Jonathan Clements's Blog, page 338

Go Ahead and Pay

EXPERTS OFTEN suggest putting bonds or bond funds in retirement accounts. I think this is kind of dumb—or, at the very least, it places the focus on the wrong thing.

It’s always a good idea to consider taxes. But my experience is that many people place too much emphasis on taxes, often to their own detriment. Municipal bonds are a great example of this: Many people who purchase them are in lower tax brackets, where the tradeoff between the tax savings and the lower yield doesn’t work in their favor. But they’re so strongly opposed to paying taxes that they buy them anyway, even though they’d be better off buying taxable bonds, collecting the higher yield and paying taxes on that income.

I recently reviewed a portfolio for a couple in their 90s. Their broker had been helping them buy municipal bonds for decades. I was appalled to discover a sizable portfolio invested in multiple individual bonds, most maturing 20 to 30 years from now. Of course, all the interest is tax-free, but their current marginal tax rate is low, the price of their bonds is highly volatile and I’d guess their broker made a Brink’s truck worth of commissions or spreads off that portfolio. He’ll do it again when he liquidates the bonds after both spouses are gone.

Back to retirement accounts. Let’s assume bonds are paying 3% a year. It’s correct that you’d end up paying annual income taxes on that interest in a regular, taxable brokerage account. But in truth, it wouldn’t be a lot of tax, because it’s not a lot of income.

Yes, if you put the bonds in a 401(k) or IRA, you’d avoid that little bit of tax every year. But you’ve also limited the tax-deferred annual growth of your 401(k) or IRA to just 3%. The opportunity cost of that choice is huge. You’ve given up tax-deferred compounding at a much higher rate for decades to come. Compare the compound growth of $50,000 for 20 years at 3% to 20 years at 6%. The difference is $70,000. And a 6% return for a diversified stock portfolio will, I suspect, prove to be a conservative estimate.

To be sure, that extra $70,000 will be subject to income taxes when withdrawn, but those taxes can be mitigated though good decisions when the time comes. In fact, 401(k) and IRA money can stay tax-deferred for decades and decades. Even with the elimination of the stretch IRA—part of the new SECURE Act—much of that money will still grow tax-deferred throughout your life, your spouse’s life and 10 years of your heir’s life.

Remember, asset allocation is a huge part of long-term investment success. One study even found that more than 90% of the variation in quarterly portfolio performance can be explained by the target allocation for stocks, bonds and cash investments.

From a purely tax standpoint, keeping bonds in tax-deferred accounts can make some sense. But that also means giving up potentially far higher compound growth in your IRA. The bottom line: Think about the unintended consequences of your choices—and focus less on tax savings and more on opportunity cost.

Dan Danford is a Certified Financial Planner with the Family Investment Center in Kansas City, Missouri. He learned early on about money from his father, who charged rent on the family lawnmower when Dan cut neighborhood lawns. Dan is a member of the National Association of Personal Financial Advisors and author of Stuck in the Middle : The Mistakes That Jeopardize Your Financial Success and How to Fix Them. His previous articles were Value for Money and Fake News.

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Danger: Cliff Ahead

MEET IRMAA. You won’t like her. IRMAA is short for income-related monthly adjustment amount. It’s a premium surcharge levied on those covered by Medicare Part B and Part D—and who have income above certain thresholds.

In 2020, the standard premium for Part B, which covers outpatient care, is $144.60 a month. That’s what you pay if you file taxes as a single individual and your modified adjusted gross income is $87,000 or less, or if you’re married filing jointly with annual income of $174,000 and below. What if your income, including tax-free municipal bond interest, exceeds these levels? You may be subject to the IRMAA surcharge.

The Part B premium is set so that it pays for 25% of Medicare’s actual cost. The remaining 75% is effectively subsidized by the federal government’s general revenue. The IRMAA surcharge is designed to remove this subsidy for those able to pay—those whose income is above the $87,000 and $174,000 thresholds. The IRMAA surcharge only affects 5% of Medicare recipients, but—depending on what happens with the inflation adjustments to the IRMAA income brackets—this 5% could increase over time.

In 2020, there are five different IRMAA income tiers. The Part B surcharge starts at $57.80 per month, equal to $693.60 annually, and gets as high up as $347 per month, or $4,164 annually. Keep in mind that the IRMAA surcharge is per person, so couples pay double these amounts.

If your income bumps you into the next income tier, you trigger the new tier’s full surcharge. For instance, income that moves you into the second tier—which starts at $109,000, versus $87,000 for the first tier—will trigger the second tier’s higher rate, even if you exceed the threshold by just $1. This so-called cliff penalty means that $1 of extra income triggers an additional IRMAA surcharge of $86.80 a month or $1,041.60 a year. A married couple would be looking at double the amount—equal to $2,083.20 a year.

To avoid triggering the IRMAA cliff penalty with modest additional income, you need to understand IRMAA’s timing, as well as what counts and doesn’t count as income. Medicare gets your income information from the IRS and bases the surcharge on your income from two years prior. For instance, when you’re age 65, Medicare uses tax returns from when you were 63. If you had a “life changing” event—perhaps you stopped working—you can file Form SSA-44 to get Medicare to look at current income. There’s no cost to do so and it’s a good idea if income from two years earlier is substantially higher than your current income.

Keep in mind that you could be bumped into a higher IRMAA bracket by, say, required minimum distributions from retirement accounts, a capital gain from selling your home or extra taxable income resulting from a Roth conversion. Even if this happens, the hit may be temporary: Medicare looks at income on an annual basis, so a taxable home sale or a Roth conversion only affects one year and won’t trigger a permanent increase in your Medicare premiums.

Are there any ways to avoid the IRMAA tax cliff? To cover your living expenses in any given year, you could reduce the taxable income you need to generate by instead taking tax-free withdrawals from a health savings account or a Roth retirement account. Neither of these is considered income for IRMAA purposes. Alternatively, once you’re in your 70s and above, you might reduce your required annual taxable withdrawal from your retirement accounts by instead making a tax-free qualified charitable distribution.

An IRMAA surcharge is also imposed on Part D, which covers prescription drugs. The Part D surcharge is smaller than that for Part B, but it uses the same income brackets. You could avoid the Part D IRMAA surcharge by skipping Part D coverage or opting for a Medicare Advantage plan without drug coverage.  But while that may save you from the Part D surcharge, it could end up costing you dearly, depending on your prescription drug needs.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Early and Often, Don’t Get an F and Late Fee.

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Seven Mistakes

ONE OF THE BIGGEST financial mistakes people make is not contributing to their employer’s 401(k). Nearly 20% of Americans are guilty of this. But that’s hardly the only mistake that folks make. As you strive for a comfortable retirement, here are seven other missteps you’ll want to avoid:

1. Poor tax planning. Try to estimate whether your tax bracket will be higher or lower in retirement. If you think it will be higher, fund Roth accounts, so your retirement withdrawals will be tax-free. If you think your tax bracket will be lower, go for traditional IRAs and 401(k) plans. With these accounts, you can get a tax deduction now, but you have to pay taxes on your withdrawals.

2. Not making a financial plan. A well-thought-out plan should take into account your expected lifespan, at what age you hope to quit the workforce, where you want to retire and the lifestyle you want post-retirement. Update the plan regularly as your needs and wants change, so you know how much you need to save each year for the retirement you want.

3. Forgetting to rebalance. It’s wise to rebalance your portfolio every year or even every quarter. This helps you maintain the asset mix you want. As you approach retirement, increase the percentage of bonds and cut back on stocks.

4. Ignoring inflation. You don’t know what the inflation rate will be when you retire, but you can prepare. If you have a pension, but it doesn’t adjust for inflation, you could be hit hard during retirement. What to do? Invest a portion of your 401(k) savings in assets that increase with inflation. These include options like real estate investment trusts and stocks generally.

5. Taking Social Security too soon. If you wait until your full Social Security retirement age or later, you’ll likely receive more money over your lifetime. For instance, if you take Social Security at age 62, your monthly benefit would be reduced by 25% to 30% compared to your benefit at 66 or 67.

6. Spending too much early in retirement. When you retire, you may be antsy to do all the things you couldn’t do when you were working. Still, make sure you don’t spend too much in the early years of retirement—or you could imperil your financial independence as you grow older.

7. Not preparing for medical expenses. Medicare, along with a supplemental Medigap policy, will cover most medical bills. Still, you’ll have to pay deductibles and co-pays, as well as expenses that Medicare doesn’t cover. If you aren’t prepared for these costs, you could find you have far less retirement income for other expenses, including the fun stuff you hope to do.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm in Goodyear, Arizona. Rick has more than three decades of experience working with investments and retirement planning. Over the past 10 years, he has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement, as well as other sites. Email him at rick@sdretirementplans.com.

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It’s a Stretch

FROM LISTENING to financial talk radio shows, it seems the hot topic these days is the SECURE Act and how it’s hurt the middle class. One caller had $2 million in his IRA, and was worried about the impact of the stretch IRA’s elimination on his children and grandchildren.

What am I missing here? I thought IRAs were a vehicle to help average Americans save for their retirement, not an estate-planning tool. Under the new law, surviving spouses aren’t adversely affected, so that’s not the problem.

Instead, the SECURE Act affects those who want to pass along their IRA’s tax advantages to their children and grandchildren. Got so much money in your retirement accounts that you don’t believe you’ll spend much of it? Yes, the new law is aimed at you—but, no, you aren’t truly middle class. If you want to leave a nice sum to your children and grandchildren, you should be using life insurance or holding investments outside of retirement accounts, not funding an IRA.

On the one hand, we hear about pitiful savings rates, as well as tiny 401(k) and IRA balances. On the other hand, we’re now hearing about the unfairness of cutting off extended tax-deferred savings through multiple generations. For whom is this a problem, except upper-income folks? Me thinks thou doth protest too much.

What’s the worst-case scenario? Some 50-year-old children get to defer taxes for only 10 years after their parents’ death. They then put their largess in a taxable investment account or tax-free bonds and carry on.

Alternatively, to avoid bequeathing a big IRA, the parents might leave a brokerage account funded with large retirement account withdrawals. The children then get taxable account money, with everything income-tax-free, thanks the step-up in cost basis upon death. The way the federal debt is going, paying those income taxes sooner rather than later might be a good thing.

The angst being demonstrated over this issue seems to substantiate the SECURE Act’s intent. Sure, folks could die before they’ve spent much of their retirement accounts and their beneficiaries will lose some tax flexibility when handling a large IRA or 401(k). But I’m guessing the majority of people funding these accounts today aren’t worried about the money they won’t spend.

My advice: Keep calm and carry on—and keep funding those retirement accounts.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Going Without, Getting Catty and Give Until It Hurts. Follow Dick on Twitter @QuinnsComments.

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The Wager Revisited

IN BERKSHIRE Hathaway’s 2006 annual report, Warren Buffett devoted several paragraphs to scathing criticism of the hedge fund industry. Their fees, Buffett wrote, were so exorbitant and so stacked against investors that they amounted to a “grotesque arrangement.”

Indeed, Buffett has frequently recommended that individual investors opt for low-cost index funds. To reinforce this point, he issued a public challenge in 2007: He would bet anyone $1 million that, over a 10-year period, a simple S&P 500-index fund would beat the performance of a portfolio of hedge funds.

As Buffett put it, “What followed was the sound of silence.” Only one brave soul, a hedge fund manager named Ted Seides, stepped forward. After agreeing to give the proceeds to charity, the two entered into their bet on Jan. 1, 2008.

What happened? The bet’s 10-year span ended on Dec. 31, 2017, but the results were so lopsided that Seides was ready to acknowledge defeat in May of that year. In the end, the S&P 500 delivered an average return of 8.5% per year, while the hedge funds came out just shy of 3%.

In the years since, the hedge fund industry has exhibited further weakness. In 2019, for the fifth straight year, more hedge funds shut down than started up. In fact, over the past five years, more than 4,000 hedge funds have closed their doors—about 30% of the industry.

As an individual investor, what lessons can you draw from this? The obvious conclusion: Avoid hedge funds—and I certainly agree with that. Even Seides himself now supports that view. While select institutions have had notable success with hedge funds, few would argue that this means individuals can achieve the same result. 

What else can we learn from the Buffett-Seides wager and its outcome? Here are five lessons:

1. Market valuation. In the 1700s, when Isaac Newton lost a fortune in the stock market, he observed that he could “calculate the motions of the heavenly bodies, but not the madness of the people.” In other words, the stock market doesn’t always behave rationally because it is, after all, just made up of individuals.

In Seides’s case, at the inception of the bet in 2007, he was willing to bet against the S&P 500 because he felt it was too expensive. In fact, he might have been right: The stock market did drop at first, but then it bounced back with a vengeance. The lesson: In theory, stock market valuations matter. You should be less enthusiastic investing when the market is booming—as it is today—than when it’s bottoming. But don’t fall into the trap of market-timing. It’s very difficult to know when the market will decline, how large that decline will be and when the recovery will begin. Instead, protect yourself through asset allocation.

2. The risk of resulting. Poker champion Annie Duke, writing in Thinking in Bets, describes the concept of “resulting,” which is the risk we run when we conflate a good result with a good decision. “Decisions are bets on the future,” Duke writes. “They aren’t ‘right’ or ‘wrong’ based on whether they turn out well on any particular iteration.”

Seides, in fact, says that he would make the same bet again, because he still believes in the logic of his decision. The lesson: You can’t control whether you’ll be lucky or unlucky, so focus on controlling what you can control—by making thoughtful, evidence-based decisions.

3. Yardstick selection. In his 2017 article, Seides walked through the reasons his bet fell short. One key point: Comparing the S&P 500 to a group of hedge funds, he said, is like comparing the Chicago Bulls to the Chicago Bears and asking which team is better.

Just as you can’t compare a basketball and football team, Seides pointed out, it doesn’t make sense to compare the S&P 500—which is 100% stocks—to a group of hedge funds, which might have just 50% in stocks. The lesson for individual investors: Whether you’re deciding how to allocate your portfolio or assessing its results, it’s vitally important to use the right yardstick.

4. The value of diversification. Over the bet’s full 10 years, the S&P 500 soundly beat the hedge funds. But in its first year, 2008, the hedge funds held up much better. In that year, the stock market dropped 37%, while the hedge funds lost just 24%.

The lesson for investors: Diversification means you’ll always have some investments that are lagging, while others are shining. It’s the rare portfolio in which everything is above average. But that’s precisely the value of diversification. I still don’t recommend hedge funds, but I’m sure that in 2008 the diversification they provided was welcomed by their shareholders. For your portfolio, seek investments with low, or negative, correlations.

5. The other side of returns. The Buffett-Seides bet was all about performance—about which investment would beat the other. That’s fine as an academic exercise or for sport between two wealthy investors. But that’s not the only thing that matters in the real world.

Equally important is risk. The best yardstick for success isn’t whether you beat a benchmark, or your neighbor, or your brother-in-law. Instead, the best measure of success is whether you meet your financial goals—while also sleeping at night.

Adam M. Grossman’s previous articles include Seven Paradoxes, Cut the Bonds and Got You Covered . Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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Five Freedoms

FOR THREE YEARS, I lived on Roosevelt Island, in the middle of New York City’s East River. It’s a wonderful place—a quiet, friendly, low-crime oasis in the middle of one of the world’s largest, most frenetic cities.

During my time there, the Franklin D. Roosevelt Four Freedoms Park opened on the island’s southern tip. The park is named after a 1941 FDR speech, where he articulated “four essential human freedoms”: freedom of speech, of worship, from fear and from want.

FDR’s speech was inspiring. Managing money is altogether more prosaic. Still, I’d argue that our pursuit of money is also about a hunger for freedom—with five dimensions:

1. Freedom from fear. We all want a sense of financial security—and yet all too many folks lead fragile financial lives. If our income barely covers our expenses, we may be okay if it’s a typical month. But so few months turn out to be typical.

We face frequent financial shocks, some large, some small. The car breaks down. The roof needs to be replaced. We lose our job. If we have scant savings and little financial breathing room in our monthly budget, such shocks can leave us scrambling to cover the bills and send our anxiety soaring.

As I mentioned last week, a Consumer Financial Protection Bureau study found that the sum we keep in liquid savings—meaning cash, checking accounts and savings accounts—has a huge impact on financial well-being. The price to escape much of our financial fear? All it may take is a few thousand dollars tucked away in the bank.

2. Freedom from financial dependence. We’re all dependent on other folks. Even billionaires need others to produce the goods and services they consume, to buy the investments they sell and to purchase the products their businesses make. But there are degrees of financial dependence—and the more dependent we are, the shakier our financial life can seem. I don’t like being financially dependent on others, and I can’t imagine many do.

Don’t get me wrong: When the day comes, I won’t have any qualms about claiming my Social Security check. But I would never want to be entirely dependent on a government program, a charity or family members.

Even working for others strikes me as a form of financial dependence, though it’s one most of us can’t avoid. It’s terrible to feel our livelihood hinges on a capricious boss. True, if we’re unhappy, we can always take our labor elsewhere. But switching employers is a costly, anxiety-inducing business.

3. Freedom from financial obligations. How much of your paycheck or your retirement income is spoken for, even before the money hits your bank account? Just as we can’t avoid all dependence on others, we can’t escape all financial obligations. But we should strive to ensure we get to call the shots on the bulk of our income, in part so we have plenty of money for discretionary spending—typically the spending that brings the greatest happiness.

That means minimizing our fixed monthly costs, such as mortgage or rent, car payments, cable, utilities, insurance premiums and streaming services. The lower these fixed costs, the more financial wiggle-room we’ll have. The key: Avoid excessive debt—and avoid committing to monthly costs that deliver little happiness.

4. Freedom from our own wants. Why do we end up with overwhelming monthly costs? It may be misfortune: We lose our job, get hit with big medical bills or need to help a family member. It may be circumstance: We’re new to the workforce, repaying students loans and living on a modest income in a high-cost city.

But sometimes, it’s our own miswanting. Instead of developing a well-calibrated sense of what constitutes enough, we foolishly hanker after a lifestyle we can’t afford and likely won’t make us happy. One result: We often end up taking on too much debt. When we do that, we get the fleeting pleasure of giving into today’s desires—but saddle our future self with monthly debt payments that will likely cause ongoing unhappiness.

5. Freedom to use our time as we wish. While we should minimize our financial obligations and our financial dependence on others, we should maximize our financial independence. How so? By making our money work for us.

Every dollar invested in the financial markets has the potential to grow into even more dollars—with little or no effort required on our part. Indeed, the more money we have at work in the markets, the less income we need to generate by working for others. Fingers crossed, we’ll eventually have enough dollars to stop working entirely, if that’s what we want, at which point we have the freedom to spend our days as we wish.

Latest Articles

HERE ARE the six other articles published by HumbleDollar this week:

Why do investors persist in trying to beat the market? Drawing on the work of behavioral finance expert Meir Statman, Robin Powell lists eight key reasons.
If you want to raise money-savvy kids, set a good example, talk about your own finances and tell family stories that illustrate the values you hope to instill.
How many different ways can we mess up financially? To complement last week’s list of investment sins, John Lim offers a dozen personal-finance sins that we should all strive to avoid.
After her husband’s death, Catherine Horiuchi grappled with her family’s spending: “Do I cancel Netflix, since we no longer sit on the sofa after the kids go to bed and watch a movie together?”
Want to make the most of your health savings account? Rick Connor discusses his HSA strategy.
“Personal finance is bedeviled by paradoxes, so no individual—no matter how rational—can always make optimal decisions,” argues Adam Grossman, who cites seven conundrums.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include Helping Them Along, Just in Time, Opening the Spigot and Humble Bragging.  Jonathan’s  latest books: From Here to Financial Happiness and How to Think About Money.

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Triple Play

I’M A BIG FAN of health savings accounts, or HSAs. They’re becoming more popular as a way to pay for medical costs—and, in the right circumstances, they can also be a valuable addition to your retirement plan.

What’s so great about HSAs? If used properly, they’re triple tax-favored. You get a tax deduction when you deposit funds. The growth thereafter is tax-deferred. And if you use distributions to pay for qualified medical expenses, withdrawals are tax-free. Result? There’s a saying that HSA funds “go in like a traditional 401(k) and come out like a Roth.”

An important feature of HSAs: The money is yours forever. You can accumulate it year after year, unlike a flexible spending account for health care expenses, which has to be largely or entirely emptied each year. There’s also no time limit for using the funds to pay for qualified medical expenses. As long as you have proper documentation, you can get distributions at any time in the future—and those distributions will be tax-free, even if the medical expenses were incurred years earlier.

The upshot: You can use an HSA as another retirement savings vehicle. Think of the strategy as having two phases: an accumulation phase and a decumulation phase. In the accumulation phase, you’re not only amassing funds in the account, but also accumulating medical expenses for later reimbursement. In the decumulation phase, you submit prior expenses and get reimbursed tax-free from your HSA.

Let’s say you have 10 years to retirement, and you have enough income to both fund an HSA and pay medical expenses out of pocket. Each year, you fund the account up to the IRS maximum and invest for long-run growth. You also save your medical receipts each year. You do this for the 10 years leading up to retirement, building up both a nice sum and a pile of medical receipts.

At retirement, you start the decumulation phase. You take the saved medical receipts and “cash them in” against your HSA account balance. As long as the expenses were for qualified medical expenses, the distribution is tax-free. Note there are no required minimum distributions for an HSA, unlike most retirement accounts. A key caveat: Although you can wait years to be reimbursed for a medical expense, the expense must have been incurred after the account was established.

Sounds easy? Don’t underestimate the record keeping that’s involved. IRS Publication 969 says you must keep records sufficient to show that:

The distributions were exclusively to cover qualified medical expenses
The qualified medical expenses hadn’t been previously covered by the HSA or another source, such as your health insurance company; and
The medical expenses hadn’t been claimed as an itemized deduction in any year on your federal tax return.

What if you’re ever audited? Each account holder is responsible for maintaining all records associated with their HSA for tax purposes. Experts recommend keeping receipts for three-to-seven years after you’re reimbursed by the account.

I’ve found that, to maintain multiple years of receipts, you need a well-organized, easy-to-use system. You can do this yourself with folders for each year. Alternatively, you might scan receipts and save them on digital media for future uploading to your HSA account. This is how I started. Luckily, the technology and sophistication of HSA accounts are making this easier. Some HSA providers have the capability to maintain a digital paper trail of your HSA spending by capturing and uploading images, even allowing users to add notes and organize receipts into folders.

Once you have your receipts saved, you can cash them in as desired. I’m aiming to hold off until my wife retires and we need the income. I am, however, worried that the amount of data will get too great and become hard to manage. I also worry that, if I’m not around, it would be a burden for my wife. Given these concerns, I’m considering some “harvesting” strategies, such as withdrawing a past year’s medical expenses each year in retirement or perhaps two years of expenses every other year.

What if you don’t have enough medical expenses to use up your HSA balance? You might use the funds to pay for a long-term-care policy. After age 65, HSA funds can be used to pay Medicare Part B, Part D and Medicare Advantage premiums (but not, alas, for a Medigap policy). You can also use the funds to pay for COBRA benefits.

After age 65, HSA distributions can be made from an HSA for non-medical expenses. These distributions will be taxed as ordinary income, just like withdrawals from a traditional IRA. What if you make withdrawals for non-medical expenses before age 65? You’ll get hit not only with income taxes, but also a 20% tax penalty.

Richard Connor is  a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Read the Fine Print, Return on Investment and Decision 2020. Follow Rick on Twitter @RConnor609.

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12 Financial Sins

THE FINANCIAL markets are often quick to punish investment sins. By contrast, if we err with our borrowing, spending and other personal-finance issues, problems might not show up until years later—but the damage can be just as great. Here, to complement last week’s list of 12 deadly investment sins, are 12 deadly personal-finance sins:

1. Pride: Keeping up with the Jones by buying luxury cars and fancy clothes.

Antidote: Realize the folly of buying depreciating assets you don’t need, with money you don’t have, to impress people you don’t like.

2. Greed: Operating with a “never enough” money mentality. A reporter asked billionaire John D. Rockefeller, “How much money is enough?” His response: “Just a little bit more.”

Antidote: Generosity. Giving away money will loosen its emotional grip on you—and make you happier as well.

3. Lust: Getting divorced.

Antidote: Invest more time and energy in your marriage.

4. Envy: Comparing your financial state to that of others. Since there will always be someone with apparently greater wealth, such comparisons often lead to envy and discontent.

Antidote: Instead of comparing yourself to others, work to develop gratitude for what you have.

5. Gluttony: Falling into debt. If money saved is financial progress, money borrowed is often a step backward. As I’ve mentioned before, going into debt to pay for today’s consumption is the path to financial slavery.

Antidote: With the exception of taking out a mortgage or student loans, if you don’t have the cash to pay for something in full, save up until you do.

6. Impatience: Claiming Social Security early. Delaying benefits can be one of the best financial deals out there.

Antidote: Make an informed decision about when to claim Social Security benefits. A great place to start is Mike Piper’s excellent book, Social Security Made Simple.

7. Sloth: Remaining financially illiterate. This sin is particularly costly because it leads to so many other financial sins.

Antidote: Read at least one good financial book a year. Start with If You Can by William Bernstein, which is both a masterpiece and a quick read. It’s also free—just Google it. If you learn to be a do-it-yourself investor, you can save a boatload in fees over your lifetime.

8. Fear: Being unable to enjoy your retirement because of irrational worries about running out of money. Spending down a nest egg requires a mindset that’s completely different from that required when saving for retirement. Drawing down a portfolio is also subject to a unique set of risks, such as sequence-of-return risk and longevity risk. I suspect a large number of retirees allow such fears to cast an unnecessary shadow over their golden years.

Antidote: If you’ve saved enough for retirement, don’t let irrational fears rob you of joy. Adjust your asset allocation as you approach retirement—by reducing your portfolio’s risk level—so an unlucky “sequence of returns” doesn’t meaningfully impact your retirement. Learn to “roll with the punches,” spending a bit less when the markets are stingy and more when returns are generous.

9. Imprudence: Failing to insure. It’s like playing Russian roulette with your financial life.

Antidote: Insure the big stuff, by purchasing home, health, auto, disability and life insurance.

10. Negligence: Buying cash-value life insurance instead of term insurance. Term is the least expensive and most appropriate form of life insurance for the vast majority of people.

Antidote: When dealing with insurance agents or financial advisors who hawk insurance products, always be on your guard—because you’ll likely be pitched the products that pay them the highest commissions.

11. Hyperactivity: Being addicted to online shopping. The convenience of online shopping is matched only by its detrimental effects on our ability to save and to delay gratification.

Antidote: If you’re hooked on internet shopping, consider cancelling your Amazon Prime membership, deleting offending apps from your smartphone and unsubscribing to emails from online merchants. Adopt a “sleep on it” rule for online purchases, so you avoid impulse spending.

12. Aimlessness: Not having a budget or rainy-day fund.

Antidote: Adopt a super-simple “pay yourself first” budget. If you don’t have a rainy-day fund, use your monthly savings to begin building one.

John Lim is a physician and author of How to Raise Your Child’s Financial IQ, which is available as both a free PDF and a Kindle edition. His previous articles include 12 Investment Sins, How Low? Too Low and Solomon on Money . Follow John on Twitter @JohnTLim .

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Helping Them Along

MOST OF US want to help our children financially. But we also want to avoid thwarting their ambition or unintentionally instilling bad money habits. And, no, this isn’t just a problem for the wealthy: All too many kids who grow up in middle-class households end up as financially irresponsible adults.

How can we avoid that fate, while still helping our children financially? Below are five strategies. The first three are cost-free and the other two don’t necessarily require serious sums of money:

1. Set a good example. When it comes to money, our children are likely to do what we do—and not what we say. If heading to the mall is a regular weekend activity, or the monthly credit card bill causes the household stress level to skyrocket, or we describe people in terms of the clothes they wear and the possessions they own, we’re telling our kids what we value and what sort of financial life they can expect—and we’re doing it more powerfully than any lecture we could possibly deliver.

2. Tell family stories. Logic and data may carry intellectual weight. But it’s stories that pack an emotional punch and that tend to shape our opinions, financial and otherwise.

How can we guide our children’s financial choices? We should pick our stories carefully and embellish when necessary. Talk about family members who have been successful—and why they were successful. Discuss your smartest financial moves, as well as the missteps you’ve made.

Also recount what it was like when you started out. Tell your children about the scuzzy one-bedroom apartment you shared with a friend when you were in your 20s. But make it three friends, and throw in a few cockroaches and mice for good measure. That’ll prepare your children for lean times when they’re in their 20s—and they might even take a certain pride in their hardship.

3. Talk about money. But don’t talk general financial principles. Instead, tell your kids about your own financial life—how much you get paid, where the money goes, the major purchases you’re considering, what your portfolio looks like today and what your financial goals are.

Use these conversations to illustrate the financial notions you want your children to grasp—and make sure it is indeed a conversation. Ask your children for their opinion of what you’re doing. Ask what their financial ambitions are. Ask what sort of money discussions they have with their friends.

4. Subsidize a Roth. If your children have any sort of earned income, seize the chance to fund a Roth IRA on their behalf. At their modest—or nonexistent—tax rate, a Roth’s tax-free growth will be more valuable than a traditional IRA’s immediate tax deduction.

Sure, it would be great if your kids invest part of their earnings in the Roth. But if they balk, I wouldn’t make their contribution a precondition for funding the account. It’s simply too good a chance to teach your kids about how retirement accounts work, how time is the investor’s friend and how to invest sensibly.

My suggestion: Use the Roth to buy one of the target-date retirement index funds offered by Fidelity Investments or Charles Schwab, all of which have no investment minimum and modest investment costs. One warning: Fidelity and Schwab have a second set of target-date funds that are actively managed. Those I would avoid.

5. Help with costs you deem important. There are all kinds of ways, big and small, to help your children financially: college costs, car repairs, house down payments, cell phones, weddings, travel, medical bills.

How much you help will be constrained by your own finances—and by how much help you think it’s wise to give. But it’ll also hinge on what you think is important. If you help your children buy their first car, but you don’t offer any help with college costs, you’re delivering a message about what you consider important—and, rest assured, your kids will hear you loud and clear.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include Just in Time, Opening the Spigot and Humble Bragging.  Jonathan’s  latest books: From Here to Financial Happiness and How to Think About Money.

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Muddling Through

DESPITE MY independent nature, I called family and friends after my injury. I thanked them for what they’d already done following my husband’s death—and requested additional, more intensive support.

One aunt, a government employee, arranged to work for a week at a nearby federal building. My sister-in-law also came for a week, and a cousin who is a nurse volunteered, too. A professional colleague parked her RV in the driveway and brought along her friendly pooch. Gaps between out-of-town guests were filled by neighbors and friends, as well as parents of our girls’ baton-twirling team.

For two months, I rotated between medical appointments, reworking the family budget, paying routine bills, learning about my spouse’s finances, and filling out the paperwork required as his executor and successor trustee. I dealt with medical providers and insurers, handling my own bills along with those left by my spouse. I developed a budget with one-, two- and five-year projections.

The most optimistic timelines for recovery came and went without noticeable improvement in my mobility. I could work remotely, but it was obvious that I couldn’t easily fulfill my committee and teaching responsibilities. My dean was hesitant about the work strategies I suggested. Rather than push back, I agreed to a few weeks of medical leave, which turned into six months of short-term disability.

Our teenagers’ school attendance and grades careened between sketchy and cringeworthy. I worked with school administrators, as they guided our three children. Meanwhile, I struggled to find well-regarded counselors with experience in handling teens coping with grief. Paying this expense is a new line in our budget for 2020.

My spouse and I split family expenses, so I only knew half of what charges to expect. My half of the bills I put on autopay, but not his. It’s easy to autopay for things you don’t use. There’s no sensation of spending the money, unless you closely review monthly statements. Every time I pay a bill, I ponder how much we use the service and compare the cost to something else I might be able to buy.

I also considered whether cutting back might result in meaningful amounts, which could then be used to rebuild our rainy-day savings. Continuing to save—or at least thinking about saving—helped me to focus on the future at a time that required seemingly reckless overspending. Every dollar saved was a dollar sent forward. Acute grief shortens perspective. “What do I need to do today, before the kids come home from school?” Saving lets me look beyond the unbearable present to a future that’s unclear but promising.

The bereaved are considered indecisive. But when you don’t know how you feel or what you want, beyond a return to your unattainable pre-bereaved state, every decision has aspects to it that didn’t exist before. Do I cancel Netflix, since we no longer sit on the sofa after the kids go to bed and watch a movie together? Do I drop the special cable sports package, since no one here watches that particular team anymore? Or do I leave the TV on anyway, to cover the silence in the middle of our family?

I will eventually drop many recurring expenses, but not yet. This has made the year of my husband’s death more expensive, but grief works that way and I have a rainy-day fund to cover this justifiable indulgence. It will look like I am making serious progress when, in the months ahead, I follow through on my resolution to get rid of things we won’t use.

Here are three takeaways from this period:

Your rainy-day fund was built for this moment. Spend without regret.
There are some trustworthy people who are helpful, while others seem to think the bereaved are fair game. Keep your credit cards and checkbook away from the latter. If you can’t tell these two groups apart, put away your credit cards and your checkbook until your good judgment returns.
While the hourly pay for a gig job or consulting may be much higher than that for regular employment, calculate the value of benefits you’re giving up. If you’re out of work for six months, what kind of disability coverage would you have? How will you pay for what you need? Our society has many laws in place that protect and benefit ordinary employees of traditional workplaces. Contract employees aren’t nearly so fortunate.

Catherine Horiuchi is an associate professor in the University of San Francisco’s School of Management, where she teaches graduate courses in public policy, public finance and government technology. This is the fourth article in a series. Catherine’s three earlier articles were At the End, The Aftermath and When It Rains.

HumbleDollar makes money in four ways: We accept donations, run advertisements served up by Google AdSense, sell merchandise and participate in Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other items, you don’t pay anything extra, but we make a little money.

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