stunning performance and the resulting high valuations, the sector is ripe for a correction. That said, you shouldn’t jettison long-held utilities that are delivering high dividend yields based on your original cost. Finally, turbulence overseas reinforces the dollar’s stature as the ultimate safe harbor. A strong dollar, although a negative for U.S. exporters and multinationals, should hold down inflation and help keep interest rates low. Turmoil in the U.K. and Europe poses diplomatic, political and security risks. But it shouldn’t have a dramatic impact on your financial strategy. ■ JEFF KOSNETT IS A SENIOR EDITOR AT KIPLINGER’S PERSONAL FINANCE.


or all their glorious history, the British, by voting to leave the European Union, have created a new standard for political and financial recklessness. In one fell swoop, voters in the world’s fifth-largest economy managed to sack the prime minister, undermine their nation’s currency, threaten its global political stature and jeopardize its critical banking sector. At stake: potential job losses, intensified class warfare and who knows what else. Financial markets hate chaos, even when it’s occurring in a small country such as Greece. When a big-league nation loses its mind, investors pay a terrible price. On June 24, the day after voters in the United Kingdom approved a referendum to leave the EU, stock markets worldwide lost more than $2 trillion. On June 27, stocks kissed off another trillion. But by the time the second quarter ended a few days later, the Dow Jones industrial average sat 866 points above its June 27 low. Investors had recouped most of their losses—that is, those investors who didn’t hastily dump their stocks and stock funds. This prompts me to reiterate the threeday rule, my personal iron law of investing, because Brexit absolutely revalidates it. Simply put, in any news-driven market crisis, wait until the third business day after the news breaks to trade anything—bonds, stocks, funds, gold, anything. Meditate. Breathe. Savor fine wine. Just don’t obsess. Never mind how much shareholder value the TV shouting heads say just got “destroyed.” The selling waves are almost always fleeting, as plenty of previous seismic events—Chinese growth scares, Federal Reserve credit tightening, U.S. debt-ceiling brinkmanship, terrorist atrocities—underscore. Losses generally persist for about 72 hours, not counting weekends and holidays. Then bargain hunters and computer-driven buyers arrive, markets go green, and the sense of dread lifts. I am not suggesting that you pretend nothing happened. These episodes are


Invest in Real Estate? It’s Easy These five real estate investment trusts offer above-average yields and potential for appreciation. BY DAREN FONDA



landlord, a real estate investment can be a ton of work, with an uncertain payoff. But stick with real estate investment trusts and you’re likely to be rewarded. Over the past 15 years, property-owning REITs have returned 11.3% annualized, nearly twice the 5.8% annualized gain of Standard & Poor’s 500-stock index. REITs (rhymes with treats) own everything from apartment buildings to offices, shopping malls and hotels. Regardless of what they hold, they’re required to shell out at least 90% of taxable income to shareholders. That makes them dividend gravy trains. REIT stocks today yield 3.7%, on average, well above the 2.2% yield of the S&P 500.

REITs could get an extra lift from a new buying wave by mutual funds. Until now, S&P has classified REITs as financial stocks, lumping them in with banks, brokers and other such firms. But starting in September, two big index providers—MSCI and S&P Dow Jones Indices—plan to make real estate a stand-alone sector. It will be the eighth-largest group in the S&P 500—bigger than materials, telecommunications and utilities. Of course, REITs could take some lumps, too. After returning 24.0% over the past year, the stocks have edged into pricey territory, trading, on average, at 103% of their net asset value (the value of their holdings, minus debt), slightly above the historical average. More-

over, REIT stocks could face pressure if long-term interest rates were to climb. That would make REIT yields less attractive than the yields of bonds and other fixed-income investments. But Kiplinger’s doesn’t expect big rate hikes over the coming year, partly because inflation expectations remain muted. REITs continue to offer yields that exceed those of investmentgrade bonds. And REIT payouts are likely to climb more than those of utilities or other income investments, making them a better bet over the long haul. Below are five REITs we like for their yields, growth prospects and reasonable valuations. Note that priceearnings ratios are based on estimated year-ahead funds from operations (FFO), a common REIT measure that represents net income plus depreciation expenses. (Returns, prices and related data are through June 30.)


Gaming and Leisure Properties (SYMBOL

GLPI, $34, P/E 11, YIELD 6.5%) Visit

a casino and you’ll probably lose money. A better bet: investing in Gaming and Leisure Properties. The REIT recently bought 14 casinos 09/2016

from Pinnacle Entertainment in a deal worth about $5 billion. Gaming issued $1.1 billion worth of stock to help finance the acquisition, and it now carries a hefty $4.9 billion in long-term debt on its balance sheet. But the purchase is a good deal for shareholders. With revenue now flowing from 35 casino and hotel properties in 14 states, Gaming and Leisure should generate ample cash to fund its dividend and raise it as rental income climbs. Jeffrey Kolitch, manager of Baron Real Estate Fund, figures that within a year the firm will bump its annual payout from $2.24 per share to $2.45. At 11 times estimated FFO, the stock trades well below the average of 21 for all property-owning REITs. The shares look “mispriced,” says Kolitch, who sees the stock hitting $41 over the next year.


Host Hotels & Resorts (HST, $16, P/E 10, YIELD

4.9%) Lodging REITs, such

as Host Hotels, have hit the bargain bin. Investors worry that hotel revenues, after climbing for years, appear to be peaking, and they fear that competition from Airbnb and other homerental websites will cut into hotel profits. All of this has taken a toll on Host’s stock, which has sunk 14% over the past year. Yet at just 10 times projected FFO, the shares look compelling. Host, the largest U.S. lodging REIT, owns 92 upscale hotels and resorts, including luxury properties such as the Hyatt Regency Maui Resort and Spa. Demand for its hotels, which KIPLINGER’S PERSONAL FINANCE




other companies manage, appears to be healthy, with average revenue per available room (a common lodging-REIT measure) climbing 3.6% in the first quarter compared with the same period in 2015. For Host’s core clientele—upscale business and leisure travelers—competition from the likes of Airbnb isn’t likely to pose a major threat. Granted, Host’s revenues would slump if the economy were to weaken and business travelers cut spending on lodging. But Host’s balance sheet looks strong, with a manageable debt level relative to its income. Its dividend should be secure, too, says Mike Underhill, manager of RidgeWorth Capital Innovations Global Resources and Infrastructure Fund. Over the next year, he expects the stock to hit $19.


Realty Income (O, $69, P/E 23, YIELD 3.5%) Most

REITs pay quarterly dividends, but Realty shells out cash monthly, paying about 20 cents per share like clockwork. That income arises from Realty’s vast collection of properties: 4,615 buildings, leased mainly to big retailers, such as Walgreens and Dollar General. These firms sign long-term triple-net (or NNN) leases with Realty, requiring them to pay for all property taxes, maintenance and insurance. Although Realty isn’t a high-growth REIT, it has paid dividends for a stunning 551 consecutive months. Its property occupancy rate is 98% (and has 60


never slipped below 96%), and revenues are climbing thanks to rent increases built into leases and a steady stream of property acquisitions. Realty expects FFO to rise by as much as 4.3% this year. That should support more growth in the dividend, which Realty has increased at an annualized rate of 4.7% since going public in 1994. At 23 times FFO, Realty is one of the pricier REITs, and its stock may stay flat in the near term. But you can scoop up steady monthly dividends while waiting for the shares to edge higher over the long run.


Sovran Self Storage (SSS, $105, P/E 19, YIELD

3.6%) Sales are strong for

Sovran, a self-storage REIT

that owns more than 550 properties under the Uncle Bob’s brand. The firm is landing customers with its modernized facilities, many of which are located in hightraffic urban and suburban areas. Occupancy hit 90.5% in the first quarter, up one percentage point from a year earlier. Sovran is also expanding with a $1.3 billion deal, announced in April, to acquire 84 properties from LifeStorage, whose buildings generate higher average rents per square foot than Sovran’s real estate. Sovran issued 6.9 million shares of stock to finance the LifeStorage deal. That could dilute FFO per share in the near term and lower the REIT’s net asset value per share. Still, analysts see Sovran’s revenues jumping

* Three Picks

Top Funds for REITs IF YOU PREFER TO BUY REAL ESTATE INVESTMENT trusts through a fund, you have plenty of choices. One good one is MANNING & NAPIER REAL ESTATE S (SYMBOL MNREX), which holds 56 real estate stocks—mainly REITs, such as mall owner Simon Property Group and storage firm Prologis. Over the past five years through June 30, the fund returned 12.7% annualized, beating 93% of its peers. One drawback: Annual fees, at 1.09%, are above average. FIDELITY REAL ESTATE INVESTMENT (FRESX) returned 12.9% annualized over the past five years. Veteran manager Steve Buller looks for REITs that offer growth at a reasonable price and says he’s emphasizing health care and triple-net-lease REITs these days. The fund yields 2.5% and costs 0.78% in annual expenses.

If you simply want to track the REIT market, buy SCHWAB U.S. REIT ETF (SCHH), an exchange-traded fund that follows the Dow Jones U.S. Select REIT index, a basket of 119 stocks weighted by market value. Yielding 3.0%, the ETF pays out more than most mutual funds, thanks to a rock-bottom expense ratio of 0.07%.


a healthy 17% this year, to $430 million. Sovran recently hiked its annual dividend rate by 11.8%, to $3.80 per share, and it ramped up its 2016 FFO forecast to as much as $5.55 per share, up 14.4% from 2015. Although the stock isn’t inexpensive at 19 times FFO, it has room to climb. Bank of America Merrill Lynch, which rates the stock a “buy,” expects the shares to hit $120 a year from now.


STAG Industrial (STAG, $24, P/E 15, YIELD 5.8%)

Leasing warehouses to autoparts makers and other firms, STAG has been snapping up properties since going public in 2011, amassing 223 buildings with more than 40 million square feet of space. And STAG aims to keep up its growth, planning to buy or develop $1.7 billion worth of properties over the next few years. Spending heavily to acquire warehouses has pushed STAG’s debt load to 36% of its property values, according to brokerage firm Baird. That’s slightly above average for industrial REITs, but it isn’t excessive relative to STAG’s income. Meanwhile, rental income is climbing steadily. FFO per share in the first quarter rose by 11.4% from the same period a year earlier, and STAG generates plenty of cash to support its dividend, which, Baird says, it should be able to increase at an annual clip of 7% to 8%. Trading about 16% below STAG’s net asset value of $28.30 a share, the stock looks like a good value, says Baird. ■


Dividends From Tiny Companies This obscure fund has chalked up solid results by investing in micro-cap stocks.

SMALL-COMPANY VALUE FUNDS Ranked by one-year returns Annualized total Max. return through June 30 sales

Symbol AVFAX

1 yr. 3 yrs. 7.8% –3.0%

2. North Star Dividend I




2.00 r



3. Principal Small-MidCap Dividend Inc A@








4. Ivy Small Cap Value A@








5. Queens Road Small Cap Value








6. Nuveen Small Cap Value A@








7. Victory Sycamore Small Company Opp A@ SSGSX







8. Intrepid Endurance Investor@





2.00 r



9. Perkins Small Cap Value T@








10. Franklin Small Cap Value A@








–4.2% 6.0%


to expand their businesses, or so the thinking goes. Thus, investors typically associate dividends with large, cash-rich companies. But Eric Kuby and Peter Gottlieb, managers of NORTH STAR DIVIDEND FUND, note that more than half of all U.S. stocks yielding at least 3% have market values of less than $1 billion. Plus, compared with their larger brethren, small-cap dividend payers are relatively cheap, they say. Kuby and Gottlieb want stocks that are inexpensive and yield at least 3%. And they focus on the smallest of the small caps. At last report, 87% of North Star Dividend’s $56 million in assets was in micro-caps, which Morningstar defines as stocks with market caps of $250 million and less. Beyond size considerations, the managers favor firms with ample free cash flow (cash profits left after capital outlays), little debt and an ability to lift their payouts. Kuby says that paying a dividend helps small firms avoid making overly aggressive moves, such as foolish takeovers. That and the emphasis on bargains in turn help temper the fund’s volatility. Over the past three years, North Star was 38% less jumpy than the small-company Russell 2000 index; at the same time, the fund beat the benchmark by an average of 3.1 percentage points per year. The biggest positions recently were Monmouth Real Estate Investment Corp., Orchids Paper Products and snowplow maker Douglas Dynamics. RYAN ERMEY

Exp. Toll-free 5 yrs. charge ratio number 4.3% 3.75% 1.75% 800-528-3780

Rank/Name 1. Aegis Value A@


20 LARGEST STOCK MUTUAL FUNDS Ranked by size Assets† Rank/Name

Symbol (billions)

1. Vanguard Total Stock Market Idx Inv@ VTSMX


Annualized total return through June 30

1 yr. 2.0%

3 yrs.

Max. sales 5 yrs. charge

Toll-free number




2. Vanguard Total Intl Stock Idx Inv@







800-635-1511 800-635-1511

3. Vanguard 500 Index Inv@







800-635-1511 800-421-0180

4. American Growth Fund of America A@ AGTHX






5. American EuroPacific Growth A@








6. Fidelity Contrafund@








7. American Capital Income Builder A@














8. American Income Fund of America A@ AMECX 9. Fidelity 500 Index Inv@








10. American Balanced A@








11. Vanguard Wellington@‡








12. American Capital World Gro & Inc A@ CWGIX







13. American Washington Mutual A@








14. Franklin Income A@








15. American Invstmt Co of America A@








16. American Fundamental Inv A@







800-421-0180 800-421-0180

17. American New Perspective A@







18. Dodge & Cox Stock








19. Vanguard Mid Cap Index Inv@








20. Dodge & Cox International Stock**















@Rankings exclude share classes of this fund with different fee structures or higher minimum initial investments. †For all share classes combined. ‡Open to new investors if purchased directly through Vanguard. **Closed to new investors. rMaximum redemption fee. MSCI EAFE index consists of developed foreign stock markets. SOURCES : Morningstar Inc., Vanguard.


RETURNS FOR THOUSANDS OF FUNDS ONLINE Use our Mutual Fund Finder to get the latest data and see the top performers over one-, three- and five-year periods. Research a specific fund, or compare multiple funds based on style, performance and cost. And view details including volatility rank and turnover rate. To use this tool, go to

EXPLANATION OF TERMS Return means total return and assumes reinvestment of all dividends and capital gains; three- and five-year returns are annualized. Returns reflect ongoing expenses but not sales charges. Maximum sales charge A figure without a footnote means the commission is deducted from the money you send to the fund. A figure with an r is the maximum redemption fee charged when you sell shares. Funds that charge both sales and redemption fees are footnoted with an s next to the front-end load. Expense ratio is the percentage of assets claimed annually for operating a fund. 09/2016







Ⓦⓙ ⓝⓏⓏ

ⓙⓙⓕ⒪Ⓥ⒪ⓞⓙⓟⓜⒶ⒪ Ⓩ⒪ⓞⓒⓏ


From the beaches of Samoa to the palaces of India, these excursions include all the arrangements and offer as much hand-holding as you want. BY MIRIAM CROSS raveling abroad with an organized tour has always been appealing because the operator takes care of the logistics, nabs group rates for hotels and sightseeing, and provides VIP entry to popular, crowded attractions. “Tours are a way of accessing unique experiences in hard-to-reach parts of the world,” says Christine Sarkis, senior editor at // But you don’t have to be stuck aboard a bus with 40 tourists toting selfie sticks. Tour operators are trimming group sizes, relaxing rigid itineraries and incorporating more features to satisfy travelers thirsting for adventure.





Go on a tour today and you could find yourself waltzing in a Viennese palace, shooting Buddhist fortresses in Bhutan with a documentary photographer or exploring Game of Thrones locations in Croatia. Or maybe you’ll watch the sun set over the Taj Mahal from across the Yamuna River because your guide knows that’s the best vantage point. To show you the range of tours available, we spotlight trips in five categories. (Prices do not include airfare, unless otherwise noted.)

vidual service is one thing that sets apart upscale tours. For example, on a luxury getaway, you won’t have to hang around the airport waiting for other travelers to land so you can catch a group transfer to your hotel; you’ll be whisked away as soon as you arrive. Other hallmarks of luxury trips include small groups, sumptuous accommodations, languid pacing so you have time to enjoy those accommodations, and perks such as laundry service, luggage handling and window seats for every guest. Most sightseeing fees, gratuities and other costs should be bundled into the price tag. On Cox & Kings’ 13-day “Splendors of Royal Antiquities” journey through India ($5,295 for an October departure), the focus is on majestic palaces and forts. Swain Destinations customizes itineraries in far-flung locales, including Australia and South Pacific islands. For a blowout trip, you can jet around the world on a private plane. At $117,000 for its October departure, Abercrombie & Kent’s “Islands, Savannas & the Amazon” whisks 50 passengers from the beaches of Samoa to the rain forests of Madagascar and more, before concluding in Monaco. Butterfield & Robinson, which specializes in cycling and walking trips, has a van circle the routes to deliver refreshments and pick up weary participants. That support might come in handy during its six-day Camino de Santiago biking trip in Spain (from $3,795 for 2017 departures), as the ter-




rain steepens in the region of Galicia. One trick to making the most of a luxury tour is avoiding destinations that don’t have a variety of accommodations. In that case, says Sarkis, “luxury trips won’t stand out as much as a less-expensive tour.” Make it a family affair. If you can’t stand

the thought of braving the lines again at Disney World, it’s time to shake up your family vacation. Look for an operator that specializes in multigenerational travel and designs trips to appeal to kids as well as parents and grandparents. Tauck Bridges offers a range of family trips, such as the eight-day “Italia Bella: Rome to Venice,” starting at $4,390 per person for 2017 departures.

Your clan can gaze at the ceiling of the Sistine Chapel during a special after-hours visit, as well as float on a gondola down a Venetian canal to the strains of a private serenade. Adventures by Disney takes families with kids as young as 6 or 7 to snorkel in the Galápagos or walk along the Great Wall of China. Grandparents can bond with their grandkids on special “grand travel” trips, perhaps to celebrate a rite of passage or keep the young ones occupied while parents are working. Road Scholar’s intergenerational getaways run the gamut from surfing in Hawaii to hiking in the Alps. Recently, a fiveday literary-themed excursion in California centered on the classic Boxcar Children series by Gertrude Chandler


Splurge a little (or a lot). Attentive, indi-


or kayaking, to boost your chances of clicking with other people. But ask the operator how it accommodates solo travelers. For example, will it put you in touch with the other single travelers before departure? A few traditional tour companies waive or reduce the “single supplement” fee on certain departures, or offer to match unaccompanied travelers with a roommate of the same gender. Insight Vacations is doing away with the single supplement entirely on select fall and winter departures of its 16-day “Treasures of Turkey” getaway, starting at $2,050. Classic Journeys, which runs cultural walking tours and culinary excursions, raises prices only by about 15% for single travelers. And Overseas Adventure Travel never charges a single supplement, making its South American treks and Asian odysseys friendly to those traveling alone. Upon request, Mayflower Tours will pair up solo guests of the same gender at a shared-room rate—and guarantee that rate even if they can’t find a suitable roommate. Get an education. Educational tours

Warner (fittingly, about a grandfather and his four grandchildren), starting at $999 per adult. Thomson Family Adventures treats grandparents and grandkids (and parents, if they care to tag along) to a number of exotic outings, such as zip-lining and whitewater rafting in Panama. Multigenerational tours usually mix downtime with activities where the kids can play and the adults can sit back and watch. “Not everyone has to play Frisbee on the lawn at Zion National Park,” says Jennifer Tombaugh, president of Tauck. “We find that if the kids are happy, the parents and grandparents are happy.” To help make your trip a success, encourage every member of your family to weigh in on the destination. You

can also call to ask about the age range and genders of kids who have registered for the tour you are eyeing. When in doubt, err on the side of a shorter rather than a longer excursion. Travel solo. Joining a tour group alone

can be intimidating. No matter how welcoming your guide is, no one wants to feel like a third wheel with couples and families. One solution is to find a tour geared toward solo participants. Women-only tours are almost exclusively made up of unaccompanied travelers, says Debra Asberry, president of Women Traveling Together, which takes groups everywhere from Ireland to Antarctica. Or you could pick a regular tour that specializes in one of your passions, such as baseball

balance learning with hands-on activities, so your day in Paris could start with a lecture about Impressionism and continue with a stroll through the Musée d’Orsay to view paintings. “You get a behind-the-scenes perspective on the place you’re visiting,” says Jim Moses, president of Road Scholar, which focuses on experiential learning. Besides tour operators such as Road Scholar and Perillo’s Learning Journeys, look into academic trips offered by a museum or art gallery. Members of the Art Institute of Chicago can learn about the murals and architecture of Mexico City with an expert from the museum’s education department. Or take in the temples and pyramids of Egypt with a curator of Egyptian art from the Metropolitan Museum of Art. Smithsonian Journeys offers more than 350 departures a year. For example, its 16-day “Discovering Vietnam”





starts at $4,357 for fall 2016 departures, including airfare. You’ll spend a day boating among the limestone islands of Ha Long Bay and dine at the home of a local historian. For animal and nature encounters, look for programs backed by zoos, aquariums and environmental organizations. For instance, an expert in reef life from the Shedd Aquarium in Chicago will lead 14 guests on a six-day diving expedition in Palau, a tiny archipelago in the Pacific Ocean, in February. The price starts at $3,780. College alumni associations also host travel programs, and many allow nongraduates to participate if they join the association. Sometimes the tour is led by an academic. For example, an astronomy professor from the University of California, Berkeley, will lead a 10-day trip to Chilean Patagonia to glimpse the solar eclipse in February (from $5,855). Go off the beaten track. A tour is the easi-

est—and sometimes the only—way to delve into remote or inaccessible parts of the world, including the Andes and




Machu Picchu, the Galápagos Islands, and polar regions. Sure, you can fly to Winnipeg, Canada, yourself and book a regional flight or train to the northern town of Churchill, a prime spot for polar bear and beluga whale sightings. But viewing the wintry wildlife is hard to arrange on your own. On Natural Habitat Adventures’ seven-day “Ultimate Churchill Adventure” ($7,595 for fall departures in 2016, including charter flights between Winnipeg and Churchill), you’ll traverse the Canadian tundra in a heated “Polar Rover” to watch polar bears tussle, and descend into a (vacant) den by helicopter. Intrepid Travel’s expeditions range from reindeer herding with a nomadic tribe in the far north of Russia to joining a tribal New Year festival in a remote region of Myanmar, the country also known as Burma. Lion World Travel goes beyond its name with safaris that showcase giraffes, rhinos, zebras and more. Its 10-day “Luxury Kenya” safari includes drives to observe game as well as breakfast by a hippo pool and evening

cocktails overlooking Lake Nakuru, flecked pink with flamingos. The package starts at $3,399 for November departures, including flights, from Washington, D.C. If adventure means immersing yourself in a foreign culture, consider Cuba, where “people to people” tours are one popular way to visit the country. (The U.S. still restricts travel to Cuba to certain authorized tours.) For example, National Geographic Expeditions’ nine-day “Cuba: Discovering Its People and Culture” starts at $6,295 for fall 2016 departures (plus charter airfare). Cross Cultural Journeys offers some themed trips, such as “writers and artists” and “Cuban boxing,” accompanied by an expert in that field (2017 departures for the former start at $4,995, including charter airfare from Miami). Another country that is slowly opening up to U.S. visitors is Iran. Alexander+Roberts’ new 14-day “Persian Moments” trip (from $7,199 for 2017 departures, including airfare from Dubai) leads you through palaces, bazaars and inhabited caves. ■






What to Look for in a Tour You can find a smattering of tour-operator reviews on sites such as or travel forums, but otherwise, most reviews exist on the operators’ own websites. Go beyond the price tag. Budget tours may lure you in with a low sticker price, then charge for everything from day excursions to meals to airfare within your destination country. Check the itinerary for what is included. Visas, gratuities and other fees are commonly excluded from the sticker price. Ask if prices are fixed or could increase after you sign up—say, because of currency fluctuations. Before purchasing flights, check whether departure dates are guaranteed or contingent on a minimum number of guests. If a hotel name isn’t specified in the itinerary, it could mean it hasn’t been booked yet. Don’t take the itinerary at face value. Ask if you can eat at a res-

taurant not on the itinerary or visit a distillery while everyone else explores a museum, if that’s more to your taste. Jay Smith, president of Sports Travel and Tours, says that, when possible, his company will even let travelers leave the tour at a certain point and deduct the unused costs. Many tour companies offer bespoke or customized itineraries, or will convert a group tour to a private one. Mickey Huang, marketing manager of Alexander+Roberts, estimates that private tours cost about 30% more than the equivalent group version for his company. Tauck tries to accommodate families who want a departure that is exclusively for them or to leave on an unpublished date, essentially creating a private experience.

Hunt down a deal. Some operators will slice a few hundred dollars off the tour price if you pay in full when booking. Others offer an early-bird discount. Still others will fill empty spaces with last-minute sales (though your savings may be diminished by paying for more-expensive airfare). Find tour operators you like, and join their mailing lists for first dibs on a sale. You can snag alluring deals on sites such as Groupon Getaways, LivingSocial Escapes and Travelzoo, but recognize that unless you’ve researched the company, “it may not be the tour for you, even if the price is for you,” says Christine Sarkis, senior editor of Smarter Beware, too, of slashed prices during a destination’s low season. Your elation at scoring a cheap trip to Thailand in July will dampen as soon as the first monsoon rains hit. Consider using a travel agent. To get an unbiased take on companies and find something that fits your budget and interests, work with a travel agent. The United States Tour Operators Association lists certified agents at travel-agent-directory. You can also find certified travel agents or consultants at or http://finda, as well as through consortia or organizations such as Travel Leaders Group ( If beginning the research on your own, use the search tools on and to find reputable tour operators (members of those two associations offer consumer protections). For a foreign-based operator, check out the tourism portal for your destination.




number of start-ups are betting that enough people hate going toeto-toe with a used-car salesperson (or random strangers on Craigslist or eBay) that they’ll embrace the prospect of buying a car online from a vendor that offers a no-haggle, seamless experience. Their short, cute names—Vroom, Beepi, Carvana and Shift—reflect the venturecapital culture and money behind them. Most don’t have a national reach yet, and only Vroom is willing to ship you a car anywhere in the lower 48 without an additional fee. Also, only one of the firms we looked at offers you a prepurchase test drive. But having surfed their sites extensively (though I didn’t actually buy a car), I think this new business model has traction.

A With these websites, you can plop a Mercedes into your shopping cart as easily as a pair of shoes from Zappos.



Virtual shopping. It may be as easy to plop a mint-condition Mercedes into your shopping cart as a pair of shoes from Zappos, but how do you know the car is any good without a test drive? Vroom and its competitors address concerns about condition with oodles of photos, inspections, title checks and short warranties that are secondary to the manufacturers’ warranties. They also promise a 100% money-back guarantee (within a fairly limited time and number of miles) if buyer’s remorse kicks in. For example, Vroom offers a refund as long as you don’t exceed 250 miles during a seven-day test-own period. At Carvana, you can get a refund within seven days if you haven’t driven more than 400 miles. Beepi and Shift have similar guarantees. In Shift’s markets (California and Washington, D.C.), a “car enthusiast” will bring you the car and let you take it for a spin. That prospect might scare away those who fear being stuck in a car with a used-car sales rep, but Shift does not pay these car guys on commission, and the outing I had with Matt in a Volkswagen Golf R was totally devoid of pressure. Plus, he really knew his cars. 09/2016

But how are the prices? The sites tout better deals than you’d get at a dealership. One big reason is that they don’t have the expense of owning a traditional car lot. Shift, for example, keeps vehicles in a parking garage in Northern Virginia. But explanations of what goes into their price comparisons are often a mumbo jumbo of “data points” and “future price forecasts.” We shopped for similar versions of that great American staple, the Toyota Camry, at all four sites and found the prices fairly close to what sites such as Edmunds and Kelley Blue Book say consumers are paying after haggling. The vendors’ processing or documentation fees, for doing paperwork and the like, are no higher than at traditional used-car dealers, and Carvana charges no such fees. Financing is available through all of the online vendors. A quick estimate of the monthly payment is either on display or can be easily calculated, but it’s based on preloaded interest rates or on values you enter. You may be able to do better if you bring financing from your bank or credit union. Motor vehicle departments still want their forms signed the old-fashioned way, which will likely mean overnighting documents; all vendors are eager to smooth out the process and deliver a car that’s ready to drive, with a temporary tag on it. If you’re in range of Carvana, its delivery gimmick—a used-car vending machine in downtown Nashville—is an experience you’ll want to bring your friends to watch. Planning on trading in your existing car as part of the deal? Most of the sites accept trades. In fact, they’ll offer you a price after you send your car’s VIN and some photos, plus answer a few questions about its condition. But get independent estimates of your car’s value before going this route. For example, CarMax offers free appraisals. ■ YOU CAN FOLLOW DAVID MUHLBAUM’S AUTOMOTIVE MUSINGS ON TWITTER AT WWW.TWITTER.COM/DAVEYDOG.


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What You Need to Know About Home Remodeling Before you start the project, figure out how you will pay for it. BY PATRICIA MERTZ ESSWEIN

June, the average variable rate was 5.5% nationally. If rates head higher, you may be able to repay portions of your credit line at a fixed rate over a fixed term. You can close on the line in about 30 days, and your only costs may be for a credit check and appraisal. You can use the line after you complete your project, but watch out for a penalty if you pay it off within three years. 5. Take out a construction loan.

1. Make a plan. If you’re think-

ing of renovating your home, start by talking with remodelers and lenders to figure out whether your ideas are financially feasible. How much will you pay out of pocket? How much will you need to borrow? You could pay with a credit card, but that’s probably your most expensive option. Home-equity borrowing makes the most sense for larger projects. You can generally borrow up to 80% of the appraised value of your home (that amount includes all housing debt). Once you sign a contract, the remodeler will require a down payment, with additional payments due at specified intervals. 2. A refi could make sense.

If you haven’t locked in a super-low interest rate, you could refinance your mortgage and take out cash. In late June, the average 30-year fixed rate nationally was 3.5%, according to Freddie Mac; you’ll pay a somewhat higher rate on a cash-out refi. If you have 70


enough equity, you can roll the closing costs (about 1.5% to 3% of the loan amount, on average) into the loan. Allow about 45 days to close. 3. Take a lump sum. Home-

equity loans are fixed-rate loans that you repay in equal monthly payments over a term of five to 20 years. They are best for onetime projects, such as replacing the roof or the heating and air-conditioning system. In late June, the average rate nationally was 6.1%. But lenders are increasingly reluctant to offer home-equity loans because of regulations resulting from the Dodd-Frank financial reform, says Keith Gumbinger, of

If you’re planning to completely renovate your present home or build a new one, a construction loan will maximize your borrowing power because the lender will generally lend against the appraised future value of the home. You may be able to lock in your interest rate during the period al-

lowed for construction (from six to 18 months, depending on the lender); during that time, you’ll make interest-only payments on the amount disbursed. When construction is complete, the loan will convert to a permanent mortgage. Depending on the lender, you can get a fixed or variable rate. EverBank recently offered a rate of 3.1% to borrowers with the best credit for a 5/1 ARM of $250,000, with a 12-month construction period. 6. Pay cash and ask for a discount. Loren Schirber,

a remodeler in the Twin Cities area, offers clients a discount of 2.5% of the project price if they pay in cash instead of with a credit card. If your builder doesn’t offer a discount up front, ask for one. ■

4. Open a home-equity line of credit. It’s easier to get a

HELOC, which you tap when you need the money. You’ll pay a variable rate of interest only on the amount you withdraw. You can usually make interest-only payments for 10 years, after which you must repay principal and interest. In late 09/2016




■ Stockton City Manager Kurt Wilson: Making sustainable spending decisions.


THEN: We chronicled the story of Stockton, Calif., in October 2012, just months after the city filed for bankruptcy protection—a result of what City Manager Kurt Wilson says were years of “myopic decision-making, inadequate financial projections and [fiscal] overreaching.” What followed were the 972 darkest days in the city’s history, says Wilson. City retirees lost promised medical benefits, and bondholders saw the value of their holdings plummet. Hundreds of city workers lost their jobs, and the rest took pay cuts ranging from 9% to 23%. NOW: Stockton emerged from bankruptcy protection on February 25, 2015, but it is still under court supervision. City services remain depleted. Jobs unrelated to safety were cut by 43%, and there’s no plan to restore them soon, says Wilson. The city closed one of its six libraries, and it has one-third fewer




firefighters. Road repairs and tree trimming in this city of 62 square miles and roughly 300,000 residents are hopelessly backlogged due to the skeleton staffing. Although retirees kept their pensions, the city will not restore their medical benefits. And investors holding Stockton’s unsecured debt took a heavy hit. They recovered between 17 and 50 cents on the dollar, depending on the bond issue and backing, according to Moody’s Investors Service. On the positive side, the police force, which lost about 25% of its officers, is hiring, thanks to revenues generated by a sales tax hike in 2013. It may take a few years, but the city can hire 46 additional officers—a 12% increase from current staffing levels. The city’s economic development division has made great strides in wooing conventioneers and entertainers, including Clint Black and Carrie Underwood. That boosted hotel

occupancy rates in 2015 by 12 percentage points, to 64.5%—a plus for bed tax revenues. The real estate market is coming back, too. The California Association of Realtors reports that median home values in San Joaquin County (of which Stockton is the county seat) are up 77% since the end of 2011. Stockton’s overall revenues have dropped 5%, but expenses have been cut three times as much, leaving the city on a sound financial footing, Moody’s says. Citing the positive trends, rating agencies have begun upgrading some of the city’s revenue bonds. The bankruptcy wasn’t a temporary thing, where you bounce right back to where you were, says Wilson. “We were in an unsustainable, unhealthy place. We want to be proud of the spending decisions we make today so that 20 years from now, whoever is sitting in this chair doesn’t have to fix the problems we created.” KATHY KRISTOF



A City Comes Back From the Brink

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Kiplinger's personal finance september 2016