Jonathan Clements's Blog, page 154

The Waiting Game

I'M IN EXCELLENT health. I avoid overindulging on sugar and carbohydrates. I exercise every day. I hope to live well into my 90s, if not longer.

What if I don’t live nearly that long? From a financial perspective, it makes little difference if I pass away before I tap my retirement funds. The value of most of my accounts wouldn’t be affected by my premature demise. My husband would simply inherit my 403(b) and Roth IRA accounts.

My state pension, however, is a different beast. I became vested in the pension when I was in my 20s. It’s a lucrative benefit. The funds are guaranteed to earn a minimum 7% interest each year. Some retired employees end up receiving as much as 130% of their final salaries from their pension payouts.

My pension consists of two separate accounts. The employee account makes up about 40% of the overall value, while the employer account holds the balance of the funds.

My plan is to hold off taking any payout from my pension until I’m 70 years old, which is 14 years’ away. At that point, I’d be eligible to receive approximately $1,400 a month for the rest of my life. In lieu of a monthly payout, I could opt to take a lump sum benefit worth approximately $165,000. Those payouts are based on a complicated formula that includes the value of both the employee and employer accounts.

Here's where things get tricky. What if I were to die before drawing any pension benefit? My husband would receive a survivor benefit. But as beneficiary, he’d be entitled to receive only those funds held in my employee account.

So how could I make the best of a situation that isn’t fun to contemplate? If I’m diagnosed with a terminal illness in the next 14 years, I’ll likely take a lump sum payment from my annuity. Doing so would guarantee that the full value of my pension would be passed along to my husband, instead of just the 40% employee portion.

The post The Waiting Game appeared first on HumbleDollar.

Grandpa’s Scholarship

WHAT SHOULD I DO with the required minimum distributions from my rollover IRAs?

I’m age 65, which means that—under last year’s tax law—I must begin taking taxable distributions in 2030, the year I turn 73. I’ve been looking at my retirement cash flow, and it appears that my wife and I won’t need the money for our living expenses.

I’m investigating using the money to help fund my grandkids’ college education. I built a spreadsheet that maps my age against the age of each grandchild and determined the years they’re expected to attend college. Using an online calculator, I estimated my required withdrawals and dropped those amounts in.

Currently, the six grandkids range in age from two-year-old twins to 11. My thought is to pay substantially all the cost of their junior and senior years. The kids are evenly spaced. Other than the twins, no two will have upper-class standing in the same year.

I have 529 college-savings accounts for each child. Based on my current contribution levels, those accounts could be exhausted in their freshman years.

Fidelity Investments’ college planning tool suggests that the average public university might cost $28,000 a year by 2031, which is when our oldest grandchild would be a freshman. The average private school might cost $64,000 by then. These costs inflate to $35,000 and $80,000, respectively, by 2038, when the twins are projected to begin college.

Of course, these costs are only averages and could vary sharply depending on the specific school the grandchildren attend. On top of that, Fidelity is inflating current college costs by just 2.5% a year, which may be too conservative.

For comparison, I’ve looked at the current cost of attending the private colleges my two children attended, as well as public universities in the states where the grandchildren live. After inflating these costs and comparing them to Fidelity’s results, I decided to increase my 2031 college cost estimates to $42,000 a year for a public school and $81,000 for a private school.

I plan to use my 2030 required minimum distributions to open an investment account to pay future college costs. By investing in money market funds, certificates of deposit or Treasury bills, I could earn some interest before making college payments.

Based on my projections, I estimate that I could provide up to $80,000 toward college in 2031. This will fund roughly a year of private college tuition, room and board. I inflated this amount by 2.5% a year to estimate the future college costs for the younger grandchildren.

Eleven years of after-tax required minimum withdrawals will generate enough to cover two years of college for each grandchild. After that, my withdrawals can be used to support my needs in late retirement.

If the grandchildren attend public schools, any extra money in their last two years of college could be used to repay student loans generated in their first two years. Some of the grandchildren might also earn scholarships that reduce their need for my money. If so, I have no problem giving them the planned money to jumpstart graduate school or their post-graduate life.

There’s always a chance that some of the grandchildren won’t attend college or won’t make it to their junior year. My wife and I are flexible. Funding trade school, an apprenticeship or starting a business are all acceptable uses. Our goal is to help launch each grandchild into the adult world with minimal student loans or other debt.

We’ll also have to consider disqualifying circumstances. We don’t like thinking about it, but our grandchildren might make choices that would make it unwise to turn over the money as planned. I could see holding it for them to see if they turn things around.

We’ve not shared these thoughts with our children. I’m honestly not sure providing $160,000 per grandchild is a good idea. I would welcome thoughts from HumbleDollar readers. But it is a comfort to know the money is available to help them.

No plan is perfect, of course. Here are three uncertainties that might affect my strategy:

My projections are based on earning 5% a year on my rollover IRAs. Actual returns could affect the amounts available.
Changes in the tax law could change my required withdrawal amounts.
Our living expenses could increase to the point that implementing this plan would compromise our standard of living.

These risks don’t mean we must abandon the plan entirely, but they could change the amount we can pay toward college.

Once we commit to the first grandchild, we’ll have to be prepared to fund the other five. With the spreadsheet built, I can monitor growth in my IRA balances, changes in college costs and changes in the tax law. All this will allow us to zero in on a specific plan when the oldest hits high school. Then we can share it with the whole family. Watch this space for an update around 2027.

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.

The post Grandpa’s Scholarship appeared first on HumbleDollar.

Better Than Buffett?

IN AN EFFORT TO identify the simplest, most resilient lifetime investment portfolio, author and investment analyst Chris Pedersen concluded that a minimum of two funds is required. His recent book, 2 Funds for Life, summarizes his back-testing study to find a simple yet effective portfolio. The book is available free at PaulMerriman.com.

Pedersen found that a 90% allocation to a Vanguard Group target-date fund coupled with a 10% allocation to a small-cap value fund provides meaningful diversification across stocks and bonds, allows investments to be easily managed, and has a high probability of enduring over 30 years of retirement withdrawals.

Vanguard’s target-date funds are broadly diversified among U.S. and international stocks and bonds. As you’ll see from the funds’ so-called glide path, bond allocations automatically increase after age 40, while stock allocations decline.

Age 40 seems early to me. My wife and I were essentially all-in on U.S. stocks during our working years. Still, as Pedersen points out, if we’d wanted to own a target-date fund, we could have achieved a higher stock ratio by investing in a fund with a retirement year later than our actual one—the 2040 fund, for example, rather than 2020.

Don’t like the idea of 90% in a target-date fund and 10% in small-cap value? Petersen also tested a portfolio of 90% S&P 500 and 10% short-term government bonds. He labeled this the “Buffett strategy” since Warren Buffett has recommended this mix for his wife after he dies.

Pedersen calculates that the more stock-heavy Buffett strategy might wind up with a higher ending value than his two-fund strategy. The two-fund portfolio is more widely diversified, however, and hence less volatile, which risk-averse investors may find comforting.

In his book, Pedersen also recommends that retirees reduce portfolio withdrawals during market downturns. This allows for somewhat higher withdrawals during most years. Pedersen estimates that his method would have a 100% chance of success in carrying a retiree through a 30-year retirement, versus 98% for the Buffett strategy.

To me, the more interesting piece of Pedersen’s portfolio puzzle is the recommendation to supplement target-date funds with small-cap value funds. He works with the Merriman Financial Education Foundation, whose research indicates that small-cap value has handily out-legged the returns of the S&P 500. According to the foundation’s studies, the S&P 500 had a compound average annual return of 9.7% from 1928 through 2016, while small-cap value stocks grew at 13.5% over the same period. Merriman’s studies also suggest that the small-cap value sector tends to perform well when other market sectors are underperforming.

Which investing path should I follow—Buffett’s or Pedersen’s? Well, I have historically been more of a Buffett strategy investor, in part because the S&P 500 was one of only seven 401(k) investment choices during my 40-year career.

But while an S&P 500 focus has served me well, Pedersen’s book and the Merriman research are making me consider supplementing almost any portfolio with a small-cap value allocation. This may sound like heresy, but perhaps I can take Buffett’s investment strategy and improve upon it by adding a sliver of small-cap value shares.

The post Better Than Buffett? appeared first on HumbleDollar.

Covering the Basics

I TURNED AGE 62 LAST summer and, as with most birthdays at this stage of life, I had a pretty good, but non-spectacular day. On my birthdays, I tend to focus on enjoying the day itself as it stands before me and, for that one day, I don’t worry too much about the future, or all the adult stuff I have to do, or problems I might have to solve tomorrow, or the problems I think up in my head that would probably go away if I just stopped thinking about them.

Not fussing about such things generally leads to having a good day. Come to think of it, I should probably have birthdays more often.

In the U.S., however, age 62 marks a unique point in personal finance. For most folks, it’s the earliest age for taking Social Security. From this point on, you’re actively choosing whether to take benefits early or opting to wait.

As most people old enough to claim Social Security know, the longer you wait to claim, up to age 70, the larger the monthly checks you get once you do claim. But of course, while you wait, you get no checks. You have to make a decision whether the more numerous small checks you’d get from claiming early would be better than the fewer but larger checks you’d get by claiming later.

The most common method to figure out the optimal claiming age involves comparing the streams of income from claiming early with those from claiming late. At some “crossover” point, the larger checks from claiming late surpass the value of benefits from claiming early. The exact crossover point varies depending on the assumptions in the analysis, but typically it occurs when claimants are in their late 70s or early 80s.

Getting grumpy. Problem is, nobody knows what future market returns will be, or the exact discount rate that accurately tells you the present value of future money, or future tax rates, all of which are important variables in figuring out a crossover or breakeven point. These future uncertainties have to be estimated. Once you’ve made your estimates, some fairly simple math tells you whether, if you die at any given age, you’d get more Social Security money by claiming early or claiming later. Then, if you have perfect foreknowledge of the exact date of your death, you can make a logical claiming decision.

In the most thoughtful analyses, these estimations have well-considered assumptions behind them, but there’s still uncertainty. Still, at some point, these uncertain projections turn into hard numbers. For most of us, numbers look exact and real, orderly and comforting. They become a mental optical illusion that allows us to forget that uncertainty doesn’t disappear when it’s turned into numbers.

The problem here is not the thoughtful analyses or the people who construct them. The analyses provide useful frameworks for thinking about one of the hardest things humans have to do: make rational decisions about the best course of action when faced with an uncertain future.

Nevertheless, I find making this kind of decision annoying—because I’d like to make the best decision possible, but knowing I’m making the best decision is impossible because the perfect decision rests on a series of future variables that are impossible to quantify with precision. The fact that many decisions in life are like this isn’t helpful. It’s as if the world wants me to be grumpy.

What’s a grumpy person to do? I reframe the decision by considering two basic questions. First, what is Social Security? Second, what can I reasonably hope it’ll do for me?

First, Social Security is an insurance program that, among other things, supplies retirement benefits in the form of a lifetime stream of income. The key word here is insurance, because insurance is a different animal from investing. When you invest money, you accept risk in the hope that the future return on your money will reward that risk. When you buy insurance, you pay money to avoid risk of financial hardship that a future event might bring you. Social Security is insurance that mitigates the risk of being entirely without income, because you depleted your savings, by delivering a stream of inflation-indexed income that you can’t outlive.

To me, one of the drawbacks of crossover analyses is they treat the income stream from Social Security not as insurance, but as an investment opportunity—a chance to use that income stream to maximize investment returns. That’s a perfectly rational way to look at most streams of income, but it ignores the value of risk mitigation that’s the central benefit of insurance. It frames the insurance offered by Social Security not as a way of decreasing risk, but as a means of accepting more investment risk.

Going for the good deal. The second question—what can I hope Social Security will do for me—is more personal. As an insurance program, Social Security was not designed to cover 100% of your retirement expenses, and for most people, including me, it won’t.

I decided to think of Social Security as a stream of income that would help cover my basic living expenses. In effect, the asset of relatively reliable Social Security payments could be matched against the ongoing liabilities stemming from my basic expenses—stuff I can’t avoid paying for as long as I’m alive.

I have a better handle on my basic expenses than I have on future market returns or how long I’m going to live. Both my basic expenses and my future Social Security income will likely increase with inflation. Social Security’s inflation adjustment almost certainly won’t exactly match the inflation in my basic expenses, but they should move in parallel and the relationship between the two won’t be derailed by market volatility, a favorable trait of Social Security not shared by many other projected income streams.

Retirement expenses obviously vary from person to person. My key point: Consider what portion of your “must have” expenses Social Security might cover at different claiming dates. I define my basic expenses as food, clothing, household supplies, minor house maintenance, health insurance premiums, car insurance, property insurance, utilities and gas for the car. I have no mortgage or other debt.

For a moment, forget about your investment accounts. Instead, think about the streams of income you have, on top of what you might get from Social Security. Some people have pensions and deferred compensation plans. Some have rental property or royalties or annuities. Some work part-time or have spouses who continue to work. I decided to think about how long I would have to wait to claim Social Security so that my benefit—in combination with my other streams of income—would cover my basic living expenses.

Because the income and health situations for people in early retirement vary from person to person, the relative value of Social Security’s insurance component also varies. At one extreme, if you have health issues and little or no other income, the insurance benefit of an immediate steady stream of guaranteed income to safely cover current expenses could be critical. Delaying Social Security to get higher future payments does you little good if you can’t pay your next health insurance premium or electric bill.

At the other extreme, if you’re doing work you enjoy, or you have some mix of steady income that exceeds your living expenses, or you have so much money in the bank that you have no problem covering your expenses, the insurance value of early Social Security payments is negligible. A higher guaranteed monthly payment in the future will be more valuable to you, particularly after you stop working and your current earned income no longer covers your basic expenses.

My situation, fortunately, is closer to the second extreme. I have two streams of income: a small rental income and my freelance work. At the moment, those two income streams almost fully cover my basic expenses. While the part-time freelance work is enjoyable to me and pays some bills now, a plan that involves “I will work forever” is not entirely realistic. The rental income, on the other hand, might last my lifetime.

I calculate that my annual Social Security benefit will be large enough that, in combination with my rental income, it’ll cover my basic expenses and a little bit more once I reach my full Social Security retirement age. Obviously, as that date gets closer, I’ll continue to monitor that projection. But at some point, when these relatively secure streams of income cover basic expenses, I’ll be inclined to claim benefits.

With Social Security to cover my basic expenses, my financial market investments will only be burdened with having to pay for “lumpy” expenses, such as another car at some point, health care issues, perhaps travel or other forms of “fun,” fixing the roof on my house someday, gifting and so forth. In my case, that remaining burden is small enough in relation to my portfolio that the risk I’ll outspend my resources is virtually eliminated, and the probability I’ll be able both to afford extra things I want and to help other people is greatly enhanced.

If that’s what Social Security, as a form of insurance, can do for me, it sounds like a pretty good deal. I accept that I can’t know with certainty which claiming decision results in the absolutely optimal outcome. But if I get a pretty good deal that minimizes financial risk, I’ll take it.

David Johnson retired in 2021 from editing hunting and fishing magazines. He spends his time reading, cooking, gardening, fishing, freelancing and hanging out with his family in Oregon. Check out David's earlier articles.

The post Covering the Basics appeared first on HumbleDollar.

Going for Broke

WHEN SOME FOLKS MAKE the all-important Social Security claiming decision, one worry outweighs all others. Their big fear: The program’s funding will “run out” in a few years and therefore they “can’t depend on Social Security being around,” so the smart strategy is to claim benefits at 62, the youngest possible age.

This is not a big worry of mine—largely because Social Security won’t “go broke.” What’s happening to the program’s funding is that, in the past, annual revenues flowing into Social Security from taxes on workers exceeded the cost of annual benefits that the program paid. Excess funds were used to purchase government bonds. As the population ages, and the percentage of retired workers rises, the revenue from current workers will drop below the benefits being paid to retirees. The shortfall at first will be made up by selling the government bonds the program has purchased in the past.

Social Security’s excess funds, called the Social Security trust funds, are projected to be depleted sometime between 2033 and 2035. In the absence of changes to the law, Social Security’s revenue will then be limited to the contributions of active workers. At that point, the stream of contributions to Social Security from current workers will still cover some 75% of benefits. Consequently, while the trust funds could be exhausted, the system can’t go entirely broke unless every single person in the country stops working.

There are several steps that policy makers might take to close the funding gap, and some of these have been done in the past: raise the Social Security withholding rate on all workers, delay the future full retirement age for current workers, or increase the income subject to Social Security payroll taxes. One thing that policy makers have never done is decrease the benefits for people already receiving them.

Even if you believe policy makers will dither and do nothing, it’s likely that your benefits would be around 75% of what current calculations suggest. If you aren’t counting on Social Security because of its funding problems, you could eliminate the risk of lower benefits by purchasing a deferred income annuity that would provide 25% of your Social Security benefit at whatever time in the future you think the system will “go broke.”

Paradoxically, it’s likely that you would find that the cheapest such annuity is simply to delay claiming Social Security itself by a little more than three years. After all, your benefit will increase by around 7% to 8% for each year you delay, and thus a three-year delay would give your benefit roughly a 25% boost. From a risk mitigation point of view, for those who can afford to wait, the possibility that future benefits will be dramatically reduced is not an argument for claiming Social Security early. Rather, it’s an argument for delaying benefits.

The post Going for Broke appeared first on HumbleDollar.

I’ll Take It From Here

I RETIRED FROM MY other job in 2022, so I could return to our family farm. Upon leaving, one of the first decisions I had to make was whether to take my pension as a lump sum or as monthly annuity payments.

The pension plan based the lump sum on length of service, salary and age, plus the interest rate as of the prior December. The lower the interest rate at the time of retirement, the higher the lump sum benefit. I made my decision in April 2022, using the interest rate set in December 2021.

The decision about how to take pension benefits is a difficult one. If you aren’t comfortable handling a large sum of money, an income annuity is the obvious choice. If all of your ancestors shuffled off this mortal coil before their hair turned gray or their joints began to ache, and you aren’t feeling so good yourself, then perhaps the lump sum might be the wiser option. Ditto if your idea of a fun day during retirement includes the consumption of illegal drugs interspersed with skydiving.

In my case, my parents are both still living and in their late 80s. Three of my grandparents lived well into their 80s. In fact, my paternal grandfather fell just short of living in three centuries. He was born in 1900 and died in 1999. With those antecedents, a lifetime annuity might seem like a good bet.

But to make a considered decision, it’s important to have some idea of the interest rate assumption used to value the annuity payments. After all, if that rate is higher than your personal long-term investment returns, or close enough so that the longevity insurance provided by the annuity plus the imputed return seem like an attractive deal, then you should choose the annuity.

In my case, the imputed interest rate was 2.5%. That made sense, given the low interest rates available at the time of my retirement, but less than I expect to make from my investments. And that’s why I chose to take the lump sum. Because of our family business, I’m comfortable handling large sums and knowing that those sums must last for a long period during which no income is likely.

That’s the nature of agriculture and particularly the greenhouse business, where our yearly income comes in a three-week period. Moreover, I have other sources of income and didn’t immediately need regular pension payments. An added bonus: Interest rates in December 2021 were at historic lows. The value of the lump sum payment would never be higher, and I was aware that the timing of my decision was fortuitous.

Now, given the lofty valuation of the stock market, even after the recent unpleasantness, maybe 2.5% or 3% is what we should expect for future investment returns. Gosh knows, my 2022 results fell short of that benchmark. But if I can average 5% or 6% over the next few years without touching the principal, my lifetime expected returns will be much larger than I could have received from the annuity.

While Social Security promises an increase in monthly payments for delaying the start of benefits, there was no advantage to postponing my pension, so the only logical choice was to take it as soon as I was eligible. Rolling the lump sum into my IRA allows the principal to grow tax-deferred, which will save me taxes over the next few years, when I expect I’ll still be receiving income from the family business.

Does all that sound well-reasoned and rational? It does to me. But truth be told, that’s not really the reason I decided to do what I did.

Among the biases identified by psychologists, one of the most persistent is our overconfidence in our abilities. I’m not immune to such bias when it comes to evaluating myself as an investor. Of course, I ignore this and other biases every day—otherwise they wouldn’t be biases.

I love to invest, spending hours each week studying the market and thinking about my portfolio. The thought of investing that lump sum over the next few years is, to me, like a fly fisherman discovering a new stream, a golfer seeing Pebble Beach for the first time, my wife finding a new flower to plant… well, you get the idea. I took the money all at once because it would be fun to invest it. If that’s a bad decision, it's not likely to affect our retirement, but rather the size of our estate. Sorry kids, but the old man has an expensive hobby.

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 article was When to Quit.

The post I’ll Take It From Here appeared first on HumbleDollar.

Unhealthy Claims

WHEN I STARTED winding down my psychology practice two years ago, I anticipated freeing up oodles of time for reflection and for hobbies long cast aside, such as collecting oldies albums and the coveted rookie cards of sports legends. But my patient hours were merely replaced by my own spiraling doctor visits.

I was disappointed and concerned about my declining medical status. Still, I was reassured by the reputation of my health insurance company and the comprehensiveness of my policy. I soon learned I was a naïve health care consumer and easy prey for a profit-hungry insurance behemoth.

It took 26 years for the Sacramento Kings to make the NBA playoffs, and even longer for me to figure out my health insurer’s modus operandi: my health, its wealth. A self-proclaimed finance savant, I’ve been bamboozled by one of those corporate giants that periodically project smiling faces of appreciative couples onto our TV screens.

Almost 50 years ago, I smugly signed up for the premier preferred provider organization (PPO) policy offered by a large public university. I kept the policy, even after I retired from the university and signed up for Medicare, because I’ve had one cancer or another for the past 26 years and I wanted a secondary insurer that would give me maximum flexibility, plus some doctors don’t take Medicare.

Members of PPOs have the option to seek treatment by doctors outside the carrier’s network of providers. For years, I dutifully sent in our claims and blithely cashed our reimbursement checks that reflected the insurer’s contractual portion of covered costs. I didn’t check so I didn’t know that many of my claims were never processed.

Until my comeuppance, I glanced haphazardly at my claim resolution statements and routinely filed them. Then, about two years ago, I noticed that my wife Alberta’s acupuncture claims were being systematically denied. I knew the treatment was covered by our plan and thought that the information submitted qualified Alberta for partial reimbursement. Curious, I checked on her physical therapy claims. They were also rejected.

With my curiosity rapidly turning into suspicion, I pulled out the statements for my own psychotherapy visits. Again, all zeros. Aroused from my slumber and berating my irresponsibility, I called the insurer’s customer service line. That was the first of a still ongoing series of telephone calls, emails and resubmitted claims over the past two years.

My experience has been infuriating and exhausting. I have been gaslit, patronized and shuffled from one department to another. Perhaps because I had dawdled for so long, I resolved to fight unflinchingly for the reimbursements to which I knew my family was entitled. I’m both embarrassed and proud to say the problems concerning Alberta’s acupuncture treatments have been resolved and my therapy belatedly reimbursed. We are now honing in on her wrongly discarded physical therapy claims.

I’ve jotted down my insurer’s most flagrant transgressions. Be alert to them as you monitor communications from your own carrier.

When the insurance company decided I hadn’t provided all required information in the desired format, the claim was summarily thrown out. No record was made of the claim, so there was no way to retrieve it for correction and reconsideration. Unfathomably, I was never contacted and, since I didn’t keep a complete ledger of all our submissions, I had no way of knowing I’d been purged.
Telephone reps were not prepared to clarify complex and critical features of the policy. The reasons given for denial of claims changed with each customer service specialist. At one point, I was told my claim was denied because all the dates of service were not listed on the same page. After I entered one after the other, I checked back to see if all was well. I was informed the claim could not be approved because I should have done what I did in the first place. I was admonished to first send my claim to Medicare, when I was not required to do so, because certain specialties are exempt from that stipulation—information that should have been second nature to the adjuster if not the agent.
Medical practitioners who don’t accept Medicare patients provide us with an opt-out letter that informs the insurance company it’s now the primary insurer. I was told numerous times I had failed to send in the letter, which was not true, suggesting either incompetence or unethical practice. When I followed up with a second letter, I was told it was no longer valid because it was more than two years old. I now send a current opt-out letter with each new claim, even though the company should have one on file.
Certain footnotes used to explain the reasons for denial would be hilarious if not for the seriousness of the medical condition for which payment was sought. About six years ago, Alberta was diagnosed with breast cancer. She selected a highly regarded private hospital and was treated with oncoplastic surgery, a procedure that combines tumor removal and plastic surgery techniques. Claiming the process was experimental, our company refused to pay its high PPO-contracted share. The surgical team accepted a minimal payment and waived our portion of the cost.
Incredibly, we were chastised for not choosing in-network doctors. Are these guys kidding me? Freedom of choice is precisely why I’m willing to pay a monstrous premium for this PPO. How can a claims evaluator for one of the world’s largest health insurance corporations not know that?

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

The post Unhealthy Claims appeared first on HumbleDollar.

Reinventing Myself

WHEN I WAS FORCED out of my banking job of 36 years, I was age 59 and had enough money to retire comfortably. But I still felt the need to work—because that’s how I’m wired. Working gives me a sense of purpose and makes me happy, but it has to be the right kind of work.

I need work that’s fulfilling and which allows me to help others. I knew myself well enough to realize that, if I failed to find something meaningful to work toward, I was going to be in trouble. Sure enough, after I lost my job, I ended up stuck in retirement hell.

Figuring out what you want to do with the rest of your life takes time and self-exploration. For months, I searched for my new “why”—until one day I had one of those “aha” moments and knew what my new mission would be.

I was bothered by the lack of guidance on non-financial retirement issues. I didn’t want people to struggle and go through what I went through. I felt obligated to write a book to warn others, and to share my knowledge and experiences, so future retirees could avoid the retirement shock I suffered.

In my enthusiasm, I didn’t realize how difficult it would be. I had to learn a bunch of new skills, which took me way out of my comfort zone. I had never written a book before. I didn’t know how to get a book published. I didn’t know how to create and manage a website. I didn’t know how to blog or tweet. I didn’t know how to promote a book using social media.

Writing a book, and then building a business around it, was one of the hardest things I’ve ever done. There was so much I didn’t know. Figuring out everything on my own was both hard and lonely. It was stressful and I was forced to make decisions on the fly. I can’t tell you the number of times I just wanted to call it quit.

It would have been easier to do this today. Colleges and universities now offer “transition assistance” programs aimed at helping retirees find new meaning and purpose by starting their own business or organization. Working with a group of like-minded people, all chasing after the same thing, is extremely motivating. It allows you to feed off the group’s enthusiasm and creativity. It facilitates the sharing of ideas and experiences.

These programs can help you discover your new source of purpose. Instead of having to learn everything on your own, like I did, there are courses on how to use new technologies like Zoom and Google docs, how to build a website, and how to market your product or service on social media.

Harvard University has a full-year course, the “Advanced Leadership Initiative,” that’s aimed at “experienced leaders” who want to contribute to society and help others in need. At the end of the course, participants present their action plan for addressing a specific societal problem. That plan might focus on saving the environment, or teaching kids about financial independence, or helping to build schools in African villages. What I like about the Harvard program is that it serves as a way to tap into all the human capital that’s sitting retired on the sidelines and using it to help create a better world.

The downside of the Harvard program is its high cost. But we’re seeing a lot of other schools wake up to the potential here and offer their own more affordable version of the Harvard program. I’m excited about these new courses because they make the transition to paid or volunteer work so much easier. Sure, they cost money. But the payoff—finding a new purpose, doing stuff you love and being able to do it for as long as you want—is immeasurable.

Mike Drak is a 38-year veteran of the financial services industry. He’s the co-author of Longevity Lifestyle by Design, Retirement Heaven or Hell  and  Victory Lap Retirement . Mike works with his wife, an investment advisor, to help clients design a fulfilling retirement. For more on Mike, head to  BoomingEncore.com . Check out his earlier articles.

The post Reinventing Myself appeared first on HumbleDollar.

Pipe Dreams

AS A TEENAGER, I wanted to be an architect. I took six years of mechanical drawing during junior and senior high school, and I was good at it, earning nearly all As.

At another time, in my 30s, I thought about becoming a lawyer. People told me I’d make a good one. A lawyer’s opinion seemed to carry more weight, even when the subject was unrelated to legal matters.

I also wanted to play a musical instrument. All my children played more than one in school, and a couple kept at it through college and after.

I often thought it would be cool to speak another language. I was always amazed that, throughout Europe, it’s hard to find someone who doesn’t speak English. Russia is the exception.

The thing is, I accomplished none of these goals, although in some parts of the U.S., I’ve been told speaking New Jersey is a foreign language. Same to you, Tex.

When I was in high school, I was advised to take general courses because I wasn’t going to college. That meant basic math, bookkeeping, typing, English, history and shop. You should see the copper ashtray and wooden salad bowl I made. Years later, I had to take remedial courses to begin college.

Not pursuing architecture may have been a good thing. My son started college in architecture and finished as a civil engineer—too much math for me.

Being a lawyer was a pipe dream. I doubt I had the necessary patience. Besides, after spending nine years of nights and weekends getting a bachelor’s degree, I was burned out. More years of night law school would have been too much for me, although I know at least two colleagues who managed it.

As far as playing an instrument goes, I never actually tried beyond a plastic trumpet at age 10—but I still think it would be cool. A couple of years ago, I met a woman in Starbucks who offered to teach me to play the bagpipes. I love to hear Amazing Grace played on the pipes. You need a lot of hot air for that instrument and, of course, that’s not me.

I toyed with going to Berlitz to learn a language. I even tried a language app on my iPad, but to no avail.

Here I am, going on 80, and I’ve achieved none of my youthful dreams. My quest after high school was to look for a job, any job, just as my father had done.

Whose fault is this? My parents, who didn’t guide or encourage me, or my school counselors? Not my wife. She encouraged me to learn a language and said she would support me going—or at least trying—law school.

No, I’m responsible. I made all the decisions and excuses. I changed direction. I could have overcome every obstacle. I could have found a way, as many others do. But I didn’t.

By most measures, I did better than okay. I’m fortunate, but it could have turned out differently.

These days, many people claim to be victims. They’re told that opportunities are few, and that the system is rigged. Many Americans see only a bleak financial future, yet seem to do little about it.

Times are tough, people tell me. Really? Get out your history book and go back a century or more. Life in America—and the world—has been much more challenging. There have been multiple wars, financial collapses, depressions, high inflation and more.

Many of the great achievers who changed the world had to overcome physical or other obstacles. Many recovered from early failures, and most started with next to nothing.

Don’t let your dreams slip by, and don’t let anyone offer you excuses or tell you what you can’t do. Reject being a victim, and don’t blame the system. Don’t get derailed envying others, many of whom worked hard and overcame obstacles. More than anything else, it’s the decisions we make—or don’t make—that determine our life’s trajectory and financial security. And that’s a fact.

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.

The post Pipe Dreams appeared first on HumbleDollar.

Learning from Failure

IN THE WEEK SINCE Silicon Valley Bank (SVB) failed, a debate has raged: Did the government do the right thing when it decided to guarantee all of SVB’s depositors, including those that exceeded FDIC limits?

On one side of this debate are those who view the government’s action as an inappropriate and undeserved bailout. In an article titled “You Should Be Outraged About Silicon Valley Bank,” The Atlantic argued that the bank’s failure was the predictable result of incompetent risk management. Critics further cite a reality of human nature: If bank executives are confident the government will step in to pick up the pieces every time something goes wrong, they won’t be as careful in managing risk. Economists call this “moral hazard.”

On the other side are those who think the government did the right thing. They point to the fact that the crisis was quickly contained, and at a cost that will likely be insignificant. Not surprisingly, the loudest voices in this camp came from Silicon Valley. Before the government stepped in, one venture capitalist warned of a “startup extinction event” if SVB were to fail. He urged the Federal Reserve to, as he put it, “bearhug the situation," but also argued that this should not be characterized as a bailout and would not create moral hazard.

For better or worse, the crisis was contained, and everyone is now breathing a little easier. But it’s worth asking what we can learn from this incident. I see five lessons:

Rule No. 1 of investing. In a letter to my clients last weekend, I commented that, when it comes to our finances, there’s always something to worry about. Beyond the stock market, which everyone understands to be volatile, investors have lost sleep over investments which are usually perceived to be far safer.

For instance, three years ago, at the start of the pandemic, there was widespread worry about municipal bonds. Earlier this year, with another government shutdown on the radar, investors began discussing the unlikely possibility of a default on Treasury bonds. And despite their infrequency, the failure of SVB, along with that of Signature Bank, serves as a reminder that even the safest instrument available—a bank account—can carry risk.

Fortunately, there is a solution, and it’s an easy one: diversification. It’s not only the simplest tool in an investor’s toolbox, but I believe it’s also the most effective. Back in 2018, I suggested several ways to diversify so as to protect against so-called unknown unknowns. As an example, I cited the 2003 blackout that hit New York City. Among the effects, ATM and credit card networks went offline. For those without cash to purchase groceries, it was a difficult situation. While it was temporary, these are the sorts of black swan events that can occur. That’s why I recommend diversifying along as many dimensions as possible to guard against whatever the next financial curveball turns out to be.

Rule No. 2 of investing. When it comes to managing our finances, many things are outside our control. That’s why it’s even more important to control what we can. SVB customers whose balances exceeded FDIC limits are lucky the government came to their rescue, but they wouldn’t have needed that support if they’d taken even the simplest of steps.

Have more than $250,000 in an individual account or $500,000 in a joint account? The easiest thing is to open an account at another bank to double your coverage. I know folks who maintain three or four separate accounts. It’s not hard, and yet there are solutions that are even easier. You could open an account with a bank that participates in the IntraFi Network. If you need to maintain large cash balances, an IntraFi bank will automatically split your cash up among multiple banks, with none exceeding FDIC limits. From the customer’s perspective, it’s as easy as opening a single account, but it provides virtually unlimited coverage. A service called Max provides a similar solution, but with an added feature: As banks raise and lower their interest rates, Max will automatically shift balances around to maximize customers’ income.

Those are two simple bank-based solutions. If you don’t mind a tiny amount of inconvenience, you could move excess cash into a brokerage account, where you could invest in a money market account that holds only Treasury bills. That would provide both more interest and essentially unlimited government backing.

Not so smart. In finance, there’s the concept of the “smart money.” I’ve never liked this term, and the Silicon Valley mess illustrates why. Even people who are knowledgeable and experienced—like SVB’s clientele in the venture capital community—can make mistakes.

In the aftermath of SVB’s failure, some have pointed out that the bank’s risks were hiding in plain sight. One observer, for example, was making the case on Twitter as far back as January. The average banking customer might not have followed his arguments, but certainly venture capitalists should have been paying attention. The implication: The notion of smart money is a myth.

Recency bias. Why did so many of SVB’s customers ignore the risk when their accounts exceeded FDIC limits? If you asked them, my guess is they’d say that the risk of a bank failure seemed remote—like the sort of thing that might have happened back in the 1930s, but not today. That complacency is understandable. Outside of recessions, bank failures are rare. But this episode reminds us to be careful of what psychologists call recency bias. Just because something hasn’t happened recently doesn’t mean it won’t.

Reputation. For decades, Silicon Valley Bank was “the” bank for Bay Area elites. Similarly, First Republic Bank, which is teetering, has cultivated an image as the banking destination for the well-heeled. Its ads feature photos of sophisticated-looking customers, including tech founders, heirs, artists and the like. But outward appearances were deceiving, as we’ve all now learned. Silicon Valley and First Republic, it turns out, were much better at marketing than at banking.

With the benefit of hindsight, we know this. The problem, though, is that P.T. Barnum-like characters inhabit every industry, and they’re difficult to identify in advance. Last year, I described “the storyteller’s toolbox,” with some recommendations on how to spot—and hopefully avoid—financial hucksters. Ultimately, though, I’ve only found one solution to this problem: to keep one’s financial life as simple as possible.

That’s why, whether an investor has $30,000 or $30 million, my advice is the same—to maintain a simple portfolio of low-cost index funds and Treasury bonds, and to assiduously avoid anything more complicated than that. That, I believe, is the best formula for virtually every investor.

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.

The post Learning from Failure appeared first on HumbleDollar.