1. society
2. work
3. retirement

WSJ 2
SUNDAY, FEBRUARY 8, 2015
THE AGGREGATOR
What a Difference 15 Years Makes
going to argue with a three-point falloff in household
debt?
We could do better, a lot better: Even at 5.6%, the
jobless rate is still too high, but the most disturbing
chart here is the huge, nearly 9%, decline in inflationadjusted median income.
Finally, take a look at the chart immediately below.
Back in September we asked our WSJ Market Data
Group (our crack staff of in-house data crunchers) to
work up a simple chart: How much would you have
today if on Sept. 13, 1999, the Monday after Sunday
Journal made its debut, you had put $200 every two
weeks into Vanguard's venerable S&P 500 Index fund,
a common component in many 401(k) plans, and your
company matched it with $100, for those 15 years?
We updated the chart through the last bi-weekly
payday in January. Out of pocket: $80,600 (and a tax
savings of around $27,000). Total in your account:
$201,001.
Traders in the S&P 500 options pit at the Chicago Mercantile Exchange on Sept. 15, 2008, the day that Lehman
Fifteen years—long enough to build a substantial
Brothers filed for bankruptcy protection.
nest egg. Enough said. Now get going.
150,000
$201,001
100,000
50,000
19%
70%
18
68
17
66
15.3%
16
’01
’03
’05
Source: WSJ Market Data Group
’07
The percentage of households living in owner-occupied
homes peaked along with the real-estate bubble.
The 2008-09 crash prompted families to
deleverage.
Vanguard 500 Index fund (VFINX)
0
1999
Home Ownership
Household Debt
$200,000
’09
’11
*Through Jan. 26
’13
’15
The Wall Street Journal
15
1999
’05
Reuters
As any parent knows, 15 years isn’t such a long
time. Yes, a lot can happen—from the dot-com bubble
to the housing bust, from 9/11 to ISIS—but 15 years is
only about one-third of a working life for most people.
Across this space, where we usually give you a
rundown of the previous week’s financial developments, we’ve assembled a series of graphs to show
you how much, or little, some things have changed
since The Wall Street Journal Sunday premiered in
September of 1999. There’s no effort to give you a
complete statistical album, just a few snapshots that
we found illuminating and worth noting.
Two real positives: It’s not quite four percentage
points down from the peak, but that decline in the
percentage of the population with no health insurance
must be considered a welcome sight. Even if you are
politically opposed to the Affordable Care Act and
think there should be a better way for people to get
the health care they need, you still must consider it a
good thing that more people have health insurance
today than at any time in the past 15 years. And who’s
’10
64
63.9%
62
1999
’14
Note: Household financial obligations as a percentage of disposable
personal income, seasonally adjusted. Quarterly data.
Source: Federal Reserve Bank of St. Louis
’05
’10
’14
Source: Census Bureau
The Wall Street Journal
The Wall Street Journal
Housing Prices
Median Income
Health Coverage
Jobless Rate
Gasoline Prices
Since 1999, an epic boom-bust cycle has
played out.
Adjusted for inflation, household earnings
have fallen about 9% since 1999.
With the recovery and a new health law,
the chronically stubborn uninsured rate
is down sharply.
17%
It bottomed out at 3.8% in April 2000,
and topped out at 10% in October 2009.
Adjusted for inflation, gasoline is still
more expensive than when the Sunday
WSJ began.
$5 a gallon
$58,000
15%
10
3Q: 5.7%
5
56,000
52,000
–5
–10
1999
16
8
15
6
14
4
13
2
54,000
0
’05
’10
’14
50,000
1999
$51,939
’05
Note: Change in purchase prices from a
year earlier. Quarterly data.
Note: In 2013 dollars; households
as of March of the following year.
Source: Federal Housing Finance Agency
Source: Census Bureau
The Wall Street Journal
The Wall Street Journal
’10
’13
10%
12
1999
4
3
12.2%
’05
’10
’14
Note: Percentage of Americans of all ages
without health insurance when queried for
the National Health Interview Survey.
2014 data are through June.
Source: National Center for Health Statistics
0
1999
5.6%
2
January: $2.12
’05
’10
’14
1
1999
’05
’10
’15
Note: December rates for people
age 16 years and older.
Note: Retail price per gallon of regular
gasoline, monthly data.
Source: Bureau of Labor Statistics
Source: Energy Information Administration
The Wall Street Journal
The Wall Street Journal
The Wall Street Journal
BARRON’S INSIGHT
ENCORE
Investing 101: How to Pick a Stock Golden Rules for Your Golden Years
BY JACK HOUGH
There’s no one checklist that
can tell whether a stock is attractive. That’s because stocks
represent part ownership in
businesses as different as egg
farming and semiconductor
etching.
However, there are signs that
bode well for any stock. Below
are four.
They aren’t must-haves, but
the appearance of at least a few
of them bolsters the case for an
otherwise appealing stock and
can reduce investor risk.
Rising Earnings Estimates:
People are slow to let go of
long-held beliefs, even as
mounting evidence says they
should.
That includes Wall Street analysts. The result is that consensus earnings estimates tend to
change gradually rather than all
at once.
Buying into rising estimates
increases the chance that more
good news is coming.
WSJ.com and Yahoo Finance
are among sites whose stockquote pages show current earnings estimates as well as how
those estimates have changed in
recent months.
Delta Air Lines (DAL), Apple
(AAPL) and General Motors (GM)
have each had earnings estimates
climb over the past month.
Room for a Higher Valuation: Value investing works.
That is, shares that are inexpensive relative to some measure of
economic appeal, like earnings,
revenue or asset value per
share, tend to outperform those
that are expensive over long
time periods. Not every cheap
stock shines and not every
pricey one flops, of course, but
most investors will improve
their odds of success by sticking
with modest valuations.
One reason is that people
tend to assign too large a negative value to company flaws or
challenges. Research by Brandes
Investment Partners, a San Diego money manager, shows that
value stocks tend to outperform
even though the companies attached to them, on average,
don’t catch investors by surprise
with bright financial results. In
other words, most stock discounts are simply too large.
Discover Financial (DFS),
hard-drive maker Western Digital (WDC) and builder Fluor
(FLR) all sell for less than 12
times projected earnings for the
next four quarters, versus close
to 17 times for the S&P 500 index.
Growing Dividends: There’s
a high-finance theory that dividends don’t matter, because
companies can extract just as
much value from their spare
cash by buying back stock or investing. Ignore it. Dividends
provide far more than income.
Payment hikes signal confidence, because managers are
loath to cut payments, and so
tend to increase them judiciously.
Dividends help attract buyers
during difficult patches, because
dividend yields rise as share
prices fall. And they act as a
check on accounting, because
it’s hard to fudge the act of putting cash in someone’s pocket.
Favor moderate yields with
healthy payment increases over
high yields with little growth.
Examples of the former: CVS
(CVS) and BlackRock (BLK).
Executive Buying: When
company managers spend their
own cash on shares, it’s an excellent sign. Technically, managers may not use nonpublic information to time stock
transactions. Realistically, their
deep experience and close view
of daily operations gives them
an informational advantage
most investors can’t match.
Fortunately, such transactions
must be quickly made public.
Hess (HES) recently reported a
share purchase of nearly $4 million by a man whose name suggests he knows a thing or two
about the company’s ability to
ride out the current oil slump:
CEO John Hess.
TAX TIP
Your Questions, Tom’s Answers
BY TOM HERMAN
Many thanks for your
thoughtful questions and comments over the past 15 years.
Your emails and letters often
have introduced me to fascinating quirks and unintended consequences of our tax system. They
also frequently have reminded
me of the Internal Revenue
Code’s needless complexity. Sure,
taxation is the price we pay for
civilization—but why should our
system have to be so complex?
Here are some closing
thoughts based on a few of the
most frequently asked questions I have received:
Home, sweet home: Most
people who sell their primary
residence for more than they
paid for it don’t owe capital-
gains tax on the profit. Generally, a married couple filing a
joint return can exclude a gain
of as much as $500,000 (or
$250,000 for singles).
To qualify for the full exclusion, you typically must have
owned your home and lived in
it as your primary residence for
at least two of the five years
before the sale. But there can
be important exceptions.
Audits can be a nightmare:
Most people don’t have to worry,
however. Only about 1% of all individual taxpayers have been audited each year in recent years.
Also, most of these have been
“correspondence” audits, conducted by mail, rather than faceto-face audits with IRS agents.
But that doesn’t mean you can
relax. Your odds of getting au-
dited generally increase if you
are self-employed, deal in large
amounts of cash, and your income isn’t subject to withholding.
Beware of the AMT: This
stands for alternative minimum
tax, a nightmarishly complex alternative way to figure your
taxes. Its origins date to the late
1960s, when Congress discovered
a small number of high-income
Americans didn’t owe any federal income tax. But the AMT
now ensnares many victims for
whom it wasn’t intended.
EITC: Many Americans who
could benefit from the earned-income tax credit, a program to
help the working poor, don’t
claim it. Created with the best of
intentions, it can be so complex
that it’s easy to overlook.
BY ANNE TERGESEN
Saving for
retirement
may feel like
an impossible
task. After all,
as definedbenefit pension plans fall by
the wayside, those with 401(k)
plans must act as their own
pension managers, a complex
task that involves amassing a
nest egg and making it last a
lifetime. As a nation, we’re
clearly falling short.
The Center for Retirement
Research at Boston College calculates that 52% of workingage households are at risk of
being unable to maintain their
pre-retirement standard of living after they stop working.
So what can you do to get
yourself on track? In this, our
final column, we present
seven “golden rules” of retirement savings.
While there are no guarantees, these recommendations
will help you avoid some of
the biggest mistakes people
make with their investments
and minimize the risk that
your nest egg will expire before you do.
1
Save early and often.
When saving for retirement, mutual-fund company T.
Rowe Price Group recommends putting away at least
15% of annual pretax pay, including matching contributions from an employer.
The goal: To stockpile 12
times your ending salary, a
sum that—combined with Social Security—should allow
you to maintain your current
standard of living over a 30year retirement.
If you haven’t saved
enough, there may be time to
catch up.
A 55-year-old who has
saved only three times salary
can reach the 12-times goal by
socking away 32% of pay for
the next decade, says T. Rowe
Price. The recommendation
for a 50-year-old in the same
situation: 24%.
2
Plan for a long life.
According to the National Center for Health Statistics, the average 65-year-old
will live an additional 19.3
years—up 1.5 years from 2000.
One in four will reach 92.
One way to boost lifelong
income is to delay Social Security. While you can start
those benefits anytime between ages 62 and 70, the longer you wait, the higher your
monthly payment.
3
Slash fees.
According to Vanguard
Group, over a 40-year career,
someone who invests 9% a year
of a salary that starts at
$30,000 into a balanced fund
that charges 0.25% annually
will save 20% more than if he
or she pays 1.25% in fees.
One way to reduce fees is
with index funds. The average
U.S. stock mutual fund charges
1.21% a year. By contrast, the
fee for Vanguard’s Total Stock
Market Index fund is 0.17%.
A note to readers:
While this is the last
Encore column
in WSJ Sunday,
Encore lives on as a
special section of
The Wall Street Journal.
Published five times a
year, it is dedicated to
providing advice about
how to live, enjoy and
finance your retirement.
We hope you’ll take
a look, in print
and at wsj.com.
Before rolling your money
over into an individual retirement account—something
many do upon leaving a job—
compare the fees on the investments in your 401(k) plan
to the lowest-cost alternatives
on the market. Many large
401(k) plans negotiate ultralow fees, says Joseph Valletta, co-publisher of the
“401(k) Averages Book.”
4
Plan your lifestyle.
If you don’t know what
you want to do in retirement,
it’s hard to know whether
you’ve saved enough.
Sites including LifePlanningForYou.com and LifeReimagined.aarp.org offer free introspective exercises and
tutorials, plus links to workshops, coaches and financial
advisers trained to help people
clarify their goals and priorities.
Nonprofits including Coming of Age, Encore.org, Project
Renewment, and The Transition Network sponsor workshops, webinars and peer support groups.
5
Consider a Roth.
The classic candidates
for a tax-free Roth IRAs or
Roth 401(k)s are convinced
their marginal tax rates will
be higher in retirement. By
paying income tax on contributions now, these workers
avoid paying Uncle Sam at a
higher rate on their withdrawals. (In contrast, with a regular IRA or 401(k), investors
receive upfront tax deductions
and pay income tax on their
withdrawals.)
But workers in their 40s,
50s and 60s who want to contribute the maximum to an
IRA or 401(k) can accrue more
wealth with a Roth than with
a traditional 401(k), even if
their marginal tax rates decline by as many as 10 percentage points in retirement,
according to Stuart Ritter, a
senior financial planner at T.
Rowe Price. The reason: With
a Roth, you can shelter your
entire contribution from
taxes. But with a traditional
IRA or 401(k), you must invest
a portion of that contribution—the upfront tax deduction—in a taxable account.
“The power of tax-free
compounding in a Roth can
offset even a drop in tax
rates,” says Mr. Ritter.
6
Budget realistically.
When estimating expenses, be sure to take into
account the cost of health
care. According to the Employee Benefit Research Institute, a 65-year-old man and
woman will need $64,000 and
$83,000 in savings, respectively, to have a 50% chance
of covering the costs Medicare doesn’t pick up, including
premiums and deductibles.
7
Withdraw 3.5% a year.
How much can you
withdraw without a substantial
risk of depleting your nest
egg? For years, advisers have
suggested spending 4% of your
initial balance and adjusting
each year for inflation. But because ultralow interest rates
have reduced the rate of return
on investments, they have
thrown the 4% rule into doubt.
Now, those who want an
80% chance of making their
money last should withdraw
no more than 3.5% a year, according to Wade Pfau, a professor at the American College of Financial Services.