Jonathan Clements's Blog, page 207

Divide and Rule

EACH OF US TAKES our monthly income and then makes countless decisions���some big, some small���about how to use those dollars. How can we get the most from the money that flows through our hands? I find it helpful to look at this ���income allocation��� through three prisms.

Divvying it up. We can use our income for three main purposes: spending it today, saving it for tomorrow or giving it to others. Our instinct is to spend today, imagining that���ll bring us the greatest joy.

But this, I believe, is shortsighted. Research suggests there���s great pleasure to be had from helping others and from knowing we���re on track for a secure financial future. I���ve heard lots of people express regrets about the purchases they���ve made. I can���t recall ever hearing folks lament the wealth they���ve amassed or the charities they���ve supported.

Fixing to have fun. The key to financial flexibility is the size of our fixed living costs���the money we���re compelled to part with each month. Think of things like mortgage or rent, utilities, groceries, insurance premiums and taxes. The lower these fixed costs, the easier it is to save for the future and to give to others.

But these aren���t the only advantages that come with low fixed living costs. We can think of these fixed costs as our needs, though ���needs��� turns out to be a moving target���because they keep growing. A few decades ago, nobody needed a cellphone, hundreds of television channels, a car packed with safety features or dinner regularly delivered by DoorDash. Today, many view such things as necessities, boosting their fixed living costs.

This is a trend we should resist. The lower our fixed monthly costs, the less financially stressed we���ll feel and the more money we���ll have for discretionary spending���the things we don���t need but rather want. These wants might include vacations, concerts and eating out, those special events that brighten our calendar and get us out of our daily routine.

Buying happiness. How should we spend our discretionary dollars? Many HumbleDollar articles mention the important distinction between possessions and experiences, and how experiences often deliver greater happiness.

Why is that? Possessions might seem shiny and exciting when we first acquire them, but they can quickly become humdrum and even disappointing, as they deteriorate and break. Their lasting value, which initially appears to be a virtue, means they often last long enough to earn our disdain. By contrast, experiences tend to be time limited, leaving us only with fond memories, plus they���re often enjoyed with others, adding to the happiness they deliver.

While I���m a big fan of spending on experiences, I���d also put in a plug for not spending���because that can buy us something that rivals the happiness from our most treasured possessions and our most thrilling experiences. I���m talking about the sense of financial security that comes with money not spent and instead stashed in a bank or brokerage account. A few thousand dollars in a savings account will likely deliver greater long-term happiness than anything that money could buy at the shopping mall.

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Saving Your Life

I GREW UP IN a lower-middle-class family. We lived in a small apartment where I slept on the living room couch. My father sold cars for a living.

Today, my living standard is quite different. On average, 97% of retirees my age have less income and assets than my wife and me. Our friends are in similar economic circumstances. If they weren���t, they couldn���t live where we do.

The minimum needed to live in our condo community is $24,000 a year. That covers property taxes and homeowners��� association fees. Many of our neighbors spend the winter at their homes in Florida. A significant percentage of residents in our community are widows, indicating they had family assets sufficient to stretch over two lifetimes.

In short, we���re all pretty much out of touch with the economic reality of most Americans our age. That may be true of some HumbleDollar readers, as well. Occasionally, we need a reality check. We need to appreciate what walking in the shoes of a typical retiree might be like.

I���m regularly brought back to reality by participating in several Facebook groups for retirees and near-retirees. In a recent exchange, a woman mentioned that she and her husband raised a family of six on $35,000 a year. I noted that $35,000 for a family of six is considered poverty.

She replied that they don���t spend what they don���t have, and the only debt they ever had was a mortgage���now almost paid off. She then said it might be poverty to some, but they feel rich.

Meanwhile, in a discussion on my blog, one retiree commented: ���I never made more than $35K during my 27 years of employment. I had 7 years that I was not employed, and my only income was a small military pension. My total income in 27 years of work was $310,000. I retired at age 50 in 2006 and in 2018, at age 62, I started [Social Security] retirement benefits. My wife and I are living on 70% of our monthly income. Our emergency fund is over $10,000 now, a first in 43 years of marriage. I never have understood all the so-called experts that say you better have $2 million in retirement savings or you will be screwed. Millions of families and retirees prove the experts wrong every day.���

I also occasionally review comments on AARP���s website. What you read is mostly pleas for higher Social Security cost-of-living adjustments, complaints about living on a fixed income and general comments about the inability to pay bills. I���m not sure how to react. Do these seniors deserve our empathy���or is it fair to question how they led their lives to reach this state?

Many people enter retirement by cutting expenses, including not eating out. They trim other costs as they can. Is that the goal of an enjoyable retirement? Maybe not. But for many, it���s a necessity.

Keep in mind that the median household��income for those 65 and older is about $47,000 a year. According to the Federal Reserve, the median retirement account��balance for households headed by someone age 65 to 74 is $164,000, while the average���which is skewed higher by those with large accounts���is $426,000.

Surveys say 58% of Americans own stocks, including in their 401(k) or IRA, with stock-owning families holding a median��$40,000 worth of shares. All this is a far cry from the $1 million that���s thrown around as the sum needed for retirement.

For many seniors, a lifelong strategy of saving and investing could have made retirement less stressful. While income is undoubtedly a factor in our ability to save and invest, so is financial��literacy.

The minimum initial investment required to open a mutual fund account is low and sometimes zero. More Americans could invest by buying stock funds and reinvesting their fund distributions, but they don���t.

Fear of losing money and the shock of 2008 haven���t helped. Those who claim they lost their retirement savings back then likely panicked and abandoned the stock market, thereby locking in their losses.

So far, 2022 may be reinforcing this fear of investing. That���s a shame because it puts future retirement security at risk. Yes, saving and investing is more difficult at lower incomes, but it���s nearly always possible. Prioritizing saving over spending is essential, as is starting early and sticking with a plan���preferably for 40 years or more.

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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Suiting Myself

EBAY CAN BE a fantastic teacher of basic economic principles. I���ve been an active buyer recently, and enjoy watching the interaction among supply, demand and price.

Take the market for business attire. Demand has declined for suits, blazers and jackets. This has happened at the same time that supply has risen, so prices are cheap.

Suits were once the everyday uniform for both men and women. When I started working, I owned six suits in shades of blue and gray: a winter suit, a summer suit and four three-season suits. Getting ready for work was easy: just pull out a suit and coordinated shirt. The only real decision I needed to make involved choosing a tie.

Business fashion eventually switched from suits to sportcoats and chinos. It then became even more casual. Nowadays, many offices only require chinos and a shirt.

I always loved jackets. Living in Minnesota, I found a sportcoat to be a valuable piece of clothing. I could wear it seven months a year and remove it when the weather got warm.

I still own a number of jackets in various materials and styles. My favorite jackets are made of wool tweed. They���re durable and wrinkle resistant, and look sharp. I paid more than $150 for my favorite tweed jacket back then���but I could never bring myself to splurge on a classic Harris Tweed.

Harris Tweeds are handwoven on Scotland���s Outer Hebrides, with the cloth available in wonderful patterns. Harris Tweeds command a premium because of their high quality.

If you���ve ever watched Downton Abbey, you may have noticed Hugh Bonneville���s character wearing tweed suits. They look fabulous on him. Nobody will ever confuse me with a television star. Still, I pull on a tweed jacket whenever I want to look fancier than normal.

Over the past year, I���ve purchased four lightly worn Harris Tweed jackets on eBay. I paid between $47 and $57. The low price is a prime example of supply and demand at work.

Supply and demand trends are also evident in the market for bolo ties. Yes, bolo ties. They���re a fine example of Native American jewelry and an excellent option for men who don���t wear extra rings, bracelets or necklaces. I bought my first bolo tie while vacationing with my wife in the Southwest.

Bolo ties traditionally come from the different Native American tribes in the region. You can now find numerous styles produced by different tribes. I recently decided to collect one bolo tie in each of the main styles: overlay, mosaic inlay, sandcast, turquoise and concho.

Five years ago, I could purchase a vintage bolo tie on eBay for $50 to $60. Since then, TV shows like Yellowstone and Tombstone have sparked an increase in demand. Current prices are three-to-four times higher than what I paid. At today���s prices, I���m an admirer of the beautiful silverwork, but no longer a buyer.

Everyone, I believe, should have a handle on basic economic principles. See an older fellow in a Harris Tweed jacket and a Native American bolo tie? Feel free to ask him if he got a bargain.

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Rx for Medicare

RONALD REAGAN SAID ���the nine most terrifying words in the English language are ���I���m from the government and I���m here to help���.��� Government programs are put in place to address real concerns. But they often come with unintended consequences.

When created in 1965, Medicare addressed the real need of senior citizens who couldn���t afford health care, just as Social Security was established in 1935 to help seniors in poverty. Both have become pillars of American retirement, but not without cost.

At the start, Medicare copied the insurance industry���s prevailing ���fee for service��� model for paying physicians, while hospitals were paid on a ���cost-plus��� basis. ���Costs��� were Medicare���s portion of hospital operating costs. The ���plus��� was meant to provide hospitals with some margin to reinvest in their plant and equipment.

We���re all economic animals and respond quickly to financial incentives. Physicians found that providing more services, and hospitals found that spending more money, resulted in more income. Rewarded for growth, our health care system suddenly supported many more doctors, facilities, personnel, technology and drugs.

The benefits to seniors were great: improved access to health care and steadily lengthening lifespans. But so was the unintended consequence: Medicare contributed to a health care cost explosion.

Health care expenditures rose from 5% of GDP in 1960 to 8.9% by 1980. As Medicare���s costs mushroomed, regulators began a long tug of war with providers to bend down the cost curve while still delivering promised medical care. Over the next four decades, there were waves of reform attempts:

Studies showed more care didn���t necessarily mean better care, so some controls on utilization were added.
Hospital charges varied widely from one area to another, or even within the same city, so standardized payments were imposed by region.
Medicare found it was paying to fix medical errors, so it moved to fixed rates for care and no longer paid to rectify mistakes.
Even with Medicare, high premium costs were hurting seniors, so Medicare Advantage plans were added to offer a private insurance alternative.

Each reform added another layer of complexity. Medicare regulations now rival the tax code in density���and may be harder to interpret. Despite all efforts, health care expenditures grew to nearly 20% of GDP by 2020. With costs this great, you can be sure more changes lie ahead.

Like a game of whack-a-mole, regulators are determined to hit higher costs with a mallet wherever they pop up. The next reform wave appears to be the widespread adoption of accountable care organizations (ACOs). These were introduced in the Affordable Care Act for what were termed ���demonstration projects.���

By the time the Affordable Care Act was formulated, health maintenance organizations had fallen into such disfavor that they needed a rebranding. ACOs are thinly veiled cousins of health maintenance organizations. The goal: Put the onus on the health care organization to control the cost of care.

As with health maintenance organizations, ACOs are paid monthly, per head, for providing care to a patient population. Cost savings from ACOs are supposed to come from greater efficiency and quality of care. Poor care could impose an economic loss on the ACO���and also damage its reputation in the marketplace.

Because ACOs are demonstration projects, different models are available. Some are fully at risk, meaning the contractor could lose money on the monthly patient payments it receives. Other ACOs could gain what amounts to bonuses for good care but would be sheltered from actually losing money.

Not all providers jumped at the chance to be a Medicare guinea pig. After about 10 years of trials, just over half of U.S. hospitals and physicians are in an ACO. Urban hospitals, which offer a wide range of services and have many available specialty physicians, were more likely to join an ACO. Rural hospitals usually stayed out. Just 6% of hospitals in New Mexico have joined, for example, but 100% of those in Rhode Island have signed up.

No matter where you live, Medicare expects its entire insured population to be in an ACO by 2030. Of course, having a goal and achieving it are two different things. Among seniors, 63% have traditional Medicare today, often with a Medigap supplemental insurance policy. While supplemental policies can be expensive, traditional Medicare participants have a wide choice of physicians and few limits on their access to care.

Many in this group may object to being routed into an ACO plan that attempts to control the availability of care. Some members of��Congress are already objecting that some private equity firms are turning health care into a profit center, and they want them kept out of ACO ownership.

Private equity firms have acquired various health care entities, including large physician staffing companies. Already, they���ve been cited as a driver behind one of the newest evils in the system: surprise��medical bills. Hospital patients in no condition to ask questions are seen by out-of-network specialists. The specialists��� bills aren���t covered by insurance, even though the patient was treated at an in-network hospital. A concern: What will happen if profit-driven private equity firms own ACOs?

ACOs are the latest in a long line of attempts to bend the health care cost curve. As in the past, the government will attempt to apply the same top-down reform measures, and expect equal acceptance and success everywhere.

We don���t yet know what unintended consequences will accompany full ACO adoption, assuming that even happens. But no matter what, you can be sure some new moles will pop up���and need to be whacked.

Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured���along with five others���on the cover of Kiplinger���s Personal Finance for an article titled ���Secrets of My Investment Success.��� Check out his previous��articles.

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Too Clever by Half

I WAS EDITING a fellow graduate student���s paper. She���s in her mid-20s, less than half my age. She���s bright and communicates well in class discussion, but her paper���frankly���was a mess. Great ideas, but she expressed them in overly pretentious language. One bloviated sentence was more than 60 words.

When I asked her why she did this, she said she wanted to ���sound smart��� by not using the same old words she normally uses. She worried that no one would take her seriously unless she adorned her ideas in the polysyllabic jargon of academia. I told her that, ironically, her convoluted writing was burying the great ideas she had. If I hadn���t been tasked to read her paper, I would have given up by page three.

I explained that the best writing is when profound ideas are delivered in simple language. Nothing beats the maxim inscribed at the Temple of Apollo at Delphi and espoused by Socrates: ���Know thyself.���

Still, I had sympathy for my fellow student. My 20-something self would have done the same thing. We all feel the need to prove our worth to the greater world, even if it���s counterproductive. Seasoned coaches will tell you that trick plays win fans, but mastered fundamentals win championships.

The same is true for money. We jump on the latest, hottest trick for making money, hoping to speed ahead of the traditional, boring-to-youth ���spend less, save more��� strategy. And when we do make financial progress, we want to be acknowledged, so we spend our wealth to show it off, never thinking how this demonstration of our financial smarts actually backfires. We get enough money for some personal freedom, but then we go for the overly large house with the overly large mortgage, and shackle ourselves with debt. We imagine the easy life of the future, but on the way buy convoluted investments and end up having to work more years. An expensive lifestyle often becomes a life sentence of work to pay for it. The British have a saying for all this: ���too clever by half.���

Time and again, articles on this site reinforce simple strategies that can have profound results when adhered to over time. Spend to have enough but avoid unnecessary debt. Max out retirement accounts. Invest so your money makes more money, but also make sure you have the right investment balance for your stage of life. Know your spending vulnerabilities, like keeping up with the Joneses, and avoid them. In a nutshell, know thyself.

Perhaps it takes the wisdom of being older to appreciate that any ���respect��� earned by youthful overcompensation is short term and not worth it. It���s a bad investment. The sooner we realize that, the sooner we can master the financial fundamentals that build championship portfolios.

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Smooth Moves

WHEN I ASKED MY college class this spring how many had been taught personal finance before, just a single hand went up. That���s why I teach Franco Modigliani���s lifecycle hypothesis of savings to my behavioral economics class.

A brilliant student born to a Jewish family in Rome, Modigliani was awarded first prize in a national economics contest by Mussolini himself. Warned to flee Italy while he still could, Modigliani soon after booked a zig-zagging trip through Switzerland and France before landing in New York in 1939. He earned a PhD in economics at The New School for Social Research, then took a job at the University of Illinois.

During a long drive back from a conference on saving, Modigliani hit on the theory that would make his name. He reasoned that people would gain the greatest utility, or satisfaction, if their spending was stable or rose slightly over their lifetime. A drop in spending was unsettling and risky���as Modigliani had experienced as a refugee, when he was forced to sell books to make the rent.

Given this goal of steady spending, Modigliani thought the best approach to our financial life would be to save a fixed percentage of pay from the first day at work until retirement. Then we���d steadily draw down our savings, spending at the same rate we���d consumed during our working years.

���Far from acquiring wealth as an end in itself, the role of savings was to accumulate resources to spend later on,��� Modigliani wrote in his autobiography, Adventures of an Economist. Invoking the story of Joseph in the Bible, Modigliani wrote that we should save ���during periods of fat cows in order to transfer and consume them during periods of lean cows, with the aim of maintaining a stable average consumption over the course of one���s life.���

This might sound obvious today, but at the time Modigliani���s hypothesis suggested that saving should be a mass movement, not just something practiced by the wealthy with surplus income. This helped spur the creation of broad-based savings programs, such as IRAs and 401(k)s. For this and other work, Modigliani was awarded the Nobel Memorial Prize in Economics in 1985.

I tell my students that Modigliani���s approach to saving is the correct way to lead their financial life. But it also highlights how much economics has changed in the past half-century. Even though it���s the rational approach, it���s not the path most of us follow. In actual practice, Modigliani���s hypothesis has four or five problems we struggle to solve.

First, it assumes everyone has the willpower to save continuously. Some people never get the memo, and most of us don���t save in our 20s. We have more urgent priorities, like getting out to bars, finding a decent apartment and laying hands on a dependable car. If you lack these, you may never get a date���the paramount goal at that age.

Retirement? Forget about it. That���s a lifetime away.

This leads directly to the second problem���we overvalue the present and discount the future. If you get ���hangry��� waiting 10 minutes for dinner, you know how today���s needs dominate. By comparison, the groceries we���ll need for a month of dinners in 20 years have zero importance to us.

Third and fourth, people suffer from loss aversion and inertia. We can avoid loss���including the loss we���d feel by subtracting savings from our pay���by doing what comes naturally, which is nothing. When the question of retirement savings comes up, the ready answer is, ���I���ll get to that later.��� Inertia is the most powerful force in the economic universe.

Finally, in Modigliani���s day, economists believed that people were inherently rational. If you plotted the best course of action, it was assumed that people would naturally fall into line, like ants streaming into a picnic basket. This might be true of the sages in the econ department. But outside the academy, lots of people have lost their way financially.

By waiting years to begin saving for retirement, most of us start on the back foot. We need to save a high percentage of pay later on, or accept a loss of income in retirement. Either way, we���re violating Modigliani���s recommendation to smooth our spending. That���s when behavioral economics came to the rescue.

Drawing on insights from psychology, economists try to help us make better choices by anticipating our natural tendencies. Their most popular invention is the automatic 401(k), in which employers enroll new workers in the plan from their very first day. Workers can quit at any time but most stay put. Inertia is now working in their favor, not against them.

With automatic plans, 86% of workers under age 25 are saving for retirement, according to research by Vanguard Group, a major 401(k) plan administrator. This compares to 24% in 401(k) plans where the young set must enroll themselves. A change that large is seismic���almost unheard of���in the social sciences. If you get a response that big, the first instinct is to check the data for errors.

But it���s no mistake. Automatic plans have shifted the conversation because they take into account how we actually behave���and not how we should behave.

I included a question on Modigliani���s lifecycle hypothesis on this past semester���s final exam, and almost everyone got it right. Still, I hope my students have an automatic 401(k) at their first job. It���s best not to leave saving to willpower, especially in our 20s.

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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A Perfect Score

THE HIGHEST CREDIT score possible is 850, and I���ve hit that mark in eight of the past 12 months. In the other four months, I had a score of either 844 or 846 under the credit rating formula created by FICO, formerly called Fair Isaac Corp.

A FICO score between 800 and 850 is considered exceptional and gets you the best rates on loans. A score of 670 or more is considered ���good,��� but more doors and opportunities are available when your score hits 740, where ���very good��� credit begins.

My perfect score partly reflects the care I take with my credit cards. I do the standard stuff. But I also have one or two tricks that aren���t found in the usual playbook. For example, when I use credit cards, I pay them off in full every month. Then I go one step further and pay a little extra toward the current month���s charges. I doubt that helps my credit score, but I figure it might impress the credit card company.

I always keep the total I charge far below my card���s credit limit. If the credit limit on the card is $10,000, the most I want to owe is 30%, or $3,000, and prefer to use just 10% of the card���s credit limit, or $1,000.

If it���s hard for me to stay below my self-imposed spending ceiling, I call the credit card company and ask it to increase my credit limit. The company is usually willing to oblige, especially if you���re a responsible borrower who always pays on time���or even a little early, as I do.

To stay under my spending ceiling, I���ve also found it helps to use several credit cards. Because I charge on two or three cards each month, I stagger their billing dates. For instance, I may have one card payment due on the first of the month and another on the 16th.

If you want to change your card���s billing date, call the card issuer. The company is typically happy to make an adjustment. When choosing payment dates, it���s helpful to synchronize them with your paychecks. Having multiple cards with staggered billing dates also creates a busy history of on-time payments���a positive for my credit score.

This hasn���t happened to me recently, but sometimes you can find yourself late with a payment. Most card companies are willing to waive the late fee if you���ve consistently paid on time up until then. It can���t hurt to ask.

If you do carry a balance on your card, be sure to make at least the minimum payment. About 35% of your credit score is based on your payment history, so late, missed or insufficient payments will drop your number. Owing more than you can pay is not a good feeling, but you can put an end to that frustration by adopting the good money management habits that I was taught as a child.

My mother opened a checking account for me when I was 12. I would deposit some of my money from cutting grass, gifts or weekend work. That meant I often had money when my friends didn���t. This habit of ���paying myself first,��� by setting aside cash for later, gives me a financial buffer���and helps me avoid bank fees and exorbitant interest charges.

My tips may not get you to 850 because there���s a lot more to a FICO score than credit cards. Credit history length, the total amount you owe, recent credit inquiries and the mix of debt you hold all play a role. Indeed, to hit 850, it���s important to have both installment loans���think a mortgage or car loan���and to use credit cards. For those who have paid off their mortgage and don���t take out car loans, and hence their only borrowing is their credit card charges, it seems hard to get a credit score much above 820. But even 820 should put you in a great position if you need to borrow.

Donnie Mattox is an Air Force veteran and former radio technician with Atlanta���s metro transit system. He���s currently employed with Delta Air Lines as an aviation maintenance technician. Donnie has been married to his wife Viola for 34 years, and they have two adult children, Victoria and Darius.

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Mutual Admiration

LIKE MANY PEOPLE who read HumbleDollar, I greatly respect Warren Buffett���s opinions and insights. I���ve even attended Berkshire Hathaway���s annual shareholder meeting in Omaha. Now that it���s broadcast, I reserve the Saturday of the meeting to watch it on the web.

Seeing it from a distance means I miss out on the terrific deals various Berkshire companies offer shareholders who attend in person. By attending virtually, however, I don���t have to navigate the crowds or spend six hours driving to Omaha and another six hours returning home.

I almost always spend the entire meeting nodding in agreement with the comments made by Buffett and Berkshire Hathaway Vice Chairman Charlie Munger. This year���s meeting started similarly. Then I heard an opinion with which I disagreed.

During a question about Berkshire���s insurance company, Geico, Buffett said something that jolted me from my chair and had me shouting at the monitor. What could cause such an outburst?

When speaking of Geico���s competitor, State Farm Insurance, Buffett said, ���The largest auto insurance company in the United States was started over in Illinois by a guy who didn���t know anything about insurance particularly. And it���s a mutual company. It���s not supposed to succeed in capitalism.���

Not succeed in capitalism? These words startled me because I���ve always been a huge believer in cooperatives and mutual companies. The reason goes back to my early childhood.

I first learned about cooperatives when I was a young boy visiting my grandfather���s farm. My father made sure to fill our car with gas at the local co-op. Why? Grandpa would get back some of the money we���d spent in the annual dividend payment made to the co-op���s members at year-end.

What a great idea, I thought. Local farmers had banded together to purchase costly goods at wholesale prices. Why should they pay somebody else more?

To me, this fits well with 18th century economist Adam Smith���s ���invisible hand,��� where many benefit when each person looks after his or her own economic interest. Co-ops and mutual companies are both built on the philosophy that cutting out the middleman can mean better results for members.

Buffett said this runs counter to what he learned in college. ���If you go to business school,��� he said, ���they teach you that only because you have incentives and compensation��� can companies succeed. Nobody���s really gotten rich off State Farm. They���ve sat there, and they are the largest insurance company.���

Perhaps an outside investor can���t profit much from mutual companies and co-ops, yet I���ve seen that they can be extremely successful businesses. The insurance industry used to have many mutual companies owned by policyholders. Just think of how many have mutual in their name: Mutual of Omaha, Liberty Mutual, Mass Mutual.

Many savings and loans were organized as mutual companies, too. Although many have failed, the cause of their demise was not their form of organization. Rather, many closed after making poor lending decisions, a sign that mutuals are still governed by the hard rules of capitalism.

Other co-ops are nationally known. REI, the outdoor equipment retailer, is a co-op that was started to purchase climbing rope at wholesale prices. Both Best Western hotels and Ace Hardware are cooperatives. Two of the largest mutual fund firms in the U.S. are mutual companies���Vanguard Group and TIAA.

Most cooperatives are relatively small, like my local credit union and Mississippi Market���the neighborhood co-op where I buy locally sourced meat and organic vegetables. There���s a huge number of co-ops in the agriculture business. Land O���Lakes is a producer cooperative that makes everything�� from its self-named cheese, butter and milk, to Purina animal feeds. Other dairy co-ops include Borden Dairy, Blue Bell Creameries and Kemps.

Buffett may not consider the success of any of these firms as particularly likely in a capitalist system, but I���d argue that their success shows that cooperative and mutual firms deserve a place. Each co-op is simply making decisions in the best interest of its members, while also creating jobs and services that make our lives better.

When I buy goods or services, I always check to see if a mutual company or a cooperative are possible suppliers. Sometimes they are and sometimes they aren���t. Either way, I figure they have a place in our economy.

Kenyon Sayler is a retired mechanical engineer. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. Kenyon's brother Larry also writes for HumbleDollar. Check our Kenyon's earlier articles.

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Feeling It

IT���S FINALLY HAPPENED: I feel old. Never mind that I am old. Until recently, I didn���t feel old. One contributor to my changed mood: At 78, I���m now the same age as my father was when he died 34 years ago.

I���ve been trying to figure out why I started feeling old. The onset of the pandemic and my recent health scare are likely candidates. Before the past two years, never did I worry about my health.

I also know my appetite has changed. It���s not that I don���t enjoy eating, but rather I just don���t want to eat as much. I���ve joined the ranks of seniors taking home doggy bags from the restaurant.

My wife and I were recently at a diner for breakfast. I leaned over and said to her, ���What are we doing? We have seven-figure assets and here we are asking for takeout containers so we can get two meals for the price of one.���

She replied, ���Maybe that���s why we have what we have. Our generation looks at things differently���don���t waste anything.���

I���ve also been afflicted by that dreaded indicator of old age���the nap. It���s not that I plan to nap. It just happens. If I���m home around 3 p.m. and sit down, it���s lights out.

Not too many years ago, I used to observe���not exactly kindly���the actions of the old folks on the vacation tours we took. Their mobility was poor, they seemed challenged by technology, they complained a lot and a few were just a tad obnoxious with their demands.

My mobility has slowed a bit, but it isn���t too bad. I���ll admit that getting the golf ball out of the cup is now as challenging as getting it in. I do complain, mostly about the actions of younger generations and politicians. As far as being obnoxious goes, I try my best to avoid that. But I find that, as I age, I���ve become more outspoken. What have I got to lose?

These days my roving eye focuses mostly on a cool car or a cute puppy. My wife of 53 years shows her extreme confidence in me���or my age���by occasionally saying, ���Did you see the outfit on that blonde?���

I also seem to be freer with money as I age. But my wife would disagree. I just had a tire blowout and the new tire cost $377. Before I could finish my full rant over the cost, my wife said, ���Oh, stop complaining, you act like you���re a pauper.���

Just spend your money, she added, what else are you going to do with it? So we went out to dinner.

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Paid to Wait

ARE YOU IN YOUR 60s and worried about rising consumer prices? It���s worth understanding how inflation affects Social Security benefits���especially its impact on those who postpone claiming their monthly check.

Social Security benefits jumped 5.9% in 2022, thanks to the annual cost-of-living adjustment. This inflation increase was based on the Bureau of Labor Statistics��� CPI-W. This was the largest adjustment since 1982, and it affected nearly 64 million retirees. The increase took effect in January. Based on current inflation, another significant increase is also predicted for 2023.

Several other Social Security limits also rose in 2022. For workers, the maximum amount of earnings subject to the Social Security payroll tax climbed to $147,000. For those in their 60s, the earnings limit���the amount of earned income that folks receiving benefits can collect before their Social Security check is reduced���also increased.

This earnings limit kicks in if you���re younger than your full retirement age (FRA), which is age 66 or 67, depending on the year you were born. Social Security defines full retirement age as the age when you���re eligible for an unreduced retirement benefit. For people younger than their FRA in 2022, the earnings limit increased to $19,560. For people who reached their full retirement age in 2022, it rose to $51,960. If your earned income is above these thresholds, your benefit is reduced.

Interestingly, these values didn���t rise by the same 5.9%. The maximum income subject to payroll taxes increased 2.94%, the pre-FRA earnings limit rose 3.16% and the FRA year earnings limit rose 2.85%. The increase in these values is based not on CPI-W, but on changes to the National Average Wage��Index, which increased 2.83% for 2020, the latest year for which data are available.

Although my wife and I are now eligible for Social Security, we���ve decided to postpone claiming benefits so we earn delayed retirement credits (DRCs). These credits are the method that Social Security uses to increase retirees��� benefits when folks claim Social Security later than their FRA. The DRCs you earn are added to your primary insurance amount���the sum you could receive as of your full retirement age���thereby increasing your benefit.

How much is the increase? You earn a credit for each month you delay, starting with the month you reach your FRA and ending with the month you reach age 70. If you were born after 1942, you receive two-thirds of 1% for each month you wait, equal to 8% a year.

DRCs for the years before you turn 70 are credited to your account in January of the following year. In the year you reach age 70, DRCs are also credited to your account in the month you turn 70.

My full retirement age is 66 and six months. If I delay claiming until I���m 70, I will receive 42 months of delayed credits, or 28% in total. Result: My benefit at age 70 will be 128% of my primary insurance amount���my benefit as of my full retirement age. My online Social Security account confirms this calculation.

You can claim your retirement benefits as early as 62, but Social Security will reduce your benefit for each month you claim before you reach your FRA. The early retirement reduction is different than the DRC calculation. The reduction is 5/9th of 1% for each month before FRA, for the first 36 months. If the number of months is greater than 36, your benefit is further reduced by 5/12th of 1% per month for each additional month beyond 36 months.

I���m currently age 64 and eight months, or 20 months from reaching my FRA. If I started my retirement benefit today, my benefit would be reduced by about 11%. My benefit would be 89% of my primary insurance amount. I also checked this one using my Social Security account.

How does Social Security handle the combination of cost-of-living adjustments and early or delayed retirement for seniors who haven���t yet claimed benefits? Any inflation increase is applied to your primary insurance amount, with that amount also adjusted to reflect any early or delayed retirement months. Once again, by checking my online account, I confirmed that Social Security applied 2022���s inflation increase to my primary insurance amount. I compared my 2022 primary insurance amount with the 2021 amount. Sure enough, it was 5.9% larger.

Even better, such cost-of-living adjustments have a compounding effect on your primary insurance amount. DRCs, however, don���t compound. Instead, those credits are fixed at eight percentage points per year more than your primary insurance amount. Still, the total credit for delaying���which could be as much as 28% for me if I delay until age 70���is applied to your inflation-increased primary insurance amount. In other words, delaying benefits, coupled with the annual inflation adjustments, could mean a much larger monthly check���and a nice piece of protection against rising consumer prices.

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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