Jonathan Clements's Blog, page 160

Where Value Ends

I RECENTLY HAD a revelation about my adult children: When it comes to money, they’re a lot like me—and that’s both a good thing and a bad thing.




I had this revelation while dining with my 25-year-old son at a sports bar over the New Year’s holiday. The food was marginal—it was a sports bar, after all—but the plates came loaded with food. What’s more, the prices were quite reasonable, especially compared to those in Philadelphia and Washington, D.C., where Liam spends the bulk of his time these days. 




All of this made him quite happy. He has, he told me, three criteria for what constitutes value while eating out. The quantity of food comes first. Second is whether the cost is reasonable. The quality of the cuisine comes last on his list. 




In other words, he could get outstanding food, but it would fail his value test if he didn’t get enough of it. His meal would really be a loser, value wise, if that superb-but-stingy dish also cost too much.




Now, let it be said that Liam is currently a law student and has no money. It could be that his criteria will change when he’s a bigshot lawyer earning lots of money, and can afford the best chefs and restaurants in the land.




But I doubt financial success will change his mindset. Why? Because he’s my son, and his frugal, value-based way of looking at money happens to come from me.




I’ve always been conservative about finances. It’s something I learned early on from my thrifty parents, who never made much money but were somehow able to make ends meet for a hungry family of eight. 




Through my folks, I learned the importance of working hard, living simply and below your means, paying the bills on time, being exceedingly careful about debt, and socking away every dollar you can for a time when you might need it. While these time-honored principles will never land me on a list of the world’s richest people, I have been able to achieve a modicum of financial independence here in my early 60s.




All that’s good, I think. And I’m happy to say that my financial conservatism has been passed onto my three adult sons, who are quite responsible with their finances. 




But there’s a point where frugality and penny-pinching become excessive, and I fear I’ve spent too many years of my adult life in that realm. It’s the part of me that has hesitated to take a fancy vacation because it will set me back $5,000. Or passing on a chance to have a prime rib dinner at a three-star Michelin restaurant and opting instead for a BYOB hole-in-the-wall because it will save me a hundred bucks.




I know where our familial tendency toward excessive thriftiness comes from. Parsimony is in our blood, passed down over the generations through the Scottish lineage on my father’s side. We Kerrs do not like spending money, and we hate wasting it even more. Maximizing the value we get from our hard-earned dollars is all-important to a Scot, a mission to which we devote every ounce of our analytical minds.






I saw this with my father, who was forever bargaining with people while making purchases, as if all the world was an auction and he the sole bidder. He threw nothing away, no matter how old and obsolete it was, on the remote chance it could come in handy in the future. He was determined to squeeze every ounce of value from the things he paid for. I remember sitting in the car as he pumped gas and seeing him lift the hose at the end to get every last drop into the tank. 




I don’t go that far with my gas, and I’m also not a hoarder, preferring to keep my surroundings simple and free of clutter. Still, now that I’m older, I realize that for too many years I’ve focused too much on shaving costs and saving money over seeking experiences. 




I mean, what good is money if we don’t spend it on all the wonderful things this world has to offer? Life is short and a slavish pursuit of value can turn a pleasant walk down Easy Street into a bleak stop at the dollar store.




Alas, I’m seeing some of these same tendencies with my kids. I once witnessed another of my sons calculate the per-square-inch cost of various pizza options on the menu to figure out which offered the best value for money spent. I remember thinking at the time, “At what point does seeking value move from common sense to madness?”




Like Scrooge after his nighttime visits by the ghosts, I’m determined to change my ways in whatever years I have left. I have a long "challenge list” filled with both fun experiences and educational activities, and I’ve committed to pulling out my wallet to make those things come true. In March, for instance, I’m splurging on a two-bedroom beachfront condo in St. Pete Beach for Rachael and the kids, even though March is spring break time in Florida and ghastly expensive.




I’m also determined to use whatever resources I have to make a difference in the world through volunteer activities and charitable giving. I’ve joined the local Rotary Club and have dedicated to giving author proceeds from my recently published book to charity.




Hopefully, all of this will set a different example for my children and maybe even break the familial chain of Kerr parsimoniousness. It seems a father’s work is never done—even after the kids have flown the nest.

James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, “The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life’s Purpose,” was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.

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Not Dad’s Retirement

MY FATHER RETIRED from a 35-year teaching career in 2002, when he was 56 years old. He hasn’t worked a day since. For years, his retirement was the primary model for my retirement aspirations—until I realized my path needed to diverge.

Like many dads, he worked a career he tolerated but probably didn’t love. It provided our family with a comfortable lifestyle in the suburbs of a low-cost-of-living city. Teaching enabled him to be ever-present during my youth, with summers off and time to coach my baseball teams. He took his pension and left teaching without hesitation when he reached retirement eligibility.

I missed his retirement celebration because I was halfway through a 14-month backpacking trip that took me to southeast Asia and South America. Upon my return, I was 27 years old, broke, unemployed and living with my parents.

Though my dating prospects were bleak, I had a finance degree and a few years of information technology (IT) experience in my back pocket. I was ready to return to the workforce. Inspired by my dad’s retirement, I set a goal to retire at age 55, one year earlier than he did, so I’d have the flexibility to travel the world again without the time constraints of salaried employment.

After six months of living with Mom and Dad, I landed a government IT consulting position in the Washington D.C. area, for which I was underqualified and overpaid. My salary snowballed. Backpacking the world trained me to live frugally. College finance courses taught me to contribute to my 401(k) and invest monthly surplus dollars into stocks. The foundations were in place to reach my retirement goal.

But one thing became apparent soon after I started my new job. I didn’t like government IT consulting. I worked on massive IT projects with hundreds of workers. My direct contributions rarely influenced outcomes or led to organizational improvements. I was a small fish in Lake Titicaca.

Job satisfaction was elusive. But I was okay with that because I mainly cared about the salary and benefits. The high earnings allowed me to save and invest to reach financial milestones. My IT career was the path of least resistance to early retirement.

A steady job and homeownership gave me the confidence to finally achieve some dating success. I married and started a family. Early retirement to travel the world suddenly became impractical for at least the next 20 years. But the desire to retire at age 55 didn’t go away. In fact, it strengthened because I didn’t enjoy my career and wanted to escape.

Like my dad, I tolerated a career I didn’t love to provide my family with a comfortable lifestyle. But unlike my father, I lived in a high-cost-of-living city, worked summers and had no pension waiting for me after 35 years.

In 2013, I discovered a creative outlet by starting a personal finance and investing blog called Retire Before Dad to share investment strategies, personal finance tips and my progress toward my age 55 retirement goal.

My website became a side business. I enjoyed writing and earning money without filling out a timesheet every day. Writing more than 400 articles helped me discover that my dad’s retirement wasn’t the right model for me. His retirement was the end of his active earning years. But I found earning money through self-employment was more rewarding than a salary, and I expected I’d want to continue earning beyond age 55. My retirement goal was ultimately about attaining freedom and flexibility in my life. I started admiring entrepreneurs and workers who built careers they genuinely loved so much that they didn’t want to retire.

At some point, all the diligent saving and investing over the previous two decades became a large enough financial backstop. Meanwhile, unproductive meetings consumed each working day. Career advancements meant I had to sacrifice more brainpower and control over my time. What I craved was independence, extended time off, more fulfilling work and control over my weekdays.

In late 2022, I left my 20-year government IT consulting career at age 47 to be a fulltime blogger. I'm not aiming to retire at age 55 anymore. I'm as excited as ever to build my business—because I now have greater control over my time and a more gratifying profession.

Blogging is location independent. I can work from anywhere. I control my workday hours. My success depends on the quality of my writing output, not some opaque HR performance metrics.

Retirement is the most logical escape from a tiring career. But many retirement-aged workers still enjoy being productive and earning money. The commutes, meetings, overbearing superiors, corporate annoyances and constraints of fulltime employment make us want to leave.

But retirement may not be the answer. My suggestion: If you’re in a career you don’t love, consider your investments as the foundation for your next life phase. You may not have saved enough to retire outright—but it may be enough to launch a second act.

Craig Stephens writes about personal finance and investing at Retire Before Dad and Access IPOs . Follow him on Twitter @RetireBeforeDad and Facebook .

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Myths That Won’t Die

I RECENTLY DISCUSSED Social Security with a friend. After trying to explain the program’s funding, I gave up when his reply was, “The facts are that the Social Security money was misappropriated and there’s no way it can be tracked after all these years. People die before they collect one Social Security check, and others get very few checks. You will never convince me otherwise.”

Yes, that's the one thing we do agree on: I will indeed never change his mind.

It’s hard to counter all the misinformation I hear. Still, I keep trying. Here are seven persistent myths about Social Security that I encounter, and my response to each:

1. If the Social Security trust fund had been invested in the stock market, all would be well. When I use the Committee for a Responsible Federal Budget’s reformer tool, investing the trust in publicly traded stocks and bonds only closes about 6% of the funding gap, so the trust remains insolvent.

2. It’s my money—I paid for my benefits. Actually, you didn’t. In 2023, my wife and I will collect $56,940 in benefits based on my earnings record, and it’ll be our 15th year of collecting benefits. From 1959 until I retired, my employers and I together paid $266,000 in payroll taxes, far less than the benefits that my wife and I have since received. Did I pay for all the benefits we have and will collect? No.

3. I would be better off if I could have invested the taxes I paid. Perhaps some HumbleDollar readers could make that work—provided there were no disabilities, deaths, divorces or lack of discipline along the way. But one glance at the saving, investing and spending patterns of the typical American says this is a red herring.

4. The payroll taxes I’ve paid determine the ultimate benefit received. Not true. Benefits are entirely based on earnings and the Social Security benefit formula. Many Americans—spouses, survivors, children, disabled individuals, ex-spouses—collect benefits having never paid a penny in payroll taxes. Keep in mind that two households with workers who paid the same payroll taxes can receive very different benefits if one is married.

5. Social Security is a ripoff because some people pay in and never collect. According to the Social Security Administration, that happens to only about 5% of taxpayers. Just like a pension or annuity, Social Security will always have actuarial gains that offset the losses—the latter being the benefits paid to individuals who live longer than expected. Social Security's longevity calculator says I have 9.2 years to go. I’m striving to be a significant actuarial loss.

6. My Social Security benefits should never be taxed. Why not? If you had an employer-funded pension, the benefit would be taxed. If you purchased an income annuity, payments in excess of your after-tax contributions would be taxed. As noted earlier, beneficiaries have not paid in full for their benefits. In fact, the taxation of benefits is capped at 85% because, in aggregate, beneficiaries only pay for about 15% of the benefits they collect. Those taxes paid on Social Security benefits help pay for both Social Security and Medicare.

7. The government misappropriated the Social Security trust fund. I often hear folks claim that this or that president stole Social Security’s money. Not true. The trust fund is dwindling for more mundane reasons. The working population relative to retirees has declined, life expectancy at age 65 has increased and benefits have risen over the years. All this means that payments are outpacing the trust fund’s revenues. Despite repeated warnings by Social Security’s trustees, Congress has failed to address the issue.

If the 6.2% payroll tax was increased to 7.7% on employer and worker alike, and pretax premiums under employers’ cafeteria plans were subject to payroll taxes, the program would be solvent for at least 75 years. Regular, modest future funding changes would keep the whole program solvent.

And guess what? Workers wouldn’t even notice the changes. Don’t believe me? Ask employees how much they pay in health insurance premiums.

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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When to Quit

RETIREMENT IS A HUGE decision, as readers of HumbleDollar well know. Retirement from a multi-generational business is even harder, because there isn’t really a day when you can say, “I’m retired.” Like the Hotel California, “You can check out any time you like, but you can never leave.”

I’m 65. That’s an age that carries a lot of social expectations. Age is not a continuum, but rather a series of milestones, and 65 is a big one. Is 65 old? I suppose it depends on the circumstances. When my grandfather was 65 and I was eight, I thought he was ancient. When my parents turned 65, I thought 65 seemed much less old. When my wife Julie and I turned 65, neither of us thought we were old.

Social media often runs pictures of old people from long ago, pointing out that people aged faster in the past than they do now. The people in the photos are certainly younger than you or I would guess. But then again, the photos are chosen to leave just that impression and, I suppose, to make us feel better about our age. We’re fatter than our ancestors, which hides wrinkles on our faces, and we’re less likely to smoke. Maybe we’re also using Botox and the surgeon’s knife to fool the camera, although not so much here in Tarkio, Missouri, the small town where I live. Still, I do have a suspicion about the use of hair dye among some of my contemporaries.

I spend a lot of time on HumbleDollar. One of the topics often tackled by writers is the proper age to claim Social Security. We’ve so far decided to wait, but I keep running the numbers in my head. This is an important decision for us and the website’s other readers. But it occurs to me that most people probably aren’t that interested in the subject. Maybe one way to judge age is whether or not you’ve turned into a total bore.

I’ve retired from one job. I spent 10 years as the president and CEO of the Missouri Farm Bureau, which is a farm advocacy group and insurance company. I didn’t leave because I was nearing “retirement age,” but because it was time to come home. I’m pretty sure both the Farm Bureau and my family are better off for the change, although my family has probably had days in the past two years when they weren’t so sure.

To know when to leave, to quit, to retire, is the hardest of decisions. I’m pretty sure I hadn’t lost the ability to make good decisions, but I am sure that my faults as a leader had become ever more calcified by time, my ability to change when change was needed was waning, my blind spots more likely to cause problems. That’s inevitable, a part of life as certain as gray hair and aching joints. It becomes sort of a calculus. When does the rising arc of experience intersect with the declining ability to change and learn? There’s no correct answer, I suppose, but rather an imprecise balancing act between the good of the organization, your personal life goals and your family.

I haven’t retired from our family business. Heck, I’m not sure I can. The business needs the help, as little as I offer. And, of course, I enjoy the work—mostly. But just as the Farm Bureau needed fresh ideas and new faces, so does our farm.

I’ve heard people talk about patriarchs who handed over management of a business while still providing much needed labor. I’ve also heard about unicorns, but I’ve never seen one. I can’t let go, you see, which is something that runs in the family, as it were. When the gerontocracy runs the place, experience means that few big mistakes are made. But the lack of change over time compounds at an increasing rate, and that can lead to real problems.

No doubt those who never move on, who never let go, stay sharper longer. As my grandfather, who was still actively farming in his 90s, used to say, “You’ll rust out before you wear out.” What’s good for Grandpa may not be best for the organization he leads, however, and that balancing act is the challenge that confronts all of us 65-year-olds running family businesses.

We’ll struggle and muddle our way through this old age thing, gradually and then not so gradually slowing down. Maybe I’ll finally learn how to fly fish, or let the younger generation run the combine, while I write that book or travel through Europe. They’ll figure it out and maybe I can stay mentally alert by taking up fantasy baseball or fixing the flaw in my golf swing. Or, I can start a new career, one that values my experience, but one where I don’t block those in the next generation from their chance to make their own way.

I’m thinking Walmart greeter.

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. 

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A Friendly Reminder

WHEN I RETIRED, I thought a successful retirement was primarily about money—about making sure I had enough income to fund daily expenses for 30 or more years. But now that I’m in my 70s, my investments don't seem quite so important to me.

Indeed, other things in my life strike me as just as crucial as my investment portfolio’s size. Some say retirement is like a three-legged stool. No, not the traditional three-legged stool of personal savings, Social Security and pension income. Instead, this new three-legged stool stresses the need for money, health and social relationships if you want to have a satisfying retirement.

I feel pretty good about the money part. Our fixed expenses are low enough that our Social Security benefits can easily cover them. But I’m not quite so sure about my health and relationships. They seem more elusive as I get older.

I’ve written about my health before. I’m concerned about being able to manage my own affairs in my later years. I was reminded of that again the other day.

I took my car in to get it serviced. I’ve been to the dealership before. This should have been an easy task. But it wasn’t. On my way there in the morning rush-hour traffic, I missed my exit. When I finally got to the dealer, I misplaced my keys and I left my phone in the car.

When a rookie baseball player makes an error in a major league game, they sometimes say the game is moving too fast for him. Maybe my life is starting to move too fast for me, and I’m having a hard time keeping up. I’m starting to make too many mistakes.

That’s why, a few years ago, I consolidated our financial holdings at two financial institutions. It makes it easier to manage our money. Eventually, I’ll consolidate our investment portfolio into a single target-date fund or two low-cost, broad-based index funds. That way, we’ll have fewer decisions to make in our later years. I also like the idea of having one credit card because we’d have just one account to monitor.

Meanwhile, I’m beginning to realize how important my friends are to my well-being. Our house this holiday season has been full of friends and visiting family members. But I couldn’t help but feel a little lonelier during those busy times. As I mentioned in a previous article, I recently lost a close childhood friend. It was sudden and unexpected. When I was told, I was rattled.

This isn’t the first time I lost a good friend. Leo, my camping and fishing buddy, passed away a few years ago. But this time, it felt different. I saw Jeremy’s death as a warning sign that my social network will get smaller as I get older.

I still have a wonderful group of friends. But some of my friends have a bigger impact on my life than others. Jeremy was one of them. He was the glue that held us five high school buddies together all these years. Now, we’ll have to step up if we're going to continue to stay together.

I read in the newspaper that friends are important for a healthy life, that they’re just as important as having a healthy diet or getting a good night's sleep. People with strong friendships have better mental and physical health.

For instance, research in Australia found over a 10-year period that, among older people who had many friends, their risk of dying was 22% less than those with fewer friends. By contrast, having a robust social network of children and relatives didn’t affect the survival rate.

Maybe the reason friends are so important to our well-being is because we tend to do things we enjoy with our friends, while many of the things we do with family might be out of a sense of obligation. It may also be that people with many friends have more access to medical care because they have more folks who can give them a ride to doctors’ appointments.

When we retire, we sometimes don’t stay in touch with our friends. We’re too busy spending time with our spouse and other family members. That could be a mistake. We should embrace the friends we have and seek even more, especially younger ones.

Potential friends are everywhere. They’re at the gym, book club, local charitable organization and on our travel adventures. If we truly want to have a healthy and satisfying retirement, we should spend less time looking at our investment portfolio—and more time with our friends.

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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My Retirement Shock

WHEN I FOUND MYSELF unexpectedly packaged off by the bank, I was initially very happy. I was planning to leave anyway because the stress was getting to me. When the bank gave me a severance check at age 59, I felt like I’d won the lottery.

Life was pretty good for a while, but then I was hit by a bad case of retirement shock. I lost my mojo, and had a constant feeling of being incredibly lost and vulnerable. My heart was no longer in the hobbies and activities that used to bring me joy. Playing golf, swimming and riding my bike all began to feel like chores.

Take it from me, there’s nothing more depressing than sitting alone at home all day, watching cable news while being bored out of your mind. If you think about it, when we retire, we lose a lot.

All at once, we lose our sense of purpose, our identity, our community, our structure and our routines. It’s important to find ways to replace these elements, or we could end up losing our minds—or worse.

I spent a long time pondering why I ended up suffering, while people like my mother are able to retire happily with no negative side effects. She was comfortable in retirement and didn’t miss her earlier, busier years.

After a lot of research and self-reflection, I came to realize that I was quite different from my mother. My retirement shock was related to my inability to satisfy some fundamental needs that I was born with, needs that must be fulfilled for me to lead a happy, healthy life.

Unlike my mother, I’m a growth-oriented retiree. I have a strong need for autonomy, variety and identity. Being labeled as “retired” isn’t going to do it for me. In fact, it irritates me.

I have a strong need to do things that are interesting and challenging, those activities that give me satisfaction and a sense of achievement. For instance, I’ve always had a strong need to help others. When I get an opportunity to do that, it makes me feel really good inside.

These needs never go away—not even in retirement. While I no longer want to be a banker, I realize that there were certain aspects of my work that I enjoyed and which gave me a sense of accomplishment. I lost that when I was forced to retire. Until I could discover alternative ways to satisfy these needs, I was stuck in retirement hell, and suffered from depression and anxiety.

Some retirees don’t hunger for work and settle for what happens. Others—the growth-oriented ones—try to numb their feelings by, say, eating or drinking too much. This behavior might bring temporary relief, but also longer-term problems. If you’re not careful, retirement shock will age you and extinguish the fire inside. You don’t want to end up like some retirees, sleepwalking through the best years of your life.

I can’t tell you how many stories I’ve heard from people about a family member or friend who wound up miserable after retiring. Many of them had enjoyed successful careers as doctors, teachers and senior executives.

They should’ve had a great retirement but didn’t—because they no longer had the strong sense of purpose they’d had when they were working. They no longer made a daily contribution that gave their life meaning and coherence. If you have a choice, why would you retire from doing something you love to do? That doesn’t make a lot of sense to me.

Unfortunately, few financial advisors talk about this vital aspect of retirement planning. This can result in some clients leading purposeless, unproductive lives.

I will leave you with a suggestion to help you avoid this fate. Retirement is one of the biggest life transitions you’ll ever experience. It’s an individual process, and what works for your retired friends might not work for you.

Know your strongest needs—the things that really turn you on—and then find activities that will satisfy them on a regular basis. That’s the key to a happy, fulfilling retirement. It’s as simple as that. Too bad it took me so long to figure it out.

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.

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A Path to $10 Million

JEFF BEZOS ONCE asked Warren Buffett why everyone doesn’t just copy his example when investing. Buffett famously replied, “Because nobody wants to get rich slowly.”

The magic of saving diligently, coupled with decades of compounding inside tax-advantaged accounts, can ensure financial freedom. In fact, young married couples today have an outside chance of accumulating $10 million by the time they reach the new required minimum distribution age of 75.

To reach the $10 million jackpot, a couple would both have to save the maximum allowed in their 401(k) or 403(b) from age 22 to 62, plus earn a 4.5% average annual return on that money from age 22 to 75. Hard to fathom? Here’s the math behind their fortune.

In 2023, workers can contribute a maximum of $22,500 per year to tax-deferred plans, which would translate to $900,000 of total contributions over a 40-year career. Assuming a 4.5% annual return, the contributions would grow to be worth $2.5 million at age 62.

Many workers also receive a company match on their contributions. Let’s assume a 3% match on $60,000 of annual earnings. This adds another $1,800 a year, or $72,000 over 40 years. With a 4.5% annual return, the company contributions would grow to be worth $201,000 at age 62.

Starting at age 50, workers can add $7,500 in catch-up contributions to their tax-deferred plans. Twelve years of catch-up contributions add another $90,000 to the savings pot. With a 4.5% annual return, that would grow to be worth $121,000 by 62.

If you’re keeping score at home, this means a determined worker can build up a nest egg of nearly $3 million in their tax-deferred accounts by age 62. But wait, there’s more.

Let’s presume retirees can live on other savings and Social Security until they begin taking required minimum distributions at age 75. That means their retirement savings can compound tax-deferred for a further 13 years, from age 62 until 75. At our constant 4.5% growth rate, their $3 million balance would grow to $5 million.

If each member of a couple followed such a diligent savings strategy, their combined retirement pot would be worth $10 million at age 75. Now comes the reward. Each one would need to take required minimum distributions of $205,000 beginning at age 75, or $410,000 annually as a couple.

With income that high, their federal tax rate would be solidly within the 32% bracket, and perhaps 35% if Social Security payments and other income were added in.

In effect, their $10 million balance is $6.6 million of after-tax wealth, and even less in states that tax retirement account distributions. In addition, their required distributions would push the couple into the second-highest Medicare income-related monthly adjustment amount (IRMAA) bracket, which would increase their Medicare Part B and Part D premiums over the base level by about $10,400 per year, based on 2023’s surcharges.

How realistic is this scenario? Well, the savings rate used in this analysis is quite high, particularly for young adults just starting out. Few couples will be able—or want—to put aside $45,000 per year in savings, especially if they’re early in their careers, with each earning just $60,000 a year. On the other hand, many of the other assumptions are relatively conservative.

The 4.5% annual return, for example, is moderate. The stock market has delivered 10% annual returns over the past 40 years, and today short-term bonds pay nearly 4.5%.

Neither the contribution limits nor the couple’s incomes are adjusted for inflation, as would happen in real life. Further, I also used simple annual compounding rather than continuous returns. Finally, the taxes on their distributions will increase substantially if the 2017 tax law is allowed to sunset as scheduled in 2026.

I wouldn’t predict a large number of young couples will get to $10 million. Yet it’s useful to know that diligent super-savers with successful career paths can save a small fortune if they choose. And, as night follows day, they would also face some surprisingly high tax rates, with IRMAA layered on top.

This high-tax scenario could also apply to anyone receiving a significant inheritance or substantial outside income. My recommended remedy for anyone on one of these three fortunate paths is to “Roth early, Roth often.” That should help keep the taxman at bay.

John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book "Win the Youth Sports Game" was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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Egg on Their Faces

WHAT A DIFFERENCE a rally makes. So far this year, the S&P 500 is up more than 6%. Not bad considering the doom and gloom from Wall Street forecasters at the end of 2022. Recall how strategists in early December were projecting large-cap U.S. stocks to finish 2023 in the red. Naturally, the market did the opposite of what most experts were thinking.

Stocks soared to jumpstart the new year. Many regions notched their best January in decades. What’s more, even the left-for-dead 60% stock-40% bond portfolio is off to its hottest beginning to a year since 1991. Put simply: The pundits have been totally wrong—at least based on the first six weeks of 2023.

Does flipping the page from December to January really make a difference? Common sense says no. Still, it’s hard to ignore one fascinating trend: The lousiest assets last year are 2023’s treasures. Goldman Sachs put out a jaw-dropping visual on this quirky relationship. Perhaps the downward pressure on share prices caused by December’s tax-loss selling, coupled with January’s drop in interest rates, set us up for this year’s gains.

The consensus among strategists also called for a first-half recession before a late-year economic recovery. Even that outlook has flipped in just a few weeks. There’s emerging chatter that the U.S. will skirt a recession. January’s jobs report was stellar, while inflation readings since the start of the year have been quite sanguine. We’ll get another read on inflation in Tuesday’s Consumer Price Index report for January.

Animal spirits are slowly re-emerging. Investors are more upbeat about where things stand, while economists and strategists are walking back their bearish calls made just a handful of weeks ago. It’s yet another instance that underscores the value of ignoring the experts—and sticking with your long-term investment plan.

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What’s in It for Me?

IN THE WANING DAYS of 2019, Congress passed the SECURE Act, a law that delivered a mixed bag of changes for retirement savers. Well, Congress has been busy again. At the tail end of 2022, a follow-up law—known as SECURE 2.0—was signed into law.

The good news: There’s a whole lot included in this new law. The bad news? There’s a whole lot included in this new law. SECURE 2.0 presents a number of new planning opportunities but, with hundreds of provisions, it’s also a lot to digest. Below are the provisions that, in my view, provide the most meaningful planning opportunities for folks at various ages and stages:

For younger workers. Young people, in many cases, are forced to contend with the twin challenges of relatively low salaries and relatively high student loan burdens. SECURE 2.0 provides some relief.

In the past, when an employer matched an employee’s 401(k) or 403(b) contribution, that match could be made only with pretax dollars. That was the case even when the employee’s own contributions were to the Roth side of the plan. SECURE 2.0 lifts that restriction. Now, an employee can opt to receive his or her employer’s match in Roth form. The match will be reported as income, but that’s okay. Folks earlier in their careers tend to be in lower tax brackets, making it advantageous to opt for Roth contributions.

The second provision for young people recognizes that they often face a tradeoff between saving for retirement and making student loan payments. SECURE 2.0 provides a clever solution. Now, an employer can make a 401(k) matching contribution, but the match will apply to student loan payments made by the employee. Research has shown that the unreasonable price of private college burdens young people in ways that go beyond the financial cost. This provision offers a bit of an offset.

For the self-employed. If you’re self-employed and want to save for retirement, there have typically been three choices, each of which was imperfect:

Standard IRA contributions are easy but carry relatively low contribution limits ($6,500 this year, or $7,500 for those 50 or older).
SEP IRAs offer higher contribution limits, but Roth contributions weren’t permitted.
Solo 401(k)s do permit Roth contributions, but they’re more complex to set up and carry a tricky reporting requirement for larger accounts.

SECURE 2.0 addresses this by allowing for Roth contributions to SEP IRAs. It won’t be appropriate for all self-employed workers. But for those in particular tax situations, it may be the perfect antidote to an imperfect set of options.

For folks in their early 60s. SECURE 2.0 is unusual in that it contains a variety of provisions targeted at narrow subsegments of the population. Case in point are the new rules on retirement “catch-up” contributions, which are the additional amounts workers age 50 and older can contribute to their company plan each year. This year, the catch-up is $7,500. Starting in 2025, this will be increased to at least $10,000, but only for those ages 60, 61, 62 and 63. This provision won’t help everyone, but it’ll be a useful addition to the playbook for those in their peak earning years.

For those in retirement. The original SECURE Act bumped up the age at which retirees must begin required minimum distributions (RMDs) from tax-deferred retirement accounts—from the endlessly confusing age of 70½ to age 72. Now, Congress has extended that timeline further. Beginning this year, RMDs don’t need to start until age 73. So, if you’re currently younger than 72 or turn 72 this year, you can wait one more year.

The new rule has a twist, though. Beginning in 2033, the starting age will rise again, from 73 to 75. This is a little confusing, so a simple way to think about it is as follows: For those born between 1951 and 1959, the starting age will be 73. For anyone born after 1959, it will be 75.

How can you use these changes to your benefit? For some retirees, RMDs really aren’t a problem, because the initial distribution percentage—about 3.8% of pretax balances as of the prior year-end—isn’t far off the amount they would have withdrawn anyway to meet living expenses.

But if you have other assets or other sources of income, RMDs may result in unneeded income—and an unnecessarily large tax bill. In this situation, the new rules may be very helpful. You’ll have an extended window to distribute dollars out of your tax-deferred accounts at tax rates that likely will be lower than they’ll be after RMDs begin. The most popular way to take these distributions is by moving cash or assets over to a Roth IRA via a Roth conversion.

For those who forget their RMDs. Perhaps the most draconian rule in the past has been the penalty for making a mistake with an RMD. The penalty was equal to 50% of the amount that should have been distributed but wasn’t. That penalty has now been cut in half, to 25%. Moreover, if the issue is corrected within a specified time window, it will be reduced further, to just 10%. Especially with the new age thresholds described above, RMDs can be confusing. This should provide a measure of relief in case of a misstep.

For retirees with charitable goals. A popular strategy for wealthy, charitably minded retirees is to make donations directly from a tax-deferred account. These are called qualified charitable distributions (QCDs), and they’re one of the only ways to take money out of a tax-deferred account without incurring any tax. QCDs can start as early as age 70½. This provides a helpful head start if your objective is to trim the size of your IRA before RMDs begin at 73 or 75.

In the past, QCDs were limited to $100,000 per year. Under SECURE 2.0, that figure will increase with inflation going forward. To be sure, this benefits only a small number of retirees, but if you’re in that category, it’s a benefit to keep in mind.

For empty-nest parents. Have your children graduated from school, leaving excess funds in a 529 college savings account? It’s a good problem to have, but in the past, the options were limited. You could leave the surplus for another relative—perhaps future grandchildren—or you could withdraw it. But withdrawals for non-educational uses entailed taxes and penalties. SECURE 2.0 provides another option, though it won’t take effect until next year.

Under the new rule, you can distribute funds out of a 529 and into a Roth for the beneficiary. That sounds great, though there are a number of restrictions. First, the total amount that can be moved is $35,000 per beneficiary, and that’s a lifetime limit. There’s also an annual limit which dovetails with the annual IRA contribution limit, so you couldn’t move the entire $35,000 all at once. Finally, the 529 needs to have been open for at least 15 years, and the funds to be moved need to have been in the 529 for at least five years. The goal, of course, is to prevent clever parents from using the new rule simply as a means to funnel $35,000 into a child’s Roth IRA. But if you meet the criteria, it’s a nice new option.

For employers to consider. If you own a business, many of the provisions in SECURE 2.0 are employer-specific and worth considering. Of particular interest is a new vehicle for employers to help their lower-paid employees build emergency funds.

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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Letter to Ryan

HI RYAN, DON’T FREAK out because I’ve written an actual letter rather than an email. No big news here, no emergency, we’re fine. I just have something that’s been percolating and I want to share it with you.

Ry, it’s become clear learning about investing is not where you’re at right now. I’ve tried to think of what I might have done to turn you off. We know I was depressed and withdrawn for much of your childhood, and you must have felt neglected or even ignored. I was overly concerned about how well you handled money and was impatient with a kid’s normal mishaps, like losing an allowance or spending it irresponsibly. A couple of times, I blew up at you. Or maybe you just recoiled from hearing so much about the harrowing gyrations of stock investing and the obligations that come with owning rental property. Am I in the ballpark?

Remember when we opened a joint brokerage account maybe five years ago? We were going to buy a stock, a mutual fund and an exchange-traded fund, so you could get an idea of how they worked. You would let me know when you felt comfortable going ahead with the plan after acquainting yourself with Morningstar. I was as excited as a little kid. But you never mentioned the account again until two years ago, when I told you I’d closed it. I could tell by your silence you were hurt, as I suspected you would be. Apparently, your wounded father was not above a bout of infantile retaliation.

I’m having trouble understanding your reluctance to pick up on managing money. You’re ambitious, you’ve got some cash and you’re a math jock. You’ll someday soon need to manage our family’s mutual funds, exchange-traded funds and real estate. And you were brought up in a home that places a premium on putting some money away in the event of, say, a health crisis or a business reversal. Acquiring some expertise in investing would seem to be only fitting.

Let’s face it, Ry, I’m almost age 78, with a stent, immunotherapy and a stroke warning. Mom will soon turn 70. For about 25 years, I’ve tried to honor Grandma and Grandpa’s sacrifices, and to protect their financial gift to us. As you and Mom know, we’ve overcome financial setbacks and avoided debacles. Along the way, I’ve accumulated a treasure trove of knowledge about the machinations of the stock market and the responsibilities of owning real estate. I’d love to pass some of that knowledge on to you.

Ryan, you’re not a kid anymore, you’re 35 and embarking on your own financial voyage. But as we’ve discussed, sports betting as a primary source of income is a risky venture that can invite personal and financial upheaval. Of course, you want to go your own way and make it on your own. We respect that and tried to encourage it. That’s why we’ve agreed to support your experiment emotionally and financially, and allow you to test the viability of living out your passion.

Your friends thought it was unwise to leave a dependable teaching job and try to turn a sideline into professional sports betting. Our friends think we’re foolish, if not outright enablers. What could make more sense than knowing how to supplement an unsteady income stream with dividends and rents? I’m baffled by your reluctance to grab the ring.

 Most likely, Mom will outlive me and have the responsibility of managing our investments. Ever since she began co-managing the properties, Mom has become more confident about overseeing their operation. She knows locations, the need for periodic upgrading and the features that renters like. You can trust her judgment.

But I don’t think she’s completely at ease with the numbers part, like the monthly reports, income statements and balance sheets, and more complex return-on-investment calculations. And I know she feels overwhelmed by the prospect of mastering mutual funds, exchange-traded funds and bonds. Your math facility, not to mention brainpower, make you a natural partner. Your mother, who has devoted so much of her life to you, will need you.

Our resilient bond survived the hurt feelings of the joint account and other episodes, and we’ve become very close. We talk almost daily about our hopes, our disappointments and our fears. We exchange good-natured barbs, and spend hours analyzing your betting strategies and results. I so look forward to Wednesday nights, when we FaceTime our basketball game of the week on TV and carry on like fraternity brothers.

Maybe I have it all backward. Why should you be the fall guy? Perhaps my harping on the benefits of investing was the original sin. Parents often revisit their childhood traumas when raising their own kids. I only began to emulate Grandpa through my investments when he was weakened by illness and his powerful image could no longer terrify me.

Could our impasse say less about a son resisting his father’s guidance than about his father’s unresolved need to seek his own father’s approval? I don’t want to repeat the tragedy of the relentless father who alienates his son. But the day will come when you’ll need to take over our family’s finances—and I’m anxious to make sure you’re prepared.

Love you, Ry,

Dad

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

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