Marginal tax rates of 70% for the working poor

Greg Mankiw points to this back-of-the-envelope calculation that suggests the working poor will find 70% of their increased income taxed or clawed back under the proposed health insurance reform bills (but since the details remain to be settled, a complete appraisal is not yet possible.)

This means many poor families will discover there's almost no incentive to taking a better, higher-paying job.

This, along with the high hidden tax in the form of compulsory, higher-cost insurance premiums for healthy younger people, makes this proposal one of the largest transfers of wealth in history from young working stiffs to over-50 slobs with lifelong bad habits.

While the proposals do allow for rewards to company-insured people who maintain good habits, on the whole it removes any financial incentive to maintain good diet and exercise habits for almost everyone else.

Simple Portfolio Program

My cousin Karen's husband (about 55, in IT at American Funds in KCMO) sent me an email asking for advice. Thought I'd share it as it's pretty good advice for most middle-aged people looking to invest for retirement.

Curtis, don't know if you have heard yet but I was RIF'd (reduction in force) at ACI along with 16 others in IT. I am out searching the market but as you are no doubt aware it's a tough market out there right now. Fortunately I have a good severance package with a year's salary and a year's health insurance for Karen and myself.

No, I hadn’t heard! You seemed to be leading a charmed life until now. Paul had to lay off about half his tech writers and hire contractors in India instead, against his better judgment.

One thing (which is more of a back burner issue right now) is how to manage our funds especially if I do not find another position in a year. Choices I have:
leave my 401K in ACI
rollover to an IRA. For that I am considering 3 possibilities:
* rollover to Vanguard (we already have some funds there, and I like the low cost index funds)
* rollover to JPMorgan/Chase (they've contacted me as they are the 401K account manager for ACI)
rollover to Wadell&Reed (an ex-manager at ACI is now a financial planner at W&R and he contacted me).

The rollover is best unless there’s something special in your 401K program; the funds in there probably pay more in fees than you’d like. You’re a smart guy, so you’d probably be better off managing your own simple program at Vanguard, which I prefer for their low costs and lack of conflicts.

I know you serve as your own financial advisor, and I would do some the same if I rollover to Vanguard although I would probably not be an active manager but more a buy and hold.

Most people who try to actively manage their accounts do worse than if they just left them alone.

W&R charges around 1.3% for managing a portfolio. Obviously if they can return more than 1.3% over what my Vanguard portfolio would then financially it might be worth it.

I seriously doubt they do.

What are your thoughts about using a financial manager?

Most are not worth the expense (I was, of course!) I am happy to pay higher fees for subspecialties (like a Korean fund I use), but for most of your funds you want simple index and bond funds, which should have low overhead. Come up with a strategy in advance, rebalance once a year or so to boost returns a little, and otherwise forget about it. As a general rule, if someone approaches you (paid salespeople) with an investment or service, it is not as good a deal as it appears. The effort you make to find your own services generally pays off well.

If I were you, I would put a heavier weight on Asian and other non-US investments than typical of managed programs. I think there is a good chance of a few decades of slow growth and low returns here, plus a good chance of US$ declines. Demographically and politically we are going to pay for being too much in debt and too obligated for pensions, so I’d put about half my investments elsewhere, in other currencies.

So it might look something like this (adjust depending on your risk tolerance): 50% stocks, 50% bonds; 50% US, 30% Asia, 20% Rest of World.

This might work out:

Van Total Stock Market Index 25%
Van Total Bond Market Index 25%
Van Total Int’l Stock Index 10%
Van Emerging Markets Stock Index 15%
Matthews Asian Growth and Income 15% (not a Vanguard fund, but you can buy it there)
Pimco Foreign Bond (unhedged) PFUUX 10% (ditto)

...then on a set date every year, buy and sell as necessary to maintain these ratios. If you want to get fancy, you gradually adjust upward the bond percentage as you get older (less tolerance for risk.) But that’s not very important in most cases.

A program like this puts you way ahead of most people.

HTH