Jonathan Clements's Blog, page 118

Check Before Leaving

AN IRONY OF PERSONAL finance is that retirement can take work. More than once I’ve heard a retiree express this sentiment: “Working was easy. Retirement is complicated.”

There is, I think, a lot of truth to this. When retirement appears on the horizon, numerous questions enter the picture. There are, of course, financial concerns: “How much will I need? Do I have enough? How should I invest my savings?” These questions are important, but they aren’t the only ones. Below are nine other topics you might include on your retirement planning checklist.

1. Work. It might seem counterintuitive to include work as the first topic on a retirement checklist. But I mention it because the traditional concept of retirement just doesn’t match reality for many of today’s retirees.

While some are happy to step out of the workforce and directly into their easy chairs, many prefer a less abrupt transition. Some spend time consulting, teaching or working part-time. Why continue working when you no longer need to? I see at least three benefits: First, it can offer welcome structure for a retiree’s daily schedule, helping to make retirement feel less like an endless weekend, with days that begin to blur together. Second, it provides socialization, an issue that’s often overlooked. Finally, it lets you keep one foot in the workforce, should you decide to return.

2. Play. Retirees, I’ve found, tend to fall into two groups. The first group say they’re so busy with family, friends and hobbies that they don’t know how they ever found time to work. Others, however, can relate to the joke about the fellow who retires one Friday afternoon. On Saturday, his first day of retirement, he gets up and happily plays a round of golf. He plays again on Sunday, and on Monday, too. But by Tuesday, he’s tired of golf and bored of retirement.

While this is perhaps an exaggeration, it highlights an important consideration: When your days are no longer spoken for by work, which of these groups do you think you’ll fall into? If you aren’t sure, this is another reason to consider keeping one foot in the workforce, so you can adjust your schedule if need be.

3. Timing. Some of the happiest retired couples I’ve seen over the years are those who coordinated their retirement dates. That ensures that one spouse isn’t left home alone, while the other continues going to the office each day. It also allows a couple to enjoy travel and other activities together. This is hardly a requirement, but—if you’re married—it’s something to consider.

4. Housing. This topic has a number of dimensions. From a purely financial perspective, I always encourage folks to enter retirement without a mortgage, if at all possible. That can provide needed flexibility if money becomes tight later on. It can also open the door to a reverse mortgage, if that becomes necessary.

There are also many non-financial aspects to the housing decision. Some might want to move to a quieter location, while others choose to move into the city, where there’s more to do within walking distance. For others, proximity to friends, children or grandchildren is the overriding factor. Depending on your age, you might consider a continuing care retirement community, commonly known as a CCRC. These offer independent and assisted living on the same campus, with the option to move between them as needed.

5. Cash flow. Many retirees orient their budgets around Social Security and required minimum distributions from their tax-deferred accounts. That isn’t unreasonable, but I suggest another approach: After determining a sustainable withdrawal rate from your portfolio, set up consistent, automated transfers from your investment account to your checking account—on the first of each month, for example. Giving yourself this sort of retirement “paycheck” makes it much easier to know whether your spending is on track. It also allows you to take more of a set-it-and-forget-it approach to money management.

6. Taxes. During our working years, most of us have little control over our tax bills. While there are strategies that can help trim taxes at the margin, they don’t begin to compare to the tax levers available in retirement.

For starters, retirees have control over the timing of their Social Security benefits. They can also choose when to realize capital gains and how much to distribute from each type of retirement account each year. In addition, retirees can choose to employ strategies like Roth conversions. Result? Retirees have quite a bit of control over their tax rate and tax bill from year to year. That’s great, but to take advantage of this opportunity, you’ll want to be more intentional with your approach toward taxes.

7. Charitable giving. In the past, I’ve discussed a tax strategy known as deduction bunching. The idea is to make larger-than-average charitable contributions to a donor-advised fund every other year, or every third year, to lift your deductions well above the standard deduction in those years. If you have charitable intentions, this can help you increase your tax savings. While the strategy can be useful for folks at all stages, it can be particularly valuable during your last full year on the job.

That’s because, assuming you don’t have significant post-retirement income, your tax rate in that final year will likely be higher than in any future year. All things being equal, that can make a deduction in your last high-income year much more valuable. To take advantage of this, I often recommend folks front-load a donor-advised fund with as much as five or 10 years’ worth of annual giving while they’re still in a high tax bracket.

8. Insurance. In addition to the all-important Medicare decision, retirees should revisit their life insurance coverage. In most cases, if you have sufficient assets to retire, you likely don’t need life insurance and could cancel your coverage. But there are some exceptions. If you have a whole life policy, for example, you want to be sure you don’t generate a taxable gain. Or, if you have a pension that doesn’t have a survivor benefit, you might want to hold onto some coverage.

9. Levers. Retirement involves many moving parts and, despite our best efforts, we can’t predict precisely how things will turn out. That’s why I recommend that retirees think in terms of levers. What levers could you pull to adjust your financial situation, if you need to do so? Some, as I mentioned, keep one foot in the workforce. Others will want to establish a home equity line of credit while their income still makes them eligible.

Even if you don’t take any specific action, I recommend sketching out a playbook for how you might navigate a costly financial challenge. Some folks know they could sell a second home, for example, while others know which expenses they could easily trim. What’s most important is to map out these options in advance. Even if you never need them, simply having these options can deliver valuable peace of mind.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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Just the Two of Us

HOW MUCH OF YOUR retirement planning revolves around your kids and grandkids? Your estate planning goals probably include bequeathing a meaningful sum. Perhaps moving closer to your kids and grandkids is part of your plan. Whether you consciously think about it or not, you may be counting on your children to help out if needed during your final years. That seemed to be my father’s plan.

But what if you don’t have kids? How different would your retirement plan look?

When my husband Warren and I made the decision not to have children, retirement was in the distant future, although never forgotten. We were frugal types who always saved for retirement.

But now, in our 60s, the future is here. On some recent road trips, Warren and I spent our “windshield time” discussing how not having children might—or might not—affect our life’s third act. We’ve landed on three basic retirement rules tailor-made for a couple without kids. It seems to me, however, that our guidelines are relevant to anyone, kids or not.

Enjoy what you’ve earned. Even before hearing about “die with zero,” we were looking to spend down what we’ve sweated to amass. That could be considered a no-brainer if you have no kids to leave money to. But even if you have kids and grandkids, it’s worth asking yourself, “Am I overly concerned with leaving a large inheritance?”

Most of our friends’ children are doing just fine in their careers. Maybe an inheritance for those kids, who may not get it until they’re age 50 or 60, means they’ll be able to splurge on a boat. Is that what you’ve worked, saved and invested all those years for? Or can you think of better things you could do with your money?

If you opt to spend down your wealth, there’s the question of how to do it. Yes, lifelong savers like Warren and me actually need to figure out how to spend. A first stab at this is a 25-year self-pension plan we devised this year.

It starts with our estimated annual expenses multiplied by 25. We carved out that sum from our net worth. That’ll cover our basic spending money. What about our remaining net worth? We divided that into three buckets designed to be emptied over 25 years.

One bucket is a “travel account,” which we expect to empty faster in our retirement’s early years. The second bucket is the “house-plus account,” which will be used to either fix up our aging house or find and furnish a new place. Finally, there’s a “shortfall account” bucket that stands by to replenish the other buckets as needed over the next quarter-century. There’s nothing unique about this “self-pension” bucket concept—except that my husband came up with it, so he feels ownership of it.

Another way we could spend down to zero is by annuitizing part of our savings. I’ve read a lot about annuitizing savings on HumbleDollar. As someone who used to get a steady paycheck and doesn’t have a pension, I can see the appeal of income-on-autopilot, especially a decade or two from now when financial simplicity becomes a priority.

Finally, since we don’t have to worry about “robbing the kids,” I could imagine doing a reverse mortgage if we still own a house at age 80 and aren’t keen on moving. The house, however, may be long gone by then.

Focus on community and independence. When kids-as-caregivers isn’t an option, you’re forced to think about community and support systems. But here again, I wonder if this kind of thinking isn’t almost as necessary for people with kids. After all, even if your kids are willing to be your support system, is that what you want for them? Extended caretaking can take a real toll on a loved one’s life and happiness.

With care and community on our minds, we’ve been taking close looks at the following:

A long-term-care (LTC) insurance policy seems an obvious purchase for folks without kids. But the more I found out, the less sure I was. My friends seemed to be the ones supervising long-term care for their ailing parents. Who would supervise my care? I also wondered who would be there to help us in the long, fraught waiting period before LTC coverage kicks in. These issues, along with the long-term-care industry’s ever-rising expenses and viability, made me wonder if there was a better way.
Continuing care retirement communities, or CCRCs, where community and care are baked into the model, caught my eye this past year. This summer, I’ve already sat through two Zoom marketing pitches for new “life plan” communities being built in my Northeast region, and I’ve gotten a sense for how expensive they are to buy into. The answer: very. I’ve also learned that the earlier you move into one of these communities, the more you benefit from the active lifestyle they offer those in their “independent living” years.

Ideally, before settling on a CCRC, you should sample a place—meaning actually stay there a few days—to get a real sense of the community, rather than just taking a tour and studying the brochures. Sorry, Warren, but there go the beach trips. I foresee more than a few of our future vacations devoted to checking out communities in less expensive parts of the country. The waiting lists are apparently long and getting longer, as the boomers queue up for these places, so I guess we shouldn’t procrastinate.

We’re starting to discuss finding a professional to manage our health and financial affairs when we’re not capable. I asked a few friends for ideas or referrals, but nobody my age had given the topic any thought. My guess is “my busy kids will do that” is the plan. While this “not capable” time seems far off, I suppose it would be smart to find a much younger professional in the near-ish future, whom we can then get to know and trust.
Finally, we’ve had a few conversations about when one of us dies and the other is alone. That situation creates daily challenges that seem to me could only be partly solved by helpful children. We’re putting thought into how best to develop and maintain independent abilities and interests now that would help keep us emotionally afloat when we’re on our own. For instance, for 2024, we’re both deliberately scheduling independent trips without the other. We’re also ramping up the time and money we invest in our individual interests and hobbies.

Look to leave your mark. On a vacation in our 50s, we had dinner with a younger cousin of mine who lives in London. He listened to Warren talk about the books he’d written and said, “Okay, I get it. Your books are sort of like your children—what you’re leaving behind in the world.”

It was an interesting “aha” moment about this human need to leave a mark on this world we travel through. For some, the mere fact of having offspring is a great legacy. But there are other ways to derive purpose and fulfillment—ways that reflect who you are as an individual, not just as a paterfamilias or matriarch.

For years, Warren and I have had the time and freedom to explore those ways. It’s included activities like mentoring, giving back to the community via time and expertise, donating to organizations that matter to us, putting art out into the world, and spreading ideas through the written word.

I believe that everybody—with or without kids—should have a plan for how they’ll leave their mark. Wealthy individuals might start a foundation or endow college scholarships. Others may use sweat equity to build something or volunteer in their community as a tutor or mentor. I know folks who’ve variously started a local chorale, a company for driving elders, and a rescue operation for hard-to-place older dogs.

Embarking on a creative endeavor can be an especially fulfilling way to share a bit of yourself with the world. Perhaps start up a sketchbook journal chronicling a trip or your daily life—even if you can’t draw at the beginning. Create a blog that publishes a photo each day and describe what it means to you. Design a perennial garden. Build quirky birdhouses and give them to friends. Gather your favorite BBQ or ethnic recipes into a keepsake scrapbook.

As writers, Warren and I believe in composing a long letter or manuscript, or even just a simple list of details about your life, aspirations and interests. That might include the story of your financial journey, like those found in HumbleDollar’s book, My Money Journey. It could take months or years to put together this document, but you’ll be amazed how all the threads tie together and give meaning and shape to your life.

You may wonder who such a document is for.

It’s for you.

Laura E. Kelly is a web designer and book editor living in Mount Kisco, New York, with her husband, author Warren Berger. As Laura contemplates retirement and relocating, all of those things could change (well, probably not the husband). Her previous article was Dying at Home.

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Random Acts

BUDGETS CAN BE a contentious topic. Some people swear by them. Others argue they’re unnecessary if you easily spend less than you make. No matter which side you take in this debate, I’d advocate budgeting for one item: kindness.

I’ve always enjoyed reading news stories about strangers who left unusually large tips for their waiter. After reading such stories, I’d daydream about where I’d leave large tips if I was that rich. One day, as I was reading one of these feel-good stories, I realized I had $100 in my wallet that I’d received as a birthday gift. At that moment, I knew exactly what I was going to do with the money.

The next time I went out to eat, I paid my modest bill and left a $100 tip. As I was getting ready to leave, the waitress stopped me and asked if I’d made a mistake. I smiled at her and said, “Nope. That’s for you.” Her gratitude and my generosity-fueled dopamine rush confirmed that I’d invested my birthday money wisely.

At that moment, I resolved to leave a $100 tip for a stranger every year on my birthday.

I kept up that annual tradition for several years until I had an epiphany. If I enjoy leaving a $100 tip so much, why am I only doing it once a year? After sitting down with my wife to review our monthly budget, we determined that we could set aside $100 every month to spend on a random act of kindness.

How we’ve spent that $100 each month varies. Sometimes, we tip our waiter or hairdresser. Other times, we contribute to a GoFundMe or CaringBridge fundraiser. On occasion, we use the money to buy a gift for a friend out of the blue.

We’ve set two rules for ourselves. First, the $100 can’t be used to cover any of our typical expenses. That means we can’t use it to pay for a birthday gift that we already planned on purchasing and it can’t go toward the normal 20% tip at a restaurant. Second, any unused portion of the $100 rolls over to the next month.

We’ve been setting aside $100 each month for random acts of kindness for several years now, and we’ve noticed three benefits. First, there’s the visceral joy that comes from surprising someone with an unexpected act of generosity. Don’t just take my word for it. A quick Google search turns up a variety of sources supporting this.

Second, giving away money regularly has increased our financial contentment. To give, we have to consciously decide what amount of money we currently have that’s more than we need. The act of deciding has profoundly changed how we view our finances.

Third, knowing that we have $100 every month to give away has helped us develop greater empathy for and interest in those around us. Is someone having a hard day? Are folks going above and beyond what their role requires? Every time I’m out in public, I’m now more interested in getting to know those around me, because an opportunity to show kindness can present itself at any moment.

If you’re interested in trying this out for yourself, here are some tips. First and most important: budget for kindness. I’ve found that if you allocate the sum ahead of time, it’s much easier to part with the money.

Next, pick a dollar amount that works for you. It doesn’t have to be $100. It could be $50 or even $20. Finally, pick a frequency that you think you can sustain. Annually, quarterly or monthly are good places to start.

In my experience, random acts of kindness that are $50-plus seem to have the biggest impact on the recipient. I’d recommend decreasing the frequency of your gifts so you can increase their size, until you feel comfortable giving away at least $50 at a time.

Keep in mind that this type of financial generosity doesn’t come with any tax benefits. If you give away significant sums each year, it makes sense to direct most of your generosity toward tax-exempt organizations, such as churches and other nonprofits. But I can confidently say that the return on investment I receive from giving people unexpected $100 gifts far exceeds the tax advantages I’ve given up.

Austin Dorenkamp wears many hats including husband, father, software engineer, program manager, landlord and therapy dog handler. He’s even been called an ice cream sommelier. If he’s not giving those around him unsolicited financial advice, Austin’s likely cracking a joke or driving in a time-efficient manner. Check out his previous articles.

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Some Gain, Less Pain

WHAT’S THE BIGGEST threat to your retirement?

For young adults, we know a key pitfall is failing to invest in stocks because they’re so afraid of the market’s short-term ups and downs, thus unwittingly risking impoverishment later in life.

But for those of us nearing retirement, the market’s ups and downs can start to matter more than stocks’ long-term inflation-beating performance. An ill-timed market crash or a run of bad annual returns could ruin our retirement plans.

What to do? That depends on a host of factors, including your nest egg’s size, your ability to work longer if necessary, and the potential income and satisfaction you might derive from part-time work once you leave fulltime employment. There’s a point at which you should strive for growth and a point at which you should focus on conserving wealth—but those points will be different for each of us.

My late mother had a decent-size portfolio. But during the final 15 months of her life, which spanned 2020-21, she required round-the-clock home health aides at a cost of $220,000 a year. We had no idea how long those expenses would go on. Mom, to her credit, had never before touched her portfolio. But during that 15-month stretch, I was forced to sell some investments at inopportune times on her behalf.

Her end-of-life health care costs were a wakeup call for me. If you’re far short of a multi-million-dollar portfolio, like I am, you may have little choice but to continue living on a tight budget for the remainder of your working years, while also investing mostly in stocks.

I know some say I should start traveling more now, while I have my health and can still get around. But I’m not earmarking a lot of money for overseas adventures. Maybe I’ll do one trip every three years or so. That’s despite the fact that, with my hip in need of possible replacement, I can imagine a future where strolling through the old town of a foreign capital will be painful. But at the same time, I also see the news of people dying who weren’t much older than I am now.

My caution today is the price I pay for ruining my finances in my 40s, when I devastated my portfolio by making risky investments using margin debt. I don’t get the three-week Europe jaunt, at least not yet. I could probably spend more, but it isn’t my goal to die broke. If possible, I’d like to leave an inheritance to my two children.

In the meantime, I still need growth. I’m 62, and I hope and plan to work for another five years or so. I may be able to work even longer, if that proves necessary. My profession—writing and editing—lends itself to part-time work in retirement, even with my arthritic joints.

There are ways to get more conservative while investing for growth. I have about 72% of my portfolio in stocks and stock funds, though I’m planning to reduce that by one or two percentage points a year. That would still leave me with more than 60% in stocks at my planned retirement age, which is perhaps somewhat aggressive.

I wrote earlier about how I’m increasingly limiting risk in my bond-market money. Within my stock holdings, I’m also trying to reduce risk, but that’s easier said than done.

I’m diversified across U.S. and foreign stocks. I also have a little extra in energy and defense stocks as a hedge against events that could drive the broad market lower. I’m intentionally minimizing exposure to China, as I’ve written here and here. Partly as a result, I’m light on emerging markets.

In addition, I lean toward a value investing style, especially small-cap value. I consider limiting exposure to high-priced mega-cap tech stocks—which today dominate the S&P 500-stock index—as a way to reduce risk. Indeed, true market-capitalization-weighted index funds only account for half of my portfolio.

Unfortunately, other investors seem to be seeing more risk in small-cap value right now than in technology, partly due to fears about a recession and the banking sector. But I’m sticking to my value tilt. Still, there are risks in waiting for value to return to favor and deliver a multi-year period of outperformance. Investment styles can lag badly for many years, as value has, and my plan is to gradually move closer to complete market-cap indexing as I get older. Moreover, value stocks aren’t immune to market collapses. Sometimes, they don’t hold up much better than growth stocks, if at all.

My approach paid off in 2020-22, a big improvement over my previous track record. My losses were well-contained last year. But with growth taking off again this year and value far behind, I’m fearful I’ll miss the boat again by not fully indexing.

Maybe I’m living my own variation of Daniel Kahneman’s Prospect Theory, which states that we hate losses twice as much as we love gains. I’d rather lag the market on the upside than be fully exposed to today’s glamour stocks and the danger that there’s a bubble about to burst. Telling myself “I told you so” would be unbearable.

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.

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Changing My Mindset

WHETHER MONEY BUYS happiness is a matter of debate, but a recent incident reinforced my conviction that financial security does indeed help. The incident would’ve caused me considerable distress a few years ago, when I was earning more but was still dependent on my fulltime job’s paycheck. My newfound financial security, however, transformed the situation into a truly memorable experience.

My wife, Bonny, and I both enjoy attending Indian music and dance performances. We make it a point to see the live shows put on by local groups and, if the ticket prices are reasonable, also those featuring artists visiting from India. This year, Bonny was keen to see a dance-drama performance by a touring group from India. Although the show was scheduled for July, Bonny wasted no time securing two tickets when reservations opened in March. I got the sense that the tickets came with a hefty price tag.

As the date drew nearer, Bonny’s excitement built. On the day of the event, she repeatedly urged me to hurry up and get ready, with the half-joking threat to leave me behind if I delayed any further. Both of us got dressed up and were about to head out when Bonny received a text message.

It was from a friend who’d purchased tickets in the same row as us. She was curious if we changed our seats because she couldn’t spot us in the theater. Bonny responded with a touch of impatience, assuring her that we’d be there shortly. Her friend called within minutes to say the show had just finished.

Bonny was perplexed, while I hastily jumped to the conclusion that she must have misremembered the showtime. Bonny, however, was adamant that she had purchased tickets for a 7 p.m. performance, and the screenshots of the tickets saved on her phone backed up her claim. Yet it appeared that the actual showtime was 1 p.m.

Whatever the source of confusion, Bonny quickly came to the painful realization that she’d missed the show she’d so eagerly anticipated. She looked despondent as she slumped into a chair, covering her face with her hands, as though she’d let slip a once-in-a-lifetime opportunity.

My reaction? A decade ago, I’d have initially delved into the cause of the mix-up, and then channeled all my energy into seeking a full or partial refund. The idea of squandering a few hundred dollars for nothing would’ve been inconceivable, and I wouldn’t have hesitated to try every avenue to recoup the loss.

But surprisingly, this time around, the monetary loss was the last thing on my mind. Clearly, the recent years of financial security had changed my priorities and values. My foremost concern was to alleviate Bonny’s distress.

An online search revealed the reason Bonny was so eager to attend the performance. It wasn’t just any dance drama; it was India’s first Broadway-style musical play, a theatrical reproduction of the legendary Indian movie Mughal-e-Azam. Now, it was my turn to comprehend the magnitude of what we’d missed.

I found out that the touring group still had three more cities to visit over the next three weekends. Fortunately, their next stop was Vancouver, just a few hours’ drive across the border. There were still a few tickets within our budget available for the Friday show. Without hesitation, I bought two tickets.

When I shared the new plan with Bonny—that we’d drive to Vancouver the following Friday to watch the same performance—she was thrilled. She still couldn’t shake off the surprise from the mix-up, and took it upon herself to investigate and request a refund. It turned out that the event organizers had indeed rescheduled the original performance to 1 p.m., but we hadn’t received any notification. After some back-and-forth between the ticketing agency and the organizers, Bonny secured two complimentary tickets for the upcoming Vancouver show, which we could pick up from the box office an hour before the performance.

That meant we now had four tickets to the Vancouver performance. Bonny contacted friends to see if anyone would be interested in purchasing our two extra tickets. Within hours, she found a buyer who was happy to acquire them without the pesky convenience fees. We were relieved that we could partially recoup the money Bonny had spent on the missed performance.

The following Friday, we set off early for Vancouver. The drive was uneventful, and we arrived in the afternoon. After enjoying a leisurely meal at a local restaurant and exploring the downtown, we made our way to the Queen Elizabeth Theatre in time to pick up our complimentary tickets.

The tickets were for the mezzanine, toward the rear of the auditorium. Considering it was a last-minute arrangement, the seats turned out to be better than we expected. Before heading inside, we opted to linger in front of the theater to snap some photos. After a few minutes, Bonny’s phone rang. It was the theater representative who gave us the complimentary tickets. She asked us to see her at the box office because, apparently, she had even better tickets to offer.

We were left in disbelief when we received the new tickets. They placed us in the center of the sixth row in the orchestra section—some of the best seats for experiencing a live performance. Later, I discovered that these tickets were priced at four times what we had originally paid. In a hurry, we entered the auditorium and grabbed our seats, not wanting to give the representative a chance to change her mind.

Watching the performance from such close proximity was an unforgettable experience. We were completely captivated and entranced. Three hours passed by in the blink of an eye. As the performance came to an end, we unanimously declared it the best live show we’d ever witnessed.

Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles.

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Retirement Do-Over

IT'S TIME TO THROW out our broken retirement system and start over. My first article for HumbleDollar, published more than five years ago, was titled Choosing Badly. It was about the inability of most employees to make good use of their 401(k) plan.

Guess what? Nothing’s changed.

Today, some 401(k) plans still have too few investment choices, while others have too many. There are multiple options that people don’t understand, such as target-date funds compared with index funds, or whether they should take advantage of the "brokerage window.” Plans will become even more complex as annuity options are added. This choice overload is partly to help the plan sponsors do their duty as fiduciaries—at the expense of their confused workers.

I recently spoke with an employer who will offer new hires a unique choice. They’ll be able to choose the existing cash-balance pension plan with employer contributions based on years of service and age, and they’ll get a guaranteed annual 6% interest credit and immediate vesting. In addition to this pension, the employer allows workers to participate in a 401(k) with an employer match of 50% on up to 7% of pay.

The new alternative, however, is to forgo the pension and instead enroll in a new 401(k) plan with a 4% guaranteed employer contribution, plus a dollar-for-dollar match on up to 4% of an employee’s pay. The possibility exists for an 8% employer contribution, which is roughly the cost to fund the typical pension plan.

Favoring the pension should be obvious because the employer guarantees lifelong payments to those who stick around long enough to qualify. How great is that? Still, I’d bet most workers will take the new 401(k) because of the easily grasped 8% payment. That’s the employer’s preferred option, too, because—unlike the pension plan—the employer has no long-term liabilities or interest-rate risk with the new 401(k).

The goal for this employer—and many others—is to work its way out of retirement plans that cause fluctuations in corporate earnings. That means it wants out of any defined benefit pension obligation.

This points up how accounting rules, federal laws and regulations create a conflict between the interests of the shareholders and that of workers—and the workers are losing. With the decline of pensions, the risk of paying for retirement has shifted to employees.

Why do we make saving and investing so complicated, especially when the average worker's financial acumen is not great? Why do we need 401(k)s, 457s, 403(b)s, IRAs, Roths, SEPs and so on? Why the different rules for government, corporate, small business and non-profit plans? Why are rules and limits different for IRAs and 401(k)s, and even for married individuals?

For example, beginning in 2026, high earners making $145,000 a year or more will be required to make any 401(k) catch-up contributions to a Roth 401(k) account—meaning after-tax dollars must be invested, but can be withdrawn tax-free. Why?

I suspect the government will capture a slight short-term revenue gain—but with potentially much greater losses of tax income in the long term. It’s about short-term federal budgeting. On the other hand, this requirement likely does high earners a favor—at the cost of more confusion for workers.

All these variables present Americans with unnecessary decisions. The typical worker simply cannot or will not make such decisions. The system isn’t working.

A look at retirement savings makes that clear. The average 401(k) balance for those age 65 and older is only $232,700, while the median (or typical) balance is just $70,600. That $232,700 might generate income of $800 a month or so—not enough to retire on.

We need to start over. We must recognize the limits of the great majority of Americans to implement a 40-year plan to save and invest for retirement. They’re too intimidated by the thousands of pages of rules and regulations.

Here are my ideas: First, we should significantly increase the percentage of income replaced by Social Security so that, at retirement, middle-class Americans would have a basic livable income. This change would be funded by increasing payroll taxes, but more so on employers than workers. Payroll taxes would be levied on benefits provided through employer cafeteria plans, such as health spending accounts and dependent care, which are currently exempt. I would also add all state and local workers to the Social Security system.

The exact nature of these taxes is not important. It’s the concept that’s important—that, for most Americans, voluntarily saving for retirement, coupled with relatively modest Social Security benefits, won’t get the job done.

The tax percentage would automatically be adjusted annually to ensure the system’s ongoing sustainability. You get what you pay for. No more periodic funding crises.

I can already hear the outcry. No, this is not socialism, though it may be a wealth transfer. It’s also an honest recognition of the shortcomings of human behavior when it comes to retirement planning. Adequate income for a growing older population will have to be paid for one way or another.

My second idea: All current regulated retirement vehicles are eliminated and replaced with a single plan, whether employer-sponsored or not. One set of rules, regulations and limits, and the same tax treatment for all contributions. If you want to save specifically for retirement on a tax-advantaged basis, you'll use this one vehicle as you see fit.

Congress—along with some states—have spent decades tinkering with schemes to encourage retirement savings, either by making plans a requirement or by rewarding retirement savings with tax advantages. But the result is a a multi-headed monster and a bureaucracy to go with it. It’s time to recognize our collective shortfalls and get back to basics.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Location, Location

WANT TO IMPROVE YOUR portfolio’s long-run performance? You could boost your stock allocation—something I wrote about last year—or cut your investment costs. But don’t overlook another key strategy: thinking carefully about which accounts you use to hold your various investments, or what financial experts call “asset location.”

My wife and I have taxable accounts, Roth IRAs, traditional IRAs and a health savings account. Earnings in each account get different tax treatment both now and in the future. By carefully allocating our investments among these various accounts, we can reduce the taxes we pay over the long term.

Time horizon is a key consideration. We’re unlikely to ever spend down all our assets. As a result, some accounts have an unknown but likely very long time horizon. At the same time, we need to generate some income to cover living expenses, so other accounts have a much shorter time horizon. Because we have some guaranteed cash flow coming in from a pension and annuities, and will eventually have more from Social Security, we’ve settled on an overall stock and alternatives allocation of 75%.

How should we allocate our investments among our various accounts? We sought some professional advice and, based on that, here’s how we’re thinking about each account type:

Taxable accounts. Our top priority is to maintain sufficient cash for living expenses and financial emergencies. That money is invested conservatively and generates interest income that’s taxed as ordinary income. The key is to have enough cash, but not too much, to meet current spending needs.

The remainder of our taxable money is invested in individual stocks and stock funds. That helps to minimize our tax bill, because the dividends and capital gains are taxed at preferred rates. Over time, we’ve added more index funds, which are less likely than actively managed funds to make capital gains distributions. I’m working toward having 80% of our taxable money in stocks and alternatives. This latter category consists primarily of some real estate investment trust funds, though I also own a PIMCO diversified commodity fund in my Roth IRA.

Traditional IRAs. In seven years, we’ll have to start taking required minimum distributions (RMDs) from our traditional IRAs. Because these accounts were funded entirely with tax-deductible dollars, all withdrawals are taxed as ordinary income. We can’t control the size of our RMDs—that’s dictated by the tax law. Moreover, high investment returns in these accounts will lead to larger RMDs, which means more taxes paid at ordinary income rates. Result: Our traditional IRAs are where we have most of our bond fund holdings, since the interest they throw off would be taxed as ordinary income anyway, plus these accounts aren’t the best place to earn high returns.

Roth IRAs. We didn’t get a tax deduction when we funded these accounts, but they come with a big benefit: Withdrawals are tax-free. We don’t believe we’ll ever have to touch this money and instead these accounts will go to our heirs. Given the long time horizon, our Roth IRAs are 90% in stocks and alternatives, and include our most aggressive fund holdings. Indeed, because of the long time horizon, even the bond fund I use is higher risk: Fidelity Capital & Income Fund (symbol: FAGIX), a Morningstar 5-star fund which focuses on U.S. high-yield bonds.

Inherited Roth IRA. I inherited this Roth IRA before the recent tax law change, so I’m able to stretch the RMDs over my lifespan, which the IRS determines to be just over 20 years. Since the RMDs aren’t taxed, maximizing earnings is the goal. I have targeted the stock and alternatives holdings at 70%. But because I need to make withdrawals every year, I buy less aggressive and more value-oriented holdings than I do in our regular Roth accounts. I also don’t reinvest the fund distributions, so cash accumulates throughout the year ahead of my annual RMD withdrawal.

Health savings account. For 10 years, we fully funded a health savings account (HSA). We were eligible to do so because we were covered by a high-deductible health plan. Rather than spending the money on current medical costs, we saved and invested it for the future.

The HSA is a small portion of our portfolio. Still, it’s a potential tax bomb for our heirs if we die without withdrawing the money. Why? While withdrawals are tax-free for us if used for qualified medical expenses, those withdrawals would be fully taxable to our heirs. We’re assuming we’ll withdraw all the money 10 to 15 years from now. With that time horizon, we’re 75% invested in stocks and alternatives. We’ll reduce that allocation as we approach the time when we’ll empty the account.

The tax law allows you to accumulate medical receipts from the time you first opened an HSA, and then use those receipts to ensure future withdrawals from the account qualify for tax-free treatment. I have manila envelopes for each year stuffed with receipts. Thanks to more than 10 years of receipts, we can withdraw any or all of the balance as a tax-free lump sum at our discretion. This makes the account a last-ditch source of emergency cash.

Before I sought advice on asset location, our traditional IRAs were much more aggressive than they are now, while our Roth IRAs were less aggressive. I hadn’t been thinking of the HSA and the inherited Roth IRA as long time horizon accounts, so they were invested more for income and less for growth.

By evaluating expense ratios and other investment costs, you can estimate how much you’ll improve your net investment performance by shifting to less expensive alternatives. Improving tax efficiency by juggling different account types is less easily quantified. But the savings are just as real.

Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured—along with five others—on the cover of Kiplinger’s Personal Finance for an article titled “Secrets of My Investment Success.” Check out his previous articles.

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Long Time Leaving

AFTER MY FIRST TWO years of studying electrical engineering at Virginia Tech, I got an internship at Frito-Lay working at its research headquarters in Irving, Texas, far from my New Jersey home. I was paid handsomely, treated well, had access to state-of-the-art computer equipment—and was miserable.

Some of that stemmed from spending the summer away from friends and family. But I was also having a career crisis even before my career began.

I wasn’t sure I wanted to work as an engineer for the next 40 years. I felt the stellar internship I’d scored was the best situation I could hope for in engineering, yet here I was profoundly unhappy. My grades were pretty good but I knew the dreaded junior year in engineering was almost upon me and my grade point average (GPA) was sure to suffer. I got the idea that I should explore becoming a doctor while my grades were still high enough for medical school admission.

I ended up cutting my three-month internship short by a month. A small liberal arts college with a high medical school acceptance rate told me over the phone that it would take me. My parents were a little stunned by this radical change, which seemed to come out of nowhere.

My pre-medical studies didn’t work out. Although I had a 4.0 GPA in my first semester at the new college, I had to drop organic chemistry because the workload proved too much for me. By the end of the semester, I was barely functional due to stress and anxiety, and I knew a career in medicine wasn’t for me. My second semester at the school was a disaster. I dropped all but three classes and was no longer even classified as a fulltime student. I was a college junior without a clue.

For a brief time, I thought about becoming a math teacher, but concluded that wasn’t right for me, either. Eventually, having failed to come up with a better alternative, I decided to return to Virginia Tech to complete my engineering degree. At least I’d be able to support myself as an engineer, I reasoned. I finished my degree and took a job at Peach Bottom Atomic Power Station in Pennsylvania.

When I first started working at Peach Bottom, I carpooled with an engineer who was stressed by his job. On the drive to the plant, he’d say things like “28 years until I can retire.” That’s an awfully long time to be unhappy. A few years later, he made a career change and left the company.

Throughout my career, I’ve thought about retirement. Early on, I didn’t understand pensions. I thought the concept of a pension was that, if you put in enough years, you’d continue getting your full salary after you stopped working. The first time I saw my pension statement, a couple of years into my job, I realized that wasn’t the case at all.

In my 20s and 30s, retirement was far in the future, and I had more pressing concerns, such as job security and taking care of my family. At 29, I married Lisa and it was only then that I started saving a significant portion of my salary in the company’s 401(k) plan. When I was 32, I was offered a voluntary separation severance payment based on my salary and years of service. The amount was $30,000, which would be equal to a little over $60,000 in today’s dollars. I would also have been allowed to keep my pension, which would be worth a little under $300 a month when I turned 55. A few of my colleagues took the package, which was offered to all of the company’s nuclear workers, but I wasn’t tempted.

My career progressed, and my responsibilities increased in my late 30s and 40s. Although retirement was in the back of my mind, my real concern was financial independence. These were years in which I contributed substantial sums to the 401(k) while simultaneously saving money for my children’s eventual college education. But retirement would periodically be thrust back into my consciousness. The company regularly offered early retirement packages to employees 50 or older during the 1990s and early 2000s. I figured my turn would come if I could hold out until age 50.

Around 2001, I was forced to think about retirement again when the company offered the option to convert to a cash-balance pension. By this time, I had 16 years of service. It was a period of change in the industry and, even though I hoped to end my career at Peach Bottom, I didn’t know if forces beyond my control would prevent that.

I gave up my traditional pension in favor of a cash-balance pension with an opening credit of around $135,000—a decision I discussed at length in an earlier article. In retrospect, I would have done better staying with the traditional pension, because my career with the company lasted 38 years. But at the time, there was no way of knowing that.

I’d clocked 30 years at the plant by the time I turned 53. Around that time, I suffered long periods of weariness. I felt like I just wanted to be done. On the whiteboard in my office, I scrawled a retirement target date aligned with my 55th birthday. At that age, I’d be entitled to reduced retirement health insurance benefits, so that seemed like a good goal to reach for.

I created various spreadsheets covering my retirement plan. For a number of years, I tracked all our expenses in one of those spreadsheets, so I’d have a handle on how much Lisa and I spent and where the money went. Along with the various finance-oriented spreadsheets, I added pages to help me brainstorm activities in retirement. One spreadsheet is solely dedicated to identifying the many parks and nature preserves in my area available for hiking. Whenever an idea about something I’d like to do in retirement popped into my head, I’d add it to the appropriate spreadsheet.

When I turned 55, I knew retirement was an option, which was psychologically freeing. I still had one year of my son’s college expenses to pay for, so it seemed prudent to stick around for another year. Also, I was enjoying my job more than I had a few years earlier.

Five months after I turned 55, I was able to shift into a newly formed group that focused on large capital projects, and my job satisfaction increased even more. I enjoyed my work and the team I was on, so I kept at it. I set a new target to retire at age 59. A few months before my 59th birthday, my manager recommended me for a promotion to senior staff engineer, which was the highest rung on the company’s technical career ladder. Once again, I put my retirement plans on hold.

I retired Sept. 5 of this year, right after Labor Day. There were financial reasons for my decision. But more important, after 38 years at one place, it felt like the right time to start a new chapter. I took off most of this past summer, winding down my considerable store of vacation days. It’s been fun getting into a completely different routine, one that has involved more time with family, more time in local parks, a bit of travel, and a reactivated library card. I also used some of my newly found free time to start writing for a website called HumbleDollar. You may have heard of it.

Earlier, I wrote a HumbleDollar piece about a magazine article that for almost three decades has influenced my thinking about retirement. If you read that piece, you probably won’t be surprised that, after retiring, I’ve accepted another position. I don’t want to say too much about it, since it’s just beginning, but I will say it is part-time, fully remote and in my area of expertise.

I enjoy mentoring the next generation of nuclear power engineers and being able to share knowledge I’ve gained over the decades. My new position should allow me to continue doing that. It’s funny. A guy who almost gave up on his engineering career before it even started has turned into a guy who, almost 40 years later, just can’t seem to give it up. As with many of life’s journeys, you just never know what lies ahead until you arrive.

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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Coming of Age

I RECENTLY HAD THREE retired men visit my psychology practice, each grappling with depression. Just as women face special challenges during their senior years, so too do their husbands, fathers and male friends.

Who hasn’t been seduced by those syrupy commercials where an elderly couple hold hands while walking a sun-kissed beach? Retirement is advertised as a magic carpet transporting us to a well-earned destination of meaning and frolic. But the reality is more complicated. Aging and illness can leave a hoped-for blissful retirement instead fraught with peril and disappointment.

My three clients felt betrayed and unprepared for retirement’s melancholy side. They were unanchored, in physical retreat and isolated without the social skills needed to nurture relationships. They’re in grief, mourning the loss of who they were and smarting at the limits that old age imposes.

Maybe you’re one of the fortunate few for whom retirement is unambiguously rich in renewal and self-regard. But for those of us too trusting or caught unawares, retirement often leaves a bittersweet mix of fulfillment and despair. Perhaps you or your loved ones have been blindsided by the ravages of aging that stalk our senior years.

Inspired by the experiences of my patients, I’d like to illustrate several of the hurdles men encounter while navigating their retirement years. All three men were treated by me, and I referred them for evaluation for possible medication. The details of their psychotherapy have been substantially modified to protect their identity.

Gary was a successful restaurateur who handed over daily operations to his daughter. He remained as a consultant, hoping that would ease his transition to a more balanced life. But that arrangement soon proved insufficient. Gary experienced a profound loss of purpose. He felt little reason to start the day and struggled to get out of bed.

Gary was skilled at home repairs, so I encouraged him to find projects around the house to inject meaning into his life and to rebuild his self-esteem. He started to lay new tile in his master bathroom, but has so far been unable to complete the job. Depression, and the resulting low energy, can lead to difficulty with task completion, further exacerbating a patient’s self-criticism.

In retirement, men’s sense of prestige and well-being hinges on their money savvy, just as it did during their working years. Problem is, once they give up their paycheck, they can no longer claim the provider role. On top of that, an often younger, still-employed wife may now be the breadwinner, which can be another ego blow. But perhaps the most corrosive yet utterly preventable damage occurred years earlier: While in the workforce, they failed to live below their means and invest the difference wisely, so now they don’t have enough for a financially comfortable retirement.

Harold and his wife Ginger are in this predicament. She abandoned a promising teaching career to raise her two kids, leaving Harold to earn the wherewithal to cover the family’s living costs and save for retirement. He handled the support part well, but muffed on saving and investing. Ginger has been understanding of her husband's financial oversights, but there’s been a price to pay. Because they didn't save enough for retirement, they plan to supplement their Social Security benefits and savings with part-time jobs at an auto garage and bookstore, reflecting their respective interests in cars and reading.

Health care surprises can be devastating psychologically as well as physically. Whether chronic or acute, debilitating or temporary, medical events’ emotional aftermaths aren’t unique to men. Still, masculinity doubts are our exclusive domain. Yes, societal expectations can have a pernicious effect on women. But we would be remiss to neglect their contribution to depression among male retirees.

A viral man is an active man, and aging takes a toll on our physical capabilities. One afternoon, Paul came into my office unusually agitated. His bad back had prevented him from finishing his morning walk to a coffee shop, something that had been part of his and his wife Julie’s routine ever since he retired six years ago. Julie was particularly upset about Paul’s inability to accompany her because their walks had become a way to have quality time together. As an alternative, I suggested weekly picnic lunches in the park. Both products of California, Paul and Julie were also enthusiastic about joining a yoga class to gently exercise Paul’s weak back.

But Paul’s setback had deeper repercussions. He began to ruminate about his father’s early demise at age 49, and the inevitability of his own physical and mental decline. He was haunted by his lack of control over the finality of death. Even when elderly, men are expected to be strong and stoic as they near the end. Paul was open to my suggestion to share his fears with his pastor and to familiarize himself with the soothing spirituality of Eastern religions.

Let’s face it, we men are social Neanderthals. Most of us have relied on our partners to bring people into our life. We make a few friends at the job, but we’re socially adrift after leaving the workplace. How many of us call friends just to chat? Many men only sparingly allow themselves to be vulnerable enough to initiate new friendships or even maintain longstanding ones. Are you willing to keep up a friendship when you always have to be the pursuer?

To be sure, our life’s last chapter can be a time of expanding horizons and gratifying intimacy with family and friends. But retirement also necessarily portends trouble and travail, and it challenges us to achieve peace with ourselves and our susceptibility to aging’s relentless march.

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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Rx for Future Pain

HEALTH SAVINGS accounts (HSAs) were introduced in 2003, and have since become commonplace in employee benefit plans. My experience with HSAs dates to 2004, when my employer offered $400 in one-time seed money as an incentive to sign up.

HSAs differed from existing health-care flexible spending accounts, and offered some features I preferred. To me, the HSA’s most appealing feature was that I controlled the money. There’s no “use it or lose it” rule, as there is with flexible spending accounts. Unspent money could accumulate and continue growing year after year.

I also liked HSA’s triple tax advantage. There was no tax owed on my contributions, no tax on my investment earnings and no tax owed on withdrawals for qualified health-care expenses. This made my HSA even more tax advantageous than, say, Roth contributions to my 401(k), because the latter didn’t earn me an immediate tax-deduction.

My family members were all in good health when I signed up for a high-deductible health plan, which made me eligible to open an HSA. I planned to pay for health-care bills out of pocket and let the HSA grow tax-free. By keeping receipts for the medical bills I’d paid, I could always reimburse myself from my HSA if I needed cash.

At first, my HSA money sat in a checking account. The administrator required a $3,000 minimum to invest in a limited choice of mutual funds, plus the funds had front-end loads. Not very appealing.

Eventually, the administrator provided better options. With my aggressive investing style and the maximum contributions that I made each year, my HSA balance has grown significantly. It also grew because I didn’t take withdrawals for a long period.

My plan to conserve my health savings account was tested in January 2010, when I suffered a heart attack. Ever the planner, I remember thinking on the way to the hospital that this would ruin my HSA. Later, I realized this is exactly why I had the account—for health care expenses. As it turned out, this was my only withdrawal for medical expenses before retirement.

When I retired in 2021, my HSA had a balance of almost $60,000. Since I couldn’t make any more contributions once I was enrolled in Medicare, it seemed prudent to change investment strategy. I focused on dividends and interest with an eye to earning more consistent returns. I wanted steady results to pay the premiums on my Medicare Part D drug insurance.

My plan worked fine until interest rates started rising, and the value of my bond funds fell. As the financier J.P. Morgan said of the market, “It will fluctuate.”

While my health care expenses in retirement have been slightly higher than I expected, I continue to pay many of these bills with money drawn from sources other than the HSA. This year, however, I relented. I paid my deductibles and coinsurance for foot surgery—plus a trip to the emergency room—from my HSA. I did so to avoid making taxable withdrawals from my traditional IRA.

I paid most of these bills with dividend distributions that I hadn't reinvested back into the market. That turned out to be a prudent move during 2022’s bond fund downturn. My plan is to continue using my HSA for my Part D premiums and for larger medical expenses. What if I want to draw down the account faster? I always have the option to reimburse myself tax-free using that box of medical receipts that date back to 2004.

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