Credit Cards: Evil or Good?

Summary: When used wisely, credit cards are an excellent financial tool and can actually pay you to use them.

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Credit cards have a bad reputation in financial circles, and for good reason. Lots of folks have used them to spend more than they can afford, and then end up paying exorbitant amounts of interest because they carry a balance. The problem, of course, is not with the credit cards themselves, but with the behavior of the person. If – and this is a big if – you have self-discipline and only buy what you truly need and can afford, then using credit cards is actually a very smart financial move. The rest of this post assumes that you can use them responsibly – if that’s not true, then stop reading now. If it is, then it turns out that the credit card companies will even pay you to use them.

There are many posts you can read that will dive into this much deeper than I will, particularly if you want to use credit cards to “travel hack.” I will just briefly describe the somewhat haphazard way I’ve gone about this to demonstrate that you don’t have to be an expert to take advantage of this (while acknowledging that it can be done better if you take the time to become an expert).

Until fairly recently we were a one credit card family. We’ve always been disciplined about our spending and we started using a credit card early on and pretty much charged everything we could simply for convenience reasons. Then credit card companies slowly started introducing “rewards” credit cards in different flavors, and we went ahead and changed our one credit card to a credit card that earned us 1% cash back that went directly into the 529 college savings plan we had started for our daughter (more on 529 plans in a future post). We still just stuck with one credit card and didn’t really see the need for more than one. Flash forward a few years and suddenly reward credit cards are everywhere, and we also happen to be financially secure, including owing no debt, so didn’t have to worry about possible impact on our credit score (if you do it right, opening multiple credit cards isn’t that much of a concern anyway).

Since some of the new reward credit cards offered more enticing deals than simply 1% back into the 529 plan, I started researching them a bit. I discovered that not only did many of them offer more than 1% cash back (at least on certain items), but they also frequently offered bonuses for signing up. At first that seemed too good to be true (I mean, really, they are going to pay me to get their credit card?), but after investigating it turns out that it was legitimate. Credit card companies make their money from merchants (who pay a fee for each transaction), and from credit card users who don’t pay off their balances each month. (Part of me feels ethically conflicted about this, so that might be a reason not to do this if you feel that same conflict strongly enough.)

For a while we were pretty content with just that one, but then in 2012 we added in a Chase Freedom Card (*referral link). This card also offers 1% back on everything, but then 5% off on categories that Chase chooses each quarter. Those categories can change from year to year, but for 2017 look like this (fourth quarter has often included Amazon):

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This then became our primary card and we eventually cancelled our earlier card. While it was a bit annoying that the categories changed each quarter, it was still better because we still got the 1% on everything and then got the 5% on some things each quarter. I don’t have an easy way to tell how much we earned with this card then, but it would’ve definitely been more than with the earlier card. Especially because this was also the first time we got a “sign-up bonus” and I’m pretty sure it was $200 (it’s currently $150 after a minimum spend).

We stuck with this card for quite a while, but then in 2014 we added in a second card, the U.S. Bank Cash Plus Card. At the time we still had our checking account at US Bank (more about our switch to Ally Bank in a future post) so it was nice and convenient, plus in addition to offering 1% cash back on everything, it offered 5% cash back in two categories and 2% in one other category that you can choose each quarter. While it’s a bit of a hassle to choose those categories each quarter, it only takes a minute or two and can definitely add up. Here are the current 2% and 5% categories you can choose from:

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Because we also had (pre-defined) categories for our Chase Card, each quarter I check for what those categories are and then choose complementary categories for the US Bank card. For example, I usually choose the 2% for the US Bank card to be for groceries, except for the quarter that Chase offers 5%, then I’d switch it to restaurants. For the two 5% categories, we really only take full advantage of one of them – cell phones. We have a family plan that includes myself, my wife and my daughter, but also my sister, my mother-in-law and my father-in-law. We pay the bill and then they reimburse us, so the bill is somewhat significant each month. By charging it to this credit card, we get 5% back each month on that. Because we really don’t buy that much, the other 5% category isn’t that important, but we usually choose department stores for when we occasionally buy some clothes. Over the life of this card (since July 2014), we’ve earned more than $1800 cash back. I think the sign-up bonus for this one was only $25 once we redeemed $100 in cash back, but I think that for a while it was a $25 bonus every time we redeemed at least $100 (that’s ended now). The sign-up bonus right now ups the 5% categories to 5.5%, 2% to 2.5%, and 1% to 1.5%, all for the first year, then it drops back down to the normal levels.

It was nice having two cards in case there was a problem with one, and it was nice being able to juice our cash back a bit, and of course we always paid off the balance each month. We were content for quite a while with just those two, but then I kept reading more and decided to add in a third card – the American Express Blue Cash Preferred Card (*referral link) in December of 2016. This is a card that I honestly thought we would never get because it has a $95 annual fee. With all the no-annual fee cards, why would you choose to pay a fee? Well, it turns out the cash back on this card is more than enough to cover the annual fee and still earn us more than some other cards.

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First, the sign-up bonus included $150 cash back after a minimum spend, so that more than took care of the $95 annual fee the first year. If we decide it isn’t worth it, we can always cancel the card before the year is up and avoid the $95 fee for the next year. An additional sign-up bonus was 10% back on Amazon purchases for the first 6 months. We got this card right before Christmas, and we also have quite a few family birthdays in the first 5 months of the year, so we took good advantage of this. The on-going rewards include 6% back on groceries (this is where we come out ahead even with the $95 annual fee, which is why at the moment we don’t intend to cancel it), 3% back on gas and department stores, and then 1% on everything else. There is a $6,000 annual limit on the groceries, but conveniently one quarter we can use the Chase Card and get 5% back on groceries and then use the Am Ex for the other three quarters of groceries and stay within that limit. We now put restaurants for the 2% category for the US Bank card instead of groceries (although during the 3rd quarter we use Chase for restaurants because it’s 5%).

Now that we had three cards, I was feeling that was plenty. But then I needed to book an airplane flight to visit my parents this summer and ended up on a different airline than usual. When I was about to book the flights, up popped an offer for a branded credit card that would give me $100 cash back on that very flight. The rest of the benefits weren’t that great, but I went ahead and got the credit card simply to pay for that one flight. Now that the flight has been completed, I’ll cancel the credit card. (Haven’t yet just in case I need to book an emergency flight on this carrier in the next few months.)

Then, funny enough, because we got that credit card (which happened to be offered by Citi), Citi then tried to upsell us on another credit card, the Citi ThankYou Premier Card. It also has a $95 yearly annual fee, but it’s waived for the first year, and you can earn $500 in bonus points with a minimum spend, plus additional points for travel purchases.

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As it so happened, we need to book several flights for later this year and those, combined with paying our annual house insurance on this card, met the minimum spend. So we got this card, put the flights and the yearly house insurance on it, and got slightly over $575 in points between the bonus and the 3% bonus on travel expenditures. The only thing I didn’t really like with this one is that if you wanted to use those points for cash back, they were only worth 50% of the value. If you booked travel through their site, they were actually worth more than 100%, but I didn’t want to deal with that going forward, so instead we converted them into $475 in Target gift cards plus $100 at Red Robin. It will take us a while, but we do eat at Red Robin and shop at Target occasionally, so again it was basically free money. We’ll keep this card until our travel is completed, then cancel before we have to pay the annual fee.

After this one I was ready to take a break for while (although still planning in about 12 months to explore options again for additional reward and sign-up bonus opportunities), but then for our next Amazon order an offer popped up to get an Amazon Credit Card. This was something I had been planning on eventually doing because it gives you 5% back on Amazon purchases (had to wait until after the 10% cash back from the Am Ex card was done), so went ahead and did it now because they also offered a bonus of $70 cash back.

Now, at this point, this may sound a bit crazy to you, but it’s all pretty straightforward. As I mentioned previously, I’m not an expert on this, and there are many blog posts that explain how you can systematically go about this to optimize your rewards (especially if you want to use them for travel). But even just doing it haphazardly like we have can easily earn you more than $1000 in bonuses, plus probably several thousand a year in cash back. (There are enough cards out there, and you can even get the same card again after not having it for a while, that you can probably keep rotating through them and continue to get bonuses for quite some time.)

This only works if you’re fairly secure financially (helps you qualify for all these cards), and if you don’t succumb to temptation and use these cards to spend money you otherwise wouldn’t. It really does end up being pretty much free money at the cost of a very small amount of time, for items you would be buying anyway. Even if you don’t want to get multiple cards at the same time, make sure the one card you do have is the optimal one for your spending habits, then periodically see if it makes sense to switch to a new one that also works for your spending and allows you to earn the bonus.

Now, what should you do with all this free money? Well, it depends on your circumstances, but most of the good options involve investing it. I’d be happy to work with you to figure out the best way to do that.

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Working Teens and Roth IRAs

Summary: If you have a teenager with a job, opening a Roth IRA for them is really good idea from both a learning and a financial perspective.

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Our daughter is 17 and has had a part-time job for a little over a year. She makes minimum wage and probably works about 8 hours a week on average during the school year, and a bit more during breaks if we are in town. (Ironically, this summer she’s interning at a summer camp, which means she’s working full-time but making less.) While I think it’s safe to say that not many 17-year-olds are thinking much about retirement, ours is (well, at least she is when I make her :-).

As a result, as soon as she received her first paycheck, she opened a Roth IRA via Vanguard (since she’s not yet 18, it’s a custodial account, but will become completely hers once she turns 18). Why in the world would we do that? Simple, because it’s a fantastic opportunity for her to learn about finances and planning ahead, and also because it’s an incredibly smart move financially for her to do this now.

If you aren’t familiar with Roth IRAs, they allow you to put money (earned income up to $5500 per year for those under 50) in post-tax (so you don’t get an immediate tax deduction like regular IRAs or 401ks). That money then grows tax-free (like a regular IRA or 401k) but then, and this is key, upon withdrawal is also tax free. That means for my daughter, and most teens working part-time like her, this money is never, ever taxed because she doesn’t make enough in a year right now to owe state or federal taxes.

In 2016 she earned a total of $1651 and contributed the same amount to her Roth IRA. In 2017 so far she has earned $2133 and contributed that to her Roth IRA. With some investment gains, her current balance is about $4000. She’s invested in a low-cost Vanguard Index ETF because since she started with $0 she didn’t meet the $3000 minimum for the index mutual fund, and the ETF allows you to buy individual shares at whatever the current cost is. We’ll wait until she surpasses $10,000 so that she qualifies for the low-cost admiral fund and then probably move it over into the mutual fund version (same expense ratio as the ETF, but a little less hassle on our part to invest).

So why is this an “incredibly smart move financially”? In a word (okay, two words): compound interest. If she continues to work about the same amount between now and August 2018 (she graduates in May 2018 and will probably be going to college in the fall), she will have invested somewhere around $7,500 in her Roth IRA. Including the investment gains she’s had so far and assuming a bit of a gain in the next year, let’s call it $8,000 at the point she starts college.

Now she’s likely to work part-time in college, and eventually she will begin full-time work, at which point she will most likely add a 401k to her retirement savings plan and she may or may not continue to contribute to a Roth IRA depending on the circumstances. For the moment, let’s assume she never contributed another dollar to her Roth IRA for the rest of her life, let’s explore what happens.

Well, predictions are just that, predictions, but we can do some decent estimates based on historical results. The stock market has typically returned over 10% a year on average for a long time (and small-cap value, what our daughter is invested in, is even a bit higher), but most folks think that at least in the short term (the next 10 years or so), those returns will be muted a bit. So for demonstration purposes, we’ll use 8% returns (feel free to substitute in a lower or higher amount if you want). So if she has $8,000 invested in her Roth IRA at age 18, doesn’t invest another dollar for the the rest of her life, and “retires” (whatever that will mean at that point) at age 68, how much money will she have? Over $375,000.

That’s fantastic, considering it’s totally tax free and it came simply from the part-time jobs she worked while in high school. But it also overstates it a bit, as those are not today’s dollars, but 2068 dollars, which means you have to take into account inflation. We’ll assume inflation of 3%. Historically inflation has averaged 3.5%, but it’s been lower lately, and governments try harder now to manage that rate, so lots of folks think it will be lower going forward (that’s also part of the reason that the expectation is that stocks will earn lower than 10% going forward as well). So, in reality, what we’re calculating here is a 5% real return after inflation (8% nominal return minus 3% inflation). That amounts to over $91,000 in today’s dollars. That may not sound quite as impressive, but keep in mind that’s assuming no additional investments after she graduates from high school, and that money is completely tax free. (That’s also likely more than a lot of the adults reading this post currently have saved in their retirement account.)

This entire scenario assumes, of course, that the teen can afford to invest this money. Many teens have to work to help support their family day-to-day, so this unfortunately isn’t an option for them. Ours doesn’t have to help support the family, so this is another advantage of us being financially secure – we can not only help our daughter learn about saving, investing, financial planning and retirement planning, but we can give her a head-start on her savings and investing. If your family is in a similar position, I highly recommend you consider this option and, if you choose to work with me, this is something we will investigate.

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PERA Transition Year (aka, 93/93 or 110/110)

Summary: For many public school employees, a transition year is a fantastic benefit that can make a huge difference in your retirement finances. It’s definitely worth finding out if your school district offers it, under what conditions, and then investigating whether it might be right for you.

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The working after retirement rules for PERA specify that retires can work up to 110 days in a calendar year for a PERA-covered employer after they retire (there’s no limit on non-PERA covered employment). While any PERA-covered employee can possibly take advantage of this, it works especially well for public school employees because our contract year naturally occurs half in one calendar year and half in the next, meaning you won’t exceed the 110-day limit in either year. Some – but not all – school districts offer this transition year benefit (sometimes referred to as 93/93 or 110/110), but often with special conditions. For example, in Littleton Public Schools you must have been continuously employed by the district for the previous 10 years in order to qualify, and the district does not pay benefits during the transition year. Check with your district to see if it’s offered and what conditions there may be. (In Douglas County Public Schools it is also working in the district the previous 10 years plus the permission of your supervisor.)

Despite this being around for a while, lots of folks are a bit unclear on the details (or unaware of it altogether), so I thought I’d use my experience as an example. I officially retired on June 1, 2017 and am now working a transition year with LPS. I currently have 29 years of teaching experience under PERA, plus I purchased 6 years of service credit, giving me 35 years of service credit that my retirement benefit is based on. Thirty-five years translates to 87.5% of my Highest Average Salary (HAS) if I choose option 1 under PERA (full benefit comes to me, but when I die the benefit stops). Since I chose option 3 (I get a reduced benefit, but when I die my spouse gets the exact same benefit until she dies), I’m getting about 91.5% of that which comes out to about 80.1% of my HAS. It’s important to understand that the factor that determines that reduction percentage changes, both according to your age and your spouse’s age and due to PERA’s current actuarial assumptions, but the changes are relatively small from year to year.

What this means is that during this transition year, I’m effectively getting 180% of the pay I would normally get, minus the amount I have to pay for my own insurance coverage. I’m adding on to my wife’s insurance (as is our daughter) so that comes out to approximately 5% of my salary, so I’m making about 175% of what I normally would. (Also, in LPS your pay for the transition year is “frozen” at what you made the previous year, so I do not receive the small cost-of-living raise I would’ve normally received.)

The other thing to keep in mind is that in addition to losing benefits, I’m “giving up” the service credit I would earn with PERA by working this transition year. I (and LPS) still contribute to PERA during this year, but I do not earn any service credit, which is effectively giving up 2.5% of my HAS. Because I’m 75% “ahead” from getting the benefit during my transition year, that’s equivalent to roughly 30 years of retirement. (Not exactly because of the time-weighted value of money, it is actually much longer than that because I can earn money by investing that 75% over those thirty years, but good enough for our purposes). So, with that back-of-the-envelope calculation, the “break-even” point is 30 years. If I live longer than that (which I have decent chance of), then theoretically not taking the transition year would work out better. In reality, because of the compounded investment returns that I can make on that 75%, it’s likely to be 40 years to break-even or perhaps a lot more, so for me the (financial) decision was pretty easy. (The fewer years of service credit you have, however, the closer you need to look at that calculation.)

There are other things to consider in addition to the “break-even” point when looking at the transition year option.

  • Because you have to retire from PERA and keep working for your employer, you have to know you are going to retire (and commit to it) about 16 months before you will actually stop working for your current employer. For some folks, that’s difficult to do.
  • As mentioned above, in many districts you’ll lose your benefits, which includes not only health, dental and vision, but things like life insurance and sick days (in LPS you get 5 sicks days for use during the transition year). So you have to figure out where you are going to get coverage (from a spouse, from LPS via COBRA where you pay the full premium, from PERACare, or on the individual market).
  • During the two calendar years that the transition year affects, your taxable income will increase (both your regular income and your PERA distribution are taxable), and there’s a decent chance it will move you into a higher tax bracket. (In LPS you get two “paychecks” – one from LPS, one from PERA – for a total of 14 months, 7 in each calendar year.) This is especially true in LPS if you have a lot of accrued sick days, as LPS gives you a payout on those as well, for me that’s over $9000 additional taxable dollars for 2017 (this is not PERA-includable salary). This is why many folks increase their contributions to 401k/403b/457 plans during these two years.
  • And it depends a lot, of course, on your personal financial circumstances and needs. There’s no one-size-fits-all when it comes to retirement planning.

So, should you take a transition year (assuming your district offers it and you’re eligible)? It depends, and if you choose to work with me we will look at this very carefully, but it’s definitely something to know about, investigate, and perhaps even make some financial decisions prior to retiring based on the knowledge that you will be receiving this benefit.

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Your Next Car Should Be Electric

Summary: While there are a plethora of environmental and climate change reasons to go electric, your next car should be electric because it will save you money and time, and will make your life better.

 

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As I indicated in the Why You Should Go Solar post, I believe climate change is a huge issue and so I’m not exactly unbiased in this discussion. Having said that, I would be writing this post even without the environmental impacts of choosing an electric car. You should choose an electric car because it’s just a better choice of car for most people. (By the way, if you really want to build wealth, health and fight climate change, consider replacing one of your cars with a bicycle.)

There are lots of reasons to go electric, this guy lists 30 (only a few of them are a bit tongue-in-cheek). Let me (briefly) give you my top three:

  1. The most important non-renewable resource you have is time. Getting an electric car will give you more of it. No more gas stations (you start every day with a full “tank”). No more oil changes. Practically no more maintenance, rotating and changing the tires is about it – by one estimate there are about 18 moving parts in an electric car, compared to over 20,000 in a typical ICE (internal combustion engine) car.
  2. You will enjoy driving more. Electric cars drive like sports cars, let you merge into traffic much easier, and are incredibly quiet. If you like to drive and think, it will be so much quieter. If you like to talk or listen to podcasts, it will be easier. If you like to listen to music, it will be higher quality.
  3. You will save money. Right now, with current incentives, you will save money up front. Over time you will save money on fuel costs (depending on current gas prices, the electricity you use costs only half as much as the equivalent amount of gas), maintenance, and a longer usable life of your car (if you so choose).

I can happily go on for a long time, going more in-depth on the above reasons or discussing many others, but since you have access to Google and can readily find that on your own, I’ll spare you (at least in this post, in person…be ready :-). For the rest of this post let me (again, reasonably briefly) go through a few of the vehicle choices you have right now and some of the pros and cons of each.

Tesla Model 3: Full disclosure (or confession), we’re first-day reservation holders on a Model 3, so I’m definitely biased (and excited to get ours later this year or perhaps early next year). Tesla is the reason I can write this post. Because of their incredible work over the last decade or so, electric cars are going mainstream. While you have several good choices today, every auto maker will be coming out with compelling electric cars in the next 2-5 years because Tesla has shown that you can make a compelling car that people will want to buy (at least 400,000 people have reserved a Model 3 and put a $1000 deposit down a year in advance, including yours truly).

Up until now Tesla has been the leader, but their offerings have only been in the luxury car segment (Model S and X cost $70,000 to $150,000-ish). That was part of Elon Musk’s master plan (here’s part deux), to generate revenue to fund the development of a mass-market car. With a base price of $35,000, I would still consider a Model 3 to be on the upper end of that mass market, but certainly within the range of what many middle-class Americans pay for their cars. (We’ve never paid more than $21,000 for a car, so this is definitely a change for us.)

The Model 3 is designed not only to be a great electric car, but to be a great car, directly competing with the BMW 3-series and the Mercedes Benz C-class. (This post does compare total cost of ownership to a Camry, but mainly from an evaluating Tesla as a company perspective.) The reveal event is scheduled for July 28th, so at that point we’ll know all the details about the car and hopefully the pricing on the available options. (Once we know the pricing on the options, I will write a follow-up post on the details of our Model 3 purchase.)

The main points to know about the Model 3 at this point for comparison purposes is a $35,000 base price, at least 215 miles of range on a charge, access to Tesla’s Supercharger Network, and all the hardware included to enable fully autonomous driving in the near future should you want that (and enhanced autopilot driving right now). The other thing, unfortunately for most of you reading this, is that if you aren’t currently on the wait list, if you sign up for one today it will likely be early 2019 before you can get one. It qualifies for the $7500 federal tax credit (although if you aren’t already on the list, you will likely be in the phase-out period by the time you can get one, so might only be $3750 or $1875) as well as the $5000 Colorado tax credit.

Tesla Model 3 Net Base Price after tax incentives: $22,500

2017 Chevy Bolt: The only non-Tesla long-range fully electric car currently on the market, the $37,500 base price Chevy Bolt is a good car. It was named North American Car of the Year for 2017 as well as Motor Trend’s Car of the Year for 2017. It gets 238 miles on a charge, is a reasonably roomy hatchback, and is a pleasure to drive. To be clear, the Model 3 is anticipated to be in a different class than the Bolt. The Model 3 is targeted at the low-end luxury market, the Chevy Bolt at the “regular” market.

There are probably three main drawbacks to the Bolt right now:

  1. Chevy is constraining production, so there is somewhat limited availability (although definitely more available than the Model 3 🙂
  2. Some people feel it is a little “small”. From what I know, I don’t think so, but if you’re used to an SUV, I imagine it will feel small.
  3. The Bolt does not have the advantage of the Supercharger network. This is only an issue for long road trips. On a long road trip, the fast-charging capabilities of the Supercharger network is a huge advantage for Teslas. There are plenty of charging stations available for the Bolt, they just won’t charge as quickly as the Superchargers will. (And, of course, you can plug into any electrical outlet.) As the charging infrastructure is built out, and faster chargers are deployed, this will become less of an issue (although it’s unclear whether today’s Bolt will be able to take advantage of those faster charging speeds).

The Bolt qualifies for the $7500 Federal Tax credit and the $5000 Colorado tax credit, so the base price in Colorado is effectively $25,000 (Chevy is still a long way away from selling enough electric cars for the Federal incentive to phase out for them.)

2017 Chevy Bolt Net Base Price after tax incentives: $25,000

2017 Nissan Leaf: Next to Tesla, Nissan has had the most impact on the EV market with the Leaf. With a base price of $30,680 and a range of just over 100 miles, it’s a great car for what it was designed for. As a “daily commuter” car, it’s great, and has all the electric advantages. The main downside is total range and the fact that Nissan did not build thermal management into the battery, so the battery degrades more over time than batteries from Tesla or Chevrolet.

Everyone is eagerly anticipating the release of the next generation Leaf (2018 model year) in early September. This is expected to be in the same range category as the Model 3 and the Bolt and hopefully will be thermally managed. Nissan has kept a tight lid on the features and pricing of this car, but I would anticipate it will be in the 230 mile range on a charge and around $33,000 base price before incentives, so $20,500 in Colorado after incentives, but I could be very wrong. (Nissan is closer than Chevy to phase out, but since they don’t have 400,000 reservations like the Model 3 does, it shouldn’t be an issue if you are buying now.)

Because the next generation Leaf is on the way, however, there is a window of opportunity to get a great deal on 2017 Leafs. If you are okay with the range limitation and the battery degradation, you can get 2017 Leafs for $25,000 or less before incentives, which means around $12,500 or less after incentives in Colorado (and currently you can even get 0% financing for 60 months). That’s a pretty good deal and worth considering. As we get closer to September, you can probably even deal and save a bit more (for any that are left in inventory).

2017 Nissan Leaf Net Base Price after tax incentives: $12,500
2018 Nissan Leaf Net Base Price after tax incentives: Guessing $20,500

2017 Chevy Volt: This is a plug-in hybrid, not a pure electric vehicle, but is a great choice for many folks, especially if you aren’t quite comfortable yet going pure electric. It gets about 50 miles on pure electric, and then switches over to the gas engine to extend the range to 420 miles. Since most people’s daily driving is less than 50 miles, it functions like a pure electric vehicle most of the time, but gives you the comfort level of knowing that the gas engine will kick in if you run out of charge (and you can fill up at gas stations instead of worrying about charging).

The base price is $34,095 but, after the Federal and Colorado tax credits, that drops to $21,595. That’s a really good price for a really great car that gets you almost all of the advantages of an electric car with the safety net of a range-extending gas engine.

2017 Chevy Volt (plug-in hybrid) Net Base Price after tax incentives: $21,595

There are other choices out there (and many more coming soon), but those give you a pretty good idea of some of the options available to you. For many of you, however, you might want to consider one more option, which is buying a used electric or plug-in electric car. Again, there are lots of options, but one of the best would be to look at used Chevy Volts, particularly 2013 models with average to low mileage.

I can speak directly to this because we ended up purchasing a used 2013 Chevy Volt at the end of December. We were not really looking at getting a new (new to us at least) car, since we had the Model 3 reservation. But we have a new driver in the household and, on occasion, having a third car would be nice (first world problem). Plus, our 1995 Honda Civic, which has been a great car, was starting to experience a few issues and we were worried it might not last until we got the Model 3 (our other car is a 2006 Toyota Prius).

So we originally explored both new and used Nissan Leafs, but finally decided that with the battery degradation issue we didn’t want to go with a somewhat compromised used Leaf, and with the Model 3 coming a new Leaf wasn’t quite as compelling for us. We had decided to live with two cars and hope the Civic held out until we got the Model 3, but then we ran across some good deals on 2013 Chevy Volts that were coming off lease with relatively low mileage. As we got closer to the end of the calendar year, the deals kept getting better, so we started investigating a bit more.

Eventually we found a base model 2013 Chevy Volt with about 21,000 miles on it for only $13,500 and decided that was too good to pass up. Especially because this car came from out of state, and at that time Colorado still offered a state tax break on any EV that had not been previously licensed in Colorado. That saved us an additional $2145, bringing the net price down to $11,355. (Unfortunately, Colorado discontinued the tax break for used cars at the end of 2016). This was also a Certified Pre-Owned vehicle, meaning we got a one year warranty and two free maintenance visits over the next two years (oil change and tire rotation).

The 2013 Chevy Volts typically get between 30 and 40 electric miles on a charge, and then the gas engine extends the total range to about 380 miles. But, again, for most folks’ daily commutes, that’s plenty. To give you an idea, we’ve driven the car about 3800 miles so far and have yet to put gas in it. We’ve used a total of 3.2 gallons of gas, and about half of that is because the car will force the gas engine on periodically if you haven’t had to use it just to keep the gas engine in good shape. I anticipate not having to put gas into it for another 12 months or so (perhaps more if our Model 3 arrives sooner rather than later).

Used 2013-ish Chevy Volt Base Price (no tax incentives): Neighborhood of $14,000

Buying a used car is often a much better financial decision than buying new (current EV incentives change that equation a bit for electric vehicles right now), so this is an excellent choice to consider for those who don’t want to spend so much, or who aren’t quite comfortable buying a fully electric car yet. It will provide a nice bridge vehicle to the near future when the charging infrastructure is built out, the range of pure EVs will likely be greater, and economies of scale will likely make the prices even more competitive. (I’d predict the “tipping point” is 3 to 5 years before buying an electric car will be the obvious choice for almost everyone – sooner if a carbon tax somehow gets passed in Washington.)

If you choose to work with me, part of our discussions will be around making good financial decisions around your transportation needs, so discussing electric would certainly be part of that. But, even if you don’t want to work with me on financial stuff, I’d be happy to discuss (cajole, harangue, hassle you about) electric vehicles. They will save you time and money (especially right now with the Federal and Colorado tax incentives), help save the planet and, oh yeah, are really fun to drive.

Focus On: LPS Retirement Plans (401k/403b/457 Plans)

Summary: Choose the PERA 401k plan and invest as much as you can.

lpsretirement

The idea of retirement is a fairly new one. It wasn’t until early in the 20th century that the concept of retiring from work and “living a life of leisure” was even a concept. Many employers started offering pension plans and then Social Security came along in 1937. Then in 1978, the idea of a tax-deferred savings plan (401k) was created, although it’s original intent was not the way we’ve ended up using it.

Social Security was really designed to be part of a “3-legged stool” concept of retirement, that retirees would draw from their company pension, from social security and from their personal savings. As pension plans have gone out of favor and 401ks have taken their place (particularly in the private sector), it has really become a two-legged stool (which is somewhat problematic). For public school employees in Colorado, PERA is a social security replacement plan, so basically covers those two legs, leaving the personal savings leg for you to figure out on your own. That’s where employer-offered tax-deferred savings plans come in.

All PERA employers offer the PERA 401k plan to their employees, and some employers also offer access to the PERA 457 and the newly created PERA Roth 401k/457 plans. Many school districts also offer additional, non-PERA options for tax-deferred accounts. This post will focus on what’s offered in Littleton Public Schools, but you should check with your employer to see what options they offer.

LPS allows you to choose between PERA and TIAA for retirement savings vehicles, offering the PERA 401k, 457, Roth 401k and Roth 457 plans, and the TIAA 403b, 457, Roth 403b and Roth 457 plans. There are subtle differences between 401k, 403b and 457 plans that can be important but, for the purposes of this discussion, we’ll treat them as roughly the same, with the important exception that you have separate contribution limits for 401k/403b and 457 plans which gives you the ability to save more if you have the cash flow to do that.

This post is not intended to be an in-depth explanation of 401k/403b/457 plans (or their Roth versions), but let me try to briefly describe them (if you decide to work with me we can dive deeper if need be). The idea behind 401k/403b/457 plans is to save money in a tax-deferred account, which means that you are not taxed on your income that you place into those accounts now, nor are you taxed on the earnings in those accounts as they accumulate, but you are only taxed when you make withdrawals which will hopefully be when you are retired. The traditional thinking is that most folks will be in a lower tax bracket when they are retired, so not only do you reap the benefits of saving “extra” all those years by not paying taxes up front, but when you do pay taxes upon withdrawal you will pay a smaller amount.

More recently Roth 401k/403b/457 plans have been created (along with Roth IRAs, which don’t flow through your employer) that take a different approach. For these plans you do pay taxes on any income you invest, but the earnings grow tax free and all withdrawals in retirement are tax free as well. In other words, pay the tax up front, never have to worry about taxes on this money again. For folks who think their tax bracket might actually be higher in retirement, this is a better option.

The obvious conundrum is how do you know for sure whether your tax bracket will be higher or lower in retirement? You don’t, which is why many folks choose to put money into both types of accounts to hedge their bets and give themselves more flexibility in retirement by giving them the option to withdraw from whichever account makes the most sense based on their current tax situation. (There are also some really nice benefits of a Roth if you are trying to leave an inheritance.)

Many employees, especially younger ones, kind of throw up their hands at all this. Retirement seems like a long way off, the choices can be complicated, and of course choosing not to spend money right now can be difficult for some folks. But the beauty and power of investing is compound interest, and it’s most effective the more time you give your money to grow, so the sooner you start, the better (and easier) it is to generate the retirement savings you want.

Many folks thinking about 401k/403b/457 plans also don’t take into account the effect on the tax-deferral on their current income. They think about putting say $100 a month into a 401k, but then worry they can’t do without that $100 a month. But they’re missing that their actual paycheck won’t go down by $100, but more like $70 (if you are in the 25% federal bracket, plus 4.65% for Colorado taxes). The government is basically saying, “invest $70 and we’ll give you $30” (always remembering that eventually they are going to tax you on that when you withdraw it). If you choose the Roth options, you don’t get that tax break up front, so your paycheck will decrease by $100 (but the potential for tax-free growth over time is tremendous).

So, with that overview, if you are an LPS employee, should you choose PERA or TIAA? Well, again, that depends on your individual circumstances and I’d be happy to discuss those with you, but for most people PERA is the better choice because of lower fees.

PERA offers a choice of several funds or a self-directed brokerage account if you want more control. For most folks, the funds are the better choice. In 2011 PERA chose to go with a “white-label” approach to investments. Research has shown that many folks make poor investment choices when given too many choices so, instead, a “white-label” approach has you choose among asset allocation choices instead of picking individual funds.

whitelabel

I’ll write more in future posts, but there are basically three things you can control when saving for retirement:

  1. How much you save.
  2. What asset allocation you choose.
  3. How much in fees you pay.

By going with a white-label approach and trying to keep fees low, PERA has tried to simplify the second and third choices for you. For each of their asset classes, PERA has typically gone with a combination of a passive (index) approach and an active (managed) approach. This combination gives you lower fees than a fully active approach, but higher fees than a strictly indexed approach. PERA thinks that they can achieve higher returns than the index this way. I’m a big fan of index funds, so I’m not totally convinced of this approach but, so far in their short lifespan (since 2011), they have mostly achieved this to  a small extent.

perafees

PERA does also give you a self-directed brokerage option (for an additional fee), which allows you almost unlimited choices in investments. For most folks, the additional complication of choices and fees make this sub-optimal, but it’s there if you want it.

selfdirected

TIAA is more like the self-directed brokerage option, which is one of the reasons the fees tend to be a bit higher (although still not bad compared to many other companies, 0.42% plus the underlying fund fees). Here’s a comparison of fees for a large-cap investment in the PERA white-label fund, the PERA self-directed brokerage option invested in a large-cap index fund (they require you to keep $500 in PERAdvantage funds), and the TIAA option invested in the same index fund. (You can view comparisons for other asset classes here.)

401kfees

If you look carefully, you’ll notice that the cheapest option is the PERA self-directed brokerage option (as soon as you pass about $20,000 in your account), with the PERAdvantage funds coming in second, and TIAA coming in last. Since the middle and third columns are essentially the same choice in terms of what you’re investing in, there’s no reason to choose the higher fee TIAA option over the PERA option. If you are investing a lot, you can save in fees by going the self-directed brokerage option, but this is where PERA would argue that they think they will outperform the index and make up those fee differences. The differences are small enough between the first two columns that, for most folks, it’s probably best to stick with the PERAdvantage options.

In future posts I’ll write more regarding possible asset allocations (which fund(s) should you choose), contribution limits (and the fact that you get separate limits for 401k/403b vs. 457, allowing you to save much more if you can), and the power of compounding. But, for now, this gives you an idea of where to start. The key thing is to start now and put as much as you can into one or more of these vehicles so that your “stool” will be sturdy enough to support you in retirement.

Section 125 Plans

Summary: If you aren’t taking full advantage of Section 125 plans, you’re giving money away.

125

Most school districts (and most employers in general) give you access to Section 125 plans which, much like the better known 401k plan, is named after a section of the federal tax code. Despite these being around for a while, many folks don’t completely understand them or take full advantage of them. While the specifics of what your employer offers may vary a little, most are pretty similar. I’ll use Littleton Public Schools as my example, but most likely your employer will be very, very similar.

The reason Section 125 plans are so useful for you is that they allow you to pay for various things pre-tax. How beneficial that is for you depends on what tax bracket you’re in, the more money you make, the more beneficial it is. Most educators are typically in the 25% or 28% federal tax bracket, and everyone in Colorado pays 4.63% in state income tax , so that means you’re typically saving between 29.63% and 32.63% in income taxes for every dollar you can put into a Section 125 plan. But, as an educator paying into Colorado PERA, you save an additional 8% because your Section 125 contributions also come out pre-PERA deduction, which brings your total savings to 37.63% to 40.63% (FYI – this also saves your school district money, as they don’t have to pay contributions on that amount either.)

So, what are these Section 125 plans? There are typically five components:

  1. Paying insurance premiums pre-tax (Premium Only Plan, or POP)
  2. Health Savings Accounts (HSA, goes with High-Deductible Plans)
  3. Health Flexible Spending Account (FSA). If you don’t have an HSA, can be used to pay for out-of-pocket medical expenses.
  4. Limited Purpose Flexible Spending Account (Limited Purpose FSA). Can be used in addition to an HSA to pay for out-of-pocket dental or vision expenses only.
  5. Dependent Care Flexible Spending Account (Dependent Care FSA). Can be used to pay for child care expenses.

Let’s look at each one briefly. (Note: this is not an in-depth look, just an overview, we can delve into much more detail in person.)

Premium Only Plan: Unless you are within 3 to 5 years of PERA retirement*, this one is a must. It takes whatever you pay in health, dental and vision insurance premiums and exempts those amounts from both income taxes and your PERA contribution. It’s basically free money – take it.

Health Savings Accounts: There’s a lot to say about High Deductible Plans and HSA’s but, to keep this brief, if you have a high-deductible plan an HSA is perhaps the best tax-advantaged option out there. It’s often referred to as a “triple-advantaged” plan, because contributions, earnings and withdrawals (for eligible expenses) are all tax free (as a bonus, your employer often contributes to this as well – more free money). Essentially, you never pay taxes on this money. Many folks just use it to pay their healthcare expenses on a yearly basis but, if you can afford to pay those expenses with other money, letting it accumulate and grow over time (invested in low-cost index funds) can be an incredible wealth builder. (2017 Contribution Limits: $3400 individual/$6750 family, additional $1000 if over 55, balance rolls over year to year.)

Health Flexible Spending Account: This existed before HSA’s and, for those folks who don’t have a high-deductible, this is still a great option. The money you put in and then use for eligible expenses is never taxed but, unlike the HSA, this is “use it or lose it” so you don’t want to put more in here than you can spend in a year. (2017 Contribution Limits: $2600)

Limited Purpose Flexible Spending Account: When paired with an HSA, this money can be used for dental or vision expenses. It’s a great way to put additional money aside tax free but, unlike the HSA, it is also use it or lose it (some employers allow you to carry over up to $500 from one year to the next). (2017 Contribution Limits: $2600)

Dependent Care Flexible Spending Account: If you have young children in day care, this is a great option to pay at least some of those expenses pre-tax. Again, it’s use it or lose it, so plan the amount wisely. Many years ago I had a conversation with someone who said they didn’t bother with this because they just deducted it when they filed their income taxes. This is not optimal, as if you do that you lose the 8% PERA savings and, depending on your itemized deductions, you may not get to claim the entire $5000. (2017 Contribution Limits: $5000).

So, let’s put some example numbers with this. How much savings you realize varies tremendously, not only based on your tax bracket, but based on the size of your family and what expenses you have, but I’ll try to pick a “typical” educator family (even though there is no such thing). For this example, I’m going to have the educator be married with two children, one of whom is in day care. The educator will cover themselves and their children (but not their spouse) for health and dental, and be employee-only for vision. They will choose the Kaiser High-Deductible Plan and the Low Cigna Dental Plan. They will max out the Dependent Care Flexible Spending Account with $5000, contribute $100 a month to their HSA (plus the district contribution), and pay for all insurance premiums pre-tax. (Their spouse would probably realize additional savings by utilizing some of these at their employer for their coverage.)

  1. Kaiser HDHP Employee Premium: $391.29/month
  2. Cigna Low Option Dental Employee Premium: $34.76/month
  3. VSP Employee Only Employee Premium: $11.29/month
  4. Dependent Care Flexible Spending Account: $416.66/month
  5. HSA Contribution: $100 month (district adds $85/month)
  6. No Limited Purpose contributions

That totals $954 a month, or $11,448 a year (not including the $1020 the district contributes toward the HSA). Assuming the family is the 25% federal tax bracket, that equates to a savings of $4308 in a year in taxes and PERA contributions. Keep in mind that you also have $2220 in your HSA to either spend or preferably rollover from year to year, for a total “savings” of $6528. Again, it could be a lot less than that if you’re doing employee only coverage (although still worth it), or a whole lot more if you’re doing family coverage, using Cigna for health care, and/or contributing more to your HSA and the Limited Purpose FSA.

As with everything financial, the specifics of your situation matters, so if you choose to work with me, we’ll work through all the permutations. In a future post, I’ll talk more about retirement accounts (401k/403b/457 plans) and how, when you combine them with Section 125 plans, you can dramatically lower your taxes.

*Very Important: If you are within 3 to 5 years of PERA retirement, you want to opt-out of all Section 125 deductions because it will lower your retirement benefit (lowers your HAS). I think there is probably at least a 40% chance that this rule will change in the 2018 Colorado Legislative session, in which case you would no longer opt-out when near retirement, but you also would “lose” the 8% PERA savings each year prior to that. Still very much worth doing because of the federal and state income tax savings.

Photo credit: reynermedia via Foter.com / CC BY

Why You Should Go Solar

Summary: Going solar, either rooftop or via a community solar farm, is not only the right thing to do for the environment and to combat climate change, but it will save you money.

Let me be clear up front, I’m passionate about sustainability, particularly the use of sustainable energy, and I believe climate change is a very serious threat. I think everyone should be concerned, not just for themselves, but for their children as well, so I of course think you should go solar. But, even if I didn’t believe all of those things, you should still consider going solar for financial reasons.

We put solar panels on our roof at the end of 2009. That’s only 8 years ago, but there’s been tremendous change in the solar energy industry since then. In 2009 solar panels were much more expensive than they are now (and the continue to get less expensive), and they weren’t as efficient as they are now (and still getting incrementally better each year). On the flip side, the incentives (at least in Colorado) were much better then than now.

roof

We purchased a 5.04 kW system from Standard Renewable Energy (SRE) and they installed it. (They’ve since been bought by GridPoint and no longer do solar installations, at least in Colorado.) The total cost was listed as $38,307, but then there was an “instant rebate” from SRE of $10,080, which took what I would consider the real cost down to $28,227. But we didn’t even have to pay that as, at the time, the combined utility and state rebate for that size installation was $17,020, which means our out-of-pocket cost (the check we had to write) was $11,207.

But it gets even better, because that doesn’t take into account the federal rebate, which turned out to be an $8,693 tax credit on our 2009 taxes, so we effectively paid $2,514. At the time SRE showed the break-even point to be between 3 and 4 years, but we estimated it at more like 5 (they had built in 10% electricity rate increases each year). We didn’t track it exactly, but we estimate the break even point was at about 4.5 years, which means that since mid-2014, our electricity has been close to free (not completely free, as we still pay a grid-access charge).

So what’s our “return on investment” on solar? Well, that’s a bit hard to tell, as the solar panels are still operating great and effectively generating income for us, and we don’t know how long that will continue or what electric rates will do. We spent $2514 at the end of 2009 and, so far, have “made” probably more than $4,000 in saved electricity bills. That’s currently around a 6% compounded yearly return (with no associated tax liability).

Plus keep in mind with all of the solar options I discuss in this post, these returns are tax-free, unlike the equivalent equity or bond investment so, depending on your tax bracket, that could significantly close the difference in returns between going solar and investing the money in the markets.

As part of the agreement with the utility company, solar systems are generally sized to generate approximately the same amount of electricity you use in a year, plus or minus a bit. (You can choose to install a smaller system and generate less, but they don’t like you to overshoot the mark.) Ours was sized at about 98% of our usage, although over the subsequent years we have actually used a bit less electricity (we installed new windows and replaced some appliances), so each year we typically have received a small rebate check from Xcel at the end of the year for the excess we’ve generated.

That was true until the beginning of this year, when we started again using more than we generated. This is because at the end of December we bought a used 2013 Chevy Volt, which is a plug-in hybrid. Much more on this in a future post, but basically because we are charging it each night, our electricity use has gone up and now surpasses what we generate. (To keep that “cost” in perspective, however, we still haven’t had to put gas in the car, having driven it more than 3,800 miles and only used 3.2 gallons of gas so far.)

Being the sustainability guy that I am, I of course wanted to figure out a way to make that new energy clean energy as well. We still had some room on our roof (perhaps not the ideal orientation, but still okay), but it turns out that most solar companies don’t want to add on to an existing system (I’m sure for liability/insurance reasons) and, since our system is still working great, we certainly didn’t want to tear it off the roof and put a whole new system on.

So we began looking at alternatives and ended up purchasing 4 panels at a community solar farm operated by Clean Energy Collective. Community solar farms are big arrays of solar panels, typically installed in big open fields, that generate electricity and feed it back into the grid. Individuals or businesses can then buy a portion of the array and get credit for the electricity generated to offset their own usage. It’s often called “roofless solar” and, in many ways, it’s better than solar on your roof. Solar farms are generally more efficient (they can align the panels perfectly) and cost effective (cheaper to install on the ground than on a roof, as well as economies of scale). I still prefer putting solar panels on roofs, as then I know for sure it’s new energy generation and it provided at the source, not simply purchasing already existing solar farm panels and feeding into the grid, although by purchasing those you are using up existing farms and therefore they are likely to build additional ones. But, because we couldn’t easily add any more to our roof, this was a great solution for us.

cec

The cost of this, of course, varies, but let me share the specifics in our case to give you an idea. Because we only needed to generate the additional amount of electricity we were using by charging the Volt, we only “purchased” 4 panels (which is the minimum) at the solar farm (located in Arapahoe County). We are effectively leasing the panels for 19 years (for initial customers it was 20, but because this farm has been in use for a little while, I guess we only have 19 years left). The cost for those panels was $3,050 out of pocket (ironically, more than our entire solar system after rebates in 2009).

Those 4 panels will generate 1.22kW. The way we get “paid” is that we get a credit on our utility bill from Xcel each month, currently 7.6 cents per kWh (that rises and falls with whatever the current rates are), as well as an 8 cent per kWh renewable energy credit (REC) that gets paid quarterly. The estimated yearly savings for 4 panels comes out to about $322. CEC then estimates that electricity rates will rise 4.8% per year. This is more realistic than the 10% SRE used back in 2009, but still perhaps a bit too high (unless a carbon tax is eventually passed, in which case it might be much too low). Using those assumptions they calculate a 9.5 year break-even point and a total return of “187%” after 19 years. Assuming no increase in electric rates, the return is about 4% per year compounded. Given that electricity rates will likely rise some, I’m going to guess it will turn out to be about 4.5% per year compounded.

Is that a great return on investment? Well, no, not compared to investing it in equities (but, again, keep in mind there’s no tax liability, so that boosts the return up some). If I was just trying to maximize my return, this would be a bad idea, investing $3,050 into an index fund would likely generate more return. But since I can generate clean energy, help combat climate change, and still earn a return that’s better than a money market account and probably pretty equivalent to what bonds would return, I think that’s a pretty good trade-off (as well as diversifies my investments a bit).

Now, if you don’t already have solar on your roof, you should definitely first investigate the cost and return on investment for that (more on that below). But, if you don’t own a house, or if you can’t or simply don’t want to put solar panels on your roof, then this is a great option. If you are interested, I’d recommend contacting Pete Stein at CEC (pete.stein@easycleanenergy.com or 720-623-0618), he was very thorough and helpful.

Full disclosure: If you mention my name and end up purchasing from CEC, I will receive a $200 referral fee. If you feel icky about that, don’t mention my name :-). But keep in mind that if you do, you also will receive a $200 check after completion of your purchase and $100 will be donated to charity, which is why I decided to go ahead and include it in this post.

Since we already had solar on our roof, I couldn’t get a quote for what it would cost to install solar now. Luckily, I have a friend who just installed solar in my neck of the woods in Colorado and he was willing to share his information. As I mentioned previously, much has changed in the solar industry since we installed in 2009. In addition to the changes in cost and efficiency, you now have many more choices of installers and many of them now offer solar leasing in addition to up-front purchasing.

My friend ended up going with Ion Solar and, so far at least, he’s been very happy with them. Let’s take a look at some of the details for his install. They installed a 4.85kW system, so roughly equivalent to the system on our roof. Their total system cost was $18,896, less the federal rebate of $5,669, for a net system cost of $13,227. There are no longer the huge state/utility rebates like when we installed ours, instead you now get a minimal REC from Xcel for the energy generated. (From the information shared with me, I can’t tell how much this is or exactly where it figures in the calculations, but I know it’s often less than 1 cent per kWh).

ion

My friend chose to finance the system, which is basically a solar lease. The amount financed is the full amount of $18,896 at 4.99%, and they’ll make payments of $79 per month for the first 16 months, then $91 a month thereafter for the remainder of the 20 years of the lease (this assumes that the $5,669 tax credit is then applied to the loan when it’s received). In their calculations Ion assumes a 4% yearly increase in electricity rates and, based on this information, after 25 years they will end up $20,667 ahead.

How does that work? Well, each month the (average) amount they save on their electric bill is more than their loan payment, so they come out ahead. Ion even does a calculation where if you apply that savings to the loan payments, the loan is paid off in 15 years and the 25 year accumulated savings is then $22,743.

So what’s the return on investment? Well, since there’s no money put down up front, it’s complicated. But for the sake of argument, let’s assume they had decided to purchase the system for the net cost after federal rebate of $13,227. Ion estimates that over 25 years (factoring in the estimated 4% yearly increase in electricity rates) they will save $42,280, which is about 4.8% per year compounded (again, tax-free). Again, compared to investing in equities, that’s not a great return. But given the good that you’re doing, along with diversifying your investments and earning a bond-like return, I think it’s more than worth it.

So what should you do? If you own a house, I’d suggest getting bids from several vendors for installed solar and compare, and perhaps also contact Pete at CEC to compare roofless solar as well. There are lots of vendors to choose from, but I would certainly include Tesla Energy (formerly Solar City), because I anticipate with their new Gigafactory 2 coming online shortly their prices will be very competitive. (In addition, if you happen to need a new roof sometime in the future, look into their new solar roof option. It’s more expensive because it’s tile, but when you factor in the electricity savings, it ends up being cheaper than an asphalt roof, plus it has an infinite warranty on the tiles themselves – you’ll never have to replace the roof again.) If you don’t own your own home, or for whatever reason don’t want to install solar panels on your roof, then definitely contact Pete at CEC and get all the details.

Any of these options will give you a decent, but not great, return on investment, as well as contribute to a better world. In future posts I will talk more about the used Chevy Volt we recently purchased, electric cars in general, and why your next car should be electric, as well as about the opportunity to invest in solar directly.

How Do You Measure Investment Risk?

risk

There are a lot of sophisticated measures in the investment business: P/E Ratios, Cash Flow Analysis, EBITDA, etc. The list goes on and on (and on). The one I find most interesting, however, is how most people measure risk. The generally agreed upon method is to measure volatility, which is how much the price of a particular asset (stock, bond, whatever) goes up and down, often in conjunction with looking at expected return of the particular asset. To simplify it a bit, the more the price of something changes, the riskier it is.

I find that fascinating and mostly wrong. If you are a long-term investor armed with self-control, measuring risk by measuring volatility is not very useful. This analogy is a bit of a stretch, but I’ll use temperature as an example. If a particular day starts at 60 degrees Fahrenheit and goes up to 80 then back down to 60, that would be considered “worse weather” than a day that starts at 100 degrees and stays there (or 40 degrees and stays there).

Now, if you are an investor who is actively trading, constantly moving in and out of different positions, volatility is important. Likewise, if you are an investor that is going to need to take money out of a particular investment in the near future, volatility could be important. But I prefer a different measure of risk: how likely are you to meet your goals?

To me, this is really the only measure of risk that matters. Will your investment portfolio/strategy achieve the goals you have set for it? If you are a long-term investor (and if you end up working with me you will be :-), you don’t care all that much about the daily ups and downs of your investment, as long as at the “end” your investment is up a sufficient amount that allows you to achieve your goal. Which means that if you construct your portfolio correctly, there is really only one sub-component of that risk that matters: you.

More specifically, do you have the self-control, the discipline, to follow your investment plan? When bad things happen (like the Great Recession in 2008, or the dot-com bubble in the early 2000’s, and the value of your investments drop, sometimes by a lot), will you be able to stay the course and not bail on your plans? One of the main reasons to hire a real financial planner (or even avail yourself of my services), is that they hopefully will help you to stick to the plan. While there are no guarantees, based on the entire history and theory of financial markets, if you invest for the long-term and don’t sabotage yourself by abandoning your investment plan at the worst possible times, you are (almost) guaranteed to be successful.

In fact, there is plenty of research that most investors earn less (often far less) than the mutual funds and other investments they invest in earn. How can that be? They buy high and sell low. They typically buy into a mutual fund (or stock, or whatever) after if has performed really well for a while (missing out on most of the gain), then lose heart and sell when it inevitably goes down. It’s the investor’s behavior that causes them to under-perform, and hence the riskiest part of investing isn’t typically what you choose to invest in, it’s you.

So what’s the secret?

  1. Spend less than you make.
  2. Regularly invest the difference in low-cost index funds.
  3. Don’t sell (unless you’ve achieved your long-term goal).

I’ll write several more posts exploring different aspects of this, but it pretty much is that simple. That’s one of the most frustrating aspects when I hear others talk about their finances. Either they are too afraid of “investing” because they are worried about losing their money (or somebody taking advantage of them), or they are constantly moving from investment to investment to try to outperform the market (generally with poor results, as that study indicated).

As I mentioned in one of the FAQs, about 90% of what you need to do is really pretty straightforward, and not all that hard to do, if you simply know a little bit and have that self-discipline. I’d be happy to get you started on that path.

Photo credit: Foter.com

Focus On: DCSD Health Insurance

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I recently posted about the health insurance offered by Littleton Public Schools, this post will focus on Douglas County Public Schools. The first part of this post will be very repetitive from the LPS post, as some of the background information is essentially the same (hooray for copy and paste). So, if you’ve read that other post, you might just want to skip down to the comparison part of this post.

Healthcare and health insurance are complicated. Each person/family has unique needs, and many families have two employer plans to choose from. Therefore it’s really important to look at each person/family individually, so this blog post is going to be a general overview of the health insurance options currently offered by Douglas County Public Schools, but your needs may require additional considerations that this post won’t cover.

As a long-time public school employee, I’m very familiar with the benefits that school districts offer. I’m also very familiar with the fact that many people don’t like to think much about benefits and aren’t really aware of the different options and what they might mean to them. Again, while each person/family has specific needs, let’s take a look at some general observations about the health insurance options that DCSD currently offers.

DCSD still offers a choice of two different insurance carriers (which is increasingly rare), CIGNA/Allegiance and Kaiser, and then two plans from each provider (a more traditional, low-deductible plan, as well as a high-deductible plan). So the first decision most people have to make is whether to go with CIGNA or Kaiser. This discussion often ends up being similar to the Apple vs. PC discussions that happened a while back, with folks having very strong opinions on both “sides,” but let me try to share what I know.

The main consideration for most folks is how important it is for them to be able to choose their own doctor. If you have an existing relationship with a doctor (not at Kaiser), and you have perhaps some on-going, chronic conditions that doctor is helping you with, that could be a strong argument for CIGNA. But I’d suggest you really give some thought to both of those conditions to see that they both apply. If either does not, then you have some more thinking to do.

One of the frustrations over the years when I’ve discussed health insurance with folks is the assumptions they make. Many (not all) assume that CIGNA must be better than Kaiser, both because it’s more expensive and because it is not “managed care.” That assumption is not correct. CIGNA is not bad, but Kaiser consistently ranks very high in both quality of care and customer satisfaction (and typically higher than CIGNA). That doesn’t mean that Kaiser is perfect, some folks have had bad experiences with them, but the structure of Kaiser is why their quality of care is so good.

Managed care has a bad reputation, but all health insurers – including CIGNA – are practicing managed care. The difference is that at Kaiser there is a dedicated team to identify best practices based on the research evidence, and that is then disseminated to the doctors, nurses and other staff members to follow. Under plans like CIGNA, doctors have more freedom (which many people like), but the quality of care is more variable from doctor to doctor. An interesting result of all of this is that when folks have a bad experience with a doctor at Kaiser, they typically blame Kaiser, but when they have a bad experience with a doctor with CIGNA (or other carriers), they typically blame the doctor. I am not trying to convince you to change to Kaiser, just to examine your assumptions and make sure you are basing your decision on your needs and the actual evidence.

Once you’ve made the decision between CIGNA and Kaiser, you then have to decide between the two plans they each offer, a more traditional low-deductible, copay/co-insurance type of plan, and the newer (and increasingly more popular among employers) high deductible plans. It is beyond the scope of this blog post to discuss all the pros and cons and the nuances of high deductible plans, but we can look a bit more carefully at the actual out-of-pocket costs under each plan and many folks will find the result surprising.

Before we do that, just a little background. It’s important to look a little bit at how much DCSD contributes toward your premiums. Unlike LPS, there does not seem to be a particular formula DCSD uses (at least it’s not apparent if there is one). DCSD appears to have made the strategic decision to keep premiums lower but have deductibles and max out of pocket be higher. They definitely do contribute some toward dependent coverage, but I’ve been unable to discern a consistent percentage amount.

Whether that is personally good for you depends, of course, on whether you are covering dependents :-). In effect, employees who choose employee only coverage end up helping subsidize those who choose any of the dependent coverage options. (And, by the way, employees who choose Kaiser end up subsidizing those who choose CIGNA.)

A second piece of background is to understand the purpose of insurance, and particularly group insurance. Folks who grew up in my generation tend to have the view that the purpose of insurance is to “pay for our healthcare costs.” While that would be nice, it’s unfortunately not sustainable. The purpose of insurance (from an individual’s perspective), is to cover outliers. If something bad happens to you (or your family), it prevents catastrophic healthcare costs that you might be unable to pay. (Prior to the Affordable Care Act, medical bills were the leading cause of personal bankruptcies, it will be interesting to see what happens going forward.)

By pooling your risks with those of a group, it becomes affordable for the group as a whole to pay those really high healthcare costs for the (hopefully) few individuals who need it. In effect, those folks who don’t end up with high costs subsidize those that do. When insurance rates go up, it’s not just because the insurance companies are greedy (Kaiser, in fact, is non-profit), it’s because the cost experience of the group (in this case, DCSD employees who’ve chosen each particular plan) has been more than the premiums that are paid in. It just takes one or two very expensive cases (a premature baby with complications, brain cancer, etc.) to require higher premiums. To be clear, this is not a bad thing, this is the reason for group health insurance. If you never get sick, the best option would be not to buy health insurance at all. This is the reason for the controversial “individual mandate” in the ACA, for health insurance to work you have to have healthy people involved in order to pay for the sick people.

So now let’s look at the premiums. When folks look at the rate sheet put out by DCSD each year, they often skip down to the employee portion of the premium, think about the deductible amount and perhaps maximum out of pocket, and then make a quick decision. For many folks, the idea of a “high-deductible” and paying costs out-of-pocket up front is scary, but if you stop to do the math, the story turns out a bit different. This table shows the total out-of-pocket costs for each plan choice under a couple of sample scenarios. Obviously, your experience will most likely not match the sample scenario, but I tried to pick scenarios that people typically worry about (which is costs that come in right at the deductible amount for the high-deductible plans).

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It turns out that under the CIGNA plans, the high-deductible plan is cheaper for almost everyone under almost every scenario. (I think it is actually everyone and every scenario, not just “almost”, but I can’t check every possible scenario so I didn’t want to overstate it.) Check out this google doc for a bit more detail but, basically, with the amount you save in premiums under the high-deductible plan, plus the amount that DCSD contributes to your HSA (I’ll write a post soon talking more about HSAs, they are a very attractive option), you come out ahead over the OAP plan even when you have large medical bills. Even better, if you have years where you don’t have large medical bills, you not only come out ahead, but the amount in your HSA (DCSD contribution plus whatever you might choose to contribute) rolls over. So not only do you pay less that year, you have “money in the bank” for future healthcare costs.

The math is not quite as straightforward on the Kaiser side, because under the DHMO you have both copays and coinsurance after you meet the deductible, and what those might end up being varies greatly depending on exactly what kind of care you end up needing (plus, ironically, since the premiums are lower than CIGNA, the difference between the two Kaiser plans is not as stark). But, in general, the story is fairly similar to CIGNA, for any of the dependent coverage plans, the high-deductible plan is better – for employee only, the DHMO might be better. When you have “good” healthcare years with low costs, you will definitely come out ahead with the high-deductible plan and can carry over any money in your HSA. When you have “bad” years with higher costs, you may still come out ahead with the high-deductible plan, but there are certainly scenarios where the DHMO would end up being cheaper. (And, of course, when you compare to the CIGNA plans, Kaiser is less expensive under all scenarios.)

So, which carrier and which plan should you choose? It depends. You also have to look at the benefits offered by any spouse’s plan, your existing health and any conditions you might have. as well as your personal preferences. That’s certainly part of what we’d do if you decide to work with me.

Additional Resources (2017-18)
DCSD 2017-18 Rate Sheet
CIGNA/Allegiant Plan Summary
Kaiser Plan Summary (appears to be HDHP only, didn’t find one for DHMO)
DCSD Benefits Summary
Medical Plan Comparison Chart

What Keeps Me Up At Night?

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Lots of things. Thinking about teaching and learning. Climate change. My fifty-three-year-old bladder.

More relevant to the area of financial planning, however, what “worries” me the most is the possibility that “This Time Might Be Different.” If you’re not familiar with this phrase, it’s usually used in a negative way. For example, in investing circles it’s often associated with people’s thinking during bubbles, say the dot-com bubble of the late 1990’s or the real-estate bubble of the mid 2000’s. It’s invoked to describe when people think that despite the evidence that things have never worked a certain way in the past, this time is going to be different because of some fundamental change in the world that will make all that historical evidence irrelevant.

While the phrase is usually used in a negative fashion there are times, of course, when things really are different. When Homo Sapiens arrived on the scene. The development of agriculture. The Industrial Revolution. The splitting of the atom. The Internet (while the investing side that produced the dot-com bubble wasn’t different, the effect the Internet has had on just about everything really has been different). So what keeps me up at night is a combination of several factors that make me worried that this time could be different in a way that makes all my assumptions about investing, financial planning, and retirement based on past evidence and practices no longer relevant.

The primary factors that have me concerned are automation, artificial intelligence and life expectancy. Each of those factors on their own already are already having dramatic impacts and, conceivably, could create a this-time-it’s-different moment. But when you combine all three of them together, the potential impact is hard to quantify. There’s no way to do this topic justice in just a short blog post, but I’ll try to summarize my thinking in just a few paragraphs.

The recent history of humanity has been all about automation. From the way we grow food, to the way we manufacture products, to the way we run organizations and manage economies, automation has been the story of modern human civilization. What makes me worry that this time might truly be different is the level and sophistication of that automation, combined with the advances that are being made in artificial intelligence. People have often worried about the effect automation might have on workers, but time and again humanity has adapted and created new things humans can do which has led to new and, arguably, better and more interesting jobs.

But the things we are beginning to be able to automate are approaching the level of being able to provide the majority of what humans need to live and even thrive. While I have no doubt we’ll adapt in terms of what we do with our time and our abilities, I do wonder if that will necessarily translate into a paid employment scenario that will allow our basic ideas of how a capitalistic economy works. A passage in Your Money or Your Life that resonated with me was,

What if we removed most of these expectations from our paid employment and recognized that all purposes for work other than earning money could be fulfilled by unpaid activities?… Redefining “work” as simply any productive or purposeful activity, with paid employment being just one activity among many, frees us from the false assumption that what we do to put food on the table and a roof over our heads should also provide us with our sense of meaning, purpose and fulfillment. Breaking the link between work and money allows us to reclaim balance and sanity.

When you think about those ideas in the context of the combination of automation and artificial intelligence, you begin to wonder if “paid employment” is a concept whose time may be about to pass. If you haven’t yet heard of the idea of universal basic income, you might want to begin learning more about it. I don’t know what the right prediction percentage is, but I would guess that there’s maybe a 50% chance that we will be dealing with a post-capitalism-as-we-know-it society in the next 20-40 years.

The third factor is life expectancy. I think there is a high probability that we are on the cusp of extended lifespans, with many folks regularly living to an age of 120 (and living relatively healthy and meaningful lives right up until the end). I think the advances we’re making in medicine, particularly around our fundamental understandings of biology and genetics as well as our ability to make genetic modifications using techniques like CRISPR, are going to lead fairly soon to dramatic decreases in untreatable instances of many cancers, diseases like Alzheimers, and “lifestyle” conditions like obesity and heart disease. Many credible folks are predicting that 120 will be the “new 100” which is already the “new 80” which was previously the “new 60”. And while not mainstream yet, some folks think 120 is just the start.

Again, these are all good things, but the impact on our economy and our finances would be dramatic. Elsewhere I’ve written about how great PERA is, but if PERA has to suddenly pay out benefits to a large percentage of their members living to 120, all bets are off. When combined with automation and artificial intelligence, we could be looking at the mother of all this-time-is-different scenarios.

Overall, I find this incredibly interesting and very exciting, but it does keep me up at night in terms of offering folks financial advice. If much of this occurs (even in less dramatic ways then described above), then lots of the assumptions that I make when giving my financial advice (fundamental assumptions that everyone makes) may not hold true. That doesn’t necessarily make it bad advice, I think it will hold up really well until it suddenly doesn’t, but once it doesn’t you’re still likely to be in better (or at least as good as) financial “shape” for what comes next. But if someone asks me “what could go wrong” based on your advice, this is what I’d share with them.

Photo credit: Foter.com