Jonathan Clements's Blog, page 164

Six Rules for Wealth

IN SEPTEMBER 2014, The Wall Street Journal published a column entitled “The Simple Secret to Building Wealth.” An early paragraph began thus: “Wealth is born of great savings habits.”

As I read along, I found myself not only agreeing, but also wondering if the author had secretly consulted with my wife prior to penning the column. The similarities between his suggestions and our savings habits were striking.

I wrote an email to the author—who, as you might have already guessed, is now HumbleDollar’s editor—and he graciously wrote back. I described the steps we took going from a negative net worth, when we married at age 31, to a net worth that, excluding home equity, is now in seven figures. This was a 26-year process, although I doubt we had that goal in mind until it seemed imminent. Instead, we just pushed hard to build wealth and reduce debt.

Over the years, in thinking about the process of building wealth, I can offer readers the following six steps. Although the steps are simple, it takes uncommon dedication and discipline to see things through.

1. Save 15% of gross earnings. Dedicate yourself to living on the remaining 85%. You need a mechanism that moves the 15% directly to savings without the possibility of spending it. This may be the most difficult step. Where should the 15% go?

2. Skip the big cash reserve. Contrary to almost everything you read, I suggest skipping the step of building up an emergency fund—in cash, that is. This money is too easily spent. I’m willing to bet that only a small minority of people build up an emergency fund and then truly use it for emergencies only.

My suggestion: Start a Roth IRA in place of the emergency fund. In a few short years, you’ll gain sufficient satisfaction from watching your Roth grow that you’ll no longer be tempted to spend your savings.

There are limits on Roth IRA contributions, of course. Assuming the maximum allowable Roth contribution amount is less than 15% of your gross, the rest should go into your 401(k) or a taxable investment account. I’m a firm believer that the Roth IRA is superior to a 401(k) because you’re free to choose exactly where the money gets invested, plus the account’s tax bill is prepaid. You have far less control over where your 401(k) money is invested and who is actually in charge of investing it, although you do benefit from your employer match.

3. Buy used cars. What you drive is perhaps the most important aspect of building wealth. In Jonathan Clements’s column, mentioned above, he wrote that great savers “take pride in driving their car until the odometer breaks.” My wife and I purchase cars that last a long time. These are top-of-the-line cars, but typically have 80,000 to 100,000 miles on them when we buy them. My wife’s everyday car is a 2010 Lexus SUV with 252,000 miles, bought used with about 80,000 miles at the time.

In other words, let the new car buyer take the huge hit on the initial depreciation and the massive amount of sales tax. After all, these cars are built to go hundreds of thousands of miles. I drive a 2008 Chevy pickup truck with 231,000 miles on it. We have, as a backup vehicle, a 1999 Toyota Avalon with 358,000 miles on it. All three vehicles are in perfect running condition and we will drive them until death do us part.

Consider how much money is lost in the transaction for a new car. The sales tax alone is enough to dissuade me from ever buying a new car, let alone the interest costs on a car loan. Once you build some wealth, you can buy the types of vehicles I’m suggesting with cash. We bought our 1999 Toyota Avalon in 2005 for $11,000 and it had 98,000 miles on the odometer. We’ve been driving it now for 17 years.

4. Prepay your mortgage. We all know that, if your return in the financial markets exceeds your mortgage interest rate, paying off your home loan early is not fiscally prudent. Still, I would suggest some acceleration in the paydown. A 30-year mortgage can be reduced to 25 or 20 years with a certain amount of extra principal paid each month. The psychological advantage of living mortgage-free is huge. Once paid down, you can then seriously ramp up your monthly contributions to your portfolio.

5. Required reading. The most important book to read is The Millionaire Next Door. Indeed, Jonathan references this book in his column I mention above. The book profiles typical American millionaires, and their habits and lifestyles. It also profiles typical high spending-low net worth Americans, whose goals are opposite of the wealth builders. These people seek status at all costs.

6. Suggested reading. I’d also recommend The Little Book that Beats the Market by Joel Greenblatt. As your net worth grows, you’ll need to learn to handle your investments. This book will guide you. I have been implementing Greenblatt’s suggestions since 2011.

As they say, “A journey begins with a single step.” Start with No. 1 above—and, after a few years, you’ll see it for yourself.

A native of Hershey, Pennsylvania, Charles Wilson recently retired from his custom homebuilding business of nearly 30 years. He holds music degrees from Pennsylvania’s West Chester University and Boston University, and is a former member of the USMA Band , West Point, New York. Chuck and his wife have two children and reside in Westminster, Maryland.

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Hayes’s Favorites

MY SIMPLE BUT successful financial life is the result of four lessons I learned through the school of hard knocks.

Lesson No. 1, learned as a child growing up on a farm: Chores are not optional and are never accompanied by cash bribes. Lesson No. 2, learned as a college student: Spend all your time studying, working jobs and sleeping, and you can earn a degree without taking out a loan. Lesson No. 3, learned as a member of the workforce: Generous benefit packages may be more valuable than a higher salary. Lesson No. 4, learned as I strove to retire early: Work for 30 years, save as much as you can and always live within your means.

As you’ll see, those four lessons run through my 10 favorite articles that I’ve written for HumbleDollar.

From Half to Whole (Jan. 31, 2017). A midlife divorce forced me to reevaluate my financial future. Learning about personal finance and investment strategies became a necessity.
My Younger Self (March 6, 2018). Thinking about the financial advice I would give to my 18-year-old self was a fun exercise. It made me realize how quickly life has passed me by.
Six Years Later (May 3, 2019). After I got divorced in 2013, I calculated my net worth. In 2019, I wrote this article to update how my net worth, as well as my mix of assets, had changed.
My Five Mistakes (May 2, 2018). Reflecting on some of the financial mistakes I’ve made was thought-provoking. I realized I needed a balanced approach to being frugal, while still allowing myself to spend money on things I love.
Not What I Planned (Jan. 30, 2021). Setting up spreadsheets, to track my progress toward my financial goals, has become a habit of mine. But no amount of planning can accurately predict all of life’s changes.
Talk About Hot (March 23, 2022). Financial success is rooted in deliberate actions. But sometimes luck—and timing—play a major role. I was fortunate to be able to sell my house at the peak of one of history’s hottest housing markets.
Farewell Paycheck (July 27, 2022). This article celebrated the realization of a long-term goal of mine—retiring at age 55.
Didn’t Last Long (July 5, 2022). Just a few weeks after achieving a seven-figure net worth, my status as a millionaire was already in jeopardy. Stock market declines meant watching my nest egg melt away faster than I anticipated.
Hitting the Brakes (Oct. 25, 2022). I’d been dreaming of owning a dog-training facility for nearly three decades. As the opportunity to pursue that dream was about to become reality, I got cold feet.
Not Like the Others (Dec. 16, 2022). Reading articles penned by HumbleDollar contributors made me realize some of the ways my financial life differs from that of the site’s other authors. This piece focused on some of those differences, and allowed me to speculate about why my own writing appeals to HumbleDollar's readers.

This is the third installment in a series devoted to the favorite articles and blog posts penned by HumbleDollar’s most prolific writers. The earlier installments were from Dennis Friedman  and Mike Zaccardi.

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An American Story

MY MONEY JOURNEY began as a young girl when a confluence of events created tragedy and financial ruin for my family. I grew up in Brooklyn in the 1950s. After the death of my father at age 40, we lost our home and had only the barest of necessities.




At that time, there was little help for people in our situation. The meager government benefits that existed were highly regulated and came with a lot of intrusion into your personal life. Today, people in need receive many financial and medical benefits. Not so then.




Mom was handicapped by severe hearing loss. In those days, hearing aids were bulky and cumbersome. Her first one was a device she had to keep in a pocket with wires leading up to her ears. It was reconditioned and never worked properly. The next one was a little better. It was built into the bars of her eyeglasses, but was heavy and clumsy.




Even at that time, hearing aids weren’t cheap. The eyeglass hearing aid, which I bought for her, cost $550—a small fortune at the time. I had to take out a loan from Manufacturers Trust Company, a forerunner of JPMorgan Chase, to pay for it. For the rest of my mother’s life, I became the buffer between her and the world. At the time of Dad’s death, my younger brother was two months old, Mom was 44 and I was 13. Despite a life that was a “tough row to hoe,” my wild Irish mother lived to be 98.




As I grew older, I always had some sort of job. Fortunately, I was quick at learning and able to make a little money by tutoring other children. Soon, I was also old enough to babysit. I got my working papers and subsequently had a series of jobs after school and on Saturdays. My first job was at S.S. Kresge, a five- and 10-cent store in downtown Brooklyn. I knew that other girls my age were having dance and music lessons, and had more time for studying. But I wasn’t resentful. I liked working.




In the 1950s and ’60s, there were limited career choices for young women. I found secretarial work more enticing than nursing or teaching. After I graduated high school, I pursued stenographic studies at night. The high school I had attended offered free evening courses, including an advanced course in Pitman shorthand. I practiced typing on an old typewriter I bought.




I got a job as a secretary with General Motors’ Chevrolet division. The salary was good and the benefits were excellent. For the first time in my life, I had health insurance. Working in Manhattan was exciting. I also worked at Bloomingdale’s at nights and on Saturdays during the holiday season. I was aware that many of my colleagues were graduates of the Katharine Gibbs secretarial school, a highly acclaimed school for polished secretaries, so I honed my skills by taking night courses there.




When my mother, my younger brother and I moved to Delaware County, outside of Philadelphia, I got a transfer to the Chevrolet division in King of Prussia, where I met a handsome ex-Marine who swept me off my feet. We’ve been married 57 years.




I reached the highest executive secretary level at my next job, as secretary to the regional manager at AC Spark Plug in Bala Cynwyd, Pennsylvania. I’d had to change jobs because GM’s policies didn’t allow both my husband and I to work in the same Chevrolet office.




We decided to buy a house in New Jersey. I got a job with the Cadillac car division in Cherry Hill, N.J. That was to be my last position with GM. The office moved to the Valley Forge, Pa., area and it proved to be too much of a daily trip for me. During my tenure at Cadillac, we were able to buy an executive’s company car with low mileage at a very good price. Imagine that—a poor girl from Brooklyn riding around in a Cadillac.

The days of the polished secretary have long since faded. But it was so much fun while it lasted. I’ll never forget the beautiful Christmas luncheons we were treated to while working for Chevrolet in New York. They were always at the best hotels—the Waldorf-Astoria and the Garden Room at the Barbizon Plaza, as well as others.




My background taught me how to stretch a dollar. I became an adept do-it-yourselfer, learning how to cut and style my own hair. Not far from where I worked in New York City was a Chock full o’ Nuts lunch counter where you could get a quality cup of coffee for 15 cents, and a tasty sandwich and soup for about 50 cents. Sometimes, I skipped the soup in favor of a slice of one of the store’s delicious cream pies or wonderful whole wheat donuts.




Being frugal allowed me to save. I enrolled in GM’s stock purchase plan. The company matched your contributions. Previously, I thought that stocks were only for rich people, but soon realized that was how many got rich. At this point, I began to think about investing part of my small nest egg in the stock market. I had no one to guide me, so I plowed headlong into penny stocks. That proved to be a fruitless endeavor. I also tried two different stockbrokers. I wasn’t impressed with their results or their ideas.




Around 1965, I began studying the stock market. The library was my haven. I learned about stocks, bonds and mutual funds. My investing became more focused when I read a book by the late Geraldine Weiss entitled Dividends Don’t Lie. It gave me a point of reference, allowing me to gauge whether a stock was undervalued or overvalued. From there, I was on my way.




I first purchased shares in Public Service Electric & Gas, Brooklyn Union Gas and Consolidated Edison. Utilities, I figured, were commodities that people needed. I also liked pharmaceutical stocks. Bristol Myers Squibb is still a favorite, along with Merck. The consumer stocks appealed to me as well. Procter & Gamble has been one of my top performers, as well as Johnson & Johnson.




When I left GM after 26 years, I could have stopped working. We could have gotten by on my husband’s salary. But I was offered a three-day-a-week bookkeeping plus secretarial job which allowed me to devote more time to Mom’s care and also help my husband with his parents. I finally retired from the working world in 1996 at age 60, so I’ve now been retired for 26 years.




In 2018, I was diagnosed with stage four metastatic lung cancer, incurable but treatable, and spent the next three years in chemotherapy and immunotherapy. I never thought I’d still be here—but I am, thanks in part to my husband’s constant support and care. I’ve now been in remission for more than a year, and I’m still very interested in finance and investing. I’m something of a neighborhood investment guru. When asked for a stock tip, I always answer, “Here’s the best one I have: Don’t take any hot tips.”


Marjorie Kondrack loves music, dancing and the arts, and is a former amateur ice dancer accredited by the United States Figure Skating Association. In retirement, she worked for eight years as a tax preparer for the IRS’s VITA and TCE programs.

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Giving Made Easy

I'M NOT ONE TO DIVE into the mysteries of the tax code in an effort to avoid paying Uncle Sam. But I’ve lately stumbled onto something that many others are already well-versed in and which has been around since 2006: qualified charitable distributions.

If I make a contribution from my traditional IRA directly to a charity, the withdrawal is excluded from the taxable income reported by my wife and me and, indeed, it counts toward my required minimum distribution. That means the donation is effectively tax-deductible, even though we no longer itemize.

The Tax Cuts and Jobs Act of 2017 eliminated personal exemptions but doubled the standard deduction—at least through 2025. For many seniors like us, the standard deduction is now higher than we can reach by itemizing.

We pay no mortgage interest, and our property and state tax deductions are capped at $10,000. If my out-of-pocket medical costs ever exceed 7.5% of our adjusted gross income—the threshold to deduct them—I probably won’t be around to know it.

So what’s left to deduct? Charitable donations. Problem is, our donations won’t exceed 2023’s standard deduction of $27,700 for a married couple. We donate to St. Jude Children’s Research Hospital, our church, a local food pantry, a volunteer fire department, the Colonial Williamsburg Foundation and a few other charities.

It’s not a lot, but it comes to several thousand dollars a year. Americans are a generous people. We donated $485 billion to charities in 2021, with $327 billion of that coming from individuals, according to the National Philanthropic Trust.

We would give this money away, regardless of the tax code. But my recent discovery allows me to make our donations tax-free. In case you’re wondering, you can’t do this with a 401(k).

There are requirements, but we meet them handily. My contributions won’t exceed the $100,000-a-year limit, I’m certainly over the required age of 70½ and the charities we support are qualified. On top of all that, the whole process is made easy for me.

I just go to my Fidelity Investments online account, pick a charity and specify the amount I want to contribute. Fidelity deducts that amount from my IRA and sends me a check payable to the charity, which I then mail. I can do this multiple times throughout the year.

I’ll have to take around $50,000 in required minimum distributions this year. My charitable contributions count toward this sum. Say I donate $10,000 to different charities. In effect, $40,000 of my required distributions will be taxable. The $10,000 I’ve given to charity will leave my IRA tax-free. Seems like a good deal to me.

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Trading High

WHILE HANGING OUT at the local Charles Schwab office, you meet a high-octane trader named Hal. He paces up and down like the Energizer bunny and talks so fast you can’t get a word in. Incessantly checking his phone, he abruptly gestures to the door and insists you join him for lunch. Apparently, Apple is up three points, his options are in-the-money and he wants to celebrate.

Hal speeds to a nearby Subway, where he proceeds to order the Spicy Italian for both of you. Just as you take a bite, he puts down his phone and cringes as his face turns red. He wails that the virus scourge has crimped iPhone sales in China. Apple is now down six and his near-term options will expire worthless.

What’s with this guy? This isn’t just a case of the Starbucks jitters. Hal’s behavior shows the telltale signs of a manicky temperament—unbounded energy, flamboyance and a big appetite for risk-taking.

Now, don’t get me wrong, all investing involves risk. Last year, even bond investors got acquainted with the old saw, “no pain, no gain.” But today, we aren’t just talking about your Uncle Louie, who drums his fingers on the table before the food arrives. Instead, we’re pondering folks with a high need for arousal and action that undermines their investment success.

That clearly includes day traders and options players. Their hyperactivity is all too obvious. But what about more subtle manifestations, to which most of us are susceptible? Sometimes, a manic temperament masquerades as legitimate portfolio changes, like portfolio rebalancing every quarter or even every month.

Or how about mutual fund switching? You thought funds were a lot safer than owning individual stocks. They usually are. But they’re also vulnerable to arousal abuse. Do you choose fund families with the most lenient exchange privileges? Do you really need to shift from one sector fund to another based on a slick podcast presentation? The temptation is made all the greater by no fund redemption fees. Is the goal here really portfolio improvement—or is it more truthfully a need for excitement on a grey and boring winter day?

Portfolio reallocation can be a special case of switching syndrome. Has international begun to move? Why not jump in? Maybe the tech debacle has run its course, so you bolt out of defensive stocks and back into growth shares. My own recent sin: I succumbed to the much-ballyhooed January effect, which promises a run for small-cap stocks from two weeks before through two weeks after New Year’s. Well, maybe next year.

Are you suffering from FOMO, or fear of missing out? Following the money can work for a month or two until investors’ collective common sense reasserts itself. Remember meme stocks like GameStop? Such herding behavior by FOMO crowds isn’t confined just to stock manipulators. Ominously, Hee Jin Kim and his associates found FOMO to be almost as common among active stock traders as among bitcoin speculators.

Given to hyperactivity? Start by acknowledging that you’re a high-arousal type who thrills to action and the taking of risk. You can’t start to get control over your weakness as an investor until you admit it. Take solace from knowing that manic-proneness has been related to creativity and high productivity.

A new year is a good time to resolve to learn and practice self-discipline. You might leave your portfolio alone and instead take refuge in activities that also promise an action hit, like a formidable hike, a challenging new exercise routine or competitive sports. Alternatively, you might trade investments on paper only, keeping a record of your performance relative to a benchmark. Doesn’t sound satisfying? For those who would otherwise suffer withdrawal pangs, several commentators have recommended a solution: Put 90% or 95% of your investment money into mutual funds and exchange-traded funds, and then use the remainder to trade individual stocks.

Meanwhile, seek support from others for your newfound commitment to self-control. Take counsel and encouragement from family and friends. Find a buddy who, say, enjoys streaming action movies with you. Maybe you’re fortunate to have a partner who’ll review your monthly brokerage statements with you and offer kudos when you show greater restraint. What if you feel your trading life has spun out of control and losses are mounting? You might consult a therapist or join a support group for overactive traders, such as Gamblers Anonymous.

One final suggestion: Try reading buy-and-hold classics like Jeremy Siegel’s Stocks for the Long Run and John Bogle’s Little Book of Common Sense Investing. To be sure, we can change personality only so much. Still, returns are maximized by keeping our lust for action in check. Take a page from Warren Buffett’s playbook and accept that, when it comes to investing, boring is beautiful.

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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Walking Around Money

ON NEW YEAR’S DAY 2022, to shed some holiday weight and make the most of one of the world’s great strolling cities, I resolved to walk several miles each day around the streets of New York.

I’ve always had a happy knack for finding money as I wander. Ideally, I’d love to have been blessed with a more glamorous superpower. But alas, my lot in life seems to be a preternatural ability to locate lost coins at a hundred paces—the result of a thrifty Scots heritage, perhaps.

Previously, I simply pocketed street finds and sent them swiftly back into the circular economy. This time, however, I decided to put any such money in a jar, tally up the total on Dec. 31 and invest the proceeds in the stock market. Losing pounds while finding dollars struck me as a winning combination.

Ultimately, my daily constitutionals around the streets of Gotham in 2022 yielded $154.73. I also collected assorted odds and ends of jewelry that, while not exactly Art Deco Cartier, certainly has some melt value given gold’s surging start to 2023. A life-changing haul? Hardly. But for literally free money, my $154.73 is nothing to sneeze at.

These coins—and they were all coins, bar one solitary crumpled dollar bill—spanned 111 years. They ranged from a sparkling new 2022 Maya Angelou quarter to a wheat penny from, astonishingly, 1911. That was twelve months before the Titanic sank and the year when a pair of capitalist icons—Ronald Reagan and IBM (symbol: IBM)—each entered the world. More on the latter in a moment.

The antique cent was part of a mysterious hoard housed in a heavy copper pot and tossed in the trash. My best guess is it came from a newly shuttered pizza parlor nearby. It contained an eclectic mix of older and more recent low denomination U.S. coins, discontinued foreign currency and some stray New York City subway tokens from yesteryear.

I found that stash in broad daylight on a major Manhattan thoroughfare, so I undoubtedly wasn’t the first to see it. Maybe my fellow New Yorkers, being a famously blasé bunch, opted to eschew the time-consuming payoff. Others perhaps missed it by virtue of being buried in their cellphones. Still more may have decided that lifting it was not worth the potential hernia, such was its weight.

Anyway, here are my two cents’ worth from a year of profitable sidewalk pickups:

The areas around coffee carts, food trucks and fruit vendors are all reliable cash cows.
Bus stops and parking meters remain surprisingly productive spots, even in our tap-and-swipe electronic era.
Many of the mother lodes of yore have been lost to Father Time. Good luck these days finding any money adjacent to shoeshiners, payphones or newspaper vending machines.
New York is an ever-evolving metropolis, always reinventing itself. Dining sheds, that pandemic-era interloper, are often littered with coins. The entrances to cannabis dispensaries—increasingly ubiquitous—offer ample promise of lost money, since their clientele’s hand-eye coordination and fine motor skills are frequently somewhat compromised.

After concluding that a Coinstar machine’s approximately 11% commission was too rich for my blood, I chose the more laborious but free alternative of manually counting the cash, rolling up the coins and depositing the winnings at my local Chase bank branch. Above the teller was a sign saying, “Please understand that coin orders may be limited or unavailable due to the government shortage.” Redeeming my found money thus came with the added bonus of helping to juice the money supply.

Next up: What stock to buy? For a giggle, I initially toyed with the idea of purchasing either Amazon (AMZN) or Google parent Alphabet (GOOG). Remarkably—given that they began 2022 trading at about $3,400 and $2,890, respectively—I could easily afford either. This, thanks to a pair of 20-for-one stock splits and annual price plunges of 51% and 39%.

Neither pays a dividend, though, and I wanted a relatively high-yielding stock from the iconic Dow Jones Industrial Average. Based on year-end levels, among other permutations, I could afford to buy as many as five shares of Intel (INTC), four of Walgreens Boots Alliance (WBA) or three of Verizon (VZ). Since single stocks were all the rage in 2022, however, I opted for a solitary share at a higher price point.

After seriously considering New York’s own JPMorgan Chase (JPM) as a way of giving back—its employees were so wonderfully patient counting my coins, after all—I went with another Empire State outfit, IBM. The quintessential blue chip stock, “Big Blue” ended last year comfortably in the green—no mean achievement in an annus horribilis for the overall stock market.

A “dividend aristocrat” that has increased its payout for 27 straight years, IBM’s roughly 4.5% yield is more than double that of the S&P 500. Since I’m 53—at my absolute financial zenith, allegedly—and several studies have linked daily walks with longevity, I could conceivably be making money on my found money for more than three decades. Add the $60 that HumbleDollar is paying for this article, and those humble coins really are the gift that keeps on giving.

That this publication compensates its authors solely via PayPal or Venmo does, admittedly, hint at the law of diminishing returns for street finds in an increasingly cashless society. Still, the priceless lessons I’ve already learned en route—the virtues of delayed gratification, the time value of money and the miracle of compound interest—will last a lifetime.

Justin Sharon is a freelance writer. After working at Merrill Lynch for many years, he shifted his career focus to financial journalism. Among other subjects, he also authors a monthly column devoted to British soccer.

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What Gets Taxed

INCOME SHOULD BE ONE of the simplest concepts in financial planning—and yet it turns out to be one of the most confusing, thanks to the multiple ways it’s calculated depending upon whether it applies to income taxes, Social Security and so on. My goal today: Help you sort out income’s shifting definition across the U.S. tax code.

Gross income. This is the granddaddy—income from all sources, before almost any taxes or deductions. For an individual, this includes wages and salary, pensions, interest, dividends, tips, capital gains, alimony and rental income. It can also include up to 85% of a retiree’s Social Security benefits, as we’ll see later.

Adjusted gross income. Commonly called AGI, this is gross income minus certain adjustments, such as up to $300 in educator expenses for teachers, student loan interest, alimony payments and contributions to retirement accounts. AGI determines eligibility for some tax deductions and credits.

Modified adjusted gross income. MAGI is widely used to determine tax eligibility for such things as IRA contributions and the child tax credit, to name just two. For many folks, AGI and MAGI are almost identical because their adjustments to income are little to none.

Unfortunately, the IRS calculates MAGI in multiple ways depending on the deduction or credit in question. Here are some of the most widely used formulas:

The MAGI for the Affordable Care Act health insurance subsidy is AGI plus any untaxed foreign income, nontaxable Social Security benefits and tax-exempt interest from investments like municipal bonds.
The MAGI for the child tax credit, the American Opportunity tax credit for higher education costs and the student loan interest deduction is AGI plus some sources of foreign income.
The MAGI for the adoption tax credit is AGI plus tax-exempt interest and some sources of foreign income.
The MAGI for Medicare premium surcharges is AGI plus tax-exempt interest income. These surcharges are also known as the income-related monthly adjustment amount, or IRMAA. Medicare uses your income from two years ago to determine if you must pay higher Medicare premiums this year.

Taxable income. This is the bottom line number you plug into the income tax table to see how much you owe Uncle Sam. It’s AGI minus any allowable tax deductions.

For most paycheck workers, their income number is provided on the W-2 form their employer sends after year-end. If you’re self-employed, keeping track of your income and deductible expenses is much more complicated. The IRS provides these guidelines for what is and isn’t considered taxable income, but it doesn’t make for easy reading.

Meanwhile, taxpayers can take one of two paths to determine their tax deductions. They can either claim the standard deduction—$13,850 for single tax filers in 2023 and $27,700 for couples filing jointly—or itemize their specific deductions. Itemized deductions include the basics like mortgage interest paid, charitable deductions, and state and local taxes, as well as more esoteric expenses.

Social Security. This is another whole can of worms. During our working years, there’s a couple of taxable income figures worth knowing. The maximum taxable earnings amount on which you pay payroll taxes is $160,200 in 2023. Once you surpass this amount, you no longer owe the 6.2% Social Security tax. You’re still on the hook for the 1.45% Medicare tax, however, since it has no upper limit.

If you collect Social Security benefits before full retirement age and continue to work for pay, your benefits can be reduced based on your income. If you’re younger than your full retirement age for the entire year, Social Security will deduct $1 in benefits for every $2 you earn above $21,240 in 2023.

In the year you reach your full retirement age, Social Security will deduct $1 in benefits for every $3 of earnings above $56,520 in 2023 until the month that you reach your full retirement age. After that, you can earn any amount with no reduction in benefits.

But hold on, we’re not quite done with Social Security. A portion of your benefit payments may be taxed based on yet another definition of income. This one is called combined income, and it’s your adjusted gross income plus any nontaxable interest income and one-half of the Social Security benefits you receive.

Taxes on benefits begin for single taxpayers with $25,000 or more in combined income, and for married taxpayers with $32,000 or more in combined income. Initially, only 50% of benefits are taxable. But if your combined income rises above $34,000 for singles and $44,000 for married couples, up to 85% of benefits are taxable.

Got all that? Yet even this isn’t a complete list of income classifications, especially for those with complex financial situations. Indeed, there are nuances and subtleties to many of these items. You know the phrase “buyer beware”? The same applies to taxpayers.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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Calm Before the Rally?

THE MARKET IS NOW in the heart of the corporate-earnings reporting season. Traders will soon be digesting big tech’s fourth-quarter profits, as well as a Federal Reserve meeting and monthly jobs data. That’s a lot to take in. Volatility must be high with so much hanging on the line, right? Wrong.

The Volatility Index, or VIX, has dropped significantly, nearing levels last seen during 2021’s bull market. At less than 20, the VIX—known as Wall Street’s “fear gauge”—implies a somewhat tame 30-day S&P 500 price change of less than 6%. For perspective, the VIX spiked to almost 40 at various times last year, such as when Russia invaded Ukraine, during the June stock market low and amid the market shakiness after the inflation report for September.

Closing out last week at 19.85, the VIX is smack dab at the long-term average that’s been set over the 30 years since the Chicago Board Options Exchange first constructed the index. Investors should recognize that volatility—like individual stocks—swings back and forth between highs and lows. But while stock indexes rise over time, volatility is mean-reverting: The VIX often spikes quickly, then takes time to settle down.

What the VIX tells us right now is that, while Wall Street strategists are generally bearish on the market’s outlook over the next several months, major downside plunges are not as likely as they were in 2022. One volatility catalyst—the potential debt ceiling crisis—is currently an afterthought for traders. Anything can happen, of course. But I’m not expecting greater stock market turmoil driven by D.C.’s machinations, and VIX traders seem to agree.

A low VIX is not an all-clear, though. Sub-20 readings were seen last April, August and early December. Each instance turned out to be a near-term high point for the S&P 500. If we get some upbeat news over the next few weeks, perhaps today’s somewhat muted VIX reading will stick—and stocks can rally further.

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Not So Gloomy

IS THE STOCK MARKET headed for a sea change? That’s the argument money manager and author Howard Marks makes in his most recent memo.

The sea change Marks is referring to: For four decades, the federal funds rate declined steadily—from a peak of 20% in 1980 to 0% in 2020. The result, Marks argues, was a steady tailwind for the stock market.

In January 1980, the S&P 500 index stood at 108. At its peak early last year, it topped 4,800, marking a period of impressive gains. Marks acknowledges that innovation played an important part in the stock market’s performance—think of all the companies and technologies created since 1980. Still, he argues, “I’d be surprised if 40 years of declining interest rates didn’t play the greatest role of all.”

That brings us to the sea change: Over the past year, the Federal Reserve has reversed course, lifting its benchmark interest rate by more than four percentage points. Not coincidentally, over that same period, the stock market has dropped about 15%, with many individual stocks down far more. Where interest rates go from here is an open question. But one thing is clear: It would be mathematically impossible for rates to replicate their feat of the past four decades and drop another 20 percentage points.

As a result, Marks paints a downbeat picture for stock market investors. Among the adjectives he uses to describe this new era: guarded, uncertain, hesitant. But should Marks’s outlook concern you? Below are some observations.

On the facts, I agree. There’s no question that four decades of declining interest rates provided an enormous tailwind. But that doesn't necessarily mean the next four decades will deliver the opposite. In other words, there’s no reason to expect that rates will now rise by 20 points. That’s because economic conditions today are very different from those of 1980.

Back then, the Fed cranked rates up to 20% because it had little choice. Inflation had been stubbornly high—hitting 13.5% at the beginning of 1980—and drastic action was needed. By contrast, while today’s inflation is high, it has been showing signs of improvement. The most recent 12-month reading for the Consumer Price Index was 6.5%, down from 9.1% in the middle of last year.

While anything could happen, it appears things are now headed in the right direction. If the Fed succeeds in bringing inflation fully under control, there would be no need to continue raising rates indefinitely. We might still see some more increases this year, but then rates would level off. If that's how things turned out, interest rates wouldn’t necessarily represent an indefinite headwind for stocks. Instead, they’d become more of a neutral factor, and that wouldn’t be such a problem, as explained below.

Stocks can still prosper. It's important to keep in mind that the fundamental driver of stock prices is corporate earnings. Higher interest rates do put a dent in profits for some firms—if they have debt—but, in general, there's no reason to think that companies will be less productive in the future. They’ll still innovate and develop new products, which will drive earnings growth. Population growth also contributes to earnings growth.

As Marks points out, higher rates do cause investors to put a lower value on earnings—owing to the way the math of present-value calculations works—and that’s a headwind for stocks. But it’s not a permanent headwind. In other words, we shouldn’t expect stocks to fall continuously into the future. Indeed, stocks would only fall continuously if interest rates rose continuously. As noted above, the latest data suggest that’s not where things are headed.

Another driver of the stock market is demand. Even though stocks are relatively less attractive compared to bonds in a world of higher interest rates, stocks should still be more attractive over the long term. Suppose stocks return only 7% on average in the coming decades, compared to 10% historically. That would still beat the 4% to 5% that bonds are paying.

For that reason, most people will still prefer the stock market for their long-term savings, and that will mean ongoing demand for stocks. That demand would help support share prices. It would take a long period of stock market malaise to turn investors off stocks, in my view. That’s because there’s no obvious alternative and because, simplistic as it may sound, savers need somewhere to put their money.

Higher rates aren’t all bad for investors. Interest rates function as a sort of redistribution mechanism. When rates are low, they punish bondholders and reward investors in risky assets, such as stocks. When rates are higher, bondholders benefit while stock market investors don’t do as well. Investors who own both stocks and bonds, then, are hedged, though it’s not perfectly proportional. Lower rates, which were a tailwind to stocks, provided a much larger benefit than the extra percentage points of interest that investors are now earning on the bond side of their portfolio. Nonetheless, the current situation isn’t all negative for investors.

Higher rates have another benefit. A key criticism of the Fed is that, in the past, it’s left interest rates too low for too long. A result was that, on the eve of the COVID-19 crisis in February 2020, the Fed’s benchmark rate was at just 1.5%. That left policymakers little room to maneuver and forced them to turn to what I’ve called the Tommy gun of monetary policy: a technique known as quantitative easing.

If you’ve heard about the government “printing money,” that’s what quantitative easing is. I’d argue it’s not a sound policy option and, if we can avoid it, we should. With rates at a higher level now, that leaves the Fed more room to lower rates in the future when it needs to, and thus avoid printing money. It’s a healthier place to be.

What does this all mean for investors? I don’t share Marks’s gloomy outlook. Still, his warning is a reminder to investors to make sure their portfolios are effectively diversified. On the stock side, higher interest rates are relatively better for value stocks—the shares of older, slower-growing and dividend-paying companies—than for growth stocks, so you’ll want to make sure your portfolio is balanced.

While I’m an advocate for simple portfolio structures, this is an area where it’s worth a little extra work. That’s because, after years of outperformance, technology company stocks now dominate broad-based indexes like the S&P 500. According to data from Morningstar, growth stocks now outweigh their value peers by nearly two-to-one in the S&P 500. For that reason, I recommend supplementing the S&P 500 with a separate, smaller holding in a value index fund.

On the bond side, it’s also important to diversify. I recommend only government bonds, and only short- or intermediate-term issues. But even within those narrow categories, you’ll want to diversify across both conventional and inflation-protected bonds. That will help your overall portfolio hold up whether inflation continues to fall or we see a resurgence. Indeed, Treasury Inflation-Protected Securities (TIPS) are now pricing in just 2.2% inflation over the next 10 years. Should inflation continue at any level above that, TIPS investors would benefit.

A final note: If you are in your working years and a net saver, Marks’s downbeat forecast shouldn’t concern you. Indeed, young people should actually look forward to market downturns because they’re an opportunity to pick up shares at lower prices.

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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We’re Overruled

I BEGAN TRYING TO figure out the laws related to retirement and employee benefits after the enactment of ERISA in 1974. I spent endless hours over many years in lawyers’ offices in Washington, D.C., as each new law or regulation came along.

TEFRA, DEFRA and COBRA are but a few of the many laws that now confound Americans. I bet most people think COBRA was only about health insurance. In fact, it’s the Consolidated Omnibus Budget Reconciliation Act. When you see a D in a law’s acronym, it usually stands for deficit. Meanwhile, an R means reduction or reconciliation. Good luck with that.

Recently, HumbleDollar’s Greg Spears explained some of the new rules in the so-called SECURE 2.0 Act. When you look closely at such laws, it’s questionable whether they provide the right incentives, whether they’re administratively feasible and—most important—whether they benefit the Americans who most need help. My experience in trying to explain, comply with and administer these laws over many decades tells me the answer to these questions is almost certainly a resounding “no.”

ERISA alone added thousands of pages of regulations. It also contributed to the decline of pension plans by making them more costly to operate. SECURE 2.0 delays required minimum distributions yet again, first to age 73 and later age 75. Who but the wealthy can delay taking retirement savings until their mid-70s?

The primary beneficiaries of all this complexity are consultants and lawyers. The losers are average Americans. They’re turned off by what they can’t understand and often interpret the rules incorrectly. It can get them into a mess of trouble.

Just consider the many different retirement plans we now have: defined benefit pensions—with many variations—the 401(k), solo 401(k), 403(b), 457, SEP-IRA, traditional IRA and Roth IRA. Each one has a different set of rules and limits.

Why? There’s no need for all these variations. Some retirement and benefit laws are pushed by the wealthy, some by employers and some by unions. But doesn’t everyone have the same objective—to strengthen retirement for all workers? I doubt Congress understands human nature when it comes to money.

Writing each law in isolation, Congress has created a mishmash of benefits tied to different income levels. When compared, they don’t seem fair. You can be eligible for the saver’s credit if the family earns up to $73,000, and yet a couple would owe taxes on as much as 85% of Social Security benefit payments with a total combined family income of over $44,000.

A deductible IRA uses various income limits, partially dependent on whether a spouse has a retirement plan at work. Meanwhile, there are no income limits on Roth conversions.

In 2023, a worker can contribute up to $22,500 to their 401(k) plan, plus $7,500 more if they’re 50 or older. Yet a person relying on an IRA—without an employer match—can contribute just $6,500 this year, or $7,500 total if they’re 50 or older.

Why are Roth withdrawals excluded from the modified adjusted gross income (MAGI) calculation, while tax-free interest on municipal bonds is not? No doubt that logic got lost in the tunnels underneath the House and Senate.

How can all these disparate rules—and their associated high administrative costs—be justified? Are they necessary? Are they fair? I can’t see how. Do we really need more laws designed to motivate Americans to save for retirement? Don’t we have enough already?

What we need with retirement plans, as we do with health care, is simplification, consolidation and uniformity. How great would it be if financial education could focus on just one set of rules? The multitude of choices we have with both retirement and health care plans is not helping Americans.

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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