Jonathan Clements's Blog, page 19

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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New Bonus Senior Deduction Impact

The recently enacted One Big Beautiful Bill Act included a number of tax provisions of interest to HumbleDollar readers. Given the emphasis on retirement planning on HumbleDollar, the new bonus Deduction for Seniors has potential to provide a significant tax savings for seniors.

This has been discussed in previous posts over the last few weeks, but the details are worth a quick review.  Taxpayers who reach 65 by the last day of the tax year, starting in 2025, are eligible for a bonus $6,000 per taxpayer deduction. This bonus deduction is in addition to the existing additional deduction for seniors. For 2025 for single filers, the base standard deduction is $15,750 and the existing senior deduction is $2,000. With the bonus, a single filer (SF) 65 and over has a combined deduction of $23,750.  For married couples filing jointly (MFJ), the base is $31,500, and the existing senior deduction is $1,600 per person. With the bonus, a MFJ filer 65 and over has a combined deduction of $46,700.

Per the IRS website there are a few important caveats. There are phaseouts for taxpayers filing single with modified adjusted gross income (MAGI) over $75,000, or $150,000 for married couples filing jointly. The phaseout is 6% of every dollar over the threshold. Additionally, the site indicates that married couples must file jointly to be eligible for the bonus deduction. The deduction is only in effect for the years 2025 through 2028.

I thought it would be interesting to see the impact of new deduction on a few different cases. I focused on the maximum income allowed before the phaseout begins, assuming this would show the maximum benefit. I also looked at a mix of income types, including IRA withdrawals, pensions, long term capital gains (LTCG) and social security (SS) benefits. I used AARP’s income tax calculator to generate the results. Unfortunately, the tool has not been updated to reflect the latest tax law changes, so I had to massage the inputs to simulate the newer deductions.

The results are shown in the table below. To be honest, the analysis didn’t produce any financial epiphanies. One of the misperceptions I have seen is that this deduction is only for people who currently receive SS benefits. This is incorrect. As long as a taxpayer meets the criteria, they will receive a tax benefit. The benefit also depends on the makeup of the income stream. It seems likely that a single filer near the phaseout limit will see a tax savings of about a $1,000; married couples will see twice that. One interesting result – the additional deduction seems to keep one’s taxable income below the threshold for the LTCG 15% bracket.

For retirees with fixed income sources – annuities, pensions, and SS, there aren’t as many opportunities for tax efficiencies. Retirees who generate their income from a mix of SS and savings, both pre and post-tax, have choices that can impact a number of tax-related items, including IRMAA.  The new deduction provides a potential tax savings, at the cost of a bit more complexity. For those 65 and over still working, it provides additional incentive to keep their MAGI below the phaseout limits. This could take the form of choosing to save in a traditional 401k, as opposed to a Roth 401k.

ItemSFSFSFMFJMFJMFJ       IRA Withdrawal$50,000$25,000$25,000$100,000$50,000$50,000Pension$25,000$25,000$25,000$50,000$50,000$50,000LTCG$0$25,000$0$0$50,000$0SS Benefits$0$0$25,000$0$0$50,000Total Income$75,000$75,000$75,000$150,000$150,000$150,000Taxable SS$0$0$21,250$0$0$42,500AGI$75,000$75,000$71,250$150,000$150,000$142,500Standard Ded$17,750$17,750$17,750$34,700$34,700$34,700Taxable Income$57,250$57,250$53,500$115,300$115,300$107,800Tax$7,515$4,970$6,690$15,194$10,152$13,554       New 65 + Ded$6,000$6,000$6,000$12,000$12,000$12,000New Std Ded$23,750$23,750$23,750$46,700$46,700$46,700New Tax Inc$51,250$51,250$47,500$103,300$103,300$95,800New Tax$6,195$3,350$5,465$12,554$6,912$11,022       Tax Savings$1,320$1,620$1,225$2,640$3,240$2,532Tax Bracket22%22%12%22%22%12%Tax on SS$0$0$2,550$0$0$5,100Eff Tax12.1%6.5%11.5%12.2%6.7%11.5%       

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ID.me

I still help prepare tax returns for pay. As such I am required, among other things, to annually renew my preparer pin number.

I recently received the  following from the IRS in a email -

We have updated the Tax Professional PTIN System sign-in process for tax return preparers who have a Social Security number (SSN). You will now sign in using ID.me, a technology provider that conducts identity verification and credential management for access to IRS online services. 

In the near future, the existing sign-in method of using a Username and Password will no longer be supported for tax return preparers with a SSN. You cannot access the Tax Professional PTIN System without an ID.me account. Tax preparers who do not have a SSN will continue using their current sign-in process.

Anyone who prepares tax returns and charges a fee for their services is required to have a Preparer Tax Identification Number (PTIN) as I understand the rules. Those who volunteer to prepare returns for free may not currently be required by the IRS to have a PTIN but I do not know if the organizations who sponsor such free services have their own requirements.

Finding and uploading some of the original documents to ID.me was the most time consuming portion of the process for me. I will not be surprised if this verification of identity becomes becomes the standard.

 

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Die With Zero? Hell No

Bill Perkins offers a radical goal: use your money to create the richest life possible, and aim to die with zero dollars left unspent. I’m told it doesn’t literally mean hit zero, just maximize experiences. I hope the book’s readers don’t take the title as a goal.

"Die with Zero" also advocates for intentional gifting to children or charities while you are alive. I agree, but for those trying to cover life’s what ifs during retirement (like the risk of LTC or survivor income) with their life savings that also presents a risk. 

We gift to our family and charities, but not by spending assets except via a portion of RMDs. They will receive the bulk as a legacy. 

Experiences over things for  sure, but not by betting on the timing of your ultimate departure. The experiences Connie and I have had since retiring have been wonderful. I would like to do it again and to keep going.

Perkins is a poker player, and former derivatives trader. In short, he is a risk taker and has plenty of money to put at risk. I suspect that is not the case for most - nearly all -  retirees. 

The goal should be enjoyable and fulfilling experiences with sustained confidence in lifelong financial security. You can do both, we have done both. We set aside money just for the purpose of experiences. At the same time meaningful experiences don’t always require spending money as some in the HD community have expressed. 

Our experiences range from cruising on the Queen Mary II to walking among penguins on the Falklands, touring the Holy Land, kissing the Blarney Stone, walking across the Little Big Horn, standing in a gas chamber at Auschwitz, walking on Hadrian’s wall, and on Omaha beach, visiting every capital in Europe, and many more plus visiting every state in the Union. 

But we never considered doing any of that by using up our assets. Yes, our pension and SS income allows us more flexibility, but nevertheless, I would never seek to spend down our assets to zero or even close. That seems even a harder choice for those relying on accumulated assets for all their income. In fact, it’s a considerable risk in my opinion. 

Seek those experiences, but don’t play an all-in-bluff on yourself. 

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Degrees of Doubt: When Higher Education Misses the Mark

I perhaps have a contrarian view of the utility of some higher education courses. This opinion has developed over the last 20 years or so, talking and interacting with younger staff I employed within my past business. Degree courses seem to have somewhat transformed into a business model, more influenced by volume over suitability of the course and proper weight being given to the future earning and retirement outcome expectations the course will achieve.

To use a fishing analogy, casting the net wide doesn't necessarily provide the optimal catch quality, although the quantity of catch can still generate a higher revenue overall if the university business model is more focused on income generation over academic success.

I question the suitability of some degree courses that, to my mind, are not well matched to employer needs. Not being an educator, my expertise is very limited and is based solely on observation. But I found that the one thing I always expected from an employee with a degree-level education was the ability for critical thinking. This has sadly not been the case on numerous occasions. Could this be related to the "cast the net wide" analogy? On balance, it seems probable.

Moving on from academic quality or maybe I should use a less inflammatory “mismatch with the demand side for graduates” wording we come next to earning and retirement outcomes. With this subject we can get onto more of a data driven firmer footing than my previous personal impressions. For instance, studies indicate that approximately 20-28% of all undergraduates, depending on the specific degree course and various contributing factors, may achieve lower lifetime earnings and consequently poorer retirement outcomes than individuals who do not pursue a university degree. This significant minority underscores my earlier point about a 'mismatch with the demand side for graduates,' demonstrating that not all degree paths lead to the promised financial uplift.

Here are the studies that provide data for this claim:

Institute for Fiscal Studies (IFS): "The impact of undergraduate degrees on lifetime earnings" https://ifs.org.uk/publications/impac... (This study states that "around one in five undergraduates would have been better off financially had they not gone to university.")

FREOPP: "Is College Worth It? A Comprehensive Return on Investment Analysis" https://freopp.org/whitepapers/is-col... (This analysis finds that "Twenty-eight percent of bachelor's degree programs have negative ROI when adjusting for the risk of non-completion.")

A rough estimation for new undergraduate enrollments in a typical year would likely be in the range of 2.5 to 3.5 million students. This includes those starting associate's or bachelor's degrees for the first time. If we use very conservative figures and assume 15% of 2 million students achieve lower income and retirement outcomes because of degree unsuitability or labour mismatch the figures become quite stark. Approximately 300,000 possible lower retirement outcomes.

If we think about this yearly number and extend it over a single typical working lifetime of 40 years we have a 40 year pipeline of graduates heading towards poorer living and retirement standards. That's 12 million people. This strongly indicates that starting a degree course may be a poor life decision for a very large number of people. Pause and think of the scale. 12 million poorer retirements just to “Experience the university lifestyle” I hope the memories are worthy because the course mismatch makes the financial outcome unworthy for a large minority who would possibly have been better served with a vocational educational experience.

I advocate strongly for vocational and higher education. There's no doubt in my mind that education is a vital component of our early life and continuing through a career. My issue is with the suitability of courses that are driven more by a commercial ethos rather than an educational ethos that lead to suboptimal outcomes. Thinking of our children and grandchildren going forward it would be wise of us to pay attention to this problem when helping them form opinions and choices for their future education needs. Be mindful that not all education experiences are equal.

The post Degrees of Doubt: When Higher Education Misses the Mark appeared first on HumbleDollar.

Degrees of Doubt: when Higher Education Misses the Mark

I perhaps have a contrarian view of the utility of some higher education courses. This opinion has developed over the last 20 years or so, talking and interacting with younger staff I employed within my past business. Degree courses seem to have somewhat transformed into a business model, more influenced by volume over suitability of the course and proper weight being given to the future earning and retirement outcome expectations the course will achieve.

To use a fishing analogy, casting the net wide doesn't necessarily provide the optimal catch quality, although the quantity of catch can still generate a higher revenue overall if the university business model is more focused on income generation over academic success.

I question the suitability of some degree courses that, to my mind, are not well matched to employer needs. Not being an educator, my expertise is very limited and is based solely on observation. But I found that the one thing I always expected from an employee with a degree-level education was the ability for critical thinking. This has sadly not been the case on numerous occasions. Could this be related to the "cast the net wide" analogy? On balance, it seems probable.

Moving on from academic quality or maybe I should use a less inflammatory “mismatch with the demand side for graduates” wording we come next to earning and retirement outcomes. With this subject we can get onto more of a data driven firmer footing than my previous personal impressions. For instance, studies indicate that approximately 20-28% of all undergraduates, depending on the specific degree course and various contributing factors, may achieve lower lifetime earnings and consequently poorer retirement outcomes than individuals who do not pursue a university degree. This significant minority underscores my earlier point about a 'mismatch with the demand side for graduates,' demonstrating that not all degree paths lead to the promised financial uplift.

Here are the studies that provide data for this claim:

Institute for Fiscal Studies (IFS): "The impact of undergraduate degrees on lifetime earnings" https://ifs.org.uk/publications/impac... (This study states that "around one in five undergraduates would have been better off financially had they not gone to university.")

FREOPP: "Is College Worth It? A Comprehensive Return on Investment Analysis" https://freopp.org/whitepapers/is-col... (This analysis finds that "Twenty-eight percent of bachelor's degree programs have negative ROI when adjusting for the risk of non-completion.")

A rough estimation for new undergraduate enrollments in a typical year would likely be in the range of 2.5 to 3.5 million students. This includes those starting associate's or bachelor's degrees for the first time. If we use very conservative figures and assume 15% of 2 million students achieve lower income and retirement outcomes because of degree unsuitability or labour mismatch the figures become quite stark. Approximately 300,000 possible lower retirement outcomes.

If we think about this yearly number and extend it over a single typical working lifetime of 40 years we have a 40 year pipeline of graduates heading towards poorer living and retirement standards. That's 12 million people. This strongly indicates that starting a degree course may be a poor life decision for a very large number of people. Pause and think of the scale. 12 million poorer retirements just to “Experience the university lifestyle” I hope the memories are worthy because the course mismatch makes the financial outcome unworthy for a large minority who would possibly have been better served with a vocational educational experience.

I advocate strongly for vocational and higher education. There's no doubt in my mind that education is a vital component of our early life and continuing through a career. My issue is with the suitability of courses that are driven more by a commercial ethos rather than an educational ethos that lead to suboptimal outcomes. Thinking of our children and grandchildren going forward it would be wise of us to pay attention to this problem when helping them form opinions and choices for their future education needs. Be mindful that not all education experiences are equal.

The post Degrees of Doubt: when Higher Education Misses the Mark appeared first on HumbleDollar.

Diworsification and Deversification

There are an ever increasing number of ETFs available to investors.  There is also the "tokenization" of stocks, but that is for another post.

Jason Zweig addresses the proliferation of ETFs over at the Wall Street Journal:

“deworsification: cluttering a portfolio with too many investments.
I think many investors should worry instead about deversification…..That’s the opposite of diversification. Rather than spreading your bets, you concentrate them—and that can be dangerous.”

Over at another forum there has been a running debate about how many stocks to own to achieve diversification. I’m of the opinion that owning a basket of 100 growth stocks isn’t that.

Zweig goes on “The fewer stocks you hold, and the farther away from the overall market you move, the more extreme your returns are likely to become. Your potential gains are greater, but so are your losses……If you must speculate, bear a few things in mind. First, amplifying the risk of single stocks can make you a ton of money when the market is going up. It will wipe you out when the market goes down.

Limit your bets to a maximum of, say, 5% of your total assets. That way, you’ll make a lot if you bet right but can’t wreck your financial future if you turn out to be wrong. ” [That’s what some call a sandbox for experimenting in the market].  The more recently an ETF launched, the fewer stocks it tends to own. “A lot of newer investments are taking on more risk than investors may realize,” - Daniel Sotiroff, a senior analyst at Morningstar."

When growth faltered a lot of people who had loaded up on a few individual stocks got burned. I’m not much of a stock picker, although I do own individual stocks, focus ETFs and funds. I do think there is a place for specialized ETFs and I do own a few.  But as Mr. Zweig points out, you may get more (or less) than you bargained for. Some of these spin off higher dividends or emphasize sectors (the Energy Select SPDR XLE, for example).

My portfolio “ballast” is a number of ETFs/Funds which are large in scope and contain several hundred stocks. My experience has been as Zweig cautions. “Single stocks can make you a ton of money when the market is going up…”

I have sold portions or Dollar Cost Averaged out of individual stocks when they skyrocketed and I locked in impressive gains. It is to be noted I missed the top and that was expected. My ETFs are the foundation for my portfolio. I think a hybrid portfolio of individual stocks and ETFs can achieve better returns than the S&P 500. That’s been my long-term experience. Some of this can be attributed to differences in valuations. My portfolio is about 28% growth while the S&P500 is about 22%. There are other differences, too and for example, I avoid what some call the "sin stocks" which are more heavily a component of the S&P 500.

I'd suggest that there are benefits to tailoring a portfolio but as Mr. Zweig points out there are also potential risks.

 

The post Diworsification and Deversification appeared first on HumbleDollar.

Diworsification and deversification

There are an ever increasing number of ETFs available to investors.  There is also the "tokenization" of stocks, but that is for another post.

Jason Zweig addresses the proliferation of ETFs over at the Wall Street Journal:

“deworsification: cluttering a portfolio with too many investments.
I think many investors should worry instead about deversification…..That’s the opposite of diversification. Rather than spreading your bets, you concentrate them—and that can be dangerous.”

Over at another forum there has been a running debate about how many stocks to own to achieve diversification. I’m of the opinion that owning a basket of 100 growth stocks isn’t that.

Zweig goes on “The fewer stocks you hold, and the farther away from the overall market you move, the more extreme your returns are likely to become. Your potential gains are greater, but so are your losses……If you must speculate, bear a few things in mind. First, amplifying the risk of single stocks can make you a ton of money when the market is going up. It will wipe you out when the market goes down.

Limit your bets to a maximum of, say, 5% of your total assets. That way, you’ll make a lot if you bet right but can’t wreck your financial future if you turn out to be wrong. ” [That’s what some call a sandbox for experimenting in the market].  The more recently an ETF launched, the fewer stocks it tends to own. “A lot of newer investments are taking on more risk than investors may realize,” - Daniel Sotiroff, a senior analyst at Morningstar."

When growth faltered a lot of people who had loaded up on a few individual stocks got burned. I’m not much of a stock picker, although I do own individual stocks, focus ETFs and funds. I do think there is a place for specialized ETFs and I do own a few.  But as Mr. Zweig points out, you may get more (or less) than you bargained for. Some of these spin off higher dividends or emphasize sectors (the Energy Select SPDR XLE, for example).

My portfolio “ballast” is a number of ETFs/Funds which are large in scope and contain several hundred stocks. My experience has been as Zweig cautions. “Single stocks can make you a ton of money when the market is going up…”

I have sold portions or Dollar Cost Averaged out of individual stocks when they skyrocketed and I locked in impressive gains. It is to be noted I missed the top and that was expected. My ETFs are the foundation for my portfolio. I think a hybrid portfolio of individual stocks and ETFs can achieve better returns than the S&P 500. That’s been my long-term experience. Some of this can be attributed to differences in valuations. My portfolio is about 28% growth while the S&P500 is about 22%. There are other differences, too and for example, I avoid what some call the "sin stocks" which are more heavily a component of the S&P 500.

I'd suggest that there are benefits to tailoring a portfolio but as Mr. Zweig points out there are also potential risks.

 

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A Grievance Most Fowl: When Golf Ate My Lunch.

I have a grievance this morning. Strange as it may seem this involves a chicken and bacon burger, one of my favourite restaurants, the global market economy and golf. At first glance they seem odd bedfellows don't you think?

Yesterday afternoon I was feeling peckish and decided to indulge myself with a chicken burger. Whilst about to order the offending item I was alarmed to discover the price had increased by 125% in a matter of a week. This state of affairs caused me to question my belief that inflation was finally under control. I decided to investigate and proceed to question the waiting staff. The culprit it turns out is golf. Perplexed over the reply I decided to take myself for a stroll and think this through.

International professional golf has come to town, namely in the form of The Open Championship at Royal Portrush just a 10 minute drive from my holiday home. Along with this bandwagon has come a couple of 100,000 hungry spectators who seem to be the nub of my lunch incident.

Massive demand for the limited resource that is restaurants has caused the market economy to wake from its slumber and readjust the cost basis for food consumption in the local area. I should be happy after all I'm getting a free demonstration of the classic supply and demand phenomena in operation. Unfortunately my stomach tends to disagree with this assessment as I hurry towards the sandwich vendor further up the street. My sincere hope is they haven't got the economic memo over prices yet!

So there we go, and if I indulge in a bit of hyperbole. A pleasant wander to get some lunch in a sleepy outpost on the North Coast of Ireland can be directly impacted by the global market economy at the stroke of a club. Keep firm control of your portfolio and finances as this simple demonstration shows anyone can be affected by seemingly unrelated global events causing sudden market imbalance and a ripple effect across global stock markets as they reprice for the new information. It's all interconnected.

My only consolation to the chicken burger saga? Free tickets an old business associate has kindly given me for the practice sessions at Royal Portrush. I wonder what the micro inflation environment is like within the hospitality area? I should maybe brown bag my lunch and save a few dollars, after all, I am retired!

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I have a challenge for you. It’s one of the most significant financial and controversial issues facing the U.S.

Before I say what it is, let’s consider all the things Americans don’t like about health care - cost, availability, insurance companies, third-party involvement, high deductibles, premiums, etc.

🙄🙄🙄🙄🙄🙄🙄🙄🙄🙄🙄🙄🙄🙄🙄🙄 

NOW, the challenge.

Tell us why you will or will not support a form of Medicare for All replacing all the payment systems currently in place, public, employer and private plans to be funded by a combination of employer and individual taxes, income based premiums and cost sharing at the point of service. 

Time to stick your neck out - Go‼️

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