Behavioral Economics Explanation for Sensitivity on Service Fees
After puzzling over why people are overly sensitive to service fees, I read this good article by New York Times columnist Ron Lieber 5 Ways to Think About Nuisance Fees. Ron posits that people judge service fees by a fairness score so-to-speak. Factors feeding into the fairness score include:
- the size of the fee compared to the cost of service
- whether the consumer already dislikes the service provider
- how the service provider justifies the fee
- the value of the service
This points me to find answers to why people seem to be irrationally sensitive to service price increases from behavioral economics. I came up with a new theory.
Deduct-and-Convert: Save Hundreds in State Income Tax on Roth IRA Contributions
Attention retirement savers in Illinois, Kentucky, Oklahoma, Delaware, North Carolina, South Carolina, and seven other states: if you are contributing to a Roth IRA, you may be able to save hundreds of dollars in state income tax if you use an alternative strategy I call deduct-and-convert.
Not everyone will qualify but it’s worth checking if you live in those states. The strategy involves making a contribution to a traditional IRA and immediately converting it to a Roth IRA.
I didn’t invent this strategy. The inspiration came from Bob’s not my name on the Bogleheads investment forum. Bob’s not my name credited it to another poster bdpb. Because the procedure is similar to Backdoor Roth, Bob’s not my name calls it Backdoor Both. I think deduct-and-convert describes it better.
Social Security Penalizes Two-Earner Families
Here’s something I learned from Jim Blankenship’s book A Social Security Owner’s Manual: Social Security is overly generous to one-earner families and penalizes two-earner families. Of course Jim didn’t say it directly in the book. I reached this conclusion based on the information I learned from the book.
When Social Security first started in the 1930s, one-earner families were the norm. Husband worked; wife stayed at home. Now, two-earner families are the norm: both husband and wife work full time. It’s been this way for many years, but Social Security rules stayed behind. They are still operating in the world as if one-earner families are the norm.
Consider two couples. Couple One is the traditional one-earner family. Husband worked; wife didn’t. They both reached their full retirement age at 66 this year. After indexing for wage increases and inflation, the husband’s average earnings over the highest 35 years is $48,000 a year.
Sales Tax Deduction Expires After 2011
Phuc Dang at Merriman Blog wrote about 3 expiring tax provisions. Andy at Saving to Invest included a few more expiring tax provisions. Jim Blankenship at Getting Your Financial Ducks In a Row included yet a few more. All of them mentioned the sales tax deduction in the list.
The sales tax deduction is primarily for people living in states that don’t have an income tax. They can deduct the state and local sales tax on their federal income tax return. People in other states can use it too but because they can’t deduct both the state and local income tax and the sales tax, they usually end up just deducting the state and local income tax but not the sales tax.
Unless Congress extends the sales tax deduction, 2011 will be the last year this deduction is available.
Financial Advisors Support Peer Who Lost His Home
Although the public comments on the financial planner who found the best way to lose his home are mostly negative, it’s the opposite in the financial advisors circle.
Michael Kitces asked his financial advisors audience Which Is More Important In Your Trust Equation: Credibility, Or Authenticity? He alluded to the worry that by admitting mistakes in personal finance, financial advisors will lose creditability from the public who already don’t trust financial advisors that much, but at the same time, by showing the human side, financial advisors will gain trust with authenticity.
The comments from financial advisors to Michael Kitces’ article are mostly supportive of Carl Richards’ heroic act of confessing personal mistakes. Carl Richards himself reported in the comments:
Retail Banking Oligopoly
During the brouhaha over the $5-a-month debit card usage fee, this article came to my attention: Banking Has Become an Oligopoly Instead of a Competitive Business. It said banking is now an oligopoly, and therefore switching banks will not work because banks are not in a competitive market.
“Banking is not really a competitive industry. In reality, it’s more like an oligopoly — a scenario in which an industry is controlled by a small number of firms.”
Somehow that’s not the impression I got. I feel like I’m being surrounded by many different banks competing with each other.
The Best Way to Lose Your Home
If you read finance related discussion boards and blogs, you must have read discussion on a confession in New York Times by a financial planner about how he lost his home in the real estate bubble in Las Vegas.
Long story short, the financial planner bought a home with 100% financing for $575,000, refinanced it with a negative amortization loan when the home’s value went up and took $200,000 cash out to fund his business. He finally sold it for $531,000 in a short-sale when he moved out of Las Vegas.
There are many negative comments on this story. Many said it shows financial planners aren’t any smarter or more savvy about financial matters than the average Joe Six-pack. Some said this planner isn’t qualified to give financial advice. These comments miss the point entirely.
Best HSA Provider for Investing HSA Money
My employer is doing open enrollment for 2012 now. I’m going to give the high deductible health plan (HDHP) and health savings account (HSA) a try.
In the past the difference in premiums charged to the employees is really small between the PPO option and the HDHP option at my employer, while the HDHP has a much higher annual deductible and out-of-pocket maximum. This year they made the difference larger. The employer is also throwing in a contribution to the HSA if employees choose the HDHP.
These changes made the HDHP more appealing. So much so I decided to give it a try for the first time. I’m also getting tired of estimating contributions to a flexible spending account (FSA). Estimating too low means paying health care expenses out of pocket with after-tax money. Estimating too high means wasting those dollars on unnecessary services.
Bonds Bubble vs Gold Bubble
PIMCO’s founder and star manager Bill Gross called the bonds bubble too soon. He got a lot of flak for getting out of Treasuries before Treasuries had a good run. Many people point to this as a case-in-point for the failure of active management. He had to issue a mea culpa saying he was wrong.
At the same time bonds ran up in prices, gold also did very well. The mainstream model portfolios typically don’t include gold. Gurus I admire, John Bogle, Burton Malkiel, David Swensen, et al don’t recommend investing in gold.
A March 2010 LA Times article said Vanguard founder John Bogle thought "gold is now the wrong place to invest." Gold price was about $1,150 per ounce at that time. It’s about $1,750 now. If you listened to John Bogle in March 2010, you missed a 50% run up.
A Social Security Owner’s Manual by Jim Blankenship
I admit I haven’t paid much attention to Social Security because I’m still far from being eligible for Social Security. When Jim Blankenship published a new book A Social Security Owner’s Manual, I took the opportunity to learn more about Social Security.
The "owner’s manual" part in the title is just figuratively speaking. The Supreme Court ruled back in 1960 in Flemming v. Nestor that nobody really "owns" Social Security benefits. Paying Social Security taxes is just that — paying taxes. It has nothing to do with receiving benefits. The ruling has been the law of the land for 50 years already, but I still hear people talking about "I earned it." That’s simply not true. You don’t earn it no matter how much you paid in taxes.
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