Jonathan Clements's Blog, page 18

Could you be (justifiably) a source of envy by others? Are you wealthy?

A great deal of wrath these days seems to target the wealthy although that generally means billionaires or close to it. However, being wealthy is very relative. I suspect many HD readers are looked upon as wealthy by their peers while perhaps not feeling so themselves. I admittedly fall in that trap.

Many comments on HD by those retired indicate to me being relatively wealthy or pretty close to it. 

So, look at the data as estimated as it may be, and see for yourself. Would your friends, neighbors and relatives be justified in viewing you as wealthy - with a touch of envy?

For reference, latest data indicate:

Median household income: 

$80.6k overall:

peaks near $95k (45–64) 

and drops to $57k (65+).

Median net worth: 

$39k (<35) 

$409k (65–74) 

$336k (75+).

Average net worth: 

$183k (<35) 

$1.79M (65–74) 

down to $1.62M (75+).

Overall median net worth: $192.7k; average is $1.06M.

I’d say having a net worth in the 90th percentile makes a person wealthy in most people’s view.

Approximate 90th percentile net worth by age:

Age 45-54 $1.4 million

Age 55-64 $2.2 million

Age 65-74 $2.5 million

Age 75 + $2.00 million

These figures are estimates based on Federal Reserve and Census data, adjusted to 2024 dollars

Recent surveys suggest that a net worth of $2.2 million to $2.5 million is often cited as the threshold for being considered wealthy by the general public. However, this can vary significantly by location and by generation. I say it also depends on what is included In the numbers. If it is mostly one’s home, that makes a difference in my opinion. 

There is a difference between income and net worth of course. Someone can have a high income but not be truly wealthy if they spend it all or have significant debt. Conversely, someone with a modest income but significant assets may be considered wealthy.

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Under Pressure

A PLANE’S ALTIMETER measures the airplane’s altitude. It’s a critical instrument—so important, in fact, that planes are typically outfitted with two. That’s for redundancy, in case one fails. In addition, because different altimeters work better in different conditions, the two readings offer pilots multiple points of reference.

I was speaking recently with a retired pilot, who explained this to me and asked how he could apply the notion of redundancy to his finances. It was a good question, one that’s relevant to anyone building a financial plan.

Let’s start with the numbers. Statisticians like to joke about the six-foot man who drowned in a river that was five-feet deep on average. The idea is that we need to be careful in how we use statistics, and this certainly applies to financial planning. We know, for example, that historically the U.S. stock market has delivered 10% annual returns, but that figure is a 100-year average. In our own retirement, each of us will experience some set of market returns, but we don’t know whether those returns will be better or worse than the long-term average, and that could make all the difference. How can you navigate this uncertainty?

One way is to assume that future returns will be lower than they’ve been in the past and to assess the impact of those lower returns on your plan. That approach would make sense especially right now, after the strong above-average returns we’ve enjoyed over the past decade.

Another approach would be to use Monte Carlo analysis. This is a statistical technique that gauges the likelihood of a plan’s success under different market conditions. It has its own strengths and weaknesses, but can be helpful in illustrating the probability of various future outcomes.

How else can you account for the uncertainty of market returns? I suggest turning the dials on more than one variable. What if you varied your expected spending rate or looked at the impact of moving? It’s useful to examine alternative scenarios even if you don’t know precisely which way things will go.

Another way to pressure-test your plan is to do what the late Charlie Munger often recommended. “Invert,” he said. “Always invert.” The idea here is to turn a problem on its head, to look at it from more than one perspective. In addition to asking how you might set your plan up for success, also ask what might cause it to fail? While none of us can see the future, an advantage we all have is we know our own circumstances. That puts us in a better position to assess which risks will likely be most relevant. Some folks worry more about their health. Others worry about their living situation or about the wellbeing of a loved one.

Another important step is to tune out unnecessary noise. Alberto Brandolini is an Italian software engineer. In observing the amount of misinformation on the internet—and how quickly it can spread—he coined what he called Brandolini’s law. It postulates that the amount of energy needed to refute misinformation is an order of magnitude greater than the effort required to produce it. Because Wall Street’s marketing machine is often in overdrive, this is a key point. In constructing your plan, try to steer clear of sales pitches for the Street’s latest “innovation.”

In the last interview he gave before his death in 1976, Benjamin Graham offered this advice: “The present optimism is going to be overdone and the next pessimism will be overdone.” And this cycle simply repeats. “You are back on the Ferris Wheel,” he said. This is another important idea. In constructing a plan, it helps to be skeptical of the prevailing sentiment of the day, whether that happens to be excessive optimism or extreme pessimism. Instead, stay focused on your plan and your goals.

On this point, it’s worth keeping in mind the history of the transportation industry. Before automobiles gained popularity in the early 1900s, it’s estimated that there were more than 4,000 companies in the horse-and-carriage business. In hindsight, it’s clear that the right move for them would have been to try to transition to automobile manufacturing. Carriage makers had relevant skills and were well positioned to make this leap.

But they adopted a collective mindset that the automobile wasn’t going to succeed. They referred to cars as “devil wagons” because, early on, they were noisy, unreliable and dangerous. As a result, just one carriage maker, Studebaker, correctly assessed where things were going and successfully shifted to making automobiles. Every other one of those 4,000 companies was so convinced of an alternate reality that they put themselves out of business.

This carries a lesson for financial planning. There’s no virtue in being contrarian simply for the sake of being contrarian. But in making a financial plan, it sometimes helps to consider viewpoints that differ from what everybody “knows.”

In their book, Like, Martin Reeves and Bob Goodson explain the art required in soliciting opinions from other people. On the one hand, there’s an advantage in casting a wide net. Diverse opinions help us sharpen our thinking. But there’s also a key advantage in talking to people who are just like us: Their knowledge and experience is most relevant. A chef will want to consult another chef with a cooking question. But that has its limits. At the advent of the automobile, horse and buggy makers probably leaned too heavily on each other in discussing the future of their industry, thus creating an unhelpful echo chamber.

There’s no easy answer to this. But if it seems like everybody is looking at a single altimeter, it might make sense to consult another one.

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 X @AdamMGrossman and check out his earlier articles.

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From Public Housing to Early Retirement: A Path Forged in Adversity

In my childhood, I grew up in public housing. From the age of 11, I attended what in the UK is the rough equivalent of a public high school. This was during a very volatile and violent phase of societal change in my country, set against a backdrop of illegal paramilitary organisations. They effectively "hoovered up" a high portion of my childhood friends, regurgitating them as dead bodies or incarcerated prisoners with no future. This was the reality of my childhood and formative years. The majority of the lucky ones who escaped this fate now work in manual labour and assembly line jobs.

And then there's me. I'm retired at 58 and could be considered slightly wealthy. How can having such similar childhood and early adulthood experiences produce such different outcomes? My brother was more intelligent than me, yet he got sucked into the paramilitary organisations, spent time in prison for attempted murder, and developed drug and alcohol addiction. Suicide took his life before forty. Two of my uncles were high-ranking individuals within the leadership of these very same organisations and also spent time in prison. Again, I think, what's different about me?

I can't think of much. I had an instinct within me to avoid drugs and gangs; peer pressure from my friends didn't faze me. I worked hard; in 15 years of employment, I never missed a day. I looked at my brother and thought that whatever he did, me doing the opposite would probably be the best course of action. I've had a stable and strong relationship with my now wife since high school. I put effort into education and learning, yet I still struggle to pinpoint the reason for such contrasting fates.

Other than the above slight advantages, I managed to get on the housing ladder, invest what I could afford for my future, and eventually leveraged my house to start my own business. I maybe had luck and some good fortune along the way, but a stable relationship, strong work ethic, entrepreneurship, and the stock market all interconnected to let me have my current lifestyle.

I don't feel ashamed of my story, and although some people scorn those who succeed, they haven't walked my path or felt my anguish. I survived and endured an era of violence and emotional trauma, but thanks to the wonder of compounding and the economic system that offered me pathways to success, I'm grateful and humbled for my retirement over adversity.

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Are You Going to Get the Social Security Benefits You First Started Paying For?

My wife started her professional career in 1979, and I in 1980.

I previously wrote an article on Humble Dollar where I tried to research the points covered below by Mark Miller who is considered one of the nation’s leading experts on retirement and aging. In a recent article on Morningstar’s website he warns of the effects of the bill recently signed into law. He writes that if congress does nothing to shore up Social Security the trust fund is projected to be emptied by 2032, one year earlier the previous estimate.

He writes: If we reach that point (barring action by Congress), benefits would be cut across the board by 23%—a reduction that would be catastrophic for lower-income seniors who depend on Social Security for most or all of their income.

It would also be unfair for younger people, who already bear the brunt of the benefit cuts made in the last major reform of Social Security in 1983. That law set in motion a gradual increase in the full retirement age—the age when you can claim 100% of your earned benefit—from 65 to 67 for workers born in 1960 or later. Every one-year increase in the full retirement age is equivalent to a roughly 7% cut in monthly benefits.

My wife and I are facing nearly a 30% cut in our Social Security benefits by the time we claim at 70 in 2028 compared to the benefits we would have qualified for when we first started paying into the system.

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Vanguard Complaints?

In recent years, I’ve regularly heard from readers who have faced service snafus at Vanguard Group. Many of these folks have stuck with Vanguard’s exchange-traded funds, but moved their accounts to Charles Schwab or Fidelity Investments, with an eye to getting better service.

Over the past 12 months, however,  I’ve heard far fewer complaints from readers. Does that mean service has improved—or does that just reflect the fact that the disgruntled have moved on and those who remain are willing to live with occasional poor service?

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Roth Conversion Timing and Amounts to Maximize Benefits

I thank everyone in advance for any assistance and advice you can provide regarding my Roth conversion scenario. I am currently 56 with a potential retirement age of 58 (approx. 2 yrs). My wife is younger and will continue working for another 8 years following my retirement. I plan on deferring Social Security as long as possible, age 70.  I have $850,000 in a regular IRA and an additional $600,000 in a company sponsored 401K.  My wife and I file jointly and are currently in the 24% tax bracket ($206,700- $394,600).

I understand the benefits and general tax implications of a Roth conversion; foremost to pay the IRA conversion tax from a taxable account, not the IRA. In my case, I will cover Roth conversion taxes from selling index funds in a brokerage account.  I am looking for clarity on when to start converting my IRA to a Roth.  General convention says that you convert when you retire and earn less income. However, I have a wife that will continue working for 8+ years. At my retirement my wife’s salary and my residual income will put us in the 22% tax bracket but very close to the max $206,700 threshold.

Wouldn’t this threshold significantly limit the amount I can convert to a Roth and still stay in the 22% bracket?

As I am already in the 24% bracket, wouldn’t it make sense to start converting now? I would be able to convert about $75,000 in 2025 and still stay in my current 24% tax bracket.

Is there a way to file taxes separately and convert more of the IRA at a lower tax bracket?  I don’t think this is an option.

I have listened to podcasts and heard different conversations about the importance of the Right Timing & Right Amounts to maximize the Roth conversion. What am I missing?

Are there advanced Roth conversion calculators that can provide individual conversion timing breakdowns with amounts based on tax brackets and future income?

All comments and assistance are greatly appreciated. Regards,  John

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Compared to What?

When news on the radio says that a given investment instrument's price is up or down by some stated percentage or monetary amount, but it doesn't say what that's compared to, is there a convention defining this? For example, do they mean a year ago, a day ago, a minute ago, since the last opening or closing, or since some event that is in the news about that instrument, such as a board choosing a new company president? This happens often on Bloomberg radio, but I visited their website and couldn't find any page that explained this.

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DIY

Excellent article about DIY. My question to all HD readers: What are you willing to do instead of paying someone else to do it?

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How Important Is Money?

I like earning money. I like having it. I like giving it away. Still, it’s worth asking: How important is money?

Yes, money can pay for the necessities we all need—food, shelter, transport—and more of it has the potential to buy us a better life. The necessities are obviously (ahem) necessary. But what about the frills that more money can buy us?

That discretionary spending has the potential to bring big smiles. Still, it’s hard to imagine that these frills would do much to offset, say, the pain of persistent ill-health or that caused by the death of a loved one. Indeed, I assume—and hope—most folks would happily give up this extra spending in return for better health and more time with those they love. I also suspect that this extra money doesn’t do much to make chronically unhappy folks feel all that happier.

So, how important is money?

I’d argue that it ranks in importance below time, good health and companionship. But it’s also hard to separate money from these things. Instead, money is inextricably entwined with these other factors: It can potentially buy us special times with others, better health and relief from tasks we dislike.

But money has its limits, especially when it comes to health. Over the past year, I’ve benefited from the finest health care, and I’m only vaguely aware of what all this has cost. But that health care hasn’t extended my life by much, and throwing even more money at the problem wouldn’t—as best I can tell—have made any difference.

What would I pay to get an extra 12 months? Perhaps fortunately, that’s not an option—because then I really would be forced to decide how important money is.

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Flexing the Retirement Spending Muscle

Suzie and I are packing a travel bag right now. Later this morning, we're off to the Fermanagh Lakelands, a two-hour drive from our holiday home. We're staying for three nights in a fancy hotel that's also the wedding venue for the daughter of a very close friend. We'll be attending the festivities there. I'm looking forward to the wedding, except, of course, for the suit I'll have to wear.

I'm particularly interested in seeing the bride in her wedding dress because, unusually enough, I purchased it for her. Certainly not the traditional way with a wedding dress, but the bridal budget was having a cash flow crisis at the time.

I was deep in the throes of sorting out my retirement finances when this not insignificant purchase happened, and I admit, very unusually for me, I dallied slightly before making the offer. But a realization hit me: I'm retiring soon. If this wasn't the perfect opportunity to give myself permission to spend in retirement, when would be?

I reasoned this would be a perfect test of flexing my retirement spending, putting the generosity line on the spreadsheet into real-world practice. Thinking about this, I considered the other outcome that people might have chosen in the same situation. After years of carefully saving for retirement and being careful with their budgeting, it's not a given that this spending muscle would be ready for its task, and the offer of bridal help may never have happened.

I've read and seen a few real examples of people never fully embracing this phase when they enter retirement, living a life far below their means. They let their spending muscle atrophy through fear of running out of funds in their later years, or from simply being unable to shed the psychological shackles of frugality ingrained through their working years.

How can people overcome this problem? Say, for example, you start a program at the gym, you trust the instructor to professionally craft a weights program to suit your goals. Similarly, you should trust your retirement advisor and financial plan when they tell you your spending is ready to lift the heavy weight of retirement spending.

Start small if you need to, just as you would in the gym. Go for a nice meal or a short vacation to slowly become accustomed to spending, but use that muscle to the best of your ability to enjoy your retirement. Just as physical exercise becomes easier with practice, so too will your ability to spend without fear in retirement become second nature.

On a similar note, I've never enjoyed public speaking, but unfortunately, I need to practice this art because I have to give a short speech at the wedding we're soon to attend. My speech will praise the bride and compliment her beautiful dress. Although I purchased it, I have no idea what it looks like. That privilege was only given to the bridal party and my wife, Suzie, who, unfortunately for me, is really good at keeping secrets. My own little secret is I'm hopeful my suit will be forgotten when packing for the big day.

I wonder to myself… Have others paused and reconsidered over impactful spending decisions because of retirement spending fears?

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