Jonathan Clements's Blog, page 392

Try This at Home

FOR THE PAST MONTH, I’ve been inviting readers to test a rough-and-ready financial tool called the Two-Minute Checkup. The tool is designed to provide a quick initial financial assessment.

The hope: It’ll eventually be one component of a larger website and app that help folks figure out what financial steps they need to take and then nudges them to follow through. This reflects a notion that’s been much on my mind in recent years: Improving America’s personal finances is partly about education—but it’s also partly about finding ways to change behavior.

Because we’re in test mode, my business partner Derek and I are doing everything on the cheap. The Two-Minute Checkup is just a spreadsheet loaded onto a web page. It isn’t pretty—and navigating the spreadsheet can be frustrating. But I like to think the underlying logic is far more robust than the clunky user experience suggests.

The Checkup asks for just nine pieces of personal information—things you likely know off the top of your head—and then provides feedback across 10 areas of your financial life. How can we say so much based on so little information? Here’s a look at some of the logic behind the Two-Minute Checkup:

Financial Fitness. Suppose you make $80,000 a year. You expect some money from Social Security, so you want a nest egg that, as of age 65, will replace half your $80,000 income, or $40,000 a year. Assuming a 4% portfolio withdrawal rate, you’d need 12.5 times your current income saved by retirement, equal to $1 million in this example.

For the Two-Minute Checkup, we took that end point and figured out what milestones those still in the workforce need to hit along the way. This notion isn’t original. Others have made similar calculations.

So what milestones should you be hitting? You would want 0.8 times your income saved at age 30, 2.7 times at age 40, 5.5 times at 50 and 9.7 times at 60. The multiples increase slowly at first and then ever faster, as an increasingly large portfolio reaps escalating benefits from each year’s market gains.

Spending. As regular readers know, I put a big emphasis on limiting fixed living costs—things like mortgage or rent, car payments, cable bills and insurance premiums—to 50% or less of pretax income. That’s built into the Checkup’s spending advice for those still in the workforce.

What about retirees? The Checkup suggests withdrawing 4% to 5% each year of a portfolio’s beginning-of-year value—unless a retiree is age 50 or younger, in which case it recommends 3%.

Borrowing. Lenders will typically let borrowers take on monthly mortgage payments equal to 28% of pretax monthly income. This is the so-called housing ratio. But before lending that much, lenders also assess borrowers using another measure: the debt ratio. This looks not only at the proposed mortgage payment, but also at other debt payments, such as credit cards, car payments and student loans. As a rule, lenders don’t want to see all these various debt payments consuming more than 36% of a borrower’s pretax monthly income.

The difference between the 28% housing ratio and the 36% debt ratio is 8%. That’s the maximum sum that lenders believe borrowers should be devoting to nonmortgage payments, so that’s the threshold suggested by the Two-Minute Checkup.

Houses. For the Checkup, we use the housing and debt ratios to assess how much folks might borrow to buy a home. But we had to guess at one number: How much, as a percentage of pretax income, would most folks end up devoting to property taxes and homeowner’s insurance? Remember, the 28% housing ratio considers the total proposed mortgage payment—and that includes property taxes and insurance.

After researching the issue, we settled on a number that may surprise folks: As a percentage of pretax income, we assume most homeowners are likely to devote 6% of monthly income to property taxes and insurance. That means that—under the housing ratio—just 22% of someone’s monthly income is left for a mortgage’s principal-and-interest payment.

Financial Emergencies. An emergency fund is, more than anything, an unemployment fund—and that notion drives the Two-Minute Checkup’s recommendation. If your job is stable, it advises keeping three months of living expenses. If it’s iffy, it recommends six months. If you’re a couple and both have jobs, the Checkup combines the two figures.

The Checkup pegs living expenses at 60% of pretax monthly income. This is above the 50% figure we suggest for fixed monthly living costs. But we wanted to leave some room for error—and we realize not everybody hits that 50%.

Insurance. The Checkup recommends disability insurance if you’re working, life insurance if you’re in a relationship or have children age 21 or younger, and long-term-care insurance if you’re over age 50.

All these recommendations get dropped if you have $1 million or more in savings, on the assumption that your household would be fine financially, even if disaster struck. At the same, however, the Checkup recommends umbrella liability insurance for the seven-figure crowd, because of the risk that your wealth will make you a target for lawsuits.

Estate Planning. The Checkup’s estate planning advice has three components. First, everybody should have a will, while also making sure they have the right beneficiaries listed on their retirement accounts and life insurance. Second, those with children age 21 or younger should make sure they name a guardian for the kids in their will. Finally, those over age 50 are advised to get powers of attorney—preferably one for financial matters and one for health care issues—in case they’re incapacitated.

If you try the Two-Minute Checkup, please also take the survey we created, by double-clicking on the link at the bottom of the spreadsheet. Alternatively, you can head to the survey directly from here.

Even More Humble

OVER THE PAST YEAR, readers have repeatedly asked for more frequent newsletters—perhaps weekly—with a list of HumbleDollar’s latest blog posts. Up until now, I’ve resisted, because I’m not sure most subscribers want to hear from me that often. As a compromise, I’ve decided to increase the newsletter’s frequency to twice a month, with each newsletter including a list and brief description of all blogs that have appeared over the prior few weeks. The first such newsletter will go out on Aug. 18.

In addition to five or six blogs each week, HumbleDollar’s homepage also includes a host of other features—our daily insight, intriguing financial statistics, suggested action items and more. I recently added two more regular features. “Truths” spotlights things we can say with some certainty about the financial world, while “Archive” offers a second look at blogs and newsletters that the site has published over the years.

Finally, my next book is slated to be published by Wiley on Sept 5. You can now preorder From Here to Financial Happiness from Amazon. The book takes readers on a 77-day journey that helps them figure out where they stand, what they hope to achieve and what they need to do.

July’s Greatest Hits

HERE ARE THE SEVEN most popular blogs published by HumbleDollar over the past month:

Two-Minute Checkup
When I’m 64
Not So Predictable
Telling Tales
Pain Postponed
All of the Above
Nothing to Chance

The site also saw large readership for July’s newsletter, our list of HumbleDollar’s top blogs during 2018’s first six months and a blog from June, Yes, It’ll Happen.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Running on Empty

AT 75 YEARS OLD, I find myself living paycheck-to-paycheck. I now understand how that feels and how it can happen. But you can put away the violin: It’s only temporary.

Being fiscally conservative, I don’t like being in debt or having unpaid bills. I even pay credit cards before they are due—or I used to. Until a month ago, I paid all my bills, with considerable money left over at the end of each month. I also had significant savings outside of my retirement accounts. Now, there is no money left at the end of the month and my non-retirement accounts are empty.

Did my income drop? Nope. But I greatly changed my spending, at least temporarily. The fact that this is temporary does not help me sleep better. The fact that, within the next several months, I will again have money in the bank at month’s end doesn’t ease my current stress.

All this has got me thinking about the folks whose paycheck-to-paycheck life is not temporary and how much their situation is driven by spending, not just income. Indeed, for all but the chronically poor, I suspect spending is the key factor.

I was talking recently with a young woman, who relayed her story about ending up each payday with $2 in the bank. Then she noticed I was looking at her well-manicured nails. “Oh, that’s the one thing I just have to have,” she said, as we sipped our drinks in a high-end coffee shop.

They say there are two sides to every story and two parts to every equation. I see that as especially true when it comes to money matters. In determining most people’s financial situation—whether good or bad—spending matters as much as income. But getting people to acknowledge that is a major challenge.

So how did I get into my fix? I bought a new residence and took on a large mortgage, because we hadn’t yet sold our current home of 45 years, plus my wife sees all new furniture as part of the deal. Now, we’re not only paying the mortgage, but two property taxes, two utility bills and so on, as well as a hefty homeowners’ association fee. That means we’re living pension check-to-pension check and Social Security-to-Social Security.

My goal was to make the move less stressful, so we can be in the new place before having to leave the old. But I fear I may have traded one stress for another.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Taking Your Lumps, Pain Postponed and Sharing It. Follow Dick on Twitter @QuinnsComments.

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My Favorite Word

I HAVE A NEW favorite word. That word is “no.” My favorite word used to be “yes,” but no more.

I used to be a yes-man. I used to say “yes” to everything, like Jim Carrey in the movie “Yes Man.” You want me to work on that project? Yes. You want me to be on that committee? Yes. You want me to pick up that extra duty in my free time? Yes.

Yes. Yes. Yes. Yes. Yes. Yes. Yes.

Now, I’m a no-man. You want me to be in charge of that committee? No. You want me to work on that new project? No. You want me to deal with that delicate issue? No.

I’m sure that, in the past, I would have said “yes.” Why have I become a no-man? Three reasons.

First, saying “no” is the superpower that being financially independent gives me. What does being financially independent mean?

According to an article I recently read, “Financial independence typically means having enough income to pay your living expenses for the rest of your life without having to work fulltime. Some people achieve this through saving and investing over many years, while others build successful businesses that can generate income without daily supervision.”

I did it by simply staying in the military and becoming a super-saver. Now, I have F U money. If you don’t know what I’m talking about, watch these videos, which are neither work- nor kid-friendly.

Second, I was recently selected for what is very likely my final military promotion, locking in a very significant military pension.

Finally, I realize that I have enough money, but not enough time. My grandfather just died, and no one cared about how much money he did or didn’t have. What’s important is the kind of man he was, and the impact he had on the world and the people who knew him.

I’m not saying I won’t say “yes” ever again. But when I do, it will be because I want to. Committee work someone else can benefit from? Projects that might be important, but I really don’t want to do? Dealing with difficult people when I have the option not to?

No.

Joel M. Schofer, MD, MBA, is a Commander with the U.S. Navy’s Medical Corps. His previous blogs for HumbleDollar were Winning the Game, Getting Used and The $121,500 Guestroom. He blogs about personal finance at MilitaryMillions.com and can be reached at Still-In@MilitaryMillions.com. The views expressed in this article are those of the author and don’t necessarily reflect the official policy or position of the Department of the Navy, Department of Defense or the U.S. Government.

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In Your Debt

THESE BEING the times they are, I frequently field queries from clients who are asked for loans by relatives or friends. These would-be borrowers plead their inability to come up with the down payments for homes or who want to launch “can’t fail” business ventures. Suppose, as so often happens, the loans go sour and the borrowers’ last messages mention their entry into witness protection programs.

I remind wannabe lenders who intend to stake friends or relatives to familiarize themselves beforehand with long-standing tax rules. The rules make it difficult to take deductions for bad debts. While the IRS allows deductions for worthless loans if there’s no likelihood of recovery in the future, it prohibits write-offs for outright gifts.

Lenders should expect the agency to look closely at their deductions for bad debts when they’re related by blood or marriage, or have other ties, to the borrowers. The burden is on the lenders to prove that what they characterize as “loans” weren’t really gifts.

There are steps lenders can take before making loans that will help in case the IRS questions their write-offs. The key to success: Set up the transactions with the same care as any loan made for business reasons.

Lenders should ask borrowers to sign notes or agreements that, among other things, do the following: specify how much they’re borrowing; explain when and in what amounts they’re supposed to make repayments; and require them to pay realistic interest charges––say, the rates lenders would receive from savings accounts if their funds weren’t loaned. Lenders also should arrange for witnesses to sign the notes if that’s a legal requirement in their state.

Some clients voice their concerns that imposing interest charges and other requirements are a rough way to deal with their friends or relatives. I remind them that it’s the only way if they want to deduct bad debts later. IRS examiners routinely throw out deductions for handshake deals.

When can lenders deduct unpaid loans? Only in the year that they become worthless. The IRS doesn’t require lenders to wait until the loans are past due to determine whether or not they’re worthless; loans becomes worthless when there’s no longer any chance that they’ll be repaid.

The IRS will want good evidence that the loans are actually worthless and will remain so in the future. While the IRS expects lenders to take reasonable steps to collect loans, it doesn’t require them to hound debtors into courts, provided they can show that judgments, if obtained, would be uncollectible. Still, lenders should at least send letters asking for repayment. Generally, if debtors declare bankruptcy, that’s a good indication that the debts are at least partially worthless.

J ulian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Moving Costs, Anti-Social Security and Execution Matters. Information about his books is available at JulianBlockTaxExpert.com. Follow  Julian on Twitter @BlockJulian.

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Truth Be Told

I WASN’T COMPLETELY honest when I wrote a recent blog. HumbleDollar’s editor asked why I reduced my stock position in 2017 from roughly 50% to 25%. He suggested I should mention it in my blog. My answer: “At the time I made these changes, I was losing confidence in the sustainability of the bull market and wanted to reduce my risk.” That was true—but it wasn’t the whole truth.

There’s another reason I initially left out the explanation for reducing my stock exposure: I’m simply not comfortable discussing my finances in great detail. There are only two things I will not talk about: my sex life and personal money matters. And it isn’t necessarily in that order. It’s one reason I write mostly about my life experiences that don’t reveal too much about my money. I did write a blog that revealed a little more financial information than I would like. It was uncomfortable. But I thought it was necessary.

Some of my friends are very open about their money. I sit there like a bump on a log, amazed at what they are telling me. I feel guilty. But I just can’t share my personal financial information with them. It’s not because I’m stingy and trying to hide my money from my friends. When I go out with them, I usually pick up the tab or pay a portion. I have also helped friends who were going through difficult times with their finances.

To be honest, I don’t want to know about their financial situation. When I hear them talk about their money, it sometimes makes me jealous. I feel that I’m not doing as well financially as I should. But in truth, I shouldn’t be comparing myself to them. It’s a shame, because I find myself avoiding them. I use the same approach that I use with my favorite baseball team, the Cleveland Indians. When they lose, I avoid reading articles about the game.

There is only one person who knows about my financial affairs. It’s my close friend, with whom I’m planning to spend the rest of my life. I feel she needs to know, because we are in this together. She is the only person with whom I’m an open book. I think it is important that your spouse or significant other knows your financial life. If something should happen to you, he or she needs to know where to go to access the assets to support him or herself.

I have given a lot of thought to my reluctance to reveal information about my finances. I haven’t come up with a good answer. I do, however, know this: In our society, we are sometimes judged by the type of car we drive, the house we live in or how much money we have. Maybe I just don’t want to be judged.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include Mind Games, Looking Forward and More Than Money.

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Stress Test

IN THE FIELD of epidemiology, researchers have long used the term “tipping point” to describe how epidemics occur. At first, an ordinary disease moves slowly, not gaining much attention. But then, seemingly overnight, it snowballs into something far larger.

Within the world of public health, this concept is well understood. But about 20 years ago, the author Malcolm Gladwell took a closer look and pointed out that tipping points can be found in a whole host of other situations far beyond epidemiology.

That includes finance. Consider Lehman Brothers. In June 2007, it reported a profit of more than $1 billion, a company record. And yet, just 15 months later, it was bankrupt and sold for scrap. Despite its sterling reputation, established over 158 years, the firm unraveled virtually overnight.

With the benefit of hindsight, there had been some early warning signs. In its writeup about Lehman’s record profit in mid-2007, The New York Times mentioned a loss related to subprime mortgages—but it wasn’t until the eighth paragraph of the story. Even then, media reports quoted Lehman executives describing the issue as “small” and “contained.” There was no indication that this “small” issue would bring down the entire company just a year later.

Why spend time talking about Lehman? While the details may not be generally applicable, it’s an example—and not an isolated one—of a financial tipping point. It’s worth studying for the same reason we study the 1929 stock market crash and the Great Depression: These were unusual events, but they remind us to take steps today to avoid financial stress tomorrow. To that end, here are five ideas to help you fortify your own finances for the long term:

1. Gather the facts. In the past, I have talked about the “Big Four”—your income, expenses, assets and liabilities. If you know these four numbers, you’ll have a solid grasp of your financial situation and you can answer most money questions. If you don’t have these numbers readily available—and don’t have time to gather them—consider hiring a bookkeeper to pull together the information for you.

2. Once you know the big four, ask yourself two questions. Am I okay now? And will I be able to handle upcoming financial obligations, such as a home purchase, college tuition or retirement? To find out, make a simple set of financial projections. It can be eye-opening. In my experience, this kind of exercise often ends up leaving folks sleeping better, not worse.

3. If you’re employing one of the retirement rules of thumb, such as the 4% rule or the 80% income replacement rule, be sure they apply to your situation. These rules can sometimes be too simplistic, especially when they’re age-based. Should Bill Gates really follow the same financial roadmap as every other 62-year-old? I think not.

4. If you want to guarantee you’ll never run out of money in retirement, there is one way to do it. Each year, simply limit your spending to a fixed portion of your portfolio’s value as of the end of the prior year. For example, if you had $1 million at the end of last year and your spending rule was 5%, you would withdraw $50,000 this year and no more.

This is the way schools and colleges operate. As long as they stick to their spending rules, it serves them extremely well. But in exchange for this near guarantee, there’s a catch: If your portfolio declines in value in any given year, you have to be willing to take a pay cut the following year.

5. Recognize that there are escape valves in our financial system if things aren’t panning out. In Lehman’s case, their financial mess was beyond human comprehension. But when ordinary folks run into a simple cash crunch, there are lots of solutions.

If you have federal student loans, you could explore an income-driven payment plan, forbearance or refinancing. If tuition for your children is crushing your budget, call the bursar’s office. Colleges are businesses and they will negotiate—even if they say they won’t. If you have bills that end up with a debt collection agency, you may be able to settle the obligation for less than the full amount owed. Even the IRS will be flexible: It has programs that allow you to pay both income and estate taxes over time.

Adam M. Grossman’s previous blogs include All of the Above, Not My Thing and Nothing to Chance . 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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Not So Predictable

I’M STILL WAITING. Along with many others, I have spent much of my investing career expecting five key financial trends to play themselves out—and yet they’ve stubbornly refused to do so.

Sure, these predictions could still come true. But I have my doubts. Maybe these five financial forecasts aren’t the slam dunk they appear:

1. Stocks will revert to average historical valuations. Whether you look at price-earnings ratios, cyclically adjusted price-earnings ratios, dividend yields or Tobin’s Q, today’s stock market is expensive. But this isn’t exactly news.

Indeed, if investors were going to sell because of sky-high valuations, they would have done so long ago. Stocks have been pricey for much of the past quarter century, and yet share prices show no signs of returning to their 100-year average of 16.5 times trailing 12-month reported earnings. It seems that, in our increasingly wealthy world, we simply have too much capital pursuing too few investment opportunities.

This doesn’t mean valuations don’t matter. With P/Es so high and dividend yields so low, stock returns over the next decade will likely be modest—unless shares get yet another big boost from rising valuations. It could happen. But I wouldn’t bank on it.

2. Interest rates are headed higher. Two decades ago, when I was at The Wall Street Journal and the 10-year Treasury note’s yield was double today’s level, I recall talking to a financial advisor about immediate fixed annuities. “I could see buying them for clients,” the advisor allowed. “But I’d want to wait for higher interest rates.”

For many investors, that waiting game has been going on since at least the 1990s. To be fair, interest rates have moved somewhat higher. The 10-year Treasury is now at 2.96%, up from the low of 1.37% in July 2016.

Still, absolute interest rates remain grudgingly low, so nominal bond returns will almost certainly be modest in the years ahead. But just because interest rates are low doesn’t guarantee they’ll go higher. It’s always dangerous to assume that market prices, which reflect the collective wisdom of all investors, are wrong and that you know better. Instead, I would take the market at its word: Whatever interest rates are, that’s the best indicator of where they ought to be.

3. Inflation is coming back. One reason interest rates are low is because inflation, too, is at modest levels. Will it come roaring back?

If the 1930s forever colored the financial attitudes of those who struggled through that miserable decade, I think the same is true—to a lesser degree—for those of us who were around during the 1970s. It was a decade of high inflation, gas shortages, high interest rates and tumbling stock market valuations, and we worry that all of those will return. But will they? History may repeat itself if circumstances are similar—but it doesn’t repeat just for repetition’s sake.

4. Taxes are going up. Along with many others, I’ve long assumed tax rates are unsustainably low and will eventually rise. We already have a $900 billion federal budget deficit and face ever-growing federal expenditures on Social Security and Medicare. Offsetting these fiscal headaches are low interest rates, so servicing the ballooning federal debt hasn’t proven to be too much of a burden—so far.

The upshot: Instead of federal income-tax rates rising, they keep getting cut. True, those falling rates are often accompanied by the loss of other tax goodies, so it’s never quite clear whether folks are better off. Still, what we haven’t seen are big tax increases, despite all the gnashing of teeth over the federal deficit.

5. We’re facing a retirement savings crisis. There’s long been handwringing about the demise of traditional pension plans and the failure of workers to make good use of the 401(k) plans that replaced them.

While I think the concern is justified, I also think we recall a golden era that never existed. For instance, a Social Security Administration study found that among the oldest baby boomers, those born between 1946 and 1950, just 50% of households have traditional pensions—which means 50% don’t. The reality: There was no glorious past when all Americans happily retired with generous monthly checks from their former employers.

My contention: It isn’t that today’s workers are wholly unprepared for retirement. Rather, the problem is that they need to be much better prepared than earlier generations—because they face far longer retirements. This isn’t just a personal finance problem confronting every U.S. household. As I discussed in a recent newsletter, if folks continue to retire in their mid-60s, we’ll have a nation—and, indeed, a world—with too few workers and too many retirees, and we simply won’t be able to produce the goods and services that society needs.

Somehow, we need to persuade Americans to stay in the workforce for longer, not just for their own financial sake, but for the sake of society. We could likely achieve that through some unappetizing combination of higher tax rates, higher inflation, wretched investment returns, and cuts to Social Security and Medicare.

That, of course, touches on all five of the long-expected developments discussed above. But maybe none will come to pass. Maybe, instead, many folks—for a mix of financial and other reasons—will decide they want to work into their late 60s and perhaps even their 70s. That’ll mean more goods and services are produced, and more taxes are paid. That, in turn, will help to restrain inflation and interest rates, while also boosting corporate profits and hence share prices. Result? We may never have to reckon with the five great reckonings that have long been predicted.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness, will be published Sept. 5 and can now be preordered through Amazon.

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Jump Start

IF YOU’RE IN COLLEGE right now, saving for retirement probably isn’t even a blip on your radar screen. Yet this is the time in your life when every dollar squirreled away will reap the most bang. Raising your eyebrows in disbelief at the thought of saving for retirement, while in the midst of struggling to cover tuition? My two children are in college and currently making money from summer internships. Here are the five things I tell them:

1. The most important reason to start isn’t what you think. Sure, the financial gains could be astonishing. The main reason to begin now, however, is to start a life-long habit—one that’ll help you reach your dreams far faster.

Look at the happiest, most fulfilled, purpose-driven people you know. There’s a high probability that they know the value of delaying a bit of gratification today to enjoy a more meaningful life later. By structuring your life during college so that you sock away a modest amount monthly, you will greatly increase the odds of achieving your aspirations, including new ones that will emerge in the years ahead.

2. You can’t beat the compounding. Because of the time stretching ahead of you, you have a luxury that your parents’ generation envies. A college sophomore who invests a $1,000 in a Roth IRA and parks it there, without adding another penny, will have more than $9,400 by age 65, while someone who waits until 45 will have around $2,650, assuming 5% compound interest. To see this for yourself, try the Securities and Exchange Commission’s online calculator.

3. There’s a hidden benefit you can’t appreciate yet. By saving now for retirement, you insulate yourself against rough times. The optimism of your age group is uplifting, but it may cloud your appreciation of this. By regularly setting aside a small part of your income now, you will greatly soften the blow when times get seriously—and sometimes frighteningly—lean. Once ingrained, living beneath your means will set you apart from your peers and be a lynchpin in your life happiness.

4. It’s cheaper than you think to get started. For $50 a month in automatic contributions, you can get things rolling. To begin, set up automatic monthly contributions into a separate savings account at your hometown bank or credit union. Once you have $500 in hand, establish a Roth IRA at your bank. When your stockpile reaches $1,000, you’ll have enough to open an account at many mutual fund companies. Transfer your $1,000 to a low-cost stock index fund in a Roth IRA at a respected company and continue your monthly automatic contributions.

I trust Vanguard Group the most because of its founding principles, long-term performance, extraordinarily low fees, and the wonderful mix of U.S., foreign, large and small-company stocks in its target-date retirement index funds. Other respected companies include Fidelity Investments and Charles Schwab.

5. What if you have big plans ahead? Thinking you might need cash someday to start your own business? Or for a down payment on a home? Or to take a year off to travel the world? Keeping your savings accessible is a valid concern—one I hear in my own household.

This, however, is yet another reason to fund a Roth IRA. Any money you stick in a Roth IRA is available to you at any time. You can’t take out your investment gains without triggering taxes and penalties, but you can withdraw your contributions whenever you want. My guess: Thanks to the good habits you’ve learned, you’ll set up a separate savings program for your other plans—and you won’t rob your Roth.

Ultimately, this isn’t just about retirement savings. It’s about a strategy for a better life. Start this month—and you’ll set yourself on a path that’ll put you far ahead of your fellow classmates.

Amy Charlene Reed is a science and energy writer who lives near Oak Ridge, Tenn. Her previous blog was Baby Steps.

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Mind Games

I FEEL LIKE there is a death cloud hovering over me. I have been retired for nine years. I have lost my father and two of my best friends to cancer. I have seen aunts, uncles and cousins pass away. I have watched my mother struggle every day to do simple activities. When I talk to my friends, it usually ends in a discussion about our aches and pains or latest doctor’s appointments.

I’m not looking for sympathy or pity. I feel lucky that my father lived to age 90 and that my mother is going to be 95 this year. As you grow older, it’s only natural that you start losing family members and friends at an increasing rate. What’s important is how you deal with it.

I have found that, in retirement, your mental outlook is as important as your finances. You might find yourself as a caregiver to a loved one. Taking care of an elderly person can be stressful and mentally exhausting. Waking up and knowing a good friend is gone can leave a hole in your life.

But I have also found there are things you can do to deal with these issues and give yourself a more positive outlook on life. As I mentioned in a previous blog, having a good social network of friends is important. You need, however, to diversify your friends, as you would your investment portfolio.

For instance, you need to have friends who are younger: These friends will give you a different outlook on life and will outlive your older friends. I find talking to my younger friends refreshing and invigorating.

You might feel there’s less need for friends because you have a large family.  But according to a study in the journal Personal Relationships, having a supportive network of friends in old age has greater benefits than having robust family connections. You tend to do things you enjoy with your friends, while many of the things you do with family might be out of a sense of obligation.

A healthy lifestyle can also help you maintain a positive state of mind. Exercising and eating a healthy diet are two ways to improve your mental and physical health. Don’t wait until you retire: You need to start early in life, just as you would your retirement savings plan. An added bonus: You could save thousands of dollars in retirement by being a healthy version of yourself. Health care is one of retirement’s biggest expenses—and those costs are increasing faster than inflation.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include Looking Forward, More Than Money and Leap of Faith.

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By the Numbers

AROUND THE TIME of my birthday each year, I request a copy of my Social Security Statement. This year, as l reviewed my report, I realized many life stories lie behind the numbers that appear in my earnings record.

The first year I had taxable earnings was 1985, the year I graduated high school. Minimum wage was $3.35 an hour and my annual income that year was $861. My earnings over the following seven years were meager, at best. I was attending college fulltime, earning both a bachelor’s and master’s degree, before becoming a member of the paid workforce.

The first year I hit a five-figure salary was 1993. I’d started working part-time in a research laboratory, while I finished my graduate studies. I made almost $11,000. After years of living on a student budget, it seemed like a substantial sum.

The following year, I was offered a fulltime position in the same lab and my earnings grew to just over $24,000. I purchased my first car that year—a Honda Civic for $9,999—but still took a bus to work, because I couldn’t afford to pay to park it. Two years later, my annual salary took a $3,500 leap. I received a promotion after my supervisor found out I was contemplating leaving the lab for a better paying position. The promotion kept me happy for a few months.

But the lure of a more lucrative salary—and the accompanying chance to improve my lifestyle—eventually proved irresistible. In 1997, after becoming fully vested in a state pension plan, I left my research position and took a job at a local hospital. My salary jumped to $37,000, but it wasn’t long before I missed the various benefits I’d grown accustomed to at my academic job. The hospital’s sole retirement benefit was a 401(k) plan with a 3% match. The amount of paid time-off was also substantially less. It was then that I became keenly aware of the trade-off between salaries and benefits. After working for 15 months at the hospital, I began looking for another job.

In June 1998, I was hired as a departmental manager at a small liberal arts college. I took a $3,000 pay cut to take the job, but the school offered a generous retirement benefit: an employer-funded account equal to 10% of my annual salary and immediate vesting. Two years after starting the job, my salary had climbed back to what I’d been making when I left the hospital, and my retirement account already had a balance of nearly $8,000.

My salary continued to climb steadily until 2005, but stagnated from 2006 through 2011. A number of factors contributed to the slowdown in taxable earnings. My husband took a job that didn’t include health care benefits, so I began covering him—and paying his premiums—through my employer’s plan. Lower cost of living adjustments, combined with higher health care costs, took a toll on my annual taxable earnings.

By 2012, my salary was on the rise again and, in 2013, my earnings record shows a nearly $8,000 increase. A divorce, and subsequent purging of my ex from my health insurance plan, resulted in a large wage increase for me. From that point forward, my salary steadily increased, the result of receiving annual cost-of-living adjustments and merit awards.

In 2017, I made nearly $70,000. Those wages came from the income earned from my primary job, as well as money from two different freelance writing side hustles.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous blogs include Happy Ending,  Material Girl  and Homeward Bound .

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