Jonathan Clements's Blog, page 209

May’s Hits

RETIREMENT IS ALMOST always the most popular topic here at HumbleDollar. But in May, concerns about the financial markets took center stage. Here are last month's six most widely read articles:

"The silver lining of a rocky market is that it provides a reminder that risk management should never be forgotten," says Adam Grossman. "Risk should be an investor���s primary focus, with the pursuit of gains second."
"If you took a chart of the stock market and then overlaid a chart of aggregate corporate earnings, you would see a close correlation," writes Adam Grossman. "The stock market goes up for a reason."
Want to sharpen your financial mind? Mike Zaccardi lists his eight favorite podcasts.
When the stock market declines, our aversion to losses kicks into high gear. What to do? John Lim offers three strategies to help investors stay on track.
When Rick Connor left fulltime work five years ago, he had five key retirement goals. He's done well with some of his goals���and not so well with others.
Kristine Hayes's net worth went from $230,000 less than a decade ago to $1 million today. She details how she did it.

What about our blog posts? The best read included my piece on why there's no alternative to stocks, Kenyon Sayler on the retirement spending smile, Dick Quinn's rant, Mike Zaccardi on stock market valuations, Larry Sayler on his McDonald's inflation index and Sanjib Saha on his 2021 tax bill.

Meanwhile, the most popular newsletters were Ray Giese's��Rules for Retirement, Allan Roth's��Striking Out��and Greg Spears's Money Vigilant.

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You May Be Surprised

IF YOU'RE LIKE MANY people, you���ll cringe when I mention reverse mortgages. The perception is that they���re loans of last resort for desperate retirees who don���t have any other options. But I suggest keeping an open mind. I believe reverse mortgages can be a shrewd way to unlock liquidity during retirement.

Reverse mortgages have evolved significantly, and retirees are often pleasantly surprised when they learn how today���s loans work. They find that many of the negatives they���ve heard are no longer true. Full disclosure: I run a website devoted to reverse mortgages, so I���m not a disinterested observer.

According to U.S. Census Bureau data from 2019, households headed by 65-year-olds have an average net worth of $268,700. Almost 68% of that is tied up in home equity. The problem, of course, is that home equity is illiquid.

Consider a retiree living paycheck-to-paycheck in San Francisco who owns a $1 million home outright. He���s technically a millionaire, and yet he can barely afford the utility bill. In the past, there were two ways for our retiree to convert his home equity into cash: sell the home or do a "cash out" refinancing. The first option doesn���t work if the goal is to stay in the home. The second option offers more flexibility but requires a new monthly payment.

Don���t like the sound of either option? This is where the reverse mortgage comes in. The most popular reverse mortgage is the Federal Housing Administration-insured��home equity conversion mortgage,��or HECM (often pronounced hec-m). If you���re age 62 or older, a HECM allows you to convert a portion of your home's value into cash without making an ongoing monthly mortgage payment. The main stipulations are that you live in and maintain your home, and that you pay your property taxes and homeowner���s insurance.

The HECM program has some additional attractive features. You remain the owner of your home and you can leave it to your heirs. If your heirs want to keep the house, they���ll need to repay the loan balance after your death. If they don���t want the place, they can either sell it or let the lender do so. Because the HECM is a nonrecourse loan, the Federal Housing Administration will cover any shortfall if the home is worth less than the amount owed at the time of repayment.

HECM proceeds have no impact on income taxes owed, Medicare or Social Security benefits.��A HECM is also versatile. You can take the proceeds as a lump sum, line of credit or monthly income. In my opinion, the line of credit is where the HECM really shines.

A HECM line of credit is similar to a standard home equity line of credit but with fewer risks. Home equity lines of credit can be risky for retirees because they���re usually interest-only and have variable rates. When the initial interest-only period is over, the borrower must begin repaying principal as well, usually over a relatively short loan term. This can mean significantly higher payments.

The HECM line of credit doesn���t require monthly payments. Your credit line is secure as long as you remain in good standing by living in the home, and paying the property taxes and homeowner���s insurance. The best part, however, is that your available credit line is guaranteed to grow over time, which unlocks more home equity.

The strategy I suggest is to set up the line of credit early in retirement and leave it untouched for as long as possible. This works best for retirees who are financially stable, owe little or nothing on their homes, and don't need immediate cash. This is not a strategy for the broke and desperate.

To see how this works, let's assume a retiree named Walter is age 62 and has a $450,000 home with no mortgage. Let's also assume Walter qualifies for total proceeds of $190,000 from a HECM.

Closing costs can vary widely. But they might run $15,000 to cover the upfront Federal Housing Administration mortgage insurance premium, as well as any origination and third-party fees charged by the lender. Closing costs are typically paid out of the proceeds, so the starting loan balance would be $15,000.

Ongoing costs include the interest charged on the balance and the 0.5% mortgage insurance premium levied by the Federal Housing Administration. If no payments are made by the homeowner���which is the point of a reverse mortgage���the interest and insurance premiums get added to the loan balance. Let���s assume the interest and insurance total 5% of the balance.

Once the closing costs are paid, Walter is left with a line of credit that starts at $175,000. The growth rate of the credit line is equal to the interest rate plus insurance, so it, too, would be 5%.��The interest and growth rate can change over time, but���for simplicity���s sake���we���ll assume they stay the same.

Result? Walter���s line of credit would grow to $183,953 if he leaves it untouched for a year. That���s an increase of almost $9,000. Meanwhile, his loan balance would grow to around $15,636, thanks to accrued interest and insurance premiums.

Meanwhile, the line of credit would balloon to $224,588 if he leaves it untouched for five years���an increase of almost $50,000.��Over that period, the loan balance would grow to about $19,170.

After a decade, Walter's line of credit would be $288,227 and his loan balance $24,602. That means that Walter would have $288,227 of tax-free cash available for home maintenance, travel or long-term-care expenses.��The HECM line of credit essentially turns a portion of Walter's home equity into a liquid and growing retirement asset.

My own reverse mortgage strategy is pretty simple: I intend to do what Walter did. I plan to pay off my home by my early 60s, set up a HECM line of credit and let it grow for as long as possible.

Mike Roberts is a reverse mortgage industry veteran and the founder of MyHECM.com , a leading online resource about HECM reverse mortgages. If you'd like to find out how much you can get from a reverse mortgage, check out his site���s free calculator .

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More Than Ever

"OLD PEOPLE���S DISEASE."��That���s how I describe my shock every time I go to the grocery store and see how much everything costs.

Partly, this is because I remember how cheap things used to be. My memory of lower prices goes back to the 1960s. My parents would give my brothers and me 50 cents per week in pocket money. I can still recall buying a pair of Reese's peanut butter cups, then my favorite candy and still top of my list for stealing from a child���s Halloween haul, for a dime. That meant that, with my 50 cents, I could potentially afford five twin packs per week. Yesterday, a twin pack at my local drugstore was on offer for $1.49, a 15-fold increase. I didn't bite.

But it recently dawned on me that my ���old people���s disease��� isn���t just the result of my long-ago memory of lower prices. There���s also compounding at work, which means my shock grows exponentially larger as the years roll by.

Think of it this way: If inflation climbs at 3% a year, a $1 item would cost $2.43 after 30 years, or $1.43 more. That���s bad enough. But tack on another 30 years, so we���re now looking at six decades, and that $1 item would cost $5.89, up $4.89.

That said, I try to temper my shock by recalling that the quality of what we can buy today is so much better. Exotic foods beckon from the grocery store shelves. Rubbery mozzarella has been replaced by freshly made, bread comes in countless artisan varieties, and tzatziki, guacamole and hummus have become commonplace. Cars now have safety features that we only dreamed of a few decades ago. Today's $1,000 laptop offers extraordinarily more speed and memory than one that used to cost twice as much.

And as for wine, I���d argue that the choice and the value have never been greater. At dinner parties, I recall my parents serving just one variety���sparkling Mateus rose. I recently spotted it in the local liquor store and almost bought a bottle. But I wasn���t sure I���d respect myself in the morning.

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Benefits of Work

SOCIAL SECURITY���S complexity never fails to surprise. While many retirees have some sense for what factors determine the size of their Social Security check, few appreciate just how involved the benefits calculation can be.

For example, have you ever wondered what the Social Security Administration does if you continue working after starting benefits? It���s not a simple answer. There are two distinct treatments depending on whether you start benefits before or after you reach your full Social Security retirement age, which is age 66 or 67, depending on the year you were born.

If you start collecting Social Security prior to reaching your full retirement age, any employment income is subject to an earnings test and could cause a benefit reduction. The earnings test threshold in 2022 is $19,560. The government reduces your benefit by one dollar for every two dollars you earn above that amount.

The reduction becomes much less severe in the year you reach your full retirement age. You lose one dollar for every three dollars earned above $51,960.��The benefits that were withheld prior to full retirement age aren���t necessarily lost forever. Once you reach your full retirement age, your monthly benefit is adjusted upward to reflect the benefits surrendered over the prior years. And at that point, you can earn as much as you want, with no reduction in your Social Security benefit.

The complexity doesn���t stop there. In some cases, additional work can actually raise the Social Security benefit you receive.

I recently spoke with a neighbor who was in this position. He had been advised to file for Social Security at his full retirement age of 66, even though he planned to work longer. This strategy might not make sense at first. He didn���t need his Social Security check to cover his living expenses, so why not wait? Delaying to 70, after all, would increase his benefit about 32%.

His financial advisor noted, however, that his additional years of earned income beyond age 66 could raise his Social Security payout, thus helping to offset the reduction from claiming before age 70. I was skeptical until I worked through the math myself and researched how the government calculates Social Security benefits.

The first number the Social Security Administration uses to calculate your retirement benefit is your lifetime earnings total. They add up all of the money you made during the 35 highest-earning years of your career, adjust that sum for inflation, and then divide it by 420.

This calculation results in your average indexed monthly earnings, which you can think of as your inflation-adjusted average monthly wage. The government uses this number to determine your primary insurance��amount, which is the benefit you receive if you file at your full retirement age.

So how can extra work raise benefits? If one of your working years after claiming benefits is one of your 35 highest, it would replace one of your lower-earning years and raise your overall average. If your additional year of income doesn't crack your top 35, it wouldn���t affect your Social Security benefit.

The folks at the Social Security Administration take additional earning years into account through an automatic process called recomputation. This process usually occurs in the fall and the recomputed amount typically takes effect the following January. Recomputation cannot lower someone���s existing benefit.

If you enjoy complex calculations, financial planning expert Michael Kitces has an excellent article on how your average indexed monthly earnings and primary insurance amount are calculated. You can use this information to see if your benefits would increase with an additional year of work. You can also do the math on the Social Security website.

Here���s how: Log into your ���my Social Security��� account. While there, check your earnings record to see if there are any lower earnings years you can easily replace. Then scroll down to the ���Plan For Retirement��� tool and select the option to incorporate future yearly earnings. By running estimates with and without potential future earnings, you can see the impact of additional years of work.

I ran the analysis for myself, looking at claiming benefits at three different ages. For context, I was age 64 and eight months when I went through this exercise. In my first test, I started benefits on Jan. 1, 2023. If I earned the maximum��taxable amount of $147,000 in 2022, my benefit would be $33 per month greater than if I earned nothing.

I then tested starting benefits at my full retirement age of 66 and 6 months. If I earned the maximum taxable amount until then, my benefit would be $69 per month greater than if I earned no income. This may not sound like a lot, but it amounts to $828 per year for the rest of my life.

Finally, I tested starting benefits at age 70. If I earned the maximum taxable amount to that point, my benefit would be greater by $174 per month, or $2,088 per year.

The upshot: Additional years of work in your 60s do indeed have the potential to improve your Social Security benefits if you have fewer than 35 working years or if you have any low income years in your earnings total. Still, the decision of when to claim benefits carries much more weight.

For instance, by delaying Social Security to age 70, I could increase my benefit by $896 per month, or $10,752 per year, compared to claiming at my full retirement age. That decision cannot be made in a vacuum, however. It would take me 14 years at the higher benefit amount to offset the benefits I would forgo between my full retirement age and age 70. If I am confident that I���ll live that long, delaying benefits might make sense. If I am not as confident about my health, it may be better to claim benefits sooner.

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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Eyeing College

INVESTING FOR education costs has never been more popular, as evidenced by recent Morningstar data. The research company found that 2021 was a record-breaking year for assets in 529 college savings plans. At almost $500 billion, total investments are up nearly fourfold over the past decade.

A big reason is the tax advantages���investments grow tax-free if they���re used for qualifying education expenses���plus 529 accounts are treated relatively leniently under the college financial-aid formulas. You can learn more about the accounts from other authors who have real life experience saving through 529 plans.

There are also compelling investment reasons to contribute to a 529��savings plan for your children or grandchildren. Today���s lower stock market valuations��and higher bond interest��rates should help families investing through 529s in the years ahead. Many 529s feature investments that take a target-date fund approach, similar to the TDFs found in many 401(k) plans.

These core investment options are age-based. There���s a heavy focus on stocks early on and then the asset allocation gradually shifts to bonds as the youngster approaches college age. That means that families across this ���glide path��� should reap the reward of today���s more favorable outlook for stocks and bonds.

On top of that, 529 investors can enjoy relatively low fees. Morningstar found that the average annual cost of a ���directly sold��� age-based plan is just 0.34%, or $34 a year for every $10,000 invested. What about plans sold through advisors? They cost families an average 0.84% annually. The implication: You can save a significant sum by simply buying a low-cost direct plan.

Want to research 529 plans? Head to SavingforCollege.com. You don���t have to fund a plan that���s earmarked for your state, but sometimes there are state tax advantages to doing so.

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IQ Isn’t Enough

A FEW WEEKS BACK, I��discussed��the notion of ���the four horsemen of the investor apocalypse.��� A concept proposed by Morningstar Managing Director Don Phillips, these are the factors that���in his experience���tend to lead investors off course. But what about��success? What are the factors that contribute to success for investors?

���Investing,��� says legendary investor��Warren Buffett, ���is not a game where the guy with the 160 IQ beats the guy with a 130 IQ��� You need to be smart, but not a genius.��� In his usual plainspoken way, he adds, ���If you have a 150 IQ, sell 30 points to someone else.���

If not intelligence, then what���s most important for investors? ���Rationality,��� Buffett says, ���is essential.��� Building on that���and to borrow a phrase from Phillips���here are the four horsemen of success:

1. Knowledge.��Information is, of course, useful. But what kind of knowledge is most helpful? Two areas seem important. The first is history.��The standard investment disclaimer states that ���past performance doesn���t guarantee future results.��� That���s undoubtedly true. The future may not look like the past. Nonetheless, it���s the best information we have to go on. In particular, I think it���s important to study past booms and busts.

Historically, the stock market has delivered a 10% average annual return. That sounds like a nice round number, and it is. Trouble is, that 10% comes with a lot of variability.��There have been periods when the market has lost 50% and taken years to climb back. That���s why it���s invaluable to have a sense of past downturns, including their frequency, depth and duration.

I would also learn some textbook investment theory, including the principles of investment valuation. What���s the meaning of a price/earnings (P/E) ratio, and what might be a normal P/E range for different types of stocks? These simple metrics, in combination with some knowledge of history, can be invaluable, especially the next time the market goes into one of its regular tulip-like frenzies.

2. Time and experience.��There���s only so much anyone can learn from a textbook. That���s why experience is critical.

Something I���ve observed over the years is that stock market bubbles seem to come along only infrequently. They don���t happen every year, or even every five years. It���s more like every 20 years. Why is that? I think it has to do with investors��� memories.

With each boom-and-bust cycle, a new generation of investors sees firsthand what manias look like���and how they end. They then carry those lessons with them. But after some years go by, a new generation comes along���one that was too young to have seen the pain inflicted by the prior cycle. Then it���s their turn to learn these lessons.

I often talk about my nephew, who���s age 25. Until this year, the stock market had been rising, almost without stop, since he was in middle school. It���s no surprise, then, that he participated in the Robinhood meme stock frenzy last year, buying options and other speculative investments. Now, for better or worse, he���s seen how these frenzies turn out. I suspect that investors from his generation will be more cautious going forward.

It���s cold comfort, though, to suggest that investors need to learn the hard way. That���s why I recommend a shortcut. Learn from investors who have lived through major historical events. Among the most thoughtful is, of course, Buffett. If you read his��annual letters, he often frames his thinking in historical terms.

Also worth reading is the work of Howard Marks, an investment manager who started his career in the 1960s, during the Nifty Fifty boom. That was the predecessor to the 1990s dot-com bubble and looked a lot like it. Marks has for years been writing memos to his clients. They���re all available on his��firm���s website. Collectively, they represent one of the best courses in market history available anywhere.

3. Mindset.��For several decades, beginning in the 1950s, the investment world believed in a concept known as Modern Portfolio Theory. This was a mathematical approach to constructing a portfolio, and it was viewed as the bedrock theory of the investment profession.

But in the late 1970s, two psychologists, Amos Tversky and Daniel Kahneman, upended that thinking with an argument that seemed radical at the time. Math is important, they said, but so is psychology���maybe even more so.

If you listen to Buffett, this comes through clearly. In his public comments, he spends much less time talking about numbers than he does about psychology and decision-making. In fact, most of Buffett���s pithy aphorisms boil down to the same basic message: ���Just be sensible.���

This may be easier said than done. That���s why I think it���s worth taking time to learn about the major cognitive biases discovered by Tversky, Kahneman and others. In particular, it���s helpful to know about��prospect theory,��recency bias��and��anchoring.

4. Luck.��This last factor���luck���might seem out of place here. After all, there isn���t much we can do to control our luck. But I still see it as one of the four horsemen of success.

While you certainly can���t predict your own luck, there���s something you can do about it: You can structure your plan so you���re well positioned to harness it to your advantage when it does come along. This applies to both good luck and bad.

In the category of good luck, you might receive a promotion or a windfall. These fit in the proverbial ���good problem to have��� category. Still, it���s helpful to have a plan. You might simply add those dollars to your existing investment strategy. Or you could focus on a specific purpose, such as paying down your mortgage. Whatever you choose, it���s best to be intentional about it. Without a plan, unfortunately, good luck��has a habit��of turning into bad luck.

Planning for bad luck is of more concern. In general, you want to be prepared for any eventuality���within reason���that might set you back. How can you do this? It���s the flip side of planning for good luck. Have a plan B and maybe a plan C mapped out for a rainy day. That might seem like a depressing exercise, but more than one person has told me that it actually made them feel better, not worse, to think this through.

Back to intelligence: Why, in Buffett���s view, is that less important? It may be because it can cut both ways.

On the one hand, there���s the��Dunning-Kruger��effect. This describes people who don���t have high IQs but nonetheless suffer from overconfidence because they can���t judge their own abilities. The classic example was��McArthur Wheeler, who tried to disguise himself while robbing banks by applying lemon juice to his face. He was quickly caught.

On the other hand, genius hardly guarantees success. The most famous case in the investment world was probably the hedge fund Long-Term Capital Management. It failed spectacularly despite having two Nobel laureates among its founders. The fund���s obituary is a book titled��When Genius Failed��by Roger Lowenstein. The reality, though, is that this wasn���t the only case in which genius failed. It���s just the most notable. Overconfidence can be a pitfall for those who are highly competent. What���s the antidote? Keep an eye on the four horsemen.

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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True to Form

IS THE IRS NO LONGER able to provide basic services to the public?

When my father passed away, he left his financial assets in a trust for my siblings and me. A trust is a good estate planning tool, but there are some disadvantages. Among them: A trust has to file its own income tax forms.

My mother is the trustee. She uses a local CPA to prepare the tax returns for the trust. My mother recently received a letter from the IRS.

���Thank you for your inquiry dated Aug. 06, 2020. We have processed the adjustment indicated on your amended Form 1041 and applied the payment of $108.00, which we received on Aug. 14, 2020, to the Form 1041 account tax period ending Dec. 31, 2019. The above referenced tax period is paid in full at this time.���

That's not a typographical error: The IRS is informing my mother that it received a check she sent nearly two years ago.

In August 2020, my mother sent the IRS an amended Form 1041, which is the tax return for trusts, along with a check for $108. Three months later, in November 2020, the check finally cleared the bank. Yes, it took the IRS three months to open the mail and deposit her check. My mother���s CPA tells me that the letter is simply an acknowledgment from the IRS that it has now processed and accepted the amended return.

End of story? A few weeks later, my mother received a second letter about the Form 1041 from the IRS. It states, ���We are required by law to charge interest when you do not pay your liability on time.��� It informs her that the interest charge is 27 cents. But then it says, in bold, ���Amount due: $0.00.��� I assume that means she does not have to pay the 27 cents, but I wish the letter would explicitly say that. You've got to wonder: How much did it cost the IRS to prepare and send a letter to my mother telling her that she doesn't owe anything?

The IRS claims the significant backlog of unprocessed returns is the result of the pandemic and chronic underfunding. But I���d add another reason���something beyond the IRS���s control���which is the ever-increasing complexity of the tax code and tax forms. Call me cynical, but I believe the No. 1 goal of most elected officials is to get reelected. They want to ���help��� us so they can trumpet their compassion to their constituency. Every time Congress passes tax legislation to ���help��� us, the tax code and tax forms become more complex.

In my humble opinion, there���s no acceptable excuse for processing tax returns nearly two years after they���ve been submitted. I don���t have any solutions. But I do wonder, is the U.S. spiraling downward? Are we becoming like a third-world country whose government is unable to provide basic services in a timely manner?

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Money Vigilant

I BELIEVE THAT OUR earliest financial experiences set lifelong patterns. It���s certainly been true for me, though I didn���t recognize it until recently.

My father was an Episcopal priest. When I was born in 1956, our family lived in a big stone parish house located in a large graveyard in Harlem. It was the overflow burial ground for Wall Street���s historic Trinity Church, whose churchyard was all filled up. Dad never voiced concerns about money and, as it turns out, enjoyed financial security his entire life. My mother took the opposite view. She was always worried the bottom might drop out, and for good reason.

She was born into a prosperous family that employed a chauffeur and a maid, as well as a nanny who was responsible for raising my mother. Her father, a lawyer, was a Gatsby-type figure who���d installed a putting green on the lawn and had his suits tailored in London. First, he lost a bundle in the 1926 Florida land bust. Later, he lost his job as the New York representative of Lloyd���s of London. He was among those tragic men who committed suicide during the Great Depression. My mother was age 11.

After college, she joined the American Red Cross in 1943. At the English airbases where she was stationed, many U.S. flight crews���people she knew���never returned from the big bombing raids. After D-Day, she followed behind Patton���s 3rd U.S. Army, which broke out of Normandy, fought across France and Belgium, and drove into Nazi Germany. In her 90s, she told a caretaker that she was taught how to drive a tank ���just in case��� the unit got surrounded and the women needed to break out. This possibility was codenamed Alamo.

My mother learned early that life���and even Western civilization���is shockingly fragile, and can be destroyed in an instant. One protective measure she took against this existential threat was to build a bulwark of savings, a lesson that she passed on to me. When I was two months old, she opened a passbook account in my name at the Harlem Bank for Savings. She took me there to make deposits, some as small as $5, to impress on me the importance of saving. The account grew to be worth $366.54 by 1968, according to my old bank book.

When I was around five, we moved from Harlem to Princeton, New Jersey, where Dad was rector of (another) Trinity Church. I was a scholarship student in local private schools, my tuition paid by a wealthy parishioner. My school friends had beach homes and every new G.I. Joe toy. My mother took me to a consignment store to buy clothes. It must be true, I realized���we���re as poor as church mice.

Actually, that wasn���t true at all. We were a solidly middle-class family surrounded by immense wealth. My friend Chip came from the family that had founded Bristol Myers. Another friend���s father, J. Richardson Dilworth, managed the Rockefeller family investments. My hazy impression of our poverty, combined with our friends��� wealth, turned me ���money vigilant��� for life.

Money vigilant describes people who are alert, watchful and concerned about their finances. We tend to work hard and save a lot because we feel our destiny���good or bad���is entirely in our hands. It���s as if I took my father���s religious faith but transferred it to finance. I always wanted to do the right thing, starting with saving. I wasn���t going to count on good luck or a windfall.

I earned $6.25 a month singing soprano in the church choir. Comic books cost 12 cents, popguns a quarter. How could I spend it all? I saved coins and bills in a Band-Aid tin. Occasionally, I���d spill it all onto my bedspread to count it. It felt protective.

The pleasure I received from saving turned out to be permanent. I have always saved, even when I didn���t earn much. For instance, I earned $130 a week in New York City one summer during college. To keep costs down, I squatted in the Bowery loft I was being paid to renovate. Later on, I rented a room in a single-room-occupancy hotel for $40 a week, where I cooked most of my meals on a hot plate.

Despite the film noir vibe, I didn���t feel deprived. My life was rich with experiences. I had a bicycle and would pedal around lower Manhattan, then mostly deserted on weekends. There was no cover charge at CBGBs, the club where punk bands played. I haunted the many used bookstores then on lower Broadway. And I managed to save enough for a week���s vacation in Jamaica before returning to college.

I���m not miserly but I am frugal. What���s the difference? I get pleasure from spending on things I value, which includes travel, antique furniture, Mark Twain first editions and large old houses. To afford them, I can do without new cars, wine pairings and flight upgrades. I also avoid casual spending, like Starbucks coffees or cafeteria lunches.

When I do spend, I want to feel that I���m getting a good deal. My wife, two kids and I began taking European vacations in 2002 because so few people wanted to fly after 9/11. We took the children to Rome, Istanbul, Amsterdam and Paris on successive annual vacations. We���d pack our coats and go in the fall, which cost much less than high season.

I always mowed my own lawn and raked the leaves. I���d tell myself the money I was saving would pay for our next trip to Europe. During summer vacations, I���d scrape down and repaint a side of my parents��� house in Maine, a house my wife and I continue to enjoy to this day. Our family always did the maintenance���that was how my parents were able to afford the place. I have a bias toward repairing old things rather than buying new ones. I���ve repaired Adirondack chairs for decades until they finally collapsed from rot. A sampler I saw once expressed my philosophy: ���Make It, Make Do, or Do Without.���

Read all over. Growing up, my parents made it clear that I was on my own once I graduated college. After a year working for a weekly newspaper in Upstate New York, I enrolled in Northwestern University���s journalism school in 1980. I rented a room in a shared apartment for $100 a month and lived on pizza slices. I told my girlfriend I had turned down the last installment of my student loan because I didn���t need the money. She told her business writing professor of my decision, and he said he had a better idea.

Following his advice, I went back to the bursar���s office to sign for the loan. Then I rode the L downtown to Chicago���s financial district and opened a money market fund with Kemper Securities. The money fund yielded something like 18%, and I���d borrowed at 5%. I was playing the float, although I wouldn���t have known what that meant. It was my first investment outside an FDIC-insured account.

My introduction to stock investing was another happy accident. I���d landed a job at The St. Petersburg Times in Florida. My editor assigned me to write about the restoration of a Spanish-revival building from the 1920s. Looking around the building, I asked my guide what all the mainframe computers were doing. He explained that this was the back office of the Templeton Funds, and it was his job to run it.

He picked up a laminated poster he called ���the Alps chart,��� which showed the growth of $10,000 in Templeton Growth Fund since its inception. I could see that it had turned into a mountain of money. After my story ran, I returned to invest $2,000 in a Templeton IRA. I took home $243 a week then, so the investment represented about two months��� pay.

The night editor would sometimes call me out of bed to cover house fires and fatal car wrecks. My day assignment was aviation, including plane crashes. I���d also written about bank robberies, murders and one fatal shark attack. After four years of tragedies, I was ready for something calmer. In 1985, I made the jump to the Washington, D.C., bureau of the Knight-Ridder newspaper chain. There, I covered Social Security, Medicare and Florida���s colorful congressional delegation.

I also received a jump in pay to $576 a week and gained entry to Knight-Ridder���s pension plan, 401(k) and employee stock purchase plan. The 401(k) was administered by Vanguard Group, which gave me entry to the often-closed Windsor Fund. Its manager, John Neff, was among the 20th century���s great value investors. I bought Windsor shares through the 401(k) for the next decade.

A source on Capitol Hill recommended her stockbroker. I opened a small account and he bought stocks for me. Soon after, on Oct. 19, 1987, the Dow Jones Industrial Average fell 22.6%, its largest one-day decline. I remember the Washington bureau coming to a standstill as we watched the wires. The only story that mattered was up in New York, and we hadn���t a clue as to what was happening. Still, I felt certain that I knew what to do.

A few days later, I walked into my broker���s office and sold all my stocks at a loss. I used the money to invest in a Van Eck gold fund. At the counter, there was a man beside me buying stocks. I remember thinking he was making a mistake. Of course, I was the fool. The stock market recovered nearly all its losses by year-end.

Luckily, I continued to stumble onto well-managed mutual funds, usually on the advice of someone else. I started saving for our son Michael���s college in June 1989, the month he was born. At first, I put the money in the bank. Then I followed a friend���s recommendation and met with a financial planner in Maryland to talk about how to invest the money.

Larry had a beautiful office on an upper floor of a glass office tower. He was friendly and persuasive, and recommended that we invest in First Eagle Global Fund. It was managed by Jean-Marie Eveillard, a canny Frenchman who had a broad mandate to buy stocks and bonds that he thought undervalued. He even stashed around 10% of the fund���s assets in gold, a reserve against unforeseen catastrophe. Like my mother, he had seen World War II.

I was happy with the fund���s excellent returns, but I didn���t know how my advisor was paid. Larry never sent us a bill. Only later did I understand that we���d purchased shares with an 8.5% load. There was also a trailing 12b-1 fee of 0.25% a year. Fortunately, Eveillard���s returns beat the market, despite his fund���s high expenses. We held onto the fund until the year before Michael entered college.

At work, I bought shares of Knight-Ridder stock at a 15% discount. It was a breakeven investment. The most valuable benefit was getting my employer���s annual report in the mail. I found it fascinating���and alarming. The charts showed a decline in newspaper circulation and advertising revenue. I got a sinking feeling as I realized my employer might not exist by the time I reached age 50. I needed to find a new job before the music stopped.

Worrying about my employer���s health was another sign of my money vigilance. I was surrounded by smart reporters, yet no one seemed to share my concerns. What iceberg? I felt that companies rose and fell in health, just as people do. Eventually, a competing newspaper company bought Knight-Ridder, which was like catching a falling anvil. It dragged the acquiring company into Chapter 11 bankruptcy. Thousands of reporters lost their jobs, and the pension plan���underfunded by $1 billion���was taken over by the federal government.

I sidestepped the whole catastrophe by leaving in late 1994. A good friend recommended that I join him a few blocks away in downtown Washington at Kiplinger���s Personal Finance magazine. I wrote a tryout piece and was hired as an associate editor covering mutual funds. One day, I interviewed the CEO of Kemper Securities, who had dropped by our offices. I escorted him out and saw him climb into the back of a limousine that had been idling at the curb. I went back in and called Kemper to sell my money market fund shares. The CEO had seemed uninspiring, and I thought he was taking shareholders for a ride.



The hardest part of my job was finding investments worth recommending to readers. I had no financial training and had serious doubts about my abilities as a forecaster. Also, I noticed a disconcerting tendency: The fund managers who explained their investment approach most persuasively seemed to fall flat on their faces in the race for performance. I steered my stories toward safe bets, like the best electric utility stocks or U.S. savings bonds. One day, I had an epiphany while reading Bogle on Mutual Funds , which made the case for index funds. I drove up to interview Vanguard Group founder Jack Bogle at the company���s headquarters in Malvern, Pennsylvania.

Bogle was a commanding presence. He had a deep voice and spoke with the confidence of an Old Testament prophet���but backed up by reams of data. He called his proofs ���the relentless rules of humble arithmetic.��� I came away convinced that index funds could solve the big problem of investment selection. Bogle was also a passionate practitioner of thrift, which certainly got my endorsement. The article I wrote said investing in a low-cost S&P 500 index fund was like having a 10-yard head start in the 100-yard dash.

In the Vanguard. Soon after, the telephone rang in my office and a recruiter asked me to interview for a job with Vanguard. The company needed an editor to support its 401(k) communications. Indexing was still something of a cultish investment then, yet I was convinced it was going to help a lot of people���and conquer the financial world. Print journalism, meanwhile, continued to circle the drain. I accepted Vanguard���s offer of a big raise and reported for work in December 1996.

For the first three months, I rented an apartment while my wife and kids completed the school year in Maryland. I spent lonely nights idly paging through a huge book of listings looking for a new house in a good school district. I saw a picture of an old farmhouse near Valley Forge Park, but my real estate agent wouldn���t take me because it was out of our price range.

My wife, kids and I drove over anyway, and the property looked enchanting. A light snowfall had dusted the overarching sycamores, and a brook ran through the large front yard. It felt as if we���d left the modern world. I saw there was a second house on the property, a small cottage attached to an old stone barn. I told my wife I thought that house could be rented and help us carry the mortgage. I hired a new real estate agent and made a low-ball offer to the owners. They countered and we eventually settled at $471,000. The rental income paid half the mortgage, so our monthly payment was about the same as that for our old house in Maryland.

I threw myself into my job at Vanguard. Within a year, we���d published an in-depth investor education series on subjects like investing, retirement, insurance, taxes and estate planning. My sources were primarily Certified Financial Planners. Eventually, I realized that I could vet the content myself if I earned the CFP designation. Vanguard agreed to pay $5,000 for my education. I studied before work, on weekends, even in the stands of Little League games. Being money vigilant, I wanted to know everything I could about finance. Still, it took years of self-study. I passed the comprehensive exam in 2005.

Vanguard pays less than most investment firms, but far more than I���d earned as a newspaper reporter. That allowed me to contribute the maximum to the 401(k), plus save $10,000 a year in 529 college funds. When college came around, we threw everything we had into making eight consecutive years of tuition payments for our son and daughter. By the end, college costs had ballooned to $65,000 a year, and we had emptied our 529s accounts and were paying $1,000 a month from income. My wife sold some jewelry to help pay the college bills.

After both kids graduated, we had more income to save. My wife opened a solo 401(k) funded from her work as a psychotherapist. I maxed out my retirement plan contributions and Vanguard kicked in another 14% of my pay through various retirement schemes. We were saving more than $50,000 a year. By 64, I had more than enough to retire. My job���managing 10 writers���had become more administrative during the pandemic. Distance and technical hurdles made it harder to write and edit.

My goal in life was never to become wealthy or lead a life of luxury. I���d rather paddle a kayak than buy a speedboat. What I���ve wanted first was to take care of my family. Then I wanted to reach a stage where my wife and I didn���t have to worry about money. After all these years of vigilance, perhaps I could relax and forget all about it. Am I there yet? Sometimes, but old habits die hard.

Recently, my wife was hospitalized overnight. At her bedside, we fell into conversation about the various checking accounts we use to pay the bills, including the property taxes. What I wanted, I told her, was to have a large enough balance in each account that I could write a big check without worrying. Afterward, I realized I���d been bargaining with fate. If we had enough savings, maybe nothing bad could happen to my wife.

Perhaps my father had it right: God will provide. He made more from his church pension than he���d ever earned working. Besides, I think he knew from presiding over so many funerals back in Harlem that every day above ground is a treasure���no matter what the size of your bank balance.

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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Buy High Sell Never

IN BEN CARLSON'S wonderful book, A Wealth of Common Sense, there���s a vignette about Bob, the world���s worst market timer.

Bob is a diligent saver. But unfortunately, he���s cursed with horrible market-timing skills, plowing money into the stock market just before every major decline. For you market history buffs, Bob buys into an S&P 500 index fund on the following dates: December 1972, August 1987, December 1999 and October 2007. The subsequent plunges from these highs were 48%, 34%, 55% and 57%, respectively.

Shellshocked by each decline, Bob immediately retreats from the market, temporarily halting his stock purchases. But just as the market reaches the next major peak, Bob takes his accumulated savings and buys into the market.

Still, Bob has one saving grace���and it���s a big one. He never sells. As Carlson puts it, ���He held on for dear life because he was too nervous about being wrong on his sell decision, too.���

As it turns out, Bob does okay. After 43 years of saving and investing, he retires a wealthy man in 2013���though his nest egg would have been twice as large had he simply dollar-cost averaged over the same time frame. There are many lessons in this story, but let me focus on just one.

When I first read this story seven years ago, I had one of my eureka moments. I realized that my fear of investing near market tops was overblown. No matter how poorly I timed my stock market buys, I would never be as unlucky as Bob. And if Bob turned out okay, so would I. This was an incredibly liberating insight.

I always remember Bob when I���m putting money to work in the market, as I am today. It���s never fun to watch an investment go down shortly after making it. Regret is a powerful emotion. But if you invest in a diversified stock portfolio and hold on for a decade or longer, just as Bob did, you should fare just fine.

My advice: Remember Bob when investing during volatile markets, such as the one we���re currently in. If you���re buying stocks today, you have already outdone Bob. But don���t forget the secret to Bob���s success. While Bob may have bought high, he never sold low. ���Buy and hold��� is a reliable formula for wealth creation.

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Staying Put

I'VE MOVED SIX TIMES in the last 10 years. Four of those moves involved relocating less than a mile. The most recent move���from Portland, Oregon, to Phoenix, Arizona���required significantly more travel.

As a child, my family changed homes frequently. I attended five different elementary schools between first and fourth grade. I���ve never minded moving. I���m not the type of person who gets attached to a home or a particular location. I���m a firm believer that change is a good thing.

But my husband and I hope the move to Phoenix will be our last. The warm weather here is a welcome change from the rainy, gray days in the Northwest. The lifestyle within the 55-plus community where we���re now located suits us. The people are friendly. The activities are plentiful. Yard care���something I never enjoyed doing���is practically nonexistent.

We���re glad we relocated, despite leaving behind friends and family members. We���re well aware most people our age are reluctant to move. For us, it was never a question of if we would leave Oregon, but when. Now that we���re both retired, it was time to relocate.

Financially, I hate to think about how much money all those moves cost me. When I was an apartment dweller, security and cleaning deposits ate up a significant amount of cash. When I broke a lease to purchase a house, I forfeited more than $2,000. As a homeowner, closing costs, inspections and real estate agent commissions cost me tens of thousands of dollars.

There have been positive aspects to making multiple moves. I���ve significantly reduced the amount of clutter in my life. With each change of address, I purged more items. Along the way, I altered my thoughts on what was meaningful to me and what wasn���t. Many items I���d been hauling around since my college days ended up at a local donation center or in a dumpster.

I���ve pared down 55 years��� worth of personal memories to a few items that fit into a couple of large plastic bins. What have I kept? I have a shoebox filled with almost every report card I ever received. I still enjoy reading the comments written by my teachers. It seems that by third grade my personality was mostly set. ���Kristine doesn���t socialize much with her peers. Instead, she spends her free time reading and writing stories.���

I have a handful of ribbons and trophies from my 4-H days. I have the scrapbooks I made for each of my dogs that document our accomplishments in different disciplines at a variety of dog shows. I have some framed photos, my high school and college diplomas, and a collection of nearly every article or story I���ve ever had published.

Technology has, no doubt, made it easier to simplify life. Most of the photos that my husband and I take these days never make it to print. Instead, they get downloaded onto a digital photo frame where they���re displayed 24/7 in our living room. Tax returns, product manuals and receipts all get scanned into digital files and stored in our online filing system.

The one thing I can���t seem to part ways with? Books.

Despite years of trying to convert to reading books on a digital platform, I just can���t seem to make the switch. Something hardwired in me prefers the feel and weight of a real book. I like to highlight passages and dog-ear pages. I like looking at the rows of books lined up on my desk that reflect the different interests I���ve had over the years. Some of the books in my collection date back to my childhood days and bring back fond memories when I flip through the pages.

Was it worthwhile to haul hundreds of pounds of books 1,200 miles to our new home? Time will tell. But if history is any indication, there���s a good chance you���ll find me sitting on our back patio, soaking up the sun, and spending my free time reading and writing stories.

Kristine Hayes retires this month from��her job as departmental manager at a small, liberal arts college. She��enjoys competitive pistol shooting and hanging out with her husband and their dogs. Check out Kristine's earlier articles.

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