Jonathan Clements's Blog, page 28

Not Retired, Just Re-Directed

I'm typing this early in the morning from my cousin's lovely little courtyard garden in London. Everyone is still sleeping, and it's a beautiful, sunny start to the day, perfect for contemplating and drinking coffee. The thought is playing through my mind: although my life is now different, I don't feel "retired.”

My days are certainly different and definitely more enjoyable than when I was working, but I still have that sense of agency and direction that filled my time prior to retirement. I assume it's because I've shed one set of metaphorical clothing and donned another set of comfy leisure clothes, more suited to my new reality of personal choice rather than professional necessity.

Perhaps, although I'm the new guy on the retirement block, that's the answer to this question: retirement shouldn't be an ending, but a continuation of your life journey at a more sedate pace, focused on yourself and your loved ones. With that little thought in mind, I may get ready for a pleasant retirement day tubing through London to the Natural History Museum for a few hours of experiencing the joys of London. I hope you, too, have a lovely, intentional retirement morning, because we only have this one shot at life. Enjoy.

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The Half-Completed Retirement Transition

Warning: this post is more of a rant and a plea for sympathy than it is thoughtful or informative!

So as you know, I retired on July 1. Or did I? I retired from two university systems and was supposed to get one pension check from each starting August 1. On August 1, I got…nothing. And it was my birthday, too!

I already knew I wouldn’t be getting one of the checks that day; my retirement application had been in limbo for a while (not my fault) and is allegedly being processed. But the other one was, I believed, a done deal. I’d received an official letter on May 15: Congratulations on your retirement; your application is complete; here’s how much you’ll get; it will be direct-deposited starting Aug. 1. So while I knew there was a glitch with the second system, I never worried about the first one—until I woke up on my birthday, checked my bank account and saw no pension check.

I got on the phone as soon as the lines opened and explained the situation to the call center rep who answered. She sounded surprised and put me on hold while she checked it out. I was on hold for 15 minutes. “This is not good,” my husband said. She came back and sounded bewildered. Apparently my retirement action had been canceled and completely disappeared from my dashboard like it had never happened. Fortunately for me, the messages from the system, including the May 15 letter, were still all there. “Something isn’t right,” she said. No kidding. She said she’d expedite my case and that someone would call me.  I suffered all day, trying not to ruin my fancy birthday lunch with my fretting.

Finally, in the evening, someone did call me. He’d been in meetings all day trying to figure out what had gone wrong. He’s never seen anything like it. He met with two supervisors that afternoon and they reinstated my retirement action and said I’d get paid on August 8. He was really sorry for the stress and confusion. No one understands how this could have happened.

I’m happy to report that the check did, indeed, arrive on schedule, for the correct amount, and that my dashboard says my next one will arrive at the end of this month. So I think I’m OK with that one, at least. But I’m going to keep checking my account every so often.  I have trust issues now.

As for the other pension, I pinged them on the messaging system last week, as it had been a month since I last heard from them. A supervisor replied and thanked me “for my patience,” said they were still working on it, and hopefully I’d hear something “in the next two weeks.” I have no idea why it’s taking so long. I filed the application for that system on March 3, the earliest day I could for a July 1 retirement.

I don’t know if there’s a lesson here other than that s**t happens, keep checking your accounts because no one cares as much as you do, and if you think something might have gone awry, it probably has. Yikes!

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Outliving Your Money? Let’s Do the Math on Annuities

When you sit down with an annuity salesperson, they’ll probably start with a question that cuts straight to your fears:

“What if you live to 100? Wouldn’t you rather have a guaranteed check every month?”

It sounds comforting — but the truth is, most annuity checks are just your own money coming back to you, with a little interest, minus their cut.

Let’s run some numbers.

Imagine you’re 65 years old with $500,000 in retirement savings. You have two options:

Buy an immediate fixed annuity with a 5.5% payout rate. That means you’ll get $27,500 a year for life, no matter how long you live.Invest in a self-managed portfolio of low-cost ETFs like VOO (S&P 500) or VYM (high-dividend stocks), withdraw 4% in the first year, and adjust withdrawals for inflation. Assume a 6% average annual return.

We’ll run both options over 20 years.

The First 5 Years

YearAnnuity Payment“Balance”*Portfolio WithdrawalPortfolio Balance1$27,500$472,500$20,000$508,8002$27,500$445,000$20,600$517,4923$27,500$417,500$21,218$526,0504$27,500$390,000$21,855$534,4485$27,500$362,500$22,510$542,654

*Annuities don’t actually give you a running balance, but this shows how much of your original $500k is left if you think of the payments as coming from your own principal.

Already you can see the difference — the annuity “balance” steadily drops, while the portfolio balance is growing, even though you’re taking withdrawals.

By Year 20:

Annuity: Still pays $27,500/year, but inflation has eaten away a big chunk of its buying power — that check now feels like only about $15,200 in today’s dollars.Portfolio: You’re taking out over $36,000/year (inflation-adjusted) and still have about $670,000 left in your account.

While a self-managed portfolio often outperforms, annuities do have a place for certain people:

No desire (or ability) to manage investments — some retirees simply don’t want the responsibility or stress.No pension — an annuity can act like a “DIY pension,” covering essential living expenses alongside Social Security.Extreme longevity risk — if your family history suggests you might live into your late 90s or beyond, an annuity can be a form of insurance.Peace-of-mind value — for some, the guaranteed check is worth more than the potential for higher returns.

In other words, annuities are less about beating the market and more about removing uncertainty.

What This Means

Annuity Pros: You’ll never get a “zero balance” notice — the insurance company keeps paying as long as you live. If you make it to 95+, you might come out ahead.Annuity Cons: Payments are fixed unless you buy expensive inflation riders. If you die early, the insurance company wins — your heirs get nothing (unless you pay extra for that option).Portfolio Pros: Lower fees, more growth, keeps up with inflation, full liquidity, and your heirs inherit the remainder.Portfolio Cons: Market volatility means you need a cash buffer and discipline not to sell in a downturn.

The Real Takeaway

The “you might outlive your money” scare works because we humans hate uncertainty more than we hate paying high fees. But with a balanced investment plan, a modest withdrawal rate, and a little patience during market swings, your odds of running out of money are already very low — without locking yourself into an inflexible annuity.

In other words: Some of us can create your own “annuity” — and often, it’ll be bigger, more flexible, and better for your heirs.

These are my thoughts - What did I get wrong?

Note: Research, data and math was AI assisted to help speed up my thoughts.

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Are We an AI-Driven Economy?

We often hear that we are a consumer driven economy, with estimates that consumer spending provides as much as 70% of GDP. I read a recent article by Ben Carlson that indicated that, at least for this year, Big Tech's capital expenditure spending on AI is approaching a similar level. The Bloomberg Magnificent 7 Total Return Index (I had no idea this existed) is up about 39% over the past year, compared to about 19% for the S&P 500. I have no idea where this will go, but it's fascinating to watch.

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Not Qualified to Carry This Anymore

I’m turning into my mother more and more every day. Back when I was taking care of her, she’d hand me her credit card whenever we went shopping. She’d say, “I’m not qualified to carry this anymore.” She was afraid she’d lose it.

Now I catch myself doing the same thing. When Rachel and I go out, I sometimes give her my wallet to toss in her purse. I’m scared I’ll lose it. Since I've retired, I lost my driver’s license in Paris, left my credit card at a restaurant in South Dakota, and who even knows what happened to my prescription sunglasses.

I don’t know if it’s age, distraction, or just bad luck—but at this point, Rachel’s purse is basically my security system. Which is not a great idea, because if we ever lose her purse—especially when we're traveling—we’d both be without credit cards and personal identification.

I’ve lost my wallet twice.

In the 1970s, I went to a Cleveland Indians game at the old Municipal Stadium in Cleveland. The Indians were terrible back then. They had players most fans had never even heard of. The stadium was huge—it held over 70,000 people—but the team was so bad, it wasn’t unusual for them to draw only about 6,000 fans.

At the game I attended, I remember an usher holding a white towel, escorting us to our seats, and wiping them off before we sat down. Because of the low attendance, many of the seats were dirty from lack of use. Six thousand fans could easily get lost in that cavernous stadium.

I don’t know how someone managed to find the wallet I left behind, but somehow, they did. A lady mailed it to my home in California with a note that said, “Indian fans watch out for each other.” I think she felt sorry for me—not just for losing my wallet, but for being an Indians fan.

The second time, my wallet was in my car when it was stolen. I was in my early 20s—old enough to know better. I didn’t even remember my license plate number when the officer asked. That didn’t help.

I told my parents everything—except one detail: the wallet. I was too embarrassed to tell them. A week later, I got a notice from the Post Office. Someone had dropped it in a mailbox, minus the cash.

The 1970s were my lost decade in more ways than one.

Later, someone broke into my first apartment. They stole my stereo, but what really got to me was knowing they had gone through my drawers—those drawers. The ones with my underwear. That apartment had been my first real home. But I moved out soon after. I felt violated, and I just couldn’t live there anymore.

My wife and I are frequent visitors to this beach town in San Diego. One time, when she was off doing her own thing, I took off and drove 20 miles south and inland to that same apartment building. It now has bars on all the windows and graffiti on the walls. Fifty years later, it looked like the crooks were still in charge.

But I haven’t given up on people.

One day, I was at the bank when a man walked in and asked if anyone drove a black Ford Fusion. He had accidentally backed into my car. I expected the worst, but it was just a scratch. I told him not to worry—I’d take care of it with some touch-up paint. He insisted on paying. Showed me his ID. Tried to hand me $300. I refused. We settled on $100.

That kind of honesty still means something.

For a long time, I thought my mom handed me her credit card because she was forgetful. Now I understand—it was trust. She trusted me to look after the things she was afraid of losing.

We may lose things as we get older—wallets, sunglasses, even our sense of certainty. But if we’re lucky, we hold on to the people who help us feel safe.

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Have you seen your money lately?

I just realized the only time I see my money is when I withdraw from an ATM. Ye gads, my wealth accumulated over 70 years is all in cyberspace.

I am at the mercy of computer systems and the folks who run them - and maybe someone in a tiny village in Mongolia. Everything hinges on a programing language which are all Greek to me. 

Even my last ATM attempt didn’t go well. There is only one branch of my bank on the Cape. I have to drive twenty minutes to get there. I walked into the lobby and found the ATM out of order. A teller said the drive up was working so off I go only to find at the moment it only dispenses $100 bills. I go back to the lobby minutes later and they have closed. Tapping on the door I attract the teller who signals through the glass she can’t unlock the door effectively saying “tough luck take $100 bills if you want cash.”

I know my online IRA and brokerage accounts say I own shares of stock, and mutual funds, but I don’t have any certificates, I have no proof. My wealth could go poof with a systems flaw.

I think I have cash in those accounts too. At least that’s what the website says. Where exactly is the Money Market? Have you ever visited?

Our several bank accounts are … where? Nowhere or somewhere…I hope. No passbook. If I lost my iPhone I’m broke because I can’t access my bank or investment firms app - or the ATM.  Is my debit card proof of anything? I think not. 

I have deeds, legal pieces of paper, showing I own my houses and cars, but not a visible “real” thing backing up all our investments. You can’t even get savings bonds to lock away in a safe deposit box anymore, instead you use Treasury Direct where your bonds are…

It seems wealth is nothing more than our ID, password and the last four digits of our social security number. 

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Tariffs and PPP (People Purchasing Power)

Since Trump's return as POTUS everyone is inundated with the news about Trump's tariffs on just about every country in the world. His reasoning is that other counties have always taken advantage of the USA, and it is time that the USA rights the imbalance of trade.  He has said that he has always believed in tariffs, harking back to before 1913 when income tax was implemented. Of course, any thinking person would know that these tariffs are paid by the importers, and eventually by the consumers if they are passed on.  Since 1913, the world has undergone phenomenal changes that have affected all aspects of life, leading to the current global economic situation, where it appears that no country can stand alone. In my lifetime, I have seen China, once referred to as a "paper tiger" bustling with people on bicycles, to a current tech-developed world with all its trimmings. This is also true for many developing countries as the world turns.

What I have not seen or heard from economic pundits is the role of people purchasing power (PPP) on trade imbalance. It has always been my belief that the concept of supply and demand is dependent on PPP, viz. the ability of people to have the means to buy what they want.  Thus, in my view a trade imbalance may always occur if a country with a small population sells to a country with a large population, regardless of the PPP of each of the countries.  In the developed western countries where the affluence/living standard is similar but not the population, should one not expect a trade imbalance?  For example, Canada's population of 40M selling to the USA with a population of 330M will, undoubtedly, result in a negative trade balance for the USA with a larger population whose need/consumption is greater.  What about poorer countries whose population does not have the means (PPP) to buy items beyond those necessary for survival? Those countries are not exempted from Trump's tariffs.

Since I am not an economist, am I missing something in my thought process in this arena?

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Data’s Double Edge: Why Spreadsheets are Both a Lifeline and a Possible Lie

Can you even begin to imagine the confusion and chaos that follows a major disaster, and the difficulty of communicating and coordinating a response? This is a situation where data management, especially with a simple but powerful tool like a spreadsheet, shows its magic.

One very well-known situation that comes to mind is the Space Shuttle Challenger disaster. Facing a complex amount of data, engineer Richard Feynman and his team had a hunch about the cause. They used a simple spreadsheet to plot launch temperatures against O-ring damage, creating an easily understandable graph that clearly showed more brittleness with temperature drops. This simple act cut through a massive amount of data that would have taken months to examine, quickly determining the reason for the failure.

A bit of online research reveals another great example: the 2014 Ebola outbreak in Africa. After a shaky start with manual data entry, a spreadsheet was developed and used to vastly improve the tracing and tracking of infected people. Using data visualization, public health officials were able to identify disease hotspots and enact quarantine areas, which slowed the outbreak to an eventual standstill and saved many lives.

While spreadsheets are powerful for analyzing and presenting data, they share the same vulnerability with handwritten math: they are only as good as the information you put into them. A single mistake—whether a miscopied number in a manual calculation or a flawed assumption in a spreadsheet—can invalidate the entire result.

The danger, I feel, with spreadsheets is that their automated power and clear outcomes can hide these errors, creating a false sense of certainty. This is the case for everything from public health data to retirement planning, where a small, incorrect input can lead to a dangerously misleading outcome. The usefulness of the output will always depend on the accuracy of the input. In simple terms, it's just the same as using the wrong numbers in an equation.

Spreadsheet skeptics, it seems to me, confuse this fundamental characteristic of all "variable driven" mathematics to debunk the very nature and real world utility of a well-designed spreadsheet.

 

 

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Back to the Future

The first movie I ever saw in a theater was 2001: A Space Odyssey. My sister Carol took me to it when I was six years old. She wasn’t sure I’d like it, but I really loved it—except for a bit of primitive violence in the opening scene that was too intense for my young eyes (and stomach). In particular, the future technology depicted in the film fired my imagination. People in 2001 casually used video telephone calling and iPad-like tablet computers. And who could forget the talking, intelligent—but ultimately sinister—computer named HAL 9000? In 1968, when the movie came out, these were indeed just technological fantasies. Spurred on by that movie, throughout my childhood and adolescence I had a keen interest in reading science fiction and predictions about future technology. As a pre-teen, I was fascinated with my father’s copy of the best-selling book Future Shock by Alvin Toffler, which was published in 1970.

Over fifty years have passed since those early childhood days. For better or worse, our world is filled with the stuff of yesteryear’s science fiction. If time travel to today from 1968 were possible (spoiler alert: not quite yet), a cinematic camera crew simply filming day-to-day life in an advanced country like the U.S. or Japan would have the elements for an epic sci-fi blockbuster.  In my lifetime, technology has advanced at a staggering pace. The period from 1969-2000 is sometimes called the Third Industrial Revolution, encompassing the use of ever-more sophisticated electronics and computers to automate processes, as well as the rise of the internet. We are currently in the mind-boggling Fourth Industrial Revolution, where a mature internet has evolved to include “the internet of things” and artificial intelligence (AI) is rapidly advancing.

Sophisticated technology used to be quite expensive and out of the reach of many people. Today, due to technological advances, just about everyone can afford a compact smartphone that contains many amazing capabilities—including video calls—that could not be obtained at any price in 1968. Personal computers have come way down in price, and the internet, providing access to almost unlimited stores of information, is free for all to use. Our friends living 50 or 60 years ago would be in complete awe of what we take for granted.

Interestingly, in 1970 Alvin Toffler foreshadowed the rise of the internet and AI. Here’s a bit of what Toffler said about a computer concept called OLIVER (On-line Interactive Vicarious Expediter and Responder): “As computerized information systems ramify, (OLIVER) would tap into a worldwide pool of data stored in libraries, corporate files, hospitals, retail stores, banks, government agencies, and universities. OLIVER would thus become a kind of universal question-answerer…. It is theoretically possible to construct an OLIVER that would analyze the content of its owner’s words, scrutinize his choices, deduce his value system, update its own program to reflect changes in his values and ultimately handle larger and larger decisions for him…. Meetings could take place among groups of OLIVERs representing their respective owners, without the owners themselves being present.”

I would have been flabbergasted if, as a youngster, I’d been clued in about the technological advances I would witness in my lifetime. I’ve truly lived a science fiction kind of life. But all the technology hasn’t resulted in a utopia. Advances in AI make deepfakes more believable all the time. My Facebook feed is increasingly cluttered with AI generated videos and pictures, making it harder to distinguish between fact and fiction—especially judging by the comments people leave. The connected nature of the internet adds to the seeming cloudiness of truth. Cybercrime is a constant threat. Sometimes I wonder if it will all come crashing down, as in the Biblical story of the Tower of Babel.

How about you? Are you optimistic that our technological advances eventually will be self-correcting and propel society to greater heights? Or do you have an uneasy feeling that technology has raced ahead of what mankind is capable of handling? Is the best yet to come? Or have we peaked?

 

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Free Lunch?

On the Fidelity account page that displays my holdings online, I noticed banners saying I could make extra money by lending my securities. I ignored this on the premise of “too good to be true.”  Then I got an email from Fidelity advertising their Fully Paid Lending Program and read what they had to say. By following a link, I was able to get an assessment of each of my accounts telling me which holdings might be eligible and how much they might yield.

The account assessments said I did have eligible securities, all of which were ETFs, and that I could earn interest by loaning them to others, apparently short sellers. The interest estimates ranged from 1% to 10% based on the loan market for each security. This interest rate is security specific and varies from time to time based on the market for each security. Interest accumulates during the month and is paid out after month end.

Still skeptical, I did an online search independent of Fidelity and found that other brokerages have substantially identical programs, including Vanguard, Schwab and Interactive Brokers. The primary caution I picked up from my online search was that tax favored qualified dividends paid on a security while it is on loan will be passed on to you, but it will be in the form of ordinary income not as a qualified dividend. Of course, this only matters in taxable accounts.

The security does not have SIPC insurance coverage while it is on loan. The program description explains that when a security is loaned out, Fidelity deposits an equivalent dollar amount into a bank account as collateral in the event the borrower fails to return the security. The collateral is adjusted periodically to account for changes in the market value of the loaned security.

I’m also relying on the reputational risk Fidelity would suffer if a client-lender lost money on this.

I enrolled my wife’s and my Roth IRA accounts as a test. I had to answer a few questions to qualify each of us for the program. Also, only accounts with a balance of $25,000 or more are eligible.

The pixels on my electronic signature were barely dry when an ETF we both own was loaned out. The interest was 8.88% and together we would receive $45 per day in interest. Counting my chickens before they hatched, I quickly calculated we’d realize $1350 per month. Not so. Both loans lasted one day. We made $45.

I now have 3 months experience. I have made fifteen loans and my wife has made six. I say “made,” but we do nothing… the security is just swept away and returns just as seamlessly. The loans have been for as little as one day while some have been as long as five days. Sometimes my entire position in an ETF is borrowed and other times it is just a partial position. The actual interest rate paid has ranged from 0.75% to 13% being a somewhat broader range than the initial assessment predicted.

To give a sense of the range, I had one loan of 39 shares of an ETF valued at $900 that lasted five days and yielded me 4 cents per day. The largest windfall was a four-day loan on a $128,000 position at 12% yielding $171.40.

The ETF position that has had the most activity is FENI (Fidelity Enhanced International ETF). We hold it in both accounts and together those two positions represent 96% of our 3 months of income payments with interest rates varying from 8.88% to 13%. The high interest rate and the frequency of the loans suggests that during this time period, there has been a big demand to borrow this ETF. I realize this could evaporate. As an example, I hold another ETF in my account that has never been borrowed… will there be demand for that in the future?

Our total additional income for three months for both accounts was just over $500, or just over $160 per month. This will cover several free lunches.

Clearly, this is not going to make me rich. On the plus side, I don’t have to do anything. And, since the interest is paid into our Roth accounts, I will never have to pay taxes on it.

Would this work for you? It depends on whether you have holdings that are desirable for lending and how big those positions are. This is where the assessment comes in.

This may be the closest I’ll get to an investment free lunch. What am I missing?

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