Jonathan Clements's Blog, page 189

My Retirement Hero

CAROL IS MY COUSIN. Long divorced, she raised three daughters on her own. Now newly retired, her life is one long adventure���tackled with an incredible attitude. Some people approach retirement with trepidation, but not Carol. She was out of the gate with gusto.

Carol retired from Medtronic in November 2021, after 22 years. She���s a registered nurse who assisted doctors with the insertion of medical devices. She has a pension���Carol became eligible just before the company stopped offering them. Now 65, she���s waiting to collect Social Security until her full retirement age of 66��.

She sold her townhome in December 2021, moved in with one of her adult daughters, and pays no rent. Her daughter lived with Carol as an adult a few times, so Carol is collecting on that. She says she takes her approach from a line in The Godfather, a movie she���s seen many times: ���Someday, and that day may never come, I will call upon you to do a service for me."

Carol turned over her 401(k) and the profit from her townhome sale to a financial advisor, and crossed her fingers. Yes, her free-spirited approach to life also applies to finance. Her investments are allocated 41% mutual funds, 30% ���other��� (whatever that means), 27% ���equities��� and 2% cash. ���That���s about all I know,��� she tells me, but she promised to ask about the ���other.���

My cousin described her immediate plans this way: ���I���ve decided to spend the next year-plus traveling and hitting many of the major European, African, Asian and Australian tourist sites. In the medical field, I learned that once you reach a certain age, you���re much more vulnerable to chronic medical problems. I am healthy and want to do challenging activities now, and for as long as I can. Then I���ll do the more relaxing stuff.���

I kinda think ���relax��� is a foreign word to Carol.

She recently returned from three months in Europe. I asked if she was bored back home. ���Heck no,��� she said. ���I���m bogged down in paperwork���getting ready for the next trip.���

Carol requested that I note the difference between a ���solo traveler��� and a ���singles traveler.��� The latter is often assumed to be on a quest for a partner. As she said to me, ���Why can���t a healthy, adventurous, financially comfortable single woman just want to explore the world, learn ancient history, see iconic sites and admire famous artwork?���

Why not indeed?

In case you think she���s exaggerating her appetite for travel, take a look at 2022 so far. In February 2022���just as a practice run, my words not hers���Carol spent three weeks in Belize. While there, she made casual friends with an elderly couple who have been traveling the world since their late 50s. The couple confided that they both have fairly serious medical problems, but they keep on going.

Perhaps that should be an inspiration to us all, especially those who like to depict retirement as having three phases���go-go, slow-go and no-go. That���s not Carol. She���s more go-go-go. After Belize in February, she traveled to Spain in April.

���I arrived in Bilbao for a 15-day tour of northern Spain. Then I headed south through Portugal, ending in Porto, a beautiful seaside city. My next stop was Tonbridge��in the UK. I stayed with a friend and lived like a local.���

My wife and I can relate to that. We met a couple on a cruise several years ago and remain friends. We have visited each other in the U.S. and U.K.

���Next, I was off to Italy with the Tonbridge friend, traveling with her for three weeks. One week in Tuscany, including cooking classes, and then off on a journey across northern Italy. Three days in Cinque Terre, a group of five villages on the northwest coast of Italy, where we hiked from village to village. We ended up in the beautiful village of Vernazza.���

Carol made all the arrangements online before leaving, including all the trains that carried her from city to city. She stayed in bed and breakfasts and three-star hotels.

I���m exhausted just writing about this adventure. But that was only the start.

���We took the train to Florence for four days, hitting the major sites. Then we took a train to Venice for three days. We strolled the canals and took water taxis. We skipped the gondola rides as they were ridiculously expensive.���

Three months in Europe and the gondola was too expensive? Oh, Carol. A few years from now, you���ll regret that.

���On to Rome for five days,��� she recounted. ���Tours of the Colosseum, Vatican and Borghese Gallery. The tour guides in Italy have been so good. We got around by walking. I never used taxis or public transportation. You save a ton of money if you walk.���

She wasn���t done. ���Another train to Pompeii for three days. My friend returned to England then, so I was alone. Being alone is both lonely and wonderful. When I���m alone, I do whatever I want. Some days, I just snack. Eating pastries for the entire day is so liberating. Cannoli or sfogliatella? Big decision.���

Carol gained eight pounds during her trip. She says it would have been 20 if she had taken taxis. Instead, she walked and hiked. ���I climbed Mount Vesuvius and did two separate tours of Pompeii and Herculaneum.���

All this exercise is getting a bit much. But we���re not done yet.

���Next, another train to Catania, Sicily. It���s a cool, four-hour train ride. At Messina, they split the train in half and tow the cars onto a giant ferry boat.��� In Sicily, Carol climbed Mount Etna while it was ���spewing volcanic ash all over.���

My wife and I rode to the top of Mount Etna once in August. Steam was coming out the top as we made snowballs in a foot of snow.

To pay for 18 months of travel, Carol has allocated about $50,000. But she keeps adding to her itinerary as she goes, and expects to withdraw more cash to pay for it.

Her investments are down about $200,000 since January, but there���s no panic. Carol says, ���I have lived through many economic downturns, both nationally and personally.��Que sera, sera.���

I bet this shakes up some HumbleDollar readers, who tend to be serious and meticulous about investing. It makes me wish I had a bit of that ���whatever will be��� attitude toward money and life.

After enough pasta and cannoli, Carol flew back to Tonbridge. You can only take mushy peas for so long, however, so after three weeks she took the Eurostar train to Paris. There she spent the last four days of her European adventure, but she is already talking about going back.

By the way, Carol has a three-country adventure in Africa starting this month, where she plans to look for gorillas. She is now busy completing the extensive paperwork. Then next January through March, she���s off to Australia. What will she do in the time between October and January? Explore some of the U.S., she says.

Carol is my retirement hero.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.

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Beginning Badly

SEQUENCE-OF-RETURN risk has long been a major concern among retirees���and it���s a real danger right now for those who just quit the workforce or soon will. Also known simply as sequence risk, it refers to the chance that the market declines sharply, forcing retirees to sell investments at depressed prices to generate income.

Wade Pfau, a leading retirement researcher, published a paper highlighting the danger involved. As he makes clear, a few years of market losses coupled with portfolio withdrawals can decimate savings, increasing the risk that a retiree will run out of money.

You might view sequence-of-return risk as the opposite of dollar-cost averaging. Instead of buying more shares when stock prices are down, you���re selling additional shares at lower prices to generate the same amount of income.

This year, unfortunately, provides a good example of how market forces can affect retirees��� savings���and their plans. Consider a retired couple with a $1 million portfolio who need $50,000 a year from savings to cover their expenses.

If they withdraw $50,000 at the beginning of the year, their balance is reduced to $950,000. If the stock market returned 10% that year, their balance at the end of the year would be $1,045,000. If this continued year after year, the retired couple would be in great shape. By the end of the fifth year, their balance would be $1,274,370.

But what if the market declined 10% in the year when they made their initial withdrawal? At the end of that first year, just as the couple was about to withdraw another $50,000, their balance would be $855,000. What if this continued? At the end of five years, their balance would be slashed by nearly 60%, to $406,211.

Folks who retired during the 2008-09��Great Recession encountered this risk head-on. I had a colleague who reached retirement age in 2007. He had changed employers several times in his career, so���unlike many of his coworkers���he didn���t have a significant pension. He also had major education expenses, including putting a daughter through medical school.

His plan was to work for as long as possible, continuing to save and invest. He also planned to postpone claiming Social Security so his benefit would grow in value. Unfortunately, the NASA program he was working on was canceled in 2008, eliminating his job. It was a stressful time for my colleague. Fortunately, after a few months, he was able to find a new job and continued working into his 70s.

Today, my wife and I are also confronting sequence-of-return risk. My wife retired last year, so 2022 is our first year with limited earned income. I have a pension that covers a good portion of our annual expenses, but we expected to dip into our retirement savings for the discretionary extras. Over the past two years, we���ve also undertaken several major home renovations.

We���d planned for these expenses by holding a large amount of cash, equal to about three years of discretionary expenses. The renovations ate up about two years of this money. This worries me some, but I remind myself that this is why we worked hard and saved all those years.

When we both claim Social Security in about five years, the combination of my pension plus our Social Security benefits should easily cover our expenses, as well as the extras���travel, gifts, entertainment���that make for a pleasant retirement.

How can we counteract sequence-of-return risk? The hope, of course, is that the market turns around and starts on its next bull run. But if luck isn���t with us, here are five ways to structure retirement income to lessen sequence risk���s corrosive effect:

1. Annuitize. If you���re lucky enough to have a defined benefit pension, you have a guaranteed stream of income. You get paid no matter what the market does. If you don���t have a pension, you can create an equivalent version by purchasing income annuities. This transfers investment risk from you to the insurance company.

2. Cash bucket. This is a popular strategy, one that my wife and I are using. It hinges on the notion that the stock market rebounds within a reasonable period of time. If you have enough cash to cover, say, three or five years of expenses, you can weather the market���s down years���usually.

3. Reduce spending. You might trim or delay large purchases. For many, tightening their belt comes naturally during a market downturn. But during the current market swoon, it���s been made more difficult by today���s high inflation. Recall the example above, where our hypothetical couple withdrew $50,000 a year. For next year, they might need more like $55,000 just to keep up with rising costs.

4. Work. For many retirees, a second career or part-time work can fill idle hours and provide welcome income. This can reduce or���if you���re industrious enough���even eliminate the need to sell investments in a down market. Indeed, it���s a strategy I���m considering. I���m currently looking at a few consulting opportunities.

5. Social Security. Some retirees plan to delay claiming Social Security until age 70 to maximize their benefit. If your retirement nest egg is getting scrambled by a prolonged market slump, you might opt to claim Social Security earlier and thereby reduce portfolio withdrawals.

Part of my angst about retiring into a down market is that I simply hate tapping our hard-earned retirement savings, especially at reduced valuations. But as I keep telling myself, why did we save all this money if not to fund our retirement? I doubt I���ll ever stop worrying completely, but I���m getting more comfortable with this ���decumulation��� phase.

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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Not Biting

MY WIFE AND I GET together occasionally with our neighbors for a glass of wine. We became good friends with Larry and Kathryn since they moved into our neighborhood. They���re retirees, just like us.

When visiting them, they often serve cheese and crackers. One day, Larry said to me, ���Try one of these whole wheat crackers. They won���t hurt you. I can���t say the same thing about the cheese, though.��� He knows I try to eat healthily.

After eating Triscuits at their house, I became hooked. I don���t know what it is, but there���s something I like about those crackers. Maybe it���s because they���re only made from three ingredients: whole grain wheat, canola oil and sea salt. My wife, however, won���t go near them.

But recently, I stopped buying Triscuits. Not because I don���t like them anymore. I���m just not willing to pay what the stores are charging. This year, the price of a 12.5-ounce box of Triscuit crackers has skyrocketed to more than $5. I���ve seen them selling for as much as $5.69 at the local supermarket.

There may be good reasons for the price increase. Higher gasoline prices, supply chain issues and the war in Ukraine are contributing to rising grocery prices. But it seems like yesterday that I was paying under $4. Although the price has come down somewhat from its peak, I still refuse to pay the higher price. I feel like I���m being gouged.

I decided to switch to store-brand crackers that are cheaper. They have different ingredients. That���s probably one of the reasons they cost less. But I like them well enough to keep buying them.

Companies know people like me will buy an alternative product if they raise their prices too high. Instead of hiking prices, they sometimes shrink the size of the product instead. They call it shrinkflation. Companies do that to combat the rising cost of ingredients, while hoping you won���t notice the smaller size.

Powerade reduced the size of its 32-ounce drinks to 28 ounces, but stores continue to charge the same price. Cottonelle Ultra Clean Care toilet paper shrank the number of sheets per roll from 340 to 312, and didn���t drop the price. You see other manufacturers, including those that make paper towels, yogurt, snack bars and coffee, shrink the size of their product, while not lowering prices.

You also need to be on the lookout for companies that change to cheaper ingredients to save money. I doubt you���ll see that happening with Triscuits since there are only three ingredients. I���m always leery of products that say ���new and improved,��� unless they specify what exactly they changed.

Mondelez International, which makes Triscuit crackers and Oreo cookies, reported its second-quarter results on July 26. "Our second quarter and first half results were marked by strong top and bottom-line performance across all regions and categories, supporting the raising of our full-year revenue growth outlook," said Dirk Van de Put, the company���s chairman and chief executive officer. "Our chocolate and biscuit businesses continue to demonstrate strong volume growth and pricing resilience across both developed and emerging markets.���

Based on Mondelez���s strong second-quarter performance, it looks like a lot of people are willing to pay the higher price for its Triscuit crackers and other products. Not me. I���m sticking to my store-brand crackers.

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Can’t Stop Themselves

I OFTEN MEET PEOPLE who have saved more than enough to retire. In my role as a financial planner, I share numbers with them showing that, if they retire today, there���s a high degree of certainty they���ll never exhaust their savings. I often tell them that, if they ran out of money, it would be because capitalism failed, and we all might as well learn to hunt and gather.

Yet few of these people retire. According to the Pew Research Center, only 17.1% of people ages 55 to 64 are retired, while only 66.9% of people ages 65 to 74 have left the workforce. Moreover, these numbers have been shrinking for decades, though���not surprisingly���there's been an uptick amid the pandemic. Since the early 1990s, people have been working longer despite rising household wealth and a falling poverty rate.

Why are we working, apparently voluntarily in many cases? My own father, who is nearly 70, still runs his one-man plumbing business, digging holes and crawling under houses, no matter what the weather.

Often, if you ask people why they keep working, they struggle to pinpoint the reason. Still, I try my best to find out why. Everyone is different.

In my experience, some people simply like to be��useful. Many of us want to feel needed, productive and important. That���s certainly the case with my father. I���m not sure he would enjoy retirement very much. He likes working with customers, completing a job and putting in a hard day���s work. In my opinion, people like my father should continue to work if that���s what they want. Maintaining a healthy life balance, while enjoying the rewards of hard work, are great reasons to keep working.

Others will tell me they don���t know what they���d do with themselves if they retired. I believe we should all aspire to retire to something. This is where hobbies are useful. I encourage clients to remember the activities they used to find totally absorbing. We���re talking about things like drawing, fishing, writing, playing music, reading, woodworking, golfing, painting, gardening, hunting, traveling, walking or simply spending more time with loved ones.

For other people, it���s the all-too-common inability to recognize what is ���enough.��� Have we saved enough? Have we accomplished enough? This concept reminds me of the tale of the businessman and the fisherman.

On his annual vacation, the businessman spots a middle-aged fisherman pulling his boat in after a half day, and then heading over to a group of family and friends who are listening to music, dancing and drinking wine.

The businessman asks him, ���Why are you done after half a day? You could fish all day, catch more fish, sell more fish, buy more boats, hire more people and make more money.���

The fisherman responds, ���Why would I want to do that?���

The businessman says, ���After many years of hard work, you could have enough saved to retire, and then spend your days fishing for pleasure, listening to music with family and friends, dancing and drinking wine.���

The fisherman was puzzled. ���Isn���t that what I do now?���

Some of us go our whole life without ever defining enough. That���s a mistake. My advice: Be more like the fisherman.

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. His previous article was Moving the Goalposts.

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Games Colleges Play

WHEN OUR KIDS applied to colleges, the smallest detail of each campus visit mattered a lot. If our daughter admired the student leading our tour, the school skyrocketed in her estimation. If the class our son attended to ���get a feel for the place��� turned out to be a test period, Grandpa���s alma mater was forever struck from consideration.

In economic terms, the college decision features asymmetric information. Colleges know a lot about us from our detailed personal and financial applications. We know only a little about the college, yet we wager a fortune on the hope that it���ll accelerate our child���s growth into adulthood.

Into this breach stepped U.S. News & World Report with its college ranking system. It assembles reams of data and boils it all down to one all-knowing statistic: how a school ranks against every other college in the nation. William & Mary, for example, is tied for No. 41 among national universities in the U.S. News��2022-23 rankings���not No. 40, not No. 42.

If you suspect such certainty suggests false precision, you���ll find plenty of support in a recent paper by Michael Thaddeus, a Columbia University math professor. Using math and new research, he demolishes his employer���s U.S. News ranking as the second-best college in the nation. He also suggests there are better sites to use when evaluating colleges, which I'll share at the end.

In his paper, Thaddeus compared Columbia���s reported U.S. News numbers against publicly available information. Lying is such an ugly word. Let���s just say he found Columbia stretched the truth quite often to raise its ranking.

For example, Columbia told U.S. News that 100% of its faculty have PhDs or terminal degrees in their field, a higher percentage than Princeton, MIT, Harvard or Yale. Looking through faculty bios, Thaddeus found 66 cases where this was not the case���although these faculty may still be great teachers and one, in fact, has a Nobel Prize. Still, just 96% of the Columbia faculty have earned the highest degree in their field, according to Thaddeus.

Columbia reported that more than 96% of its faculty are fulltime. Thaddeus���s research yielded a figure of 74%. Columbia claimed that 82% of its classes contain fewer than 20 students. From the data he found, Thaddeus concludes the true number is at most 67%. Columbia reported its student-faculty ratio is 6:1. Thaddeus comes up somewhere between 8:1 and 11:1 based on the information he could find.

On and on it goes. Now, I���m certain Columbia is a great school. From Thaddeus���s research, however, I���d wager it doesn���t deserve its standing as the second-best college in the nation. Yet it���s been sold as such to thousands of prospective students, who are paying almost $86,000 this year in tuition, fees, room and board. Travel is extra.

You might wonder: At what point does fiddling the numbers cross the line into fraud? For an insight, look to Temple University���s Fox School of Business in Philadelphia. Temple���s online MBA program was ranked No. 1 in the nation by U.S. News for four years. It was based on falsified figures.

At a trial in federal court, prosecutors argued that Moshe Porat, the former dean, reverse-engineered the ranking system and then provided U.S. News with the false data necessary to produce a top result. They alleged the school collected an extra $40 million in tuition based on these falsehoods.

After deliberating for less than an hour, a jury found Porat guilty of wire fraud and conspiracy to commit wire fraud last November. He���s currently appealing his conviction and his sentence to 14 months in prison and a $250,000 fine. Meantime, Fox���s online MBA program dropped to 105th place in the latest ranking after U.S. News received unadulterated figures from the school.

Thaddeus recommends that the entire ranking system be scrapped. ���No one should try to reform or rehabilitate the U.S. News ranking: it is irredeemable,��� he wrote in the executive summary for his paper. ���Students are poorly served by rankings, and they create harmful incentives for universities. Even worse, the data on which rankings are based cannot be trusted.���

Thaddeus recommends three websites to evaluate colleges. ���College applicants are much better advised to rely on government websites like��College Navigator��and��College Scorecard, which compare specific aspects of specific schools. A broad categorization of institutions, like the��Carnegie Classification, may also be helpful.���

The first two sites provide reams of raw data about colleges, including costs, admission rates, average test scores, graduation rates and graduates��� average earnings. The Carnegie Classification groups schools by type. MIT, for example, is classified as a ���doctoral university��� conducting ���very high research activity.��� When I clicked on the site���s ���find similar��� schools button, I got 146 results���among them Auburn, Clemson, Emory, Montana State and the University of Rochester.

What you won���t find on these sites are any hierarchical rankings or bragging rights. You become the judge of the best schools, given the raw data and what you know about your child.

Incidentally, in July,��U.S. News��dropped Columbia from last year's rankings. The publisher said the school ���failed to respond to multiple U.S. News requests that the university substantiate certain data it previously submitted.��� Columbia's response? Last Friday, it finally acknowledged submitting inaccurate data.

Yesterday, U.S. News published its new 2022-23 rankings. Where does Columbia stand? How does tied for 18th sound?

Greg Spears is HumbleDollar's��deputy editor.��Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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Ten Reasons to Claim

IN MY FIRST ARTICLE for HumbleDollar nearly four years ago, I said I���d claim Social Security benefits at my full retirement age of 66 and two months. By claiming mid-way between 62 and 70, I intended to hedge my bets, because I couldn���t know such relevant variables as my lifespan or future tax rates, inflation rates and investment returns.

And I did indeed claim Social Security recently, though���full disclosure���it was nine months after my full retirement age. Here are the 10 factors that influenced my decision:

I may have challenged genes. Not a single family member on my mother���s side has made it to age 80. I hope my daily exercise, moderate weight, lack of smoking and more balanced diet may help offset my family���s clear lack of longevity.
The added Social Security income means we won���t need to take taxable IRA distributions or realize capital gains from selling investments over the next five years.
By claiming earlier than age 70, my Social Security payment is somewhat reduced. This will marginally help our tax situation beginning at age 72. That���s when required minimum distributions are scheduled to kick in���and when our tax rate is likely to rise.
Today���s low federal income tax rates are slated to sunset��at year-end 2025, so the tax on my Social Security payments should be somewhat lower for the next three-plus years.
We live in one of the 37 states that doesn���t tax Social Security income, so I won���t incur added state taxes from claiming earlier.
To solve the future Social Security funding shortfall, many of the suggested fixes include reducing benefits for those with moderate to higher incomes. A recent bipartisan poll indicates that more than 80% of Americans support some sort of benefit reduction for the financially well-off. If that happens, claiming earlier may prove to be a wise move.
The Social Security Administration can forevermore administer my Medicare premiums by deducting them from my Social Security payments.
I would be extremely frustrated if I delayed Social Security until age 70 and then subsequently suffered some major physical deterioration so I was unable to enjoy the extra money, even if I did live beyond the age 80 or so financial breakeven point.
I no longer need to evaluate the tradeoff of when to claim. I can move on from this debate, which���frankly���just feels good.
Claiming Social Security near my full retirement age, versus claiming at either age 62 or 70, guarantees that I���ll be at least half-right.

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A Home Run

MY WIFE SARAH AND I recently dusted off our old Scrabble board. We reviewed the rules and were reminded of the Scrabble Bingo���the 50-point bonus awarded to a player who figures out how to play every letter tile from the tray on a single turn.

Neither of us could remember ever achieving the Scrabble Bingo. That wasn���t surprising, we reasoned, because it���s rare for all the stars to align. You���d need the right combination of seven letters, the vision to see the word they can form, and the perfectly accommodating space on the board to play the long word. On top of all that, you���d need to fit with at least one other previously played letter in a crossword-like fashion.

Lo and behold, that very night I did it. I used all seven of my letters to intersect perpendicularly with an open ���e��� on the board���forming the word ���infields��� and tacking the 50-point bonus onto my score.

I share this story not because I think you���ll be dazzled by my Scrabble prowess any more than Sarah was, but because I want you to recognize the significance of a tax planning opportunity that may be open to you���with the kind of serendipity that reminds me of the Scrabble Bingo.

The tax break I have in mind is the personal residence gain exclusion. It���s the one that allows a married couple to sell their home and completely wipe out all taxes on a gain of up to $500,000. The exclusion is $250,000 for a single individual. Let me explain how the stars are aligning right now to make this tax benefit more relevant than ever to more people than ever���and how it could deliver a tax bonanza for those looking to move. Here's the trio of remarkable conditions that are coming together:

Home equity is at an all-time high. The real estate data firm ATTOM tracks how many mortgaged U.S. homes have equity-rich owners, meaning they have at least 50% equity in their home. As of the second quarter, 48.1% of homeowners had achieved equity-rich status���the highest percentage ever recorded. How did we get here? A combination of historically low mortgage rates and skyrocketing home prices.

Even though the July median existing-home sales price fell to $403,800 from the record-high June mark of $413,800, July continues an astounding streak of 125 consecutive months of year-over-year price increases���yet another record. More people than ever now own a home with a $500,000 (or $250,000) unrealized gain baked in���enough to realize maximum benefit from the tax exclusion. While it���s true that if you sell high, you���ll likely have to turn around and buy high, homeowners with a lot of equity are in better shape to do so.

Many who own that equity are ready to move. In East Tennessee, where I grew up and still live, I now have more new friends who have moved here from out of state than ever before. They���re coming from all over the country for all kinds of reasons: to find a more reasonable cost of living, a more agreeable lifestyle, to be closer to family, closer to nature���you name it.

Some are retiring here, but many have families with school-age kids. Often, remote work has made it possible to move without switching jobs. The Washington Post recently reported that about a third of all work is now done remotely, and this number appears to be holding steady, even as the pandemic wanes. Knowledge industries like finance and information lead the way, but every industry has become more open to remote work, and that���s removed a barrier to many potential moves.

Rent prices are at an all-time high. Thanks to climbing mortgage interest rates colliding with already-high home prices, housing affordability has tanked. According to the National Association of Realtors, it���s at its worst level in 33 years. These market conditions have led many would-be homeowners to rent instead of buying, which helped push up the July national median asking rent to $2,032. You guessed it���that���s another record.

Why are rent prices relevant to this conversation? Because, in an unexpected display of generosity, the tax code will count your home as a qualifying primary residence provided you���ve used it as such for any two out of the past five years. That means, once you���ve lived in a home for two years, you could move, collect that record-high rent check for up to three years and still take advantage of the full $250,000 or $500,000 exclusion���as long as you sell your home before the end of the fifth year.

Given that home prices could decline, is it worth it to rent your home for three years before selling? I could quote an economist���s prediction of where the housing market is headed, but would that really matter? The reality: No one knows. If I moved, I might try to rent for three years if the right situation fell into my lap. But if not, I���d happily sell and not look back.

Tacking on three years of rental income to this deal is like getting the 50-point bonus for playing a Scrabble Bingo. It���s a great goal, but successful players won���t let a preoccupation with the bonus deter them from taking the easy points right in front of them. The real key to making the whole deal work: You must have a convincing, non-financial reason to move.

In other words, please don���t uproot your life to pocket a tax-free $250,000 or $500,000 gain. There are so many more significant considerations to mull over before selling your home. But if you already have a good reason to move, shielding $500,000 from taxes is a fantastic play.

Just make sure you qualify for the personal residence gain exclusion before selling. Generally, there are two straightforward qualifications���the two-year ownership test and the two-year residence test. There can be some tricky nuances, however. Here are five clarifications that might help:

1. Only one spouse has to pass the ownership test. If you���re a married couple aiming to use the exclusion, it���s fine if only one spouse���s name is on the title. You can still qualify.

2. The residence test applies to each spouse separately. Let���s say you got married and decided to buy a new house together, so you both sold your previous houses. You could each qualify to exclude up to $250,000 of gain if you���d lived in your respective homes for two years. But you wouldn���t qualify for the $500,000 exclusion on the sale of either one.

3. If you need to sell before meeting the two-year residence test, you might still qualify for a partial exclusion, but only in limited circumstances. It won���t work if you moved just because you wanted to, but it might work if you can show that you were motivated by a change in work location, a health issue or an unforeseeable event.

4. You can apply the exclusion to only one sale during a two-year period. If your gain is less than the maximum exclusion, you don���t get to carry over the unused exclusion. You shield what gains you can, even if they���re less than the $500,000 maximum, and then you���re done for two years.

5. If you rent the home before selling, don���t forget about depreciation. While you rent, you get the benefit of this tax deduction, which simultaneously reduces your home���s cost basis for tax purposes. But when you sell, you have to pay tax on that part of the gain that���s attributable to the depreciation.

I think about the personal residence gain exclusion now because it can be so valuable. Exactly how much in tax savings is at stake? It depends on your individual tax picture. If you have significant income from other sources, the pertinent tax rate could be 23.8%, which works out to $119,000 of tax savings on a $500,000 capital gain. I recommend finding a trusted tax professional to help you figure out whether you qualify and to make sure you report everything correctly���especially if you rent before selling.

Matt Christopher White is a CPA and CFP�� who writes about money and apprenticeship to Jesus. He's the author of ���How to Love Money: Four Paradoxes that Breathe Life into Your Finances,��� available at MattChristopherWhite.com . Matt is equally comfortable talking about Luke 6:43, Section 643 of the Internal Revenue Code and the 6-4-3 double play. There���s no place he���d rather be than with Sarah and their two girls, Lydia and Eliza, at their home in the foothills of the Smoky Mountains. Follow Matt on Twitter @WriteMattWhite and check out his earlier articles .

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Hoping for a Repeat

MIDTERM ELECTIONS are less than two months away. The political landscape is uncertain and always fraught with heated opinions���but I won���t dive into that end of the pool. Instead, consider how the stock market might perform in the coming months and into 2023.

While technical analysis���using past price data to infer future prices���is controversial and dismissed by many fundamental investors, it���s hard to ignore a persistent bullish pattern that could soon repeat. Stock market history tells us that, during midterm election years, the S&P 500 has���on average���bottomed in late September or early October. Big gains then occur through the first half of the following year, the so-called pre-election year.

Is this just a random walk, not a reliable phenomenon? Maybe so. I���m not betting my IRA on the pattern repeating itself in the months ahead. But I���m also cognizant that markets go through trends. I encourage readers interested in the topic to read what Ryan Detrick has to say in his in-depth look at market history.

While technical analysis suggests the market will fare well in the months ahead, there are also some fundamental drivers that tend to spur the stock market higher around the midterm elections and ahead of a presidential election year. Consider that the incumbent party often seeks to stimulate the economy so folks feel better about their financial situation. Sound familiar? With recent bills like the Inflation Reduction Act and the CHIPS and Science Act, more money is being flung into the economy. On top of that, let���s not forget the massive student loan forgiveness plan.

Something else to weigh: It���s often said that the stock market hates uncertainty. Perhaps investors buy up shares as they anticipate an end to the midterm election drama. Voters then head to the polls, a new Congress is put to work, life moves on, and the stock market rallies as the feared political turmoil fails to materialize.

Is there something to the election cycle pattern? Perhaps, perhaps not. But for investors who have been unnerved by this year���s stock market volatility, this might be another reason to continue hanging tough.

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Book Smart?

JAMES J. CHOI is a finance professor at Yale University. But in a recent paper titled “Popular Personal Financial Advice versus the Professors,” Choi played the role of (somewhat) neutral arbiter. The question he sought to answer: Do popular—that is, non-academic—personal finance books offer advice consistent with the academic literature? And if not, is that a problem?




To conduct his study, Choi looked at 50 personal finance titles including The Millionaire Next Door, Rich Dad Poor Dad, A Random Walk Down Wall Street and I Will Teach You to Be Rich. As you might guess, Choi found a sizable disconnect between the academic literature and the advice offered by popular titles.




For example, academic studies advocate an approach to budgeting called “consumption smoothing.” The idea is that, when people are early in their careers and their incomes are low, they should save very little, leaving them with more cash for living expenses. In fact, the theory goes, young people should even take on debt so they can enjoy a reasonable standard of living while their incomes are low. As Choi puts it, “You don’t want to be starving in one period and overindulged in the next.” According to this theory, workers shouldn’t start saving until later in their careers, when their incomes are higher.




That’s what the academic literature says. Most personal finance books, though, recommend the opposite: The standard advice for young people is to avoid debt—other than a mortgage. Recognizing the power of compound interest, young people should also start saving as soon as possible rather than delaying.




Another disconnect with the academic literature: Popular books recommend that investors diversify internationally but still maintain the bulk of their investments in U.S. stocks. Academics, however, look down on this approach. They call it “home bias” and believe it’s illogical to favor any one country’s stock market over another. Choi, in fact, accuses personal finance authors of “jingoism” and maybe laziness. "People just like the stocks that they are familiar with," he says.




Another key point of disagreement between academics and popular books: To facilitate saving, books often recommend that consumers segregate money using different accounts. You might have an emergency fund, for example, that’s separate from your day-to-day checking account.




This setup can help people get organized, and it can help them measure progress toward specific goals. That makes intuitive sense, but economists see it as foolish. They call it “mental accounting” and believe that it, too, is illogical. In the academic view, money is fungible, so there’s no reason to segregate funds in different accounts.




Those are just some of the disagreements. On several other points, as well, Choi found that popular books don’t adhere to many of the key findings in the finance literature.




As an investor, what should you make of this? Is it a problem that personal finance books, in Choi’s view, seem to have so little basis in research? To answer this question, I would consider four points:




1. Investing isn’t easy. Investors are human beings. It’s no surprise, then, that much of the popular literature is focused on practical solutions. Choi himself acknowledges this. Ordinary people need solutions that are “easily computable” and not complex, he says. He goes on to say that individuals may be susceptible to “emotional reactions to circumstances” and might need to fight against “limited motivation.”




These observations have a condescending tone, but they may also be correct. Intuitively, many of us know the right thing to do. We shouldn’t overspend, carry high-interest debt and so forth. What’s needed, then, isn’t so much formulas as practical solutions. That’s what most personal finance books offer. Most of their recommendations aren’t really counter to the academic literature. Instead, they just select the most important findings and translate them into recommendations that are usable.




2. Risk isn’t so simple. Very few popular books look at risk the way economists do. Formal economics uses volatility—the variability of returns from year to year—as the primary measure of risk. This is the basis for Modern Portfolio Theory. But it also has a flaw: Volatility is a backward-looking statistic. No one can say what the volatility of an investment will be in the future—and that, of course, is all that matters.




There’s the joke that Bernie Madoff only had one bad year. If you had looked at the volatility of his firm’s returns before his scheme unraveled, it would have looked great. But that would have overlooked other, non-quantitative risk factors. Critics noted that Madoff didn’t use a traditional custodian, that his math didn’t add up and that he carefully avoided people who questioned him too closely. None of those risks would have shown up in a traditional economic analysis.






To be sure, Madoff is an extreme example. The reality, though, is that all investments carry risks that are multi-dimensional. Using only the academic lens would be foolish. In that way, then, it’s a good thing that popular authors deviate from the academic understanding of risk.




3. Historical data is—necessarily—about the past. It’s important to remember that research studies are backward-looking. That’s a problem because the past is only a guide to the future. It offers no guarantees. For that reason, it’s not surprising if popular advice looks beyond historical data.




A good example: Historically, value stocks have outperformed growth stocks. But very few authors would tell readers to put all their money into value stocks. Why? This historical outperformance was only on average and over time. It hasn’t been true in every time period, and there are no guarantees that it’ll be true in the future.




Further, when it comes to historical data, there’s always an additional risk: that the pattern observed historically might have been just a fluke, without any fundamental basis.

Finally, we each get to make just one financial journey. Like most investors, I reference charts that go back to the 1920s. But I also recognize that no one will be in retirement for 100 years—so those long-term averages can’t be applied directly to any one individual.




4. Finance is not a physical science. Each year, the Nobel Committee issues a prize in “economic sciences.” The reality, though, is that economics isn’t a science in the same way that physics or chemistry is. Economics can only approximate how the world works. Because the economy is so complex, it’s impossible to ever know for sure how things will turn out.




Consider our experience with inflation over the past few years. A portion of it was perhaps the predictable result of stimulus spending. But no one could have predicted Russia’s invasion of Ukraine, which made matters worse. These sorts of things happen all the time. An economic model might predict one thing, but then something else happens.




In his survey, Choi found quite a bit of disagreement between academic research and popular books. He also found quite a bit of dispersion among the personal finance books themselves. On the one hand, this might sound discouraging. My sense, though, is that this confirms what we already knew: Personal finance has some quantitative underpinnings, and academic research does provide many useful insights. But ultimately, it’s a balance. No formula can perfectly explain the real world. Thus, there's a danger in relying solely on the numbers. At the same time, academic research does provide an important leg of the stool.




A final thought: Choi did identify one—and only one—area in which there was broad agreement between academics and popular authors. On the topic of mutual funds, nearly all agreed that index funds were a better bet than actively managed funds.

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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All Together Now

ONE OUT OF FOUR Americans lives in a household with three or more generations under one roof, according to Generations United���s 2021 report. The number of folks living in these multigenerational households has increased sharply over the past decade, from 7% in 2011 to 26% in 2021. Although ���multigen��� households come in many shapes and sizes, the rarest type is a four- or five-generation family living together.

For most of my pre-teen years, I lived in a four-generation household. It all began in 1947, during a blustery blizzard when my great-grandpa drove my very pregnant mother and my father to the hospital. He didn���t trust Dad to navigate his DeSoto on the icy roads. When my parents brought me home, my great-grandparents and grandparents welcomed me.

All seven of us lived together as a multigenerational family in a large rambling house built in the late 1800s. When Dad returned from Europe after World War II, he was a G.I. Bill university student with no income. Mom promptly got pregnant and remained a homemaker for several years as the babies came quickly. Living with family was about economics and affordability.

I thought our housing arrangement was normal, though I later realized most of our neighbors lived in two-generation family homes. Except for a short stint when my parents and I stayed with my great-aunt and uncle on their farm, we lived with my double set of grandparents until I was almost 13 years old.

I believe my parents��� failed finances were the main reason they lived with the grands. My great-grandma provided childcare, allowing Mom to earn income working outside the home. When my great-grandmother and grandmother were each widowed, living with the extended family helped them emotionally as well as financially.

Growing up with all these relatives taught me several money messages. ���You can���t take big shortcuts and expect to get paid,��� my exasperated grandmother told me one day. As an eight-year-old, I had to pick a row of green beans from the backyard garden before receiving my compensation���the chance to play with friends. Rushing to get done, I offered up only a half-filled bowl. Admonishing me for missing many string beans still on the vine, Grandma sent me back for another round. Only when I returned with a brimming bowl was I rewarded with playtime.

In addition to that lesson on doing a job the right way, there were six other lessons I learned from my multigenerational family:

1. Live frugally, resourcefully and spend money intentionally. Both sets of grandparents lived through the Great Depression and knew how to stretch a dollar. They saved and reused everything until further repair was impossible. Times were tight for us all, so money was spent meaningfully. Today, I still find bargains at vintage thrift shops, use coupons and prefer spending money on experiences rather than stuff.

��S&H Green Stamps bought many kitchen accessories. Vacations were rare and usually involved visiting family. Seven of us drove from Wisconsin to California and back jammed into our Rambler station wagon with overload springs. We probably looked like The Beverly Hillbillies. Going to the state fair at summer���s end every year was a special family treat.

2. Start a small business. That's what��my grandmother did with her commercial bakery, and where I helped after school. A related lesson I learned from Grandma is that it takes dedicated, demanding work to make your business successful and, even then, things might not work out. My first venture as a 10-year-old entrepreneur was a lemonade stand, followed by selling greeting cards door-to-door. My babysitting work boomed when I was 11. At 49, I began my own financial planning business, which I continued for 18 years before switching to a six-year encore consulting business.

3. You���ll never go hungry if you grow your own food. I helped my family raise plentiful crops, which filled our freezer and the basement���s shelves of canned goods. All that bounty fed us through the winter. Today, I continue harvesting a wide variety of healthy veggies and luscious blueberries from our garden, although I no longer pack a full-sized freezer.

4. Don���t eat your money. Dining at McDonald���s was a rare treat for us in the 1950s. Today, I���m not comfortable paying $50 for lunch when I can easily eat a healthy meal at home, brown bag it or choose an inexpensive alternative if I���m out.

5. Do well in school.��Scholarships and a college degree can be your ticket to a better life. Having seen my parents, grandparents and great-grandparents struggle financially, I hoped to break the cycle by continuing my education. Both my great-grandmother and grandmother were briefly one-room schoolteachers, before their marriages. I���m glad they encouraged me to earn a university degree and start my professional career as a public-school teacher.

6. We care for each other as we age, and save money that way, too. After my great-grandpa died and later my grandpa passed, their widows continued living in our multigenerational household for decades. Before his death, my father-in-law moved in with my husband, my children and me for several years. It was much less costly than a retirement home, and it was meaningful for his grandkids to know this gentle soul better. I believe living with us gave Grandpa a better quality of life in his remaining years.

I don���t want to appear pollyannaish. Yes, I do also remember negative money messages from my childhood. My parents often argued about their finances. There never seemed to be enough money, especially one Christmas when Mom bought many presents from the General Merchandise catalog on credit.

My grandparents dealt with their money disagreements away from us kids, but sometimes I heard their fights as well. I recall adults yelling, banging doors and sulking. These memories turned me 180 degrees in the opposite direction. My husband and I openly discuss money matters and don���t keep financial secrets.

Will the trend toward increased multigenerational housing continue? I believe it will.

During the pandemic, a friend of mine and her husband combined households with their adult daughter, son-in-law and two toddlers. With no childcare available, their remote-working daughter and husband were desperate for help. Now that the critical phase of the pandemic has passed, this three-generation family has decided to remain together for financial and other benefits. Indeed, they pooled their money and bought a bigger house to provide more space for all, including a semi-private in-law suite.

For many years, I���ve enjoyed living just with my husband, inviting extended relatives to visit often. Two summers ago, my son and his family stayed with us in our roomy house for almost two months. Years ago, when my mother was widowed, she was with me before choosing to live in a nearby retirement home.

I plan to maintain my independent lifestyle for many more years. But who knows? Perhaps someday I���ll return to a multigenerational family���but this time I���ll be the elderly grandparent.

Kathleen M. Rehl is retired following a career in financial planning and an ���encore career��� of speaking and doing research about widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows. Kathleen enjoys writing legacy poetry and stories, as well as assisting various nonprofits. You can learn more at www.KathleenRehl.com. Check out Kathleen's earlier articles.

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