Jonathan Clements's Blog, page 224
March 14, 2022
My Time to Claim
I'VE FINALLY DECIDED when to claim my Social Security benefit. Along the way, I realized that calculating the ideal start date is easy���provided you can predict your retirement income needs (doable), your investment returns (hard), the inflation rate (hard), your future tax rate (hard), your date of death (hard) and what Congress will do in the future (impossible).
This particular financial journey began when I was preparing a recent blog post on the knotty issue of when to file. I downloaded my Social Security statement, which shows my benefit amount at various ages, and then used the statement to build an Excel spreadsheet. I expected the calculation would be relatively straightforward because my wife, who is two years older, doesn���t qualify for Social Security on her own.
I started with the conventional wisdom that���because my wife and I don���t need the money for daily living expenses���I should delay Social Security until age 70. That way, I knew I���d get the largest possible benefit. But in our case, there was a complication.
My wife can only begin taking her benefit when I begin mine. While my benefit increases if I delay beyond my full Social Security retirement age (FRA) of 66 years and six months, her spousal benefit is fixed at 50% of my FRA benefit. My waiting until 70 would mean forgoing years of payments that my wife is entitled to���because she wouldn���t receive her spousal benefit until age 72.
In fact, I soon realized that our situation was more complex than I was able to model in Excel. Instead, I turned to the free calculator from financial blogger Mike Piper. It calculated my ideal Social Security claiming age as 69 and seven months���not far from my starting assumption of 70. ���Ideal��� is defined as the starting date that yields the highest present value over a lifetime, given the model���s assumptions. Logic���and Social Security���s rules���dictated that my wife should start her spousal benefit at the same time I file. The calculator verified this.
But I wasn���t done. The calculator incorporates several important assumptions. First, when will my wife and I die? If we both went to an early grave, starting benefits sooner would be much smarter. The calculator has a default longevity table, but also has optional tables you can choose from and even allows you to input your own estimate. This manual input is valuable to test what happens if the longevity table says you will live to 85, but there���s a bus with your name on it arriving at 75. If you wait until 70 to begin benefits and die sooner than the model suggests, you will have left money on the table���though, in our case, not all would be lost: My wife would receive my higher benefit as a survivor benefit.
The calculator uses a discount rate to calculate the present value of your expected benefits. It defaults to the current Treasury Inflation-Protected Securities yield, but you can override that. The calculator even allows you to input an assumption about future cuts in the Social Security program.
One downside: The calculator doesn���t know the details of our financial or tax situation. Clearly, if I needed the money to make ends meet before age 70, that would override any recommendation to delay filing. What if I make bad investment decisions or inflation erodes our nest egg���s value? These possibilities aren���t built into the model, either.
More difficult is projecting our future tax situation. When I reach 72, I���ll begin taking required minimum distributions from my traditional IRAs, which will boost our taxable income. This has implications for our Social Security payments: If I wait until 70, my larger Social Security benefits will potentially be taxed at a higher rate than if I started smaller payments years earlier.
Some retirees may also be concerned about triggering IRMAA���the income-related monthly adjustment amount that increases Medicare Part B and Part D premiums for high-income individuals. Just $1 over various IRMAA thresholds can trigger substantial premium increases. What if a higher Social Security payment at age 70 adds that extra $1 to our taxable income?
As with the Social Security website, the amounts reported by the calculator are in current dollars, with no assumption about future inflation. Since Social Security payments are indexed for inflation, high inflation might make delaying benefits more appealing, especially if that high inflation hurts our investment returns.
I give credit to Piper for developing an excellent calculator. But like all calculators, it implies a degree of precision���precision that hinges on assumptions that may not hold up.
That said, the calculator has a very useful feature: It produces a color chart showing all possible Social Security start dates and compares the present value of each relative to the ideal claiming date. For instance, the section of the chart shaded dark green shows dates that are within 1% of your ideal start date���s present value.
My calculated ideal date is five months shy of my 70th birthday, but I could start two years and three months earlier and still have an expected present value that���s less than 1% below the ideal. I hadn���t realized there was such a wide range of dates that were close to the ideal. Even starting benefits at my full Social Security retirement age only dropped the present value to 98.2% of the ideal starting date.
The upshot: After all my research, I realized that there���s no single ideal date to begin Social Security. As Piper���s calculator shows, there���s a range of essentially equal ideal dates that you can choose from based on your personal situation and preferences. Indeed, because of the unknowns that lie ahead, any date within that range could wind up being more beneficial than the single calculated ideal start date.
In the end, I decided to deviate from that ideal start date. I���m thinking my IRA required minimum distributions, coupled with Social Security, could deliver a tax hit that subtract from the larger benefits I���d receive by waiting until almost age 70. My inclination is to start at the earliest age that achieves 99% of the ideal. In our case, my wife and I would file just after my 67th birthday. Your mileage may vary.
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.
This particular financial journey began when I was preparing a recent blog post on the knotty issue of when to file. I downloaded my Social Security statement, which shows my benefit amount at various ages, and then used the statement to build an Excel spreadsheet. I expected the calculation would be relatively straightforward because my wife, who is two years older, doesn���t qualify for Social Security on her own.
I started with the conventional wisdom that���because my wife and I don���t need the money for daily living expenses���I should delay Social Security until age 70. That way, I knew I���d get the largest possible benefit. But in our case, there was a complication.
My wife can only begin taking her benefit when I begin mine. While my benefit increases if I delay beyond my full Social Security retirement age (FRA) of 66 years and six months, her spousal benefit is fixed at 50% of my FRA benefit. My waiting until 70 would mean forgoing years of payments that my wife is entitled to���because she wouldn���t receive her spousal benefit until age 72.
In fact, I soon realized that our situation was more complex than I was able to model in Excel. Instead, I turned to the free calculator from financial blogger Mike Piper. It calculated my ideal Social Security claiming age as 69 and seven months���not far from my starting assumption of 70. ���Ideal��� is defined as the starting date that yields the highest present value over a lifetime, given the model���s assumptions. Logic���and Social Security���s rules���dictated that my wife should start her spousal benefit at the same time I file. The calculator verified this.
But I wasn���t done. The calculator incorporates several important assumptions. First, when will my wife and I die? If we both went to an early grave, starting benefits sooner would be much smarter. The calculator has a default longevity table, but also has optional tables you can choose from and even allows you to input your own estimate. This manual input is valuable to test what happens if the longevity table says you will live to 85, but there���s a bus with your name on it arriving at 75. If you wait until 70 to begin benefits and die sooner than the model suggests, you will have left money on the table���though, in our case, not all would be lost: My wife would receive my higher benefit as a survivor benefit.
The calculator uses a discount rate to calculate the present value of your expected benefits. It defaults to the current Treasury Inflation-Protected Securities yield, but you can override that. The calculator even allows you to input an assumption about future cuts in the Social Security program.
One downside: The calculator doesn���t know the details of our financial or tax situation. Clearly, if I needed the money to make ends meet before age 70, that would override any recommendation to delay filing. What if I make bad investment decisions or inflation erodes our nest egg���s value? These possibilities aren���t built into the model, either.
More difficult is projecting our future tax situation. When I reach 72, I���ll begin taking required minimum distributions from my traditional IRAs, which will boost our taxable income. This has implications for our Social Security payments: If I wait until 70, my larger Social Security benefits will potentially be taxed at a higher rate than if I started smaller payments years earlier.
Some retirees may also be concerned about triggering IRMAA���the income-related monthly adjustment amount that increases Medicare Part B and Part D premiums for high-income individuals. Just $1 over various IRMAA thresholds can trigger substantial premium increases. What if a higher Social Security payment at age 70 adds that extra $1 to our taxable income?
As with the Social Security website, the amounts reported by the calculator are in current dollars, with no assumption about future inflation. Since Social Security payments are indexed for inflation, high inflation might make delaying benefits more appealing, especially if that high inflation hurts our investment returns.
I give credit to Piper for developing an excellent calculator. But like all calculators, it implies a degree of precision���precision that hinges on assumptions that may not hold up.
That said, the calculator has a very useful feature: It produces a color chart showing all possible Social Security start dates and compares the present value of each relative to the ideal claiming date. For instance, the section of the chart shaded dark green shows dates that are within 1% of your ideal start date���s present value.
My calculated ideal date is five months shy of my 70th birthday, but I could start two years and three months earlier and still have an expected present value that���s less than 1% below the ideal. I hadn���t realized there was such a wide range of dates that were close to the ideal. Even starting benefits at my full Social Security retirement age only dropped the present value to 98.2% of the ideal starting date.
The upshot: After all my research, I realized that there���s no single ideal date to begin Social Security. As Piper���s calculator shows, there���s a range of essentially equal ideal dates that you can choose from based on your personal situation and preferences. Indeed, because of the unknowns that lie ahead, any date within that range could wind up being more beneficial than the single calculated ideal start date.
In the end, I decided to deviate from that ideal start date. I���m thinking my IRA required minimum distributions, coupled with Social Security, could deliver a tax hit that subtract from the larger benefits I���d receive by waiting until almost age 70. My inclination is to start at the earliest age that achieves 99% of the ideal. In our case, my wife and I would file just after my 67th birthday. Your mileage may vary.
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.The post My Time to Claim appeared first on HumbleDollar.
March 13, 2022
Tough on Quitters
JUST HOW ROUGH HAS 2022 been for retirees? Vanguard Target Retirement Income Fund (symbol: VTINX) is down nearly 6% so far this year.��Barring a strong comeback, this could be among the lousiest years for this conservatively positioned mutual fund since its October 2003 inception.
The pandemic led to a rash of retirements. Soaring stock prices, booming real estate values and flexible work arrangements helped change the employment landscape. Many Americans finally called it quits in recent months. Likely, some workers stuck with their employer through Jan. 1 to nab another year of retirement benefits and perhaps one last year-end bonus.
Guess what happened next? The stock market���s lone 2022 all-time high was notched on the first trading day of the year���just as some clocked out for the final time. That might make the latest bout of volatility even more difficult to stomach for these newly minted retirees. A 10% decline in the market���which hadn���t happened since the COVID-induced drop two years ago���would have taken a massive dollar figure off the net worth of these retirees, whose nest eggs were likely at their plumpest.
Even more worrying might be the lack of cushioning from bonds. Interest rates were already heading higher before Russia attacked Ukraine. As rates rise, bond prices drop. When geopolitical risks mount, credit quality sometimes also gets called into question, causing corporate bond prices to fall. Combine those two bearish factors, and the Vanguard Total Bond Market ETF (BND) is down 7% from its early August 2020 peak, including dividends. After inflation, that���s a 16% loss in purchasing power.
While that might be unnerving, it also portends better future returns. Consider that high-quality corporate bonds now offer a yield of 3.5%. That���s almost double the rate from early last year. You might scoff at that, especially if you���re a longtime investor who can recall bond market yields north of 8% in the 1980s and '90s. It goes to show that today���s investing landscape is no picnic���and we should get used to the notion that diversified portfolios will likely deliver modest��returns.
The pandemic led to a rash of retirements. Soaring stock prices, booming real estate values and flexible work arrangements helped change the employment landscape. Many Americans finally called it quits in recent months. Likely, some workers stuck with their employer through Jan. 1 to nab another year of retirement benefits and perhaps one last year-end bonus.
Guess what happened next? The stock market���s lone 2022 all-time high was notched on the first trading day of the year���just as some clocked out for the final time. That might make the latest bout of volatility even more difficult to stomach for these newly minted retirees. A 10% decline in the market���which hadn���t happened since the COVID-induced drop two years ago���would have taken a massive dollar figure off the net worth of these retirees, whose nest eggs were likely at their plumpest.
Even more worrying might be the lack of cushioning from bonds. Interest rates were already heading higher before Russia attacked Ukraine. As rates rise, bond prices drop. When geopolitical risks mount, credit quality sometimes also gets called into question, causing corporate bond prices to fall. Combine those two bearish factors, and the Vanguard Total Bond Market ETF (BND) is down 7% from its early August 2020 peak, including dividends. After inflation, that���s a 16% loss in purchasing power.
While that might be unnerving, it also portends better future returns. Consider that high-quality corporate bonds now offer a yield of 3.5%. That���s almost double the rate from early last year. You might scoff at that, especially if you���re a longtime investor who can recall bond market yields north of 8% in the 1980s and '90s. It goes to show that today���s investing landscape is no picnic���and we should get used to the notion that diversified portfolios will likely deliver modest��returns.
The post Tough on Quitters appeared first on HumbleDollar.
March 12, 2022
Tempting Fate
ONLINE SPORTS BETTING is currently legal in 30 states but eventually will be legal everywhere���because the tax revenue is simply too attractive. All this was made possible by the Supreme Court, which in 2018 struck down federal legislation prohibiting online sports betting.
The sports leagues spent decades denouncing gambling, saying it threatened the integrity of the game. But my concern isn���t the ���integrity��� of the game. Rather, I worry about the individual bettor who ends up wagering too much.
Fortunately, I���m stingy when it comes to betting, which has kept me out of trouble. Forty years ago, when I would gamble in Las Vegas, I would limit myself to losing $200 per trip. I never inflation-adjusted my limit and still hold myself to that $200 limit. I thoroughly enjoy many types of gambling: craps, Kentucky Derby, March Madness, the Super Bowl and even betting on local college sports teams���when they have a chance at a championship. I may seem like a degenerate gambler. But the key for me is to bet in such small amounts that, even if I lose money, it���ll have zero effect on me.
The NFL is putting out public service announcements, with Coach Steve Mariucci advising gamblers to ���bet responsibly.��� Still, many folks will likely end up gambling too much���because the temptation will soon be everywhere. The NFL is now partnering with DraftKings, the online sports company. I���m a regular viewer of sports talk shows, and I���m bothered by the gambling advertisements that surround the screen when I���m trying to enjoy the broadcasts.
HumbleDollar readers are well trained to buy index funds, while only occasionally ���gambling��� a little on active funds. The same should be true for actual gambling. If you have a limited amount of entertainment dollars set aside for gambling, that strikes me as fine. But if you���re gambling constantly or borrowing money to bet, there���s a chance you have a problem���and you should likely to talk to someone.
The sports leagues spent decades denouncing gambling, saying it threatened the integrity of the game. But my concern isn���t the ���integrity��� of the game. Rather, I worry about the individual bettor who ends up wagering too much.
Fortunately, I���m stingy when it comes to betting, which has kept me out of trouble. Forty years ago, when I would gamble in Las Vegas, I would limit myself to losing $200 per trip. I never inflation-adjusted my limit and still hold myself to that $200 limit. I thoroughly enjoy many types of gambling: craps, Kentucky Derby, March Madness, the Super Bowl and even betting on local college sports teams���when they have a chance at a championship. I may seem like a degenerate gambler. But the key for me is to bet in such small amounts that, even if I lose money, it���ll have zero effect on me.
The NFL is putting out public service announcements, with Coach Steve Mariucci advising gamblers to ���bet responsibly.��� Still, many folks will likely end up gambling too much���because the temptation will soon be everywhere. The NFL is now partnering with DraftKings, the online sports company. I���m a regular viewer of sports talk shows, and I���m bothered by the gambling advertisements that surround the screen when I���m trying to enjoy the broadcasts.
HumbleDollar readers are well trained to buy index funds, while only occasionally ���gambling��� a little on active funds. The same should be true for actual gambling. If you have a limited amount of entertainment dollars set aside for gambling, that strikes me as fine. But if you���re gambling constantly or borrowing money to bet, there���s a chance you have a problem���and you should likely to talk to someone.
The post Tempting Fate appeared first on HumbleDollar.
In Case You’re Wrong
"MARGIN OF SAFETY"��is a concept with deep roots in finance, going back at least as far as Benjamin Graham���s��Security Analysis, first published in 1934. The idea: Investors should never be too confident in any analysis and should leave the door open to the possibility that their analysis might be right��but not precisely right.
Suppose you���re interested in buying Microsoft stock. And suppose that, after analyzing it, you concluded that it was worth $330 a share. With the stock around $280 today, that might look like an attractive investment. If the stock rose to $330, you���d earn an 18% profit. That���s not bad.
But what if things didn't work out precisely according to the numbers? Then that profit might not materialize. That���s where you���d apply a margin of safety. In this case, Graham might have recommended you wait and only buy the stock if it dropped to, say, $250. That would allow you to come out ahead even if the stock didn���t get all the way to $330.
Since Graham���s time, margin of safety has become foundational for value investors. That���s why Seth Klarman, a hedge fund manager and one of history���s most successful value investors, titled his 1991 book��Margin of Safety. Because of this association with Graham and Klarman, the notion of margin of safety is seen mostly as a concept within the limited domain of investment analysis���and, even more narrowly, within the domain of value investing.
It is, however, an idea that I think is more broadly applicable within personal finance. At times of uncertainty, margin of safety seems like an especially important idea to revisit. In his book�� The Psychology of Money , Morgan Housel articulated the key benefit: ���Room for error lets you endure a range of potential outcomes.��� Let���s look at how this applies in practice.
In the past, I���ve often come back to the idea that forecasting is a fool���s errand. I still believe that. But that also poses a problem: How can anyone plan for the future if the future is unknowable? The idea of a margin of safety helps reconcile this inherent contradiction.
As you think about your financial future, you shouldn���t be too precise with your assumptions���just as you shouldn���t be too precise in forecasting where Microsoft���s stock will go. What you can do, though, is consider a range of potential outcomes.
In making a long-term plan, you might guess that the stock market will return 7% a year. That sounds reasonable. But there���s no guarantee it will work out that way, so I wouldn���t build a plan around that one assumption. Like Graham, you might want to make sure that your plan will still work even if market returns are lower���just 5%, for example. The key is that these numbers���whether 7% or 5%���aren���t predictions. Instead, you���re simply testing various scenarios to see how things could potentially pan out.
In building a plan, you might test ranges around each of the key variables. This would include your projected retirement date, life expectancy, inflation and future tax rates. Again, the key is that you aren���t predicting���since there���s no way to predict. Instead, you���re simply exploring what would happen under various scenarios.
This approach doesn���t guarantee success, of course. No amount of planning could capture every conceivable outcome. But there are still steps you can take in the face of uncertainty. Harry Browne���an investment advisor, author and erstwhile presidential candidate���encouraged investors to think as broadly as possible about risk when building portfolios. Specifically, Browne highlighted four extreme scenarios:
Hyperinflation, like Germany experienced after the First World War.
Deflation, a phenomenon that induces malaise and economic contraction.
Devastation, such as war, natural disasters and famine.
Confiscation, as Venezuela has experienced, for example.
Picking up on Browne���s idea, author William Bernstein calls these ���deep risks��� because they���re risks that could result in permanent loss. That���s in contrast to temporary losses, which is what investors usually think of when they think about risk.
These are admittedly extreme scenarios. In making a financial plan, can you really protect yourself against these kinds of risks? Browne���s view was that you could. He recommended constructing what he called a ���permanent portfolio��� consisting of four assets: stocks, long-term government bonds, gold and cash.
Do I recommend this specific mix? No. But I do agree with the premise at a high level. Diversification is one of the most powerful tools available. And I agree with Browne���s fundamental recommendation, which is to diversify across asset classes that exhibit little or no���or even negative���correlation with each other.
Diversification isn���t the only tool that can provide you with a margin for error. As you review your financial situation, you���ll want to look for other levers. For example, if you have a mortgage or other debt, consider paying it down. Another idea: If you haven���t yet claimed Social Security, consider delaying it as long as possible to accumulate the largest possible benefit. While they aren���t a product I normally recommend, income annuities can definitely play a role for some retirees. Each of these would provide a valuable margin for error if things got tight down the road.
What about bitcoin? I hear this question a lot. While I don���t generally recommend it either, cryptocurrency has an important and unique characteristic: It���s borderless. It isn���t subject to any government���s authority and it isn't tied to any country���s currency. An asset like this would be invaluable today to refugees fleeing a tyrant in Europe. While I still have a number of concerns about cryptocurrency, I do appreciate that it carries this benefit. I hope it evolves and becomes a valid tool for expanding one���s margin of safety.
The benefits of maintaining a margin for error aren���t merely financial. There���s also an important peace-of-mind benefit. In her book�� The Happiness Project , author Gretchen Rubin described how she overhauled her life. One of her simple strategies: She left a shelf empty in her closet.
Why? Rubin says it offers her a dose of happiness each time she sees the shelf. To her, it provides a symbolic margin for error in her daily life. She has no plans to use it���but she knows she could. That, in and of itself, is a benefit. It���s the same with your finances. If you can identify levers that offer you a financial margin for error, the benefits could be significant.
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.
Suppose you���re interested in buying Microsoft stock. And suppose that, after analyzing it, you concluded that it was worth $330 a share. With the stock around $280 today, that might look like an attractive investment. If the stock rose to $330, you���d earn an 18% profit. That���s not bad.
But what if things didn't work out precisely according to the numbers? Then that profit might not materialize. That���s where you���d apply a margin of safety. In this case, Graham might have recommended you wait and only buy the stock if it dropped to, say, $250. That would allow you to come out ahead even if the stock didn���t get all the way to $330.
Since Graham���s time, margin of safety has become foundational for value investors. That���s why Seth Klarman, a hedge fund manager and one of history���s most successful value investors, titled his 1991 book��Margin of Safety. Because of this association with Graham and Klarman, the notion of margin of safety is seen mostly as a concept within the limited domain of investment analysis���and, even more narrowly, within the domain of value investing.
It is, however, an idea that I think is more broadly applicable within personal finance. At times of uncertainty, margin of safety seems like an especially important idea to revisit. In his book�� The Psychology of Money , Morgan Housel articulated the key benefit: ���Room for error lets you endure a range of potential outcomes.��� Let���s look at how this applies in practice.
In the past, I���ve often come back to the idea that forecasting is a fool���s errand. I still believe that. But that also poses a problem: How can anyone plan for the future if the future is unknowable? The idea of a margin of safety helps reconcile this inherent contradiction.
As you think about your financial future, you shouldn���t be too precise with your assumptions���just as you shouldn���t be too precise in forecasting where Microsoft���s stock will go. What you can do, though, is consider a range of potential outcomes.
In making a long-term plan, you might guess that the stock market will return 7% a year. That sounds reasonable. But there���s no guarantee it will work out that way, so I wouldn���t build a plan around that one assumption. Like Graham, you might want to make sure that your plan will still work even if market returns are lower���just 5%, for example. The key is that these numbers���whether 7% or 5%���aren���t predictions. Instead, you���re simply testing various scenarios to see how things could potentially pan out.
In building a plan, you might test ranges around each of the key variables. This would include your projected retirement date, life expectancy, inflation and future tax rates. Again, the key is that you aren���t predicting���since there���s no way to predict. Instead, you���re simply exploring what would happen under various scenarios.
This approach doesn���t guarantee success, of course. No amount of planning could capture every conceivable outcome. But there are still steps you can take in the face of uncertainty. Harry Browne���an investment advisor, author and erstwhile presidential candidate���encouraged investors to think as broadly as possible about risk when building portfolios. Specifically, Browne highlighted four extreme scenarios:
Hyperinflation, like Germany experienced after the First World War.
Deflation, a phenomenon that induces malaise and economic contraction.
Devastation, such as war, natural disasters and famine.
Confiscation, as Venezuela has experienced, for example.
Picking up on Browne���s idea, author William Bernstein calls these ���deep risks��� because they���re risks that could result in permanent loss. That���s in contrast to temporary losses, which is what investors usually think of when they think about risk.
These are admittedly extreme scenarios. In making a financial plan, can you really protect yourself against these kinds of risks? Browne���s view was that you could. He recommended constructing what he called a ���permanent portfolio��� consisting of four assets: stocks, long-term government bonds, gold and cash.
Do I recommend this specific mix? No. But I do agree with the premise at a high level. Diversification is one of the most powerful tools available. And I agree with Browne���s fundamental recommendation, which is to diversify across asset classes that exhibit little or no���or even negative���correlation with each other.
Diversification isn���t the only tool that can provide you with a margin for error. As you review your financial situation, you���ll want to look for other levers. For example, if you have a mortgage or other debt, consider paying it down. Another idea: If you haven���t yet claimed Social Security, consider delaying it as long as possible to accumulate the largest possible benefit. While they aren���t a product I normally recommend, income annuities can definitely play a role for some retirees. Each of these would provide a valuable margin for error if things got tight down the road.
What about bitcoin? I hear this question a lot. While I don���t generally recommend it either, cryptocurrency has an important and unique characteristic: It���s borderless. It isn���t subject to any government���s authority and it isn't tied to any country���s currency. An asset like this would be invaluable today to refugees fleeing a tyrant in Europe. While I still have a number of concerns about cryptocurrency, I do appreciate that it carries this benefit. I hope it evolves and becomes a valid tool for expanding one���s margin of safety.
The benefits of maintaining a margin for error aren���t merely financial. There���s also an important peace-of-mind benefit. In her book�� The Happiness Project , author Gretchen Rubin described how she overhauled her life. One of her simple strategies: She left a shelf empty in her closet.
Why? Rubin says it offers her a dose of happiness each time she sees the shelf. To her, it provides a symbolic margin for error in her daily life. She has no plans to use it���but she knows she could. That, in and of itself, is a benefit. It���s the same with your finances. If you can identify levers that offer you a financial margin for error, the benefits could be significant.
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.The post In Case You’re Wrong appeared first on HumbleDollar.
March 11, 2022
Missing Out
A FRIEND ASKED ME if I was buying cryptocurrencies or nonfungible tokens. When I replied that I was not, my friend asked if I was afraid that I was missing out on the investment of a lifetime. That got me thinking about three great investments where I did indeed miss out.
First, in 1981, some young engineers were sitting around talking about what we should invest in. One fellow said he was going to buy a share of Berkshire Hathaway, which was then selling for about $500, equal to a week���s salary. In my wisdom, I said that the stock had performed superbly, but CEO Warren Buffett was 51-years-old and unlikely to stick around much longer. In fact, he���d probably have to retire when he turned 65, a scant 14 years hence.
One share of Berkshire Hathaway (symbol: BRK-A) now costs almost $500,000, for an annual return of about 18%. Had I invested the money in an S&P 500-index fund, the price appreciation would have been about 9%. I could add a few percent to the S&P���s return to account for dividends. Still, I clearly missed out on a great stock purchase���and, unfortunately, I didn���t even invest in an S&P 500 fund. More on that later.
Next up: In 1990, feeling like I���d missed one great stock picker, I chose another. I purchased Fidelity Magellan Fund. While people today pay zero trading costs, I paid Fidelity a 3% load, or commission, to invest with the great Peter Lynch. Sadly, two months after I purchased the fund, Lynch decided to retire. I never saw the great returns that Magellan had earned in its early years.
Note that Lynch was only age 44 when he retired. That���s seven years younger than Buffett was when I was concerned that he would retire.
My final miss: I graduated from college in 1981. That was five years after Jack Bogle launched the First Index Investment Trust, which would later be renamed Vanguard 500 Index Fund.
I regularly read The Wall Street Journal and Barron���s. I stayed current on the latest investments. Yet I didn���t invest in any index fund until 1990. Shortly after Lynch���s retirement, I decided to forget about finding the next great investment guru and purchased Vanguard 500. I had lost nine years chasing the latest hot hand, either paying steep trading costs or paying mutual fund loads and high management fees.
Despite my three misses, our investments have been satisfactory. We���ve provided our children with world class educations. We have been able to travel widely with them, both in the U.S. and abroad. We have a nice home and a secure retirement.
So am I worried about not getting in on the ground floor of cryptocurrencies and nonfungible tokens? Not really. Perhaps I���m missing the opportunity of a lifetime. But���like missing Buffett and Lynch���I think our life will still be just fine.
First, in 1981, some young engineers were sitting around talking about what we should invest in. One fellow said he was going to buy a share of Berkshire Hathaway, which was then selling for about $500, equal to a week���s salary. In my wisdom, I said that the stock had performed superbly, but CEO Warren Buffett was 51-years-old and unlikely to stick around much longer. In fact, he���d probably have to retire when he turned 65, a scant 14 years hence.
One share of Berkshire Hathaway (symbol: BRK-A) now costs almost $500,000, for an annual return of about 18%. Had I invested the money in an S&P 500-index fund, the price appreciation would have been about 9%. I could add a few percent to the S&P���s return to account for dividends. Still, I clearly missed out on a great stock purchase���and, unfortunately, I didn���t even invest in an S&P 500 fund. More on that later.
Next up: In 1990, feeling like I���d missed one great stock picker, I chose another. I purchased Fidelity Magellan Fund. While people today pay zero trading costs, I paid Fidelity a 3% load, or commission, to invest with the great Peter Lynch. Sadly, two months after I purchased the fund, Lynch decided to retire. I never saw the great returns that Magellan had earned in its early years.
Note that Lynch was only age 44 when he retired. That���s seven years younger than Buffett was when I was concerned that he would retire.
My final miss: I graduated from college in 1981. That was five years after Jack Bogle launched the First Index Investment Trust, which would later be renamed Vanguard 500 Index Fund.
I regularly read The Wall Street Journal and Barron���s. I stayed current on the latest investments. Yet I didn���t invest in any index fund until 1990. Shortly after Lynch���s retirement, I decided to forget about finding the next great investment guru and purchased Vanguard 500. I had lost nine years chasing the latest hot hand, either paying steep trading costs or paying mutual fund loads and high management fees.
Despite my three misses, our investments have been satisfactory. We���ve provided our children with world class educations. We have been able to travel widely with them, both in the U.S. and abroad. We have a nice home and a secure retirement.
So am I worried about not getting in on the ground floor of cryptocurrencies and nonfungible tokens? Not really. Perhaps I���m missing the opportunity of a lifetime. But���like missing Buffett and Lynch���I think our life will still be just fine.
The post Missing Out appeared first on HumbleDollar.
My Favorite Detours
THIS ISN'T THE STORY of how my wife and I reached financial independence. Technically, we haven���t���but we will. Instead, it���s a story about the power of stories.
I was raised listening to tales of my grandfather���s life during the Great Depression and Second World War. A few themes always stood out: family, service, and the constant need to squirrel away as much money as possible for a rainy day. I was fascinated to hear about a world that seemed so distant from the comfortable existence I grew up in���one that my grandfather helped make possible.
My grandfather never told me these stories. Instead, my grandmother or mom shared them. They would talk about how my grandfather had to graduate from Stanford University a year early, in 1930, despite having been offered the starting quarterback position for his final year by the famous football coach Pop Warner.
When the fallout from the 1929 stock market crash finally reached Main Street, my great-grandfather was unable to keep the family���s California milk-crate business afloat without his son���s help. My grandfather never complained about missing the glorious culmination of his many years of hard work on the football field. Instead, like so many of the Greatest Generation, he dutifully rolled up his sleeves and struggled to ensure his family���s survival. A decade later, my grandfather volunteered for the Army, using his mechanical engineering degree to build and maintain aircraft while serving in the Pacific. After the war, he returned to run the family business, and did so successfully for many decades.
Through his actions, my grandfather taught me many things. But two lessons stand out: When it comes to money, you can never save too much. And when it comes to family, you make whatever sacrifices are necessary to give them the best life possible.
That brings me to the final years of my education. I resolved that I would do everything in my power to ensure I never found myself in need of money. I went to college on an Army ROTC (Reserve Officers��� Training Corps) scholarship. Deciding that I wanted to be a military lawyer, I applied to law schools. I had paid for college with the promise of my future Army service, but law school required money I didn���t have. Rather than allow me to go into debt, my grandfather offered to pay the whole bill for law school shortly before his death. His lifelong aversion to debt stemmed from seeing so much financial and personal carnage created by Wall Street speculation. He had struggled and given up much to achieve financial freedom, and he hated the idea of his grandson going into debt.
These are stories that I now tell to my children. But to my grandfather���s story, I have added three of my own. In each case, however, they aren���t about amassing money, but rather about the virtue of occasionally letting it slip away.
Money well saved. After graduating from law school, I reentered the Army. By then, I had married my high school sweetheart. We learned to live on my military income while she went through medical school and residency. We lived frugally and saved roughly a third of my salary, which ranged from $60,000 to $75,000 during those seven years.
In 2012, just as my wife was about to finish her residency, I deployed for a year to Afghanistan. That was one of my life���s bleakest periods. How did I get through it? I continued to save voraciously���but I spent the year saving for what most personal finance experts would consider one of the worst uses of money: buying a��new car. Four months into my time in Afghanistan, I committed to buying the car through a program offered to deployed service members. I paid a big chunk of my salary each month until the vehicle was paid off at the end of my deployment. In return, I received a small discount on a car that I was allowed to customize.
And it wasn���t just any new car. I bought a 2013 black Ford Mustang GT Premium California Special Edition. I spent months choosing the color of the car, the color and location of the racing stripes, and the sleek custom touches like window louvers. I longed for that car, and thinking about it offered an escape from the war���s daily reality. When I was back stateside, and eventually got to feel the full power of the 442-horsepower V-8 engine on a back road somewhere between Tennessee and Texas, the feeling was indescribable.
I paid roughly $36,000 for that depreciating asset. Had I invested that sum in an index fund, today it would easily be worth three times as much. But looking back on my year in Afghanistan, having something to take my mind off all that was happening around me was, without a doubt, the best investment I could have made.
From zero to three. I still recall the shock of seeing our bank balance jump when my wife finished residency and got her first doctor paycheck. I know some men, especially those who are older, prefer to be the family���s main breadwinner. Not me. I���ve always felt a deep sense of gratitude that my wife makes roughly double what I bring in.
Many physicians spend their first major paychecks on expensive cars and large houses, items they���d been deprived of during their long years of training. But we remained frugal after my wife���s residency. Our annual expenses were still a little less than $32,000, thanks in large part to the military allowance for housing. Occasionally, we would even live on base, where housing is free.
Because my wife earned scholarships and attended the cheapest medical school she could find, all our education expenses were paid off by age 32. That���s when we really began to save and to see our wealth compound. If you were to use the standard 4% withdrawal rate, my wife and I could have come close to covering all our expenses from savings by the time we reached 35. Four more years of saving at that clip would have easily clinched our financial independence.
But instead, we hit the pause button. Why? We began asking ourselves a key question: ���What good is money if there���s no one to share its many uses with?���
Over Thanksgiving dinner, I had a conversation with my brother and his wife about the child they���d adopted. I was struck by his offhand comment that so many kids are awaiting adoption. As my wife and I mulled over the issue, it became clearer to us that we might be wired differently from most people. While we reasoned that the important part of having a family is raising and loving kids, neither of us really wanted a baby. We realized it didn���t matter to us if the children we raised shared our genes.
We decided that adoption would be our next journey, even though that decision set us back many years on our path to financial independence. Partly, that���s because kids are expensive. But partly, it���s because we chose the most expensive path to adoption. For those unfamiliar with the process, international adoption is far more costly than domestic adoption. But we were wary of U.S. judges, who might reopen an adoption at the request of a biological parent, so we decided to adopt internationally.
We traveled to Medellin, Colombia, embarking on the greatest���and perhaps most expensive���adventure of our lives. The U.S. offers phenomenal tax credits for adoption costs, covering up to $14,890 of expenses per child in 2022. That credit phases out entirely at higher incomes. Believing that we would have our adoption expenses effectively reimbursed by tax credits, the decision to adopt internationally became a no-brainer. We expected to travel to Colombia in early 2018, so we planned our taxes and work schedules to take full advantage of the tax credit.
Then the adoption agency called���in October 2017. We���d been approved by the Colombian government much faster than usual. Three kids were waiting for us if we were still interested. When you work with a foreign government, these types of offers are take-it-or-leave-it, not something you can negotiate. Our agency emailed us the children���s files. As we looked at the photos of the three beautiful siblings and read their histories, we saw���in the eyes of these adolescent kids���God���s beauty staring back at us. My wife and I knew then that we were not going to let this opportunity pass us by. The lodging for five weeks in Colombia, plus travel costs, totaled roughly $15,000. The fees to adopt���paid to a Colombian attorney, agency caseworkers, and the U.S. and Colombian governments���added some $40,000 more.
In the midst of all this, it dawned on me: We wouldn���t qualify for the adoption tax credits.
Our joint income in 2017 was above the top of the tax credit���s income phaseout range by less than $1,000. We missed out on all three tax credits by the narrowest of margins. To lower our taxable income and collect as much as $44,000 in tax credits, I tried to recharacterize that year���s Roth retirement savings as traditional, tax-deductible contributions. But this proved impossible with both of our employer plans.
Clearly, it was a financial setback. Still, the adoptions have proved to be the best investment of our lives. Part of the return on investment comes from love, but much of it comes from the parts that haven���t been easy. As a parent, I have learned so many lessons. Fatherhood has helped me improve from the woefully unprepared, overconfident person that I was���a version of myself that I look back on now with a grimace.
Sacrificing my pension. Two years after we welcomed our three kids, I decided to cut short my active-duty Army career. I notified the Army that 2020 would be my final year as a fulltime soldier. When I left at age 39, the military had been the only professional life I���d ever known.
It would be hard to argue that this was a smart financial decision. On the civilian side, defined-benefit pension plans have mostly been replaced by 401(k) and similar plans, where the onus to save and invest rests on the employee���s shoulders. But the military still offers a traditional pension. In fact, it might be the gold standard of pensions, one that���s indexed to inflation and backed by Uncle Sam.
If you remain in military service for 20 years, your pension will amount to 50% of your highest 36 months of base pay. For each additional year of service past 20, the pension increases by 2.5 percentage points. How much you receive varies substantially depending on rank and years of service. Given my active-duty career path, I estimate that a 50% pension would have equaled about $60,500 a year in today���s dollars. I could have drawn that amount���for life���starting at age 45.
I���m still pursuing those 20 years of service, but I���m now doing so in the Army Reserve, which will earn me a reduced pension that won���t kick in for 20 years. Pensions for Reserve and National Guard members are far less generous, and hinge on the amount of time spent in uniform���working on weekends, mobilizing to assist during natural disasters, fighting in combat zones and so on.
My pension will depend on how actively I participate in the Reserve, but I estimate I���ll draw roughly 39% of my Army salary. That means I���ll receive about $46,000 a year once I turn 60. That���s roughly $15,000 less than I would have received if I���d stayed on active duty for six more years, plus my payout will start 15 years after the larger pension I could have received by simply remaining in the Army.
The obvious question: Why forgo the comfort, security and immediacy of that pension money?��Among the many reasons, the chief one was that my family had lived in four places over the prior two years. Moving and military life are, alas, synonymous. With older kids, those moves get harder, as they repeatedly have to say goodbye to friends.
Although some people might disagree, I believe such moves are enormously disruptive to kids��� well-being, and never more so than when your children are learning a new language and cultural norms. Our kids are resilient, but it seemed selfish to pursue opportunities and promotions at the cost of the children finding their footing as new Americans. On top of that, my wife has constantly had to interrupt her career to support my military service. Few outside the military are aware of how much spouses and kids sacrifice to support their family member���s military career.
Measuring wealth. In our winding path toward financial independence, I find that the best parts have been defined by those times when I left money on the table. That���s because building true wealth requires balance. I think back on my grandfather���s journey, and the role the Great Depression played in his life. He saved, invested and built a successful family business. But I also think about the many sacrifices he made for those he loved. His wealth was measured not only in dollars, but also by his family, friends and legacy.
I expect to reach financial independence long before age 60. But if I���m unsuccessful, I���ll have my Reserve pension and Social Security to fall back on once I get into my 60s. As that paranoid kid who was affected deeply by the stories of the Great Depression, I���ve ensured that we have financial backup, should we fall short for any reason.
For now, my wife and I save most of our income. The bulk of those savings go to ensure that we don���t saddle our kids with college debt, passing on the gift that my grandfather gave to me. Our kids are older, so the college timeline is tighter and the urgency to save is greater.
Some say that you should secure your own financial future before saving for your children���s college. If we were closer to retirement, and if I didn���t have a pension in my future, I���d say these folks might have a case. Still, I���m not sure about the me-first mentality and, frankly, I don���t care���because I���d rather follow the path laid down by my grandfather.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John��on Twitter @HighGroundPlan��and check out his earlier articles.
I was raised listening to tales of my grandfather���s life during the Great Depression and Second World War. A few themes always stood out: family, service, and the constant need to squirrel away as much money as possible for a rainy day. I was fascinated to hear about a world that seemed so distant from the comfortable existence I grew up in���one that my grandfather helped make possible.
My grandfather never told me these stories. Instead, my grandmother or mom shared them. They would talk about how my grandfather had to graduate from Stanford University a year early, in 1930, despite having been offered the starting quarterback position for his final year by the famous football coach Pop Warner.
When the fallout from the 1929 stock market crash finally reached Main Street, my great-grandfather was unable to keep the family���s California milk-crate business afloat without his son���s help. My grandfather never complained about missing the glorious culmination of his many years of hard work on the football field. Instead, like so many of the Greatest Generation, he dutifully rolled up his sleeves and struggled to ensure his family���s survival. A decade later, my grandfather volunteered for the Army, using his mechanical engineering degree to build and maintain aircraft while serving in the Pacific. After the war, he returned to run the family business, and did so successfully for many decades.Through his actions, my grandfather taught me many things. But two lessons stand out: When it comes to money, you can never save too much. And when it comes to family, you make whatever sacrifices are necessary to give them the best life possible.
That brings me to the final years of my education. I resolved that I would do everything in my power to ensure I never found myself in need of money. I went to college on an Army ROTC (Reserve Officers��� Training Corps) scholarship. Deciding that I wanted to be a military lawyer, I applied to law schools. I had paid for college with the promise of my future Army service, but law school required money I didn���t have. Rather than allow me to go into debt, my grandfather offered to pay the whole bill for law school shortly before his death. His lifelong aversion to debt stemmed from seeing so much financial and personal carnage created by Wall Street speculation. He had struggled and given up much to achieve financial freedom, and he hated the idea of his grandson going into debt.
These are stories that I now tell to my children. But to my grandfather���s story, I have added three of my own. In each case, however, they aren���t about amassing money, but rather about the virtue of occasionally letting it slip away.
Money well saved. After graduating from law school, I reentered the Army. By then, I had married my high school sweetheart. We learned to live on my military income while she went through medical school and residency. We lived frugally and saved roughly a third of my salary, which ranged from $60,000 to $75,000 during those seven years.
In 2012, just as my wife was about to finish her residency, I deployed for a year to Afghanistan. That was one of my life���s bleakest periods. How did I get through it? I continued to save voraciously���but I spent the year saving for what most personal finance experts would consider one of the worst uses of money: buying a��new car. Four months into my time in Afghanistan, I committed to buying the car through a program offered to deployed service members. I paid a big chunk of my salary each month until the vehicle was paid off at the end of my deployment. In return, I received a small discount on a car that I was allowed to customize.
And it wasn���t just any new car. I bought a 2013 black Ford Mustang GT Premium California Special Edition. I spent months choosing the color of the car, the color and location of the racing stripes, and the sleek custom touches like window louvers. I longed for that car, and thinking about it offered an escape from the war���s daily reality. When I was back stateside, and eventually got to feel the full power of the 442-horsepower V-8 engine on a back road somewhere between Tennessee and Texas, the feeling was indescribable.
I paid roughly $36,000 for that depreciating asset. Had I invested that sum in an index fund, today it would easily be worth three times as much. But looking back on my year in Afghanistan, having something to take my mind off all that was happening around me was, without a doubt, the best investment I could have made.
From zero to three. I still recall the shock of seeing our bank balance jump when my wife finished residency and got her first doctor paycheck. I know some men, especially those who are older, prefer to be the family���s main breadwinner. Not me. I���ve always felt a deep sense of gratitude that my wife makes roughly double what I bring in.
Many physicians spend their first major paychecks on expensive cars and large houses, items they���d been deprived of during their long years of training. But we remained frugal after my wife���s residency. Our annual expenses were still a little less than $32,000, thanks in large part to the military allowance for housing. Occasionally, we would even live on base, where housing is free.
Because my wife earned scholarships and attended the cheapest medical school she could find, all our education expenses were paid off by age 32. That���s when we really began to save and to see our wealth compound. If you were to use the standard 4% withdrawal rate, my wife and I could have come close to covering all our expenses from savings by the time we reached 35. Four more years of saving at that clip would have easily clinched our financial independence.
But instead, we hit the pause button. Why? We began asking ourselves a key question: ���What good is money if there���s no one to share its many uses with?���
Over Thanksgiving dinner, I had a conversation with my brother and his wife about the child they���d adopted. I was struck by his offhand comment that so many kids are awaiting adoption. As my wife and I mulled over the issue, it became clearer to us that we might be wired differently from most people. While we reasoned that the important part of having a family is raising and loving kids, neither of us really wanted a baby. We realized it didn���t matter to us if the children we raised shared our genes.
We decided that adoption would be our next journey, even though that decision set us back many years on our path to financial independence. Partly, that���s because kids are expensive. But partly, it���s because we chose the most expensive path to adoption. For those unfamiliar with the process, international adoption is far more costly than domestic adoption. But we were wary of U.S. judges, who might reopen an adoption at the request of a biological parent, so we decided to adopt internationally.
We traveled to Medellin, Colombia, embarking on the greatest���and perhaps most expensive���adventure of our lives. The U.S. offers phenomenal tax credits for adoption costs, covering up to $14,890 of expenses per child in 2022. That credit phases out entirely at higher incomes. Believing that we would have our adoption expenses effectively reimbursed by tax credits, the decision to adopt internationally became a no-brainer. We expected to travel to Colombia in early 2018, so we planned our taxes and work schedules to take full advantage of the tax credit.
Then the adoption agency called���in October 2017. We���d been approved by the Colombian government much faster than usual. Three kids were waiting for us if we were still interested. When you work with a foreign government, these types of offers are take-it-or-leave-it, not something you can negotiate. Our agency emailed us the children���s files. As we looked at the photos of the three beautiful siblings and read their histories, we saw���in the eyes of these adolescent kids���God���s beauty staring back at us. My wife and I knew then that we were not going to let this opportunity pass us by. The lodging for five weeks in Colombia, plus travel costs, totaled roughly $15,000. The fees to adopt���paid to a Colombian attorney, agency caseworkers, and the U.S. and Colombian governments���added some $40,000 more.
In the midst of all this, it dawned on me: We wouldn���t qualify for the adoption tax credits.
Our joint income in 2017 was above the top of the tax credit���s income phaseout range by less than $1,000. We missed out on all three tax credits by the narrowest of margins. To lower our taxable income and collect as much as $44,000 in tax credits, I tried to recharacterize that year���s Roth retirement savings as traditional, tax-deductible contributions. But this proved impossible with both of our employer plans.
Clearly, it was a financial setback. Still, the adoptions have proved to be the best investment of our lives. Part of the return on investment comes from love, but much of it comes from the parts that haven���t been easy. As a parent, I have learned so many lessons. Fatherhood has helped me improve from the woefully unprepared, overconfident person that I was���a version of myself that I look back on now with a grimace.
Sacrificing my pension. Two years after we welcomed our three kids, I decided to cut short my active-duty Army career. I notified the Army that 2020 would be my final year as a fulltime soldier. When I left at age 39, the military had been the only professional life I���d ever known.
It would be hard to argue that this was a smart financial decision. On the civilian side, defined-benefit pension plans have mostly been replaced by 401(k) and similar plans, where the onus to save and invest rests on the employee���s shoulders. But the military still offers a traditional pension. In fact, it might be the gold standard of pensions, one that���s indexed to inflation and backed by Uncle Sam.
If you remain in military service for 20 years, your pension will amount to 50% of your highest 36 months of base pay. For each additional year of service past 20, the pension increases by 2.5 percentage points. How much you receive varies substantially depending on rank and years of service. Given my active-duty career path, I estimate that a 50% pension would have equaled about $60,500 a year in today���s dollars. I could have drawn that amount���for life���starting at age 45.
I���m still pursuing those 20 years of service, but I���m now doing so in the Army Reserve, which will earn me a reduced pension that won���t kick in for 20 years. Pensions for Reserve and National Guard members are far less generous, and hinge on the amount of time spent in uniform���working on weekends, mobilizing to assist during natural disasters, fighting in combat zones and so on.
My pension will depend on how actively I participate in the Reserve, but I estimate I���ll draw roughly 39% of my Army salary. That means I���ll receive about $46,000 a year once I turn 60. That���s roughly $15,000 less than I would have received if I���d stayed on active duty for six more years, plus my payout will start 15 years after the larger pension I could have received by simply remaining in the Army.
The obvious question: Why forgo the comfort, security and immediacy of that pension money?��Among the many reasons, the chief one was that my family had lived in four places over the prior two years. Moving and military life are, alas, synonymous. With older kids, those moves get harder, as they repeatedly have to say goodbye to friends.
Although some people might disagree, I believe such moves are enormously disruptive to kids��� well-being, and never more so than when your children are learning a new language and cultural norms. Our kids are resilient, but it seemed selfish to pursue opportunities and promotions at the cost of the children finding their footing as new Americans. On top of that, my wife has constantly had to interrupt her career to support my military service. Few outside the military are aware of how much spouses and kids sacrifice to support their family member���s military career.
Measuring wealth. In our winding path toward financial independence, I find that the best parts have been defined by those times when I left money on the table. That���s because building true wealth requires balance. I think back on my grandfather���s journey, and the role the Great Depression played in his life. He saved, invested and built a successful family business. But I also think about the many sacrifices he made for those he loved. His wealth was measured not only in dollars, but also by his family, friends and legacy.
I expect to reach financial independence long before age 60. But if I���m unsuccessful, I���ll have my Reserve pension and Social Security to fall back on once I get into my 60s. As that paranoid kid who was affected deeply by the stories of the Great Depression, I���ve ensured that we have financial backup, should we fall short for any reason.
For now, my wife and I save most of our income. The bulk of those savings go to ensure that we don���t saddle our kids with college debt, passing on the gift that my grandfather gave to me. Our kids are older, so the college timeline is tighter and the urgency to save is greater.
Some say that you should secure your own financial future before saving for your children���s college. If we were closer to retirement, and if I didn���t have a pension in my future, I���d say these folks might have a case. Still, I���m not sure about the me-first mentality and, frankly, I don���t care���because I���d rather follow the path laid down by my grandfather.
John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John��on Twitter @HighGroundPlan��and check out his earlier articles.The post My Favorite Detours appeared first on HumbleDollar.
Only an Eight
WHEN I STOPPED at CVS the other day to pick up a new charging cable for my iPhone, I was reminded just how woefully out of fashion I am.
The young lady behind the counter handed me a box from the rack and watched as I took the cable out to make sure it was the right one. I guessed her to be in her early 20s. She was wearing a pair of those huge loopy earrings that you could jump hoops through out in the parking lot.
When she saw me bring out my phone, she gave a little laugh. ���Is that an iPhone 8?��� she asked with genuine amazement.
I looked at the phone in my hand, then back at her. ���Yup,��� I replied.
���Wow,��� she said. ���It���s been like years since I saw somebody with an iPhone 8. Why haven���t you upgraded?���
By now, I was feeling a little self-conscious. Would she make fun of my reading glasses too? The boring dad haircut that I���d gotten at Hair Cuttery for $25? The clothes that I wear over and over because they���re comfortable and I���m too cheap to buy new ones?
But I steeled myself and told her there was no need to upgrade because my phone worked just fine. I was able to do everything I needed to do on my iPhone 8, and it also takes pretty darn good pictures. Plus, it was paid off, and I wasn���t particularly eager to take on a new monthly payment now that I���m semi-retired and living off my savings.
���I���ll replace it when it breaks,��� I said. ���I do that with everything.���
It���s true. I like to get my money���s worth from things and tend to hang on to them until they die���phones, cars, old pairs of jeans. It���s a habit I learned from my parsimonious father, who used to hold up the hose at the pump to make sure he got every drop of gas he���d paid for into the tank.
I once drove a 10-year-old Ford Escape until it died. The engine, which had 138,000 miles, had been failing for months. I had the pedal to the floor as I drove it to the local dealership to trade it in.
The girl at CVS took in my use-it-until-it-breaks philosophy with a vacant stare. ���I upgrade every couple of years,��� she said. ���I just got the iPhone 13 Pro.���
With visible excitement, she brought out her phone and held it out proudly for me to look at. I had to admit, it was gorgeous. Even from behind the COVID-safety plexiglass that separated us, the slim piece of aluminum pink technology glittered in the light like a jewel worthy of going around a queen���s neck. My five-year-old black iPhone 8 suddenly felt as elegant as a rock in my hand.
I found myself wondering how much the latest phone cost, thinking somewhere in the $1,000 range. The upgrade price, of course, would be lower than that, but then you���re locked into a three-year phone plan at the cost of a small monthly mortgage. I was on a basic cut-rate phone plan myself. Forty bucks a month for unlimited talk and text, no contract, no strings attached. Simple, just the way I like it.
���It���s amazing,��� the girl said, about the phone. ���It even has lidar.���
Lidar, I asked. What was lidar?
She tried to explain it to me���some kind of radar scanning technology that shoots laser beams across the room to create a 3D image���but I wasn���t getting it. ���It���s really cool. My friends and I use it to see how tall we are and move objects around the room.���
���Move objects around the room?��� I asked.
���Virtually,��� she explained. ���In games, you know.���
I nodded vacantly. How to explain to her that I���m a hopeless frugalist? ���Simplicity�����is my rallying cry, taken straight out of the pages of Henry David Thoreau���s�� Walden , which I read back in high school and has been my north star ever since.
It was Thoreau who taught me the concept of economy not as a measure of societal output and consumption, but rather as something we practice when we keep our needs simple and live below our means. From Thoreau, I also learned that the value of something is more than just the price we pay for it. It���s the cost of the time we put into earning the money to pay for that item���time that we could use doing something else.
After Thoreau, it was a natural progression to teachers like Warren Buffett and Jack Bogle, who taught me the importance of investing in low-cost index funds, avoiding fees like the plague and letting the market do the work for me, instead of paying up for people who think they can outsmart a random walk down Wall Street.
But I wasn���t sure it would do any good getting into all this with the young lady on the other side of the plexiglass, plus other people were waiting in line. She rang up my charging cable, put it in a bag and I walked away. I was thinking about that iPhone 13 Pro, how beautiful it was, all the things I could do with it. I could measure just how short my girlfriend Rachael is���she is really short. I could move things around the room. Virtually, of course.
But then I thought about the monthly payment and my ancient plain-black phone seemed just fine as it was.
Rock in my hand, I pushed through the glass doors of the consumeristic madhouse and, like Chief Bromden, out into freedom.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� is forthcoming in early 2022 from Blydyn Square Books. Jim blogs at
PeaceableMan.com
. Check out his previous articles.
The young lady behind the counter handed me a box from the rack and watched as I took the cable out to make sure it was the right one. I guessed her to be in her early 20s. She was wearing a pair of those huge loopy earrings that you could jump hoops through out in the parking lot.
When she saw me bring out my phone, she gave a little laugh. ���Is that an iPhone 8?��� she asked with genuine amazement.
I looked at the phone in my hand, then back at her. ���Yup,��� I replied.
���Wow,��� she said. ���It���s been like years since I saw somebody with an iPhone 8. Why haven���t you upgraded?���
By now, I was feeling a little self-conscious. Would she make fun of my reading glasses too? The boring dad haircut that I���d gotten at Hair Cuttery for $25? The clothes that I wear over and over because they���re comfortable and I���m too cheap to buy new ones?
But I steeled myself and told her there was no need to upgrade because my phone worked just fine. I was able to do everything I needed to do on my iPhone 8, and it also takes pretty darn good pictures. Plus, it was paid off, and I wasn���t particularly eager to take on a new monthly payment now that I���m semi-retired and living off my savings.
���I���ll replace it when it breaks,��� I said. ���I do that with everything.���
It���s true. I like to get my money���s worth from things and tend to hang on to them until they die���phones, cars, old pairs of jeans. It���s a habit I learned from my parsimonious father, who used to hold up the hose at the pump to make sure he got every drop of gas he���d paid for into the tank.
I once drove a 10-year-old Ford Escape until it died. The engine, which had 138,000 miles, had been failing for months. I had the pedal to the floor as I drove it to the local dealership to trade it in.
The girl at CVS took in my use-it-until-it-breaks philosophy with a vacant stare. ���I upgrade every couple of years,��� she said. ���I just got the iPhone 13 Pro.���
With visible excitement, she brought out her phone and held it out proudly for me to look at. I had to admit, it was gorgeous. Even from behind the COVID-safety plexiglass that separated us, the slim piece of aluminum pink technology glittered in the light like a jewel worthy of going around a queen���s neck. My five-year-old black iPhone 8 suddenly felt as elegant as a rock in my hand.
I found myself wondering how much the latest phone cost, thinking somewhere in the $1,000 range. The upgrade price, of course, would be lower than that, but then you���re locked into a three-year phone plan at the cost of a small monthly mortgage. I was on a basic cut-rate phone plan myself. Forty bucks a month for unlimited talk and text, no contract, no strings attached. Simple, just the way I like it.
���It���s amazing,��� the girl said, about the phone. ���It even has lidar.���
Lidar, I asked. What was lidar?
She tried to explain it to me���some kind of radar scanning technology that shoots laser beams across the room to create a 3D image���but I wasn���t getting it. ���It���s really cool. My friends and I use it to see how tall we are and move objects around the room.���
���Move objects around the room?��� I asked.
���Virtually,��� she explained. ���In games, you know.���
I nodded vacantly. How to explain to her that I���m a hopeless frugalist? ���Simplicity�����is my rallying cry, taken straight out of the pages of Henry David Thoreau���s�� Walden , which I read back in high school and has been my north star ever since.
It was Thoreau who taught me the concept of economy not as a measure of societal output and consumption, but rather as something we practice when we keep our needs simple and live below our means. From Thoreau, I also learned that the value of something is more than just the price we pay for it. It���s the cost of the time we put into earning the money to pay for that item���time that we could use doing something else.
After Thoreau, it was a natural progression to teachers like Warren Buffett and Jack Bogle, who taught me the importance of investing in low-cost index funds, avoiding fees like the plague and letting the market do the work for me, instead of paying up for people who think they can outsmart a random walk down Wall Street.
But I wasn���t sure it would do any good getting into all this with the young lady on the other side of the plexiglass, plus other people were waiting in line. She rang up my charging cable, put it in a bag and I walked away. I was thinking about that iPhone 13 Pro, how beautiful it was, all the things I could do with it. I could measure just how short my girlfriend Rachael is���she is really short. I could move things around the room. Virtually, of course.
But then I thought about the monthly payment and my ancient plain-black phone seemed just fine as it was.
Rock in my hand, I pushed through the glass doors of the consumeristic madhouse and, like Chief Bromden, out into freedom.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� is forthcoming in early 2022 from Blydyn Square Books. Jim blogs at
PeaceableMan.com
. Check out his previous articles.The post Only an Eight appeared first on HumbleDollar.
March 10, 2022
Don���t Be Deceived
AT FIRST GLANCE, personal finance might appear to have nothing in common with the world of personal fitness. I���d argue otherwise.
Perhaps the clearest parallel is between the gains from diligent investing in low-cost index funds and the gains from proper diet and exercise. Both are hardly noticeable at first and, as a result, there���s a temptation to stray. But if we continue the process of saving and investing���or eating correctly and exercising���we can see tremendous gains over time.
There is, however, another analogy���one I recently came across in an article discussing the rampant use of steroids in the fitness industry. The use of anabolic steroids among bodybuilders is widely known. But did you know that many famous fitness social media influencers, and even some of our favorite Hollywood stars, have likely bulked up using performance-enhancing drugs? The short-term gains are remarkable, though they mask significant longer-term health costs.
Many fans don���t realize that these fitness gurus are effectively lying and cheating their way to profits. For average folks, the consequence is severe disappointment when they don���t enjoy results similar to those they emulate.
As a 40-year-old who has worked out regularly since he was 16, I can attest that the first decade in the gym produced little result, and it was discouraging. If the Army didn���t force me to exercise continuously, I probably would have quit and never have realized some of my best fitness gains���many of which have only become obvious in my third decade working out.
This same integrity issue afflicts the financial services industry. What we see online and on TV is rarely indicative of reality. The amount of investor assets that some CNBC pundit manages is akin to the number of followers a fitness guru attracts. Neither metric actually measures performance. No one should confuse being good at selling with being good at investing, and yet the financial media and excellent marketing would have us think otherwise���while also hoping we forget that few of these pundits outperform a simple index fund over time.
In personal finance, as in personal fitness, there���s no legitimate way to get ahead quickly. Slow and steady hard work compound��over decades. Cheating to accomplish better results won���t work. But that���s good news because, in the end, the journey itself is as rewarding as the destination���and perhaps more so.
Perhaps the clearest parallel is between the gains from diligent investing in low-cost index funds and the gains from proper diet and exercise. Both are hardly noticeable at first and, as a result, there���s a temptation to stray. But if we continue the process of saving and investing���or eating correctly and exercising���we can see tremendous gains over time.
There is, however, another analogy���one I recently came across in an article discussing the rampant use of steroids in the fitness industry. The use of anabolic steroids among bodybuilders is widely known. But did you know that many famous fitness social media influencers, and even some of our favorite Hollywood stars, have likely bulked up using performance-enhancing drugs? The short-term gains are remarkable, though they mask significant longer-term health costs.
Many fans don���t realize that these fitness gurus are effectively lying and cheating their way to profits. For average folks, the consequence is severe disappointment when they don���t enjoy results similar to those they emulate.
As a 40-year-old who has worked out regularly since he was 16, I can attest that the first decade in the gym produced little result, and it was discouraging. If the Army didn���t force me to exercise continuously, I probably would have quit and never have realized some of my best fitness gains���many of which have only become obvious in my third decade working out.
This same integrity issue afflicts the financial services industry. What we see online and on TV is rarely indicative of reality. The amount of investor assets that some CNBC pundit manages is akin to the number of followers a fitness guru attracts. Neither metric actually measures performance. No one should confuse being good at selling with being good at investing, and yet the financial media and excellent marketing would have us think otherwise���while also hoping we forget that few of these pundits outperform a simple index fund over time.
In personal finance, as in personal fitness, there���s no legitimate way to get ahead quickly. Slow and steady hard work compound��over decades. Cheating to accomplish better results won���t work. But that���s good news because, in the end, the journey itself is as rewarding as the destination���and perhaps more so.
The post Don���t Be Deceived appeared first on HumbleDollar.
Driven to What?
IN THE FIRST WEEK of March, prices for regular unleaded gas sprinted past $5 per gallon in Ventura County, California. Last week, a station I pass on my way to work increased its price three times in 36 hours. Before work on Thursday, March 3, the price was $4.89 per gallon. By the end of that same day, the price was up to $5.09. When I left work on Friday, March 4, the price had been jacked up again, this time to $5.29.
As I write this post on Wednesday, March 9, the price has ticked up to $5.69 per gallon. That’s an increase of 80 cents, or 16%, in less than a week.
The last time I saw prices over $5 was July 2008. While I don’t remember adjusting my habits when prices hit $4 or $4.50 in 2008, there was something about the $5 threshold that led me and many others to change our daily routine. With 2022 prices looking like they’ll be over $5 per gallon for an extended period, I’m curious to see when and how consumers will change their behavior this time around. Here’s what I’ll be watching for:
Wading into the carpool. In 2008, I commuted 50 miles roundtrip. While I lived close to a handful of my coworkers, we all preferred to drive solo most days. But when prices touched $5 per gallon, a group of us started to carpool a few days per week. With continued COVID worries and many people working remotely, carpooling options may be limited in 2022. But if prices continue to rise, I suspect many will start sharing commute time with others.
Pricing SUVs. In 2008, demand for gas-guzzling sports utility vehicles dropped dramatically in our area. I had two friends who sold Ford Expeditions around this time. Both struggled to sell these behemoths. One had such a hard time selling his SUV that he seriously considered giving it away. Ultimately, both sold them for a few thousand dollars, which was extremely low relative to both their Kelley Blue Book value and what they’d paid a few years earlier. With annual vehicle price inflation still running at about 30%, it’s hard to imagine there will be a major drop in SUV prices. But if we’re soon looking at $6 or $7 per gallon gas, consumers may be less keen to upsize their vehicles.
Minding the gap. For my wife and me, the cost of filling our tanks will be about $150 per month more than in December 2021. With others facing similar—and, in some cases, higher—cost increases, it will be interesting to see how consumers reduce spending in other areas to offset this higher fuel cost. It seems likely that many will cut back on eating out, as well as limiting trips to Starbucks. I can also see consumers cutting a streaming service or two to help close their monthly budget gap.
As I write this post on Wednesday, March 9, the price has ticked up to $5.69 per gallon. That’s an increase of 80 cents, or 16%, in less than a week.
The last time I saw prices over $5 was July 2008. While I don’t remember adjusting my habits when prices hit $4 or $4.50 in 2008, there was something about the $5 threshold that led me and many others to change our daily routine. With 2022 prices looking like they’ll be over $5 per gallon for an extended period, I’m curious to see when and how consumers will change their behavior this time around. Here’s what I’ll be watching for:
Wading into the carpool. In 2008, I commuted 50 miles roundtrip. While I lived close to a handful of my coworkers, we all preferred to drive solo most days. But when prices touched $5 per gallon, a group of us started to carpool a few days per week. With continued COVID worries and many people working remotely, carpooling options may be limited in 2022. But if prices continue to rise, I suspect many will start sharing commute time with others.
Pricing SUVs. In 2008, demand for gas-guzzling sports utility vehicles dropped dramatically in our area. I had two friends who sold Ford Expeditions around this time. Both struggled to sell these behemoths. One had such a hard time selling his SUV that he seriously considered giving it away. Ultimately, both sold them for a few thousand dollars, which was extremely low relative to both their Kelley Blue Book value and what they’d paid a few years earlier. With annual vehicle price inflation still running at about 30%, it’s hard to imagine there will be a major drop in SUV prices. But if we’re soon looking at $6 or $7 per gallon gas, consumers may be less keen to upsize their vehicles.
Minding the gap. For my wife and me, the cost of filling our tanks will be about $150 per month more than in December 2021. With others facing similar—and, in some cases, higher—cost increases, it will be interesting to see how consumers reduce spending in other areas to offset this higher fuel cost. It seems likely that many will cut back on eating out, as well as limiting trips to Starbucks. I can also see consumers cutting a streaming service or two to help close their monthly budget gap.
The post Driven to What? appeared first on HumbleDollar.
Paying for Aging
HERE’S A SOBERING statistic: It’s estimated that 50% to 60% of 65-year-olds will require long-term care at some point in their lives. This is defined as assistance with activities of daily living—things like taking a bath, dressing oneself, and maintaining bowel and bladder continence. How’s that for something to look forward to?
Such care isn’t cheap. By some estimates, the average 65-year-old can expect to incur $138,000 in long-term-care (LTC) expenses, with half of that cost borne by families. Mind you, this is just the average, which includes those who will never need long-term care. For those who do shell out, the average lifetime cost is closer to $266,000.
Long-term care is a classic example of what retirement expert Wade Pfau has referred to as a spending shock. If you don’t account for such spending shocks, they could easily derail an otherwise well-planned retirement.
Without delving into too much detail, the following are the primary ways retirees deal with LTC expenses:
Self-funding followed by Medicaid. Once personal assets are spent, Medicaid picks up the expense. This is the default option and also the most common approach in the U.S.
Traditional long-term-care insurance. Unsurprisingly, LTC insurance is expensive. Policies are not standardized and can be quite complicated. While the history of LTC insurance is blighted, this is clearly one option.
Hybrid policies. These life insurance or tax-deferred annuity policies include the ability to withdraw funds for LTC expenses. This is another option—but a complex one. You’ll need to read the fine print carefully.
I propose a fourth option, which is far simpler than the second and third options above. It also addresses another major risk—perhaps the risk—in retirement, namely longevity risk.
My proposal centers on deferred income annuities (DIAs), also known as longevity insurance or—if purchased with retirement account money—as a qualified longevity annuity contract. I believe DIAs could play a significant role in addressing the risk of long-term care in retirement.
Don’t let the names fool you. This is just a bread-and-butter income annuity with one quirk: The annuity doesn’t pay out immediately, but only after a delay. For example, you could buy a DIA at age 50. In exchange for a onetime lump-sum payment, you’d receive an income stream for life. That income stream wouldn’t begin until, say, age 75.
Why would this make sense for long-term care? The risk of needing care rises in lockstep with age. The incidence of Alzheimer’s disease, for example, begins to skyrocket after age 80. When you are most likely to require care, a DIA could be there to help pay for it.
Longevity risk is the possibility that a very long retirement depletes our financial resources. Put simply, it’s the risk of running out of money before we run out of breath. The longer we live, the greater the risk that this will happen.
A spending shock late in retirement—such as one member of a married couple requiring nursing home care—could exacerbate longevity risk for the surviving spouse. A DIA could not only help defray the cost of long-term care, but also provide an income floor should the couple’s savings become depleted.
Because the annuity’s payout is deferred until age 75, mortality credits—the secret sauce of annuities—are maximized. Put bluntly, those who die before 75 don’t receive a cent, which leaves far more generous payouts for those who live longer than 75. These “survivors” are precisely the ones who face the greatest financial risks from long-term care and longevity.
Still, you may ask: What if I need long-term care before I reach 75? In this scenario, your portfolio would indeed be called upon to fund long-term-care costs without the help of the DIA—at least until 75. But such a spending shock could more easily be absorbed by the larger portfolio available earlier in retirement. The stress on those assets would then be relieved at 75 by the annuity’s payout, providing the beneficiary reaches that age.
Another reason to consider this approach: If you have a health issue that precludes you from qualifying for LTC insurance, or makes such insurance prohibitively expensive, a DIA requires no such underwriting.
Some other advantages of DIAs: They are far simpler to understand than long-term-care insurance or hybrid policies. Remember, also, that slightly less than half of the population won’t require any long-term care. If you’re in that lucky pool, a DIA is not money wasted. It will help fund your retirement late into your golden years, while reducing the worry of depleting your portfolio. The added income from the annuity could also help with rising costs late in life, during what is called the “spending smile.”
For those of greater means, Medicaid is less likely to play a role in paying for long-term care. This well-to-do cohort is also best positioned to afford a DIA to partially fund retirement in the first place.
Finally, while Medicaid is always the default option, the quality of care it provides may be less than desirable. It is a welfare program, after all.
John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition. Follow John on Twitter @JohnTLim and check out his earlier articles.
Such care isn’t cheap. By some estimates, the average 65-year-old can expect to incur $138,000 in long-term-care (LTC) expenses, with half of that cost borne by families. Mind you, this is just the average, which includes those who will never need long-term care. For those who do shell out, the average lifetime cost is closer to $266,000.
Long-term care is a classic example of what retirement expert Wade Pfau has referred to as a spending shock. If you don’t account for such spending shocks, they could easily derail an otherwise well-planned retirement.
Without delving into too much detail, the following are the primary ways retirees deal with LTC expenses:
Self-funding followed by Medicaid. Once personal assets are spent, Medicaid picks up the expense. This is the default option and also the most common approach in the U.S.
Traditional long-term-care insurance. Unsurprisingly, LTC insurance is expensive. Policies are not standardized and can be quite complicated. While the history of LTC insurance is blighted, this is clearly one option.
Hybrid policies. These life insurance or tax-deferred annuity policies include the ability to withdraw funds for LTC expenses. This is another option—but a complex one. You’ll need to read the fine print carefully.
I propose a fourth option, which is far simpler than the second and third options above. It also addresses another major risk—perhaps the risk—in retirement, namely longevity risk.
My proposal centers on deferred income annuities (DIAs), also known as longevity insurance or—if purchased with retirement account money—as a qualified longevity annuity contract. I believe DIAs could play a significant role in addressing the risk of long-term care in retirement.
Don’t let the names fool you. This is just a bread-and-butter income annuity with one quirk: The annuity doesn’t pay out immediately, but only after a delay. For example, you could buy a DIA at age 50. In exchange for a onetime lump-sum payment, you’d receive an income stream for life. That income stream wouldn’t begin until, say, age 75.
Why would this make sense for long-term care? The risk of needing care rises in lockstep with age. The incidence of Alzheimer’s disease, for example, begins to skyrocket after age 80. When you are most likely to require care, a DIA could be there to help pay for it.
Longevity risk is the possibility that a very long retirement depletes our financial resources. Put simply, it’s the risk of running out of money before we run out of breath. The longer we live, the greater the risk that this will happen.
A spending shock late in retirement—such as one member of a married couple requiring nursing home care—could exacerbate longevity risk for the surviving spouse. A DIA could not only help defray the cost of long-term care, but also provide an income floor should the couple’s savings become depleted.
Because the annuity’s payout is deferred until age 75, mortality credits—the secret sauce of annuities—are maximized. Put bluntly, those who die before 75 don’t receive a cent, which leaves far more generous payouts for those who live longer than 75. These “survivors” are precisely the ones who face the greatest financial risks from long-term care and longevity.
Still, you may ask: What if I need long-term care before I reach 75? In this scenario, your portfolio would indeed be called upon to fund long-term-care costs without the help of the DIA—at least until 75. But such a spending shock could more easily be absorbed by the larger portfolio available earlier in retirement. The stress on those assets would then be relieved at 75 by the annuity’s payout, providing the beneficiary reaches that age.
Another reason to consider this approach: If you have a health issue that precludes you from qualifying for LTC insurance, or makes such insurance prohibitively expensive, a DIA requires no such underwriting.
Some other advantages of DIAs: They are far simpler to understand than long-term-care insurance or hybrid policies. Remember, also, that slightly less than half of the population won’t require any long-term care. If you’re in that lucky pool, a DIA is not money wasted. It will help fund your retirement late into your golden years, while reducing the worry of depleting your portfolio. The added income from the annuity could also help with rising costs late in life, during what is called the “spending smile.”
For those of greater means, Medicaid is less likely to play a role in paying for long-term care. This well-to-do cohort is also best positioned to afford a DIA to partially fund retirement in the first place.
Finally, while Medicaid is always the default option, the quality of care it provides may be less than desirable. It is a welfare program, after all.
John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition. Follow John on Twitter @JohnTLim and check out his earlier articles.The post Paying for Aging appeared first on HumbleDollar.
