Jonathan Clements's Blog, page 24

A puzzling situation.

There is something of a tradition when family is at our place on Cape Cod and it puzzles me. Actually it is picture puzzles. 

A card table is set up and the puzzle pieces laid out. The puzzle is assembled on the three foot square coffee table. The puzzles are 1,000 pieces or more and are photographs of houses, woods, streams with many of the pieces looking very much alike. I guess that why it’s a puzzle.

Connie, our daughter and two granddaughters spend hours - days -  on this task, especially Connie who, once she starts, just keeps going. Her patience with this task seems endless. She also has the determination to read at least two books a week. 

I’ve given it a try once or twice, picked up a piece now and then. On occasion I had success finding where the piece fit. But I quickly realized I had no patience for this level of detail and as I see it, contrary to an enjoyable pastime, it’s a recipe for frustration and stress. 

Eventually they complete the puzzle and we take a picture of the result. As far as I know, no puzzle has been assembled more than once. One year there was a piece missing - the task was futile. The best laid plans. 

I called the puzzle company and asked if they could send the missing piece. They were very apologetic, but couldn’t send one piece, they sent a new puzzle though. Come to think of it, asking for one piece was an unreasonable request. Back to the coffee table. 

Some evenings we all play BINGO for prizes I provide. That too is a bit frustrating. I look at the BINGO card and it reminds me of a spreadsheet. 

It should not come as a surprise to regular HD readers, my patience for dealing with detail is limited. Those of us so afflicted must focus on the big picture and long-term financial goals and a bit of luck while recognizing we may not be optimizing all possible opportunities - that is making mistakes. 

In the end though what matters is that all the pieces come together to form a satisfying picture of one’s life. I may have a few pieces missing and an extra share of good fortune, but as Frank sang, “I did it my way.”

As you muddle though all the financial complexities and retirement planning decisions, know there is hope even for ye with little tolerance for detail. Keep your eye on the prize. 

This is not a recommended strategy though - especially if you are a puzzle person🤑

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After Loss, Love Again

I belong to a club I never wanted to join: women who have outlived their husbands. Like me, millions of baby boomer women, and now Gen Xers too, will face life without their long-term partner.

Thankfully, today’s widows have more choices than our great-grandmothers did. Some of us embrace living solo. Others are surprised to find companionship again, sometimes even love. That next chapter can be sweet, but it's also financially complex.

I know this firsthand. Eleven years after my husband died, I remarried at age 71. But before saying “I do” again, my new husband and I worked through a host of financial and emotional questions—just like the ones I now offer below.

Money matters more than you might think. A LearnVest survey found that financial issues are more than twice as likely as sex to cause tension in a relationship. Talking honestly about money isn’t just smart—it’s essential.

In a study I co-led of over 4,000 widows from around the world, nearly one-quarter had re-partnered—through marriage or long-term relationships. What was their most significant piece of advice? Take your time, talk honestly, and don’t overlook the money questions.

Here are 10 to get you started:

Have you and your new partner had a discussion about financial matters yet? It’s tempting to avoid tough topics early on, but clarity builds trust.Who pays for what? Will you split expenses according to an agreed-upon method? Use a joint account? Keep finances separate?Where will you live, and whose name is on the deed or lease? Moving in together is exciting, but it's worth considering the legal and financial implications.Will you sell your home or keep it? If you sell, who gets the proceeds? Will you buy something together?What are your partner’s retirement plans? Do you both want to travel, volunteer, or downsize? And can you afford it?Will you merge investments or keep them separate? Financial independence can be healthy, but transparency is essential.What if your partner earns far less or has more debt? Have you considered whether your partner’s net worth is significantly different from yours? Be honest about expectations and boundaries.Have you discussed healthcare needs and costs? Illness or caregiving roles can come suddenly. Will you support each other?What are the financial responsibilities for children or aging parents? Love might be free, but families may bring financial obligations.Have you considered a cohabitation or prenuptial agreement? These conversations may protect both you and your loved ones.

Here’s what some real-life widows shared with me during our research:

“I didn’t bring up the money stuff because I thought it would hurt our relationship . . . We split up later anyway over the money.”

“Be careful with your finances. Don’t allow anyone to take advantage of you because you are lonely or sad.”

“Understand each other’s financial stability and responsibility. Don’t wait to be surprised later that your partner has huge credit card debt!”

You’ve already walked through grief. If you’re fortunate enough to love again, protect your heart and your wallet. Don’t rush. Ask the right questions. And if it feels too overwhelming, a trusted and skilled professional, especially one familiar with widowhood, can help you navigate the journey with clarity and compassion.

Starting the Money Talk

Don’t try to cover everything at once. Begin gently. A good opening might be, “I’ve been thinking about my financial future. I’d like the two of us to talk about that as we look toward our future together.”

Choose a relaxed time when you’re both comfortable, such as Sunday evening after dinner. Keep your first conversation short, around 30 minutes. Tackle just one or two questions. Then try another talk next week. This slow approach can reveal what matters most to each of you—and whether you're truly financially compatible.

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Another interesting article on Social Security Claimin

A recent article by Michael Finke in Think Advisor discusses some anecdotal evidence he has been hearing about recent trends in SS claiming. Worry about a reduction in benefits apparently is leading some retirees to claim their benefits earlier than might be expected given their wealth.  I have to admit that this year's discussions around SS funding and administration have given me pause.

Two things about the article. It was published in a professional journal targeting financial  advisors. Second, the discussion targets more affluent retirees, who can afford professional advice, as well as delaying their SS.  I think the discussion  is useful information for new or future retirees still considering when to claim SS.

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Lucky Us and the Generational Divide

Sometimes, the big picture that frames your life can just happen without much thought, mostly by luck. I guess not everyone who has good fortune like this will admit anything other than hard work and true grit got them to where they are now. Take myself; I claim some credit for what I've achieved, but I had a lot of good tailwinds that certainly helped immensely.

I was part of the last UK generation eligible for free higher education. I entered the housing market when prices were still reasonable and just before the property market ballooned. During my young adulthood, the UK economy experienced a strong economic boom, well above historical norms. I had no input or influence on these things; they just happened at the right time, and I was in the right place to benefit from the lucky tailwinds I stumbled into.

Recognizing luck and external factors doesn't diminish your achievements. I believe in myself it has fostered a humbleness that extends to being able to recognise the much harder conditions the current generation has encountered in trying to thrive financially.

There seems to be a very judgmental narrative in play, for reasons I don't understand but possibly a lack of awareness of systematic shifts in the world. I've had a lot of contact with today's generation, through employing them, to the children of friends and my own children, and while I have great reservations over the digital/influencer social media elements of the group, I don't recognise the generational stereotype used to depict them—lazy, no ambition, financially irresponsible, etc.

Of the millennials I know, most have identified the need to purchase over renting and have made a first step onto the property market or are renting and trying to save for a deposit. The landscape around pensions has changed to an emphasis on personal responsibility over employer responsibility.

They face challenges I never did, like inflated property prices, less security in employment, and tighter restrictions around lending. The shadow of covid loomed large and stunted their early social and educational life. With these challenges, I can understand why emotional wellbeing is an issue; when you have little control over your future, it must manifest somehow.

I try to mentor, support and give helpful advice where I think it will be useful and where I have some competence or lived experience to share. I think it's a duty to help a generation that has certainly not had the tailwinds that eased my journey. I would urge you to take time to gain more understanding of a generation that has had a hard start to adulthood.

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Which really matters? Marginal or effective tax rate? Just show me how much I get to keep says Quinn.

The recent tax legislation triggered a thought. Do taxpayers understand the difference between their marginal tax rate and effective tax rate?

I see the focus on the tax on the next dollar earned - marginal tax rate as opposed to what I view as actually mattering - the effective tax rate. 

There is a big difference between their two. Are seniors overestimating the net impact on the new $6,000 deduction? 

My associate Gemini explains it like this:

Marginal rate is the speed limit on each segment of a road. You might have different speed limits (tax rates) on different parts of your journey (income levels).
Effective rate is your average speed for the entire trip. Even if you hit a high speed on one segment (high marginal rate on your top income), your overall average speed (effective rate) will be lower because you also drove slower on other segments (lower marginal rates on your initial income).

I see the effective tax rate as the most relevant. The average speed reflects how long it takes to reach your destination and may also reflect better driving efficiency. 

Would I turn down a bonus or raise because it pushes me into a higher tax bracket? I never did. Last year my effective tax rate was 18% - less than my highest bracket do to deductions, our ages and tax free income.  While a large income increase may affect that number, the effective rate and not the marginal rate seems most important in terms what percentage of my income I get to keep. 

I have read the marginal tax rate tells you the tax impact of your next financial move. But is that really accurate? Isn’t the only measure of the net tax impact your effective rate? Shouldn’t my next move consider the real bottom line? 

Since I claim no expertise on taxes or tax planning, let’s discuss. 

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Room to Maneuver

ON DEC. 31, 1759, Arthur Guinness signed a lease to take over a defunct brewery in Dublin. What was unusual was the lease’s term: 9,000 years.

It didn't take long before Guinness and his landlord both realized they’d made a mistake and agreed to end the lease. Guinness needed more space, and the landlord realized he’d neglected to account for inflation. The rent was fixed at £45 annually for the entire 9,000 years.

The Guinness case is notable because it’s so extreme, but it illustrates an important point: In making financial decisions, we should always look for ways to maintain flexibility. What does this mean in practice?

When it comes to your portfolio, I’d start by asking two questions: Are you diversified between asset classes, and are you diversified within asset classes? There are other considerations, but these two decisions—according to the data—generally have the most impact on both risk and return.

In choosing among asset classes, what’s most important is to look for investments that, ideally, would not all decline together during a downturn. The two asset classes I recommend are stocks and bonds, because they often move in opposite directions. But those aren’t the only options. Real estate, for example, could be very helpful.

Decisions within each asset class are less important but nonetheless deserve attention and can make a portfolio more flexible. On the stock side, I almost always recommend index funds, but you might also consider an allocation to one of the newer, lower-cost direct indexing services. These indexing services aren’t appropriate for everyone, but they can deliver added flexibility from a tax perspective.

On the bond side, I’d avoid total-market funds. While they are diversified, their duration exposes them to risk. In 2022, these funds lost 13%. Instead, I’d opt for a broad mix of funds. Most important, I’d include one or more short-term funds in the mix. In 2022, most short-term funds lost less than 5%. For additional flexibility, you might also add some individual bonds to help insulate the value of your bond holdings should rates rise or fall.

Looking beyond your portfolio, how else can you add flexibility to your finances?

Tracking spending is no one’s favorite activity, and the process of categorizing transactions can be tedious. One way to simplify this process is to categorize spending into a few major categories. I believe what’s most important is to see how your spending breaks down between fixed costs and discretionary expenses. Doing this will tell you how much flexibility you have to reduce spending, if need be, in future years and could provide valuable peace of mind.

How might you achieve financial flexibility when buying a home? Suppose you can make a down payment that’s larger than the required minimum. If you make a larger down payment, you’ll have less in the bank but will have smaller monthly payments. On the other hand, if you make a smaller down payment, then you’ll have more in the bank but have larger ongoing payments. Each option provides some flexibility. Which is better? In my view, making a larger down payment is the better bet, because lower payments could provide welcomed flexibility down the road.

You can also incorporate flexibility into your charitable plans. If you employ a donor-advised fund (DAF), you can front-load multiple years of contributions during years when your tax rate is high. By doing so you could then use the DAF as a charitable piggybank from which to make contributions over any number of subsequent years.

What about insurance? If you have children and are looking to buy life insurance, don’t feel you need to choose just one policy. Recognizing that your need for insurance will likely decline over time—as your savings grow, your children finish school and your mortgage balance shrinks—you might set up a ladder of sorts, with more coverage during your early career years. Or look for a policy that allows you to reduce the coverage level over time.

Buying a new car? When you do the math, leasing generally isn’t the best option. But that doesn’t account for the non-quantitative aspects of the decision. Those who prefer leasing cars cite several benefits. Leasing always allows you to drive a new car with the latest safety features. New cars are known to be more reliable and require less time in the shop. Leasing can also make sense if you’re considering an electric car, where the technology—and thus the resale value—can quickly change. By leasing, this risk becomes a non-issue. In short, leasing might not be the “right” answer according to the calculator, but it may provide the most flexibility.

Maintaining flexibility can be valuable even when it doesn’t seem necessary. Consider the universities that have faced funding pressure from the federal government this year. Some of them have been forced to conduct fire sales of their illiquid private equity holdings. There’s no way these universities could have predicted this funding crisis. But if they allocated more to standard, publicly traded investments when structuring their portfolios, they would have a buffer against any potential unknowns.

It’s natural to want to make logical financial decisions. But because the future is full of unknowns, it’s important to avoid being too strictly wedded to the math. I believe there are two answers to every financial question: what the numbers say and your feelings about it. Both answers deserve an equal vote when making a financial decision, and you shouldn’t worry if you prioritize flexibility over what is deemed “optimal.”

In my town, the big political debate these days is whether to allow overnight parking. So, things are rather tame. Nonetheless if you were to visit the mayor’s office, you’d find that behind her desk is a door leading to a narrow staircase. It’s an escape hatch, allowing the mayor to exit directly from her second-floor office to an out-of-the-way door at the back of the building. I’m not sure that any mayor has ever had to use this exit, but I imagine there have been times when they’ve been grateful to know it was there.

The bottom line: Finding ways to maintain flexibility, even when the risks don’t seem high, can pay dividends in more ways than one.

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 X @AdamMGrossman and check out his earlier articles.

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Increased Deduction for Seniors

I have been following the passage of the new bill signed today. I thought the deduction was 6K for couples, but it is per person. Here is information on the specifics from an AI source:

The (bill) includes a significant tax break for older Americans, specifically a new $6,000 "bonus" deduction for those 65 and older. This deduction is targeted at those with modified adjusted gross incomes up to $75,000 for individual filers and $150,000 for joint filers. The deduction phases out at higher income levels, and it is not available for those earning more than $175,000 (or $250,000 for couples).

My wife and I will be able to take full advantage of this deduction. I will be increasing my wife’s Roth conversions by another 12K and still stay in the 12% tax bracket. This will assist in trying to convert the total amount of her traditional IRA before she runs 70 in 3 1/2 years. The deduction is through 2028. I just hope we won’t pay for it in the future with reduced Social Security checks in the future, as it has been reported these payments will cause the trust fund to run dry six months earlier then current projections.

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Selling our business – contemplating what’s next

So, we have signed the contracts. We have advised all our staff. We are talking to our customers every day about the sale, about the new owners and how it will be “business as usual”, how they can expect the same service that they have been used to.

We have already received lots of really positive and quite humbling feedback from our customers. Even those that could be challenging at times have been really generous in their praise and thanks.

Any many comment – “You must be happy!?” And I think…..”I’m not sure how I feel.”

When we decided to sell the business, it was primarily driven by my co-owner Dad  reaching 77. With each year his stamina reduces a little more. Despite having really good overall health for his age, he is able to do less, so I have to do more. This has also drained my energy reserves. At the moment we both enjoy the business, but feel very worn out. So a sale at the time felt right (and still does). It’s financially in good shape, perhaps the best it’s been for the last 9 years. Our staff have been with us for a while, they know what they’re doing and are well placed to help the new owners.

But my Dad and I are both in a weird “twilight zone”. Our aim has been to sell our business. We have a buyer that seems really well suited to the business and is very enthusiastic. On paper, we should be over the moon, overjoyed at our situation. But I think both of us are pondering ….. what comes next? For my Dad, he tried to retire at 68, and it didn’t work out. He really needed to continue with the engagement and activity that comes with working, particularly running a small business. He knows that retirement is coming at the right time, but I don’t think he can imagine what a normal Tuesday will look like. How does he keep both body and mind stimulated, but also give himself more time to rest? I’m sure the answer is there, but he really doesn’t know yet.

For me, it’s a great opportunity to try out something new. At 51 I feel young and energetic enough to do something new and different. But I have no idea what that might be? My total focus for the next 3 weeks is to provide a really good handover to the new owners, so I’m not putting any effort into my next phase. But soon I’ll have to work out what that might be, and that’s a confronting proposition.

To make this business a success, we have had “heart and soul” invested daily. We have gone home cold, wet, dirty, frustrated and worn out. And we don’t regret any of it. But when you’re so committed to something, the thought of that not being there is pretty odd.

I imagine that this feeling is what a lot of HD readers have felt before retirement, leaving behind a life that they knew so well, entering a new unknown. We will both find a new path in life and I’m sure it will be positive for both of us. But right now, the next step feels confronting ……… and a little scary.

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Inflation, Through a Glass Half Full.

We hear a lot of doom and gloom about inflation these days.  Soaring prices,  the sigh every time we fill up the tank. On my side of the pond inflation seems to be receding as a major problem. Fingers crossed it stays in its box and doesn't jack in the box back out. But what if I told you that inflation is actually a benevolent force?

I don't want to belittle the genuine hardship that the recent bout of inflation has caused to many families around the world but I was just thinking…. again. Wouldn't it be nice to find a few smiles and a little crumb of lightheartedness among the relentless price increases?

It doesn't seem too long ago when a family-sized bar of chocolate was an impulse buy. Those days are a distant memory. I now unwrap mine like a prized gift and nibble it over a couple of days, generally when the grandkids aren't about! but look at the positive, it's forcing us to reconsider our confectionary cravings. And what's the result? A decline in spontaneous chocolate consumption! Think of it: fewer empty calories, less sugar crashing through your system.  Who needs a diet when the economy is doing the work for you?

I moan to my wife Suzie as we pull up to the petrol pump. I should really stop .Let's reframe this for my wife's sake. Inflation, in its infinite wisdom, is actively encouraging us to embrace walking. Why drive to the shop when a brisk five-minute walk will do the trick? Suddenly, those short car journeys are looking awfully expensive, and your own two feet are becoming surprisingly appealing. You're getting more steps in, breathing fresher air, and saving a fortune on fuel and parking. It's an enforced fitness regime, a green initiative, and a budget-friendly commute all rolled into one. Your step counter is thrilled, and your carbon footprint is shrinking faster than your disposable income.

Then we have that impulse to buy a shiny new gadget or trendy piece of clothing. Inflation is here to cure you of that addiction.  Suddenly every purchase undergoes rigorous scrutiny. Do I really need that artisanal sourdough starter kit? Is that designer coffee table book truly essential for my well-being? The answer, more often than not, is nope! Can do without. Inflation is teaching us the invaluable skill of delayed gratification, It's financial discipline without spreadsheets!

Going out for a meal used to be a regular occurrence? Now It's for special occasions ,dining out has become an exercise in extreme fiscal courage. But never worry, for this is a blessing in disguise! We're rediscovering the joys of home cooking, the cozyness of family dinners around the kitchen table, and the satisfaction of a meal prepared with your own two hands, just don't use too many eggs! Your culinary skills are improving, your waistline is benefiting. Who needs a Michelin-starred restaurant when you have a perfectly good kitchen and a knack for boiling pasta.

So, the next time you find yourself grumbling about rising prices, take a moment to consider the unexpected, but slightly inconvenient, ways inflation might be secretly improving your life. You might just find yourself a little healthier, a little fitter, and a whole lot better at refusing that overpriced chocolate bar.

So there we go: a few brief shout-outs for inflation. Maybe it wouldn't hurt us; possibly, it might even benefit us to sometimes try to see the lighter side of things in a difficult situation. It's certainly helped me with challenges over the price of chocolate.

 

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Debt and taxes and the future, Quinn asks if he is wrong.

I observe the National state of taxes, deficit spending, debt and related interest payments and wonder, is the American view of this fiscal management a reflection of the personal finance habits of too many of us? 

As a nation we don’t live within our means for sure, largely ignore interest payments, and apparently don’t think about our financial future or who will pay the bills some day.

As individuals, that scenario seems to reflect the lifestyle of too many Americans. Am I wrong?

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