Category: Riding Out the Storm

So, let's say you've ignored the red flag I waved the other day. You want to be a landlord despite the mountain of aggravation I went to so much trouble to describe.

Okay, let's get down to some of the nitty-gritty financial issues. But first a caveat: These matters are terribly complex, and I'll offer just a bird's-eye view that misses lots of exceptions and special circumstances. Taxes are a nightmare, and you should study IRS Publication 527.

Tales from my 20 years as a landlord: One former tenant phoned months after disappearing into the night -- and leaving a horrific mess -- to berate me for letting the city junk the broken-down car he'd abandoned out front.

Another tenant called to have me referee a dispute with a plumber. I could hear his wife and the plumber screaming so viciously in the background that I thought about calling 911.

And, of course, I had tenants who fell behind in the rent, racked up huge, unnecessary repair bills, clogged the toilet with latex objects, set up meth labs in the basement and used the disposal to get rid of dead bodies.

Okay, those last two weren't real -- just the stuff of my nightmares. Every single night.

Ever hear of the Rule of 72? How about the Rule of 300?

They are easy ways to get a rough idea of whether your investments will grow big enough for your retirement.

When I say "rough," I mean very rough. But there's no perfectly precise alternative, because all projections rely on guesswork about investment return, inflation and the number of years you'll be retired.

When my son Dash was eight or nine, my wife and I took him to Puerto Rico for a winter vacation and we invented coffee eggs.

We were staying in a resort that charged about $35 for three breakfasts that were nothing to brag about. On the second day we bought eggs at a little grocery and boiled them in the coffee maker in our room, saving a couple of hundred dollars over the rest of the trip and missing nothing we cared about.

On another vacation we invented the Whopper Test. Was the $40 restaurant dinner 10 times better than a $4 Burger King Whopper? If the answer was "no," the Whopper was the better value. We apply the Whopper Test to everything.

Come January, millions of Americans will be allowed to open tax-free Roth retirement accounts, due to repeal of a longstanding rule that prevented "Roth conversions" by taxpayers earning more than $100,000 a year.

Shifting money from a traditional IRA, 401(k) or similar plan to a Roth can be a profitable move for many, but a money-loser for many others. It's worth thinking about now because you may need to scrape up quite a bit of cash to pay tax on a conversion if you conclude that's the right move.

First, a quick refresher: Roths are a form of individual retirement account that has been around since 1998. There is no tax deduction on contributions, but all withdrawals are tax free, including investment gains. Also, you're not required to start taking money out after turning 70 ½, as with traditional IRAs and 401(k)s. (More details. Also see IRS Publication 590.)

Charles Schwab, the discount brokerage, made a bit of news this week by offering eight new exchange-traded funds, or ETFs. That wasn't such a big deal in itself, since the ETF business is booming with new offerings from just about every mutual fund firm and brokerage. But Schwab has upped the ante by allowing its customers to trade the house-brand ETFs for free - without paying the $12.95 brokerage commission for trading other types of stocks.

Now that's interesting. Commissions have been one of the few drawbacks to ETFs, because they can chew up accounts of investors who want to add modest sums frequently. That $12.95 is 6.5 percent of a $200 purchase, for example. You wouldn't want to pay that every month. With an ordinary mutual fund, as opposed to an ETF, you can buy and sell with no fee if you deal directly with the fund company.

You don't mind paying 1 or 2 percent in annual mutual fund fees? Okay, how would you feel about 10, 15 or 20 percent? Maybe even 30 percent?

Numbers like that would get most investors' attention - if they were real. In fact, they are. I'll get back to that in a moment.

What brings this up is news of a U.S. Supreme Court case involving investors' complaints about high fees. They are unhappy that the Oakmark family of mutual funds charges individuals twice what it does institutions like insurance companies and pension funds.

If someone made me America's personal-finance dictator, I'd scrap the 401(k). These workplace retirement plans are inequitable, as some companies offer good ones, some bad ones and others none at all. Fees are often too high. And even the better plans often don't provide enough investment options.

Instead, I'd like to see the Roth IRA opened up to allow 401(k)-sized contributions - $16,500 a year instead of $5,000. (Or $22,000 and $6,000 for people 50 and over.) And I'd like to see the Roth's income limits lifted, so anyone could have one.

Roth's don't offer tax deductions on contributions, as 401(k)s do, but Roth withdrawals are tax free, while money taken out of 401(k)s is taxed as income, at rates as high as 35 percent. Most importantly, with a Roth you can invest in just about anything you want, not just a set of funds picked by the boss.

But since I'm not running things, the best I can do is suggest ways to make the traditional 401(k) work best.

Life, as we all know, is unfair. You can shun cigarettes all your life and still get cancer, while your chain-smoking uncle lives to 100.

It's the same with investing. What's one to say to the stock-market investor who did everything right - diversified, used indexed funds, stuck with it for the long term - and got hammered anyway?

A disturbing story in The New York Times, relying on research by Morningstar Inc, the market-data firm, points out that people who invested in a Standard & Poor's index fund 10 years ago have lost money, while folks who bought diversified portfolios of government bonds made 8.1 percent a year. In fact, the S&P 500 has underperformed long-term government and corporate bond categories over the past 20 years, largely because stocks did so poorly over the past 10.

My post on Tuesday dealt with selling money-losing investments by the year's end for tax reasons. It's a good idea, but doing so presents investors with a new dilemma: what to do with the proceeds?

That's easy: reinvest them - as soon as possible.

The hard part is choosing the new investment, and if you don't watch out you can get stuck with an unwelcome - but avoidable -- tax bill when you buy mutual fund shares late in the year - around now.