Jonathan Clements's Blog, page 288

Aging Alone

MY MATERNAL grandmother just celebrated her 100th birthday. She still lives a mostly independent life, residing in her own apartment within a senior living facility. She walks to the dining room three times a day for her meals, does her own laundry and is always willing to talk about current events.

At age 54, I often try to imagine what it’ll be like if I live to the same age as my grandmother. The process usually overwhelms me with angst. Will I have enough money to support myself if the retirement phase of my life exceeds the number of years I’ve been actively employed? Will I be mentally and physically capable of caring for myself in my 90s or later? Who will I rely on for care if I live to be a centenarian?

Adding to my anxiety is the fact that I chose not to raise children. I’m not alone in that decision. According to 2010 census data, 19% of my female Gen X cohorts also chose to remain childless. I recently heard the term elder orphan, a euphemism applied to elderly adults who don’t have children or spouses to help them with caregiving as they age. The number of elder orphans is expected to increase sharply over the next few decades as life expectancy rates continue to rise.

My husband—who is 13 years older than me—may be able to depend on me for some of his caregiving needs as he ages. But if I live into my 90s, it’s likely I’ll need to rely on people outside of my family for assistance. Even though I haven’t yet reached retirement age, I’ve already begun the process of preparing to live independently for as long as I can. I’ve recognized three pillars I consider important for a well-rounded retirement: physical health, mental acuity and financial stability. With retirement looming, I’ve already established ways to meet those needs.



Two years ago, my husband and I purchased a single-story home in an age-restricted community. The community has the infrastructure necessary to provide residents with ample opportunities to nurture their physical and mental well-being as they age. Within the 11 square miles that the city encompasses, there’s a full-service hospital. There are also several physicians’ offices, a dedicated fire and ambulance service, and a volunteer sheriff’s posse that provides wellness checks on residents.

The community has in place a wide variety of activities designed to provide the mental stimulation and social interactions necessary for healthy aging. In addition to four recreation centers, there are numerous parks, walking tracks and swimming pools. There’s also a library, woodworking shop and movie theater. The grocery stores, restaurants and shops within the community are all easily accessible by car, golf cart, bike or on foot. For mobility-challenged residents, a shuttle service is available to pick up residents from their homes and take them to any location within several square miles of their residence.

To achieve my financial goals, I’m planning to set up an annuity to supplement my Social Security and pension. This money should provide me with enough income to cover my basic living expenses. On top of that, I’ll be able to leave a substantial portion of my retirement earnings in an index fund to help mitigate the risks of inflation and provide me with supplemental discretionary income.

If I end up aging as gracefully as my grandmother, I may find my need for living assistance is minimal. But if I do find myself needing significant help caring for myself, I’ll have options. I may be able to transition into an assisted living facility within our retirement community or receive in-home assistance from any number of care providers located nearby.

Knowing I have a plan in place to address my physical, mental and financial well-being helps me relax a bit as I think about my future. Should I live as long, or longer, than my grandmother, I’m hopeful that I can remain independent for much of that time.

Kristine Hayes is a departmental manager at a small, liberal arts college. She enjoys competitive pistol shooting and hanging out with her husband and their dogs. Check out Kristine's earlier articles.

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The Places You’ll Go

MY TWIN DAUGHTERS just finished sorting through college offers and making their decision ahead of the May 1 acceptance deadline. With nearly 3,000 four-year colleges to choose from, how did they decide?

It wasn���t easy. The pandemic didn���t just close our local public schools. It also ended visits from universities and limited school-based college counseling. Counselors compensated with lunchtime workshops, links to webinars, and lots of robocalls and emails urging students to fill out and submit the Free Application for Federal Student Aid (FAFSA).

Working on their applications from home, my students were deluged with glossy mailings. ���The University of Chicago wants you,��� I said to one twin. She laughed and replied, ���No, they don���t.���

Luckily, during my daughters��� junior year, I attended one at-school event just before the pandemic hit. The presenters explained that neighboring states might be a better choice than our in-state system. They also encouraged parents to help their students build a list of seven to 10 schools in three categories: safety, match and reach. To further my education, I read several books, including The Price You Pay for College , Excellent Sheep , Who Gets In and Why and The Tyranny of Merit .

With COVID-19 disrupting the usual pre-college test taking, applications surged for high-visibility and elite universities that were offering test-optional and test-blind reviews. There was also much interest in colleges with need-blind admissions, especially those where financial aid comes solely in the form of grant money. The resulting deluge of applicants for relatively few spots made it easy for these colleges to assemble an incoming class that matched their wishes, while sharply reducing the chances that any one student would make the cut.

Faced with this discouraging math, we sought out solidly rated, somewhat selective, diverse and interesting colleges where the students��� median grade point average (GPA) and test scores resembled ours. In particular, we focused on four-year schools that had the career orientation essential to one twin, and universities with a lower net cost and the broad program of undergraduate study needed by the other.

Both had sat for the SAT the week before their high school closed, but the prevalence of test-optional and test-blind reviews diminished the value of their good scores. Meanwhile, their high school GPAs weren���t as competitive. Partly that was a result of the distance learning necessitated by the pandemic. But it also reflected the well-known academic performance hit following a parental death���in this case the sudden loss of their father in 2019.

Every college application this year included a question inviting students to describe the impact of the pandemic. Reports suggest that answers to this question heavily influenced application decisions. By contrast, my daughters��� loss of their father is a less universal and less widely understood grief, and no doubt harder for the typical admissions reader to interpret.

I had the twins write their own essays. We made a conscious decision not to play in the space where consultants ���advise��� students or where parents ���help��� with essays. Given how easy it is to game these essays, I���m surprised at their oversized importance in the admissions process.

While the girls wrote their essays, I studied key statistics found in federal data, including retention and graduation rates. An example: The state university in our city reports a four-year graduation rate of only 12% and a six-year graduation rate of 55%. Saving money short-term by going local thus creates a likely long-term opportunity cost that���s equal to two years of post-college employment income. I focused on cost, likelihood of admission, speedy graduation and low rates of loan default. This last data point is a good proxy for post-college success.



The twins ultimately decided on a handful of ���good fit��� schools, expecting to be accepted by one or more. The good news: Each was admitted to and will attend her first-choice school. I have modest sticker shock. The first year alone will cost more than my last full year���s after-tax salary. The best part: I will ���contribute��� significantly less than the FAFSA-calculated EFC, or expected family contribution. How is that?

Many schools, especially private nonprofit colleges, discount tuition through awards of merit aid. This is one reason to look beyond local public universities. Merit awards for each twin mean that sending the girls to college won���t break the bank. I anticipate today that I have enough to pay my fair share of the tab for the next four years.

My initial promise to my twins was one year of college costs. It���s up to them to show they���re ready to do right by my investment of life savings, as well as by their own investment of time and effort. If all goes well, I���ve promised to continue supporting their studies in future academic years.

What have I learned from all of this?

In the aggregate, graduating from college in four years leads to a long-term positive return on investment. We don���t, however, live in the aggregate. Instead, we live in individual families and in uncertain times. To find good places for your students to apply, you need to know your students��� desires, your family���s capacity to pay, the likelihood of a positive return for the degrees they seek and how that education will feed into their career aspirations.
While some top schools are highly selective, most admit a majority of applicants. For incoming students at any particular college, interquartile ranges for GPAs and SAT/ACT scores are usually available. At private schools, merit aid offers are likely if your student���s GPA and test scores place him or her in the top quartile.
Your children may not be certain of their desired major or which schools might be a good choice. But some things can be teased out. Big city or small town? Big university or small college? Lots of fun or lots of academic collaboration? Avoid shoehorning your kid according to your beliefs about the next 50 years. Honestly, you don���t know.
As a parent, your information needs differ from those of your child. Review all the data you can find on schools your student has suggested, including student demographics, net price and default rates for those who have federal loans.
Colleges that send glossy brochures seek to boost applications and drive selectivity���and thus their national ranking���to new heights. If your student has previously shown interest in one of these schools and wants to apply, know that the likelihood of getting in is minuscule, even if your student appears to be a stellar applicant.
Your student didn���t get in anywhere she applied? Or earlier thought she���d take a gap year before applying, only to be sad now that her friends are heading off to college? No worries. Many schools, public and private, have non-traditional deadlines or rolling admissions. Check out��this list.

Catherine Horiuchi recently retired from��the University of San Francisco's School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine's earlier articles.

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Chicken or the Egg?

ON THE JOURNEY to retirement, should you focus on setting a retirement spending budget or on making sure you have adequate retirement income?

I think the answer is obvious: There���s no point deciding on a budget until you know how much money you���ll have available to spend. And yet I hear about people who devote endless hours to detailing precisely how much they���ll spend in retirement on everything from housing to travel to health care to dining out. This strikes me as a colossal waste of time���until they know how much income they���ll have at their disposal.

In the 10 years before I retired, my compensation came in three parts: my base salary, annual incentive compensation and long-term incentive compensation. Base salary and annual incentives were paid in cash, while long-term incentives consisted of stock options and restricted shares.

My wife and I based our ongoing expenses���our lifestyle���on what was left of my base salary after taxes were taken out, and after deductions for 401(k) contributions and premiums for health, dental, group life and long-term-care insurance. Meanwhile, we sometimes used my annual incentive pay for onetime major purchases, but mostly we saved the money.

What about long-term incentive pay? That was more variable and depended on the organization���s performance. For example, stock options could be worthless upon vesting. Restricted shares go up or down. I once exercised stock options and immediately sold the resulting shares, so I could put an addition on our vacation home. The rest of the time, I kept the stock upon exercising options���a strategy I���m told is rarely used. I did the same with the restricted shares. Over several years, I used all this stock to create a healthy stream of dividend income, which is reinvested in additional shares and which I view as a financial backstop, in case inflation starts to crimp our retirement lifestyle.

Notice that I haven���t mentioned a budget. My take-home pay set our budget. We would never spend more each month than could be paid for in full that month.

During the years leading up to retirement, my focus was on having at least enough income to maintain our preretirement lifestyle. There was no immediate plan to relocate and downsize to lower our expenses, though eight years into retirement we did opt to move into a nearby 55-plus community.

As I was getting closer to retirement, I monitored my accrued pension and Social Security benefit. When I finally retired after nearly 50 years on the job, that combined retirement income was slightly more than my gross base pay. That had always been my goal.

I never tried to budget for retirement. Instead, my focus was on funding what I wanted to spend���and that funding goal had no better target than what I was living on just before I retired.

Do I spend more or less in retirement? On average, I spend about the same each month, though ���spend��� includes discretionary amounts, 529 plan contributions for the grandchildren, travel and saving. Yup, I said it, I still put money aside in retirement for contingencies, just as I did while working.

There are tradeoffs in retirement spending. I no longer pay payroll taxes, but my health insurance premiums are five times higher. I don���t put money into a 401(k), but I spend thousands on travel and leisure activities. I don���t buy new suits, instead living in jeans and shorts (as long as my wife approves), but I spend $60 per week on golf.

Many people are convinced their expenses will be vastly different in retirement. Different perhaps. Lower? Not so much. ���I���m moving to a lower-cost part of the country, so I���ll save money,��� I���ve heard. Good for you. But you might want to use those savings to build up a financial reserve, because your expenses are sure to grow, by choice or by chance.

Having a pension, as I do, isn���t typical. What if you don���t have a pension? The notion that retirement income���and not a budget���should determine spending still applies. If you have $1 million in retirement funds, your spending possibilities will be around $40,000 a year, assuming a 4% withdrawal rate, plus whatever you get from Social Security.

That���s the reality. It doesn���t matter what your retirement budget says. The chicken is your retirement income���and that produces the egg of spending possibilities.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.

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Twin Certainties

COMMON WISDOM tells us that we all pay taxes and that we all die. As a semi-retired minister, financial coach and tax preparer, I���ve gained an unusual appreciation for these two certainties of life. But never more so than this year.

I began my first congregational ministry in August 2001, two weeks before the Sept. 11 terrorist attacks. The first class I offered was titled A Year to Live, in which we met over 12 months to plan and prepare as if we would die at the end of the year. In the aftermath of the 9/11 tragedy, we were each ready to reflect on our own life and eventual death, making peace with as much as we could, while taking care of the spiritual, emotional and practical details surrounding our death. The experience was transformational.

I hadn���t taught the class since my dad died in 2019. I spent his last year caring for him. But this January, I decided to teach the class again, knowing the pandemic has made many people more aware, anxious and curious about death. Then, in February, I began preparing income tax returns again. I realized one Saturday morning, as I read HumbleDollar, that I might have a unique perspective on death and taxes���especially this year.

Cicely Tyson, the amazing actress and icon who died in January at age 96, said, ���Why should I be afraid of death���I don���t know anything about it.��� But too many people are afraid of death���and taxes as well���even if they don���t know much about either. I find learning about both, especially with other people, makes death and taxes more comfortable or, at least, tolerable. Here are four lessons I���ve learned about death and taxes from my experiences as a teacher, minister and tax preparer:

1. Reflection is powerful. One of the assignments I give my students is to read obituaries and to write their own. I���ve come to see how similar a tax return can be to an obituary and how helpful they both can be to living a better life. An obituary is a summary of a life. If we choose to, we can use it as a way to highlight what we do���and don���t���want to accomplish.

An annual tax return can serve the same purpose. A tax return shows us, from a financial perspective, what matters to us. Are we sharing enough with others? Are we saving for our retirement? Is the money we���re making worth what we are doing? Do our earnings, deductions and taxes reflect what we value most? The bottom line with an obituary or a tax return is that they show us the choices we���ve made. Writing your obituary can change the course of your life. Looking at a tax return with a spiritual focus, as well as a material one, can do the same.

2. Denial doesn���t help. Denying or delaying tax planning and preparation has financial and sometimes legal consequences���and so does delaying plans for our final departure. I���ve seen too many people and families delay talking about death until it���s too late. When relatives gather to remember and honor the deceased, they often do so without knowing their beloved���s wishes. Families fight and argue, often over money, when they should be grieving.

One of the things that always happens halfway through A Year to Live is that participants want to talk about their death and life with loved ones. But all too often, those loved ones refuse to talk. I have seen the same thing happen with couples when it comes to their money and taxes. Silence is not always golden. Sometimes, it���s heart-breaking.

3. Don���t go it alone. Life���as with tax preparation���goes better when we do it with others. One of the most powerful changes people experience in the class is they become more open to talking about the realities of death, a topic we rarely discuss with others. By sharing their fears, questions and curiosities with each other, and with a guide who is trained and experienced in life and death like a minister, they learn and grow in their acceptance and readiness for death.

The same is true with regard to taxes. In my experience, people talk about money even less than they do about death. If we���re able to ask questions of others, including those who are trained in what works and doesn���t work, our acceptance and readiness for taxes and financial planning can grow as well.

4. Worry can lead to peace. I think the most common feelings people express about death and taxes are anxiety and worry. This can be anxiety about being dead. But more often, it���s worry about the process of dying and how it will affect those they love. Being a burden on others is the No. 1 fear people have. Nobody wants to be a financial, emotional or spiritual burden on anyone, but especially not on those we love.

When my dad had terminal cancer, entered home hospice and needed someone to take care of him, I was fortunate to be able to do so. While neither of us enjoyed those intimate acts of end-of-life care, we were both grateful I was the one to be with him and to do them for him. Overcoming my fear of death, and of financial planning and taxes as well, gave me the spiritual and material grounding to do something hard and uncomfortable, and for which I will be eternally grateful.

People often ask me how anyone���but especially a minister���can enjoy doing taxes. Those are people who might prefer to give their dying father an enema instead of taking on the numbers, complexities and doubts that come with taxes. I hear the echo of conversations from A Year to Live in those voices. The fear of doing something wrong or missing something is common both to life and to taxes.

But the truth is, that worry can turn into peace. The purpose of the A Year to Live class is ���to deepen our understanding, acceptance and readiness for death, so that we can live with more mindfulness, gratitude and peace.��� I could say the same thing about preparing taxes or any financial coaching. Death and taxes are indeed inevitable. But when prepared for with wisdom, they���re invitations to a better life.

Don Southworth is a semi-retired minister, consultant and tax preparer living in Chapel Hill, North Carolina. He recently completed his Certified Financial Planner education. In addition to teaching����� A Year to Live,�����he has taught�����Financial Management for People Who Don���t Want to Bother .��� Don is passionate about the intersection between spirituality and money, and he encourages people to follow their callings wherever they lead.

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Four Reasons to Roth

CONGRESS IS BACK at it, aiming to change the tax laws again. Just since 2017, there���s been the Tax Cuts and Jobs Act (TCJA), the SECURE Act and the CARES Act, each of which contained tax provisions, some very significant. As I type this, Congress and the White House are horse-trading on another round of changes.

Because new legislation is still being negotiated, I think it���s too soon to change your financial plan. But there���s one strategy that makes sense for a lot of people, and it may make even more sense if certain proposals become law. That strategy is a Roth conversion. If you aren���t familiar with the idea, I���ve written about it in an earlier��article.

The primary benefit of Roth conversions is to take advantage of tax rate ���arbitrage.��� For example, if you could convert a traditional, pretax IRA to a Roth IRA today and��pay a tax of just 24%, you should happily do so if you expect your tax rate to be much higher���say 32% or 35%���down the road.

As I noted in my earlier article, though, it can be tricky to guess your future tax rate. First, you need to estimate your future income. Then you need to guess what Congress will do with tax rates. As we���ve seen in recent years, political winds can shift back and forth frequently, making this a difficult guessing game.

Because of that frustrating reality, I���m not a fan of forecasting. Still, there are two reasons to believe tax rates will indeed be higher in the future:

The 2017 TCJA included a sunset provision, meaning that���in 2026���rates could automatically revert to 2017 levels. In other words, if Congress doesn���t act, rates will climb in less than five years.
Right now, Congress is debating potential increases that might take effect even sooner.

For those reasons, Roth conversions look appealing right now. If you happen to be retired or have a low income this year for other reasons, this could be an ideal time to complete a conversion, while rates remain at current levels. To be sure, there���s always the possibility that Congress could make any tax increases retroactive to Jan. 1, 2021. But the further we progress into the year, the less likely that seems.

Tax rate arbitrage is the most-commonly cited reason for doing a Roth conversion. Still on the fence? Here are four additional benefits that often get overlooked.

1. Medicare premiums.��For most people, Medicare premiums are very reasonable. But the premiums��do vary��based on income. Specifically, the costs for Part B and Part D both scale up as your income increases. For example, a single individual with income under $88,000 would pay just $1,782 per year for Part B coverage. But with income between $165,000 and $500,000, the cost for Part B more than triples, to $5,702 a year. Part D would also increase, by almost $1,000.

These are called Income Related Monthly Adjustment Amount (IRMAA) surcharges, and they���re effectively another tax. If you can reduce your income in retirement, you can reduce these surcharges. How can you trim income? Roth conversions are particularly effective. Remember, every dollar that comes out of a traditional, pretax IRA is taxable. When required minimum distributions begin at age 72, the size of your pretax IRA will impact the level of your income. But if you convert some of your pretax IRA to a Roth, these taxable distributions will be smaller. If you can shrink your pretax IRA enough, you can bump down those costly IRMAA surcharges���a benefit that can last throughout retirement.

2. Estate tax.��Today, the federal estate tax exclusion���the amount you can leave heirs without paying any estate tax���is nearly $12 million per person, or more than $23 million for a married couple. For that reason, it isn���t an issue for most people. But starting in 2026, those limits could get cut in half, to about $6 million and $12 million, if the 2017 tax law is allowed to sunset. These might still seem like big numbers, but there are some wrinkles to keep in mind.

The first is that the estate tax is a political football. That exclusion number has changed many times in the past, it���s likely to continue changing���and, indeed, it���s on the table for discussion right now. In addition, many states impose their own estate tax, often with far lower exclusions. In��Massachusetts, for example, the estate tax kicks in at just $1 million of assets. Don���t let that headline $23 million figure lull you into complacency. The estate tax should always be on your radar.



How can Roth conversions help with the estate tax? Suppose you have $15 million in assets, including $3 million in pretax IRAs. If you were to die in 10 years, after the exclusion had reverted to the $12 million level for a married couple, $3 million of your estate would be subject to tax. Now, suppose you complete a Roth conversion this year. If you converted your entire $3 million IRA, you���d pay about $1 million in federal taxes, plus potentially state income taxes. After paying that tax, your estate would now be $1 million smaller���$14 million instead of $15 million. The result: Because the federal estate tax rate is a flat 40%, the bill would be about $400,000 smaller.

This wouldn���t shortchange your heirs in any way. You���d just be paying a tax now that they would have paid later. In fact, this strategy could actually help your heirs, as described next.

3. Taxes on inherited IRAs.��Another recent tax law change was the elimination of the so-called stretch IRA. In the past, when children inherited an IRA, they had decades over which to withdraw the funds. The ability to stretch those distributions out over many years meant that the tax impact each year was modest. But under the new rules, heirs must empty the entire account within the first 10 years after the account owner dies. The result is a potentially large amount of additional taxable income for children inheriting IRAs.

But if, instead, you completed a Roth conversion during your lifetime, you���d effectively be paying taxes on your children���s behalf and potentially at much lower rates. Why would the rate be lower? If you think about the normal cycle of life, parents tend to die when their children are in their peak earning years. If you complete a Roth conversion when you���re retired and have a relatively low income, you���ll likely save your children from paying higher rates down the road.

Will this benefit your family? It depends on the size of your IRA, how many children you have, their ages and their careers. But in certain circumstances, it could make an enormous difference.

4. Peace of mind.��I often say that there are two answers to every financial question. The first is what the math says. The second is how you feel about it. When it comes to Roth conversions, it���s definitely important to work through the numbers. If Congress agrees on rate increases this year, that���ll tip the scales further in favor of conversions. But ultimately, we���re still in the land of predictions.

You can never be sure how things will work out. Tax rates, longevity and market growth all remain unknowns. But that uncertainty ends up being a point in favor of Roth conversions. Once you���ve paid the tax to move funds into a Roth IRA, you can be virtually certain the money will never be taxed again. That���ll provide you with a benefit that���s unquantifiable but highly valuable: peace of mind.

Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. In his series of free��e-books, he advocates an evidence-based��approach to personal finance. Follow Adam on Twitter @AdamMGrossman��and check out his earlier articles.

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Work in Progress

RETIREMENT MAY MARK the end of fulltime work���but that doesn���t mean we should stop working on our finances. Even after we quit the workforce, there���s much we can do to strengthen our retirement plan and, indeed, that may be necessary if we find we���re drawing down our nest egg too quickly.

Are you concerned that you might outlive your savings? Consider these six financial tweaks:

1. Work part-time. I���ve heard folks claim that if you���re still doing some work for pay, you aren���t truly retired. I think that���s silly���as silly as the related notion that a happy retirement is one devoted to blissful nothingness.

My contention: Working part-time in retirement is not only a great way to bolster our retirement finances, but for some folks it may also be the key to a happier retirement, because it delivers the sense of purpose they need. Working a day or two each week may not be as appealing or even possible later in retirement, but it could be a smart strategy during our initial retirement years. Think of it this way: If you could earn $10,000 a year by working part-time, that���s like having a nest egg that���s $250,000 larger, assuming a 4% portfolio withdrawal rate.

2. Spend less. During our working years, we often temporarily cut back on discretionary spending if we find ourselves out of work or if we get hit with large, unexpected expenses. Even after we quit the workforce, such spending adjustments should remain a key weapon in our financial arsenal.

Facing steep medical bills? Worried because stocks are down sharply? Temporarily reducing spending could get your finances back on track. Thanks to the pandemic, most of us have discovered there���s plenty of fat in our budget. Think about how much you saved over the past 14 months by not going on vacation, cooking at home and avoiding the shopping mall. During retirement, if your nest egg looks a little depleted, perhaps you should adopt a ���pandemic budget��� for six months or a year.

3. Delay Social Security. The math is crystal clear: As long as you live until at least your late 70s or early 80s, you���ll come out ahead financially if you cover costs in your early retirement years by spending down your cash and bond holdings, while delaying the start of Social Security benefits, so you lock in a larger stream of government-guaranteed, inflation-adjusted income.



What if you���ve already claimed benefits and realize you���ve made a mistake? If you���re younger than your full Social Security retirement age (FRA) of 66 or 67 and you claimed benefits within the past 12 months, you can repay the benefits you received and reverse the decision. Alternatively, if you���ve already reached your FRA, you can suspend benefits. You can then leave your monthly check to grow at eight percentage points a year, plus any inflation increase, up until age 70.

4. Buy income annuities. Another way to squeeze more income out of your nest egg is to use a slice of your savings to buy immediate fixed annuities that pay lifetime income. Yes, that means turning over a chunk of your portfolio to an insurance company. But unless you die early in retirement, it could be a smart move.

As I���ve mentioned before, I plan to put a significant sum into immediate fixed annuities. The resulting regular income will allow me to invest my remaining portfolio more heavily in stocks���and that could mean a larger inheritance for my kids, despite the money I ���lost��� by buying the immediate annuities.

My plan is to purchase those immediate annuities in my 60s. But buying annuities could also salvage your later retirement years. Suppose you and your spouse are age 80 and have $300,000 left in savings. A 4% withdrawal rate would give you $12,000 a year. What if, instead, you stashed the entire $300,000 in an immediate fixed annuity? You���d collect annual income of almost $24,000, according to a quote from Charles Schwab. Note that this income would be fixed. If you wanted the income to rise each year by, say, 2%, so you have some protection against inflation, the initial income would be somewhat lower.

5. Keep at least 30% in stocks. Retirees often favor bonds and cash investments. But if you want your nest egg to generate a healthy stream of income that keeps up with inflation, you should stash part of your savings in stocks. To understand why, check out Vanguard Group���s retirement nest egg calculator. It uses something called Monte Carlo analysis to see how a retirement portfolio might perform in a host of market scenarios.

Suppose you���re looking to fund a 30-year retirement and want to use a 4.5% withdrawal rate. If you play around with the calculator, you���ll see that a very high stock allocation probably won���t hurt your chances of funding that 30-year retirement���but a low allocation likely will. Indeed, once your stock allocation drops below 30%, things start looking pretty grim, especially if you stash the remaining money heavily in cash investments.

If anything, I���d favor a minimum stock allocation closer to 40% or even 50%. Why? Vanguard���s calculator is built on historical returns. At today���s miserably low bond and cash yields, such conservative investments will struggle to keep up with inflation. To be sure, future stock returns may also be disappointing by historical standards, given today���s rich valuations. But at least stocks give investors a decent shot at outpacing the twin threats of inflation and taxes.

6. Tap home equity. Downsizing to a smaller, less expensive home is a hassle, but it strikes me as the smartest way to use home equity to pay for retirement. Done right, it should allow retirees to convert part of their current home���s value into spending money, while also lowering their monthly living costs.

I���m less keen on reverse mortgages or accessing home equity by remortgaging a home. Both should be viewed as last resorts, I believe. Still, I wouldn���t rule them out. You only get one shot at retirement���and I���d rather see folks take out a reverse mortgage than spend their final years pinching pennies.
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HERE ARE THE SIX other articles published by HumbleDollar this week:

"One thing I didn���t save money on: clothing," recounts Ben Rodriguez. "When you lose 100 pounds over two years, you don���t just replace your whole wardrobe���you need to do it twice."
How do miserably low savings account yields explain skyrocketing cryptocurrency prices? Adam Grossman offers a guided tour to the Capital Market Line.
The real estate market may be red hot. But thanks to rock-bottom mortgage rates, homes still look very affordable compared to much of the past three decades, says Mike Zaccardi.
"Reviewing my best investments has confirmed what I already knew," writes Mike Flack. "Trying to beat the market is a fool���s errand, with outperformance more likely due to luck than skill."
Earlier this year, when everyday investors crowded into GameStop, it meant big losses for short-selling hedge funds. But as Terry Odean explains to Bill Ehart, such "herding" usually��backfires.
"If you���re like me, you���re always looking for ways to make your life less stressful," writes Dennis Friedman. "Here���s one thing you can do with your money that can be a big help: Organize and consolidate."

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.

The post Work in Progress appeared first on HumbleDollar.

One Simple Thing

I THOUGHT SAYING goodbye to my coworkers, and walking out my office door for the last time, would be the most memorable moment from the beginning of my retirement. But, no, that moment didn���t come until the next day.

I woke up, got out of bed and walked into the living room. Staring out the front window, I felt this sense of calm and peacefulness that I can���t remember ever feeling before. I felt so relaxed that I could swear I was weightless. I didn't have a worry in the world. It seemed like all my troubles disappeared when I left my job. I thought I���d reached nirvana. I asked myself, ���Is this what retirement feels like?���

Of course, retirement isn���t without its problems. Retirees have health issues, relationship problems and money woes, just like everyone else. If you���re like me, you���re always looking for ways to make your life less stressful. On that score, here���s one simple thing you can do with your money that can be a big help: Organize and consolidate.

One of my first jobs was as a production planner at an aerospace company. As a neophyte, I was indecisive and unable to keep up with the workflow. One of my seasoned coworkers pulled me aside and gave me some helpful advice I���ll never forget. ���Clean up your desk,��� he said.

At first, I couldn���t understand how this simple act of housecleaning was going to solve my problems at work. But it sure did. Organizing my desk gave me a clearer understanding of what my priorities were, allowing me to make timely and accurate decisions on what needed to be done. More important, it made me feel I was in control and gave me the morale boost I desperately needed at that time.

I���ve taken that same advice and better organized my personal finances, consolidating everything into fewer financial accounts. I used to have my money with seven financial institutions. Now, I have only two. My finances are less time-consuming and stressful because, with fewer accounts, I have fewer decisions to make. It also gives me an easier and clearer understanding of how well my overall investment portfolio is performing.



My wife and I have consolidated all our investments at Vanguard Group, while our saving and checking accounts are at a local credit union. Our financial life is not only simpler for us, but it���ll also be simpler for our heirs. After our deaths, our loved ones will spend less time filling out paperwork and dealing with different financial institutions, each of which will have their own requirements for closing accounts.

Of course, I might be able to find better interest rates for my cash at an online savings bank. But my credit union���s rates are competitive enough, and it means I don���t have the hassle of dealing with additional accounts. Meanwhile, if you have a mutual fund you like, you may be able to transfer it to Vanguard, or whatever primary investment company you use. You don���t have to liquidate the fund. That's what I did with a T. Rowe Price mutual fund.

In fact, Vanguard makes the process of transferring assets easy. It���ll generate the paperwork for you and send it to your online account���s message center. All you have to do is upload a copy of the latest statement for the asset you want to transfer, attach it to the paperwork and sign the documents with your electronic signature. This process, however, doesn���t apply to a 401(k). For those, you���ll likely have to contact your previous employer to generate the required paperwork.

Why did I choose Vanguard? In recent years, there���s been some grumbling about Vanguard���s customer service. But I���ve found over the years that Vanguard is not only an excellent financial institution to invest your money with, but also it provides great customer service, especially during difficult times. When I was the trustee for my mother���s estate, a customer service representative stayed on the phone with me, answering all my questions until the required documents were completed. None of my mother���s other financial institutions was willing to do that.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier��articles��and follow him on Twitter @DMFrie.

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The Get Rich Fast

TWO YEARS AGO, I was 100 pounds overweight and constantly hungry. I had been overweight most of my life. But as a father of young kids, I was newly motivated to try to improve my life expectancy. I fortuitously discovered intermittent fasting and the low-carbohydrate way of eating, and instantly had success. Right away, I set an ambitious goal of losing the entire 100 pounds in one year. With a lot of hard work and dedication, I reached my goal���but it took two years.

Along the way, I���ve learned a lot about health and about myself. While my primary motivation for losing weight was to improve my longevity, health and happiness, losing weight also saved me money, both in the short term and���I strongly suspect���over the long haul. To begin with, by fasting, I avoided many costly restaurant meals. While fasting, I also couldn���t drink alcohol on an empty stomach, further adding to the savings.

After losing about 75 pounds, I figured it was time to check in with my term-life insurance broker to see if I could save on premiums. It turned out that, at my new weight, I could save $300 per year���about one third of the premium. Over the life of my 20-year term policy, that���ll be quite a chunk of change.



The savings on forgone copays and medication seem obvious, but the biggest savings will likely be the future medical costs I won���t incur. I don���t have a precise figure on how much I���ll likely save by not being obese, but it appears to be substantial. Given my family history of diabetes, I would likely have required insulin injections, which can run into the thousands of dollars per month.

Overweight people can expect a whole host of costly medical problems, including joint pains and stress, high blood pressure and heart issues. A book I recently read indicated that obesity is highly correlated with all forms of cancer���an expensive disease to treat and one you���re lucky to survive. While I don���t mind spending money on medical care when it���s necessary, I���d rather fund my ounce of prevention over the costly pounds of cure. And, as the years go by, the money I don���t spend on health care can continue to grow tax-deferred in my health savings account (HSA). Any money remaining in the account can be withdrawn penalty-free after age 65, effectively turning my HSA into another traditional IRA.

One thing I didn���t save money on: clothing. When you lose 100 pounds over two years, you don���t just replace your whole wardrobe���you need to do it twice. But the fun of buying new clothes that fit well and look great on my new form has been well worth the money. I���m now my haberdasher���s favorite customer.



While HumbleDollar is primarily dedicated to personal finance, there are often articles written about happiness and health. After all, what���s the use of money if you���re unhappy or you don���t live long enough to enjoy it? The truth is, two years ago, I was miserable and tired of being overweight. As I looked around, I noticed there weren���t many other fathers my age who were as big as I was. There were even fewer 70-year-olds my size. I wanted to have as many good, healthy years as possible with my wife, kids and���God willing���one day grandkids. I wanted that more than I wanted anything, and I was able to leverage that willpower to achieve my goals. I���m pleased to say that, at age 41, I���ve never been healthier in my life.

A few times, I���ve heard Dave Ramsey say on his radio show, ���If I can control the guy in my mirror, I can be skinny and rich.��� While I don���t think obesity is entirely a function of willpower, if you find a program that works for you, you���ll certainly need discipline and self-control to stick with it and avoid all of the detours that life will throw at you. The same, of course, is true for investing. If you have the discipline to save regularly and adequately, and avoid all the temptations along the way, you can be rich���and, if you���re determined, skinny too.

Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters.��Since 2009, Ben's made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts. His previous article was On the House.

The post The Get Rich Fast appeared first on HumbleDollar.

Through the Roof

STOP LUSTING AFTER homes on Zillow. It���s time to get serious about the property market���and ask whether houses today are a good value.

Make no mistake: Real estate is red hot. Bloomberg recently reported that demand is so strong that almost half of U.S. homes sell within a week of coming to market. The S&P Case-Shiller U.S. National Home Price Index surged 12% over the 12 months through February, with the Phoenix and San Diego markets leading the way with 17% gains.

Rock-bottom mortgage rates are fueling this buying frenzy. Freddie Mac posts average 30-year and 15-year fixed rates each Thursday. The average 30-year mortgage is slightly below 3%, while the rate on a typical 15-year loan is 2.3%. With inflation forecast to be 2.5% over the next five years, buyers may be borrowing at less than the inflation rate.

Still, for first-time homebuyers, it���s easy to get frustrated as they watch prices go up and up. But the fact is, the data suggest homes remain a relative bargain.

Many folks believe housing affordability is simply the median price of a house compared to median income. But there���s more to it than that. The National Association of Realtors was kind enough to provide me with the full history for its housing affordability index (HAI), which goes back to 1989. The HAI measures how easily the typical family could qualify for a mortgage using these inputs:

The national median price for an existing single-family home.
Median family income, as reported by the Census Bureau.
The effective 30-year mortgage rate, which includes an amortized amount for upfront points and fees.
An assumed 20% down payment.

The question: If the typical family puts 25% of its income toward the mortgage payments on the typical home, how affordable is housing? When the index is at 100, the typical family has just enough income to cover the mortgage. A level above 100 means the typical family has more than enough income, so qualifying for a mortgage should be somewhat easier.

As of March, the index stood at 173.6. Affordability has improved from a year ago, when the index stood at 167.7. In March, the median existing single-family home price was up 18% from a year earlier and stood at $334,500. But household income has also been rising, though not quite as fast as home prices. Meanwhile, mortgage rates are lower than a year ago, but have been ticking higher in recent months.

Worried? Maybe we shouldn���t be. Historically, houses were far less affordable. During 1989 and 1990, the effective mortgage rate was above 10% and the HAI for 30-year fixed-rate mortgage borrowers bounced around 100, meaning homes were much less affordable than they are today.



Through the 1990s, affordability improved, peaking at 139.8 in February 1999. From there, affordability gradually deteriorated again, culminating in the mid-2000s housing bubble. At its low point, in July 2006, the affordability index stood at just 100.5, a level not seen since 1989 and 1990. We all know what happened next: Home prices plummeted, while the Great Recession caused family income to stagnate and triggered a drop in mortgage rates.

The overall result: Housing affordability surged in 2008, then kept drifting higher as home prices continued to struggle. By far the best time to buy a home was late 2011 to early 2013. During some months in that stretch, the HAI was above 200.

Fast forward to today, and the HAI has averaged in the low 170s since June of last year. That may not be a bargain compared to 2011-13, but the U.S. housing market looks affordable compared to much of the past three decades.

Where do we go from here? There could be a trifecta of factors hurting affordability as the year progresses. We may see rising home prices and interest rates, coupled with slower income growth, as the impact of fiscal stimulus checks peter out. Still, for now, we probably shouldn���t be too alarmed by today���s red hot housing market.

Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He's a CFA�� charterholder and Chartered Market Technician��, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com��and check out his earlier articles.

The post Through the Roof appeared first on HumbleDollar.

Robbin’ Who?

TERRY ODEAN has been studying investor behavior for decades. The University of California at Berkeley finance professor has proven again and again that everyday investors often harm their performance by trading too much.

Last year, Odean and his fellow researchers turned their attention to the Robinhood phenomenon. Result? When I spoke to Odean, he said the only thing that surprised him was the magnitude of the self-inflicted investment wounds by users of the free-and-easy trading app. Many of the app���s users are first-time investors buying and selling not just stocks, but also options.

Odean and his co-authors studied trading activity over a two-year period through August 2020, analyzing stocks experiencing so-called herding events, where investors crowd into particular investments, often buying simply because others are doing so. The authors defined those herding events using measures such as percent gain and level of ownership by Robinhood users.

���We concluded that, over a 30-day period starting 10 days before the [herding] event and ending 20 days after, the Robinhood community that invested in these herding stocks lost on average about five percentage points.��� That loss increased to six percentage points if you look at investors��� returns relative to the market���s performance.

Odean���s Robinhood study predates this year���s excitement over ���meme stocks,��� such as GameStop and AMC Entertainment, which involved similar herding behavior. Somehow, legions of novice investors allowed themselves to be persuaded���in part by Robinhood���s free trading platform, in part by internet chat rooms such as Reddit���s r/wallstreetbets���that trading stocks and options is fun and easy. (Recently, Robinhood discontinued its practice of showering users��� screens with confetti when they made a trade.)

But some investors went even further: They adopted the ethos that, by herding together into stocks touted by influencers such as Keith Gill (a.k.a. Roaring Kitty, a.k.a. DeepFuckingValue), they were ���sticking it to the man��� by squeezing hedge funds that had ���shorted��� stocks in a bet that those stocks would fall in value. The very name Robinhood suggests taking money from Wall Street���s modern-day Sheriffs of Nottingham. And the herd did, indeed, badly trample hedge fund Melvin Capital, which reportedly lost $53 million in January betting against stocks that Robinhood users piled into.

But Odean���s study shows that, as a group, other investors���presumably professional money managers���routinely and profitably bet against the Robinhood investors. ���There are traders out there who are intentionally shorting the stocks that have these (herding) events,��� Odean said.

Robinhood may not be charging commissions for trading, but that doesn���t mean the trading app doesn���t make money. ���Robinhood���s not doing it for free,��� Odean noted. ���They���re just getting paid by someone else.���

That someone else are Wall Street���s market makers, who make money off the so-called bid-ask spread, the higher price at which investors can currently buy a stock and the lower price at which they can sell. To handle more trades, these market makers engage in ���payment for order flow������and these payments are what enable Robinhood to offer commission-free trades to investors.

��

The order flow from Robinhood seems to be particularly attractive to Wall Street���s market makers. According to an SEC regulatory filing last year, Wall Street pays much more per share for Robinhood order flow than it does for that of Schwab and E*Trade. Customers at these other firms have average balances higher than the reported $2,000 at Robinhood, tend to be more experienced and trade much less frequently.

What���s the downside of all this? One way that Robinhood investors lose���or, at least, have in the past���is through poor trade execution. The company paid a $65 million fine to the SEC in December for ���failing to satisfy its duty to seek the best reasonably available terms to execute customer orders,��� the agency said in announcing the fine.

���Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors,��� the SEC said. ���The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.���

The implication: Robinhood is ���giving their clients worse execution,��� Odean said. ���You don���t have to charge them a commission because (Wall Street market makers are) getting the opportunity to trade with uninformed investors and give them a lousy deal.���

If you got into GameStop early, congratulations. Maybe you���ve been able to pay off your student loans. If you didn���t get in early, you could have experienced a loss of up to 88% in a matter of weeks. As of yesterday, GameStop was trading at about $143 per share, 59% below its Jan. 27 high of nearly $348.

���A lot of these Robinhood investors are probably not risking money that they can't afford to lose,��� Odean said. ���But some of them are, and those are the ones that worry me.���

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart��and check out his earlier articles.

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