Jonathan Clements's Blog, page 173

Slowdown Ahead

ARE YOU TRAVELING for the holidays? There’s good news for drivers. Average retail pump prices have dropped below $3.30 a gallon, with many states seeing prices under $3. This positive development for consumers—including those off to grandma’s house this season—comes as wholesale gasoline futures fall to their lowest level in a year.

Following Russia’s invasion of Ukraine in early 2022, and just in time for the busy U.S. summer driving season, gas prices notched all-time highs near $5 per gallon. Consumer sentiment soured and stock traders were carefully following energy prices. Now, gas prices are almost an afterthought. Instead, fears of recession are permeating Wall Street.

Inflation had been a top concern among portfolio managers, but I see that negative narrative quickly fading from the headlines in the coming quarters. Indeed, traders have priced in future annual inflation of just 2.2% to 2.3% over the next 10 years. Also encouraging was Friday’s University of Michigan preliminary survey of inflation expectations for the next 12 months. According to the report, the year-ahead rise in prices is seen at 4.6%, the lowest since September 2021.

The University of Michigan’s consumer expectations are important. They’re among the few inflation metrics that members of the Federal Reserve use to determine interest rate policy. If workers feel inflation won’t be a big deal in the upcoming year, they might be less inclined to demand a big raise. Wage growth is a so-called sticky source of inflation. The more it moderates, the less damage to the economy that the Fed will need to do.

This week, investors will pout if Tuesday’s inflation report comes in too high. Wednesday’s Fed interest rate decision will also move markets. As more signs point to a topping off in inflation, all eyes will instead turn to the quarterly corporate earnings season that begins next month.

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Clipping Coupons

IN A TYPICAL YEAR, the bond market doesn’t attract much interest. That’s by design. The role of bonds in a portfolio is to serve as a bulwark against the unpredictability of stocks. They’re supposed to be boring.




All that changed this year. Thanks to rising interest rates, the most common total bond market index, the Bloomberg Aggregate, has lost about 11%. To put that in perspective, this index has delivered a negative return in only three of the past 25 years. Most years, it delivers a modest but respectable positive return. Since 1997, that has averaged about 5%.




At the same time, another type of bond has surged in value and gained in popularity. The U.S. Treasury’s Series I savings bonds—often referred to as I bonds—are tied to the Consumer Price Index and appreciate when inflation rises. As a result, earlier this year, I bonds were offering an interest rate of 9.62%. Even today, with inflation having moderated a bit, the Treasury is offering I bonds with an initial rate of 6.89%.




Result: Some investors this year have developed a newfound love for bonds, while others have been left disappointed. For that reason, it may be helpful to review five bond market nuances.




1. Yields on conventional bonds. You’ve probably heard the term “bond yield.” In simple terms, this refers to the income a bond produces. But as I’ve ​noted, yield can be calculated in several different ways.




If you’re considering an individual bond, you’ll generally see only its coupon rate and will need to calculate other yield figures manually. By contrast, if you’re looking at a bond fund, the manager will usually provide more yield information—but that doesn’t necessarily make things easier. Consult the iShares website, for example, to learn about its total bond market fund, and you’ll find four different yield numbers, ranging from 2.2% to 4.4%.




Which number should investors pay attention to? Fortunately, there’s an easy answer: Investors should focus on yield to maturity. This is the total return that an investor will earn if he buys a bond today and holds it to maturity.




Yield to maturity has two components: interest payments (often called coupons) and, potentially, a gain or loss on the price of the bond. Why might a bond gain or lose money while you own it? It’s because bonds can be purchased at discounts or at premiums to their face value. But regardless of the purchase price, investors will receive the bond's face value at maturity.




Take the example of a bond maturing one year from today with a face value of $1,000 and a coupon rate of 3%. Suppose you purchase this bond at a discount. Instead of $1,000, you pay $990. Over the course of the next year, you’ll collect 3% in interest, plus—at maturity—you’ll pick up another $10 (the difference between $990 and $1,000). This $10 translates to 1% of the value of the bond, so in total you’ll earn 4%. That 4% is the yield to maturity on this bond. Because it represents an investor’s total investment gain, I believe it's the most important number.




When it comes to bond funds, there isn’t a single yield to maturity that can be calculated. Still, fund companies publish a figure that’s a reasonable approximation.  This isn’t a perfect figure because the holdings in a fund can, and likely will, change. It’s for that reason that some bond investors prefer individual bonds, where the yield to maturity is mathematically guaranteed—assuming the issuer doesn’t default.




2. Yields on inflation-linked bonds. What about the yields on I bonds and their cousin, Treasury Inflation Protected Securities, otherwise known as TIPS? With these bonds, another yield figure is most important: the real yield. In economics, the term “real” refers to a number that’s been adjusted for inflation. For example, if a company raises the price of a product by 7%, but inflation is 5%, the real increase would be 2%.




What does this mean in the context of inflation-linked bonds? Both I bonds and TIPS have a real yield, which is the actual yield to maturity that they guarantee over and above inflation. Look at the Treasury’s I bond website today, and you’ll see this described as the “fixed rate.” Currently, it’s 0.4%. The remainder of the 6.89% rate advertised is attributable to the inflation adjustment. This distinction is important to understand because the Treasury adjusts the latter component in response to inflation every six months. In other words, that 6.89% is not guaranteed for the life of the bond. Investors are only guaranteed 0.4% above inflation. If inflation moderates, so too will the nominal return on I bonds.




Real yield is also a useful metric for comparing I bonds and TIPS. All last year, and through the first half of this year, TIPS were quite expensive and, as a result, offered a negative real yield. But that’s changed, and today real yields on TIPS are positive. The rate Friday was 1.45% on five-year Treasury notes. Thus, in comparison to I bonds—which are offering a real yield of just 0.4%—TIPS today represent a much better deal. Yields change all the time, though, so if you’re considering inflation-linked bonds, start by comparing their real yields. TIPS and I bonds have a few other differences, but I see this as the most fundamental consideration.




3. “Phantom income” from inflation-linked bonds. Both TIPS and I bonds carry another unique characteristic: Over time, as their value adjusts in response to the latest inflation reading, they will generate what’s commonly referred to as phantom income. This is reported to you—and to the IRS—as income, but as a bondholder, you won’t actually receive a cash payment. For that reason, you’ll want to try to sidestep this phantom income.

For TIPS, the solution is to hold the bonds only in a tax-deferred account, such as an IRA or a 401(k). I bonds, on the other hand, can’t be held in a retirement account. But the Treasury offers another way to sidestep this unfavorable tax treatment. If you purchase an I bond, choose the “cash basis accounting” option. That way, the income will be reported only when you redeem your bond, better aligning the tax bill with when you get your I bond proceeds.




4. Coupon choices. As I mentioned above, a bond’s coupon rate is just one component of its yield to maturity. The other is the bond’s price. Indeed, two bonds can carry identical yields to maturity but have very different coupon rates. Short-term bonds today, for example, carry yields to maturity around 4.5%. But among bonds with that same yield, some will have coupon rates above 4.5% and some below. In fact, some bonds pay no interest at all—that is, they have 0% coupons.




If yield to maturity is most important, should you be totally indifferent to a bond’s coupon rate? Mathematically, if a bond is held to maturity, an investor would indeed be indifferent. But especially if you’re purchasing a bond with a maturity of more than a few years, you do want to pay attention to the coupon rate. Your choice here will depend on your objectives.




Some investors prefer higher coupon payments so they can use that reliable income to meet household expenses. Others prefer the opposite. Investors who don’t need the coupon income often find it simpler to buy bonds with lower, or even zero, coupon rates. That saves them the trouble of reinvesting income payments along the way. This can be especially valuable if you’re worried that interest rates might drop in the future. When that happens, investors face what’s called “reinvestment risk.” If rates on newer bonds are lower, it will be hard to maintain the overall yield to maturity of a bond portfolio. It’s for that reason that zero-coupon bonds—which sound counterintuitive—are quite popular. They eliminate reinvestment risk.




5. A bond market misnomer. A final point for bond investors: While total bond market index funds are popular, their name is misleading. The Bloomberg Aggregate index, on which these funds are based, doesn’t include inflation-linked bonds. Want inflation protection? Be sure to make a separate purchase of either I bonds or TIPS.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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Running the Numbers

THE HOLIDAY SEASON is upon us. Our thoughts—or mine at least—turn to family, friends, wine, decorations, gifts, wine, food, fun and wine. But before I ring in the new year, I have a few financial questions I need to resolve.

Our 2022 income hasn’t been what I expected. I earn consulting income in two ways. I’m a part-time employee of a small engineering consulting firm. In this role, I’m an hourly employee with no benefits. I get a paycheck with federal, state and Social Security payroll taxes withheld. At the end of the year, I receive a W-2 tax form from my employer. This year, the work I expected hasn’t materialized and, to date, I’ve earned just $850.

I also own a small business—a sole proprietor LLC. I use this for direct consulting to several small businesses. I invoice customers and receive a check based on an hourly rate and how much time I put in. At the end of the year, I’m sent a 1099-NEC form by the companies I’ve worked for. The primary project I expected to support this year seems to have been delayed until 2023, so I’ve earned a mere $280.

As you can see, it hasn’t been a lucrative year for my consulting. That’s okay. We don’t count on me collecting a specific amount of earned income. Anything I make is nice, but it isn’t necessary. The previous two years were better, but not greatly so. The pandemic limited both my consulting opportunities and my willingness to travel.

To handle the variations in the income collected by my wife and me, I developed a spreadsheet that tracks our income, tax withholding and expected tax bills. I update it as things change. I found this necessary because, as a business owner, I’m required to pay quarterly estimated taxes to the federal and state government. You can be penalized if you don’t make timely and adequate estimated payments. You’re also responsible for self-employment taxes, which are a hefty 15.3%. My spreadsheet helps me stay on top of any required estimated tax payments.

I also use the spreadsheet to keep tabs on our current year’s tax withholding. I receive a traditional pension, from which both federal and state taxes are withheld. I also have taxes withheld from any retirement plan distributions. In 2022, I was overly conservative in my withholding. We stand to get a fairly sizable tax refund from both the federal and state government. Although it’s nice to get a big check, I don’t like making an interest-free loan to Washington, D.C., and New Jersey. I’ll likely dial back our withholding for 2023.

In addition, I use my spreadsheet to decide how much, if any, of my self-employment income I want to contribute to my solo 401(k). I started this in 2017, and it has been a great addition to our retirement portfolio. You can generally save your “net earnings from self-employment less one-half of your self-employment tax.” In the past, this has produced a nice tax savings. This year, I can make a tax-deductible contribution of some $258 out of the $280 that I earned—not a lot, but every little bit helps.

The final and biggest question that my spreadsheet helps answer: Should I do a Roth conversion? In an earlier article, I wrote about my plan to assess annually whether to convert. Since then, we’ve moved from Pennsylvania to New Jersey. Pennsylvania doesn’t tax retirement income, but New Jersey may, depending on your total income.

Even with my minimal consulting income this year, I calculate that our marginal New Jersey state income-tax rate will be 8.97%. Figure in our 24% marginal federal rate, and my spreadsheet shows that any Roth conversion would be subject to a combined federal and state tax rate of about 33%.

There are multiple reasons to do a Roth conversion, such as reducing future required minimum distributions or to leave a tax-free inheritance. This year’s market losses also make it an attractive time to convert. But barring a significant tax code change, I don’t think our future federal marginal tax rate will exceed our current 24% bracket.

My wife will begin collecting her Social Security benefits in 2023. This income will replace the IRA withdrawals we’d otherwise make. Social Security is tax-advantaged at the federal level—at most 85% of the amount is taxed—and it isn’t taxed at all in New Jersey. This means there’s a real chance we can lower the state tax on future IRA withdrawals and perhaps avoid it entirely. The upshot: I’ve concluded that a Roth conversion this year doesn’t make sense, given our likely 2022 tax rate and the chance that we’ll be taxed less heavily in future years. But I’ll check again in 2023.

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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Late Shift

LIKE A SLOW-MOTION train wreck, we’ve spent recent decades inching toward a world where we have too few workers and too many retirees dependent upon their labor. Have we finally reached the tipping point?

Consider today’s confluence of economic events: a labor shortage, sharply higher inflation, massive government budget deficits, and depressed stock and bond prices. To be sure, all this can be explained by the pandemic and what followed—excessive government stimulus, supply chain issues, frightened and exhausted workers retiring in droves, and the past year’s about-face by a Federal Reserve intent on squashing inflation.

But arguably, the pandemic was simply the crisis that brought our demographic problems into sharp relief, including the retirement of the baby boomers, our dependence on imported goods, and federal government spending that’s increasingly directed toward Social Security and Medicare. The fundamental issue: In 2000, we had 4.8 Americans age 20 to 64 for every one person age 65 and older. Today, that number is 3.4, and in 10 years it'll be 2.7, according to United Nations data. This, of course, isn’t just a U.S. problem: The worker-retiree imbalance is an even bigger issue in Western Europe and Japan.

At the same time, the pandemic and its fallout are also highlighting how we’ll resolve these issues—by pressuring those in their 60s to stay in the workforce for longer or to return to work either fulltime or part-time, while also pressuring employers to make the workplace more appealing to older workers.

How are older Americans being pressured? This year, their portfolios are shrinking even as their cost of living is climbing. No doubt many retirees are feeling squeezed and many older workers don’t like the way their finances look, and at least some have concluded that a little extra time in the workforce wouldn’t be a bad idea.

Indeed, the Bureau of Labor Statistics (BLS) expects more older Americans to stay in the workforce over the decade ahead. Among those ages 60 to 64, the BLS predicts labor force participation will climb from 57.1% in 2020 to 62.5% in 2030. Over the same stretch, it’s also projecting a rise from 33% to 39.6% in labor force participation among those 65 to 69, and an increase from 18.9% to 23.8% among those 70 to 74.

Another sign that folks are worried about how to pay for an increasingly lengthy retirement: More retired workers are delaying Social Security so they collect a larger stream of inflation-adjusted lifetime income—arguably the best hedge against the risk of a surprisingly long life. In 2021, 16.3% of men claiming benefits were age 67 or older, up from 10.3% in 2016. For women, the figures were 16.2% in 2021 and 11.5% in 2016. (These figures ignore those on Social Security disability benefits who were automatically converted over to retirement benefits when they reached their full Social Security retirement age.)

But it isn’t just workers who are feeling pressured. So, too, are employers, who are struggling to fill open positions. Job vacancies—as a percent of all jobs, including those that remain unfilled—were at 6.3% in October, close to a 20-year high, according to the BLS. Meanwhile, the unemployment rate was near a 50-year low at 3.7% in November. I suspect, in the years ahead, we'll see forward-thinking employers take steps to make older workers feel more welcome, such as designing jobs that are less physically demanding, while also offering greater flexibility to work part-time and from home.

If we do see a move toward retiring at a later age, there are all kinds of potential benefits, both for the individuals concerned and for the economy. For individuals, there isn’t just the additional earned income, but potentially also a greater sense of purpose. Even in retirement, we all need a reason to get out of bed in the morning, and working a few days each week might provide that.

Also think about the benefits for the economy. It isn’t just that we’ll keep workers with decades of wisdom in the workforce for longer. We’ll also start to rectify U.S. society’s imbalance between workers and those retirees who are effectively dependent on their labor. Make no mistake: This—more than anything—will go a long way to address many of the financial concerns that are voiced today.

Worried about the dwindling Social Security trust fund, the trade imbalance, inflation, the burgeoning federal government budget deficit and sluggish economic growth? These various issues—often blamed on things like insufficient tax receipts, excessive government spending and an over-reliance on foreign goods—are, in truth, driven by the fundamental problem of too few workers and too many retirees.

In other words, if workers can be enticed to stay in the workforce for longer, many of the financial problems we grouse about will potentially go away. This is a point that Robert Arnott and Anne Casscells emphasized in a 2003 article. More recently, Larry Siegel and Stephen Sexauer made a similar argument in an intriguing new paper.

As folks find themselves financially pressured to stay in the workforce for longer, there will no doubt be some hand-wringing in the media, as the pundits lament that 68-year-olds are compelled to work a few days each week. But for those who are in decent health and can find work they enjoy, is that really so terrible?

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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Booking It

I SPENT 40 YEARS practicing criminal law, and there was always a lot to read: police reports, lab reports, probation and pre-sentence reports, motions, orders and court opinions. These were required reading and there was little time left to read for pleasure.

One of the great joys of retirement is the freedom to read a lot—and whatever I choose.

Which, in this season of reflecting on the things we’re thankful for, brings me to one of mine: public libraries. Since this is a personal finance site, let me add that—when it comes to great buys—it’s hard to beat libraries. For just a tiny slice of your tax dollars, the benefits are enormous.

I confess I may be prejudiced. After I graduated from the University of Texas, I wondered what career to pursue. My sociology degree didn’t exactly open a lot of doors, so I was casting about.

The university offered one of those aptitude tests that would indicate which careers most suited me. Given my introvert streak, I wasn’t too surprised when the results listed my No. 1 potential career as “librarian.”

I ultimately went to law school but never lost my love of libraries. A quiet spacious room where you can dive into a smorgasbord of books is my idea of a great place to hang out.

We’re lucky to have several libraries within an easy drive, but the one we frequent most is the Lake Travis Community Library. Not too small, not too big, it’s a real jewel. For a fee of exactly nothing, you get:

A wide variety of books, magazines, movies and reference materials.
Classes on a multitude of subjects, both in person and online.
A subscription to Kanopy, which offers foreign, older and cult streaming movies you won’t find on the better-known streaming services.
Interlibrary loans so you can request a book from another library.
A great staff that happily entertains suggestions for new acquisitions.
Handy online features such as “bookmarks”—a list of books you intend to read—and “history,” which lists books you’ve previously checked out. The latter can be helpful for those with an imperfect memory.

In our de-cluttering stage of life, libraries also mean no additional crowding on the bookshelf. While e-books accomplish the same, I’m one of those dinosaurs who likes books made of paper that you hold in your hand. I’m quite happy to go online for news and research, but when it comes to books, I’m old school.

Finally, a library encourages experimentation. I’ll often check out a couple of books by authors I know and love. Then I’ll add an extra volume by someone I’m curious about—one which I never would’ve risked purchasing.

So, I’m appreciative of and thankful for my local library. In fact, when I die, just send me to that great library in the sky. Oh yes, and please make it dog friendly.

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Clear as Knight

GOOGLE THE WORD “annuity” and you’ll receive 103 million and one results. Is there anything left to be said?

Yes, I think there is.

About 11 years ago, my 89-year-old mother asked me if she should invest more money in her Knights of Columbus annuity. Unbeknownst to me, she and my father had purchased it many years earlier. It earned a guaranteed 3.5% annual interest rate, which was better than every savings account or certificate of deposit available, plus it was tax-deferred.

As I had previously answered her vital questions—“can I get my hair done every other week?” (she could) and “should I give the front desk lady $20 for Christmas?” (she should)—she expected immediate and salient financial advice from her favorite son.

I told her I wasn’t sure if she should invest more as my knowledge of annuities was limited. I knew that variable annuities were bad, and that immediate fixed annuities had their uses and that their present value could be easily explained by PV = PMT * [1 – [ (1 / 1+r)^n] / r].

I think she was expecting an answer that was a little more concise—and affirmative.

Each time a certificate of deposit matured, she would ask me, “How about putting some money in that K of C annuity?” As a dutiful son—and after the third time she asked—I promised to contact the knight who sold her the annuity those many years ago.

Sir Keith was duly contacted and asked to provide details on my mother’s annuity. He was a very nice man, who promptly mailed my mother her most recent statement, which didn’t exactly answer my question.

When I called Sir Keith back, he claimed that was all he could do. When I asked for a prospectus, he informed me that there was no such thing and that I should look at my mother’s contract. I only mention this to show my commitment to resolving this issue, not to demonstrate how little I really knew about annuities.

“Ah ha, now we’re getting someplace,” I thought. But I immediately realized how this would go. When I asked my mother to produce the contract, she replied with the expected answer, “What contract?”

The Supreme Knight was contacted and my mother received a copy of her contract. Trust me, this was easier—and quicker—said than done.

Unfortunately, the nine-page contract was less than illuminating. It was filled with terms such as “assignment,” “maintenance of solvency” and “the accumulation value as of the maturity date.”

The fact that the contract was in my late father’s name—and that it was now eight years after the contract’s maturity date—made everything that much more confusing. Sir Keith assured me that all of this was not a problem and that, basically, the contract was now in my mother’s name.

I reported all this to my mother—or should I say the “owner,” or maybe “beneficiary,” or possibly the “annuitant”? She was still quite insistent on “investing.” Or should I say making a “premium payment”?

What could I do? Catholic guilt can be a powerful product feature.

My mother died at age 99. During her final years, she never needed to take any “payments,” or should I say make “monthly withdrawals,” because during her later years—besides a cup of coffee and a Bavarian cream doughnut at Dunkin’—her extravagances were few.

After her death, her beneficiaries were paid a handsome death benefit, which appeared to be the answer to a trick question, as it could be either “the sum of the premiums paid, less any withdrawals” or “the accumulation value as of the date of death.”

One of the features that stocks, bonds and certificates of deposit offer is that you know exactly what you’re getting. One share of IBM is just like any other. This isn’t true of annuities. Even the simplest ones are still guided by the specific contract you have with the insurance company—or, in this case, the fraternal benefit society.

I don’t mean to offer an unduly harsh take on annuities, as they can be a useful component of retirement planning. Besides the aforementioned Catholic guilt, I really have no idea why my parents purchased this flexible premium annuity. But I have a feeling my mother wasn’t aware of two of the annuity’s features.

First, as the contract’s beneficiaries were limited to the exact people named, her predeceased daughter’s children were not considered beneficiaries.

Second, most of the accumulation value that was paid to the beneficiaries was now considered taxable income—basically transferring her tax liability to her heirs. Since the exact amount of the payment was somewhat unknown, this complicated the Rothification efforts of at least one of the beneficiaries.

Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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Watching Them Grow

FOR THE PAST 20 YEARS, I’ve bought dividend-paying stocks and then reinvested my dividends. The big appeal: I increase my wealth with minimal effort.

Starting as a dividend investor used to be tricky, but it’s now much simpler. Many discount brokerage firms have no minimum to open an account and no longer charge stock commissions. You can also purchase shares through the dividend reinvestment plans offered by the transfer agents for many companies. These plans allow shareholders to reinvest their dividends and also purchase shares in amounts as little as $50 or $100.

Indeed, when I buy dividend stocks, I usually set them to "dividend reinvestment." That means I don't get my dividends in cash, but instead use them to buy additional shares. That way my share count—and the dividends I receive—increase automatically.

Of course, there are thousands of companies you could potentially invest in. Which should you choose? First, I avoid companies that don't pay dividends. Second, for those that do, I look at their track record. Did they cut or eliminate dividends when the going got tough? How long have they been paying dividends? Do they have a history of increasing dividends over time?

In addition, I avoid companies that are in the news a lot. I prefer companies that are almost boring, that have been around a while—companies that are likely to have staying power. We’ve all seen how technology has replaced prior methods of doing things, and we know that’ll continue. It just isn’t easy to know what those changes will be. Financial history is full of once-successful companies that have since ceased to exist. How can investors protect yourself?

I know my choices won’t be perfect, which is why I buy shares in different companies in different industries. Some companies will fail or falter, even though at one time they were seen as very strong—companies such as Kodak, Sears and General Electric. But over the long term, my investments in those companies that thrive will more than make up for those that don't.

Today, I own shares in stalwarts such as Johnson & Johnson, Colgate-Palmolive and Procter & Gamble, and some not-so-well-known names like RPM and Emerson Electric. No, I’m not recommending you buy these particular stocks—they’re just five of the 60 stocks I own. Among those 60, most I chose to buy, but a few of my holdings were the result of spinoffs or acquisitions by other companies.

Instead of buying individual stocks, you could purchase funds such as iShares Core High Dividend ETF (symbol: HDV) and Vanguard High Dividend Yield ETF (VYM). But I prefer individual stocks because I get to choose the companies myself.

Intrigued? To succeed at dividend investing, you need just three things. First, you need some initial capital. Second, you need to identify the companies you want to own and decide what to do with your dividends. Do you want income now or do you want to let the dividends buy more shares?

The third thing you need is time. Your income from a diversified collection of dividend-paying stocks should grow over time—and more time means more growth. The earlier you start, the more time you’ll have not just for your companies to raise their dividends, but for you to buy more shares by reinvesting dividends and by investing new savings.

That's it. It isn’t magic. Getting started is the hardest step. But once you’ve gotten over that hurdle, things should just grow and grow.

Joe Springer is retired and lives in California. He likes oatmeal, gardening, taking a morning walk and laughing at his own jokes. Joe is the author of the blog Smile If You Dare , where he tackles money, retirement and other topics.

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Ounce of Prevention

I WISH I HAD HEARD the term “prehab” long ago. I think it would have prevented my current physical disability.

Many people delay surgery. Why not put off a potentially long recovery period—and a big medical bill? Often, this wait-and-see approach is harmless. But not always.

A little history might be useful. A couple of years after college, I joined my dad in his cash register business. Back in 1970, cash registers were massive and heavy—150 pounds or more. Just one wrong twist or turn was all that it took to induce unbelievable shooting pains down my leg.

My first surgery was in 1973. Too much Dilaudid after the surgery, and I was addicted. I went cold turkey and beat it in a few months.

I got better and, three years later, started playing tennis. Oops, I should have let that one go, because it meant surgery No. 2: in for another laminectomy to relieve pressure and reduce back pain.

The electronics industry was looking for new applications for their fancy computer chips, and discovered they could imitate the functions of a calculator, cash register and typewriter. The benefit to me was lighter cash registers and less risk of back pain.

Fast forward to 2000. My wife wanted the couch moved. I didn’t want to do it, got angry, pushed too hard and—pop—I was in line for my third back surgery. I was older, so the recovery took a bit longer this time.

By 2017, I’d been semi-retired for nearly 20 years. While on vacation in Aruba, I found it difficult to walk to the beach, or more than a block or two to dinner. I made an appointment with my favorite neurosurgeon.

Since he was doing more brain than back surgeries, he brought in a young surgeon who specializes in spinal reconstruction, among other things. After reviewing my images and history, they had just two questions: How are you even walking? Why aren’t you in more pain?

They felt that the surgery I needed was extensive—a fusion with rods and screws on an unknown number of levels. Yet they couldn’t recommend the surgery because I wasn’t in enough pain.

To control what little pain I had, they suggested that I take Gabapentin. For me, it was a miracle drug. There was just one side-effect: drowsiness in the afternoon. It was non-addictive, safe and—with my doctors’ supervision—the dosage was increased until it worked.

I started to live a pain-free life. I was happy and unconcerned because the doctors were sure the window for a future surgery was open for years, or even a decade or two, and there was no downside to waiting. I did give up golf, however, as the pain pills were no longer getting the job done after 12 holes.

Two years later, it was summertime, I was wearing shorts to the gym and happened by a mirror. I noticed that my left calf was much thinner than my right one. I decided to visit my doctors again, even though I still wasn’t in pain.

After taking new images, they were now ready to recommend surgery. Things had deteriorated some and there was a sense of urgency to schedule me. Their first opening was just after a planned trip to Iceland. That was good timing, as I really wanted to go on the trip.

I’m going to skip the infection part. Needless to say, bad stuff happens. I ended up with two rods and 18 screws for a nine-level fusion of my entire lower back. They said I could play golf again, but my swing would be ugly. How did they know I had an ugly swing?

What nobody had realized was that there was harm in waiting, which brings me to where I am today. I have a pinched nerve, resulting in foot drop. The nerve was pinched too long and never recovered.

Prehab could have helped. What’s that? It’s not rehabilitation but preventive monitoring. Anyone who is waiting for surgery to fix a physical problem should visit a physical therapist, not necessarily to work on the problem, but to be monitored for changes that could affect the timing of the surgery.

Had I been monitored by a professional, I might have had the surgery—pain-free or not—earlier. The nerve could have been less damaged and I might have recovered fuller function. Pain is your body’s way of telling you something is wrong. Mask that pain with medication and you’ll need monitoring to see if all is well—or not.

Now, I’m working hard to stand upright and keep walking. Each week, I have four visits to physical therapists, plus three gym sessions, two of them with a personal trainer. After they trained me to walk properly with a cane, I am using it more often when I go out. Sometimes—when I want to be treated as a younger, healthier person—I use two walking sticks.

The operation was a great success. I am totally pain-free and no longer cringe before a sneeze, which used to cause shooting pains from my hip to my ankle. I know one thing for sure, though. I’m never golfing again. I often wonder where I’d be if I had that “too big” operation sooner.

Richard Hayman is a second-generation family business owner and inventor with three patents. He studied engineering at Cornell University and received a master's degree from George Washington University. After his family's business was purchased by a public company in 1999, Richard went on to enjoy several additional careers. He’s also been a STEM instructor for middle and high school students in after-school technology programs. Richard's previous articles were Answers to Everything and Investing in Family.

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A Challenging Year

DO YOU THINK differently about money today compared to a year ago?

Cast your mind back 12 months. Interest rates were near record lows, cryptocurrencies were surging and stocks were hitting new highs day after day. Checking your investment account balance was an instant dopamine hit. Ditto for homeowners, who could get a sense for their home’s skyrocketing value by perusing the local listings.

Last year was also a time when many Americans called it quits from the nine-to-five grind. In fact, so many folks retired during the pandemic that it was dubbed the “Great Resignation,” with 2.6 million more people retiring than expected. Meanwhile, the Census Bureau reports that some 5.4 million new business applications were filed in 2021, up from the previous year’s record of 4.4 million.

The upshot: Entering 2022, many folks didn’t have the safety net offered by traditional fulltime employment, with its predictable salary and array of employee benefits. And I was among them.

I parted ways with my employer in early 2021, instead turning my focus to freelance investment writing. One reason I could take that risk: At age 33, I’d amassed enough money to be what many personal finance gurus would deem financially independent.

Through 2021, I hunted for the right fulltime job, and I even had a couple of decent offers. But the numbers didn’t match what I wanted, so I continued to build my freelance writing business. All the while, my portfolio crept higher, though perhaps not at the pace of other investors because my stock portfolio was globally diversified, plus I held some bonds and cash.

Then came 2022. Nonstop market volatility, coupled with four-decade-high inflation, has made for a nerve-racking year. My portfolio’s value has slumped, but my freelance income has continued to grow, allowing me to save a healthy sum. The good news: My net worth today is pretty much where it stood a year ago—if I ignore inflation.

Overall, it’s been a year that’s reaffirmed some of my prudent financial habits, while also highlighting some of my mistakes. Here are my five takeaways from 2022:

1. Keep buying. It’s easy to be a saver and investor if you have a fulltime job that offers a 401(k) or 403(b) plan. Your regular savings get silently subtracted from your paycheck and dumped into the funds you choose.

But now that I’m self-employed, I need to be more conscientious, stashing dollars in my solo 401(k) plan. Still, it’s been a great time to be a stock market buyer. Global stock valuations are attractive, with a price-earnings multiple of 15 based on forecasted corporate profits, and yields on Treasurys are comfortably above expected inflation rates.

2. Have a plan for my cash. Today, letting money sit in a short-term government bond fund seems like a decent deal, with yields on offer above 4%. That’s good news for someone like me, who needs to carry a fair amount of cash, given my unpredictable income.

By contrast, last year, when bond and cash yields were tiny, I got a little too wild. I invested modest amounts in a few speculative areas, including stablecoins, a form of cryptocurrency. Luckily, I withdrew my stablecoins before this year’s cryptocurrency storm hit. But I still hold some of my other speculative investments, including fractional ownership of high-end wine and art. I suspect these modest bets will prove to be more of a nuisance than a big help to my portfolio’s performance.

3. Simplify, consolidate, protect. By dipping my toes into somewhat opaque investments, I set myself up for time hassles—not just tracking these investments, but also reporting gains and losses for tax purposes. To be sure, buying new investments and opening new accounts is fun, because they offer the chance to daydream about the gains we might score. But whenever we buy, we should also think about the ongoing headaches and about what will be involved in selling.

Eventually, I should consolidate my various accounts, so my estate is as simple as possible and I have fewer tax complications. My goal: Have investment accounts at only the most established firms. That way, I’ll reduce the risk that some niche company gets into financial trouble and freezes my account.

4. Set work boundaries. My biggest regret this year isn’t my asset allocation. Instead, what needs correcting are my work boundaries. Maintaining a roster of a dozen clients, while also keeping my finger on the pulse of the financial markets, takes its toll. Whenever I check out from work—let alone take a vacation—I forgo income, which is hard to stomach. That reality has prompted me to look around occasionally for a fulltime job with benefits and regular hours. The bottom line: Work-life balance is a lesson I’m still trying to learn, and I need regular reminders that it’s okay to step away from my desk to clear my head.

5. Get my own taxman. My inclination is always to do things myself, rather than pay someone else. That’s potentially dangerous and costly when it comes to taxes. A few early missteps, coupled with my higher income in 2022, has me pondering whether to hire a CPA to help me manage my taxes.

While the stock and bond markets have been crazy this year, that hasn’t been the biggest source of financial stress for me. Sometimes, I miss the good old days, when I felt my employer was taking care of me. While the numbers say I’m financially independent, I now feel more anxiety about money—because of all that’s involved in managing my own business.

Mike Zaccardi is a freelance writer for financial advisors and investment firms. He's a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com and check out his earlier articles.

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It’s All Relatives

MY WIFE AND I JUST returned from our annual Thanksgiving vacation on North Carolina’s Outer Banks. This is a yearly outing for our immediate family, my wife’s four siblings and their families. This year we numbered 43, representing three generations of siblings, children, grandchildren, nieces and nephews, along with significant others.

I wrote an article about this family tradition three years ago. It started in 1995, and has been held 25 times since. We’ve only missed two years—one because of a family wedding in California and another due to COVID-19.

For the first several years, we rented a seven-bedroom house on the beach for the week. As the family has grown, so has the size of the house we rent. These past two years, we’ve rented a 27-bedroom beachfront home in Kill Devil Hills, N.C.

It’s called an “event house” because it can sleep around 50 and hold a wedding or other special event with up to 100 guests. It has a heated pool, hot tub, kiddie pool, sports bar, theater room, exercise room and a catering-ready kitchen.

The house is three years old and is rented about 50 weeks a year. Prime summer weeks rent for about $40,000—if you can reserve one. The Thanksgiving, Christmas and New Year’s weeks cost about $18,000 each.

These figures may seem pretty pricey, but remember we’re housing 16 families for a week in a luxurious beachfront home. When you consider the number of bedrooms used and for how many nights, it works out to about $100 to $110 per night per bedroom. This compares favorably with a beachfront hotel, plus our rental includes far more amenities.

In the early years, we split the cost six ways among our family, my wife’s parents and my wife’s four siblings. Since my wife’s parents died, we’ve split the costs among what I call the five families—my wife, her three brothers and one sister. The five siblings range in age from the late-50s into the 70s.

Each family has at least two children, most of whom are married or have a significant other. There are also 12 grandchildren spread among the five families.

Our children and their spouses, as well as their nine cousins and their families, represent the next generation of the family. They span Gen-X and millennials, ranging in age from the mid-20s to mid-40s. I know I’m biased, but this group is exceptional. Whenever I hear disparaging remarks about the younger generation, I shake my head in disagreement.

They have strong, stable marriages. They have successful careers, own homes and contribute to their communities. Their personalities, professions and interests are quite varied. Yet all share something precious—a commitment to family.

I give my in-laws tremendous credit for this. They set the tone by always making the effort to show up, and that ethic has been passed down to successive generations. The next generation has been taking on more responsibility each year for cooking, cleaning and event planning. They’ve also volunteered to contribute financially to the future funding of the event.

For the past decade or so, I’ve handled the finances for family week. I take care of the leases, collect family contributions and make the scheduled payments. I have an online savings account to hold the funds until needed, and to try to earn a little interest in the meantime. The process is pretty simple, and it’s something I enjoy.

This year we had a family meeting with the two adult generations to discuss plans. It was heartening to see everybody’s interest and willingness to contribute. They also have some ideas on how to create a more formal structure to accumulate funds for future years.

While we’ve discussed some ideas, we have some work to do to put something in place. I’d be interested to hear from the HumbleDollar community about any ideas or experiences they may have had in structuring a family enterprise.

Money is a challenging subject among families. We have a large and diverse family. The group of adults I’m discussing ranges from five years into their career to five years into retirement. It’s only natural that an individual’s financial circumstances would vary with age and employment.

One of the most important tenets of the family is not to let finances prevent a family member from attending. This has worked well for the past 28 years, and it will guide any funding structure that we put in place.

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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