AS I TYPE THIS, I’m less than a week from walking out the door of my workplace for the last time, bringing my second career to a close. I’m looking forward to the rest of my life. We’ve been anticipating this day and we’re more than ready. My wife is already retired. My work for a large corporation is fine, but I’m not passionate about it. While there are some positive aspects to where we currently live, the best part is the airport. We predicted some time ago that, if my job still had us here when we got to this point, we’d be calling it quits and taking our life’s possessions elsewhere. We’ve thought a lot about how we’ll support ourselves financially—what combination of pension benefit, retirement accounts, taxable accounts and Social Security benefits will carry us through the rest of our lives. Maybe that’s a topic for a future article. Short version: We’re comfortable with our situation and we have no hesitation about our decision to retire. We’ve also thought a lot about where and how to live, which is also a subject for another day. Short version again: We haven’t decided. We aren’t in as much of a hurry to move as we expected to be. One reason: We didn’t anticipate some of our close relatives would be living in Spain. There’s no telling how long they’ll be there, so—before we do anything else—we’ll spend some time with them. And who knows? In the next few years, we may make a surprise addition to our future hometown shortlist. A lot of folks find it bittersweet to leave behind fulltime work. I get it. Leaving my first career in the military was like that. But this time, I’m happy to say it’s all sweet.

WE TRIMMED THE TAXES we owed on investment gains in 2021 by using losses we’d realized during 2020’s stock market swoon. Now, 2022’s market decline has allowed us to repeat this process, once again offsetting capital gains with tax losses that we’d earlier harvested. My wife and I haven’t just saved on taxes, however. The sales have also allowed us to reposition our taxable portfolio away from active management and toward more of an indexing bent. Along the way, we sidestepped one mistake but made two others—mistakes you’ll want to avoid if you decide to make similar trades. Here are some of the investment moves we’ve made over the past year: We realized losses when selling an actively managed fund and invested the proceeds in a broad-based index fund. We sold municipal bond funds at a small loss, again moving the proceeds to a stock index fund. At the same time, we moved from stock investments within a 401(k) to a stable value fund to maintain the same overall stock-bond mix. We realized losses on some index funds and invested the proceeds in similar index funds, in some cases doing so repeatedly. Regarding this last move, you might wonder why we swapped index funds back and forth. We did so purely to harvest losses that we could then use to offset later gains. While the index funds we’re switching between are not identical—that would disallow the tax loss—they’re similar enough for our investment purposes. At this stage, we’re happy to own these index funds no matter what the market does. If the market continues higher, great. If it drops, we may trade between these funds again—and harvest new tax losses. Our losses allowed us to offset $3,000 in ordinary income last year. That was a bonus because our marginal tax rate—the rate we pay on our last dollar of income—is higher than the 15% rate we pay on long-term capital gains, and thus it’s especially attractive to offset losses against ordinary income rather than capital gains. With more tax losses from 2022, we have the same tax-saving opportunity this year. Other harvested losses allowed us to sell one actively managed fund and reduce our position in another. Both of these sales created some gains, but we could offset them with recently harvested tax losses from one of our index funds. While all these trades have worked as intended, this kind of exercise isn’t foolproof. If you choose to realize gains and losses, here are three things to watch out for. Violating the wash-sale rule. A few years ago, I broke the rule and wasted a small loss. You may be wondering how I could possibly mess this up. You sell at a loss and wait 30 days before buying the same or substantially identical security again. Easy, right? Wrong. The issue is that the 30 days work in both directions, before and after the sale, and includes buying any shares through the automatic reinvestment of dividends. So, if you had even the tiniest dividend reinvested within 30 days of selling at a loss, that creates a wash sale and the entire transaction is not tax-deductible. To avoid this, check for dividends from the stock or fund before you sell. To make it even simpler and foolproof, have your dividends paid in cash to the money-market fund connected to your brokerage account. Also, know that you must do this for every account in which you hold the security, not just the one where you’re selling. If you sell a stock or fund in one account, and the tiniest dividend is reinvested in the same security in another account, that’s still a wash-sale rule violation. Buying the dividend. This happens when you purchase a stock or fund just before the ex-dividend date. Buyers of shares before that date will receive the next dividend payment. In my case, I harvested a loss in one fund and bought its replacement just in time to get paid a dividend. Since the share price drops when a dividend is paid, isn’t this all even? Yes—except we owed taxes on the dividend paid. Had I remembered to check, I’d have waited a few more days to realize the loss and buy the new fund. [xyz-ihs snippet="Mobile-Subscribe"] Avoiding a taxable dividend payment like this is very simple. You just need to remember to do your homework. Check the ex-dividend date of the security you’re about to buy and, if a dividend is near, consider waiting until after the ex-dividend date, especially if it’s a large amount of money. Breaking tax thresholds. This hasn’t happened to us, but realizing taxable gains could be costly in unexpected ways. Enough harvested gains might push you into a higher marginal tax bracket or trigger the net investment income tax, alternative minimum tax or Medicare’s income-related monthly adjustment amount, otherwise known as IRMAA. To avoid all these, keep an eye on how close you are to crossing the thresholds involved. When I wrote about using capital losses in 2021, I was in my last few months before retirement. That summer, I was already thinking about the details of what I would sell and when, and how I’d keep track of dividends and capital gains distributions toward the end of the year. Now that I’m fully retired, I somehow seem to have less time to spend on these details. This process does require time—and thought. It takes me a few hours to identify losses, find appropriate investments to take their place and keep track of our income so we don’t inadvertently go over certain tax thresholds. Some of these hours are required late in the year, toward holiday time, when we often have more fun things to do. I intended to make some of these moves in the last week of December. No matter, the strategies still work even if the calendar changes. With another few years of harvesting, we’ll have eliminated the actively managed funds in our taxable accounts and realized a chunk of their embedded capital gains without paying taxes. Our portfolio will be simpler and more tax efficient, too, with fewer annual capital gains distributions. Any loss harvesting will likewise be much simpler, likely limited to exchanging one index fund for a similar one. Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. Check out his earlier articles. [xyz-ihs snippet="Donate"]

Lately I’ve been thinking about the Fidelity ZERO series of funds. These are broad stock index funds, which is good, and they have zero fees, which is better. The downside, if it even is one, is that they track Fidelity proprietary indexes rather than industry standard ones. Fidelity also has outstanding standard index funds that track the industry standard broad indexes for low fees. My question to myself, and to anyone who cares to opine: is the difference worth any fee at all when I can pay zero? Note that I’m not considering other companies’ mutual fund offerings here, nor am I considering exchange-traded funds. I’m sure someone is going to say that ETFs are better, or that Vanguard has lower fees in general, or that the zero-fee funds are to lure investors in to sell them other services. That’s fine, but the choice I’m evaluating is between Fidelity’s newish zero-fee funds and their closest Fidelity standard index fund. For the purposes of this discussion, there are no other options. Here are the funds in question, with their expense ratio, yield, turnover, and trailing one-year and five-year returns. (All information cited in the post is from Morningstar.) FUND ER YLD T/O 1YR 5YR             Fidelity ZERO Total Market Index (FZROX) 0% 1.16% 2% 27.23% 14.24% Fidelity Total Market Index (FSKAX) 0.01% 1.19% 3% 27.19% 14.09%             Fidelity ZERO Large Cap Index (FNILX) 0% 1.09% 3% 28.07% 14.88% Fidelity 500 Index (FXAIX) 0.01% 1.25% 2% 27.50% 14.75%             Fidelity ZERO Extended Market Index (FZIPX) 0% 1.22% 8% 20.18% 9.73% Fidelity Extended Market Index (FSMAX) 0.30% 0.48% 9% 25.32% 10.76%             Fidelity ZERO International Index Fund (FZILX) 0% 3.0% 5% 11.69% 4.92% Fidelity Total International Index Fund (FTIHX) 0.06% 2.8% 5% 11.25% 4.62% The figures for the U.S. total market funds and S&P 500 funds are very close. Likewise, if I delve into their holdings, looking at measures such as how their holdings are distributed according to the Morningstar style box, and what percentage of their holdings are companies with economic moats, they’re again almost identical. So, do I care that Fidelity is using a proprietary index for these rather than an industry standard total market index or the S&P 500 index? I see no reason why I should. I suppose the proprietary index could change without me knowing, but this doesn’t strike me as something to worry about and would not stop me from holding the zero-fee funds. By the way, both the low-fee and zero-fee funds get Gold ratings from Morningstar. The U.S. extended market funds are a different story. The differences in yield and on trailing one-year and five-year returns are significant. Looking at their holdings tells us why. The standard low-fee fund tracks the Dow Jones US Completion Total Stock Market Index, which covers the mid-cap and small-cap stocks that are outside of the S&P 500, weighted by market cap (which is what I’d expect from a fund called  “extended market index”). The zero fee fund, on the other hand, is significantly tilted toward small caps, and toward value. So, it’s a very different fund. Both get Bronze ratings from Morningstar. The zero-fee international fund isn’t as close to the standard index fund as the U.S. total market and large cap funds are, but it’s closer than the extended market fund. The standard low-fee international fund tracks the MSCI ACWI ex-USA Investable Market Index, which includes stocks of all market capitalizations from around the world, including from emerging markets. The proprietary index used by the zero-fee fund doesn’t include small caps. Perhaps because of this, the zero-fee fund holds more companies with economic moats (48 percent) than its low-fee counterpart (43 percent). There’s still not much of a difference in their trailing returns, but to the extent there is one, the zero-fee fund has done a little better. The low-fee fund gets a Gold rating from Morningstar; the zero-fee fund gets a Silver rating. If I were building a portfolio now, and again assuming I only wanted Fidelity mutual funds, I would feel fine opting for the zero-fee total U.S. market or S&P 500 funds over the standard low-fee funds. I would probably also do this for the international fund. I don’t feel I’d be missing much by not having international small caps. (Indeed, I might prefer a developed markets index fund, but that’s not an option in this comparison.) The extended market fund is a more complicated story, and I think it depends on the intended purpose of the fund. If the purpose is to complement a S&P 500 index fund, the standard low-fee fund does that, but the zero-fee fund largely misses mid-caps, so I’d pay the low fee. If the purpose is to give a small value tilt to a portfolio that otherwise largely mirrors the market, then the zero-fee fund seems fine.  

TRAVELING TO AND living in foreign countries has been a big part of my adult life. My wife and I are looking forward to even more travel now that we’re no longer working. In fact, we just spent three months in Europe. It’s our second such trip since retiring late last year. Over the decades, we’ve given a fair amount of thought to how we can stay safe during our travels. Below are 10 suggestions for those venturing beyond our borders. Many of these tips also apply if you’re traveling within the U.S. 1. Safeguard your passport. Sure, this is common sense. But it’s first on the list for a reason. Take it seriously. There are different places to secure your passport—hotel safe, double closure pocket, hidden travel wallet. Make a photocopy or take a picture of the personal information page with your phone, and keep your actual passport safely tucked away. Many times, when folks ask for your passport, all they really need is the info that’s on it. But have no doubt: The airline taking you home wants the real thing. Replacing credit cards or a driver’s license would be a hassle. But those pale in comparison with trying to get home without a passport or replacing it while overseas. 2. Separate your credit cards. Replacing credit cards outside your home country isn’t as simple as getting new ones in the mail. If you have more than one—and you should if you travel—keep them separate so they aren’t all lost or stolen at once. For example, my wife and I travel with two joint credit cards. I carry card A in my wallet, and card B is with my passport. My wife carries her card B, and her card A is with her passport. Of course, both A and B have no foreign transaction fees. When we want to pay for something, one of us pulls out whichever card we want to use. If one of our wallets is lost or stolen, only one account is compromised, and we can use the other. There’s also a card C, which is our main one and waits for us at home. That account is safe even if all our stuff is stolen. Extra tip: Have apps for your cards set up on your phone so you can easily lock the account as soon as you know your card is missing, no matter what time it is at home. 3. Separate your IDs. If some piece of identification gets stolen despite your best efforts, it’s good to have a backup. You should always carry identification, but that doesn’t have to be your passport. You might keep a driver’s license in your wallet and secure your passport somewhere else. I take my retired military identification with me overseas, along with my Global Entry card, but I don’t keep all these together. 4. Get a travel wallet. It might be anywhere on your body, but the key is that it’s hard to see and hard to pick if it is seen. I suggest using it for important items and then continuing to carry a normal wallet so you can pay for stuff or produce ID without revealing you have another wallet hidden. My regular wallet has my driver’s license, a single credit card, a debit card, a health insurance card and some cash. I don’t always use my hidden travel wallet, but it’s nice to have. I’ve used it when I’m forced to carry a lot of cash, or when I know I’ll need to produce my physical passport but don’t want it in my open pocket all day. I also use it on travel days when passing through high pickpocket areas, such as a train station. 5. Identify your bags. Make sure your suitcase, backpack or purse has your contact details inside. Also, put something on it that makes it quickly and easily identifiable as yours. A distinctive ribbon or piece of tape also helps owners of similar-looking bags realize it’s not theirs. [xyz-ihs snippet="Mobile-Subscribe"] We’ve never used Apple AirTags, but I’ve read that these and similar coin-sized devices were the only reason lots of travelers got their lost luggage back this summer. They’re small and cheap enough that we’re going to consider using them not only for luggage, but also for our wallets and keys. It’s not unheard of for a thief to remove cash and toss the wallet or purse in the trash. It would be nice to at least get the other stuff back. 6. Pack mindfully. In some situations, you may not be able to keep control of your bags in the way you’d want. Several times in the last few months, we’ve had to stow luggage under a bus. Other people were getting off and taking luggage—out of our sight—while we remained on board. We’ve also had to stow bags on a rack two train cars down from our seats, as well as in other less-than-optimal situations. Make sure that, when you pack, your most important items are in a backpack or purse that’s always under your direct control. 7. Consider hiding valuables. Put things you care about deeper in your backpack, not in the most convenient outer pocket. If you lock belongings in a car trunk, consider putting your most valuable items in an innocuous plastic bag. A thief who breaks in will most likely grab your luggage—but not every little thing in the trunk. Not everywhere you stay is going to have a safe, so consider hiding things you care about elsewhere in your room. I’m one of those people who might forget he did this until he’s 50 miles away, so I’d have to be pretty concerned to take that extra step. Hello travel wallet. 8. Secure your communications. Continue to observe good internet safety practices. Recognize this may be harder when you’re away from home. Just because your hotel wi-fi requires a password doesn’t mean it’s secure. If your phone comes with a personal hotspot, you can use it to generate a more secure internet connection for your computer. Speaking of phones, add a PIN code to your SIM card. It’s not inconvenient to you, as the device will generally only ask for it when it’s completely powered off and back on. It will, however, prevent a thief who steals your phone from using your SIM card. If you’re traveling with a computer, secure it with a password, too. 9. Carry some cash. Sometimes, there’s no substitute. On those occasions, it may not matter much what currency it is. U.S. dollars always seem to work in a pinch. Don’t keep all your cash in the same place. (I was going to make a joke about carrying traveler’s checks, but I just learned those are still around, though far less used these days and probably not a good option for most people.) 10. Observe good personal safety practices. Be alert, no matter where you are. Some areas will be more prone to criminal activity, but—as a foreigner—you may not realize you’ve stumbled into a riskier part of town. Looking for further suggestions? The FBI has published tips for business travelers and students. Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. Check out his earlier articles. [xyz-ihs snippet="Donate"]

AFTER YOU QUIT the workforce and before you start Social Security, you may find yourself with little or no taxable income. As many financial experts have pointed out, this can be a great time to convert a traditional IRA to a Roth and pay taxes at a relatively low rate. But here’s another tax-savings opportunity to consider: If you have winning stocks and funds in your regular taxable account, this period can also offer the chance to realize long-term gains and pay taxes at a 0% federal rate. The key: Keep your taxable income low, including paying attention to capital gains distributions from your mutual funds. Those distributions may leave you with less room to realize gains at a 0% rate. How might this work in practice? Let’s take the example of Bob and Jane, a retired couple not yet receiving Social Security. They collect a $30,000 annual pension. In 2020, their taxable investments produced $2,000 in interest, $10,000 in qualified dividends and $10,000 in long-term capital gains fund distributions. Assuming these numbers are the same this year, Bob and Jane would be looking at $52,000 in total income. Result: They could intentionally realize another $53,900 in long-term capital gains, bringing their total income to $105,900—and pay nothing in capital gains taxes. If they take that $105,900 and subtract a married couple’s $25,100 standard deduction, they would be left with taxable income of $80,800. (The figures for those filing as single individuals would be half these levels.) As long as their total taxable income doesn’t breach that $80,800 threshold, any long-term capital gains—whether distributed by their mutual funds or the result of selling winning investments—would be taxed at 0%. [xyz-ihs snippet="Mobile-Subscribe"] A key problem: It’s highly unlikely that Bob and Jane’s numbers are going to be the same this year as in 2020, and most can’t be known in advance. Yes, the pension amount is probably fixed, but it’s harder to know precisely how much in interest and dividends they’ll receive during the year, and next to impossible to know what capital gains will be paid out by their mutual funds. Still, they can anticipate 2021’s numbers will be at least somewhat similar to 2020’s, and then finetune their calculations closer to year-end. Here’s what they’ll need to pay attention to: Pension. Bob and Jane should know the precise amount of pension income they’ll receive in 2021, though the amount may be higher than 2020 if the pension is inflation-linked. Dividends and interest. They can know with fair certainty the interest payments they’ll receive, as well as what dividends they’ll receive from individual stocks. But they should check near year-end. Fund capital gains distributions. Last year’s distributions are, alas, a poor predictor of this year’s. Instead, Bob and Jane will want to look out for the fourth-quarter announcements from their funds, detailing the capital gains that the funds plan to distribute by year-end. Any capital losses realized in 2021. These could be used to offset gains. Any new income, potential tax deductions larger than the standard deduction, or other unexpected factors that could change the math. By waiting until the fourth quarter to realize capitals gains, Bob and Jane can know what their total income and losses from various sources will be for the full year. They’ll then be able to calculate with some precision how much in long-term capital gains they can realize at the 0% tax rate. What if they realize a bit more? The additional gains would be taxed at 15%. This would only apply to those gains over and above the $80,800 taxable-income threshold, so it wouldn’t be the end of the world. Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. His previous articles were Working My Losses and An Appreciated Gift.  [xyz-ihs snippet="Donate"]

AT THE START OF THE pandemic, we picked up a nice chunk of capital losses. I say “nice” because these were intentional. When the market dropped significantly, we realized losses and immediately reinvested the proceeds in other fallen stocks. What about capital gains? In 2020, some of our mutual funds distributed capital gains, but we didn’t intentionally realize any other gains. Some of our realized losses offset the distributed fund gains. Another $3,000 was applied against ordinary income. But our remaining capital losses were carried over for future years. We intend to put some of these losses to use in 2021, allowing us to harvest more tax-free gains. Our taxable accounts have a combination of index funds, actively managed funds and individual stocks. Where should we realize gains? One approach would be to simplify our portfolio by selling individual stocks, which include some rather small positions. As we get closer to retirement, having fewer holdings would make managing our investment income and taxes simpler. It would also make the portfolio easier for my wife to manage should I not be around to help. But I’m not 100% convinced this is the right strategy. Besides being tax-efficient and very low cost, some of the individual stocks are nice dividend payers. As I near retirement, I wonder if this is the right time to remove a source of income. Finally, some of our holdings are undervalued, according to Morningstar. Why sell these now if they may have room to run? Another approach would be to realize gains in one or more of our actively managed funds. That would slightly improve our overall portfolio’s tax efficiency and slightly reduce our overall fees. None of these funds is highly tax-inefficient, judging by the tax cost ratio provided by Morningstar. But there’s undoubtedly room for improvement. One drawback: If our goal is to use up our tax losses while not ending up with a net realized capital gain, we couldn’t eliminate any of these fund positions entirely if we took capital gains—which means we wouldn’t do anything to simplify our portfolio. Whatever we decide, we won’t take much action until our funds announce their year-end distributions. At that point, we can subtract those distributions from our carried-over losses, plus $3,000. Then we’ll know what further gains we can realize. [xyz-ihs snippet="Mobile-Subscribe"] As many readers are no doubt aware, the IRS allows $3,000 in losses to be applied against ordinary income each year. I’ll take care not to realize so much in capital gains that I miss the opportunity to offset that $3,000 in ordinary income. After all, ordinary income tends to be taxed at a higher marginal rate than capital gains. As I look ahead, I anticipate that at least some of the gains we realize will need to come from the sale of individual stocks. Why? When we sell mutual fund shares, we won’t know the selling price until after the fact. With individual stocks, on the other hand, we can set a limit price and expect to get it. That way, we can match our realized gains more precisely to the amount of our available carried-over losses. All of this may seem overly complicated. Quite possibly. But in retirement, I know we’re going to be conducting an annual review of where next year’s money is coming from—and whether and how much capital gains and losses should be realized. As complex as all this may sound, I’d better get used to it because I’ll be doing it again. Finally, as I write this, I can imagine someone recounting the adage about “don’t let the tax tail wag the investment dog.” I agree with that sentiment, but that isn’t my intention. We’d be happy to hold on to everything we currently own. If that weren’t the case, deciding what to sell would be a whole lot easier. Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. His previous article was An Appreciated Gift.  [xyz-ihs snippet="Donate"]