Jonathan Clements's Blog, page 137

The Company You Keep

AFTER ENRON'S COLLAPSE in 2001, there were numerous articles about employees who had most of their money in the company’s stock and how they’d lost it all. Taking that message to heart, I’ve endeavored to keep our holdings of my company’s stock below 10% of our net worth. I must confess, however, that in good times it’s crept up to 15%—and in bad times it’s fallen to zero.

I can’t claim any particular insights or novel thoughts on how to manage company stock. I’m willing to share what I’ve done, however, and let you decide how to handle your situation.

My company stock came from three main sources: the employee stock purchase plan, the match on my 401(k) contributions, and the stock options or restricted stock awards received as part of my annual compensation. As you’ll see, these three stock programs represent the good, the bad and the ugly of my investing career.

The employee stock purchase plan was the good. In our plan, we were allowed to divert up to 10% of our salary to company stock. The best part was that we could buy the stock at a 15% discount to current market prices.

Early in my career, there was a machine operator who was retiring. The word in the factory was that he was wealthy. He had been stashing 10% of his pay in company stock for the past 45 years. He had never touched the shares. I’m sure his retirement was much more comfortable than that of most machine operators.

I also spent my first five years at the company not touching the stock. We then sold it to make the downpayment on our house. Shortly thereafter, I decided I needed to rethink how to handle the stock purchase plan so I wasn’t overly reliant on the company.

For about 20 years, I was able to sell the stock after holding it for only a month. I would purchase the stock one month at a 15% discount and sell it the next month. I always made money. Depending on the market, sometimes I made more than 15% and sometimes less.

Some coworkers would scold me, telling me that I should hold the stock for a year to qualify for the lower long-term capital gains rate on my profits. My reply was that—depending on how you do the math—I was making an annualized return of as much as 603%, so I was happy to pay the ordinary income-tax rate. (For math nerds, a 15% discount is equal to an immediate 17.6% monthly gain on the purchase price. Compounded over 12 months, that comes to 603%.)

Some would look at me blankly, saying that I was only making 15%. When I couldn’t convince them that I was making far, far more than that on an annualized basis, I’d offer to lend them all the money they wanted at 5% a month. None of them took me up on the offer.

Eventually, to encourage long-term investing, the company changed the rules and required a year-long holding period before selling. At the end of the year, rather than selling, we’d donate the shares we’d purchased to charity, thereby avoiding any taxes on the gains.

For a while, the company paid its 401(k) matching contribution in company stock, which meant we had an ever-increasing exposure to this single stock. Shortly after Enron blew up, my employer stopped paying the match in company stock, while also allowing us to sell whatever company stock we had in our 401(k) and invest the money in one of the plan’s mutual funds.

I promptly traded half my company stock for shares in a broad-based mutual fund. Why only half? I’d heard about the tax advantages of net unrealized appreciation of company stock held within a 401(k). Executed correctly, when you sell, you pay income taxes on the original cost basis of the stock but the lower long-term rate on any gains. I thought that in 20 years, when I retired, this would be a good deal.

Fast forward 20 years. I was planning on withdrawing my company stock from the 401(k). Remember the good, the bad and the ugly? This is where we get to the bad. First, the stock had fallen in price, dramatically reducing both its value and the strategy’s tax advantages.

Second, I read research by financial planner Michael Kitces suggesting that if you plan to own company stock for the long term, you’d be better off buying it outside the 401(k) to obtain the more favorable long-term capital gain rate on the whole investment and not just on a portion of it. I decided to sell all my shares and diversify using mutual funds in my 401(k). In hindsight, I realize I should have done this much earlier.

What about the ugly? That’s been the performance of my company stock options. Part of my compensation was “at risk” compensation. We were able to take this as either restricted stock units, which is a grant of shares at some future time, or as stock options, which would have value only if the shares achieved a specified price in the future. According to my employer, the value of either award was calculated to be the same when they vested in three years.

Every year, when it came time to choose how to receive this compensation, there would be lots of discussion about which was the better choice. When asked my opinion, I always said that what I was planning to do wasn’t appropriate for all people, but I’d be taking all my shares in stock options.

I had 20 years of data going back to 1978 showing that, if you held the stock options until they expired in 10 years, they performed significantly better than the restricted stock units. I planned to use my stock options as income during the 10 years following my retirement at age 60, and then claim Social Security at age 70.

I’m retired now and my remaining stock options are worth exactly zero dollars. Some may be worth money in the future if the company’s shares rise, but the hoped-for income stream from the stock options has vanished. Fortunately, I saved and invested well enough so I won’t have to claim Social Security before 70.

Although my stock option decision didn’t play out as planned, the poker player Annie Duke cautions people to not confuse the results with the decision-making process. In other words, you can be right and still lose money. I believe that my process was sound. I knew there was a potential for the options to be worth nothing and so, while it’s disappointing, it’s a financial setback I was prepared for.

While there are lots of valid ways to treat company stock, my advice would be to limit the value of your company stock to 10% or less of your total portfolio. As I’ve learned, company stock is a concentrated investment—and you may not be rewarded for the extra risk you run.

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

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Our Exit Strategy

IT'S CHALLENGING TO GO from saving during our working years to spending in retirement. Our solution: Use a modified version of the 4% rule.

Financial planner William Bengen was the first person to articulate the 4% rule. He wanted to know how much people could withdraw from their investments each year and still not run out of money. Through extensive back-testing, he found that if folks withdrew 4% in the first year, and thereafter increased this amount each year for inflation, in almost all cases they wouldn’t run out of money over a 30-year retirement.

With Bengen’s 4% rule, the amount withdrawn is driven only by the initial portfolio value and subsequent inflation. History suggests this approach should be okay despite sequence-of-return risk—the danger that the financial markets perform poorly during the years immediately after a person retires. Still, folks who retire and keep taking out an inflation-adjusted 4% do run some risk of running out of money.

I believe it’s reasonable to increase spending when the markets are doing well, while also cutting back when markets perform poorly. Bengen’s model doesn’t incorporate this. Vanguard Group developed a withdrawal method which does. I have read its guide several times and, I must confess, I still don’t understand it.

What to do? For my wife and me, I had three criteria for our retirement withdrawal strategy. First, it should be simple, something I can use when I’m 90 years old. Second, the approach should be responsive to market returns. Finally, it should be financially conservative, meaning there’s reasonable certainty we won’t run out of money before we die.

A withdrawal each year that’s simply 4% of the prior year-end balance—without the inflation adjustment in Bengen’s approach—meets these three objectives. With such a plan, a person would never run out of money. Each year, you always leave 96% of your portfolio invested. And it's certainly simple. But a major drawback is that the amount withdrawn each year fluctuates widely because market returns are so erratic.

That’s why I nixed the idea of simply withdrawing 4% of our prior year-end balance. Instead, I’ve made two modifications, which I have found to be extremely helpful.

First, rather than using last year’s Dec. 31 balance, I apply a percentage to a three-year rolling average of year-end balances. It allows for significant spending increases only if there have been sustained market gains, while cutbacks are only required if there’s a prolonged bear market. Second, because I’m financially conservative, instead of 4%, I use 3%.

The upshot: We limit our annual withdrawals to no more than 3% of our average investment balance for the prior three year-ends. I believe this is a simple yet elegant solution. Because of a lifetime of frugal habits, we’re in the fortunate position that we could live on Social Security and a modest pension I receive. We use withdrawals from our nest egg primarily for gifts to individuals, contributions to charitable organizations and to fund a major overseas trip every few years.

Because we’re heavily invested in stocks and limit our withdrawals to 3%, I fully expect our investments to continue to grow. When the time comes, hopefully a decade or more away, we’ll spend what we need to for assisted living or nursing care, even if it exceeds the 3%.

We have just three investment accounts: a traditional IRA, a Roth IRA and a regular taxable investment account. Each January, I enter the year-end amounts for the three accounts in a simple spreadsheet. It totals the three accounts and calculates the three-year rolling average. The calculation could also be done by hand. If I pass away first, my wife can easily take over.

After a lifetime of saving, we initially found it unsettling to make withdrawals from our investments. But with this plan, we sleep well at night, enjoy the fruits of our earlier saving and remain confident we won’t run out of money.

Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles.

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Retirement at Risk

I HAVE TROUBLE accepting things at face value. I like to validate information, checking it against several sources. This is especially true when it comes to all things money- and retirement-related. But it’s not always easy to do.

Do Americans tell the truth about how they spend their money? Do they actually know? Does it really take extreme frugality to save for the future, a talent many folks lack or refuse to embrace?

I look around and, on every block, see thriving businesses providing non-essential services. Within a mile of where I sit, I count five coffee shops, not including the Starbucks. Not one block in my town is without a nail or hair salon, and three new fitness centers have opened in the past year.

Where does their revenue come from when we hear that Americans are cash-strapped, can’t save, have modest retirement accounts and are unprepared for financial emergencies? Something doesn’t add up.

No matter where you look, the story is the same. Retirement for many Americans, and perhaps most, will be no bed of roses. While the few individuals who claim to be retired and financially independent in their 30s or 40s grab the headlines, half or more of Americans face a serious financial challenge if they hope to retire and maintain their standard of living.

According to the Bureau of Labor Statistics, 68% of private industry workers had access to a workplace retirement plan in 2021, with 75% of these folks choosing to join. Fidelity Investments reports that the average 401(k) balance for baby boomers is $215,000, while for Generation X—defined by Fidelity as those ages 43 to 58—it’s $145,500.

One survey found that 55% of Gen Xers expect to be able to retire, but 25% aren’t sure. At the same time, they expect to live off their 401(k) balance plus Social Security. Given their current account balances, their retirement may be frugal indeed.

According to MarketWatch, the median amount of savings—excluding retirement funds—of Americans under age 35 is just $3,240, compared to $6,400 for those ages 55 to 64. That means half of Americans have less than these amounts.

How is it possible that half of us reaching our 60s have less than $6,400 outside of our retirement savings? Where did the money go? How would these folks deal with a financial emergency? Just saving the change in your pocket each day over 40 years should result in more.

At the other end of the spectrum are followers of FIRE, the financial independence-retire early movement. They plan to retire in their 30s or 40s by dedicating up to 70% of their income to savings during their working years.

To be sure, these individuals aren’t earning $40,000 a year. Nevertheless, it takes a good measure of frugality to achieve this rate of savings. Not for me. I surely didn’t want to downsize to a hermitage.

I never aspired to retire at 40. Age 67 was fine with me. A 2021 survey says Generation Y—then ages 25 to 40 and often called millennials—hope to retire at an average age of 59. Fidelity says the average 401(k) balance for this group is $44,900. Better get cracking folks.

For Generation X, ages 41 to 56 at the time of the survey, the average planned retirement age is 60. Baby boomers, ages 57 to 75 at the time, indicated they plan to work longer, with an average expected retirement age of 68.

Overall, workers looking ahead to retirement expect to step away from work at age 65, according to the Employee Benefit Research Institute’s 2023 Retirement Confidence Survey. Yet, while 65 is the anticipated median retirement age among those still employed, retirees reported leaving the workforce at a median age of 62, the survey found.

How accurate are the data regarding saving, retirement expectations and spending, especially when collected through surveys? Does anyone know? When I double-check the claims, my conclusion is those in the workforce hope for the best but are in denial about what it takes to get to retirement.

Oh well, at least all that’s behind me.

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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Alphabet Soup

MOST PEOPLE ON Medicare report that they’re very satisfied with their health care coverage—but the program is undoubtedly complicated. There’s an alphabet soup of plans, coverage choices, premium levels and enrollment rules.




While it’s easy to be flummoxed by the ins and outs of Medicare, think of it as “eating an elephant.” The only way to start is one bite at a time. Learn the basics first—by deciding whether you want original Medicare or Medicare Advantage.




Original Medicare has these parts: Part A is for aggravation and Part B is for bureaucracy. Meanwhile, C is for confusion, better known as Medicare Advantage—which seems to have lots of disadvantages. And then we come to D, for the donut hole.




What happens when you come to the donut hole? Are the donuts glazed? Or do they have sprinkles? Just who is responsible for this incomprehensible concept? It had me crying in my alphabet soup.




Got the basics down? If you decide on original Medicare, you may wish to add a Medigap supplemental insurance plan, which involves a dizzying array of standardized plan options with more alphabet designations and varying degrees of coverage.




I’ll make it easy for you, and save you the hassle of figuring out the whole Medigap alphabet. You won’t even have to read the Medicare for Dummies book. Plan F exists, but it’s not open to new enrollees. Plans G and N are the most popular, with plan G being the most comprehensive. Plan N has co-pays which can easily add up and surpass what you think you might be saving in premiums. Pick your poison and try not to pull out too much hair.




It’s also easy to confuse the Medicare parts with the Medigap plans, as well as the premiums with the deductibles and co-pays. Just when you think you have a reasonable grasp of the whole shebang, you have to deal with all the companies that are providers of the various plans, each one saying they’re better than the others.




If you’re new to Medicare, your mailbox will be flooded with offers. This will happen automatically once you near the magical Medicare age of 65. If you have decided on original Medicare, just pitch all the Medicare Advantage offers. If you decide on Medicare Advantage, you’ll need to navigate all the competing possibilities—in my area, there are 35 major carriers offering Medicare Advantage plans—but at least you can toss all the Medigap plan offers.




Apologies to those who thought this article was a comprehensive guide through the Medicare maze, especially to our editor who prefers articles giving more detailed information. But I leave that to other HumbleDollar contributors, who have handled that task more admirably than I could.




Start slowly. Gather information. It’ll all fall into place eventually, preferably before Medicare madness sets in. As for me, I’m an information junkie, but writing about Medicare is giving me a headache. I think I need a donut.

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What Drives Us

HARRY MARKOWITZ, the Nobel Prize-winning economist who passed away recently, invented a new approach to investing. Known as modern portfolio theory, it offered investors, for the first time, a logical approach to building portfolios. How much should you hold in stocks vs. bonds? Markowitz could tell you precisely.

But Markowitz also knew math wasn’t the only driver of investment decisions. In a frequently cited interview, Markowitz recalled how he decided what to hold in his own retirement plan early in his career. “I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it,” he said. “So, I split my contributions 50-50 between bonds and equities.” In other words, Markowitz set aside the formulas and opted for a solution that simply felt right.

In later years, Markowitz said he did take a more rigorous approach. But he nonetheless found common ground quite often with behavioral economists—those who take a distinctly non-quantitative approach to investing. Markowitz happily collaborated, for example, with fellow economist Meir Statman on a 2010 paper.

In it, they worked to reconcile modern portfolio theory with popular behavioral theories. Their conclusion: Consumers try to be rational, but only after deciding on their personal goals—which are rarely driven strictly by the numbers. In other words, the desire to maximize returns or to minimize risk, which are the two pillars of modern portfolio theory, aren’t the only factors that motivate investors.

What does motivate investors? James O’Shaughnessy is the founder of a quantitative investment firm. In a recent write-up, he reflected on what he’s learned about investors through a long and successful career. One paper he found particularly valuable: “Why Do Individuals Exhibit Investment Biases?” To answer this question, the authors identified two factors.

One was genetics. Some of us are simply born with a greater or lesser tolerance for risk. That explains almost half of decision-making. The remainder, the authors concluded, is accounted for by each individual’s personal experience with investment markets. I’ve certainly found this to be true. We are all shaped by our experiences. In my work, I’ve observed a number of other factors as well, including:

1. Salespeople. If you’ve ever been on the receiving end of a pitch from a life insurance salesperson, you know how easy it is to be affected by salespeople’s ability to tap into our fears. Even when we know what they’re trying to do, they can be very convincing.

2. Self-image. It’s not just salespeople. I’ve referred in the past to what I call the brother-in-law effect. Much as we wish it weren’t the case, the opinions of friends and neighbors do affect spending decisions.

3. Status. Look at the data on private equity and hedge funds, and you’ll find that, on average, they haven’t been the best investments. So why do individual investors continue pouring money in? Meir Statman suggests one theory: Because these funds often have very high minimums, it’s a sort of status symbol to be invested in funds like this.

4. The leaderboard. Hedge fund managers regularly rank among the highest-paid and wealthiest Americans. At a certain point, you might wonder why they keep working. If someone has already accumulated $500 million, is there really a need to get to $600 million? From a financial standpoint, no. But if it means you’ll pull ahead of your neighbors in the wealth rankings, then the answer very well might be yes.

5. Debt. One of the most commonly asked questions of investment advisors is: If I can afford to pay off my mortgage early, should I? Especially for those with very low mortgage rates, it might seem irrational to pay down this debt more quickly than is required. But that ignores an important reality: Some people are simply more comfortable with debt than others. Many derive such satisfaction from being debt-free that they don’t care what the math says.

6. Values. Earlier in my career, I worked at a firm that, as a policy, didn’t invest in tobacco, firearms or gambling-related stocks. Not once did I hear a client ask how much better or worse they would have done if they’d had those companies in their portfolio. Indeed, even if these investors were earning less, I suspect they would’ve viewed that as a small price to pay for being able to feel good about their investments.

7. Religion. At that same firm, we also managed portfolios for a number of religious groups. Their portfolios were structured to exclude additional companies considered objectionable. Especially in their case, I doubt they ever worried how many basis points they were giving up to be able to align their investments with their principles.

8. Fun. If you think investing isn’t fun, tell that to someone who’s “hodling” bitcoin. Or ask why Robinhood used to rain confetti down the screen after an investor made a trade. In my view, investing shouldn’t be used as entertainment. It’s certainly not what modern portfolio theory would recommend. But just like those who invest according to their values, I doubt these investors worry how their returns compare to standard benchmarks. After all, where’s the fun in an S&P 500-index fund?

9. Fear. Meir Statman notes that consumers often make decisions that—strictly according to the math—are suboptimal. But behind them lies a powerful motivator: Especially for those who had to work their way up the ladder, an overriding goal is to avoid ever going back.

10. Rare disasters. Fear takes many forms. Economist James Choi notes that many investors live in fear of “rare disasters”—a repeat of the 1930s, for example, when the stock market sank 90%. The challenge, Choi says, is that it’s very difficult to combat these fears because there is, by definition, so little data on rare events. As a result, many live in fear that “the big one” is always right around the corner.

The lesson? I’ve noted before that there are two answers to every financial question: what the calculator says—and how you feel about it. If you ever find yourself feeling conflicted between these two answers, the most important thing is to understand why you wish to go in a particular direction. There are, as we’ve seen, a long list of reasons we might choose to make one choice or another. As long as you feel like a given choice makes sense to you, and as long as you can afford it, no one should tell you that your decision isn’t the right one.

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 Up and Down

THE STOCK MARKET offers limited downside and unlimited upside. That might not seem like a big deal. But this asymmetry has huge implications for how we manage our money—and, for prudent investors, it should be a great comfort. How so? Consider five key implications.

No. 1: The most a stock can lose is 100% of its value. Sound grim? There’s a silver lining. Assuming you own your stocks outright, your potential loss is limited to the sum you invested. By contrast, if you sell a stock short, sell put or call options, or buy stocks using margin debt, a bad bet could threaten the rest of your portfolio.

The fact that a stock could lose 100% of its value is the most-pressing reason to diversify broadly. How often do stocks become worthless? Historically, they’ve done so with surprising frequency.

Consider the 2018 study by Arizona State University’s Hendrik Bessembinder, who analyzed the roughly 26,000 U.S. stocks that traded over the nine decades through 2016. Of these, 4,138 stocks were still trading at the end of the period, 12,560 had been merged, exchanged for other shares or liquidated, and 9,187 had been delisted by the exchange. This last set of stocks—some 35% of the total—lost a median 92% of their value over their lifetime.

That brings me to a frequent and ill-founded complaint. Have you heard investors heap scorn on dividends and stock buybacks? They shouldn’t. If a company doesn’t eventually start returning cash to its investors through dividends and buybacks, it could disappear without creating any overall value for its shareholders during its corporate lifetime.

What if a company does pay a dividend? We should think long and hard before reinvesting those dividends back into the same stock. If almost all companies will eventually disappear—and at least some will end up worthless rather than, say, being acquired by another company—you want to take dividends from your individual stocks and reinvest them across a broad array of companies, rather than plowing that money back into the same stock.

I knew an investor who owned Washington Mutual. It was easily her largest individual stock holding and a hefty percentage of her portfolio. She merrily reinvested dividends, and also made additional cash investments, through the company’s dividend reinvestment plan. Remember what happened to WaMu? The bank collapsed in 2008—and the investor I knew lost everything.

No. 2: The most a stock can climb is far more than 100%. How much more? The potential gain is infinite, though that’s a tad too optimistic. Companies can grow faster than the overall economy for a few decades, driving their shares to impressive gains. Think of companies like Alphabet, Amazon.com and Apple. But eventually, that growth must inevitably slow, or the company and the economy would become one and the same.

No. 3: Most years, the stock market’s gain is driven by a minority of stocks. Welcome to what’s called skewness, in this case the result of stocks’ limited downside and unlimited upside. Every year, a small number of stocks post huge gains—sometimes 100%, 200% or more—and their results skew the market averages higher, so typically a majority of stocks end up with market-lagging results.

Many investors are captivated by these highflying stocks and assume their best bet is to hunt for the next big winners. But just the opposite is true. If you try to pick the next big winners, the odds suggest you’ll end up picking turkeys. Instead, the only sure way to own the next big winners is to own the entire stock market—by purchasing total market index funds. Any other strategy runs the risk of delivering market-lagging results.

No. 4: The global stock market is highly unlikely to lose 100%. During late 2008, with the Dow Jones Industrial Average plunging below 10,000 and the index regularly losing 500 points in a single day, I’d joke to colleagues that, “Another 19 days like this and it’ll all be over.”

Yes, it was gallows humor—but with a point: The Dow wasn’t going to zero. If it ever did, it would be game over. It would mean something truly dreadful had happened to the world, causing the economy to cease functioning. At that point, it wouldn’t matter what you owned. Bonds and cash investments would also lose all value because borrowers wouldn’t be able to make their interest payments and, no, nobody would be interested in buying your bitcoin or gold bars.

What if the economy doesn’t cease to function? Even if some companies and even entire national markets shed all value, a globally diversified portfolio of stocks would eventually recover and start notching new highs. In other words, investing is a coin flip where "heads" means diversified stock market investors win, and "tails" means all investors lose. That’s why, to me, stocks are the only logical choice for long-term investors.

It's also the reason I happily buy stocks whenever there’s a major market swoon. Yes, there’s a risk that a 20% decline might become a 40% or 50% drubbing. But it’s highly unlikely to become 100%. Stocks will ultimately recover, though it may take far longer than any of us would like.

No. 5: There’s no limit to the stock market’s potential gain. As I’ve written in earlier articles, I’m happy to over-rebalance when the stock market nosedives, shifting a higher percentage of my portfolio into stock funds than my written asset allocation calls for.

But the opposite isn’t true. When stocks soar, I sell shares to get back to my target percentage—but I would be loath to underweight stocks. Why? While the potential loss on stocks is 100%, the potential gain is far more than 100%, and underweighting stocks could mean I’d miss out on big gains.

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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Field of Dreams

WE BOUGHT A FARM earlier this year. We already have a greenhouse business, where we grow flowers, as well as several small tracts of land. The purchase was part of our farming plan, which involves expanding our crop business as opportunities arise.

But buying a farm is also part of our estate plan—and our fishing hopes. We now have two ponds with fish. True, they’re very small fish, as far as we can tell from three afternoons of fishing, but we have hopes.

Farm real estate is an interesting investment. From a cash flow basis, farms don’t have much to offer. If we’re lucky, our new farm will have an annual cash return, after all expenses, of around 2.5% on our initial investment. That’s worse than a certificate of deposit at the local bank, and our investment certainly doesn’t come with a government guarantee. That said, the government does have an interest in farming, and various subsidy programs tend to smooth the cyclical nature of farming.

According to the Department of Agriculture, farmland values in Missouri have appreciated at an average 6% a year since 1950. A survey by the Kansas City Federal Reserve found that farmland values in Western Missouri, where I live and farm, went up 17% in 2022. That’s unsustainable, and farmers as old as I am can remember the 1980s, when farmland prices dropped 25% over the course of nearly a decade.

Will our farm make up in capital appreciation what it lacks in annual cash return? Perhaps. On the other hand, we could be at a cyclical top in farm values. But it doesn’t really matter. We won’t be selling in our lifetimes and, if our commitment and values pass to the next generation, we won’t be selling in the future.

It’s a good thing we don’t plan on selling. Farms aren’t liquid. We couldn’t sell this place quickly if we had an urgent need for cash. In fact, completing the transaction to purchase the farm was a nightmare. It was supposed to close on Jan. 30, and we finally received possession on April 14, and only then because I had negotiated an April 15 financial penalty for the sellers, who were delinquent in supplying us with a clear title. Both the nature of farm real estate and our emotional commitment to this farm guarantees that it’s an investment for the long term.

We paid for the farm with cash, after a several year period of moving funds out of my tax-protected retirement funds. I parked the money in a Roth IRA while looking for a farm to purchase. This increased our tax bill over the past few years, but it’ll save my family taxes when my wife and I shuffle off this mortal coil.

Is that a good exchange? Maybe not based solely on a financial accounting. But farmland has an emotional value to my wife and me and, to be totally honest, we’re also attempting to encourage our heirs to continue our family’s long-term commitment to farming and farm real estate.

Upon our death, the farm will be run by our children. The land will receive a step-up in cost basis, should it increase in value during the time we own it. That will protect any gain in value over the remainder of our lives from capital gains tax. We also don’t have to worry about the estate tax under current law, and we hope our planning will protect us if there’s a lower federal estate-tax exemption in the future. The value of the farmland we own at death should never be taxed again, unless our heirs choose to sell. Even then, capital gains taxes would only be owed on any gain in value after our deaths.

On the other hand, most of the rest of the value of our estate will be in IRAs. Upon our passing, our heirs will have to pay taxes on the remaining value over a 10-year period at personal income-tax rates. That may force them to sell assets from our IRAs, even if the market is in the doldrums. I can’t forecast future tax rates, but I would wager that tax rates will be higher than they are now.

I have neither the skill nor the patience to model the expected future value of the taxes we’ve paid on my IRA withdrawals over the past few years. I also can’t predict the future trend of farmland values, but I’m comfortable with the way we’ve handled the transaction. The alternative—a debt-financed purchase while keeping my cash in an IRA—would probably have made more financial sense, but I’m reluctant to take on a mortgage that’ll last longer than I will.

It was a hot and dry June, and my soybean crop on the new farm has been suffering. It may be next year before I see any cash return. Still, the bass are growing, and the grandkids have already caught a few. What’s that worth? I don’t know, but they’ll remember those bass ponds long after they’ve forgotten any money Grandpa made from a smart investment in the stock market.

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. His previous articles were I'll Take It From Here and When to Quit.

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What Did We Pay?

WHAT’S THE COST BASIS of the stocks you own? It’s hardly surprising that this information occasionally gets lost, especially if we’re talking about shares acquired years or even decades ago. In fact, you may never have known the cost basis if you received the shares as a gift and, to make things even more confusing, the IRS has quirky rules for gifted shares.

Whatever the reason, many people are missing cost basis information—a significant problem because cost basis directly affects the taxes you may have to pay when selling investments held in a regular taxable account. That said, three sets of investors have less reason to worry.

First, if you inherited taxable-account assets, the original cost basis doesn’t matter. Instead, such assets generally receive a step-up in cost basis to their fair market value as of the original owner’s date of death. Second, you may be in the 0% tax bracket for capital gains. Even if you have to assume a zero cost basis, no taxes may be owed. Third, you might be planning to gift the shares to charity or leave them to your heirs, in which case the original cost basis becomes irrelevant.

What if the above situations don’t apply? To determine your cost basis, you’ll typically need:

the original date of purchase, number of shares and purchase price.
the dates and amounts of any subsequent investments, including dividends reinvested in additional shares.
any relevant corporate actions, such as mergers, acquisitions, spinoffs, stock splits, fund conversions and so on.

To track down the information, try to locate the original trade confirmations from the broker or custodian through which you purchased the shares. This information would also be in the brokerage statement for the month in which you purchased the shares. Even later statements might include helpful information, such as the date of purchase or the original price.

Failing that, the next step would be to check with the financial firm where the shares were purchased or are currently held. Financial firms weren’t required to keep cost basis information prior to 2011. Still, many firms maintain records from earlier. You could get lucky.

No luck? You may have to estimate the cost basis. If you make a good faith effort based on reasonable calculations and documentation, there’s a good chance you’ll be fine. What if the IRS challenges it? You may have to assume your basis is zero, in which case 100% of any sale would be considered capital gain.

Let's assume you’ve left no stone unturned and have to make an estimate. Presumably, you already have the current value and number of shares you own. If you have physical share certificates, you can track down the company that maintains records for those shares and see if it can help. The firm’s name should be listed on the share certificates, but you might have to do some sleuthing—try Google—if the company has changed names or been acquired.

A key piece of information you’ll need is the original purchase date. This will be earlier than the date on which the shares were gifted—assuming they were gifted. You may have to estimate this, but try to back it up with some documentation, if possible.

With the exact or estimated purchase date in hand, you could work backward from the current price to estimate the cost basis. You might be able to simply take the number of shares you own and multiply it by the stock price on the purchase date. This will require access to historical stock price data. Luckily, there are many free online sources, but there are also a few potential pitfalls:

Dividends, if relevant, should be factored into the calculation. Did you receive the dividends or were they reinvested?
Many stocks have split their shares. For example, 400 shares today might have been just 40 shares when the stock was bought. Most data sources factor this in, but it’s easy to miss.
In addition to stock splits, companies may also have been acquired, been spun off or merged over the time you owned the shares. Getting a handle on this can be complicated, but it’s still doable.

I generally use Portfolio Visualizer, an online tool that includes historical performance calculations, for simpler cases, or a spreadsheet for more complex situations. Even if you don’t know how many shares were originally bought, you may be able to calculate the cost basis if you know how the investment performed over the time you’ve owned the shares.

If you can find or estimate your cost basis, you or your financial advisor may be able to manually enter it into your brokerage account. I’ve done this with Charles Schwab, and I suspect other brokerage firms offer a similar service.

Once you get the data into the brokerage firm’s system and sell your holdings, it should make the required calculations and automatically include the information on your next 1099 tax report. Problem solved. Not an option? You may have to enter this data directly into IRS Form 8949 when filing taxes for the year in which the stock was sold.

Aaron Brask is an investment advisor based in West Palm Beach, Florida. His practice and research focus on low-cost, tax-efficient strategies for investing and retirement. Outside of work, Aaron enjoys sports, traveling, and spending time with his wife and two young children. His previous article was Not Just a Number.

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My Magic Wand

ONE REASON I WAITED so long to sell my house was my extreme reluctance to move all my belongings. I didn't want to deal with the hassles involved—because I’d gone through that less than a decade earlier.

In 2013, I had the house renovated. I replaced almost all the flooring, with hardwood downstairs, carpet upstairs and tile in the bathrooms. I also updated the kitchen cabinets. That meant, of course, that every single thing in the house had to be moved. I got rid of a few boxes of books. But otherwise, I still had the same amount of stuff in 2022 that I had in 2013.

Meanwhile, in 2019, I put down a deposit on a one-bedroom apartment at a local continuing care retirement community, or CCRC. In 2020, I was able to switch to a two-bedroom apartment in a new building, with completion scheduled for some time in 2023. I was finally going to have to move—and to downsize.

Fortunately, there wouldn’t be too much downsizing involved. I would move from a 1,520-square-foot, three-bedroom, two-and-a-half bath house to a 1,660-square-foot, two-bedroom, two-bath apartment with den at the CCRC. I could keep my main bedroom, study and living room unchanged.

The upshot: All I’d need to do is donate the furniture in my home’s spare bedroom, the dining table and chairs, and the dinette set in the kitchen. For the apartment, I’d buy a new dining set and put it in the den.

With an eye to simplifying the move to the CCRC, I decided to sell my house in 2022 and move temporarily to an apartment, while I waited for the CCRC apartment to be ready. There was a fairly new complex near my house, with elevators and a parking garage, where I could rent a two-bedroom, two-bath apartment, although it was only 1,150-square feet. I would buy counter stools for the kitchen island and do without dining-room furniture for a while.

But there was still plenty of stuff that would have to be packed and moved. I wanted a magic wand that I could point at the furniture, the books and all the other stuff, and have it disappear into a moving truck and then magically reappear at the apartment, unpacked and in the right places.

A pipe dream? Happily, no. I forget where I learned about the existence of “senior movers”—maybe it was a class at the local senior center—but they’re the closest I could find to a magic wand. To be sure, it’s an expensive magic wand, but pretty close to my fantasy. While I call them senior movers, they may also be called transition specialists or relocation specialists. They don’t move your furniture, but rather make all the necessary arrangements. There are both national and local companies, and some may belong to national organizations, such as NASMM, short for National Association of Senior & Specialty Move Managers. Besides working with people like me, some companies will also handle estates.

I got estimates from three local companies, two recommended by my future CCRC and one used by residents at a friend's CCRC. One charged by the work segment and two by the hour. Although it was a little more expensive, I chose the former. The company gave me an estimate for the first move to the apartment and the second to the CCRC, and I paid a deposit for both moves.

Ahead of the move, I became a regular donor of smaller items at a local charity shop. Meanwhile, the company handled arrangements for furniture donations and the “trash,” which the town would pick up from the curb for a reasonable fee. The company also took hazardous and electronic items to the dump for an additional charge.

We had a few disagreements over the placement of furniture in the temporary apartment. I didn't feel I needed a full 36-inch clearance at the foot of the bed, and I was sure all my bookcases would fit in the second bedroom, which they did, but otherwise the planning went smoothly. The company also made arrangements with the actual movers, who I then paid separately.

Ahead of the move, people from the company packed everything, except items I would need for the night. The day of the move, I went over to the apartment complex with them to get extra keys and arrange to open the double doors near the elevator. Then, as instructed, I left them to it.

When I returned, they had nearly finished. Things I could do without until the second move stayed packed, though I did have them unpack the books, which I figured would take up more room in boxes than on the shelves. I did wind up moving some things around, but I didn't have to.

My senior movers were certainly an uncharacteristic extravagance. But as I hadn't traveled since 2018, I figured I could afford them. After they left, and I sat down in my tidy new apartment with a cup of coffee, having barely lifted a finger all day, I decided they were worth every penny.

Kathy Wilhelm, who comments on HumbleDollar as mytimetotravel, is a former software engineer. She took early retirement so she could travel extensively. Some of Kathy's trips are chronicled on her blog. Born and educated in England, she has lived in North Carolina since 1975. Check out Kathy's previous articles.

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And Yet I Did Okay

IF YOU WANT ADVICE on investing, don’t ask me. My investment knowledge is, shall we say, limited.

I don’t pay much attention to expense ratios, individual stocks, international markets, the VIX, interest rates or much else. I know nothing about evaluating stocks or the overall market, though I have learned the hard way that rising interest rates aren’t friendly to utility stocks.

In other words, I’m more like your typical saver who’s playing at investing.

The way I look at it, the most important thing is to keep your net worth growing and you can do that by saving regularly, even if you never earn a penny on those savings. Let's say you saved 50 cents from your pocket change every day for 40 years. You’d accumulate $7,300, even if you just left the money in a piggy bank. Oh right, inflation.

I invest in municipal bond funds—simply because I like the idea of the tax-free income. So little is actually free these days. Would higher-yielding taxable bonds have been a better deal, given my tax bracket? I failed to determine that. Still, that tax-free income provides a nice inflation hedge.

I’ve saved and invested since I was age 18. I signed up to buy savings bonds through payroll deduction as soon as I started my first job. When I became eligible, I enrolled in my employer’s stock purchase plan, which allowed me to buy shares at a 5% discount. Along the way, I dabbled modestly in a few mutual funds. In 1982, when the company introduced a 401(k), I signed up and didn’t stop until I retired in 2010. In every case, I reinvested all earnings—and still do.

In the last few years of my career, I began receiving stock options and stock awards as part of my compensation. Eventually, I converted them into shares of my employer’s stock, a move I was advised against and which wasn’t common. “Take the cash and run” was the more typical approach. I also have a higher percentage of my investments than advisable in one stock. But today, the dividends from my old employer’s stock are almost equal to my Social Security benefit, once taxes and Medicare premiums are deducted from the latter.

When investing, it seems I don’t do much right. I might write the next version of Investing for Dummies and mean it. To be sure, today, I do use index funds and I don’t trade. That’s a good thing, right? The result of my hodgepodge of investment decisions over the decades can be seen in the accompanying chart.

I’m nearing my 80th birthday. My net worth is beyond what I could have imagined as a mail boy 62 years ago. But I occasionally think to myself, “If you’d made better decisions, sought some expert advice and taken a bit more risk, how much more would you have?”

Then again, does it really matter?

Seems to me financial success boils down to patience, simplicity, perseverance, time and compounding. Even we dummies can do that.

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