Jonathan Clements's Blog, page 140

Crotchety Aunt IRMAA

HOW MUCH DO WE PAY for Medicare? You might think that premiums would be fixed, like the prices on a restaurant menu. But instead, the correct answer is “it all depends”—on your income, which isn’t necessarily a good thing in our case.

It’s a fact of life: The more you make, the more you may have to pay for Medicare, the health insurance program for older Americans. Medicare calls its variable pricing system the income-related monthly adjustment amount, or IRMAA for short. The ins and outs of IRMAA remind me of dealing with a crotchety old aunt who’s hard of hearing and slow to respond. Still, my experience may help those approaching age 65 to avoid her or at least minimize her impact.

The income level that affects Medicare premiums is what you earned two years ago. Confusing but true. I knew ahead of time that our income in 2021 would potentially bump me into the Medicare premium stratosphere. That’s because, to simplify our lives in preparation for retirement, my husband and I sold two homes that year.

For a married couple filing jointly, our 2021 income could not be one penny above $194,000 or I’d be on the hook for higher Medicare premiums. Even though the two home sales were a one-time gain, they were still counted as regular income by Aunt IRMAA.

Fortunately, in the same year, my husband and I also both reduced our work hours. Unlike the home sales, a change in job status does allow you to ask for a reduction in IRMAA premium surcharges based on changed circumstances. But as I discovered, the appeal process isn’t always easy.

Our 2021 income was going to escalate my premiums by two levels with Aunt IRMAA—or so I was initially informed. My total Medicare Part B premium for 2023 was set to climb from the standard $164.90 a month to $329.70. Then there was another $31.50 a month extra for Part D drug coverage, although I take no medications. In all, my monthly Medicare premium would potentially be $361.20 a month.

My husband is not yet on Medicare. Still, we’re purposely keeping our income low so he can qualify for a low-cost Washington State health plan until he reaches age 65 and becomes eligible for Medicare—and so, in the future, both of us stay below Aunt IRMAA’s super-premium limits.

The tricky part is you don’t know what the income limits will be in the future because they change every year. It’s terribly confusing and yet important because, if you’re close to the edge of a premium increase and, say, make a Roth conversion, it could make a big difference to your premiums two years from now. All you know for sure is that this year’s income will affect your 2025 premiums—but you don’t know what the IRMAA income thresholds will be.

On the very day I got my notice of increased premium for 2023, I attempted to file an appeal explaining that our work situation had changed—and hence our ongoing income was far lower than it had been in 2021. I knew I was in the right, but it turns out appealing Aunt IRMAA’s ruling is neither easy nor fast. Here’s a timeline of how the process went.

Nov. 26, 2022. Received my Medicare premium notification in the mail on Saturday, informing me I had to pay $361.20 a month in 2023.

Nov. 28. On Monday, after three hours of trying to get through to a representative, I mailed my appeal form to my local Medicare office.

Dec. 5. No update on the Social Security or Medicare site, or even a record of receiving my appeal. I called a Medicare phone number and was given a different number to call at Social Security for appeals. After an hour on hold, I finally hung up.

Dec. 8. Called Social Security again and this time got through. The rep told me that my paperwork had been received but had no comment as to whether it was satisfactory. I was told I must pay the higher premium until I was notified in writing of a problem or acceptance of my appeal.

Jan. 10, 2023. I was given all kinds of confusing information on the phone with Social Security. No information had been updated, except that my appeal had been received. Finally, I was given a direct number to call at my local office.

Feb. 22. After multiple attempts, I got through to the local office. A harried employee stated they’re short-staffed and “it sucks.” She also found my appeal and said it seemed everything was in order, so someday someone would review it.

 March 15. Called the local office again and was told by a nice but unknowledgeable staff person that, if I met qualifying circumstances, my Medicare premium would be reduced from $361.20 to $164.90 a month. She had me verify my last year’s taxable income and said she would try to expedite things.

April 3. I talked to Robert at my local Social Security office who said, “Everything looks in order.” He said he would send it to the folks responsible for making a ruling, whom he identified as Jessica and her manager. He said, “It has been too long, call back next week to check on things.” By this time, I was asking for names when I called.

April 11. I called my local office back—repeatedly. Finally, someone named Irina answered, and she was the angel who helped me. She was the first person who knew what to do and took care of it in minutes. Irina said I would get a letter in the mail confirming that I qualified for the baseline Medicare premium of $164.90 a month. She also said I would get a refund of $785.20 for the four months I’d been paying excessive premiums to Aunt IRMAA.

April 17. I received a letter adjusting my payment to $164.90. No word on my refund. An interaction with the Medicare site’s chat function said I wouldn’t get a refund. Instead, my overpayments would be applied against my future premiums and I wouldn’t be billed again until I owed Medicare more than $10.

May 7. The Medicare site still shows I owe a premium for May of $361.20

May 22. The Medicare site finally shows I owe the standard premium of $164.90 a month. I was done. Meanwhile, my neighbor, who faxed her IRMMA appeal in January and did nothing else, received an actual refund.

Just for fun, I kept track of the time I spent trying to resolve this issue. It was at least eight-and-a-half hours. Here’s hoping you spend less time with crotchety old Aunt IRMAA.

Marla McCune is a registered nurse with a career spanning 45 years. She also loves journaling and outdoor activities, including swimming, photography and gardening. Marla's previous articles were What Do You Want and Finally in Charge.

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College in Retirement

I RECENTLY COMPLETED a course called England: From the Fall of Rome to the Norman Conquest. Before that was Books That Matter: The Federalist Papers. Okay, I’m a nerd, I’ll admit it.

Since I retired, I’ve looked for avenues to broaden and deepen my understanding of subjects that I was taught in high school and at the liberal arts college I attended. Back then, there were college courses, like accounting, that I felt I had to take to earn a living. Still, some of my favorite courses were American history, Shakespeare, philosophy and poetry. If I could go back, I might take more of these latter topics—and less accounting.

But wait, I can go back.

For years, retirees interested in learning needed to find a way to take a class at a local college or build their own curriculum with books they borrowed from the library or bought. Later, books on tape and CDs offered a way to bring courses to your dashboard or den.

Now, quality courses can be streamed. While some educational resources are available on a subscription basis, many courses are available free or at a low cost. And those accounting courses taught me that free is good.

My go-to source for serious college content is The Great Courses offered by The Teaching Company. I’ve worked my way through dozens of its courses. The company offers a wide variety of subjects. Some I have no interest in, but many others are on my wish list. The marketing material brags that the company seeks out professors known for their teaching ability. No disagreement here. I’ve yet to come across a dud.

The courses I’ve taken range in length from six to 36 lectures, each 30 minutes long. The longest I’ve seen in the catalog is a 48-lecture course on western civilization. My favorites often derive from the quality of the instructor as much as the course subject. These have included:

How to Read and Understand Shakespeare : 24 lectures by Prof. Marc Conner of Skidmore College. I wish I had access to this when I took my college Shakespeare class.
Myths, Lies and Half-Truths of Language Usage : 24 lectures by Prof. John McWhorter of Columbia University. This changed my view of how to think about “proper” English and the uniqueness of the English language. If you want a preview, listen to the Freakonomics podcast on “Leaving Black People in the Lurch,” which is where I first heard McWhorter.
Before 1776: Life in The American Colonies : 36 lectures by Prof. Robert J. Allison of Suffolk University. You learn the distinct history behind the founding of each colony and see how those experiences shaped the new country. Fun fact: You could consider South Carolina a colony of Barbados as much as a colony of England.
The Secrets of Great Mystery and Suspense Fiction : 36 lectures by Prof. David Schmid of the University of Buffalo. I’ve read lots of detective fiction, including all the Sherlock Holmes stories. This course gave me new authors to explore, as well as the background of favorite writers such as Raymond Chandler and Dashiell Hammett. Schmid also weighs in on the case for Edgar Allan Poe being the first to write a detective story.

Your taste will likely differ from mine. No worries. There’s content that’ll address any interest. I’ve never sought out “how to” courses, but you can learn photography, cooking, gardening and even investing. Art appreciation, music appreciation, philosophy, and many areas of science and math are represented.

Courses are offered on DVDs, CDs or streaming, each with a different price point. If you go to The Great Courses website, you’ll see some eye-popping list prices for its courses. I’ve never paid anything near those list prices. The site is constantly running sales, offering coupon codes or otherwise discounting its courses on a rotating basis.

In many cases, I’ve paid nothing at all by accessing courses through my local library. There are at least three ways this can be done:

Borrow the DVDs or CDs from the library.
Stream the content through either Hoopla or Kanopy, assuming your library offers these online resources.
Pick up courses at the library’s used book sale. Yes, this costs something, but it’s often not much.

Best of all, there are no tests with The Great Courses, and you can choose whether to do the homework. I took a course on The Illiad and read each set of chapters before the lecture that discussed them. No question it added to my appreciation, but no one was checking. Still, with most of the courses, I simply watch and enjoy.

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

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Better Things to Do

I NEVER PLANNED TO retire at age 53. I wasn't an early adopter of the FIRE, or financial independence-retire early, philosophy. In fact, I didn't start saving seriously until my late 30s, when I left my first husband and finally realized that—unlike pensions in my native U.K.—my U.S. pension didn't come with an annual cost-of-living adjustment.

Instead, three developments in the late 1990s led me to consider quitting. First, I was no longer enjoying my job. I had been a happy techie for most of my career, but in the early 1990s a major corporate reorganization had miscast me as a project manager for a couple of years. My division was then sold to a competitor and two-thirds of my colleagues in the division were laid off. Although I was back working as a techie, the job seemed less interesting and I didn't think I was as good at it as I had been. I started to think about reinventing myself as a technology writer.

Second, I was hearing too many stories of people who had retired at 65, only to drop dead or become sick. I was developing an interest in travel, and I wanted to start while I still had good health and good mobility.

Finally, my employer started on its long road of rolling back promised provisions for retirees. I was old enough to be grandfathered under the existing pension plan, but my pension wouldn’t increase after I reached 30 years of service—and that was only a couple of years away.

But could I afford to quit? My pension would only be 40% of my final year’s salary. While corporate apparently wanted me out, my local management didn’t, so I had no hope of a package. I had been fully funding my 401(k), and saving in my taxable account as well, but my nest egg hadn’t yet reached my personal “magic number.” Still, that number was in sight, and I wasn't planning to stop earning altogether, at least not then.

Looking at cash flow, the picture was brighter. I was living on less than my income and my expenses would drop considerably when I quit. I had refinanced my mortgage to 15 years, and had also been making extra-principal payments. I could easily pay off the remaining loan. If I stopped working, I’d stop saving for retirement, and instead leave it to the market to increase my nest egg’s size, and I’d also save a bundle in taxes.

I discovered that a local university offered a “certificate in professional writing.” I took the first required class while I was still working fulltime. I told my managers that I was planning to retire. They offered to switch me to permanent part-time, but I thought that would confuse the benefit situation. Instead, I retired on Oct. 1, 2000, the day I reached 30 years. On Oct. 2, I went back to work as a part-time contractor, while also taking the remaining writing courses, which proved more fun than useful.

Of course, with stocks mired in a two-and-a-half-year bear market, October 2000 wasn't the best time to retire from a sequence-of-returns perspective. It was fortunate that I didn't need to tap my nest egg. Instead, I followed a policy of benign neglect, neither buying nor selling. Over time, my portfolio recovered and kept growing, which meant I had no problem following the same policy in 2008 and 2020. Indeed, in 2008-09, I was too busy planning trips and traveling to worry about my market losses.

I finally quit my techie job in August 2001, when I left on my first long trip, China to Chennai. I’d had thoughts of selling travel articles. But when I returned in January 2002, nobody wanted articles about travel in Asia. Instead, I got a job as a part-time tech writer at a local start-up that was mostly staffed by former colleagues. It paid a good bit less, but was also a lot less stress. I kept it—between trips—until April 2004, when I started a 10-month trip around the world.

Back home in early 2005, I found three jobs I qualified for on Monster.com, but then realized I didn't actually want any of them. I was ready to quit work once and for all, and find out if I could live on my pension.

I began using Quicken in 1999, so I could run reports to see how I was doing and where my money was going, and I have records for the whole of my retirement. I started with a healthy balance in my Vanguard Group money market fund. I include interest from that account in my income, but not interest and dividends from my other taxable funds.

The money market fund paid for my house renovation in 2013, the cost of which is excluded from the income-and-expense analysis that follows, although maintenance costs—such as a new roof, new HVAC and so on—are included. My much-loved Mazda MX-6 was totaled in an accident in 2007. But since the insurance settlement covered almost all the cost of my current Camry Hybrid, my new car fund is still untouched.

The key question: Has my retirement income—my pension, Social Security and the income from my money market fund—proved sufficient to cover my expenses? The years from 2001 through 2021 break down into four phases. From 2001 through 2004, when I was both working part-time and traveling, my income was ahead of expenses. From 2005 through 2009, when I was traveling but not working, I basically broke even.

From 2010 through 2016, despite starting spousal Social Security benefits in 2013, my expenses were well ahead of income. About a third of the amount over and above my income was for work on my house, and the rest went to travel expenses. Finally, since 2017, when I started my own Social Security benefit, and was later grounded by rheumatoid arthritis and then the pandemic, my income has significantly exceeded my expenses and has more than made up for the shortfall in phase three.

The money market fund, which I used as a kind of overflow tank, reached a low point in 2013—the year of my big home renovation—but has since recovered, although it's down about 45% in inflation-adjusted dollars since I retired.

Last year, I sold my home and moved to an apartment, ahead of my planned move to a continuing care retirement community (CCRC). In the 23 years since I retired, I haven't touched my retirement or taxable accounts—except for the money market fund—but I expect to finally start the dreaded decumulation phase when I enter the CCRC.

Do I regret my early retirement? Absolutely not. It's true that I would have more money and a bigger Social Security payment if I’d continued to work. But when I was grounded by rheumatoid arthritis in 2017, I was profoundly thankful for those years of travel. Carpe diem, dear reader, carpe diem.

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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Spending Tip: Don’t

I'VE DECIDED TO SELL some of my investments and buy a Bentley. The one I admire would cost about $300,000, including taxes and fees.

Just kidding. Besides, I couldn’t face my four children after such an indecent splurge, knowing that they’re dealing with high-deductible health plans, saving for college and socking away money for retirement—just like millions of other Americans.

While that Bentley purchase would be possible in theory, it would substantially reduce my assets, plus the insurance, maintenance and gas would mean giving up more frivolous things—such as eating. Indeed, a major purchase is rarely just a purchase. There’s usually some other expense that goes with it: maintenance, repairs, interest payments, insurance, opportunity cost or—who knows?—all of the above. That’s why, before any significant purchase, we ought to consider the long-term consequences.

That’s no fun, of course.

How many times have you heard the phrases, “It’s only money” and “You only live once”? I laugh when I watch a game show and the host asks, “What will you do if you win the $10,000?” Last night, the answer was, “I always wanted to go to Australia and New Zealand, and I’m going to take my family for a month or two.” Are they planning to swim both ways?

I have yet to hear a contestant say, “I’m going to pay off my credit cards” or “I think I’ll contribute to my IRA.” There was little chance of him winning the $10,000, anyway. To the question, “What war did the Boston Tea Party precede,” he answered, “World War II.” Mensa candidate, he wasn’t.

It doesn’t take a genius to know that spur-of-the-moment, emotionally driven buying can be risky. And it doesn’t have to be Bentley-level spending, either. Vacations are easily rationalized and put on a credit card. Such splurges seem almost reasonable when they’re couched in terms such as “who doesn’t deserve a break” or “who wants to disappoint their family,” or framed as the desire for “quality time” with loved ones.

I’ll concede that I’m an emotional buyer at the supermarket, especially when I don’t want to cook. You can spend a lot of dollars wandering the supermarket aisles. I recently bought store-prepared chicken and roast potatoes that cost $24—just because I was lazy.

Not buying isn’t easy, and resistance is sometimes futile. My wife and I used to travel through Europe with another couple. We would be in Paris, Madrid and London, with all these amazing things to see. The other couple went shopping rather than visit museums, historic sites or the London Eye, the enormous ferris wheel alongside the River Thames. They’re in their 80s and still working.

Emotions can be powerful. While on a trip to Spain, we wandered into a Lladro store. There was a porcelain figure of Don Quixote. Not a big deal, except our first date was to see Man of La Mancha, our wedding song was The Impossible Dream and we were at that moment on a romantic vacation in Spain. What could we do except purchase it? Besides, it was only a few hundred Euros—not real money.

As British philosopher Bertrand Russell wryly noted, “It has been said that man is a rational animal. All my life I have been searching for evidence which could support this.”

Since we know not buying is rarely our first inclination, here are four strategies that might help:

Look and dream, but then walk away before you buy. If you’re serious, you’ll go back. Don’t fall into the “it may not be there later” trap.
Think about past purchases of nice-to-have things. Do you even know where they are? Keep in mind your kids won’t want them when you’re gone.
Have the cash before you buy, or know exactly where the cash will come from when the credit card bill arrives. While that doesn’t make a purchase a rational choice, at least it can help keep you out of financial trouble.
Use your phone to do a future value calculation of the money you’re proposing to spend. How much would you have if, instead, you invested the money for retirement? For extra credit, convert the sum into a stream of potential retirement income using the 4% rule.

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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A Pleasant Dilemma

THIS SIMPLE EQUATION is arguably the most important in personal finance: income – expenses = savings.

Think back to your early paychecks. Most of your after-tax salary likely went toward housing, food and maybe a few debt payments. For many of us, little was available to save each month for the first year or two of our working lives.

Then one day, on the last day of the month, there was money left over. From then on, we had a seemingly infinite choice of how to invest that leftover money: stocks vs. bonds, exchange-traded funds vs. mutual funds, pre-tax vs. after-tax, traditional vs. alternative assets, and self-managed vs. advisor-managed.

Mr. Miller, my high school economics teacher, called this the "pleasant dilemma of adulthood." It’s pleasant when you have more than enough money to live comfortably and you can start building wealth. It’s a dilemma because personal money management is a significant challenge, with many variables and pitfalls. How do we invest for the future without making mistakes?

The answer is, we can’t. We all inevitably make mistakes, Mr. Miller said, but reducing the number and severity of these errors was crucial to successfully building wealth. He told us to diversify, invest with a long-term outlook and remove emotion from investment decisions, so we reduce the risk of self-inflicted blunders.

To help us prepare, Mr. Miller asked students to select a portfolio of five stocks from the newspaper listings and track them for one month. I chose Gillette as one of my holdings, well before it was acquired by Procter & Gamble. My primary selection criteria was that I recognized the company’s name when I came across it in the business section.

A month later, my Gillette “investment” had increased by 8%. Despite Mr. Miller’s cautionary words, I decided my successful experiment meant I had a knack for picking stocks. I did not, which became clear over the decades that followed. Though I own individual stocks today, I can’t attribute my accumulated wealth to superior stock selection. Instead, my wealth results from 25 years of spending less than I earn.

Mr. Miller’s advice back in 1994 jibes with the standard financial advice we hear today. To reach the pleasant dilemma, we need to spend less than we earn. We should then use our savings to buy broad market index funds, hold them for the long term and don’t try to time the market. Time and persistence are far more powerful than any insights we might discover in some elaborately designed spreadsheet.

For me as a young man, Mr. Miller was a fortunate financial influence, alongside my Dad and Uncle Jim. His foreshadowing of the pleasant dilemma was motivation to live below my means and save money every month from an early age.

Do-it-yourself personal finance enthusiasts spend countless hours analyzing investing strategies, fund choices and market trends as we try to fine-tune our portfolios. We read articles, compare charts, and scratch around for ways to reduce fees and taxes even further. We do this, in part, because we enjoy it. But there’s a point at which the additional time spent on such activities provides diminishing benefits.

My contention: Our ability to create personal wealth is less about all this portfolio fine-tuning—and more about how good we are at earning and saving money. Annual stock market returns of 15% don’t equate to much if there’s only $50 to invest each month. The implication: Younger savers should devote more brain resources toward increasing their earned income.

Bored at the office early in my career, I’d open a spreadsheet and get lost in a 30-year portfolio projection model, or I’d find another $10 to cut from my monthly budget. That felt like I was being smart with money. But a better use of my time would have been to build my network of business contacts, angle for a promotion or cultivate a lucrative side business to supplement my salary.

Craig Stephens writes about personal finance and investing at Retire Before Dad and Access IPOs . Follow him on Facebook and on Twitter @RetireBeforeDad . Craig's previous articles were Gift of Knowledge and Not Dad's Retirement.

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A Happy Retirement

AS I MENTIONED IN an earlier article, I've been writing for HumbleDollar since 2017. Along the way, I set a personal goal of writing 100 articles, not counting the 36 shorter blog posts I’ve penned. This is my 99th article. I’m almost there.

It may not seem like a lofty goal to many people, but to me it’s been a challenge. After I wrote my first article, it took me a year to write another one. When I did, HumbleDollar’s editor said, “Welcome back.” I actually thought he wouldn’t remember me since it was such a long period between articles.

Sometimes, ideas come in bunches and sometimes they’re far between. What I find most difficult when writing about money is finding something to say that’s personal and has value to the reader, while not sounding too much like a broken record. One result: Many of my articles are about my life experiences.

The goal of writing 100 HumbleDollar articles is really about finding personal satisfaction. With each article’s publication, I have a sense of accomplishment. This feeling of being pleased and satisfied with myself after performing a meaningful task is sometimes hard to find in retirement. That’s one of the biggest things I miss about working. It’s probably why some people never fully retire.

Transitioning to retirement, however, has been relatively easy for me. I credit my relationship with my wife. Since we’re both retired, we spend a lot of time together. It’s important to have a solid relationship with your partner. We have one, especially when it comes to money.

I learned an important lesson many years ago about married couples and money: I had a coworker whose husband surprised her with a Mercedes-Benz for her birthday. She was so angry with him for spending so much money that it almost wrecked their marriage. She stopped talking to him and refused to drive the car. They were able to reconcile, but it took time.

Before I proposed to Rachel a few years ago, I thought about buying her a ring first. But I kept thinking about my coworker and that car, so I decided that it would be best if Rachel and I picked out the ring together. That way, she’d not only get something she liked, but also she would have some input on the cost of the ring. She wound up selecting a small, good-quality diamond at a reasonable price.

That’s the way our marriage has been when it comes to making many financial decisions, especially large expenditures. We treat each other not only as a spouse, but also as a business partner.

When we remodeled our house, we made sure each of us was involved in drawing up the contract. If there were any changes, we both were made aware of them before a decision was made. When Moe, our contractor, called me and thought it would be a good idea to add lighting underneath the kitchen cabinets, I consulted Rachel before giving him the go-ahead.

Surprisingly, we only had one major disagreement in remodeling our home. We have a two-and-a-half bathroom house. We decided to gut and remodel all of the bathrooms. We both agreed to have a walk-in shower in the master bathroom. In the other full-size bathroom, Rachel wanted another walk-in shower. I thought we should keep the same configuration, and simply replace the bathtub and the shower faucet.

My rationale: If we ever sell our house, having a bathtub in one of the bathrooms might make it easier to sell our three-bedroom house to a family with small children. There are also folks who like to wash their dogs in the bathtub. In addition, it might be wise to have that option available if we ever need a tub for ourselves. Rachel agreed.

I don’t always get my way. When we bought our Honda Civic, I wanted a few extras, like SiriusXM radio. She wanted a basic model with no options. Her reasoning: We’re going to eventually buy another vehicle that’s more luxurious for our longer trips. We should wait and get those options on our next car. We’re only going to use this car primarily for short errands around town. It made sense, so I agreed.

We also make each other aware of the details of our own individual investments, such as IRAs and 401(k). This way, we make sure our total allocation is in alignment with our risk tolerance and time horizon. More important, with both of us fully and openly engaged in our finances, it makes it easier for one of us to take over if the other becomes incapacitated or passes away. The key to our financial relationship can be summed up in two words: participation and compromise.

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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Time to Change?

IN 2014, AN INVESTOR asked Charlie Munger—Warren Buffett’s second-in-command—why he wasn’t investing in Apple. Munger responded that, “No matter what their financial statements showed,” he’d never have a high degree of confidence in the company. “It’s just too hard.”

Buffett agreed. But things changed. Today, Buffett’s Berkshire Hathaway is Apple’s third-largest shareholder, with holdings valued at more than $150 billion.

What should we conclude from Buffett’s about-face? In recent weeks, I’ve referenced studies on market timing and trading. What the data show is that it’s very difficult to forecast where companies, markets or the overall economy are headed. For that reason, investors are typically better served by not actively trading and instead opting for a buy-and-hold approach. This applies equally to individual and professional investors.

But what about Buffett’s experience with Apple? By changing his mind, Buffett made a fortune. Clearly, investors need to strike a balance. Yes, consistency is important. But no one should worship so stubbornly at the altar of consistency that they never do anything differently. Here are four areas where I suggest taking a flexible approach with your personal finances:

Asset location. Personal finance textbooks will tell you that it makes sense to hold bonds, which can be tax-inefficient, in retirement accounts. That’s to shield their income from tax until you withdraw from those accounts later. But this shouldn’t be regarded as an ironclad rule. Let’s look at how this answer might change over time.

During your working years, bonds serve an important role: Whether it’s saving for a big purchase or guarding against a rainy day, it can be valuable to own bonds for their stability. But because withdrawals from retirement accounts carry a tax penalty before age 59½, it can be counterproductive to house bonds in those accounts. That’s why I think it makes sense to override the textbook and hold at least some bonds in a taxable account during your working years.

Once you reach retirement, however, it often makes sense to flip that script. After 59½, you can access your tax-deferred accounts penalty-free, so it becomes less of a problem to hold bonds in those accounts. The bottom line: How you structure your portfolio will change over time.

Municipal bonds. If you’re concerned about bonds’ tax inefficiency, an alternative is municipal bonds, which are generally free of federal and sometimes state income tax. That’s a reasonable solution for taxable-account investors, but it’s important to be adaptable. Because everyone’s tax situation is different—and because everyone’s tax situation will change over time—you shouldn’t view this as a firm rule.

Suppose you’re in your working years and in the 37% federal tax bracket. To determine whether municipals make sense, you’d want to look at the following comparison: First, find the yield-to-maturity on a standard Treasury bond. Today, one-year Treasurys yield about 5.3%. Now, compare that to the yield on a municipal with the same one-year maturity.

Highly rated munis today are paying about 3.5%. But that 3.5% is free of federal tax, so we need to make an adjustment to compare it to the Treasury. Divide the municipal’s 3.5% by 0.63 (which is 1 minus 0.37, representing your tax rate of 37%). That gives us 5.6%. Now, we can make an apples-to-apples comparison. By a small margin, you’d come out ahead choosing the municipal at 5.6% over the Treasury at 5.3%.

But what if you’re in retirement, and your tax rate is nowhere near 37%? Let’s compare these same two bonds using a lower tax rate—say, 22%. When we divide the muni yield of 3.5% by 0.78 (1 minus 0.22, representing your 22% tax rate), the result is very different: 4.5%. In this case, you’d come out ahead, even after taxes, with a Treasury bond paying 5.3%.

The bottom line: Which bonds you choose, and which accounts you hold them in, will depend both on market rates and on your own tax situation. There’s no single right answer for everyone. And since most people’s tax situation changes over time, it’s important to revisit this question regularly.

Retirement account contributions. Today, many employers offer workers a choice in how they make retirement contributions. Traditional 401(k)s offer a tax deduction, while Roth accounts offer no deduction but do grow tax-free. Which should you choose? Like the bond question above, the answer will depend.

Here’s how to do the math: First, determine what your tax rate will be this year. Then compare that to what you think your rate might be in retirement. To be sure, it can be difficult to estimate that future rate, especially if it’s many years off. But at certain points in life, the answer is clear.

Suppose you’re just getting started in your career. You’re single and have a $50,000 gross income. Most likely, you’d be in the 12% tax bracket. How would that compare to your tax rate in retirement? My guess is your rate would be higher later, so I’d opt for the Roth contribution. Yes, you’d be forgoing a tax deduction, but only at 12%, and that might allow you to avoid paying a higher rate later.

Now, suppose you’re further along in your career, married and have a combined income of $400,000. In that case, you’d likely be in the 32% tax bracket—a fairly high rate. Again, it’s difficult to know for sure, but it’s quite possible you’d be in a lower bracket once retired. In that case, you’d benefit from a tax deduction this year. You’d thus choose to make tax-deductible retirement account contributions in years like this.

The bottom line: Especially when it comes to anything tax-related, it’s important to periodically reevaluate decisions. What makes sense at age 25 may not make sense at 45, and what makes sense at 45 may not make sense at 65.

New investment options. When building an investment portfolio, simplicity is a great virtue. That’s why I try to steer clear of Wall Street’s “innovations.” But just like Buffett, it’s important to keep an open mind.

Sometimes, something new comes along that’s worth our attention—direct indexing, for instance, which could be valuable in some situations. And sometimes investments that were previously tried-and-true change in ways that make them less attractive—many emerging markets funds, for example.

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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A Dangerous Moment

MY PORTFOLIO HAS bounced back nicely from October 2022's stock market low—and that’s a problem: I’ve learned over the decades that I’m not good at handling prosperity.

At issue is the question of when to rebalance my portfolio, in this case selling stocks and buying bonds to bring them back into line with my target percentages. Among experts, there’s no agreed-upon strategy, which is almost an invitation to bad behavior. We investors do better with hard-and-fast rules.

Some folks rebalance according to the calendar, such as every quarter or every year. Others rebalance when their portfolio strays by some specified amount from their target percentages, such as when their stocks go from a desired 60% of their total investment mix to either 50% or 70%.

And then there are those who—to use a technical phrase—are a little loosey-goosey about the whole thing. That’s the camp I’m in, for two reasons. First, history tells us that, at both bear market bottoms and bull market peaks, stocks can become unmoored from their fundamental value, though often this is only apparent in retrospect. Second, both on the way down and during the initial market recovery, stock prices often display momentum, thanks to a bandwagon effect as latecomers pile on the selling or buying pressure.

What does this have to do with rebalancing? When share prices fall steeply, I tend to “over-rebalance” into stocks, a strategy I described last October. This isn’t about forecasting what the stock market will do, but rather reacting to what it’s done—dropped to the point where there’s a possibility that stocks are below their fundamental value. I used over-rebalancing to good effect in 2008-09, 2020 and last year. I love buying when share prices are down sharply.

Meanwhile, when stocks start to rebound, my head tells me to hold off rebalancing back into bonds for a year or two, and instead ride the stock market’s upward price momentum. But, alas, I find this hard to do. Indeed, when I look at my own investing behavior, I see two related faults—traits I’ve tried to overcome, but with only partial success.

First, when the stock market starts to bounce back, I struggle to keep buying, even though the prices on offer may be below those at which I was merrily shoveling money into the market during the preceding decline. What’s going on here? Early in a market recovery, some folks no doubt think stocks will fall back and they’ll get another chance to buy at lower prices. But for me, a different instinct is at work—a reluctance to buy when I know better prices were available just a few days or weeks earlier.

Second, I tend to sell too early in market rallies. In other words, it isn’t just that I grow increasingly reluctant to buy as share prices bounce back. That reluctance to buy often turns to selling. For instance, during the recovery from the 2007-09 stock market collapse, I started lightening up on stocks far too soon. Admittedly, I’d gone out on a limb in late 2008 and early 2009, over-rebalancing so stocks had ballooned to some 95% of my portfolio. Still, if I’d sat tight for longer before cutting back my stock exposure, my portfolio’s performance would clearly have been better.

My hunch: I’m partly influenced by the old “get even, then get out” phenomenon. By 2010, having recouped much of my losses, I didn’t want to risk another big hit, so I pared back my stocks. To be sure, my selling wasn’t too extreme. Through the bull market of the 2010s, I kept 70% to 80% of my money in stocks—but it’s also clear I lightened up on stocks too early.

When will I start selling this time around? Partly, it’ll depend on the stock market. I assume the fitful market recovery, up almost 22% since mid-October as measured by the S&P 500, will continue as inflation eases and the Federal Reserve brings its rate-hiking campaign to an end. But I could be wrong, in which case I’ll sit tight with my overweight position in stocks for longer.

Before 2022’s bear market, I had more than 20% of my total portfolio in short-term bonds in preparation for my eventual retirement. That 20% would have given me roughly five years of potential spending money, assuming a 4% withdrawal rate. Today, I’m at around three years of potential spending money, thanks to my 2022 stock-market buying. I’d like to get back to five years’ worth.

If the stock market continues to recover, maybe I’ll do at least a little selling later in 2023, once we’re a year into the rebound. But I haven’t got a firm timetable laid out. Like I said before, it’s all a little loosey-goosey—and I worry I’ll once again find myself selling a tad too soon.

What's the best strategy for rebalancing a portfolio? Offer your thoughts in HumbleDollar’s Voices section.

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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For Safety’s Sake

ON JUNE 15, THE NEWS was broken by The Oregonian of a massive hack at Oregon’s Department of Motor Vehicles, apparently leading to the theft of sensitive details about most of Oregon’s 3.5 million holders of a driver’s license or ID card. Incidents like this, along with the huge 2017 Equifax hack, give criminals cheap and easy access to key personal information that many organizations routinely use to verify our identities and screen our credit applications.

That kind of data make it a breeze for crooks to appropriate your identity for the purpose of opening credit accounts in your name. It also makes it simple for criminals to open a bank or investment account in your name, one which they control and which could potentially be linked to your existing, legitimate accounts. Once linked, they quickly transfer out funds you might never see again.

I’ll wager more than a few HumbleDollar readers and authors, as well as folks they know, have been victims of crimes involving identity theft. Cybercrime today seems unstoppable, but the worst thing you can do is ignore the risk and hope you won’t be affected. Hope is not a plan.

My daughter, an Oregon resident, just asked me what she could do to protect her identity, money and sensitive accounts from security breaches. My response: Three simple steps can help you avoid the worst consequences of identity theft and an assortment of cybercrimes.

1. Freeze your credit reports at Equifax, Experian and TransUnion until you next need credit. It’s been nearly a decade since I froze ours at the big three credit reporting companies, after a security incident at a nonprofit where we volunteered regularly. Today, it’s simpler to both freeze and temporarily unfreeze credit files when you need access to credit. While your files are frozen, it’s much harder for someone to use your stolen identity to open a fraudulent account in your name.

2. Enable two-factor authentication (2FA) on all sensitive online accounts. This technology makes it extremely difficult for thieves to log into your account, even when they’ve guessed your password or acquired it through phishing or a big hack. There are several 2FA technologies in wide use today. Some types are more secure, but enabling any 2FA on your key accounts is far better than no 2FA at all.

The most important accounts to protect with 2FA are your Apple, Google or Microsoft ID accounts, email accounts which receive password reset links, cellular service provider accounts, and banking or investment accounts.

3. Check your bank and brokerage balances monthly, and your credit reports annually. When you suffer an identity theft crime, your chances of recovering any lost money, or reversing unauthorized credit account charges, rise a lot if you catch and report it early, as one couple learned.

Yes, if you want to improve your investment behavior, it’s best to automate your financial life, so you can ignore what Mr. Market is doing each day to your investments, as Rick Connor noted recently. Still, for security purposes, it’s wise to glance monthly at your accounts to see if there’s been a sudden, unexpected drop in your balance or some other suspicious activity. To check for fraudulent new accounts, it's also good to review your free credit reports each year.

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The Proof You Need

I HAVE WRITTEN THIS article about bourbon because, when HumbleDollar’s editor previously asked me to write about my travels, I thought, “Hey, if someone wants to pay me $60 to write about travel, I’m in. I’m hoping he’ll next suggest I write an article about drinking bourbon.”

Sadly, this site’s editor didn’t ask me to write about bourbon. But I went ahead anyway.

I “spiritually” came of age when I was 19 years old. It’s not that I was so much more mature than those who came after me. Rather, in New York in 1984, it was legal for a 19-year-old to drink alcohol.

I remember my salad days quite well, drinking in the hospitable confines of bars with such timeless names as Yesterday’s, The Cobbler and [insert Irish name]’s Pub. Then, a few months after my 19th birthday, for some unknown reason, the powers that be raised the drinking age to 21, and my friends and I were back to drinking in the less-than-hospitable confines of a 1966 Buick Special in the supermarket parking lot.

Back then, we all pretty much drank the drink that has been drunk since the first teenager started drinking—cold, cheap beer—though the adjectives weren’t necessarily in that order. This was all before the whole microbrew trend started, though I do remember one of my friends, who thought he was special, ordering some imported crap called Boddingtons.

After more than a few Buds, Miller Lites and Rolling Rocks, our taste buds inevitably matured and we graduated to drinking Screwdrivers, Alabama Slammers and shots of anything that could be poured into a shot glass, which included for some strange reason Drambuie. For those of you who are unfamiliar with the “cocktail” Alabama Slammer or the liqueur Drambuie, consider yourself lucky.

When I subsequently joined the Navy, my palate was most definitely not expanded, unless you count cheap foreign beer and shots of ouzo. And when I started working for Exxon Mobil, I quickly realized that wine was to be drunk when eating ridiculously expensive steak or seafood, but otherwise I stuck to what I knew—and what I knew was beer, though now bought in bottles and poured into a glass.

That all changed when I read Dale DeGroff’s The Essential Cocktail. It was different from any other cocktail book I’d ever read. Instead of being an endless compendium of drink after drink, it was a thesis on how 30 or so cocktails were made, including their history and possible variations.

Perhaps due to its manliness, I was immediately drawn to whiskey cocktails, and quickly became enamored with the Old Fashioned and the Manhattan. Or it could be that, by this time, I’d had my fill of rum (how many rum and cokes can a man drink?) and vodka (see Screwdriver, above).

I quickly realized that I wasn’t alone in my newfound love of whiskey. When I’d squeeze my way to the bar about 15 years ago, that—and microbrews—were all everyone wanted to order. I realized there might have been a slight herd mentality with me and my bourbon-heads, but at least I wasn’t drinking the ersatz gasoline cocktail that’s called a Martini. I need to note that the establishments where I was now doing my drinking were much classier, as confirmed by their names—PX, The Milk Room, the bar at the Ritz—and by their prices.

The one issue I’ve found with drinking whiskey is that the number of choices has now become staggering. In fact, drinking whiskey has become like drinking wine: The prices range from dirt cheap to WTF and, after you find a good bottle at a reasonable price, finding it again can be problematic.

Therefore, in an effort to simplify the decision making-process and reduce expenses, I now categorize all whiskey as follows:

1. The Undrinkable. This group includes the bottom shelf at the liquor store, Canadian whisky and, of course, all Scotch—no matter the price.

2. The Good Stuff. It’s like porn, you know it when you see it, generally due to the price, the cork or the shape of the bottle. Now, don’t buy this stuff yourself. But if you’re on the company’s dime or at your brother-in-law’s house, then of course partake. Not to excess, though: You don’t want your boss or brother-in-law to get too wise.

If you get it as a gift (you lucky dog) do not mix it. Mixing “The Good Stuff” into a cocktail is like ordering a medium rare 22-ounce bone-in ribeye at The Capital Grille and then slathering it with ketchup. Drink it neat, with a little branch water or on the rocks.

3. The Middle Shelf. By extensively sampling this group, you’re looking for the sweet spot between taste and price. A few thoughts: Stay away from Jim Beam, except for the rye. You cannot go wrong with Buffalo Trace. It’s the best middle-shelf bourbon I’ve ever tasted. Unfortunately, the word is out and it has become the unicorn of bourbons.

Stay above 80 proof if you’re going to mix it, otherwise it’ll all just get diluted away. And if you do mix it, mix it with fresh juices, bottled mixers and top-shelf accompaniments like Carpano Antica Formula Vermouth. Remember, your cocktail liquor stipend is better allocated to the accoutrements than to the whiskey.

Currently, I’m partial to Mellow Corn, Old Forester, Rittenhouse Rye and all Irish whiskey. But as I type this, the options are increasing exponentially. By the way, after purchasing, I then sometimes decant it into my father-in-law’s crystal decanter. It makes it taste that much better.

Much like sex and pizza, there’s no need to overpay to fulfill your primal needs. Damn good whiskey can be purchased at a reasonable price. Just follow my above guidelines, be responsible and remember, “Pay medium, drink premium.”

Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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