Jonathan Clements's Blog, page 120

Two Big Questions

MY WIFE CALLS HER 99-year-old mother every morning. One morning, her mother asked, “Are you making big things happen?” After Rachel reminds her mother that she’s retired, her mother asked, “How do you make money?”

Although I chuckled when I heard the conversation, those two questions are probably on most folks’ minds as they prepare for retirement. First, how are they going to generate enough income to fund their retirement? Second, how are they going to stay busy doing meaningful activities?

Funding our retirement. When I retired, I was eligible for a pension. But I took a lump-sum payout instead of the annuity, rolling the money into an IRA. One of the reasons I took the lump sum: I was single at the time. I was concerned that, if I eventually got married, my future wife wouldn’t receive any money if I took the annuity. There would be no survivor benefit upon my death. It turned out to be the right choice. In 2020, Rachel and I got married.

As a result, our retirement income comes from two sources: Social Security and retirement account withdrawals. I believe this is a viable strategy for folks like us who want to remain in their home, self-fund their long-term-care needs, and not run out of money.

In 2024, when I turn age 73, I’ll need to start taking required minimum distributions, or RMDs, from my retirement accounts. Rachel is six years younger, so that milestone is still a handful of years away for her. Each year, our RMDs will be determined by dividing our taxed-deferred retirement account balances as of Dec. 31 by a life expectancy factor. That means that, as we grow older and our life expectancy shortens, we withdraw a larger percentage of our retirement funds each year. Relying on RMDs to guide our spending will lead us to spend less in the early years of retirement, while increasing spending in our later years when health care costs may be higher.

Since I didn’t take my pension as an annuity, I thought about buying an immediate-fixed annuity after I retired. But I was never convinced that was the right move for us. I always thought having the lump sum rather than an additional income stream might be more valuable as we age. I know that runs contrary to the idea that having guaranteed lifetime income reduces the risk that you’ll run out of money.

My thinking: In retirement, health care costs can come rapidly and in large chunks. For instance, the annual cost for a private room in a nursing home is approximately $108,405. The average stay in a nursing home is about two years, though it could be far longer, of course. In California, where we live, a home health aide costs an average $29 per hour. Having a lump sum might be more valuable in covering these types of spikes in health care costs, especially if your health fails you early in retirement. At that juncture, the additional lifetime income might not be that useful.

I do believe it’s important to have an annuity, and we have that with our two Social Security checks. These are the two best annuities we could buy. Compared to annuities sold by insurance companies, Social Security offers inflation protection, it’s taxed less heavily and there’s less credit risk.

When I start RMDs next year, our Social Security benefits will probably be about 45% of our total income. That 45% is more than enough to cover our low fixed living costs, allowing us to ride out the ups and downs of the stock market without selling shares at depressed prices.

Depending on the safety net offered by Social Security works best if at least one of the spouses—preferably the one with the higher lifetime earnings—delays his or her benefit until age 70. With any luck, that will ensure the surviving spouse will have sufficient predictable income to cover fixed living expenses. If one of your Social Security checks does that, I don't think there’s a pressing need for an immediate-fixed annuity.

Staying busy in retirement. When I retired, my father said to me, “Don’t worry about staying busy in retirement. Your doctor’s appointments will keep you busy.” He was almost right. It was my dad’s doctor’s appointments that kept me busy. Shortly after I retired, my dad was diagnosed with lymphoma. The next three years, my mother and I helped him fight his battle against cancer.

Being a caregiver for both my parents for the first 10 years of my retirement wasn't something I planned for. You find out there’s a lot of things that can happen in retirement that aren’t planned. This doesn’t mean you shouldn’t have a retirement plan. Rather, it means your plan should be flexible.

My initial plan was to stay busy by taking cooking classes. I got the bug from watching cooking shows. Seeing those chefs make mouth-watering dishes motivated me to buy new cooking utensils, knives, and pots and pans.

When I wasn’t taking cooking lessons, I thought I’d get a part-time job. I didn’t want a job that was stressful. I had one of those. I wanted a job that allowed me to be around a lot of people, so I wouldn’t get lonely. My first choice was Trader Joe’s. There was one a few miles from my home. No long commutes to ruin my day. Plenty of people to mingle with, young and old.

In my spare time, I would travel. Maybe a cross-country trip in the Volkswagen van that I always wanted. Better yet, how about a trip to Europe?

But none of that happened. My parents needed help, and they came first. Luckily, my retirement plan wasn’t carved in stone. I could easily drop everything I planned and take care of my parents. I hadn’t made any major financial commitments. For instance, I didn’t plow money into a second home in another part of the country, where I’d spend part of my retirement.

These days, I devote some of my free time to writing. I started keeping a journal to record my experiences, ideas and feelings. I believe a journal will help me achieve my goals by tracking my progress. I also hope the journal will improve my memory. When you write something down, you tend to remember it better. Lately, I’ve been recording my dreams when I wake up. I dream a lot, and I’d like to find some meaning behind those dreams.

The real inspiration behind keeping a journal was to improve my writing skill. I thought that the more I write, the more my writing will improve. Of course, I still plan on writing for HumbleDollar when I have something worthwhile to say.

When I’m not writing, I spend my time reading, exercising, gardening and traveling. I’d be remiss if I didn’t mention those doctor’s appointments. My dad was right. They can keep you busy as you grow older.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.

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Someone Likes Value

DON'T LOOK NOW, but value is beating growth—just not here in the U.S.

From May 31 through Sept. 29, iShares MSCI EAFE Value ETF (symbol: EFV), which invests in developed foreign markets, is up 5.6%, while iShares MSCI EAFE Growth ETF (EFG) is down 6.5%. That brings the year-to-date performance of the two funds to 9.6% for the iShares value fund and 4% for the iShares growth fund. Meanwhile, the style-neutral iShares MSCI EAFE ETF (EFA) is up 6.9% in 2023. U.S. stocks, as measured by iShares Core S&P 500 ETF (IVV), are up 13.1% for the year, even after their recent selloff.

I’m partial to Dimensional International Value ETF (DFIV), which yields 4.3% and is up 10.7% on the year. The fund’s small-cap sibling, Dimensional International Small Cap Value ETF (DISV), is also doing well in relative terms, up 9.5% year to date, well ahead of the style-neutral iShares MSCI EAFE Small-Cap ETF (SCZ), which is up 1.7% in 2023.

Japan is among the better-performing foreign markets. The iShares MSCI Japan Value ETF (EWJV) is up 18.5% year to date, despite a weak yen, compared with an 11.5% gain for iShares MSCI Japan ETF (EWJ). My little bet on Japan small-cap value continues to do well, though small-caps are lagging large caps in Japan. WisdomTree Japan SmallCap Dividend Fund (DFJ) is up 11.3% year to date, much better than the broad foreign benchmark and the foreign small-cap ETF. I also own stakes in some of the other funds mentioned here.

What about developing countries? Dimensional Emerging Markets Value ETF (DFEV) is up 7.8% year to date, compared with 2.9% for iShares Core MSCI Emerging Markets ETF (IEMG) and 2% for Vanguard FTSE Emerging Markets ETF (VWO), both of which diversify across growth and value stocks. All have heavy stakes in poorly performing China.

I get my emerging markets exposure through the style-neutral iShares MSCI Emerging Markets ex China ETF (EMXC). But despite its avoidance of increasingly authoritarian China, it’s up just 5.7% year to date, still behind Dimensional’s emerging markets value ETF, with its 7.8% gain.

Even in the U.S., value appears to be attempting a comeback versus growth—at least in relative terms. Vanguard Value ETF (VTV) is down 2.9% since July 17, versus a 6.4% decline for Vanguard Growth ETF (VUG).

But for the year to date through September, it’s still an embarrassing showing for U.S. value stocks. Vanguard Value ETF is flat, while Vanguard Growth ETF is up 28.4%. The picture is a little better among U.S. small caps. Vanguard Small-Cap Value ETF (VBR) is up 2.1% in 2023, versus 7.3% for its growth counterpart.

Still, just as those fond of a drink like to say “it’s 5 o’clock somewhere,” it’s good for thirsty value investors to know that cheaper stocks are being rewarded elsewhere in the world. Who knows? Maybe soon it’ll be happy hour for value devotees even here in the land of mega-cap tech stocks.

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Starting Late

IT WAS JULY 2003. My wife and I were in our early 50s. We had jobs we liked and we lived comfortably. Our two children were about to go to college, and we had a plan for covering the cost. We had renewed our marriage vows on our 25th anniversary. We had no debt.

But I began thinking.

What would our financial situation be if we retired and our only income was Social Security? That was entirely possible. My employer’s pension plan had been woefully underfunded when I began working there. Future pension benefits were far from certain. Meanwhile, my wife’s employer had recently been sold, and the new owner had no pension plan.

Worse, we weren’t really savers. Somehow, we’d managed to set aside about nine months of gross income. But most of the time, the money that came in each month went out almost as fast. On top of that—despite having unhappy experiences with older family members who suddenly required long-term care—we hadn’t taken any steps to spare our children the financial and personal trouble we might cause.

In short, we simply weren’t preparing to pay for life after work, nor were we dealing with scary possibilities. We wouldn’t be able to maintain our lifestyle in retirement even if we waited until age 70 to claim Social Security. We also didn’t own a home. If our behavior didn’t change, we could end up—old, frail and broke—on our kids’ doorstep.

Neither of us knew what to do, but we knew what we didn’t want, which was to be a burden to our children. We had to make our own better future. Because we were starting late, we knew we’d have to save as though we were being chased by wild bears and angry hornets.

Reading about saving and investing wasn’t our usual fare. Still, we agreed to read a personal finance book together. The book we chose was Smart Couples Finish Rich by David Bach. The author stated bluntly that, while what we were reading might be entertaining and thought-provoking, it would be useless if we took no action. For us at that moment, those words were like a waiter prompting us to order from the menu we were staring at.

We set a goal of amassing a $1 million portfolio by age 70. We calculated that we needed to save 25% of our gross income, on top of our employers’ matching contribution, beginning the next workday—which we did. After all, if we’d been forced to take a big pay cut at work, we would have figured out how to carry on. By the same token, why not tighten our belts for the sake of our future selves?

We began investing in mutual funds offered through our workplaces—Vanguard Group for my wife, Fidelity Investments for me. Our formula was to save a lot, make appropriate asset allocation choices and then save even more. We accepted that we might not reach our $1 million. But we figured that even if we missed our moonshot goal, we’d still be among the stars. That’s bad astronomy, but it was good for our motivation.

My wife and I are very different people. She follows HGTV, while I’m in another room, watching the History Channel. On a nature walk, she’ll take 100 up-close photos, while I’ll be gazing off into the distance. I would happily eat chicken every day, she’d go for fish tacos forever. She loves to shop, while I’d rather have measles than wander through a mall. As you might imagine, with our new plan, we were constantly negotiating choices and tradeoffs.

Over the next four years, we settled into our new arrangement. We each had a monthly allowance. We bought a house in 2005. We made sure we saved by paying ourselves first through workplace withholding.

Those good times didn’t last. In 2007, I abruptly needed to find a new job. During the Great Recession, our investments imploded. The house we bought became a financial albatross, which we couldn’t unload until 2010. By the time we sold, we were so far underwater that we had to pay six figures above the selling price to clear our mortgage.

When the dust settled, we had lost our home and a lot of net worth. We also lost our daily life together when, in 2008, I finally found a new job—in another state.

When the house sold, we had a yard sale and downsized more. We were already living apart. For five years, we saw each other every other weekend and talked on the phone every day. A lot of people had it much worse, we knew, so we actually felt fortunate.

We also kept saving. Our brutal experience made us even more determined to become financially secure.

Eventually, things righted themselves. We were able to get under one roof again. Our investments recovered and the money we added during those bad times bought mutual fund shares that really blossomed as stock prices rose. We each retired when we reached age 70, holding off on Social Security until then.

Today, my wife receives a small annuity from a previous employer. My employer’s pension fund got better management and I receive benefits. We have enough money to enter a lifecare community we like.

Our success is due, in part, to luck and to not facing the discrimination suffered by those who are minorities, and we say so. But it wasn’t all luck. We also persisted with good practices during bad times, and we stuck to a “good enough” investing plan.

Tom Scott is a retired Episcopal priest. He and his wife live in Evanston, Illinois. They love retirement because they get to see more of their children and grandchildren, and they can spend more time at concerts, the opera and the Chicago Botanic Garden.

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September’s Hits

OUR LATEST MONTHLY list of the most popular articles and blog posts is a little lopsided—because half of September's top 10 were penned by two HumbleDollar regulars, Adam Grossman and Greg Spears:

Want to stop hackers from emptying your bank account? The thieves are increasingly sophisticated, which means we all need to strengthen our defenses. Adam Grossman suggests 12 steps.
If you're worried about federal and state estate taxes, Adam Grossman offers a handful of intriguing strategies—including some you may not have thought of.
Want to get from here to retirement? Greg Spears boils it down to four simple steps.
"My problem in Oslo arose partly because I didn’t want to pay an extra $10 for a taxi—on a $7,000 trip," recounts Jim Mitchell. "That was foolishness, not restraint."
"Something wonderful occurred when I retired," says Bruce Roberts. "I now have the time to try new activities, and it doesn’t feel like a big risk if I pick badly. This, I’m finding, is retirement’s surprise gift."
Want to minimize the stress and turmoil that come with airline travel? Dennis Friedman and his wife follow four rules.
Ed Marsh and his family visited Charleston—and found out why retirement can be bittersweet.
"The patient investor can capture the hopes and dreams of a noisy market just by standing still," says Jeff Actor. "All you have to do is tell your ego that it’s okay to accept the market’s average return."
Looking to cut your energy bill and save on taxes at the same time? Greg Spears details the goodies on offer in 2022’s Inflation Reduction Act.
Total bond market index funds are a key component of the classic three-fund portfolio, but Adam Grossman is no fan. Why not? In a word, duration.

What about our twice weekly newsletters? Among our Wednesday newsletters, the best read were Scott Martin's Finding Hope and Doug Texter's My Best Experiences, while the most popular Saturday newsletters were On Second Thought and Absolutely Fine, both written by me.

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A Thousand Words

AS THE SAYING GOES, a picture is worth a thousand words. Over the years, I’ve found certain images and illustrations to be immensely helpful in discussing investment concepts. These are the ones I’ve relied on the most:

Only in Australia. A key challenge for investors—if not the key challenge—is that none of us has a crystal ball. It’s impossible to know what markets will do next month or next year. As a result, all we’re left with is our best guess and, for that reason, it’s natural to extrapolate from recent history. The problem is, there’s a first time for everything. We can never be too confident that something won’t happen, even if it hasn’t happened before or hasn’t happened recently.

This notion was best illustrated by author and retired investor Nassim Nicholas Taleb in his book The Black Swan. In most parts of the world, swans are white—but not in Australia, where most are black. But if you’d never been there, and if every single swan you’d ever seen was white, you might feel safe in concluding that all swans are white. The lesson: Don’t dismiss risks and possibilities out of hand just because they seem unlikely.

In a new home. Suppose you were furnishing a new home. How would you go about it? If you’re like most people, you’d start with the basics—a table and chairs for the kitchen, a couch for the living room, and so forth. You probably wouldn’t start by purchasing an umbrella stand. That would be nonsensical.

But that's the way the investment industry markets mutual funds to consumers. Open a financial publication or go to a financial website, and you’ll often see ads promoting all sorts of different funds—everything from stocks to gold to cryptocurrencies. As a result, many people start their investing careers by assembling a collection of investments without an overall blueprint—like buying an umbrella stand before anything else. A better way: Tune out Wall Street’s marketing machine and instead think about building your portfolio the same way you’d build a home, with an overall plan as your first step.

In the war chest. It’s common to think about asset allocation in percentage terms. You might, for example, ask whether you should have 50% or 60% in stocks. While that makes sense, I also recommend thinking in dollar terms—specifically, the amount of dollars you hold outside of stocks.

Suppose you’re retired and require $100,000 a year from your portfolio. As an asset allocation, I might suggest holding $500,000 to $700,000 in a combination of cash and bonds. Those are the dollars that would help carry you through a stock market downturn, and I wouldn’t worry too much about that sum as a percent of your portfolio. Fellow financial planner Matthew Jarvis calls these cash-and-bond dollars a “war chest,” and I think that’s an excellent image.

In the studio. Pablo Picasso was obviously very productive, but the state of his studio might have led you to think otherwise. It was a mess. Among the canvases lived an assortment of cats and dogs, as well as a monkey that liked to sit on the artist’s shoulder as he worked. But a lot of good work emerged from that chaos. The lesson for investors: Know what’s most important, focus your energy on getting those basics right, and don’t fret too much about the rest.

On the elevator. Mutual funds make it easy for investors to build diversified portfolios. But they’re not perfect. A key flaw: A fund’s gains or losses are shared pro-rata by all of its shareholders. Normally this isn’t an issue, but in market downturns it can be a problem.

That’s because downturns will always cause some investors to become spooked. If enough shareholders request redemptions from a fund, it can cause the fund manager to sell holdings, triggering a tax bill for the taxable-account shareholders who remain. That’s why I compare being an investor in a mutual fund to being a passenger on an elevator: Everything will probably be just fine—as long as everybody else behaves. But since the world is unpredictable, I try to minimize that risk by sticking to exchange-traded funds (ETFs), and especially to index-based ETFs, which are structured in a way that lend themselves to being more tax-efficient.

On the farm. I’ve often quoted what I believe to be the only published poem in the world of personal finance. In 1938, John Burr Williams included these words in an otherwise math-filled volume called The Theory of Investment Value:

A cow for her milk

A hen for her eggs

An orchard for its fruit

Bees for their honey

Williams used this image to illustrate a key concept in finance: intrinsic value. The idea is that an investment only has value because it can produce something. Stocks, for example, can produce dividends. Bonds produce interest. Real estate produces rent. That’s why I avoid things, such as cryptocurrencies, which might be interesting but have no intrinsic value. The risk: Assets lacking intrinsic value are worth only what the next person is willing to pay for them. That makes their prices more volatile and unpredictable.

In the infield. Warren Buffett has offered his own colorful illustration of intrinsic value. If you took all of the world’s gold, he noted, it would form a cube about 67 feet high. It would fill most of a baseball diamond. That might seem valuable, but what would it do for you? Buffett says, “You could get a ladder and climb on top of it… you could polish it… you could stare at it… but it isn't going to do anything.”

In other words, gold—unlike stocks and bonds—doesn’t produce dividends or interest. “All you’re doing when you buy that is hoping that somebody else… will pay you more to own something that, again, can’t do anything,” says Buffett. While gold is a bit of a special case because of its long history, the point remains: If an investment isn’t capable of producing any income until you sell it to someone else, it’s going to be inherently more risky and its value more subjective.

At home. In recent weeks, I’ve discussed the risk posed by hackers, and that’s one of the reasons I recommend not holding all your assets at the same institution. That said, I do favor consolidating most of your assets under the same roof. Here’s how I think about it: Suppose you’re babysitting two children. To keep things under control, it’s best if they’re both within your line of sight. But if one is playing in the yard, and the other is running around in the basement, anything could happen. It’s the same with your portfolio. The fewer places you have to keep tabs on, the easier it’ll be to monitor your portfolio and to make changes.

On the road. Some years ago, I was heading to a meeting in Upstate New York. At a certain point, I realized I was going too fast, and for no good reason. If I slowed down, I still would’ve gotten there on time. But if I’d gotten pulled over, then I would’ve ended up being late. It’s the same with asset allocation. We all want our investments to grow. But if we hold too much in stocks, it can end up backfiring. Sometimes, it’s better to slow down a little, so we avoid getting derailed.

Running away. Groucho Marx famously said, “I don’t want to belong to any club that would accept me as one of its members.” Years later, venture capitalist Andy Rachleff offered investors advice along the same lines. The most successful venture capital, private equity and hedge funds, Rachleff explained, have no shortage of potential investors, such as university endowments willing to write eight- or nine-figure checks. It’s only investment funds with poor track records that are out marketing their funds to individual investors. So, if you’re on the receiving end of a pitch like this, Rachleff says, “Run away.”

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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Looking for an Edge

ACCORDING TO THE consensus of HumbleDollar’s thoughtful and learned readers and contributors, I’m making a mistake by actively managing my investments instead of passively investing in index funds. In an earlier piece, I touched briefly on my reasons for doing so. It’s simple. I do it because I like to do it.

After the past few months, when my investments have definitely lagged the averages, I’ve decided to revisit my decision. What I write here is in no way intended to influence anyone else’s decision. My decisions and conclusions may be correct for me, but they’re quite likely to be a bad fit for anybody else.

I decided it was important to list my reasons for doing what I do in the way I do it. I strongly believe good writing is a result of good thinking, and that putting my thoughts on paper will have real value to me, if not to anyone else.

Well, maybe.

I still have the notes my wife and I made outlining all the good and logical reasons for buying a flower shop in the neighboring town some 30 years ago. That was a disaster—and a reminder that writing things down doesn’t always help your thinking. Nowhere in the list of pros and cons did we consider employee theft. We should have.

First off, a memory: I’m sitting on the board of a small nonprofit, and we’re discussing how to handle the organization’s relatively modest portfolio. The rest of the board is strongly in favor of hiring an investment advisor. I argue that we should invest in index funds. I hand out copies of several articles, which cover ground familiar to HumbleDollar readers and which document index funds’ performance superiority relative to actively managed funds. I also point out that, if we eschew index funds, management fees will cost the organization tens of thousands of dollars each year.

The argument went on for the rest of the time I was on the board, and the staff invested the money in some index funds while we argued. I guess I won while I was there, but my suspicion is the index funds were sold and an advisor hired at the first board meeting after my retirement.

You’ll have noticed a contradiction here. Why would I argue for index funds for the nonprofit, while actively managing my own money? Well, as Walt Whitman wrote, “I contain multitudes.”

We had interviewed several prospective advisors, and none impressed me as being the least bit original in his or her thinking. If a manager is bound by what everyone else in the market is thinking, if she’s afraid to stray too far from the market consensus, then she’s unlikely to have returns better than the market because she is the market.

One of the advantages of a portfolio as small as the nonprofit’s is that we could invest in companies that couldn’t be invested in by managers running large portfolios. But none of our prospective managers mentioned that fact, convincing me that our portfolio would be managed in conjunction with the rest of the funds managed by the company being interviewed—meaning we’d be throwing away the small investor’s biggest advantage.

To be sure, it takes a certain arrogance to actively manage your portfolio, because it’s a declaration that you can do a better job than most investment professionals, some of whom wear nice suits and French cuffs. Still, I’m convinced that I have an advantage running my own money, because I can buy companies that are too small to make much difference to large investment funds.

Of course, I’ve often failed to make the most of that advantage because of the other reason I don’t use index funds. I am by nature cheap. My wife and I have only bought two new cars in our 46 years of married life. Our house is a project, well over 100 years old, and bought cheap because of the needed maintenance—repairs that will never be completely finished. None of my farm machinery is newer than 10 years old. I tie my overalls up with baling wire, and only replaced my last pickup when the wheels literally fell off, causing a wreck. Might have overdone the cheapness a bit there.

Index funds reflect the market. As Apple and Nvidia increase in value, their percentage of the fund goes up. By the nature of the beast, your stock portfolio is concentrated in the stocks that have risen the fastest, and are almost by definition more expensive than the average stock, certainly the average stock in my portfolio.

I just can’t buy the best companies. It goes against everything my Depression-surviving grandfather taught, that my 88-year-old father believes, and what I know in my very soul. I’ll never own a market leader, and that reluctance will no doubt mean that my cheapness will be dear, at least when the market is headed up.

It also means that I sell my small-cap discoveries too quickly. I bought Apple at $18 and sold in the low $30s. I bought Berkshire Hathaway (the first time) at $2,500 and sold at $16,000. I owned shares of a local convenience store chain at $10 and sold at $13. It’s now trading at $246. I still believe that small investors have an advantage, but all too often I’ve squandered it by selling too soon. I’m working on doing better, but—if a stock I own makes the front page of The Wall Street Journal—I’m selling.

Tell me a story about a stock that’s out of favor, and I’m there. I have oil stocks and cigarette companies. I’m a sucker for losers who are still fighting, and I’ve certainly picked some losers over the years. I won’t own stock in a company with a lot of debt.

I know there are index funds that reflect my investing style. I even own a couple. I also own some stocks, like Berkshire Hathaway, that are involved in many industries and have large portfolios. After all, if index funds are desirable because the fees are low, I’m hiring Warren Buffett for free. Still, I do use funds for all of my foreign investments. 

So, how has it all worked out? My returns over the long term slightly lag the market, but I’m convinced that my risk exposure is much lower. By buying index funds, I would never have had the joy that comes from reading 10-Ks and transcripts of earnings calls, or from trying products with the idea that I might someday own part of the company. When it all works out, it’s a thrill that can’t be equaled in any area of life—or, at least, no area that can be discussed on the pages of HumbleDollar.

Has it been worth it? I think so, but if my kids ask—and they haven’t—I’d still recommend a good index fund. 

Blake Hurst farms and grows flowers with his family in northwest Missouri. He and his wife Julie have three children. Their oldest daughter and both sons-in-law are involved in the family business, growing corn and soybeans, and shipping flowers to four states. Their middle daughter is the chief operating officer for a small hospital. Their youngest, a son, is a lawyer for the Department of Justice. Blake and Julie have six grandchildren. Blake is the former president of the Missouri Farm Bureau and a freelance writer. Check out his earlier articles.

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Growing Pains

AS WE GET OLDER, the financial hits often grow far larger, for two reasons. First, we’re typically wealthier, which means the potential dollar losses are bigger. Second, as we age, there’s greater risk of hefty health-care costs, notably long-term-care expenses.

Almost everybody endures at least a few big financial hits during their lifetime. Perhaps you lose your job, and it then takes many months to find work. Maybe your parents need nursing-home care and you end up footing part of the tab. Maybe your longtime spouse leaves you, and suddenly you’re saying goodbye to half of everything. Perhaps you buy a home and discover a huge problem, such as a leaking underground oil tank that requires a costly environmental cleanup.

When I lived in New Jersey, I knew two families who suffered this last fate—which is why I breathed a huge sigh of relief when an abandoned oil tank on my property was found to be intact. But while I dodged that bullet, I’ve lately been on a five-year losing streak.

No, I haven’t had any significant health issues, thank goodness. But I’ve suffered some notable financial hits. My younger self would have found the dollars involved unfathomable, and even my current self doesn’t like to dwell on them. Still, today—in my more philosophical moments—I classify these losses as the “price of success,” because they were made possible by the moderate amount of wealth I’ve accumulated.

A failed business. In 2016, I was contacted by two financial planners I knew about getting involved in a financial startup. The project and the participants morphed over time, and the whole thing came to an acrimonious end in early 2018. This debacle cost me around $10,000, plus huge amounts of time.

I would never have got involved in such a longshot venture early in my career—because I simply couldn’t have devoted the necessary time and I would have balked at the financial risk involved. There was, however, a silver lining: The original version of the Two-Minute Checkup was developed as part of the startup, and it now resides on HumbleDollar.

Two bear markets. Like anybody with significant stock exposure, my portfolio took a huge hit during 2007-09’s market crash—as measured by percentages. But my dollar losses in early 2020 and in 2022 were much larger because, by then, my portfolio was far bigger than it had been a dozen years earlier.

But among the misfortunes detailed here, these were the losses I was most sanguine about. Big short-term hits are the price we pay to earn healthy long-run stock market returns, and I’ve never been much bothered by the financial pain involved.

Another divorce. It’s a long and painful story, and—because it’s not solely my story—I don’t feel I can reveal all the gory details. But this much I will share: In July 2019, my second wife demanded a divorce. A member of her family, who had previously been unstinting in his praise of me, advised my then-wife to “hire the best Manhattan divorce attorney you can and screw him over financially”—an incident I heard about not only from my then-wife, but also from her sister.

Fortunately, while the divorce wasn’t cheap, there was no financial screwing over. The marriage had been relatively brief, and I’d been careful to keep my finances entirely separate, so my assets never became our assets. Still, it seems my earlier financial success made me a tempting target—another problem that comes with age and growing wealth.

The long goodbye. Amid the divorce negotiations, I decided to decamp from New York to Philadelphia. In September 2019, I put my apartment on the market. It finally sold in March 2022, a grueling two-and-a-half years later.

Along the way, we had a pandemic that nixed interest in living in close proximity to others in an apartment building. I reached deals with two separate buyers, but both subsequently backed out. I even hired an architect to create plans to turn the apartment—which was really two apartments combined into one—back into two apartments, figuring that way they might be easier to sell. But after paying for all the architectural plans, I discovered the construction costs would be far higher than I was initially led to believe.

Eventually, I reached a deal with a third buyer. The buyers’ attorney conducted not only a title search, but also a municipal records search, which didn’t turn up any paperwork proving that the apartments had been legally combined in 1964, almost six decades earlier. That perhaps wasn’t surprising, given that the town’s records from that time were chaotic. Still, before the apartment’s sale could go through, I had to obtain a certificate of occupancy, which required architectural drawings, some upgrades, and inspections by the town’s buildings department.

To be honest, I can’t bring myself to calculate what all the delays and additional work cost, but I’m confident it’s comfortably over $100,000. It was an expensive apartment in an expensive part of the country, and that meant the various headaches were also expensive. When I was younger, I would have simply stuck it out and stayed in the apartment, because the cost of moving would have seemed so prohibitive. But I wanted to get on with my life and, fortunately, I could afford to do so.

Wall-to-wall problems. In September 2020—for those keeping score at home, this was 18 months before I managed to sell my New York apartment—I bought a small, 100-year-old townhouse in Philadelphia, not far from where my daughter and her family live. The house was a little dated, but it was of the size and in the location that I wanted.

After living in the house for a while, I came to feel it was a bit dark, and Elaine—who was now living with me—agreed. We decided to install much bigger windows at the back of the house, both downstairs and up. As part of the work, which began in May, we opted to upgrade the kitchen. Many Philly townhomes from the 1920s have what my architect refers to as “the shed,” an add-on at the back of the house that was once a mudroom but has since been fully incorporated into the house.

It turns out these sheds often weren’t well constructed—or, at least, ours wasn’t. As the remodeling project’s lead carpenter put it, “Nobody good has ever worked on this house.” I’ll save the full gory details for a future article. But the bottom line is, shoring up the back of the house with a new foundation and new framing will cost at least $33,000.

That $33,000—and the other dollar sums mentioned here—pain me. Could I have avoided the losses involved? It’s a question I’ve asked myself many times.

Maybe I should have pulled out of the financial startup earlier, when my doubts about its prospects first emerged. Perhaps I should never have remarried. What about my two real estate debacles? I’d never heard of a municipal records search and nobody suggested conducting one when I bought the place, so I don’t know how I could have avoided that pitfall. Meanwhile, I had my current home thoroughly inspected by a firm that came highly recommended by an architect. But even a top-notch inspector can’t see what’s under a concrete floor or behind wallboard.

When we make financial decisions, we make the best decisions we can with the information available at the time. But that’s no guarantee of a good outcome—and the more money that’s at stake, the bigger the potential hit. No, we usually can’t predict when these financial hits will strike. But, at a minimum, we can make sure we're financially prepared.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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No 401 Way

MY WIFE AND I ARE super-savers. For us, that means we save as much as permitted each year in the retirement plans available to us. Once we’ve done that, we invest in our regular taxable accounts, where there’s no limit on the amount we can contribute.

We’re under age 50. That meant that, in 2022, the maximum contribution was $6,000 each to our IRAs and $20,500 each to our 401(k)s. Because the contribution limits increase with inflation, the 2023 limits are $6,500 for IRAs and $22,500 for 401(k)s.

My wife is considered a highly compensated employee—I know, a nice problem to have—so her company reduces the amount she can contribute to her 401(k). That makes me even more motivated to contribute all that I can. I also have a high-deductible health insurance plan with an accompanying health savings account, which allowed me to sock away $3,650 in 2022, then the maximum allowed. This year’s max is $3,850.

In recent years, it’s become fashionable to bash 401(k)s for reasons I don’t entirely understand. While I enjoy contributing to all my accounts, I view the 401(k) as the primary vehicle for ordinary Americans to build wealth. I still believe it’s possible for regular people to get rich in this country, and to do so they should contribute to their retirement plans—even if they don’t or can’t save the maximum allowed.

Which, surprisingly, recently happened to me.

In March 2022, I was enjoying both my job and my journey toward maxing out my firm’s 401(k). Quite unexpectedly, I received a job offer from another firm, one that was too good to refuse. My new employer also has a 401(k). But the firm’s policy is that new employees couldn’t begin contributing until they worked there for six months.

Because I started the new job on April 11, that would mean that I, Mr. Super Saver, would have to cool my jets until October, when I could then resume my 401(k) contributions and max out that year’s contribution limit.

No problem, I thought. I dutifully calculated the difference between the maximum contribution for 2022 and the amount I had contributed at my previous employer. I then plotted the exact percentage of my income I’d need to have deducted each pay period to hit the maximum for the year with my new 401(k).

When the pay period following Oct. 11 arrived, I eagerly checked my paystub for confirmation of my 401(k) contribution. Nothing was deducted. Obviously, there was a mistake in the processing, either with my firm or its 401(k) provider. I immediately contacted human resources.

HR informed me that there was no mistake. The firm’s policy, it turns out, states that a new employee can begin making 401(k) contributions on the first day of the next quarter that follows his or her six-month anniversary. Because I began work on April 11, that date was Jan. 1, 2023. In other words, I was 11 days too late to contribute anything more for 2022.

Acting as my own counsel, I objected to the rule. I begged that an exception be made so that I could super-save. The objection was overruled, and no exception was granted for little old me.

In addition to fine print like this, there’s another important point for employees to understand: The individual annual 401(k) contribution limit applies, no matter how many jobs or 401(k) plans they may have. If you’re under 50, you may not under any circumstances contribute more than $22,500 to all of your 401(k)s in 2023. Workers 50 or older can contribute another $7,500 in catch-up contributions, or $30,000 maximum from all jobs they have.

Because I only had one job at a time in 2022—which was enough for me, thank you very much—that meant I was effectively unable to contribute anything further to my 401(k), beyond what I’d already saved in my previous employer’s plan.

Although disappointed, I made extra contributions to taxable brokerage accounts and also saved some cash. As it happens, that extra cash came in handy—when our home was damaged by a tornado. But that’s another story.

Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters. Since 2009, Ben's made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts. Check out his earlier articles.

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Peace Premium

TWO YEARS AGO, at age 59½, I thought I was on the verge of taking a major step toward retirement. At the time, my usual zest for my work as a physical therapist was waning. Though I don’t think the quality of my patient care suffered, I found it took more effort to maintain the energy needed to complete a day at the clinic, and concentrating on work became tougher.

In addition to the tension building on the inside, I was also feeling external pressures. One concern was the care my wife and I were providing to our families. Over the past decade, we’ve become intricately involved in the lives of several family members who need our help because of age or illness. We love them dearly, and don’t consciously begrudge the time we give them. Still, anything that stretches time thin can fray nerves and shorten tempers.

Further stress came from the pandemic. We were all affected by COVID-19 in some way, from the annoyance of the toilet paper shortage to the heart-rending loss of a loved one. The social narrative about the disease took on a surrealistic life of its own. I finally stopped discussing it with nearly all except my wife, and I won’t comment on it here. I can’t deny, however, that the pandemic profoundly affected how I felt about my job.

My experience is hardly an anomaly. Howard, a coworker, notes that the pandemic magnified the stress inherent in a health care career. His opinion is supported by a study led by researchers from Harvard-affiliated Brigham and Women’s Hospital. It discovered some 50% of workers from all areas of health care reported an increase in stress during the pandemic. The highest levels of job-related stress, which can cause an occupational phenomenon termed burnout, were reported among nurses and other clinical staff.

Burnout can lead people to leave jobs, and the health care industry hasn’t escaped the exodus. A report from Definitive Healthcare highlights the significant shortage of clinical staff caused by resignations and early retirements in 2021, including 22,000 physical therapists.

My home state of Georgia is one of five states hit hardest by shortages. Nurses were so scarce at my small hospital that roughly a third of patient rooms were unavailable due to a lack of staff. On weekends, instead of my usual weekday duty at the outpatient rehab clinic, I assisted in the acute care hospital, providing treatment to patients housed in the emergency department for multiple days because there was no other accommodation for them.

In summer 2021, I considered contributing to the shortage of physical therapists by trimming my work hours. I like to believe I’m an independent thinker, and perhaps even instinctively go against the flow. But I know at times I’m tempted to follow the herd. I don’t know how much pandemic stress contributed to my itchy feet, as compared to the stress from my personal life, but I know it was part of the force pushing me toward retirement. Although my wife works just a few hours each month as a physical therapist, she was thinking of racing me to the exit.

Even away from the clinic, thoughts of chasing other interests started creeping in. I didn’t imagine full retirement, but I dreamt of busy days at home working in my garden, playing with family and friends, or catching up on reading. I was acutely aware of the time I didn’t have because it belonged to my employer, and I realized the money I received was beginning to lose its luster.

Rising pressure must find a way out, or else it damages the vessel trying to contain it. My pressure-relief valve was created by shifting additional money from stocks to short-term bonds, to boost the amount already set aside in conservative investments. This move provided income protection for my wife and me in the event I decided to cut my work hours just when the market decided to drop, thus freeing us from the need to sell stocks at depressed prices.

Today, two years later, I’m still working fulltime, but in a different frame of mind. Why? For starters, the strain on my mind and my time has eased. The overwhelming flood of patients from the pandemic has settled down to a more manageable flow. Frontline health care workers are still dealing with the fatigue caused by staffing shortages, but the added apprehension that accompanied an unknown disease has dissipated. For now, COVID-19 has become just one more familiar hazard that can make a hospital an unhealthy place to work.

In addition, a change in our family circumstances has cut down on both brain time and actual hours devoted to that responsibility. My wife’s anxiety is visibly reduced, which eases my mind as well.

More important, our cash and bonds gave us the courage to face the possibility of cutting back on work hours due to need or desire. Knowing that I continue to work fulltime by choice, rather than by necessity, takes a load off my mind. Though a little wounded by inflation and rising interest rates, our stockpile of safe money remains substantial and comforting.

With our minds preoccupied by uncertainty over the future source of our income, we didn't use our cash to make big buys of cheaper stocks last summer. Contrast this to early 2020, when we were chasing dropping share prices at the beginning of the pandemic. We have, however, continued to commit 25% of our income to purchasing stock-index mutual funds through our employer’s 403(b) and our IRAs, plus we have the company match and bonus money going into my 403(b). We also continue to invest our health savings account money in stock funds. Right now, stocks account for about 74% of our retirement savings.

The upshot: We haven’t needed the conservative investments we set aside two years ago. It could be argued we wasted the potential for growth by keeping money out of the stock market. I might be persuaded to lean that way during a weak moment, but I have few regrets. That would be like regretting the insurance premiums we’ve paid for claims we haven’t needed to make. The stock market growth we missed is the premium we’ve paid for the peace of mind we’ve gained.

Ed Marsh is a physical therapist who lives and works in a small community near Atlanta. He likes to spend time with his church, with his family and in his garden thinking about retirement. His favorite question to ask a young person is, "Are you saving for retirement?" Check out Ed's earlier articles.

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Friend Request

HOW’S YOUR FRIENDSHIP account balance looking? I spent my life watching my bank account, and taking great pleasure as it grew and grew. I never cared much for what I could buy with the money, but I loved the feeling of security it offered.

Friendships, meanwhile, took a back seat. That was pretty much normal for my family, and maybe it’s more normal for most folks than we like to admit. We have a tight little circle that includes family, but not many others.

It’s not that I was socially awkward or unfriendly. But my interactions with people were a quick hello, how are you doing and goodbye. There was nobody other than family that I would go out of my way to socialize with. But that changed—thanks to my determined effort.

What did I do? For starters, there was the part-time job I picked up some 20 years ago, writing a column for a weekly local paper in our small town. My columns were principally comedy, religion and human-interest pieces focusing on readers and events. Soon, people would walk up to me and comment on what I wrote. I enjoyed those interactions more than the notoriety of my work or what little money I earned. Some 1,000 columns later, I still get a kick out of talking to readers.

My retirement led to doing volunteer work with an organization called the Marion County Veterans Honor Guard, which performs at military funerals. My old sergeant major called, said they were always short of vets and asked me to help out.

Among those in the honor guard, I was the kid at age 60. At that time, the ages of the folks ranged up to 93. One uses a walker. I came to enjoy my time with a bunch of old guys who know the joy of yesterday’s parade.

We have about 40 members. For each funeral, 14 or so show up with flags flying, seven riflemen giving a three-round volley with M1 rifles, and a bugler. We do about 170 funerals a year. The guys take great pride in what they do and are constantly thanked by the community. We discuss local folks, family, events and medical problems. Sadly, quite a few members of the honor guard have passed away. But what’s remarkable is the way the rest take it in stride as part of life.

I began reaching out by phone to former coworkers and asking them if I could take them out to lunch. Yep, I even offer to buy a meal for them just to discuss old times. Most really enjoy it. I have to admit that sometimes an offer of a free meal will make folks wonder if I’m trying to sell them something. But they come to realize that I only enjoy their company and talking about what they’re doing today. Sometimes, when they live far away and want to visit, I’ve invited them to stay in our home for a few days.

Finally, my wife and I would volunteer to take communion for our local Catholic church to shut-ins. You might imagine these people are depressed. Not so. We’ve met some of the most interesting people, folks who were enjoying life and made us smile. These folks included a bedridden woman who spent all her time watching the world from her picture window, and a husband and his blind wife. But especially memorable was a 103-year-old woman who lived alone. She hadn’t left her home in two years. She was a total hoot. Her life should be made into a movie. This was particularly so when she talked about visiting her grandson, who was in prison.

My efforts to expand my circle of friends doesn’t stop there. It continues with everyone from my barber to the grocery store cashiers. They all have stories—stories they enjoy telling and I enjoy listening to. One thing I've learned from retirement, and from slowing down and focusing on those around me: My friendship account is more important than my bank account.

Ken Begley has worked for the IRS and as an accountant, a college director of student financial aid and a newspaper columnist, and he also spent 42 years on active and reserve service with the U.S. Navy and Army. Now retired, Ken likes to spend his time with his family, especially his grandchildren, and as a volunteer with Kentucky's Marion County Veterans Honor Guard performing last rites at military funerals. Check out Ken's earlier articles.

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