Jonathan Clements's Blog, page 172

Just What I Wanted

'TIS THE SEASON when many of us open our wallets and spend with reckless abandon. Along the way, we often end up buying a gift or two for that special person in our life—ourselves.

I don’t put too much stock in the accuracy of quick consumer surveys, but it seems the percentage of folks who self-gift might be 22% or 57% or even 77%. Whatever the right number is, I’m not inclined to be too judgmental, provided a reasonable amount of thought goes into the purchase. What do I mean by that? Here are six bad reasons to buy something:

To send a message. With our spending, we’re often purchasing a vision of ourselves that we want the rest of the world to buy into. The Honda Fit says we’re thrifty, the Jeep says we’re fun-loving, the Prius says we’re concerned about the environment and the Mercedes says we’re well-heeled.

While I find such signaling silly, I also realize it’s hard to separate signaling from carefully considered desire. Perhaps you really do love German engineering and you don’t give a hoot what the neighbors think of your BMW. But probably not.

To imitate others. There’s a reason marketers hire celebrities to endorse products. Clearly, it works. But to state the obvious, if you buy a celebrity-endorsed product, you don’t achieve celebrity status and, in fact, the celebrity may not even use the product. Meanwhile, who’s paying for that celebrity endorsement? If you buy the product or service, you’re footing part of the bill.

Because it’s on sale. This is a weakness of mine. I’m always drawn to products that are deeply discounted. Exhibit A: More than a decade ago, at an outlet shopping mall in Flemington, New Jersey, I bought a pair of black leather Cole Haan shoes that were on sale for $75, down from $300. Every time I wore the darn things, my feet would scream. Years later, after the pain of the foolish purchase had finally eased, I stuck the shoes in one of those charity bins at the local supermarket and bid them good riddance.

Because it’s supposedly in short supply. Remember March 2020, when panicked shoppers emptied grocery store shelves and created unnecessary shortages in key products, notably toilet paper? A few months later, I overheard a neighbor discussing the $1,000 of meat that she’d rushed to buy in the early days of the pandemic—and which she was now throwing out because her family hadn’t eaten it.

Retailers know that limited supply—real or not—can create a sense of urgency and get shoppers to pull the trigger. “Going out of business sale,” proclaims the sign in the window of a store that never seems to go out of business. “Only 2 left in stock—order soon,” announces the Amazon listing for a mug I was looking at, and which perhaps explains why I bought it.

To boost our spirits. After a rough day at the office, folks might seek solace at the mall on their commute home or do a little online shopping, sometimes spending money they can’t afford. Partly, it’s because a rough day can leave our willpower at a low ebb. But partly, it’s an attempt to cheer ourselves up. I have, alas, witnessed this phenomenon among people I’ve known. Trust me: Spending won't cure unhappiness.

Because we think it’ll appreciate. Of course, some possessions do appreciate in value—classic cars, rare stamps, art—but the vast majority of our purchases will end up all but worthless.

So, why do folks persist in seeing more than fleeting value in the possessions they buy? I think it’s a holdover from the past, when families measured their wealth not just in land, but also in fine china, silverware and antique furniture.

If the six reasons above make for bad spending decisions, what makes a purchase a good one? Obviously, it should be something we can afford. Many of the best possessions, I believe, are those that turn into experiences and that are potentially shared with others—the supplies needed for our favorite hobby, the car for the cross-country trip, the tennis racquets for you and your spouse.

But much of the time, we won’t know whether we’ve made a good purchase until later, when we realize we have—or have not—received great pleasure for the dollars we spent. How can we tilt the odds in our favor? We’ll likely fare better if we avoid the mistakes listed above. We might also favor many small purchases over a few large ones, so an occasional bum expenditure isn't so devastating. But as always with financial matters, perhaps the best strategy is to inject a healthy pause between when the desire to act hits us—and when we fork over our hard-earned dollars.

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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The Gift of the MAGI

I’LL BE ENROLLING IN Medicare in a couple of years. I wish I knew how much my premiums will be, but that’s a mystery worthy of Sherlock Holmes. I’ve researched it thoroughly, as you shall see, and it all starts with something called IRMAA.

IRMAA is not the name of my seventh-grade crush. Instead, it stands for income-related monthly adjustment amount. It’s the premium surcharge that people with higher incomes pay for Medicare.

How much is the surcharge? In 2022, single taxpayers with incomes above $91,000—or $182,000 for joint filers—paid at least $68 a month on top of the standard premium of $170.10 for Medicare Part B. The surcharge ranged as high as $408.20 a month for top earners. You can get all the details here.

There’s a similar surcharge for Medicare Part D, which pays for prescription drugs. That surcharge ranged from $12.40 to $77.90 a month in 2022 depending, again, on income levels. These figures adjust a bit every year.

There are several complications in anticipating the size of my future Medicare premiums. First, my income this year, at age 63, will determine if I must pay a surcharge when I enroll in Medicare at 65. Medicare, you see, looks back two years when determining our income levels.

Second, the income amount that counts is not adjusted gross income, but rather MAGI, or modified adjusted gross income. MAGI is adjusted gross income with tax-exempt interest income added back in.

Third, if I exceed the income threshold—even by $1—the Medicare surcharge will be triggered for the entire year. To avoid this fate, I need to know my income this year and keep it below the threshold, if I can.

At the moment, I think I’m just below the limit. It’s complicated, though, because my income comes from many sources. I have a pension, a period-certain annuity from my IRA that I’m using as a bridge until I claim Social Security at age 70, Roth conversions, taxable interest income, taxable dividend income and capital gains. Then there’s my business income, which is negligible this year.

My pension and annuity income are easy to calculate because they’re fixed. My dividends and interest income are also mostly known quantities, and I can track those on a year-to-date basis in my taxable brokerage account. This leaves three swing factors affecting my income: Roth conversions, tax losses and health insurance deductions.

I’ve made sizable Roth conversions in the past, but I backed off in 2022 to stay beneath the IRMAA limit. Still, I have made small monthly Roth conversions this year, and monitored their effect on my income.

I was comfortably below the income threshold in November—until Elon Musk decided to buy Twitter Inc. I owned some Twitter shares, and his purchase meant a long-term capital gain that has put me very close to the IRMAA threshold.

After that unexpected gain, I stopped making Roth conversions. If, in 2022’s remaining days, it looks like my income will exceed the IRMAA threshold, I can take some capital losses in my brokerage account before year-end to get my income below the threshold.

I also have a high-deductible health insurance plan, so I fund a health savings account. This year, I’ve contributed $4,650 to my health savings account, which includes a $1,000 catch-up contribution. It’s the biggest deduction from my MAGI income calculation.

Right now, I’m fairly confident that I won’t pay an IRMAA surcharge in the year I turn 65 and become eligible for Medicare. But that doesn’t mean I won’t pay the surcharge in future years. One reason: I won’t be able to contribute to a health savings account after I file for Medicare, so I’ll have one less lever to pull to reduce my reported income.

IRMAA is complicated, and the surcharge might be unavoidable if your income is high. But it’s still worth paying close attention. Even if you breach one IRMAA income threshold, you may be able to avoid crossing the next one and triggering an even larger surcharge.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC  in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of  Retirement Planning Tips for Baby Boomers . Check out his earlier articles.

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Not Like the Others

WHEN I SUBMITTED MY first article to HumbleDollar almost six years ago, I was sure it would be rejected. I was a divorced, middle-aged woman living alone in a small apartment. I assumed my personal finance story wouldn’t be of interest to readers. Now, after writing almost 90 pieces, I realize my insights—while different from many other writers—appeal to some portion of the site’s readership.

Over the years, it’s dawned on me that some of my fellow HumbleDollar contributors have far more wealth than I’ll ever have. This was perhaps never more evident than in a recent post. A HumbleDollar writer mentioned his investment portfolio had dropped $500,000 in value in 2022. My entire nest egg was worth just over $500,000 back in January.

Many contributors pen articles about their travel adventures. This is one subject I have yet to tackle. I never got bit by the travel bug. I admit I’ve never set foot off the North American continent. I’m a homebody and an introvert who would rather stay on familiar ground than venture to faraway lands. No doubt I would be a huge disappointment to my Viking ancestors.

Many writers and readers have mentioned that they view their house as more than a financial investment. They emphasize how the memories associated with their homes are something they can’t put a value on. For me, a house is a structure. I’ve bought and sold three homes in the past 30 years. Each was purchased with an eye toward maximizing the profit that could be made from each.

A HumbleDollar contributor recently mentioned how living in a retirement community wasn’t his cup of tea. For my husband and me, living in an age-restricted community feels ideal. Our township—with 18,000 homes—is small enough that we can walk or ride our bikes almost anywhere we want to go. Several grocery stores, hardware stores and a large hospital are located less than two miles from our home.

Salaries seem to be a taboo subject on HumbleDollar. I retired after working fulltime for 30 years, having never earned more than $77,000 a year. I suspect many HumbleDollar contributors have—or had—much higher salaries. I’ve always been willing to share the details of my financial life with readers. Whether it’s my salary, my net worth or how much I sold a house for, I’m willing to put my personal information out there.

I don’t have a slew of initials behind my name denoting my proficiency in personal finance and investing. I learned much of what I know through the school of hard knocks. Getting divorced at age 45 forced me to educate myself about personal finance. I spent hours reading books, website posts and forums just to learn basic investment strategies.

I admit I’m naive about many subjects that are tackled by other HumbleDollar writers. I don’t know what an inverted yield curve is or why I should be concerned about it. I never needed to know how to open a backdoor Roth account.

So, what is it about my writing that appeals to some readers? I can only assume the theme of simplicity—which runs through my life—may resonate with others.

My husband and I have enough money to cover all of our expenses. But we don’t have so much wealth that we need to worry about complicated strategies to avoid paying taxes or elevated Medicare premiums.

Both my husband and I are content to spend most of our days at home. Over the past few months, we’ve developed a daily routine that involves training our dogs, taking walks through our neighborhood and enjoying the mild Arizona winter. Even the meals we eat are simple. A leafy green salad, along with a slab of whatever meat happens to be on sale, make up the majority of our dinners.

If there’s a unifying subject many HumbleDollar writers and readers seem eager to discuss, it would have to be pets. Many of us have an irrational fondness for the four-legged creatures we share our lives with. Whether it’s dogs or cats, we all seem content to shell out however much time—and money—it takes to guarantee happiness for our pets.

Kristine Hayes Nibler recently retired, and she and her husband now live in Arizona. She enjoys spending her time reading, writing and training their four dogs. Check out Kristine's earlier articles.

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Rules for Gift Giving

IT’S THE MOST wonderful time of year—for trying to figure out what gifts to give. If you’re like me, you may be wringing your hands. But some studies and a bit of psychology could help.

While searching my favorite websites for gift ideas, I came across a helpful article by psychologist Jill Suttie. She offered five suggestions.

The first is to make sure the gift is practical. I didn’t see that one coming. Practical gifts are remembered. Expensive gifts aren’t necessarily better. Please don’t tell my husband.

You’ll be able to relate to No. 2 if you have small children: Initial enthusiasm doesn’t equate to long-term satisfaction. Have you ever given a child that toy he wanted, only to see him set it aside after a few days or even a few hours, never to be touched again? Suttie says we shouldn’t aim to wow the recipient momentarily with something flashy, but rather give a present likely to deliver longer-term happiness.

Third, people prefer gifts they’ve asked for rather than something you thought they’d appreciate. I can relate to this. Growing up, my mother rarely bought something on the spot when I wanted it. But often, I would later find it under the Christmas tree or as a birthday gift. I’m sure this was her way of ensuring her only child didn’t become a spoiled brat. I hope she succeeded.

Fourth, there’s been much talk about giving experiences over things. According to science, this brings about feelings of closeness between the gift-giver and the recipient.

Finally, there was one caution I found interesting: Don’t give folks a gift if they don’t want one. Such gifts are seen as self-serving, creating a sense of indebtedness.

Suttie’s article reminded me that the point of giving gifts is to strengthen relationships. That helped reduce the commercial aspect of the holiday for me, and also made me look at shopping a little more positively.

Now, about that diamond bracelet I’ve been eyeing. I told my husband it would definitely strengthen our relationship.

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Getting Off Lightly

I'VE BEEN A WITNESS to inflation with every trip to our neighborhood H-E-B grocery store. As various articles have pointed out, inflation can disproportionately hurt retirees. Yet recently I stumbled on a piece that argued the reverse, at least for some of us. I think my wife and I fall into that lucky category, and I’m curious if other HumbleDollar readers feel the same.

We own our home free and clear, so there are no rent increases to worry about and no mortgage to pay. There isn’t much we can do about the cost of home repairs and maintenance. But we’re in good shape when it comes to property taxes, thanks to generous homestead and over-age-65 exemptions. For our comfortable 2,800-square-foot home on a one-acre lot in a nice neighborhood, we pay $2,619 a year in taxes, plus our annual homeowners’ association fees are just $195.

As empty nesters, we’re only buying for two people. That’s quite a contrast to earlier years, when we were raising four kids. Food, clothes, transportation, school supplies, health insurance, dental and orthodontics expenses all made for a hefty domestic overhead.

Later, there were high car expenses, including maintenance and insurance. The liability quote for a teenage male driver will really get your attention.

And the grand finale—college—was a whole different order of magnitude. We treasure our kids and wouldn’t have done anything differently. But for a long time, we didn’t have much discretionary income.

We’ve always been dog people, and have never been without one and usually more. Not long ago, we had four elderly rescues with a variety of medical conditions. The cost of their health care and medications was pretty staggering. You know it’s bad when you have your vet’s phone number memorized. While inflation has affected vet prices, we’re down to one canine companion, and our vet bills have plummeted.

Now that I’m retired, my 48-mile roundtrip daily commute is history. My gas and car maintenance expenses are at lifetime lows. Moreover, when we do need to fill ‘er up, we luck out. I’ve read that some folks out west have been paying $7 a gallon for gas. I recently filled up here in Texas for around $2.50 a gallon.

During my career, I was a member of that shrinking dinosaur class who had to put on a suit and tie every day. That meant clothing and dry-cleaning expenses, even if I did find a way to mitigate the former by buying clothes on eBay. That necessity, too, is now gone.

We live in central Texas. While we make constant use of the air-conditioning in summer, our typically mild winters—if you don’t count the Great Freeze of February 2021—mean modest heating bills. We are all electric at our house, so there are no heating oil costs, either.

I no longer pay for disability insurance, since I’m no longer working, or for term-life insurance, since our kids are grown and self-sufficient. Our savings are enough to provide for my wife should I die first.

When I turned age 65, I celebrated—not my birthday, but my Medicare eligibility. When my wife recently also became eligible, our happiness doubled. In 2021, we had been paying almost $900 a month for her health policy. In August of that year, we began instead paying $170 a month for her Medicare, $104 for her Medicare supplement and $7 for her Part D drug plan. That’s a total of just $281 a month.

Finally, in retirement, a greater portion of our expenses are discretionary. These are things we would’ve avoided during our high overhead years but which we indulge in now. If we ever needed to cut back, we could.

It’s not just the expense side that’s been favorable during our golden years. While we’ve lost my employment earnings, there have been some nice pluses on the income side.

The main one is Social Security. I still can’t quite believe this gift that shows up in my bank account every month like clockwork. The second Wednesday of the month seems a little like Christmas. The potent inflation fighter is the cost-of-living adjustment, with a recently announced 8.7% increase for 2023.

Icing the cake, my wife is about to start her Social Security, which will be a spousal benefit. She’s waiting till her full retirement age of 66 and four months to get the maximum. If I predecease her, she’ll enjoy maximum survivor benefits, too, since I waited until age 70 to claim.

Our cash is earning more interest these days. The same goes for other fixed-income products such as certificates of deposit and Treasury bills. While it’s true that interest rates aren’t rising as fast as inflation, the loftier yields still look pretty attractive compared to the anemic returns of the past few years. Our other investments, especially stocks, while depressed at the moment, should be an excellent source of inflation protection in the long run.

I realize inflation is still passed through to us in myriad ways, no doubt taking a toll. Still, as I look across our finances, I suspect my wife and I are getting off more lightly than most.

Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dog, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with five beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier articles.

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Eye of the Tiger

IT'S BEEN A TUMULTUOUS year for diversified investors. Usually, when stocks are down, bonds are up. Not this year. The U.S. stock and bond markets have both suffered double-digit losses. That includes the Treasury bond market, widely considered to be a secure and low-risk place to invest.

A widely accepted measure of risk is a portfolio’s stock-to-bond ratio. More in stocks usually means more risk. But in 2022, whatever an investor’s stock-to-bond mix, investment results have likely been painful. Seeing our portfolio decrease in value affects everyone differently. But the most common reaction that I see in investors, especially retirees, is fear.

Imagine you’re on a hike through the rain forest. You hear some movement in the brush behind you. You spin around and come face to face with a 600-pound tiger with glowing neon eyes. What does it feel like? First, your heart drops into your stomach like a boulder. Next, you feel heat rush to your face as you begin to sweat. By now, you’ve comprehended you’re in danger. It’s time to act. You could run. You could climb a tree. You could try to fight. Or you could just sit there and do nothing. But who would do that?

Now, imagine a very different scenario. You’re recently retired. You have worked long and hard to get to your golden years, and they’re finally here. But in your first year as a retiree, you open your investment statement and see an ocean of red numbers. Your stomach drops. You feel the fear of running out of money. You feel the dread of possibly going back to work. You feel fear. Now, it’s time to act. You could sell everything and run. You could try to make back the losses quickly with a risky, new strategy. Or you could just sit there and do nothing. But who would do that?

This experience of fear is one we all know. The first time we had to speak in front of a class of our peers. Fear of judgment. The first time we talked to a young crush. Fear of rejection. The first time we experience significant investment losses. Fear of uncertainty.

Our brains are built so that fear triggers that visceral response we’ve all heard about: fight or flight. Our brains are very good at making a quick calculation about what to do in the face of danger. But with investments, it can be even worse. It’s like the hungry tiger is sitting above our head, following us everywhere we go, reminding us to be afraid. Afraid of who the president will be. Afraid of what foreign dictators will do. Afraid of what higher interest rates mean. Afraid of inflation.

This is why investing is so difficult. Many financial planners, myself included, encourage investors to pick an investment mix and then stick with it through thick and thin. This is the best way to survive the fear of uncertainty. When times grow fear-inducing, we often suggest sitting there and doing nothing—the “stay the course” cliché. But it’s a cliché for a reason. It’s worked for millions of investors.

Whenever we make a decision with long-term implications, such as a change to our portfolio, we need to think critically about it. I once heard it said that the time devoted to every decision should be proportional to that decision’s impact on our life. What’s for dinner? Quick decision. Should I sell my long-term investments because of short-term world issues? Slow decision.

Fight or flight is a system that our brain uses to make quick emotional decisions that spur action. I say, save it for the tiger. Instead, take your time with any investment decision, thinking long and hard before making any changes.

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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Riding Out the Storm

THEY SAY TIMING IS everything. That’s something I should know—because I’ve never been very good at it. The motto of Scotland’s Kerr clan is Sero Sed Serio, or Late, but in Earnest. That’s been my reputation since I was young.

In high school, my basketball game blossomed at the end of my senior year, just in time to have one good game of double-digit scoring before I graduated. I’ve missed every fashion trend that’s come along. Anybody want an unworn pair of bell-bottom jeans? I didn’t publish my first book until I was age 62. And as for investing? Well, let’s just say I didn’t buy shares of Apple or Amazon before they took off for the moon.

So, when it came to saving for retirement during my working career, I automated the process as much as possible. In addition to making monthly pretax payroll contributions to my 401(k) to take advantage of the company match, I had additional money pulled out of my bank account every month and invested in mutual funds held in a taxable account. Over time, the power of dollar-cost averaging made up for my own lack of investing prowess and enabled me to build a decent-sized nest egg.

Alas, my miserable sense of timing came back to bite me when picking the date of my "retirement" from the corporate world. I opted for September 2021. Back then, all was blue skies in the financial markets. My portfolio was appropriately diversified for someone of my age, or so said my account advisor at Vanguard Group. As long as I didn’t change my spending levels or long-term income expectations, he was confident I could leave the workforce at 61 and be fine for the next few years, until I started taking Social Security and Medicare.

Then came 2022, soaring inflation and interest rates, and a brutal year for stock and bond investors. Who could have predicted that in my first year without a steady paycheck, I’d be looking at double-digit losses on both the stock and bond sides of my portfolio? So much for the power of diversification in reducing portfolio risk.

Even worse, right before interest rates took off, I rolled over my 401(k) balance from my former employer, which had been invested in small-cap funds, and put the money mostly into the bond side of my portfolio, with the goal of maintaining my targeted 60% stock-40% bond mix. Needless to say, those funds have gotten hammered in the bond selloff.

Sero Sed Serio.

But here I am, still standing. I haven’t (as yet) had to go back to fulltime work or draw on my retirement accounts. How am I riding out the storm? Four things have been key to staying afloat:

1. Low expenses, plus avoiding debt like the plague. Proper preparation goes a long way toward making up for lousy timing. For years before I stepped away from the corporate workplace, I was ruthlessly lowering my expenses. I downsized, paid off my credit cards and got rid of all debt except the loan on my new Keystone travel trailer.

If I had a big mortgage to pay every month, there’s no way I could have ridden out this storm in the financial markets without going back to work. I own free and clear my mountain cabin and the land it sits on. My biggest monthly expense is buying my own medical insurance. That isn’t cheap, but I consider it the price of freedom.

Unlike when I was working, I know I can’t buy anything I want. I have a budget and I work hard to stick to it. Every potential purchase gets weighed on a scale of what I would have to give up to buy it. The one exception is travel. This phase of my life is about experiences and adventures, so—if I can afford a trip—I’ll take it. For instance, the weekend before Thanksgiving, I went on a spur-of-the-moment trip to Breckenridge, Colorado, to see my son and his fiancée.

2. A sizable emergency fund and health savings account. Life is unpredictable. While budgets are great, they can’t take all contingencies into account.

That’s why, before I stepped away from the corporate world, I made sure I had a substantial emergency fund to pull from when necessary. I tapped into it recently to help my son with a legal problem he was facing. I also used the fund to pay for a new set of tires for my truck. Without a rainy-day fund, I would be pulling out the credit card or going to the bank for a loan—and that would spell the end of my freedom.

Before I retired, I also made sure I had a health savings account fund to draw on for out-of-pocket medical expenses. I built up the fund with pretax contributions while I was working, and have been pulling from it over the past 18 months to cover deductibles and insurance copayments. Having this fund was critical in paying the cost of my replacement left hip earlier this year.

3. A side gig to bring in extra income. Even with all my preparations, I knew going into early retirement that I’d have to continue making money to replenish my emergency fund, and to pay for travel and other adventures.

Fortunately, I have a skill—writing—that I can make some money at without being chained to a corporation. In addition to writing freelance articles like this one, I’ve launched my own communications business, Boy Blue Communications, to take on select writing and communications projects for my former employer and other corporate clients.

The beauty of having my own firm is that I can choose the clients and projects I take on and how many hours I want to work. My specialty is high-level financial and executive communications, speechwriting, and client case studies—all areas that interest me and that I can charge a healthy premium for. I enjoy keeping my finger in the corporate world. It keeps me mentally sharp, while bringing in a decent amount of income.

4. The power of dividends. When the market was crashing at the beginning of the pandemic, I took advantage by picking up a bunch of quality dividend-paying stocks in my taxable account.

A few of these stocks, such as Exxon, AbbVie and Blackstone, have more than doubled since I bought them. Only one, AT&T, has been a dud. But all of them have continued to pay dividends over the past few years, and a few of them have increased their payouts. The dividend stream isn’t much—less than $5,000 a year—but it has helped keep my savings account from dwindling and paid for a few trips over the past year and a half.

The stock market will come back and eventually return to record highs. In the meantime, I’m holding my ground in the storm, while enjoying my newfound freedom to pursue my passions. Sero Sed Serio.

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

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When Late Is Okay

I EXPECT TO OWE some $8,000 to the IRS on April 15. On the surface, this might seem like poor tax planning. But I’d argue that it’s just the opposite.

Too often, folks are excited to get a large refund when they file their annual tax return. In response, you’ll hear financial advisors jumping in and saying, “That’s bad. You gave the IRS an interest-free loan.”

In theory, I agree. But until recently, savings accounts have been paying so little that it wasn’t worth the effort for folks to manage their tax liability that closely. That’s changed, however, in the current interest rate environment.

Let me explain. With my own tax planning, I’m expecting to owe taxes. It would be a different story if I got this surprise in April or if I was avoiding tax payments because I didn’t have the money. But the fact is, I’m aware of where I stand and I’ve been planning for April’s tax bill throughout 2022.

I’m in the early years of running my own business. My income started low and has been increasing each year. In 2021, my net business income was a four-figure amount, which resulted in a small tax liability. In 2022, I’ll report almost four times as much income as I did last year, resulting in more taxes due.

The IRS is a pay-as-you-go system. If you’re self-employed and have no tax withholding from your income, you’re required to make estimated tax payments each quarter based on the amount of your income. It can be hard for a business to know what its income will be for the year. The IRS understands this, and offers two options to remain compliant with your taxes:

Pay at least 90% of the tax owed for the current year
Pay at least 100% of the tax from the prior year, or 110% if you made $150,000-plus in the prior year.

Adhering to one of these two options doesn’t relieve you of any further tax liability, but it does allow you to avoid penalties for the underpayment of taxes as of your tax filing date. Many refer to the above sums as the “safe harbor” amount.

The reason I’ll owe so much money is because I’m following No. 2 above. Since my 2021 tax return had a small tax liability, I based my 2022 estimated tax payments off that number and held on to the rest of my cash. That way, I won’t owe any penalties even though I paid a relatively modest amount of tax throughout the year. But in the meantime, I’ve been collecting some interest on my cash.

This interest was a small win when yields were so low. But in today’s interest rate environment, with savings accounts paying 3%-plus and short-term Treasury bonds yielding well over 4%, overpaying your taxes to ensure a big refund really is an interest-free loan to the IRS. The bottom line: I’m going to owe $8,000 whether I paid it on Jan. 1, 2022, or I pay it on April 15, 2023, so I decided to hold onto that money and earn some interest.

I recognize my situation isn’t common, especially among retirees. Still, retirees can also take advantage of the safe harbor rules. The IRS treats quarterly tax payments differently from tax withholding. Quarterly tax payments are counted on the date of the payment, while withholding is counted as if it was paid ratably throughout the year.

Let's say you’re retired and need to take required minimum distributions (RMDs) each year. Perhaps you don’t need that money to cover your living costs throughout the year. Meanwhile, you have to make estimated tax payments because of other income, such as the gains in your regular taxable account.

One strategy: You might wait until year-end to take your RMD and, at that juncture, have enough tax withheld to “safe harbor” yourself. The IRS would view this as comparable to making quarterly tax payments throughout the year, even though you didn’t actually make the payment until the end of the year. In the meantime, you got to use the money for the full year to earn extra interest within your retirement account.

Logan Murray is a solo financial advisor. His company  Pocket Project  offers subscription-based financial planning services to young professionals. For more financial insights, read Logan’s  blog , connect with him on  LinkedIn  and check out his earlier articles.

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Walking Man

I RECENTLY WROTE about things we can do to protect our finances in the event we suffer cognitive decline. This may not be anybody’s favorite subject, but it’s an important one.

 Many of us have first-hand experience with the ravages of dementia. It can upend a carefully crafted retirement plan and necessitate costly medical care. Like many of my friends and colleagues, I’d like to know if there are things I can do to prevent or forestall the onset of mental decline.

Harvard Medical School published an article listing six factors that may help prevent cognitive decline:

Engage in regular exercise.
Eat a Mediterranean diet emphasizing fruits, vegetables, whole grains and lean protein.
Limit alcohol consumption to about one drink per day.
Get quality sleep. Seven to eight hours per night is optimal.
Get mental stimulation. Reading, writing, puzzles, card or board games, group discussions and playing music were mentioned.
Find some form of regular social engagement.

A friend’s mother suffered from severe Alzheimer’s disease. He was concerned that this might increase his risk, and he expressed this concern to his doctor at an annual checkup. The doctor had a similar family history and shared my friend’s concern. He told him that he’d been studying dementia for a number of years and that, among the studies he’d reviewed, the one common element in reducing the risk of dementia was walking.

A recent article in the Journal of the American Medical Association’s neurology publication added some credence to my friend’s anecdote. The article describes a study that monitored more than 78,000 adults and looked at the relationship between the number of steps walked each day and the chances of developing dementia.

The article referenced previous findings that indicated that walking reduces the risk of many of the causes of illness and mortality, including cardiovascular disease, cancer and diabetes. The article states that “an optimal dose of 6,000 to 8,000 steps has been suggested to reduce the risk of all-cause mortality.”

In our previous home in suburban Philadelphia, there were limited opportunities to walk to a store or café. I usually walked around the neighborhood or drove to a park.

Our oldest son and his family live in Manhattan. Walking is a way of life for them. It’s how they go shopping, get to the park, go to school and visit friends. They routinely exceed 10,000 steps per day. When we visit, we also walk everywhere.

In our current home, I still take walks just for exercise. There are lots of destinations to walk to, including downtown cafes and restaurants, plus there’s a 2.5-mile-long boardwalk.

I like to think of this as functional walking. Combining brain-healthy walking with an errand or a social occasion is a great “two-fer.” There’s something especially gratifying about walking to a store, coffee shop or restaurant. You feel like you earned that cafe latte.

My commitment to regular walking will be tested in the near future. I’m planning to have my left knee replaced in early January. I had my right knee replaced in September 2019. I waited too long to have that one replaced; the last year prior to the surgery was one of constant pain and very limited mobility. A two-week trip to Italy in May of that year was largely wasted.

The left knee has been mostly pain-free, but the X-rays don’t lie. There’s hardly any cartilage left and bone spurs abound. The surgeon told me I was “one fall or twist” from a lot of pain. An hour of pickleball yesterday confirmed the doctor’s warning. It’s sore today, though not too bad. I’ll take a walk after I finish writing this.

I’m thankful that the medical technology is available to help people like me overcome the challenges of age and excess. I look forward to continuing to walk for many more years. And I’m gladdened that it may help me stay mentally sharp as well.

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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Never Going Back

A FRIEND ONCE explained to me his theory of lifestyle creep—and how there’s a ratchet effect. Let’s say you move to a better neighborhood. A bigger house means larger utility bills. Property taxes will be higher, the lawns bigger and the landscaping more extensive. The neighbor’s cars are nicer, and the shopping and restaurants are more upscale.

Like a socket wrench, once the one-way ratchet of lifestyle creep clicks in, it’s nearly impossible to go back.

Two years ago, I moved to a metro area from a small town. My expenses are definitely up. Besides substantially higher property taxes, there are several vendors who now have their hands in my pocket. I continue to pay for the services that I’ve always had: trash collection, internet, lawn treatments, cell phone and a security system. Yet the urban prices are much higher than the small-town prices I was accustomed to paying.

To reduce outlays, I’ve converted other expenses from pay-as-you-go to annual prepayment. There’s a convenience factor, plus vendors always provide a discount. This includes the pest control company, as well as the folks who service my furnace, air-conditioning and sprinkler systems.

We even subscribe annually for dental care. We pay the dentist in advance to get two cleanings and routine X-rays, along with a discount on needed treatments.

On the other side of the ledger, I’ve increased my spending with new monthly subscriptions. I’ve replaced our magazine and newspaper subscriptions with online equivalents. I did drop cable TV, but now I pay for several streaming services. Then there’s the satellite radio. We continued the service after a free trial when we bought a new car.

Technology has added several new “necessities.” I have taken on software subscriptions that I never had before. I resisted them for as long as I could, but now I have subscriptions for cloud storage, Dashlane password manager, Quicken and Evernote task-management software.

Occasionally, new technology will reduce my costs as well. I’m no longer paying the phone company per minute for long-distance calls or to rent a wall phone.

Vendors know that, with a subscription, I’m less likely to overcome the inertia to switch or cancel. Marketers would describe my accounts as “sticky.” These subscriptions effectively ratchet up my base expenses.

All of this is my own fault because I agreed to each and every cost. An interesting exercise is to think about how many of these subscriptions existed 20 years ago, let alone when I was growing up in the 1960s. No question, we all did more ourselves. Or the service didn’t exist. Or we did without.

Vendors love prepayment because they have my credit card number on file and can schedule my payments at their convenience. If I miss the email announcing a price increase, it takes effect automatically.

With some effort, you may be able to protest. I recently got the security company to roll back a proposed rate increase with a phone call to customer service. I didn’t even have to threaten to quit.

I periodically check my credit card bills to verify that I still use all the services that I’m billed for. I also monitor for price hikes, knowing which month I would need to call to protest an increase. Seeking bids from competitors would be smart, but I rarely do that. The vendors count on a large percentage of customers like me not bothering.

I hear the ratchet clicking.

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