Jonathan Clements's Blog, page 348

Time Well Spent

I CONSIDER myself a retirement newbie. I only quit fulltime work in May 2018. Still, it doesn���t take long to pick up a few things about life in retirement. Here are four insights I���ve gained over the past year and a half:

1. It���s important to have a plan.��I have witnessed how some retirees, without a plan or direction, struggle to fill the empty time. Here in Spain, for some retirees it can become an endless ���Groundhog Day��� cycle of daily drinking and tapas hopping. The only sign of creativity is, ���Which bar today?�����One study linked retirement to a 40% greater probability of suffering from clinical depression, especially among men.

When your day is no longer occupied with work, meetings, projects and commutes, how do you fill the time? Retirement is like a blank canvas. You���re free to paint, draw or make of it anything you want. That can be liberating, but it���s also quite daunting when you first confront the canvas. Indeed, many retirees are uncomfortable with the prospect, especially if they step in front of the blank canvas with just the vague notion that they want to create ���something.��� In retirement, we not only have to continue to do things on purpose, but also we need a sense of purpose.

2. Old habits die hard. It���s hard to switch off ���working mode��� right after retirement. I admit I still tackle tasks furiously, with an imaginary deadline-meeting determination that causes my husband Jim to joke, ���Don���t get in Jiab���s way, because she���s on a mission.��� It���s a lifelong habit that I developed from a young age. No doubt this focus helped me to succeed in graduate school and in my career. But in retirement, it can also bring self-imposed stress. Every day, I work to tame my relentlessness���but at least I haven���t set a deadline to achieve this particular goal.

Similarly, I���ve noticed that how others deal with retirement isn���t so different from how they approached life before retirement. Passive people tend to stay passive, proactive people stay proactive and busy people find things to keep themselves busy. If you���ve been pushing off exercise your whole life and think you���ll get fit after you retire, you will find plenty of excuses to not exercise, even after you quit the workforce. It is easier to remain the same���unless you make a conscious effort to change.

3. It���s better with a partner.��While change is hard to both initiate and adjust to, it is easier if you have a partner���one who���s on the same page as you. Jim and I retired at the same time with similar outlooks on retirement. Not only do we share goals, like traveling, but also we support each other���s individual passions, from Jim���s book writing to my learning guitar.

We also push each other to be better. That���s our competitive nature. Our Spanish has improved significantly over the past year, because we see each other practicing and neither wants to be left behind. When you live alone, it���s easy to take the path of least resistance and binge watch Netflix in English for three days, instead of getting out. This is why many improvement programs have a buddy or sponsor system. Being accountable to another person makes you, well, accountable.

4. Learning gets harder as we age. After my retirement, I took up designing, building and maintaining a blog. Along with the blog, I started to write, both for our blog and for financial websites. I found that writing is a process that can���t be rushed. For every piece I draft, I have to edit it multiple times more. I now call writing ���rewriting.��� The process takes many weeks, because I need to let the ideas and phrasing flow and gel in my mind. As a lifelong numbers person, writing is definitely using a weaker muscle. It���s what makes it hard, but also rewarding.

Because I���m already fluent in Thai and English, learning another language���Spanish���should be easy, right? Not quite. It���s much tougher to learn a new language in my 50s than when I began learning English at age 10. I don���t retain words as well as I used to and the rules don���t click quite as easily. While it���s true that you���re never too old to learn something new, the older you are, the steeper the learning curve. Still, there���s one Spanish phrase I���ve learned that gives me heart: poco a poco���little by little.

Last year, at age 53, Jiab Wasserman left her job as a financial analyst at a large bank. She’s now semi-retired. Her previous articles include Those Millennials,��Cutting Corners��and��Fast Forward . ��Jiab and her husband Jim, who also writes for HumbleDollar, currently live in Granada, Spain. They blog about downshifting, personal finance and other aspects of retirement���as well as about their experience relocating to another country���at�� YourThirdLife.com .

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Our Charity

WHEN I WAS in the workforce, it was easy to give to charity. Now that I���m semi-retired, it seems like more of a struggle���for four reasons:

Because I���m no longer employed fulltime, I can���t donate through payroll deduction, which used to make giving simple and automatic.
Leaving fulltime employment often results in reduced or uncertain income, and sometimes both. Today, I find it harder to know how much I can afford to give.
Retirement heightens thoughts of leaving a legacy to children and other heirs. If I give to charity, it���ll cut into the sum I can bequeath.
The Tax Cuts and Jobs Act of 2017 dramatically increased the standard deduction. That made charitable giving somewhat less valuable from a tax perspective.

Forbes recently ran an article on the impact of 2017���s tax code changes on last year���s charitable giving. In 2018, 21 million fewer taxpayers claimed nearly $37 billion less in donations, compared to the prior year. This doesn���t necessarily mean those who didn���t deduct donations in 2018 failed to give to charity. But it does indicate that many who had given in 2017 weren���t able to take a tax deduction in 2018. This change effectively increases the cost of giving, potentially discouraging many who otherwise would have made donations.

Many of us find other ways to give, including donating time. I���ve gotten involved in AARP���s Tax-Aide program, helping to prepare tax returns for seniors and low-to-middle-income families. My wife and I also contribute to the many charitable events our extended family participates in. It���s a real source of pride to see the generosity of our larger family. But neither of these replaces the workplace programs, which were the largest part of our monetary giving.

Recently, however, my wife and I found an option that has filled this gap: We created our own donor-advised fund. According to the National Philanthropic Trust, ���A donor-advised fund, or DAF, is a giving vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.���

One of the obstacles, however, can be the minimum donation required to set up a DAF. At Fidelity Charitable and Schwab Charitable, you need $5,000. Vanguard Charitable requires a $25,000 initial contribution. Also, investors in donor-advised funds pay annual administrative fees on account balances. In addition, some DAFs require relatively high minimum grants���perhaps $500 every time you give.

We chose to open our fund at Growfund, which I heard about because a family member works at the fund���s parent organization. Growfund was developed to bring the benefits of a DAF to everyday Americans. There���s no cost to open an account and your contributions are immediately tax-deductible. The minimum initial donation is $1. Your contributions can be invested and left to grow over time. There are no annual account fees, though there is a 1% administrative fee charged at the fund level.

We even got to name the fund. It may not be the Gates Foundation, but it was fun to come up with a name���we dubbed it the Richard and Victoria Connor Fund���and it gave my wife and me the chance to have some serious conversations about what causes truly matter to us.

At Growfund, minimum grants are $10, and can be onetime or set up as recurring donations. Grants can be made to more than 1.8 million charities. There���s a variety of options for contributing, including cash, check, credit card, wire transfer and payroll deduction. You also have the option of contributing other types of financial assets, including stocks, mutual funds and real estate. That can be a smart move if it���s an asset that���s appreciated in value, because you avoid the capital gains tax bill.

That isn���t the only potential tax savings. Many financial planners now recommend bundling several years of charitable contributions into one tax year, so you���re able to itemize your deductions and get a tax break for your generosity. Once the money is in a DAF, you can provide grants to charities at any frequency and over a time period of your choice. Depending on the DAF, there may be no limitations on when assets must be distributed.

On that score, I���ve read several articles that indicate that the amount contributed to DAFs is significantly higher than the amount distributed. While tax considerations are important, remember why you���re donating. There are many worthwhile charities that need our support. Make sure you follow through���and use your DAF to help the causes you care about.

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 Solo Effort,��What Number��and��Taking Your Lumps. Follow Rick on Twitter��@RConnor609.

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Better Than Timing

IT���S THE GREAT investor fantasy: Quit the stock market at the top and buy back in at the bottom. While the lure of market timing sells millions of books and is standard fodder for financial television, the reality rarely lives up to the promise.

History is littered with the failed dreams of market timers. Less than five years after the nadir of the financial crisis,��some pundits��were saying U.S. stocks were overvalued. Another five years on and the market had gained more than 60%.

Not even the gurus have much of a record. Back in 1996, Federal Reserve Chairman Alan Greenspan warned of “irrational exuberance” in the stock market, and yet the market climbed for another three years before the dot-com bubble finally burst.

Even if your logic about valuations is impeccable, there���s no guarantee the market will come around to your view. As someone once said���no, it wasn���t John Maynard Keynes���markets can stay irrational longer than you can stay solvent.

But the most overlooked challenge with market timing is that it requires you to make two correct decisions: You must get out at the right time���and you need to know when to get back in.

Think back to the global financial crisis. Plenty of people were throwing in the towel by early 2009. But how many bought back into the market in time to enjoy the big bounce that followed in the second and third quarter of that year?

The fact is, market timing is tricky, because big gains and losses can come in relatively short periods. Not even the professionals have much of a track record in successfully negotiating these unpredictable twists and turns.

If market timing is a mirage, what��can��you do? Here are five alternatives that make more sense���and none requires a crystal ball:

1. Take the long view. “The historical data supports one conclusion with unusual force,” the index fund pioneer Jack Bogle once wrote. “To invest with success, you must be a long-term investor.”

Instead of trying to time the ups and down of the markets, why not simply change your time horizon? Over the very long term, patient stock investors holding diversified portfolios have almost always been rewarded. To be sure, not everyone��can��take the long view, such as those who need to access their money within the next two or three years���which is why these folks shouldn���t have this money invested in stocks.

2. Build a portfolio for all seasons.��Everyone should have a balanced asset allocation���certainly a mix of stocks and high-quality bonds���that matches their capacity for risk. Defensively minded investors might have just 50% or less of their portfolio in stocks, with the rest in bonds.

The right mix also depends on your age, goals and circumstances. Whatever your risk capacity, diversification is key. Spreading your risk across different asset classes and geographies will reduce the impact of a steep decline in one particular market. Ultimately, it���s your asset allocation that���s going to be the most important driver of your investment returns.

3. Rebalance occasionally.��In general, the less you tinker with your portfolio, the better. That���s not to stay you shouldn���t touch it at all, but any changes you make should be done in a strategic, structured and disciplined way that reflects your needs and circumstances.

A good discipline is to rebalance your investment mix periodically, so you bring its asset allocation back into line with your target portfolio weights. This means, every year or so, lightening up on some of the winners and adding more money to the losers. This effectively forces you to sell high and buy low, which is what you should be doing.

4. Drip money into the market.��If you���re worried about the stock market and want to reduce your risk, try dollar-cost averaging. Say you have a sizable sum���perhaps an inheritance or a year-end bonus��� that you want to invest. Instead of going all in and investing the full amount in one go, you can drip small amounts into the market over a period of time.��Economists don���t think this approach makes much difference from an investment perspective. You might end up with slightly lower returns. But it���s a useful way of helping you sleep at night and minimizing regret.

5. Carry more cash.��Everyone should hold enough cash to cover three to six months of living expenses, in case of, say, unexpected medical bills or you lose your job. But nervous investors may want to keep more cash than that. The advantage: Your portfolio will hold up better in a market downturn, plus���if you���re feeling courageous���you���ll have extra cash to put to work when share prices are lower.

Robin Powell is an award-winning journalist. He’s a campaigner for positive change in global investing,��advocating better investor education and greater transparency. Robin is the editor of�� The Evidence-Based Investor , which is where a version of this article first appeared. His previous articles for HumbleDollar were��Writing Wrongs,�� Private Matters ��and Where’s the Value? Follow Robin on Twitter @RobinJPowell .

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Happiness Formula

CLAY COCKRELL has an unusual job. He describes himself as a psychotherapist treating the ���1% of the 1%��� in New York City. From this vantage point, Cockrell has gained unique insights into the lives of the extremely wealthy. What conclusions does he draw about money and happiness? ���If you have an enemy,��� Cockrell says, ���go buy them a lottery ticket because, on the off-chance that they win, their life is going to be really messed up.���

This observation fits well with the aphorism that ���money doesn���t buy happiness.��� There���s a growing body of research supporting this view. Lots of professional��athletes��run into financial distress, despite earning millions.��Lottery��winners seem like a particularly unfortunate lot. Even the��neighbors��of lottery winners��end up worse off.

But those who��aren���t��wealthy are quick to rebut claims that money doesn���t buy happiness. Having too little money can also carry negative consequences.

If both��too much��and��too little��money can be problematic, where does that leave us? In researching this question, I wasn’t surprised to learn that the single most popular class in the 318-year history of Yale University is called ���Psychology and the Good Life.��� The topic: happiness and how to achieve it. Each semester, more than 1,000 students enroll. This suggests that most people���s ultimate goal isn���t to accumulate the most dollars. Rather, it���s to accumulate maximum happiness.

Does this mean there���s no connection between money and happiness? Far from it. It’s just that the relationship is complex. Consider three insights from the research:

1. Money does indeed buy happiness���but to a limited extent.��If you earn $40,000, you���ll definitely feel happier if you get a raise. But those benefits top out more quickly than you might expect���at around��$75,000. People who earn $500,000 are indeed happier than those who earn $50,000, but not 10 times happier. The same applies to retirees: Those with $1 million in the bank are certainly happier than those with $100,000, but the happiness benefits aren���t proportional to the sum involved.

The lesson: You should work hard and save diligently, but be aware of what���s known as the “arrival fallacy.” This is the tendency to say to ourselves, ���I���ll be happy when _____.��� Clay Cockrell describes one patient who had $500 million, but really wanted to get to $1 billion to feel truly secure.

That���s an extreme case, but you get the point: We would all like a few more dollars, but the evidence suggests that���unless you���re truly destitute���it probably won���t help. While you might find this conclusion discouraging, I think it���s comforting. It means that the road to greater happiness doesn���t necessarily require more money.

2. How you spend your money is far more important than how much you have.��According to retirement researcher Michael Finke, the best way to spend your money is in ways that bring you greater socialization. We should invest in friendships, even if it means traveling long distances. That���s money well spent. Time with grandchildren also increases happiness.

While Finke wouldn’t recommend buying an expensive toy like an antique car, he points out that the litmus test should be socialization. If you drive the car by yourself, it does no good. But if it brings you into contact with other classic car enthusiasts, that could be beneficial.

3. In retirement, guaranteed income may be more valuable than higher income.��According to a happiness survey by Towers Watson, workers with pensions, annuities or other reliable income sources experience lower levels of anxiety than those who rely entirely on their investment portfolios during retirement, regardless of the portfolio���s size. This is an extremely important point. In many cases, people make financial decisions only through the lens of maximizing wealth. But what this study shows is that maximizing peace of mind is actually a more important goal.

How can you structure your finances to achieve greater peace of mind? There���s a number of ways���and often they run contrary to conventional wisdom. Annuities, for example, have a bad reputation due to their fees, complexity and inherent longevity gamble. But if you want a secure retirement, a low-cost annuity might not be such a bad idea.

By the same token, many investors today prefer to maintain higher allocations to stocks, instead of earning thin yields in the bond market. But if you don���t need to take additional stock market risk, maybe it makes sense to adopt a more defensive posture. In other words, don���t worry about forgoing potential upside in the stock market. Instead, focus on the increased peace of mind you���ll achieve in the bond market.

Many years ago, I knew an investor who preferred to keep $1 million in his checking account at all times. While conventional wisdom would say this was irrational, I always felt it made perfect sense. You alone are the best judge of what will help you sleep at night.

Adam M. Grossman���s previous articles��include Yet Another Reason,��Peter Principles��and But Will It Work . 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 .

Do you enjoy the articles by Adam and HumbleDollar’s other writers? Please support our work with a�� donation .

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Guessing Game

WE WON���T KNOW until we get there.

How much do we need for retirement and what will it take to amass that coveted sum? It sometimes seems like the entire financial advice business���brokerage firms, fund companies, financial planners, online calculators and more���is solely focused on this conundrum.

That���s mostly a good thing. It is indeed crucial to amass enough for a comfortable retirement. Still, let���s acknowledge an inconvenient truth: The resulting retirement projections imply a degree of precision that���ll likely look hopelessly na��ve once the real world intervenes. Here are three key pitfalls:

1. Market mayhem. Through our initial decades in the workforce, it doesn���t much matter whether the financial markets are kind or cruel. Why not? At that early juncture, the biggest driver of our portfolio���s growth is the actual dollars we sock away. Moreover, if returns are indeed lousy, it���s often a plus: Our savings will buy stocks and bonds at cheaper prices, and those dollars should eventually enjoy higher returns.

But as we approach retirement, with fat portfolios but relatively few years left to save, it���s hard to be so sanguine about market performance. Whether we get wonderful or rotten returns will make a huge difference to our ultimate nest egg.

Let���s say we���re 10 years from retirement, with $300,000 socked away. If we hold a 60% stock-40% bond mix and we get returns that look like the past decade, our $300,000 might balloon to more than $630,000. That should be enough to generate over $25,000 in annual retirement income, which would then supplement whatever we get from Social Security and any pension. But if returns look like the decade before���the 10 years through September 2009���we���d retire with less than $410,000. That would give us just over $16,000 a year, assuming a 4% withdrawal rate.

What to do? I fall back on the advice I often dish out: We should save as much as possible early in our careers. If all goes well, we���ll enter that final decade in decent financial shape, so lousy investment returns during those last 10 years shouldn���t badly derail our planned retirement.

2. Lifestyle creep. As we advance through our working years, our cost of living climbs. There���s the obvious reason: inflation. Less obvious: Our collective standard of living rises not with inflation, but with per-capita GDP, which in the U.S. has increased 1.6 percentage points a year faster than inflation over the past 25 years. In the early 1990s, we didn���t have cell phones, internet access and next day delivery. Today, we expect such things.

Moreover, for many of us, our living expenses rise even faster than per-capita GDP. As we get periodic promotions and accompanying pay raises throughout our career, our lifestyle creeps upward. The upshot: The nest egg we need in our 60s to maintain our standard of living is likely far larger than the one we needed in our 20s. That means our earlier retirement projections will likely be badly off and, if we don���t revise them, we could end up with a nest egg that���s too small to sustain our lifestyle.

What���s the solution? Suppose we start our working career by saving 10% or 12% of our income toward retirement. As inflation climbs, we should increase the dollar amount we save each year���and, if we receive a pay raise that���s above the inflation rate, we might sock away half of that additional amount.

3. Savings interrupted. Retirement projections often assume we���re able to save steadily throughout our careers. But stuff happens: Bosses fire us. Spouses leave us. Illness derails our career. Children turn up and expect to be fed, clothed and educated.

To prepare, we could super-charge our savings early in our career���or we could try to compensate by toughing it out in the workforce for longer. It is, however, dangerous to bank on working late in life.

Why? According to the Employee Benefit Research Institute, workers say they expect to retire at age 65, on average, and yet the typical retirement age turns out to be age 62. That early exit might be prompted by illness, layoffs or simply a growing disenchantment with the work world. Whatever the reason, it means three fewer years to sock away money and earn investment returns, plus three more years of retirement to pay for.

At that point, with the chance to save now passed, the key is to spend less. If we find ourselves retired before we planned, we should move quickly to cut our living costs. Probably the biggest cost savings is to trade down to a less expensive home.

We might also look to squeeze more income out of the nest egg we have. How? We could pay for our initial retirement years out of savings, while delaying Social Security to get a larger monthly check. Similarly, we might turn a chunk of our savings into a stream of guaranteed lifetime income by purchasing an immediate fixed annuity.

My goal here isn���t to dissuade you from making retirement projections. If that inspires you to get your financial act together and it gives you a sense of financial control, go right ahead. But if you���re going to project, project often, because your required number will change constantly. What if you come up short? You���ll do what retirees have always done: You���ll find some way to muddle through.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Improving the Odds,��50 Shades of Risk��and��Show Me the Money. Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense 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 merchandise, you don’t pay anything extra, but we make a little money.

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Financial Pilates

NOTHING COMPARES to the human body when it comes to the combination of strength, flexibility and control. Build a strong core, and the possibilities are limitless. Through the discipline of Pilates, you can strengthen your core, while developing flexibility and control. It���s a wonderful tool, but one that���s underutilized.

The same can be said for health savings accounts, or HSAs, which can be funded if you have a high-deductible health plan. With an HSA, you can build strength, flexibility and control, helping you to achieve financial independence with an unrivaled triple-tax advantage���tax-deductible contributions, tax-deferred growth and tax-free withdrawals when the money���s used for qualified health care expenses.

In its most common form, an HSA is simply a checking account with a debit card, and that���s a shame. While that checking account offers flexibility, it doesn���t build strength or offer you control. But banks love to use your money as a cheap source of funds, while your dollars sit there waiting to cover future health care costs. Other HSAs allow you to purchase a limited number of mutual funds, but those funds often have high annual expenses and some even charge upfront sales commissions.

If you find your HSA has these issues, find a new HSA provider. If your HSA is part of your employee benefits, explain to the benefits department that there are much better options.

What do you want? The latest generation of HSA providers offer an unlimited menu of investments, plus some additional features specific to HSAs. For instance, the HSA might allow you to set a dollar amount for the cash held in your account, with everything over that amount directed into longer-term investments.

A voice might be telling you that you simply don���t have enough to fund both an HSA and your 401(k). My advice: Think of your 401(k) and HSA as a single long-term investment.

Remember, you can use any amounts left in your HSA for retirement, just like it was your 401(k). Withdrawals for qualified medical expenses are always tax-free. Meanwhile, withdrawals after age 65 for other uses will be taxed as ordinary income���the same as money coming out of a traditional 401(k).

Look to fund your HSA to the max and then direct additional savings to your 401(k). The HSA then becomes a combination emergency health care and retirement fund. You���re still investing and growing your retirement assets, while also gaining flexibility in case of unforeseen health care expenses. This might allow you to avoid taking a loan or even a hardship withdrawal from your 401(k) to cover health care costs. Hardship withdrawals are taxable and, if they happen before you reach age 59��, you have a 10% tax penalty, too.

One warning: Check both the timing and formula your 401(k) uses to compute the employer match. Make sure you contribute enough to the plan each paycheck to earn your employer���s maximum matching contribution. That���s a financial bonanza you don���t want to miss.

Mark Eckman is a data-oriented CPA with a focus on employee benefit plans. His previous article was Giving Voice. As Mark approaches retirement, he’s realizing that saving and investing were just the start���and maybe the easy part. His priorities: family, food and fun.��

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense 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 merchandise, you don’t pay anything extra, but we make a little money.

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Waiting Game

HOW DO DEFERRED income annuities work and how do they fit into a retirement portfolio? I���m a fan of DIAs���sometimes also called longevity insurance���because of their simplicity and range of benefits. Indeed, I sell them through the insurance website I run. But I also realize they aren���t for everyone.

With a DIA, you hand over a lump sum to an insurer in exchange for regular income payments. Like a standard lifetime income annuity, the payments are guaranteed, no matter what happens in the markets or how long you live. With a DIA, however, the start date for your payments is deferred at least a year and often far longer.

By delaying the payment starting date, DIA buyers can receive higher income, because insurers get to invest the funds for longer, plus buyers collect ���mortality credits.��� What are mortality credits? That refers to the fact that some DIA buyers will die young and their funds can then be used to make higher payments to those who live longer.

For example, a 65-year-old man investing $100,000 in a DIA could receive some $24,000 a year in guaranteed lifetime income starting at age 80, compared to $6,300 a year if he bought an annuity that starts paying immediately. Obviously, by the time the DIA starts at age 80, the immediate annuity would���ve already paid out a heap of money���$94,500. But in terms of total dollars collected, our 65-year-old DIA buyer makes up that lost ground by age 86. If he lives longer than that, the DIA starts pulling far ahead of the immediate annuity in terms of total income. (One nerdy point: If you figure in the time value of money���the fact that the immediate annuity pays you back sooner���the breakeven would be somewhat later.)

In effect, a DIA lets you maximize your income for your later years, while providing protection against both a financial market downturn and the risk that you run through your other retirement savings. A DIA can also help simplify the management of your remaining assets, because you have more certainty about your future income.

One possibility: A 65-year-old couple could purchase a DIA to cover all the income they���ll need starting at age 85 and then spend down their remaining assets over the intervening 20-year period. Alternatively, let���s say you have some other sources of guaranteed income, such as Social Security and a defined benefit pension. You might buy a smaller DIA to supplement this income in later years, thus helping to offset the corrosive impact of inflation on your pension���s fixed payments, while also ensuring you have extra income if you face higher medical expenses later in life.

Another way to use DIAs: Help with the transition to retirement. Imagine a 55-year-old woman who invests $10,000 a year in a deferred annuity, with payments starting at 65. Based on today���s rates, her $100,000 investment over 10 years would generate income of $7,500 a year starting at 65. By contrast, if she���d invested the full $100,000 at 65, she���d receive $5,950. Once again, the purchaser benefits from the mortality credits collected during the deferral period and she gets rewarded for letting the insurer use her money for longer. Other benefits of this strategy: It allows you to dollar-cost average into an immediate annuity, potentially protecting part of your portfolio from a severe market downturn prior to retirement.

DIAs have many uses and benefits���but they aren���t perfect. During the deferral period, you forgo the returns you could have earned with other investments, plus the promised payments will have less spending power, thanks to the intervening inflation. Also, there���s the risk you die young���and you���re the one who ends up subsidizing the mortality credits collected by others. If you pass away before a DIA starts paying, you lose your entire principal. DIAs are available with return-of-premium features, but that heavily diminishes the value of the product and means you should probably consider other strategies instead.

In addition, DIAs can make tax planning more complicated. With income annuities, a portion of each payment is considered interest and hence it���s taxable. Because DIAs have a higher interest component, a larger percentage of your payment will be taxable. When evaluating immediate and deferred income annuities, be sure to look at both the gross and taxable income. Both are available with any quote.

One final consideration: There���s the so-called counter-party risk���the risk that the��insurer won���t be around to make your annuity payments. To limit this risk, buy from large insurers with a high rating for financial strength, and consider purchasing DIAs from multiple insurers.

Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for income annuities, long-term-care insurance and other insurance products. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles for HumbleDollar include End Game,��Policy Decisions��and Works If You Can’t. Dennis can be reached via LinkedIn��or��at dennis@saturdayinsurance.com.

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Battling Time

AS I GROW OLDER, I realize how important money and good health are. If we have sufficient income to pay our retirement expenses and if our health remains good, we have the makings of something very special.

What is that special thing? It���s the ability to be independent���to live the life we���ve always lived with few limitations. We can continue to live in our home, drive our car, visit our friends and cook our meals.

As we age, this isn���t easy. I see my 96-year-old mother struggle every day to maintain her independence. Little by little, time is stripping her of her ability to do the things she���s always done. She���s becoming more dependent on others to help her with her daily activities.

My mother’s currently waging her biggest battle of all against time. It���s her ability to continue living in her own house���the place she���s called home for 40 years.

Some people don���t understand why my mother doesn���t go into an assisted living facility. They point out, ���She would have better care. Her family wouldn���t have to worry about her.��� They also argue, ���When I can no longer care for myself, I���m going into assisted living. I don���t want my children to have to take care of me.���

My mother may be 96, but her mind is good, she can navigate her house on her own, manage her own medication, bathe and dress herself, and cook her own meals when necessary. She does, however, need help with grocery shopping, doctor���s appointments and her finances.

Her house has the necessary safety precautions, such as handrails to protect her from falling and an alert system to summon immediate medical attention. In an emergency, she can still drive her car. She passed her written driving test at 93.

My mother doesn���t have a disability like my aunt, who has trouble seeing, or my friend, who is showing early signs of dementia. Both are in assisted living. In other words, my mother is perfectly capable of staying in her home, with some assistance from family, friends or a caregiver.

When is it time for a parent to go into assisted living? It���s a question many families face. According to the Elder Care Alliance, ���Some common signs that may suggest your parent could benefit from assisted living can include:

Needing reminders to take medication
Noticeable weight loss or gain
Loss of mobility or increase in falls
Signs of neglecting household maintenance
No longer able to perform daily tasks, such as grooming or preparing meals
Increased isolation
Loss of interest in hobbies.���

I believe my mother is currently better off living at home. She���s in no imminent danger. Running her household keeps her engaged and active, both mentally and physically. It gives her a reason to get up in the morning.

This battle with Father Time isn���t really about her home. It���s about my mother���s independence���her ability to control her own life. Isn���t this the true reason money and health are so valuable?

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. His previous articles include Don’t Want to Know,��Are We There Yet��and��Healthy and Wealthy. ��Follow Dennis on Twitter��@DMFrie.

Do you enjoy articles by Dennis and HumbleDollar’s other writers? Please support our work with a�� donation .

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It’ll Cost You

IT���S IRONIC that we often shortchange retirement savings during the first half of our working lives, because that���s when we can buy future retirement dollars at a huge discount���thanks to investment compounding.

How can we hammer home this point? My proposal: We should adopt a simple mental math rule that allows us to weigh today���s spending against future retirement dollars. That brings me to my ���6 to 2 times 200��� rule. The rule covers five age groups: early 20s, late 20s, early 30s, late 30s and early 40s.

The first part of the rule���the ���6 to 2��� part���gives the compounding factor for each age group. For instance, the compounding factor is six times if you���re in your early 20s, five times if you���re in your late 20s, and so on. As you grow older and enter the next age group, the compounding factor drops by one. What does all this mean? Each $1 spent by folks in their early 20s means at least $6 less in retirement spending. Similarly, $1 spent in your early 40s means at least $2 less in retirement.

Admittedly, the rule is only an approximation. Still, with any luck, it���ll help us to pause before spending. For instance, it will make a 27-year-old realize that switching to that shiny new $1,000 iPhone could cost as much as $5,000 in retirement spending. Is it worth effectively spending $5,000 on a new phone?

Our 27-year-old may still decide to switch to the new iPhone. After all, we all make bad spending decisions and we usually get away with, provided the bad decisions aren���t too frequent or too costly. Instead, the real damage often comes from recurring expenses���the monthly magazine that no one reads, the extra property taxes for the bigger-than-needed house and countless similar items.

This is where the second part of the rule���the ���times 200��� part���comes into the picture. Suppose our 27-year-old is looking at an unlimited data plan that costs $25 a month extra. To figure out how much this means in lost retirement spending, we would multiply the $25 by five, which is the age factor, and then by 200, because it���s a recurring monthly expense. Result: Opting for the data plan means giving up perhaps $25,000 of retirement spending.

To put it another way: $1 of recurring monthly expenses over your working life dents your ultimate nest egg by $1,200 if you���re in your early 20s, $1,000 if you���re in your late 20s, $800 if you���re in your early 30s, and so on.

Is the ���6 to 2 times 200��� rule accurate? Some argue that the cost of a daily latte for a 22-year-old amounts to $1 million. My rule puts it at a relatively modest $120,000, assuming each latte costs $3.33. Why the big difference? I���m using an inflation-adjusted “real��� investment return of 5%, so the numbers aren���t distorted by inflation. That means that, if the rule says $10 spent every month is costing you $10,000 in retirement, those two numbers have similar purchasing power. But however you do the calculation, the lesson is clear: A recurring expense is far costlier than it appears.

Curious about where the numbers come from? They assume you work until around age 60. The compounding factor���the ���6 to 2��� part���comes from eyeballing the future value of a dollar invested for various time periods. The lump sum conversion of the monthly recurring payments���the ���times 200��� part of the rule���is the aggregate present value of the payment streams involved.

As you might gather, I���m not swearing that the ���6 to 2 times 200��� rule gives the exact right answer. But precision isn���t the point. Instead, the goal is simplicity, so the rule is easy both to remember and apply. The idea: Get ourselves to pause before we spend���and ponder how much an item is truly costing us.

A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles were Mind the Trap,��A Rich Life and��Cost of Living. Self-taught in investment and financial planning, Sanjib is passionate about raising financial literacy and��enjoys helping others with their finances.��Earlier this year, he passed the Series 65 licensing exam as a non-industry candidate.��

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Solo Effort

SHORTLY AFTER I retired in March 2017, I was asked to consult on some projects. I knew it was going to be a more complex tax year than I���d faced before. I had earned income from my previous employer, pension income and self-employment income from my consulting.

On top of all that, my wife started a new fulltime job the Monday after I retired. We switched to her benefits, but her company didn���t have a high-deductible health plan with an HSA, or health savings account. That meant that, three months into the year, we lost two valuable tax-deductible savings options: my 401(k) and HSA.

Losing those options concerned me. Was there any way to cut our tax bill? I knew there were retirement plans for small businesses, but I wasn���t very familiar with them. I didn���t think we���d meet the income limits to fund an IRA. A SEP IRA���a variation on an IRA intended for small business owners���seemed like a good idea, but I knew little about the accounts. I then discovered a plan that seemed tailor-made for us: a solo 401(k).

A solo 401(k) is like a traditional 401(k) plan, but covers a sole business owner with no employees. One exception: The business owner���s spouse can also participate. The contribution limits for a solo 401(k) are the same as any other 401(k). But with a solo 401(k), the business owner wears two hats: He or she can contribute both as the employee and the employer. Contribution limits for 2019 are:

Employee elective deferrals of up to 100% of earned income, though these contributions are capped at $19,000, or $25,000 if age 50 or older.
Employer contributions of up to 25% of compensation.
Total contributions to a participant���s account cannot exceed $56,000, or $62,000 if age 50 or older.

The definitions of earned income and compensation are important and a little tricky. For employee contributions, you can deduct 100% of ���net earnings from self-employment less one-half of your self-employment tax.���

When figuring your contributions as an employer, compensation is your earned income, which is defined as net earnings from self-employment, but with two deductions: one-half of your self-employment tax, plus any solo 401(k) contributions you make as an employee.

You can direct your employee contributions to either a tax-deductible or Roth account. Meanwhile, your contributions as an employer go into a tax-deductible account. If you���re also employed by a second company and participate in its 401(k) plan, contributions to that other plan limit your ability to fund a solo 401(k).

A 401(k) plan is typically required to file an annual report on Form 5500-SF. A solo 401(k) plan, however, is exempt from the annual filing requirement if it has $250,000 or less in assets at the end of the year.

There���s plenty of information online about solo 401(k)s, including from the IRS, financial firms and other sites. I investigated some of the larger firms before choosing Vanguard Group. It was surprisingly easy and inexpensive to set up the plan. It was linked to my other accounts, so I could see my entire holdings with one logon. And because we were established customers, Vanguard waived the annual account fee. With my solo 401(k), I can invest in all of Vanguard���s mutual funds.

The account must be opened by Dec. 31 if you want to contribute for the current tax year, but you have until the April 15 tax-filing deadline to make contributions. This turned out to be helpful. In my first year, most of my consulting income came in the fourth quarter. I used the 401(k) contribution to tailor our tax bill. Using TurboTax, I computed a number of tax returns with different contribution amounts until I achieved a final tax owed that we were comfortable with. I was happy to have this ���dial��� to turn, as I fine-tuned our tax bill.

The following year���2018���my income varied even more. I had less self-employment income from my business, but picked up some more as a part-time employee for a small business. Again, a significant portion of my income came in the fourth quarter. This variability made tax planning a bit more complicated. In 2018, we were able to defer virtually all of the self-employment income to limit the tax owed. Note that income from working full- or part-time for another business doesn���t count when computing the maximum allowable solo 401(k) contribution. Instead, you need to be working as a contractor, with income reported to you on Form 1099.

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 What Number,��Taking Your Lumps��and��Quiet Heroism. Follow Rick on Twitter��@RConnor609.

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