Jonathan Clements's Blog, page 110

Running Up the Tab

A FEW DAYS AGO, I RAN the numbers on our likely 2023 taxes, and reached two conclusions: We have a small refund coming—and we should find a way to pay more taxes.

How can both be true? I project that our 2023 taxable income will be well below $190,750, which is the top of the 22% tax bracket for those married filing jointly. Getting taxed at 22% strikes me as a good deal, given the likelihood that we’ll be taxed at an even higher rate later in retirement. There are a few things we could do by Dec. 31 to make sure this opportunity doesn’t go to waste.

For instance, we could convert some holdings from a traditional IRA to a Roth IRA, paying tax at 22% on the sum converted. That marginal rate is probably low compared to what we’ll pay when we draw down our traditional retirement accounts later in retirement. By the time we make those withdrawals, we hope our accounts will have grown, plus income tax rates may have gone up.

Today’s historically low tax brackets are set to sunset at year-end 2025. The costs of the pandemic, foreign wars and the government’s growing debt burden create further pressure to raise taxes. Anything can happen, of course, but it seems highly likely that our future tax burden will be higher than our present one.

We might even consider Roth conversions that would push us into the next bracket, which goes up to $364,200 for married couples. Even at that high amount, the effective marginal rate would only be 24%. While the net investment income tax (NIIT) is triggered for couples at $250,000 in modified adjusted gross income, distributions from IRAs and 401(k) accounts are exempt from this additional 3.8% tax.

Still, converting such a large sum would mean a big tax bill. Moreover, there are reasons to keep a healthy sum in traditional retirement accounts, rather than moving too much into Roth accounts. We also don’t have children, so we don’t have the legacy considerations that make Roth conversions appealing to many. But while converting at a 24% rate is debatable, converting enough to get to the top of the 22% bracket seems like a no-brainer for us, improving our tax diversification across Roth and traditional retirement accounts.

Another way we might take advantage of our low bracket is to realize some capital gains by selling appreciated investments held in our regular taxable account. We have some tax losses that we harvested last year and which are available to offset gains.

What about generating additional gains beyond the size of our realized losses? Our taxable income is too high to realize gains at the zero percent rate. On the other hand, even if we realized enough gains to get our income all the way to the top of the 24% income tax bracket, the tax on those gains would be just 15%, with the 3.8% NIIT layered on top of that 15%.

We have a few holdings in mind to sell. These are perfectly fine funds and stocks, but selective selling could reduce our large number of holdings, lower the average expense ratio of our portfolio and increase its tax efficiency. Then again, if we just sit tight, when the first of us dies, these holdings will get an adjustment in cost basis that makes the embedded gains go away.

This will be especially significant if we’re still residents of a community property state. In other words, we have a choice between paying some tax today to improve our portfolio or avoiding that tax payment and letting nature do the job for us—though hopefully not until the far distant future.

Our default would probably be to reduce some of the holdings mentioned above by the amount we can cover with carried-over losses, for a net zero capital gains tax liability for 2023. An argument could be made for preserving the carried-over losses for use in future years, when the capital gains tax rate is perhaps higher than 15%. After all, if basic income tax brackets are likely to go up, why not capital gains tax brackets?

We have to be cognizant of the NIIT in realizing capital gains. Unlike Roth conversions, dividends and capital gains are subject to the NIIT and its additional 3.8% tax. If we did both, while the Roth conversion amount itself wouldn’t be subject to the NIIT, it would count toward the $250,000 threshold beyond which dividends and capital gains would get hit with the NIIT.

Next year, we’ll have another, perhaps bigger bite at this tax apple. I project our taxable income in 2024 will be even lower, which would give us more room to do a Roth conversion or take capital gains at a relatively low rate. We’ll also still be more than three years away from Medicare, which means not having to worry about triggering higher Medicare premiums.

As I write this, we haven’t decided. I expect we’ll realize capital gains up to the point where these gains are offset by the losses harvested last year. I also expect we’ll do enough Roth conversion to get us near the top of the 22% tax bracket. Beyond that, well, we still have a few weeks to decide.

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.

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Pick Your Fights

WHEN I WAS GETTING ready to marry for the second time, I went to Klaus Dorfi, the CEO of the company where I worked, and asked what advice he’d offer to ensure a lasting marriage. His words became another of those phrases that stayed with me for the rest of my life.

“Pick and choose your fights,” he said. “You can argue about everything—or decide what are the most important issues that need to be agreed upon.”

We all know people who disagree often. There are others who enjoy debating an issue. Then there’s the third group, who love to get into physical fights. These folks I avoid like the plague. They’ll erupt and strike without warning.

I’ve never been in a physical fight, so all my bones, joints and teeth are where they’re supposed to be. The bad news is, I lived defensively to avoid confrontations at all costs. This also means that, throughout my life, I’ve internalized my problems and didn’t properly confront the folks who caused me headaches. I could have done a better job.

One benefit of my aversion to fighting: I was never terminated from a job for cause. I never hit, mouthed off to anyone or got into a "pissing match." As I noted in an earlier article, the primary cause of my job terminations was that my bosses simply didn’t like me.

My brother was the opposite. His first reaction to any problem was to fight, badger, argue and blame others. This led to the dissolution of all the businesses he formed and the partnerships he entered. It also led to tensions with my mother, especially when my brother and his family moved into her house at the end of her life. The only partnership that lasted was his 57-year marriage.

This behavior ultimately led to his death. Two years prior, he apparently got into a verbal and physical confrontation with a neighbor, who ended up pushing him. That caused my brother to lose his balance, fall back and hit his head. The head injury resulted in him losing his verbal abilities and to infections, and ultimately to his death.

We all have the right to stand up for what we believe. We all have our individual needs and wants, which may or may not be given to us without some intervention on our part. What’s important is the approach you use to get what you want.

Successful people know how to negotiate for what they need or want, and can do so without raising their fists. You can “win the battle but lose the war” by focusing on minor issues at the cost of the bigger win. Sometimes, you have to accept a loss if the ultimate goal will eventually be achieved.

Whenever I started a new job after a period of unemployment, I always reviewed the benefits package and made sure I got what I needed. My three priorities were salary, 401(k) and medical insurance. As long as all three were part of my package, I was satisfied. I, of course, took advantage of the other benefits and learned how to maximize things such as flexible spending accounts, automatic savings plans for U.S. savings bonds, and pre-tax transit benefits. For me, vacation was the least important benefit.

When applying for a job or once you’re employed, a satisfactory benefits package and a salary increase are worth fighting for, as long as the negotiations don’t backfire and harm your employment status. You shouldn’t have to settle for something less than what other employees receive. That’s a fight worth fighting. But don’t fight—and, for goodness sake, don’t fight aggressively—for something you’re unlikely to get.

David Gartland was born and raised on Long Island, New York, and has lived in central New Jersey since 1987. He earned a bachelor’s degree in math from the State University of New York at Cortland and holds various professional insurance designations. Dave’s property and casualty insurance career with different companies lasted 42 years. He’s been married 36 years, and has a son with special needs. Dave has identified three areas of interest that he focuses on to enjoy retirement: exploring, learning and accomplishing. Pursuing any one of these leads to contentment. Check out Dave's earlier articles.

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Calculated Risk

SOMEONE POSTED THIS comment on a Facebook retirement-planning group that I follow: “My plan is based on my spouse and I living to 95 and 94 respectively. Our paid house is now worth about 900K. I am comfortable it will appreciate at 5% per year. The plan shows a 75% chance of success. If we sell the house at 85-84 and rent at a retirement community the success goes to 99%. We could cut back on expenses and that 75% chance would improve but why do that if I don't need to?”

I suppose that, if the commenter changed his longevity assumption to age 80, his success probability would increase as well—but I wouldn’t advise it.

This person is using retirement-planning software that requires numerous assumptions, such as his estimate that his house will appreciate 5% a year. Given that, even with that assumption, his plan has a 75% chance of success—meaning there’s a 25% chance that he and his wife will run out of money—it seems there may not be sufficient investments to meet their needs.

Then there’s the old “cut back on spending” strategy. Who would retire with a 75% chance of success—based on all the variables and assumptions in the software—and then have spending less as the backup strategy? And yet several people commenting on the post said they’d be fine with a 75% chance of not running out of money. Talk about sleepless nights.

We don’t know how old this couple is, but selling a house around age 85 is a big gamble, as is the assumption that they can simply rent in a retirement community at that point. Selling and moving is a big hassle—not something I’d recommend at that age. I sold and moved home at age 75, and I don’t recommend that, either.

Moving to a retirement community may take time, places may have waiting lists and, depending on the type of facility, may require relocating a considerable distance. On top of that, the cost could be more than maintaining a house.

Suddenly, the Facebook discussion took a strange turn. Someone asked: What withdrawal percentage are you using in the planning tool? The answers from various commenters ranged from 0% to 5%. The person claiming 0% said he’d just take money as needed. I wonder how the planning tool incorporated that strategy.

Another contributor said he and his wife will be retiring early, and plan on withdrawing between 5% and 8% from savings in the years before collecting Social Security at age 70. I wonder how many years, with withdrawals at 5% and above, we’re talking about.

Most of the people in the discussion weren’t yet retired, but they had great plans, great assumptions and apparently great confidence. They relied on planning software to tell them if they’d be successful or not.

In my opinion, it’s impossible to plan every year of retirement. Instead, I think the surer strategy is to start retirement with an adequate income stream, whether from Social Security, investments, income annuities or a pension, that’ll allow you to maintain your pre-retirement standard of living. If that income stream is adequate, chances are you won’t run out of money.

If, after you retire, you fancy a luxury cruise, you save for it or take the money from a designated travel fund, just as you should have done before retirement. You also ought to maintain an emergency fund, again just as you (hopefully) did while working.

Retirement-planning software is helpful, but it’s no replacement for common sense. Tweaking your software inputs may make your plan “work,” but it may also give a false sense of security. Somewhere outside those software programs there’s a potential whammy. My advice: Don’t press your luck.

A rough calculation tells me that, in my 13 years of retirement, at least $100,000 of unanticipated expenses have cropped up, including tree and oil tank removal, HVAC units replaced, dental work and more. I could add an additional $200,000 in unplanned discretionary spending that was a necessity or deemed to be: new kitchen, two new bathrooms, a new deck, a new car. I wonder if the planning software has a place to enter “spouse would like” under future spending?

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A Moat That Works?

IN THE VALLEY OF FEAR, Sherlock Holmes searches a moat to shed light on a puzzling murder, only to be surprised by what he finds. Among today’s exchange-traded index fund (ETF) cognoscenti, another moat has become the focus of inquiry.

“Holmes, which moat are you investigating now?”

“Too much chronicling of our little capers, Watson, and not enough reading. It’s the VanEck Morningstar Wide Moat ETF.”

“The who?”

“Shame, shame, Watson, you’re so ill-informed about popular culture. The Who was an English rock band in the '60s. VanEck is a global money manager headquartered in New York. It’s one of the oldest investment firms in the U.S. and runs some 70 ETFs. And even you, my friend, have heard of Morningstar, the fund research outfit.”

“You are still so insufferable, Holmes. What’s with this VanEck fund, anyway?”

“Not a typical actively managed fund, but more active than most index funds. Been around since 2012. Has about $12 billion in assets. It’s the company’s second-largest ETF.”

“Never heard of it.”

“You will soon, Watson. It has outperformed Vanguard’s S&P 500 ETF over the past 10 years—and it’s kicked up a brouhaha worthy of my inspection.”

Stocks in VanEck Morningstar Wide Moat ETF (symbol: MOAT) are chosen based on two criteria: a business’s competitive advantage and its stock’s valuation. According to Morningstar, the defining features of competitive advantage include intangible assets, strong barriers to a competitor’s entry and economies of scale. Companies like Pfizer and Warren Buffett’s Berkshire Hathaway come to mind. Meanwhile, attractive valuation is measured by the gap between a stock’s current price and Morningstar’s estimate of its fair market value. About 50 stocks, which are equal weighted in the fund, make the cut.

As a retiree, I prefer funds with above-market yields and below-market volatility. Since the VanEck fund isn’t notable in either category, I don’t own it. But the fund is a core holding in an account I manage for a family member who has more laps left to run than me.

The VanEck ETF has accomplished a rare feat. Over the 10 years ending Nov. 30, it has outperformed Vanguard Group’s S&P 500 ETF (VOO), as well as the funds in Morningstar’s large-company blend category. Moreover, it’s done so even after adjusting for the fund’s risk level—and despite an eyebrow-raising expense ratio of 0.46%, or 46 cents a year for every $100 managed.

The VanEck fund’s holdings are rebalanced quarterly. It has no portfolio manager per se, but the fund is considered active because it is rules-based. About half of the holdings are replaced in a typical year, a high turnover rate for what’s sometimes labelled an index fund.

What should we make of the VanEck fund’s outperformance? Many of us graybeards remember Wall Street Week, the breakthrough television show that brought the stock market into our homes. One of the program’s highlights was a reckoning of the prior picks of the acclaimed pundits sitting around a conference table. Celebrated host Louis Rukeyser would announce with wonder the results of his “most successful” guest. The profit was usually extraordinary, often approaching 100%.

But every roll of the dice yields a distribution of possible results, a few falling at the extreme low end and a few at the extreme high end—all due to luck. The program’s producers, and surely Rukeyser, should have known to tell viewers the average gain among all the participants, not the largest.

Exaggerating the “skill” of the stock pickers, intentional or not, had the unfortunate effect of wowing the audience, undoubtedly increasing viewers’ faith in the prescience of market “experts,” their dependence on brokers’ dubious advice, the allure of star mutual fund managers—and, of course, boosting the program’s ratings. Though 10 years of data suggest the VanEck Morningstar Wide Moat ETF isn’t simply lucky, it could be an outlier that benefited from chance.

A second takeaway: The stellar performance of index funds often flows from their low expenses, while high expenses may mask the success of active funds’ actual portfolio management. If it’s not a statistical fluke, then the VanEck fund’s accomplishment, with its 0.46% expense ratio, is quite remarkable—because Vanguard S&P 500’s minuscule 0.03% expense ratio gives it a significant advantage right out of the box.

“Well done, Holmes,” offered Watson, after listening to Holmes’s analysis. “A quizzical episode, and unlike the certainty of The Disappearance of the Load Fund,” which I recently recounted in Financial Exposé.

“You are, as usual, Watson, so kind but also so shortsighted. Too much memorization in medical school and too little steeped in finance. Ten years in the life of the market is a mere pittance, only 20 years will solve the case.”

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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Predictably Wrong

I DON’T USUALLY FOLLOW the NFL. But this year, I’ve made an exception—because the current season offers a valuable lesson not just for football fans, but also for investors.

Teams devote huge amounts of time, energy and money to determining who’s the best quarterback for their team. Yet, this year, three quarterbacks are leading their teams when most experts, who get paid to evaluate talent, didn’t give them much of a chance.

Brock Purdy leads the San Francisco 49ers. He was the 2022 NFL draft’s 262nd and final pick, and became a third-string quarterback. As a rookie last year, due to injuries to the team’s two other quarterbacks, he was elevated to starter and took the 49ers to the NFC Championship game.

Joshua Dobbs was the 2017 draft’s 135th pick, as well as the seventh quarterback to be selected. In seven years in the NFL, he’s bounced among seven teams, meaning the first six teams looked at him and decided they had better options. He started a total of 11 games for three teams. This season, only four days after being traded to Minnesota, he led the Vikings to victory over the Atlanta Falcons. It's not clear whether he'll remain the starting quarterback.

Finally, Aidan O’Connell was the 2023 draft’s 135th pick. He was the third-string quarterback for the Las Vegas Raiders this season until injuries to the two other quarterbacks meant he got the starting position, and he won his first two games.

To be sure, folks evaluating quarterbacks selected each of these players in the NFL draft. There are more than 250 Division I football teams and only 32 NFL teams, so just being selected says that the teams thought these quarterbacks were better than many of their college peers.

What does any of this have to do with investing? With investing as with football, here’s the issue: We’re just not very good at forecasting.

Investment researchers Morningstar recently published a report on how much a new retiree could safely withdraw each year from savings. Morningstar suggests that a new retiree might start by pulling out 4% of assets. This is up from its recent recommendations of 3.3% in 2021 and 3.8% in 2022.

I’m reminded of the old joke: How do you know economists have a sense of humor? Because they use a decimal point.

Don’t get me wrong: I think Morningstar provides a great service and thoughtful studies. One of the study’s authors is John Rekenthaler, who became my investment hero when I heard of the perhaps apocryphal Rekenthaler theorem. It states that, by the time the bozos know about an investment idea, it’s too late to make money with it.

As an engineer, I would apply a pretty wide margin of error to Morningstar’s retiree withdrawal rates. For starters, Morningstar estimated that, over the next 30 years, inflation will average 2.42%, stocks will return 9.41% and investment grade bonds will return 4.93%. Yes, the numbers come with two-decimal-point precision.

When doing ballistic calculations, I usually round the gravitational constant off to one decimal place. I think the Morningstar folks would agree that predicting 30-year returns is extremely difficult, and this type of precision is hard to justify.

Of course, this doesn’t mean that the Morningstar study isn’t useful. It most certainly is. Don’t focus on the exact numbers, but on the impact of changes:

The higher the expected return over inflation, the larger the percentage of your portfolio you can withdraw each year.
The starting valuation of stocks and bonds is critical to future returns.
Although a 100% stock portfolio leaves you with the largest ending balance most of the time, it also increases the risk of failure, thanks to stocks’ volatility.
By the same token, a 100% bond portfolio is unlikely to provide much growth, so the starting withdrawal rate needs to be lower.
The shorter the period you spend in retirement, the higher your withdrawal percentage can be.
Conversely, the longer you spend in retirement, the lower the percentage of assets you can safely withdraw. But the risk isn’t symmetrical. In other words, the increase in the withdrawal rate triggered by five fewer years in retirement is greater than the decrease caused by adding five extra years.

Even if you don’t buy the exact withdrawal rate suggested, the Morningstar study gives you a sense of what a safe withdrawal rate should look like: It’s probably a low to middling single-digit number. People who suggest that you can withdraw 10%, just because stocks have made more than that over some time periods, are likely to be proved badly wrong.

If you chose a starting withdrawal rate of between 3.5% and 4.5%, nobody’s likely to quibble with you—especially if, over the next 30 years, you’re willing and able to adjust the amount you withdraw based on your portfolio’s performance.

Kenyon Sayler is a retired mechanical engineer. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. Kenyon's brother Larry also writes for HumbleDollar. Check our Kenyon's earlier articles.

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Took Time

HOW DID I GET financially to where I am today, 15 years into retirement? It’s a good question—one that’s taken me a lifetime to answer.

I’ve been fortunate in a way that’s nearly impossible for Americans today. I worked for one company for nearly 50 years and I accumulated a traditional pension based on that service. In addition, during my last few years on the job, I was eligible for stock options, restricted stock awards and enhanced bonuses. My pension, plus investing nearly all that extra compensation, solidified my financial security.

But my retirement success was also built on sticking to my often-criticized goal of replacing 100% of my base pay from my working years—that is, my pay excluding bonuses and other compensation. I met that goal with my pension, my Social Security, my wife Connie’s Social Security spousal benefit, and by working until age 67.

The story begins much earlier, however. I started working at age 18, and soon after signed up to buy savings bonds through payroll deduction, which I continued to do for decades. Now, I’m forced to redeem those bonds that have reached their 30-year maturity.

When I became eligible, I also signed up for the employee discount stock purchase plan (symbol: PEG) and, for the 60 years since, I’ve reinvested dividends. Today, those shares are about 20% of our total investments. While I purchased some shares, I received most of them as part of my compensation. I again showed my “unique” approach to investing by converting my stock options into shares rather than cash. Today, the annual dividends I receive are equal to almost 10% of my pension.

In 1982, I gained access to the company’s newly launched 401(k) plan, and I kept contributing until I retired. I always saved enough to receive the full employer match, and often I socked away even more, except during the 10 years when we had up to three children in college at the same time. My 401(k), which now sits in a rollover IRA, accounts for 42% of our total investments.

Connie and I began Social Security at my full retirement age. I was still working at the time, so—for the next two years—we invested both payments in municipal bond funds. We’ve since reinvested all income distributions. I’ve also added to the funds using part of my required minimum distributions. Today, the muni funds equal 19% of our investments. Were the muni funds a smart investment choice? Probably not. But I find the idea of something tax-free fascinating.

Being young and foolish, at around age 45, I was talked into buying two tax-deferred annuities. I stopped adding money decades ago. Today, they have a combined value of $200,000. But as far as being a good investment goes, your guess is as good as mine. Fees? I haven’t a clue.

About that time, I also enrolled in a group universal life insurance plan. The premiums were age-based and a portion of that money was invested. If you died, the policy’s proceeds were tax-free. As I got older, the premiums became too much, so I used the investment fund to buy paid-up life insurance. It got me $70,000’s worth of coverage. One of these days, somebody will benefit—but not too soon, I hope.

My fundamental rule of investing is that, as long as our net worth is higher than last year, I’m good. But if we were living off our investments and counting on a steady withdrawal of assets each year, I’d likely throw that rule out the window. In fact, if I didn’t have a pension and needed to cover our living costs with our investments, I’m pretty sure I’d have purchased an immediate annuity with a portion of our savings. I’d need the resulting retirement income stream to soothe my nerves.

My largest single investment, other than my company stock, is Fidelity Large Cap Growth Index Fund (symbol: FSPGX). I also own Fidelity Mid Cap Index Fund (FSMDX).

We have a few other mutual funds: Fidelity Balanced Fund (FBALX), Columbia Large Cap Growth Fund Class A (LEGAX), Fidelity VIP Balanced (FJBAC), Janus Henderson Global Life Sciences Fund Class T (JAGLX) and Allspring Large Company Value Fund Class A (WLCAX).

Those fund names contained words I found attractive like “balanced,” “growth” and “value.” Besides, they invest in some cool companies, such as Berkshire Hathaway, Apple, Microsoft, even McDonald’s. What could go wrong?

According to my Fidelity Investments account, I have 53% in U.S. stocks, 4% in international stocks, 32% in bond funds, including munis, and 10% in what Fidelity calls short-term, meaning cash investments. Did I mention that I’m 80 years old?

Do I have an investment strategy? Other than trying to keep my money growing, not really, except sticking with mutual funds, mostly index funds. I do have a goal, though: It’s never to sell any shares. With reinvestment, the shares are still growing, but in 2024 I’m considering not reinvesting dividends and interest so we can build up more cash.

My approach to investing hasn’t changed since I was 18. Save, always save, never stop saving. Even in retirement, we still save each month. Saving is not investing, you say? You’re right, it’s not. But if you don’t save, there’s nothing to invest.

The real secret to my success—if I can call it that—is time, all the years since I graduated high school in 1961. Call me the dollar-cost-averaging guru. My reinvesting—for now—keeps that going.

No doubt, as wiser folks analyze my investing acumen, they’ll find it amusing, perhaps scary, even foolish. But keep in mind that the overwhelming majority of American investors, who might think they’re diversified because they own three different large-cap mutual funds, are more like me—and less like the typical HumbleDollar reader.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Math Rules

I STUDIED MATH AND statistics at university. When I mentioned my academic focus at parties, eyes would glaze over as fellow students looked for a way to extricate themselves from the conversation.

To lighten the mood, I’d say I was studying statistics to learn how to get rich in the stock market. In truth, I had no idea what I was talking about, but it sounded good and would often break the ice. Still, the notion of getting rich quickly was in the back of my mind as I learned more advanced math, including modeling and econometrics. (I sense—once again—that eyes are glazing over.) But I did wonder if there was a magic bullet that would help me conquer Wall Street.

When I left school and entered the working world, I continued to educate myself about investing. I read—a lot. Among the investment literature I read, Burton Malkiel’s A Random Walk Down Wall Street had a big impact on me. I decided that short of taking a job in the investment world—which I had no interest in doing—I wasn’t going to best the big boys at investing. But I continued my search for a way to build my personal fortune.

First, I thought about real estate as a road to wealth. At the time, many of the world’s richest people had made their money by owning property. But they were active investors, and I had neither the initial capital to be a landlord nor the necessary interest, so I dropped that idea.

I finally had an epiphany, and it sprang from my understanding of mathematics. It wasn’t complicated: compounding + time = wealth. This was the key—not getting rich quickly, but getting rich slowly. I was relatively young, and had time on my side. With the inexorable logic of math, this was a low-risk way to increase wealth, albeit over a longer period of time. I would just have to be patient.

Now, the question became: What investments should I put my money into? The more I read, it became clear that the stock market was the place to be. If I could ride out the rollercoaster ups and downs, I could reasonably expect 10% average annual returns over long periods. A secondary advantage of stocks: They’re relatively liquid, giving me access to cash when needed, something I wouldn’t get with hard assets like real estate and collectibles. With a young family, this ease of raising cash would prove useful as our needs changed over time.

I often hear others talk about non-stock market investments with explosive growth. The numbers often look compelling. But this is when I use some simple math and the rule of 72 to compare their return with investing in stocks. The rule of 72 says to divide a rate of return into 72, and that’ll tell you the number of years it’ll take to double your money. For instance, 72 divided by nine is eight, so a 9% return would double your money in eight years.

Real estate is often mentioned as a good alternative to stocks. One example: My folks bought their home in 1958 for $23,000. It’s now worth $925,000. Eye-popping, right? How could anything beat that return? I’ll use math to help answer this question.

The key assumption I make is that stocks return 10% a year, assuming dividends are reinvested. Using the rule of 72, we divide 72 by that 10%, and find that stocks double in value roughly every seven years. My folks owned their house for 65 years. How many seven-year doubling periods is that? If we divide 65 by seven, we get approximately nine doubling periods. So, a stock market investment would have doubled nine times. I multiply two by itself nine times, for the nine doublings, to get a growth factor of 512.

We can now use the 512-growth factor to calculate that a stock market investment of $23,000 would have grown to around $23,000 x 512 = $11,776,000. Now, that’s eye-popping.

You may counter this by saying, “But they only put 20% down for the house, or $4,600.” That’s a good point. They were able to leverage their money in real estate in a way they were unlikely to do with stock market investments. So, let’s look at that: $4,600 invested in the stock market would have grown to $4,600 x 512 = $2,355,200, which handily beats the house value. Stocks win again.

Of course, these are all back-of-the-envelope calculations. I don’t take into account taxes, house upkeep, mortgage interest and other costs. In addition, I don’t factor in the imputed rent—the fact that my parents get to live in the place, rather than having to rent from someone else. Still, when I do these calculations, the differences are usually starkly in favor of stock market investing.

Let me be clear: I’m not saying you shouldn’t buy your own home. I’ve done that multiple times myself. But for investable cash, I’ve yet to find a passive investment that can compete with stocks over a lifetime.

I’ve been fortunate: Time has rewarded my fondness for the stock market. That’s no guarantee for the future, of course. Still, I talk about this to the next generation—my kids, nieces and nephews—in the hope they can learn from it and find their own path to financial security.

Bruce Roberts retired from IBM after a 35-year career as a software engineer. Degrees in math and computer science served him well during his career and when investing. In retirement, Bruce enjoys tennis, playing bridge and tutoring math. His previous articles were Getting Myself Ready and A Pretty Penny.

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Matters of Trust

WHEN MY WIFE AND I got married, she had a credit card with an outstanding balance. Back then, you could write off the interest on your tax return. Still, I hate debt and I paid off her balance. Ever since, she’s continued to maintain a separate credit card because I wanted her to have a credit history, so she could take out a loan on her own if I died. We’ve always paid off her monthly balance in full.

I’m responsible for paying our bills. In the beginning, when I reviewed my wife's credit card statement, if I saw a large amount, I'd ask her what she’d bought and why she bought it. That didn’t go over so well. My wife has a different financial philosophy from me. She’s not foolish, just more easy going.

I decided I’d trust her judgment, even if I wouldn’t have bought the same item, and just verify that the amount she spent was registered correctly on the statement. I would then pay off the balance. That system has worked for us, for the most part.

The only glitch occurs when she doesn’t have a receipt. I have to rely on her memory to trust the amount billed is correct. When she doesn’t have a receipt, she says, “Don’t worry about it,” which is the direct opposite of what I do. I take a deep breath, write the check and hope we aren’t getting screwed.

Who do you trust? That was the name of a quiz show that was hosted by Johnny Carson of Tonight Show fame. When should you trust others?

Billy Joel has a song called, “A Matter of Trust,” which apparently is about his former brother-in-law, whom Joel sued, claiming he ripped him off for millions of dollars. I guess Billy shouldn’t have trusted him as much as he did.

Who is handling your money? Is it your spouse? Your financial advisor? Your brother-in-law? Can you trust them? What safeguards do you have in place to make sure you don’t lose it all? Remember Bernie Madoff? Everyone trusted him. Look what happened to their money.

Checks and balances are a common practice in business to prevent one person from stealing money from the firm. Usually, there’s a requirement for two signatures on checks, or something similar.

What checks and balances do you have in place to protect your money? It's lazy to just sit back and hope the person handling your finances is honest and trustworthy. Some folks are trustworthy, some aren’t. What about the person managing your money? Are you sure? Better to be safe than sorry.

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Searching for When

DURING MY FINAL NINE years with the Coast Guard, I was involved in decisions regarding search-and-rescue operations. We were almost always working with imperfect information. For three of those nine years, I was responsible for all missions in one section of the Great Lakes and, in my last year, I made the final decision on when to suspend search-and-rescue operations in an even larger area.

To lower risk, we often assumed the worst, and threw copious operational resources at the situation. But paradoxically, this also increased risk: Actions taken to improve a mission’s chances of success also meant greater risk for the air and boat crews involved. Such decisions are best made by people with gray hair who know what it’s like to have skin in the game.

That brings me to my decision on when to take Social Security retirement benefits. This may not have life-and-death consequences. But arguably, it’s one of the most important financial decisions that Americans make—and, like the search-and-rescue missions I helped oversee, it must be made with imperfect information. Even with skin in this game and a lot of gray hair, I wish I had answers to these questions before making my decision:

How long will my spouse and I live?
What unusual or critical financial needs will befall us later in life?
Will we enjoy good health later in life?
What level of activity will we be able to sustain?
How will our investments perform?
How will our Social Security claiming decision affect the surviving spouse?
Might I opt to return to work after electing early, causing my benefits to be taxed?

I can make educated guesses on some of these questions, and I have a solid idea of our cost of living and the financial resources available to us in retirement. Even so, when to claim benefits boils down to a very personal decision, one that’s heavily dependent on each retiree’s circumstances, desires and best guesses. I won’t bore you with all the pros and cons you might ponder. But at almost age 63, I’ll mention the factors that I’m considering, but with one caveat—I reserve the right to be slightly irrational.

My wife and I currently live on my military pension, our interest income, my wife’s Social Security (she’s older than me and claimed benefits early) and my wife’s modest part-time earnings. Our house and cars are paid for, and we live in Alabama, which is a low-tax state. Every month, I’m able to sock away $1,000 to $2,000, depending on how much we travel. Our IRAs remain untapped. Over the years, I’ve made a concerted effort to keep our fixed costs down: no big house, costly cars or keeping up with the Joneses. In short, we can get by without me claiming Social Security benefits early, but the cash sure would be nice.

Here are the pros of taking benefits early:

Receive $110,000 before my full Social Security retirement age of 67. I’m not waiting any longer than that. I know I’ll save a portion of those benefits based on my history.
My wife will be able to swap from benefits based on her earnings record to spousal benefits based on my lifetime earnings, which will mean a larger monthly check for her.
Provide funds for more expensive trips than we otherwise might take.
Extra money for unexpected expenses.
Extra money for unexpected opportunities.

Meanwhile, here are the cons:

Possibly less money over my lifetime.
A reduced survivor benefit for my spouse should she outlive me.
Less money available later in life, when our expenses might prove higher than expected.

If I claim benefits at full retirement age, rather than now, I figure the breakeven age is around 78, meaning that thereafter I’ll be better off if I waited until 67. As it happens, at 78, my military survivor benefit plan becomes paid up, meaning an increase in my pension because the monthly deduction that’s involved goes away. This is where I choose to be a little irrational. Yes, if I claim now and live to 78 and beyond, I’d be forgoing the difference between the early and full benefit. But the bump up in my pension would take some of the sting out of that—at least in my mind.

As of now, I’m leaning toward taking Social Security at age 63. I have arthritis hitting various points of my body—lower back discs, wrists—and I’ve had one hip replaced, with the other needing replacement eventually. I probably have another 10 years of good physical activity. The extra money would come in handy for travel while I can still get around relatively easily. At the rate I’m going, by my early 70s, I’m going to be a stiff old grump.

I’m aware that conventional wisdom says to forgo early election if you don’t really need the money. Yet friends I’ve spoken to, who claimed early, don’t seem to have any regrets. I take that with a grain of salt, however, because few will ever admit to serious mistakes handling their money, plus these friends haven’t reached their later years, when the consequences of their decision may hit home. I have the Veterans Affairs as a resource later in life if I get into real trouble—many don’t have that.

And so I sit and think, the pros and cons dancing in my head. Some things never change: I must make yet another decision with imperfect information. Maybe, just maybe, if I wait long enough, the future will become clearer and I’ll make the right decision. But unfortunately, the world often doesn’t work that way.

Patrick Brennan is a retired Coast Guard officer and aviator currently residing with his wife of 34 years in Mobile, Alabama. He earned a bachelor's degree in government studies from the U.S. Coast Guard Academy and an MBA from Spring Hill College. Besides an interest in finance, Pat enjoys traveling to visit family and friends, and especially enjoys visiting our National Parks. His previous article was Why We Get Fooled.

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Learned From Less

HOW MANY OF OUR adult financial habits are shaped by childhood experiences? My parents, who grew up during the Great Depression, weren’t fans of providing allowances for my sisters and me. My oldest sister, Gail, got no pocket money but remembers being offered a quarter to fill a grocery bag with dandelions pulled from the yard. Lynn, 10 years older than me, received a quarter a week for a short period.

My first allowance was also a quarter a week, which I started receiving around age 10. That may not sound like much, but I felt fortunate. At the right store—Grants—I could buy three full-size candy bars for that quarter. Baseball cards, my other big extravagance, were a dime a pack.

It seemed that all my friends had more money than me. One friend’s dad gave him $5 a month, paid out all at once. I suspect it was doled out that way in an attempt to teach him to budget his allowance for the whole month. The lesson was lost on my friend. Shortly after receiving his monthly $5, he tended to blow the entire wad on candy, soda, baseball cards, comic books and whatever else caught his fancy. It was fun to hang out with him right after he got paid.

Some of my friends had newspaper routes. These guys were flush with cash. They could afford many more packs of baseball cards than me. Since I couldn’t buy my way to a superior baseball card collection, I had to learn to be a shrewd trader. If I came into possession of a card coveted by one of my richer friends, I’d negotiate getting a large number of their unwanted duplicate cards in return. Then I’d use one or more of those duplicates to execute a similar trade with a different friend who also held excess cards. In this way, I built up my card collection on a tight budget.

Perceiving myself as impoverished compared to my peers, I was always on the lookout for extra money. My parents chuckled as I checked every public phone booth we passed, looking for forgotten change. Every now and then, I had the last laugh when I found a dime or two.

One early financial event sticks out. I accompanied my father to his business after hours. While he was doing work in his office, I looked in all the trash cans to see what I could find. I could hardly believe it when I found a crumpled $1 bill in one of the cans. My dad laughed and let me keep it. A month’s pay for so little effort.

Inflation in the 1970s hit hard, and eventually I negotiated a raise to $1 a week. I still had to be careful with my money. There were now more things than baseball cards and candy bars to buy. I loved going to the nearby mall in Moorestown, New Jersey. For music, I frequented the discount bins at Sears. They often contained record albums for 99 cents each, 75% or more off the original list price. At Woolworths, discounted 45 RPM records could be had for a quarter, and there were some great deals to be had on bulk candy. I also had my hobbies of collecting coins and postage stamps to fund. The mall had the Koin Korner to satisfy those needs.

As I entered my teen years, I told my parents I wanted a paper route to make more money. My mother was not in favor and, as a compromise, my allowance was raised for the last time, to $3 a week. In return, I had to mow the lawn and take out the trash.

My allowance ended when I got my first paying job, right after I turned 16. I was hired by the Moorestown Public Library for the princely sum of $2.25 an hour. This was below minimum wage—the library had an exemption—but I didn’t mind. I liked the feeling of having a real job and gaining access to the “employees only” areas of the library. I was in charge of the massive magazine room, and I got positive feedback from my supervisor.

I worked there after school and every other Saturday for a year and a half. My parents had explained that I’d be responsible for buying all my textbooks and funding incidental expenses while in college. That meant I needed to earn and save money. My modest passbook savings account began to grow.

What were the effects of my early experiences with money? Not having it in abundance as a youngster most likely made me view the value of a dollar differently from my more cash-flush and spendthrift peers. Whereas a dime may have meant little to a kid who was raking in $10 or $15 a week from a paper route, it remained a significant sum for me.

The habit of spending with care got ingrained in me early on. As an adult, I’m fairly certain I get more satisfaction from finding a good deal than the average person. On the downside, I often feel uncomfortable making large but necessary purchases, though my older self is getting better about that.

This year, we had to replace both our roof and a vehicle. To my surprise, I wasn’t stressed about these large expenditures. In both cases, I didn’t agonize over whether I was getting the best possible price or picking the right option. I didn’t even feel the need to create a new spreadsheet. That’s progress.

I learned as a teenager that I needed to save money to achieve longer-term goals. That continued to be the case throughout my working life. The goals changed from buying college textbooks to things like purchasing a car, buying a house, funding retirement and paying for my children’s education.

My parents weren’t poor, and they could have easily afforded to give me an allowance commensurate with those of my peers. They also could have paid for my college textbooks and given me spending money for college. But by not doing so, they taught me thrift. That lesson has lasted a lifetime.

Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. Check out Ken's earlier articles.

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