Jonathan Clements's Blog, page 165

Juggling for Retirees

WHEN I FIRST LOOKED at the issue of portfolio withdrawals more than two decades ago, many financial experts suggested retirees follow a simple strategy: spend taxable account money first, traditional retirement accounts next and Roth accounts last. That way, you’d squeeze more years of tax-deferred growth out of your traditional retirement accounts, and even more out of your tax-free Roth.

If only things were so simple today.

Why have portfolio withdrawals become more complicated? More than anything, it’s driven by the tax laws. Let’s start by considering four key sources of retirement income.

Taxable accounts. Yes, with a regular taxable account, you have to pay taxes each year on interest, dividends and realized capital gains. But if you need to make a withdrawal from your taxable account, the tax bill may be zero—and, for most folks, the maximum will likely be 15%, and that assumes a zero cost basis. Moreover, if you hold your taxable account investments until death, any embedded capital-gains tax bill disappears.

Traditional retirement accounts. While withdrawals from a taxable account may involve little or no tax, every dollar withdrawn from a traditional retirement account will typically be taxed as ordinary income. Still, each year, you’ll want some income that’s potentially taxable—perhaps as much as $58,575 in 2023 if you’re single and $117,150 if married—so you take advantage of your standard deduction, along with the 10% and 12% federal income-tax brackets. As I see it, exiting an IRA at those tax rates is a bargain.

On top of that, if you have hefty itemized deductions later in retirement thanks to, say, large medical costs, you can set your deductions against your retirement account withdrawals, potentially paying little or no taxes on those withdrawals.

Another consideration: charitable giving. Even if your IRA is on the hefty side, that might not be such a problem if you plan to make qualified charitable distributions once you reach age 70½. You might also opt to bequeath what’s left of your traditional IRA to charity, thus saving your heirs from the embedded income-tax bill and instead leaving them your Roth accounts. The bottom line: Having a healthy balance in a traditional IRA or 401(k) isn’t necessarily a tax nightmare.

Roth accounts. These offer the chance for tax-free growth, don’t necessitate required minimum distributions like traditional retirement accounts, and still make a great inheritance even though most heirs now have to empty retirement accounts within 10 years. But there’s a cost to be paid today: Getting money into a Roth means paying income taxes either on the wages contributed or on money converted from traditional retirement accounts.

Social Security. In addition to the key benefits—lifetime inflation-adjusted income with a possible survivor benefit for your spouse—Social Security has another virtue: At most, just 85% of your benefit will be taxable and it could be far less. Whatever the tax rate, it’ll be lower than that levied on your traditional retirement accounts.

To get the largest possible monthly check, many folks postpone Social Security until as late as age 70, especially if they were the family’s main breadwinner. Problem is, from a tax perspective, delaying Social Security clashes with the notion of delaying traditional retirement account withdrawals.

How so? Once folks start required minimum distributions in their early 70s from their often-bloated traditional retirement accounts, not only are those withdrawals sometimes taxed at a steep rate, but also all that income often means that even more of their Social Security benefit is taxable—a phenomenon known as the tax torpedo. In other words, postponing all retirement account withdrawals until your 70s can trigger a double tax whammy, because it can also mean that up to 85% of your Social Security benefit is also taxed.

What to do? Today, retirees are often advised to start drawing down their traditional IRAs and 401(k)s in their 60s or to convert a portion of their IRA to a Roth. But in this “it’s never simple” tax world, that has two other knock-on effects.

Health insurance premium tax credit. If you retire before age 65, and hence you aren’t yet eligible for Medicare, one of the biggest potential costs is health insurance. But if you purchase insurance through a health-care exchange, and your household modified adjusted gross income is no more than four times the federal poverty level, you should receive a tax subsidy.

That puts the cutoff at $54,360 for single individuals and $73,240 for couples, assuming there are no kids at home. The further you’re below these levels, the larger the tax credit—potentially more than $9,000 per person per year where I live. Result? If your goal is to get a large tax subsidy, you’d want to avoid, say, converting to a Roth or realizing capital gains.

IRMAA. Limiting your income can also be the key to avoiding the Medicare premium surcharges known as IRMAA, short for income-related monthly adjustment amount. In 2023, these surcharges apply to single individuals with modified adjusted gross incomes of $97,000 and above and couples with incomes of $194,000 and above.

At these income levels, the surcharges for Medicare Part B and Part D are equal to roughly 1% of income—something to be avoided, if possible, but hardly a devastating financial hit. The income that’s assessed is that from two years earlier, which means high-income folks need to start worrying about these surcharges in the year they turn age 63.

How do you navigate your way through this thicket of tax considerations? There’s no one-size-fits-all answer.

My plan is to do hefty annual Roth conversions through at least age 62 and possibly for a few years beyond that, with the goal of avoiding much bigger tax bills in my 70s, when I’ll have to take required minimum withdrawals from my traditional IRA. My earned income is still sufficiently high that it would be tough to qualify for the health insurance tax credit, so I’m not worrying about that.

I’m also not too worried about IRMAA. The Medicare premium surcharges I might trigger look far less punitive than the higher income-tax rates I could face in my 70s if I didn’t undertake some hefty Roth conversions. That said, because IRMAA is a cliff penalty—meaning $1 over the various thresholds triggers the full charge for the year—I’ll keep an eye on those thresholds once I reach age 63 and I’ll look to limit my income if I’m likely to be close to the next threshold.

While the above strategy should work out okay for my situation, I could easily imagine a scenario where folks, instead of deliberately generating extra taxable income in their early 60s, might want to minimize it, so they qualify for the health insurance tax credit. This would be a double tax win—both avoiding income taxes and collecting the credit.

How would you pay for living expenses during this stretch? That’s where a handsome taxable account balance would come in handy. Once you reach 65 and start Medicare, you might then look at drawing down your IRA or converting a portion to a Roth, assuming you fear punishing tax bills from required minimum distributions in your 70s and beyond.

Where does that leave us? At the risk of oversimplifying, here are four suggestions:

Don’t worry too much about IRMAA. As I noted above, the potential hit is just 1% of income, though it’s worth keeping tabs on where you stand relative to IRMAA's various income cliffs.
If you retire before age 65 and your regular income is minimal, consider whether you should avoid realizing additional taxable income so you maximize your health insurance tax credit.
If you aren’t looking to collect the health insurance tax credit, or once you’re covered by Medicare, aim to stay in the same marginal tax bracket throughout retirement. This can be a real juggling act. As you look to supplement Social Security—whenever you claim it—and any pension you’re entitled to, you’ll want to carefully consider each year’s mix of withdrawals from Roth, taxable and traditional retirement accounts, and what the tax cost of each will be.
Got a seven-figure 401(k) or IRA and you don’t plan to claim Social Security until close to age 70? In your 60s, you may want to make large Roth conversion and perhaps also draw on your traditional retirement accounts for spending money, while leaving Roth and taxable account money for later in retirement. If you don’t take steps to shrink your traditional retirement accounts in your 60s, your 70s and beyond may be especially taxing once required minimum distributions kick in.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Guess Again

DON’T LET PREDICTIONS cloud your thinking. When my husband and I first started investing, that was the wisest advice we received. You know the sort of predictions I’m talking about: “It’ll be a bad year for the stock market, so you should pull all your money out,” or “bitcoin is going through the roof, so stock up now.”

Last year, I decided to make a note of some of the predictions I read, and put them in my followup file for the beginning of this year.

For instance, a year ago, The Wall Street Journal asked its readers where the Dow Jones Industrial Average, S&P 500, 10-year Treasury note and bitcoin would finish 2022. They predicted the Dow would end the year at 36,853. The actual finish was 33,147.25, or 10% lower. The prediction for the S&P was way off. Readers were expecting a 6% gain, but instead the S&P finished down 18%, including dividends. They thought interest rates would be 2% when they were closer to 4%. Then there’s bitcoin, which fell 64.3% to below $17,000, nowhere near the year-end price of $53,900 that readers predicted.

To be sure, these were readers, not financial experts. But the experts didn’t do any better. The ones I read included a local Philadelphia investment firm, an online financial blog and a financial newsletter. They all predicted the Dow and S&P 500 would be up in 2022. They also predicted there would be four interest rate hikes by the Federal Reserve. There were seven. What did the experts get right? Bitcoin. They all said it would tank, and it certainly did.

How did 2022’s tumbling markets affect my husband and me? Happily, we were down a lot less than the S&P 500, thanks to some good financial advice and our conservative investment tendencies, including an emphasis on dividend-paying stocks. The interest rate hikes mean we’re now actually making some money on our cash. We’re also still ahead on the bitcoin we bought, but I consider that pure luck. What about the two other cryptocurrencies we bought? Let’s just say they’ll help offset some capital gains.

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Avoiding Unhappiness

"DOES MONEY BUY happiness?" That’s one of the questions in HumbleDollar’s Voices section. I hesitate to say that happiness is a commodity we can buy. But studies—and many people’s personal experiences—suggest a lack of money can bring on unhappiness.

A recent paper, “Financial Stress and Depression in Adults” by researchers at the University of Birmingham in England, supports this conclusion. The researchers reviewed 40 studies examining the relationship between depression and financial stress, 32 of which were conducted in high-income countries like the U.S., Japan and the U.K.

Perhaps it should come as no surprise that research has found that financial hardship—defined as difficulty affording the basic requirements of daily life—can lead to depression. A lack of money to buy food, make rent or pay for medical services could challenge anyone’s happiness.

Such a dire situation can force folks to sell assets or ask for assistance so they can purchase necessities. Lest we think this phenomenon is confined to “the other half,” remember the increasing number of adult children in the U.S. who live with their parents because they can’t afford to live independently.

The study also found that absolute income didn’t reliably predict the risk of depression. Rather, it was relative income that was a stronger indicator. Our feelings about our finances are tied to how we measure up against our neighbors, according to the research. We are happier hanging out with people who have the same amount of stuff or the same buying power that we have.

Debt is a similarly nuanced measure of the risk of depression. Two of the studies examined indicated that debt can lead to better mental well-being if it eases financial stress or assists us in attaining a coveted status. When we borrow to buy a home or business—and pass a background check of our finances—we can experience added feelings of well-being.

Secured debt, such as a mortgage, didn’t cause stress—unless the borrower was behind on payments or if the debt exceeded 80% of the home’s value. But unsecured debt, such as an outstanding credit card balance, is a significant marker for depression.

Once again, these findings are relative. Total debt is not as reliable at predicting depression as the ratio of debt to income or debt to assets. People who go from no debt or low debt to substantial debt have a corresponding rise in their risk for depression.

On the brighter side, if we pay down our debts, our risk of depression falls. The implication: Money may not buy happiness, but it can help ward off depression if it’s used to pay off excessive debt.

Having little savings to fall back on can also produce foreboding about our financial future, according to the study. We could lower our stress by choosing not to live at the outer limit of our income or by adding more money to our emergency fund.

To answer the question posed at the start, it seems that we can’t buy happiness with a fistful of dollars or a stack of credit cards. The thrill of a new purchase is short-lived. But money spent to reduce our financial worries, such as by paying off credit card debt, may help stave off the unhappiness that can lead to depression.

Ed Marsh is a physical therapist who lives and works in a small community near Atlanta. He likes to spend time with his church, with his family and in his garden thinking about retirement. His favorite question to ask a young person is, "Are you saving for retirement?" Check out Ed's earlier articles.

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Meant to Be Spent

JUST BEFORE CHRISTMAS, I had a call scheduled with a financial planning client to discuss investment and tax strategies, with an eye to making sure everything was squared away before year-end.

This client is a retired executive who was successful because of her attention to detail. Her retirement is no different. She’s savvy and loves to get into the weeds of financial planning. As a financial nerd, that’s fine with me.

Naturally, given her personality, she has saved a tremendous amount. Her plan is one of the best I’ve seen. Her wealth is projected to grow throughout retirement. I think she likes it that way or, at least, how it looks on a spreadsheet. As you might expect, if you’ve read some of my earlier articles, I regularly challenge her to enjoy her money more. Every meeting, I tell her that she can afford to spend more and that, in my humblest opinion, she should. She always appreciates my sentiments and says that she’ll do so. But it’s a work in progress. No matter, to each their own. My biggest concern is that she knows that she can spend more if she so desires.

After we were done discussing various tax strategies, and the pros and cons of each, we got to talking about the holidays and our respective plans. I told her that I’m blessed that most of my family are nearby, so I won’t be traveling at Christmas. I know that her family lives in the South, so I asked her if she’d be heading there as usual. She loves her family very much and they’ll likely be the beneficiaries of her lack of spending.

She sighed, “I wanted to. But this will be the first time in 20 years I’m not going to make it down there. I’m just going to spend Christmas at home by myself.”

Immediately, my mind began to race. Something bad had happened. But what? Was she ill? Was there a family dispute? We’re comfortable with each other, so I prodded, “Why not?”

“The flights are too expensive,” she whispered.

Like a train pulling the brakes to a screeching halt, my immediate reaction was disbelief. I told her, “Wait, wait, wait. Not only can you afford this flight, but I also want to ask you a question: Do you think your family would rather have you at Christmas this year, or inherit an extra $1,000 in 25 years?” We had a big laugh, and some humorous back and forth, and she quickly agreed that she may be overthinking it a bit. After a while, I wished her a Merry Christmas and told her I hope she isn’t at home on Dec. 25.

About an hour later, she sent me an email that just said, “Thank you for perspective.”

I haven’t yet caught up with her in the New Year, but I like to imagine that she was booking a flight in the time between our call and that email. Maybe wishful thinking.

Whatever the case, I believe there’s a good lesson here. Sometimes we get so caught up in the routine of our life that we lose perspective. What better purpose for money could there be than to use it to spend the holidays with family? Of course, she already knew that. But sometimes it helps to have a reminder from a third party. We all need people who care enough to speak up and point out our blind spots. And maybe even more important, we should all be open to different perspectives—and be willing to change our minds.

Luke Smith is a CFP® professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine two passions: finance and people. He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at  Luke.Smith@Wealthspire.com. Check out Luke's earlier articles.

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Logging the Hours

I GREW UP IN a blue-collar family. When money was tight, one strategy my dad used to improve the situation was simple but effective. Overtime, time-and-a-half and double-time were all terms I heard frequently throughout my childhood.

In this Iowa factory town, those words can still be regularly heard at the taverns, bowling alley and family get-togethers. Overtime is the gift that can make a low-paying factory job worthwhile. Time-and-a-half turns that $12 job into a far more palatable $18 an hour, and can make the difference between renting and owning a home.

If you can land that great job in your local area that pays $25 to $40 an hour, those overtime hours become truly lucrative. Once I began my job at the chemical plant in 1999, the idea of getting a second job went out the window. Making time-and-a-half became your second job. Spouses accommodated your overtime because neither of you could replicate that income elsewhere.

I never developed the taste for overtime—or had the stamina to put in the hours—that some of my coworkers did. One year, I logged 500 hours of overtime. But I was single then, with no kids, and had just bought a house. The money came in handy furnishing my home, and my routine was pretty simple. Go to work for 12 hours. Hit the gym, sleep and eat. Repeat.

This year, by contrast, I’ll log around 225 hours of overtime. Most of it is organic. I don’t seek it out. It's what I get when covering production demands and for vacations taken by others.

We get paid biweekly. Today, my take-home pay is around $2,000 every two weeks. It doesn’t take much overtime to bump that up. If your life is set up to live off your 40-hour pay, the OT is all gravy.

I once worked several 12-hour days, along with a Saturday, and brought home $3,000 after Uncle Sam took his hefty cut. It’s a good feeling, for sure, but you don’t see your family much during those two weeks.

A year after I started in the plant, around 2000, one coworker told me he once broke the $100,000 mark. For those of us with high school diplomas, who live in a low-cost part of the country, that’s a lot of cash— an annual wage our parents never saw and money many of us never thought we’d make. But my coworker shared with me that it wasn’t worth it. He wanted to do it once, but it took 800-plus hours of overtime to do it. All you do is work, he said, and then recover from work.

Some in the plant eat overtime like candy. They have the energy to work the hours and their batteries just run hotter. Some have spouses who stay at home with the kids. They work a ton of overtime and their partners don’t expect as much from them when they get home.

An old boss spent the first half of his career doing shift work. After weeks of marathon shifts, he came home to an annoyed wife. As they sat down to dinner, he noticed she’d put name tags on their kids. He got the message.

In fact, he worked so much overtime that he took a pay cut during his first years in a management role. He told me he knew he had a problem when he got agitated looking at a paycheck that didn’t have a single hour of overtime on it.

Honestly, I admired how he put his three daughters through college and maintained his marriage. They always took vacations, and went camping as a family. He seemed like my dad. If he wasn’t at work, he was home. If he wasn’t at home, he was at work.

Over the years, I’ve recognized a sadder element to a few of these overtime machines. They don’t want to be at home, and their family doesn’t seem to mind them being gone. The house is quiet, with the dad usually at work, and the fat checks keep rolling in. Not my cup of tea, but who am I to judge?

One coworker shared a story from his old employer in Davenport, Iowa. The warehouse he worked in was notorious for its overtime. He knew he didn’t want that life when another employee, who was gravely ill, wasn’t responding when his family members spoke to him. But when they asked some of his coworkers to talk to him, he was acknowledging their voices. My friend said that did it for him. He began looking for another job.

For the past five years or so, I’ve usually made around $50 an hour when I work time-and-a-half. The math is simple. Work 100 hours of overtime and you got an extra $5,000. Those workhorses doing 700 or more hours of overtime per year? That’s big money. These folks, who love their overtime, can recite their employer’s compensation policy as if it’s burned into their brains.

One year, on July 4th, we were forced to work the holiday. Some coworkers, who were older and had families, wanted the day off. They were already going to get eight hours of straight time—which was their holiday pay—and they wanted to watch the parade and fireworks.

I was on graveyards that week, so I started late, around midnight. I worked my night shift, and got time-and-a-half for those hours, plus my eight hours of holiday pay. I went home, got some sleep, and came back to cover someone’s 3 p.m. to 11 p.m. shift. I was pleasantly surprised when I got my check to see I received double time for those eight hours on the second shift.

A few other local area employers pay just as well or even better. One of my friends from the gym, who works at the local power plant, has made some serious money maximizing his OT. He works hard and plays hard. He has a great relationship with his grown children and has been married for decades. He just isn’t the type to sit at home and watch Netflix all day. He grew up always having to work if he wanted name-brand jeans or a car. I was at a local barbecue and someone said that, in terms of pay, he was only below the general manager and the most upper management at his plant.

I’ll be sticking with my overtime policy of only working when my team needs me to. If coworkers want the overtime hours and the cash that comes with it, they can have it. But it’s good to know that, if I do have to work some extra hours, I’ll get paid well for my time. Seems like a fair deal to me.

Juan Fourneau’s goal is to retire at age 55. When he isn't at his manufacturing job, he enjoys reading and writing about personal finance, investing and his other interests. Juan, who is married with two children, retired from the ring after wrestling on the independent circuit for more than 25 years. He wrestled as a Mexican Luchador under the name Latin Thunder . Follow Juan on Twitter @LatinThunder1, visit his website and check out his previous articles.

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Zaccardi’s Favorites

I BEGAN WRITING for HumbleDollar in early 2020. As a market junkie, but one who’s also deeply curious about personal finance, I was already a regular reader of the site.

Since then, I’ve contributed roughly 140 pieces. My articles and blog posts often focus on the financial markets and long-term investing, with a nod toward the financial independence movement. What do my 10 favorite posts have in common? They’re mostly focused on macro trends and my own financial journey.

If Only (Jan. 13, 2020). I stumbled upon an old savings bond in early 2020 that yielded a modest rate. That got me thinking about the returns that might have been if the money had instead been invested in stocks.
Reading the Signs (July 14, 2020). This summer 2020 article, penned when baseball stadiums were empty due to COVID-19, discussed several market indicators I use to assess both the economy and my portfolio. While most data are best disregarded, a few signals matter in my playbook.
Which Road? (Feb. 19, 2021). I put my feet up on the HumbleDollar couch in early 2021, outlining possible paths I might venture down following my departure from fulltime employment. Truth be told, I’m still figuring it out.
Vive La Difference (Aug. 23, 2021). HumbleDollar started publishing shorter blog posts during the second half of 2021. These pieces were a good vehicle for me, given my limited attention span. Putting on my analyst hat, I dug into the sector breakdown of different stock market regions.
Parents Know Best (Sept. 2, 2021). While not hugely wealthy, my parents managed to save enough to fund a decent retirement that should soon begin. Their recent kitchen upgrade also earned a thumbs up from me.
Dinner Is Served (Sept. 15, 2021). I love a great ribeye steak and enjoy learning about retirement planning. In this blog post, I describe some of the strategies that advisors use to hook new clients at those infamous steak dinners.
Christmas in October (Oct. 9, 2021). Supply chain disruptions and goods shortages were major concerns heading into the 2021 holiday season. I urged consumers to shop early that year. While those logistical snafus have now been largely resolved, higher prices have—unfortunately—stuck around.
Out of Reach (Feb. 2, 2022). Among 2022’s most troubling financial events was how unaffordable housing became for first-time buyers. Even when mortgage rates were under 4%, real estate was expensive.
Sites Worth Seeing (March 30, 2022). My former students and current investment-writing colleagues often ask what my favorite investment websites are. Here I describe my go-to sites.
Cash No Longer Trash (Aug. 1, 2022). With so much financial gloom in 2022, higher interest rates on short-term cash accounts emerged as a bright spot, and they remain so today. In this blog post, I noted that money market fund yields would be on the rise.

This is the second installment in a series devoted to the favorite articles and blog posts penned by HumbleDollar’s most prolific writers. The first installment was from Dennis Friedman .

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Warren’s Way

I GRADUATED FROM college in 2007, shortly before the economy was brought to its knees by the Great Recession. I worked in asset management for Macerich (symbol: MAC), a publicly traded real estate investment trust. During the panic, the company’s share price plunged from $92 to $5.

There was fear in the markets. You might even say mass hysteria. Our executives were mostly miserable because their stock options were underwater. Waves of layoffs ensued. Knowing the company’s balance sheet was relatively healthy, I began buying shares—although I didn’t have much money and I was pretty clueless as an investor.

What I didn’t know then was that 2008-09 would present one of the best investment opportunities of my lifetime. I’ve continued to invest, mostly following the advice of Warren Buffett and Charlie Munger, the chairman and vice chairman of Berkshire Hathaway. Along the way, I’ve made millions of dollars’ worth of mistakes—but I've also enjoyed some success and learned an awful lot.

Being raised in a family where money was tight—my parents had to file for bankruptcy—I root for people to invest well. I also agree with Buffett that most people should “consistently buy an S&P 500 low-cost index fund; keep buying it through thick and thin, and especially through thin.”

What if, like me, you feel compelled to actively manage your investments? I’d suggest following Buffett and Munger’s philosophy. Here are 10 rules I’ve distilled by studying their approach to investing.

1. Limit yourself to 10 “units.” "Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now,” says Buffett. “Over time, you will find only a few companies that meet those standards."

Growing up, I was always told to diversify. If you’re going to actively manage your stock investments, that advice goes out the window. Good ideas are rare, and you should only invest in something if you’re willing to risk 10% of your capital, advises Buffett.

I take this literally, and imagine my portfolio as containing only 10 units. I’ll usually buy a pilot position and then scale up as my conviction rises. It’s not uncommon for a single position to be worth 20% to 30% of my portfolio.

2. Swing at your pitch and only your pitch. “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot,” says Buffett. “And if people are yelling, ‘swing, you bum,’ ignore them.”

You must determine your pitch. Mine is to invest in small public companies that have undergone a management change and are demonstrating sound capital allocation, with the results starting to appear in their financial performance.

An example is Lattice Semiconductor (LSCC). A capable and motivated CEO, Jim Anderson, took the helm in 2018. He focused the company on a single market segment where it had a competitive advantage: low-power chips that can be reprogrammed. Demand for such chips was exploding, thanks to 5G, edge computing and the internet of things.

 Anderson also succeeded in revamping the company’s culture, with the employees committed to delighting the firm’s target customers. That’s started to show in its financial performance. When the markets plummeted in early 2020, I added significantly to my holdings. Shares were below $20 then; they’ve traded above $70 recently.

3. Bet more when your conviction rises. “The wise ones bet heavily when the world offers them that opportunity,” says Munger. “They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.”

I overlooked this one for a long time. I was content with a decent gain instead of adding more money to a winning position. It’s much like a poker game, where you raise your bet when you think you have the best hand. I now use a modified version of the Kelly Formula, which leads to heavier bets when the outcome looks auspicious.

One big bet I undertook recently was Atlas Corporation (ATCO). Atlas’s CEO is the former Berkshire Hathaway executive David Sokol, who’s fashioning Atlas into a mini version of his old employer. Unlike Berkshire, however, Atlas pays a decent dividend. I’d happily hold this stock indefinitely, but it’s likely being taken private by its largest shareholders.

4. Do lots of reading and learning—but not trading. “The real money is in the waiting, not the trading,” says Munger.

While my day job is building early stage tech companies, I commit the first 90 minutes of each day to value investing. I copied this from Munger who, when he was still practicing law, would dedicate the first hour of his workday to his investments.

I read, think and meditate. My actual transactions during this time are minimal. While there are some amazing traders out there, I'm not one of them. For me, this time is better spent revisiting key concepts from some of the best books about Buffett.

5. Be a contrarian and ignore most pundits. “It’s not enough to do the opposite of what others are doing,” says Buffett. “You have to understand what they’re doing; understand why it’s wrong; know what to do instead; have the nerve to act in a contrary fashion; and be willing to look terribly wrong until the ship turns and you’re proved right.”

Being contrarian suits me because I’m competitive and I like to reach my own conclusions. Companies are like puzzles. I enjoy reviewing financials, listening to earnings calls and scrutinizing shareholder letters. I like being an investment committee of one, where you make money when you’re right—and pay the price when you’re wrong.

6. Use your small portfolio to your advantage. "Clearly you run into companies that are less followed,” Buffett says. “There's more chances for inefficiency when you're dealing with something where you can buy $100,000 worth of it in a month rather than $100 million."

Berkshire is too big to invest in smaller companies now. As an everyday investor, your investment universe is far larger. It takes in small- and micro-cap stocks—meaning companies with market values of less than $2 billion and $300 million, respectively. Companies this size make up more than half of the stocks listed on U.S. exchanges, yet they’re often out of reach of institutional investors.

7. Capitalize on market cycles but don’t time them. “Be fearful when others are greedy, and greedy when others are fearful,” Buffett famously advised.

I study market cycles in hopes of capitalizing on them. Howard Marks’s book, Mastering the Market Cycle, is an excellent overview of booms and busts, which are largely driven by credit—or the lack thereof. As legendary value investor Ben Graham taught us, Mr. Market will sometimes present us with great stocks at cheap prices. The key is to buy when others are petrified.

8. Leverage yield, especially “yield on cost,” over long holding periods. “Generate funds at 3% and invest them at 13%,” Munger advises.

Ideally, you’ll have at least one holding that returns your entire initial investment every time you receive a dividend payment. While it can take a number of years, you only need to find one or two of these in your investment career, as Buffett has demonstrated with Coca-Cola and American Express. Yet I’ve made horrendous mistakes around this principle.

My prescient grandmother bought 100 shares of Exxon for me in the mid-1980s, shortly after I was born. The stock split two-for-one in 1987, 1997 and 2001. The money was intended for my college education, but—thanks to academic scholarships—I was able to hang on to the 800 shares. Then, thinking that I was wisely diversifying, I sold half my shares in 2007.

At times, my mother and I relied on the dividend income to make ends meet. If that hadn’t been necessary, imagine what the position would be worth today if we’d reinvested all dividends and held on to all the shares—and how today’s annual dividends would compare to the original cost of the shares.

Regrettably, I made the same mistake again years later, selling a great stock, Innovative Industrial Properties (IIPR), far too early. Now paying nearly 40% of its initial purchase price in annual dividends, it would have been an incredible core portfolio holding.

9. Sell when the investment thesis changes. "We would sell if we needed money for something else—I would reluctantly sell something terribly cheap to buy something even cheaper," Buffett says.

The ideal holding period is forever. But if you find a better use for your capital, or when the investment thesis changes, it’s likely time to sell. As I mentioned at the start, I bought shares of my employer, Macerich, during the Great Recession. I bought even more shares when they fell into the single digits.

The thesis changed when its largest competitor offered to acquire the company for $91 per share in 2015. The stock surged on the news and I sold my entire position. That was a significant premium for a business that I no longer wanted to own “forever.”

10. Judge your performance against the S&P 500. “If any three-year or longer period produces poor results, we all should start looking around for other places to have our money,” Buffett writes.

Value investing is hard. While Buffett and Stan Druckenmiller have produced incredible streaks of outperformance in their careers, even great investors have down years. A concentrated portfolio is prone to significant swings and may show paper losses. Buffett’s test is to compare your long-run returns to the S&P 500. If you aren’t able to beat it, it’s probably wiser to index.

Kai Sato is the founder of Kaizen Reserve , Inc., a venture capital advisory firm for corporations and family offices. He recently served as the co-president and chief marketing officer of Crown ElectroKinetics ( CRKN ), a smart glass technology company that combats climate change. Kai is also a fund advisor and the former entrepreneur-in-residence at Hatch, a global startup accelerator focused on helping feed the world through sustainable aquaculture technologies. He’s the author of “ Marketing Architecture : How to Attract Customers, Hires, and Investors for Any Company Under 50 Employees.” Follow Kai on Twitter @KaiDaywalker.

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Choosing Success

PRESIDENT BARACK OBAMA told Vanity Fair, “You’ll see I wear only gray or blue suits. I’m trying to pare down decisions. I don’t want to make decisions about what I’m eating or wearing. Because I have too many other decisions to make.”

He believed that spending mental energy to make an inconsequential decision about clothes early in the day might lead to a bad decision on a consequential matter for the country later in the day. Think about that: A U.S. president, who had access to anything and everything, put a limit on what he could and couldn’t do.

The psychological term for this is decision fatigue. According to Wikipedia, “Decision fatigue refers to the deteriorating quality of decisions made by an individual after a long session of decision-making. It is now understood as one of the causes of irrational tradeoffs in decision-making. Decision fatigue may also lead to consumers making poor choices with their purchases.”

Paradoxically, when we have limited choices, we believe we need more—and yet having more choices and making more decisions can lead to worse outcomes.

Society tells us having more is a sign of success. More information, more clothes, more shoes, more books, more podcasts, more movies, more music, more food. But the more we have, the more complex we make our lives.

We believe that freedom means the ability to do whatever we want. We might be freer, however, if we limited our options and gained more time. As Obama noted, "You need to focus your decision-making energy. You need to routinize yourself. You can’t be going through the day distracted by trivia.”

In our finances, this is vital. The more active we are in managing our money, the greater the likelihood of introducing points of failure. The fewer decisions we make, the easier it is to make reliable choices.

For me, there are two parts to limiting my money decisions: first creating my money rules and then automating how my money is managed.

My money rules are the foundation of my finances. It helps me limit the things I have to pay attention to. Here are some examples:

Give away 10% to 15% of my income in some way, shape or form.
Save at least 20% of my income.
Keep enough cash in an emergency fund to meet three months of my regular expenses, and six months if and when I get married.
Avoid all consumer debt unless I have the cash to, say, pay off the credit card bill when it arrives.
Have fun but don't mess up.

I use automation to implement these money rules. It keeps my emotions from getting in the way of success. For example, before my paycheck enters my primary checking account, 20% of my income automatically gets invested.

That decision has already been made. I don’t have to make it again and again. This is especially helpful during major market downturns like 2022’s.

This doesn’t mean I won’t make changes if life forces my hand. It does mean, however, that I’m staying on the path I’ve chosen and not deviating too far from where I want to be. And if I have to deviate, I know exactly how to get back on the right path.

It seems counter-intuitive, but doing less is often the answer to succeeding financially. As we enter the new year, what are some of the money rules you’ll be putting in place? And how will you go about implementing them?

Kelechi Iwuaba is an engineer, a Nigerian-American and a self-taught finance nerd who lives in Atlanta. He loves talking about all things finance to anyone willing to listen. In his free time, Kelechi creates finance videos, records the “Rambling Mind” podcast and writes a blog. He loves volunteering at his local church and playing soccer at every opportunity. Follow him on Twitter @KelechIwuaba and check out his earlier articles.

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Stealing Joy

IF YOU'RE A HISTORY buff, you know how difficult life was during the 1930s. In our modern American world of plenty, it can be hard to appreciate what life was like during that period. The Great Depression, as it was later dubbed, was a time of incredible strife and struggle.

Today, we have an unemployment rate of less than 4%. During the 1930s, it reached 25% in the U.S. Think about that. A quarter of the country was looking for work to feed their family, and couldn’t find any. Even those who could afford goods were faced with shortages of things like gas, sugar, fish, butter, eggs, cheese and meat. There was even a shortage of leather, causing people to ration shoes for their children. Can you imagine? I struggle to.

Learning about history is a great way to gain the perspective we so desperately need in our world of plenty. By some measures, people today are more unhappy than they were back then. Yet all of us, from the top 10% of income earners to the bottom 10%, are exponentially better off than we would been at earlier times in human history. We have come miles in almost every category that defines an affluent, civil society: human rights, shelter, poverty, starvation, clean water, heat, air conditioning, education, work conditions, employment rights. The list goes on and on.

Why then, if everything has gotten so much better, are people chronically unhappy? I have a theory. It comes down to a simple idea: Comparison is the thief of joy. We aren’t satisfied with having more when someone else has even more. We judge and grade our lives in comparison to our peers or, worse, celebrities. One thing is certain: Someone will always have more than we do.

One stimulant to our feelings of inadequacy may be social media. We see an endless stream of often carefully curated, meticulously edited and finely filtered posts from peers and from the rich and famous. Each post is created with the intent to illustrate an illusion of perfection. I don’t mean to claim that social media is inherently bad. It can be a great way to connect across the world. But when we use social media as the measuring stick for our life, we get a distorted view of reality that can lead to unhealthy comparisons. We might be tempted to ask, “Everyone looks so happy all the time. What’s wrong with me?”

Another reason we might feel that things are worse than they are: the current state of the news. Bad news sells, plus it spreads twice as fast as good news. You won’t see a headline tomorrow that reads, “Global Poverty Down Again for the 20th Decade in a Row.” I don’t mean to claim that following the news is bad. It can, however, cause us to become convinced that life is getting worse—when, by almost every measure, it’s getting objectively better all the time for most of the world. No, not perfect. But yes, better.

When it comes to finances, this game of comparison can cause us mental anguish, with feelings that we’re behind, or inadequate, or inferior. It can cause us to forget that our quality of life is so incredible, right here and right now. Worse even than the mental aspect, the comparison game can cause us to act irrationally. We may be attracted to dangerous investments we don’t understand because our neighbor purportedly got rich owning it. Berkshire Hathaway Vice Chairman Charlie Munger said it best at a recent meeting with his business partner, Warren Buffett: “The world is not driven by greed, it’s driven by envy.”

The grass is green where you water it. Gratitude is an antidote to envy. Keep that in mind when comparison tries to steal your joy.

Luke Smith is a CFP® professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine his two favorite passions: finance and people. He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at  Luke.Smith@Wealthspire.com. Check out Luke's earlier articles.

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My First 2023 Rant

I'M ANNOYED BY the financial independence-retire early movement, otherwise known as FIRE. Most annoying are the FIRE bloggers who present their fantasy world of radically early retirement, but don’t like to be questioned, challenged or criticized. As if I’d ever do that.

FIRE folks typically have a few things in common. They were high-income earners before “retiring” and their households usually had two incomes. They’re willing—indeed eager—to embrace a frugal, nontraditional lifestyle, sometimes outside the U.S. Many aren’t retired, in my view, because they work to generate consulting income. Oh yes, upon dropping out of the nine-to-five life, many are instant experts on all things financial and frugal.

Some of them like to present a rosy but limited view of their lives. They start their FIRE blogging by presenting their great “forever” lifestyle—and then disappear or stop updating their blog. A bit suspicious, I’d say.

Several of the ones I follow sell their expertise, yet state that they aren’t experts and have no formal qualifications. Others write books, broadcast YouTube videos, record podcasts or gain notoriety in the press. I liken them to sideshow barkers.

Their pitch goes something like this: “Hey, if I can save half or more of my income, retire at 33, raise three children and put them through college, you can, too. I’ll show you how—for a fee.” FIRE is big business.

Even Suze Orman says she hates the FIRE movement. Am I in good company?

You and I often lend a helping hand to the FIRE folks. In some cases, they keep their income so low that they receive taxpayer subsidies for health care and other services. One blogger I follow gets free cable TV and a heavily subsidized community college education. I don’t know about you but, at age 33, we were one of those paycheck-to-paycheck families, grabbing as much overtime as possible.

Some of these bloggers have “curmudgeon blockers” on their sites. What else could it be, as I’m often ignored or have my skeptical comments deleted? My most recent encounter was with the Frugalwoods blogger. She posted that she buys nearly all of her children's clothes second-hand at garage sales or thrift stores, including shoes.

I pointed out that shoes were important for young children, and it’s not a good idea for them to wear shoes shaped by another person’s foot. My comment was deleted. Or did I get on her bad side when I mentioned that her reported monthly spending includes $100 to $200 for beer and wine?

I’m also not popular with the Root of Good blogger. A recent post says, “We kept busy in October with a ten day cruise to the Caribbean, plus several parties for family and friends. I need a vacation! Ha ha…we are two weeks away from our next big trip. We fly to Portugal for a week-long adventure around the Lisbon and coastal areas of Portugal. Then we depart on a transatlantic cruise back to the US of A in the middle of December.”

Oh yeah, this family of five spent the summer traveling Eastern Europe. In January 2023, they’ll leave on another 10-day cruise. For a fee, he will tell you how you, too, can live this frugal fantasy.

The Root of Good blogger claims a net worth of $2,718,000, including the value of his home. He deleted my comment when I asked for the value of the house. His annual spending is budgeted at $40,000. Guess what? I don’t buy it.

Is it me or aren’t American families with three children at that income level among those struggling financially and unable to come up with cash for an emergency? The weighted average poverty threshold for a family of five is $32,885. Yet it seems it’s possible to travel the world while just scraping by.

What do seniors have to complain about? In 2021, the median income for households age 65 or older was $47,620. Time to book the next cruise, I’d say.

The bottom line: If you aspire to retire in your 30s, you can get a head start by selling your car, saving at least half your income, giving up any semblance of luxury, shopping for used everything and maybe living off the grid. Nothing to it. Just be prepared for a radical lifestyle change. To survive, you may also need to sell your newfound expertise—and hope that you avoid any personal or financial crisis for the rest of your life.

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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