Jonathan Clements's Blog, page 395

Spending Deferred

YOU MAY BE saving and investing for retirement. But what you’re really doing is buying future income. How much income? That brings us to a little number crunching, which I hope will illuminate five key financial ideas.

Let’s start with the numbers. Imagine stocks notch 6% a year, but inflation steals two percentage points of that gain, so you collect an after-inflation annual return of 4%. If you socked away $1,000, what would it be worth in retirement? We’ll look at the value as of age 70—and not just the sum accumulated, but also how much income it would generate each year thereafter, assuming a 4% portfolio withdrawal rate.

If your parents socked away $1,000 for you when you were born, you would have more than $59,000 at age 70, thanks to seven decades of 6% annual returns. But seven decades of inflation would also take their toll, so your $59,000 would be worth $15,572 in today’s dollars. That would generate $623 in annual income—again, figured in current dollars. That’s a pretty good tradeoff: In return for your parents’ onetime decision not to spend $1,000, you get to spend $623 every year in retirement, with money likely left over for your heirs.
If you put away $1,000 from your summer job at age 16, you’d have an inflation-adjusted $8,314 at age 70. You could then spend that lump sum or draw it down slowly using a 4% withdrawal rate, which would give you $333 in annual retirement income.
If you saved $1,000 when you entered the workforce at age 22, you’d have an inflation-adjusted $6,571 at age 70, which would then kick off $263 in income, assuming a 4% annual portfolio drawdown rate.
The $1,000 you save at age 40 would be worth $3,243 at 70, figured in today’s dollars. That should be good for $130 in annual income. Think of it this way: At $130 a year, you’d recoup your $1,000 sacrifice in less than eight years—and still have plenty of money left over to spend in subsequent years.
The $1,000 you salt away at age 50 would grow to an inflation-adjusted $2,191 at age 70, giving you $88 a year in retirement income.

There’s nothing especially sophisticated about these examples. But I hope they highlight five important financial lessons. First, by not spending today, we can potentially spend far more in future.

Second, time is the lever that turns modest sums into great wealth. The earlier we start, the better off we’ll be.

Third, we don’t save and invest today simply to pile up the dollars. Rather, we save today so we can spend later (and, if we don’t, our heirs will happily take on the task).

Fourth, impressive wealth seems less impressive when we ponder the lifestyle it can support. Make no mistake: It takes a hefty nest egg to pay for a comfortable retirement.

Finally, inflation is the mortal enemy of the long-term investor—and stocks are the great ally. The numbers above may seem a tad disappointing, once inflation is factored in. But imagine how much worse they’d be if we assumed not stock market returns, but those generated by savings accounts and money market funds.

In addition to inflation, long-term investors need to fend off the threat from taxes and investment costs. What to do? That’s easy: Shovel your dollars into tax-deductible and Roth retirement accounts—and use those accounts to buy low-cost index funds that give broad market exposure.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Anti-Social Security

THE TAX LAW relieves most Social Security recipients of income taxes on their monthly checks. But it requires middle- and upper-income households to count up to 85% of their benefits as reportable income. Sound punishing? It can be especially punishing for couples who are cutting the knot—but they may live happily ever after.

Taxes on Social Security benefits are triggered when recipients’ MAGI exceeds specified amounts. MAGI is an acronym for modified adjusted gross income (and not the term for the three wise men who bore gifts to the infant Jesus). It’s essentially the same as adjusted gross income—but with two potential add-ons: Taxpayers may have to include part of their Social Security benefits and any tax-exempt bond interest.

Social Security recipients don’t have to count any of their benefits when MAGI is below $25,000 for single taxpayers and $32,000 for married couples filing jointly. But when MAGI is between $25,000 and $34,000 for single persons and between $32,000 and $44,000 for joint filers, they must count as much as 50%. The count can get as high as 85% when MAGI surpasses $34,000 for singles and $44,000 for joint filers.

That brings us to those who are divorcing. There’s a much-misunderstood restriction for couples who opt to file separate returns because, say, they’re getting divorced. Generally, if a couple files separately, their exemption drops from $32,000 to zero, with a precisely worded exception for spouses who don’t reside together at any time during the taxable year. Stated another way, a couple who live together, even for just a day, and file separately aren’t allowed any exemption and must count 100% of their Social Security benefits as reportable income.

This trap snared Thomas W. McAdams, a retired Army colonel. Tom and his wife Norma stayed married but lived apart, she in the home they owned in Boise, Idaho, while for many years he lived most of the time in Ninilchik, Alaska, and other locales far from Boise. The estranged spouses listed themselves on their 1040s as “married filing separately.”

During an audit of Tom’s return, the career officer forgot that loose lips sink ships. Tom inadvertently divulged that he stayed in Norma’s dwelling for more than 30 days during the year in issue, though he always slept in a separate bedroom.

That admission convinced the Tax Court to agree with the IRS that Tom didn’t, as the law specifies, “live apart” from his wife “at all times during the taxable year.” The 2002 decision deconstructed living apart to mean only living in separate residences, not separate areas of the same residence. It held that his visits disqualified him from any exemption. Result: His benefits didn’t sidestep taxes.

But once divorced, couples may find their lives are less taxing. Whether by design or inadvertence, Congress crafted rules that require a person to pay more taxes on benefits solely because he or she is married. How so? Two single persons who share quarters without benefit of clergy can each have an exemption of as much as $25,000 before any of their benefits are taxable. With a combined base amount of $50,000, they gain an advantage of $18,000 over the $32,000 threshold for a married couple—an aspect of the law that’s a “marriage penalty” or “sin subsidy,” depending on one’s point of view.

To be sure, most couples wouldn’t divorce just to trim the taxes on their Social Security benefits. But for a tax-conscious couple contemplating an unhitching, the prospect of sizable savings at filing time could well be the clincher—even if they remain committed to one another.

Indeed, to put more of their benefits beyond the IRS’s reach, all they need do is divorce and then live together out of wedlock. A beleaguered IRS readily concedes that as long as their “un-altared” arrangement remains unaltered, each would become entitled to use the base amount of $25,000 for a single person. Their unhitching (or forgoing that walk down the aisle to begin with) would enable them thereafter to live a more prosperous life in unwedded bliss.

Julian 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 Execution Matters, Taking Shelter and For the Record. This article is excerpted from Julian Block’s Tax Tips for Marriage and Divorce, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

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No Laughing Matter

I FEEL FORTUNATE there weren’t any iPhones or iPads when our son was a toddler. I’ve recently seen two-year-olds mesmerized by the magic of a smartphone. The kids can whiz around a screen like they were born with one in their diaper pocket. It scares me to think how we would have managed these “toys” if they existed in the 1990s.

But they didn’t. From our perspective, Saturday morning cartoons were the biggest threat to our child’s financial development. What possible harm, you might wonder, could a cartoon do—and what does that have to do with financial education?

Every Saturday morning, I took our son grocery shopping at Kroger. I’d say, “Let’s go Krogering.” It was a lot of fun, having him ride in the shopping cart in his bouncer, before he was able to sit. At that juncture, managing his impulses was not a problem.

But around us, I saw a number of parents struggling with kids who had spied a product on a shelf they recognized. Sometimes, the showdowns weren’t pretty.

Wow. Is this what I had to look forward to? I remember that we read a number of articles about kids, TV shows and commercials. We came to the conclusion that if our son didn’t know about the “benefits” of Cocoa Puffs, Tony the Tiger or Happy Meals, we stood a fighting chance that he wouldn’t be attracted to them on the grocery store shelf or when we drove past the Golden Arches.

The upshot: We decided that we wouldn’t introduce him to Saturday morning cartoons, the Cartoon Network or Toys “R” Us. That’s the nice thing about having only one child. There aren’t any older siblings to offer a “second opinion.” His TV viewing consisted of one channel: PBS. It was all about Barney, Sesame Street and The Magic School Bus.

Interestingly, the one thing that I clearly remember, after watching hundreds of these shows with him, is the marketing line that was used by one of the program sponsors: “Chuck E. Cheese: Where a kid can be a kid.”

I thought this was pretty tame and we used to have fun repeating the phrase. It sounded cool and had a nice ring to it. In retrospect, it shocks me that I still remember it 20 years later. Clearly, it’s the kind of marketing that can influence purchasing habits for a lifetime.

But that’s the reason Saturday morning cartoons exist: to market a whole universe of products to impressionable children. It’s where a kid can learn to be a consumer.

Our plan ran into a hitch when we went to India one summer to visit relatives. Most days, it was around 110 degrees in New Delhi, so our son was stuck in the house for many hours during that month. In a moment of desperation, we let him discover the Cartoon Network. We rationalized it by telling ourselves that there were language benefits to watching Scooby-Doo speak in Hindi.

And the line that we developed before returning to the U.S. was: “When we get back home, it’s back to normal. No more Cartoon Network.” Somehow, it worked.

Back to Kroger and age three: Up and down the aisles we went. I hope it’s not selective memory, but I don’t remember him ever saying, “Can I have that?” Not even when we were in the evil checkout line, where they put all kinds of shiny objects, meant to attract the attention of kids. Never once did we have a battle-of-wills over a consumer product in a store aisle.

Of course, maybe it wasn’t PBS or a lack of Saturday cartoons. But that’s my version and I’m sticking with it.

Alan Cronk retired after spending 32 years in the newspaper industry as a marketer, editor and writer at the Winston-Salem Journal. This is the second in a series of blogs about his and his wife’s experience educating their child about money. Previous blog: Baby Steps.

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What Motivates Me

MY FATHER was age 19 and my mother was 11 when the Great Depression started. They were married in 1942 and I was born in late 1943. Their view of money matters was surely tempered by their life experience.

They had no investments to speak of and always kept what little money they had in a checking account. They would never borrow and didn’t know what a credit card was.

Many years ago, I convinced my mother to buy 75 shares of the company I worked for—a large utility. The investment at the time was less than $2,000. But I could never convince her to enroll in the dividend reinvestment plan. She wanted her cash each quarter. When she died at age 87, I inherited those 75 shares and promptly added them to my dividend reinvestment plan. My parents’ sole income in retirement was Social Security. They had what they needed, but not much more.

Witnessing their experience could impact a child in one of two ways, I suspect: Repeat their mistakes or head in the opposite direction. I chose the latter route.

In the late 1970s, when I was around 35, my wife and I went to a financial planner, who turned out to be more of a salesman. He asked me my financial goals. I told him I wanted a vacation home on Cape Cod and to pay for my four children’s college. He thought for a moment and didn’t say much, but his manner and the look on his face made it clear he was tempted to laugh in my face. It seemed I couldn’t afford anything, except to die. That ticked me off and, as you now know, I never forgot that meeting.

The motivation from that meeting, a company where I worked for 49 years, a pension and later a 401(k), coupled with a frugal financial attitude, allowed me to meet all my goals over the years. I even saved for 20 years in a special account to buy the car that I promised my father—who was a car salesman—I would someday buy. I was 71 when I purchased it for cash. Talk about delayed gratification.

Today’s workers don’t have it as good. The days of pensions and decades with one employer are long gone. But that doesn’t mean the ability to balance needs and wants, save diligently, avoid unnecessary debt and invest systematically are also gone.

I contend that virtually everyone, except the chronically poor, can find money to save and, equally important, to invest. For most, it’s a matter of setting priorities, accepting a reasonable standard of living, and applying discipline to saving and spending, even with the small things. Most Americans simply have too much stuff and may be more focused on the Joneses than their own future. If the only way you can have that upscale vehicle you really, really want is to lease it, you can’t afford it.

For most, the formula is simple: Save and invest at least 10% of pretax income and set your standard of living on what’s left. If that doesn’t make you happy, find a way to supplement your income. I had two jobs of one kind or another from age 13 until I retired at age 67. Even now, I earn small amounts each month—by blogging.

And by the way, saving and investing are not the same thing. It takes considerable ongoing effort to invest. You must set goals, be comfortable with a risk level, learn about different types of investments, set a long-term strategy and more. You can’t simply let your contributions be defaulted into your 401(k) plan’s money market fund or throw darts at the menu of investment options, and then walk away.

Richard Quinn blogs at   QuinnsCommentary.com . Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include  Benefits Lost, Double Life and Wait, There’s More . Follow Dick on Twitter  @QuinnsComments.

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You—But Better

MUCH PERSONAL finance literature, including most of what I write, focuses on how to handle money—how much to save, which investments to buy, and so forth. But what if you have a more fundamental question: How do I earn more in the first place?

To help answer that question, I have five new summer reading recommendations. Each of these books offers strategies to help you increase your productivity—and your happiness—on the job. That, in turn, may be all you need to take your earnings to the next level.

1. The Checklist Manifesto by Atul Gawande. It’s well known that airline pilots make religious use of checklists. Outside of aviation, however, most people use them for routine tasks only occasionally. In The Checklist Manifesto, Gawande, who is a surgeon and a professor of public health, acknowledges that checklists are “ridiculous in their simplicity,” but argues that they can be incredibly effective, if done right.

Gawande relates the positive impact of checklists in his own operating room and then takes the reader on an educational tour through other organizations that also have implemented checklists to positive effect. If you work in health care, you’ll find this book particularly enjoyable, but I would recommend it to anyone who wants to see their organization run better.

2. When by Daniel Pink. For many people, 3 p.m. is the worst time of day. If you’re lucky enough to be in preschool, you can take a nap. But for working people, it can be a real struggle. In this book, Pink provides a more comprehensive understanding of the importance of timing than I have seen anywhere else.

Some of Pink’s prescriptions may sound hokey, such as the Nappuccino or his 20-20-20 rule. The former involves downing a cup of coffee and then napping for perhaps 20 minutes, while the latter involves taking a break every 20 minutes to stare for 20 seconds at something 20 feet away. Still, this book will make you think twice about the often-overlooked role that timing plays when it comes to important undertakings at work and at home.

3. Micro-Resilience by Bonnie St. John and Allen Haines. An Olympian and Rhodes Scholar, St. John knows a thing or two about managing herself for maximum productivity. In this book, she provides a number of counterintuitive insights to help you get more from your workday.

Micro-Resilience may be particularly helpful to stressed-out Type A folks, but it can help anyone who feels like they’re drowning in an ocean of to-do lists, deadlines, texts, emails and pop-up alerts. St. John provides dozens of useful and easy-to-implement tips for keeping your mind, body and spirit in balance for maximum peace and productivity.

4. Extreme Productivity by Robert Pozen. A veteran of the mutual fund industry, Pozen is hardly the typical self-help guru. It turns out that Pozen was recruited to write this book by friends and colleagues who were astonished by his ability to lead a multi-thousand-employee company and simultaneously teach, write and serve in community roles—all without sacrificing his personal relationships.

Extreme Productivity is an easy read with truly practical advice on how to more effectively read, write, speak, manage employees and more. What I’ve found most useful is Pozen’s advice on conducting meetings. If you work in an organization that is suffering from “death by meeting,” you’ll want this book for that section alone.

5. The E-Myth by Michael Gerber. This book is especially for entrepreneurs and business owners. It’s an old book, but the message is timeless: If you feel like you’re on a treadmill and a prisoner of your own creation, there is a solution.

Gerber’s mantra is that you should always be “working on your business rather than in your business.” By doing so, you effectively promote yourself from line worker to CEO: You can spend your time focusing on growth and big picture questions. Fifteen years ago, I had a great boss who gave me a copy of this book and I have reread it several times since. If you have your own business or work in a small company, I highly recommend it.

If you don’t have time for an entire book, I have one recommendation for you: a 2011 article titled Extraneous Factors in Judicial Decisions. Admittedly, the title sounds dull. But it’s probably no coincidence that several of the above books reference this study, which reveals the alarmingly high correlation between the timing of meals and critical outcomes in the workplace.

Adam M. Grossman’s previous blogs include Happily Misbehaving,  Laying Claim  and Proceed with Caution. 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 .

Full disclosure: If you buy any of the above books by clicking through to Amazon using the links embedded in the above article, HumbleDollar earns a small referral fee.

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Yes, It’ll Happen

YOU WILL RETIRE one day—and, if you want to spend your final decades in even moderate comfort, it won’t be cheap. Not too concerned about saving for retirement right now? Here are five uncomfortable realities:

1. You’ll almost certainly live to retirement age. Sure, you could go under a bus before then. But that isn’t something you should bank on: If you’re age 20 today, there’s an 85% chance you will live to 65, according to 2014 mortality rates from the National Center for Health Statistics.

2. It isn’t optional. You don’t have to own a home and you don’t have to pay the kids’ college costs. These other goals are desirable, but they fall into the “nice to have” category, not the “must have.”

A retirement nest egg, by contrast, is firmly in the “must have” category. You might imagine you can work forever and never retire. But your boss could have different ideas and, even if she doesn’t, the day will likely arrive when your aging body simply doesn’t cooperate.

3. You can’t pay out of current income. This is another difference between retirement and other goals: It isn’t like purchasing a home or a college education, where you can borrow a bunch of money and then repay it over time. Instead, if you want a financially comfortable final few decades, you need to come to the retirement party with a heaping pile of dollar bills.

That said, both borrowing and earning money could play a role in your retirement income strategy. You might work part-time during, say, the first decade of your retirement—something I favor, partly because it eases the financial strain and partly because it could bring a sense of purpose to your initial retirement years. You could also borrow against your home’s value through a reverse mortgage—something I’m less enthused about, because of the hefty costs involved.

4. It’s mighty expensive. Based on a 4% withdrawal rate, you need to amass $100,000 for every $4,000 of annual retirement income you desire. Suppose you’re making $80,000 a year. To replicate just half of that income, you might need a $1 million nest egg.

To accumulate that million, you would have to save $10,119 every year for 40 years, assuming a 4% after-inflation rate of return. That’s 12.6% of the $80,000 income we’re assuming.

What if you delay saving for retirement, so you have just 30 years to sock away money? To hit $1 million, the required annual savings jumps to $17,144 a year, or 21.4% of income. What if you wait even longer? The required savings rate quickly becomes unachievable.

Those who procrastinate won’t just get less benefit from investment compounding. Their time horizon will also be shorter, which means they should probably take less risk and hence they’ll likely earn lower returns. On top of that, they will squeeze less benefit from the retirement accounts they fund, including any matching contribution in their employer’s plan.

5. You can’t afford to fail. As you’ve no doubt gathered, retirement is a hugely expensive, pretty much unavoidable goal—and that means you should do everything possible to stack the odds in your favor by making the most of retirement accounts, diversifying broadly and buying total market index funds with rockbottom annual expenses.

But, you might wonder, wouldn’t it be easier to achieve your retirement goals if you notched market-beating returns? Even if there were a decent chance you could outperform the averages by betting on a handful of individual stocks, putting everything into the technology sector or buying bitcoin—which there isn’t—pursuing such strategies would be extraordinarily foolish. Why? Think about the downside: If you fail badly in your pursuit of outsized returns, you could be faced with a retirement of grinding poverty.

At that juncture, the options wouldn’t be great. You would likely need to continue working at whatever job you can find. But while part-time work may be stimulating, fulltime work would likely prove exhausting—and the jobs on offer may be neither enjoyable nor especially remunerative. You would likely also have to reduce your standard of living sharply. That’s a grim proposition: While an ever-improving lifestyle offers a pleasant sense of progress, a falling standard of living can be downright depressing.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Happy Ending

AS I CHILD, I remember reading a series of “choose your own ending” adventure books. These novels allowed the reader, at different junctures, to choose how they wanted the main character in the book to proceed. I always enjoyed rereading these books, creating a different story each time I progressed through the pages.

At this point in my life, I’m beginning to feel like my eventual retirement is a bit of a “choose your own ending” adventure. The age at which I finally leave my job, the place I eventually live and the activities I’ll ultimately pursue: All of these feel like they’re up for grabs on a daily basis. I’m constantly playing out different scenarios in my mind, imagining one life after another. What will it take to get me to retire? It comes down to a few basic elements:

Savings. For now, my goal is to have a net worth of at least $500,000 before I stop working fulltime. I’m currently on track to hit that number by age 55. But if the stock market took a dive, as it did in 2007-09, I’d likely need to continue working fulltime for at least a few more years.

Housing. I’m planning to leave the Portland, Oregon, area when I quit my current job. Tax rates and housing prices are among the many factors that’ll drive my relocation decision.

Of course, there are other issues to consider as well. I certainly wouldn’t mind living somewhere that gets more than 68 days of sunshine a year. It’s also important to me to find a place where I can participate in some of my favorite activities, including dog training and competitive shooting.

Employment opportunities. Because I’ll likely need to work part-time for a few years, I have to figure out what type of job to pursue. Having been in my current fulltime position for 20 years, I find it difficult to imagine doing anything else.

I debate whether to freelance or get a part-time job with one employer. The final decision may hinge on my retirement account balance. If the markets have been kind, I may feel more comfortable attempting to freelance. If my budget is tight, I’ll probably resort to finding a job with a solid schedule of hours. The decision will, no doubt, also be closely tied to where I end up living. Freelancing would allow me more freedom to live wherever I wanted, while holding down a more traditional job could mean having to live in or near a larger metropolitan area.

Other considerations. Access to health care, an area’s political climate and overall cost-of-living expenses will also ultimately factor into my retirement equation. How will all this play out? For now, I’m still choosing my own ending.

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

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Benefits Lost

WHO IS YOUR worst financial enemy? Got a mirror? For millions of American workers, their employee benefits play a significant role in their financial lives—and yet this noncash portion of their compensation is often undervalued, overlooked and misused.

I designed and managed employee benefits for nearly 50 years. During those years, I tried every form of communication I could think of to get employees to pay attention to their benefits. I retired with a sense of failure. Before I began writing this blog, I checked with a few former colleagues. Their response: “Not much has changed.” Lack of attention to benefit programs puts workers at immediate and long-term financial risk.

One professional I recently spoke with said, “We have advanced our education and selection tools by offering mobile access. Still, no one is reading or taking the time to understand their benefits package.”

Workers misuse, abuse or ignore their 401(k) plans. They fail to maximize both their own savings and the employer match, take too many loans and generally have no idea when it comes to picking investments. That’s a grim assessment, I realize. But it was true 10 years ago and it’s true today.

Even when workers are fortunate enough to have a pension plan, they generally don’t learn what it can provide for them and their survivors. In 1996, I started a cash balance pension plan for new hires. To this day, many participants insist they don’t have a pension plan: They focus on the accumulated amount in their notational account—and ignore the annuity payout.

It gets worse. When given a choice, workers typically choose the highest cost health plan, even when they don’t have the ongoing expenses to justify it. They equate higher premiums with better coverage—coverage they often don’t need. They lock in the cost of higher monthly premiums, which frequently are greater than the potential out-of-pocket costs they would have faced with a less expensive plan.

Meanwhile, many workers with a high-deductible health plan fail to take full advantage of a Health Savings Account. An HSA is a highly tax-favored vehicle that can not only cover out-of-pocket health care costs today, but also can be a great investment tool to pay for costs in retirement. What other vehicle will allow you to make tax-deductible contributions, accumulate earnings tax-deferred and withdraw the money tax-free? What you don’t spend while working can be carried into retirement. Once you’re age 65, you can withdraw funds for any reason without tax penalty—and, if the reason is medical expenses, the withdrawal isn’t subject to income taxes.

A 2017 survey says 108 million Americans have group life insurance through their employer. This is a good thing—or maybe not. The amounts provided by the employer tend to be low and, in my experience, this group coverage is often the only life insurance that employees have. Various sources estimate that 40% of Americans have no life insurance and, among those who do, the amount of coverage is frequently inadequate.

Richard Quinn blogs at   QuinnsCommentary.com . Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Double Life, Age-Old Myths and Wait, There’s More .  Follow Dick on Twitter  @QuinnsComments .

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More Than Money

WHEN I DECIDED to retire, I kept asking myself, “Do I have enough money?” If I’m lucky enough to live a long life, my savings might have to last 35 years.

My coworkers, however, had a different question. “Hey Dennis, what are you going to do with all your free time?” I was asked that question so many times it became annoying. I soon realized they had doubts about how they would stay busy during retirement. They were looking for an answer for themselves.

I have been retired for nine years and I now know how important that question is. Have you ever heard the saying, “An idle brain is the devil’s workshop”? That’s what happened to me the other day.

My doctors asked me to come back for a colonoscopy sooner than I was expecting. Previously, they hadn’t found anything alarming and they said there wasn’t anything to worry about. Still, I had a lot of free time and I made it into something bigger than it was. If I had been working, I probably wouldn’t have given it a second thought. It’s important for me not to have too much free time.

In truth, I have a fairly busy schedule. I’m the primary caregiver for my mother, who will turn 95 this year. Taking her to doctor’s appointments, cooking, laundry, shopping and yardwork is like having another job.

When I’m not taking care of my mother, I have a very close friend I spend time with. Recently, I read an article about married couples living longer than those who are single. That doesn’t surprise me.

The other night, I was helping my mother to bed and she said, “I never worried about anything when your father was alive.” I can’t tell you how many times she’s said, “All my old friends have passed away. I don’t have many friends anymore.”

I’m not saying you should run out and get married. But it might be a good idea to have a close friend who can help you get through the rough times. When you retire, it’s important to have a plan that’s about more than money. I find having a daily schedule that keeps me active is as valuable as my investments. As I get older, I realize that friends are like gold.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs were Leap of Faith and Lessons Learned.

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Happily Misbehaving

IN SUMMER 2011, a rural Illinois man named Wayne Sabaj was in his backyard picking broccoli, when something caught his eye. Half buried in the dirt, he found a sealed nylon bag. Inside was $150,000 in cash. For Sabaj, who was unemployed and had, in his words, “spent my last $10 on cigarettes,” this was a godsend.

Though it remains a mystery who had buried this particular stash of money, these sorts of finds are not uncommon. With some regularity, homeowners doing renovations unearth money buried in backyards, basements and bedroom walls. Often, the money dates back to the Depression era, when there was greater concern about the solvency of banks. But that’s not always the case: I was born long after the Great Depression—and I’ve seen cash hidden in some unusual places around homes.

While these stories are humorous, I would argue that people who squirrel away cash like this are not altogether irrational. In fact, I would go a step further and say that—as long as they don’t forget about it—these folks are actually making the right decision with their money.

Why? The reality is that many, if not most, of our financial decisions are driven by emotional goals and not by any kind of logical or numerical cost-benefit analysis. While perhaps less colorful than hiding money in the broccoli garden, we all make financial decisions that are motivated by what makes us feel good. Whether it is a $5 latte, $1,000 phone or $100,000 sports car, every one of us allocates money in ways that bring us happiness, even if our spending might seem irrational to the next person.

In my view, a cash hoard is no different. Whether it is in the garden or in the bank, if this is what provides you with happiness and security, then I would say it is, by definition, the right way to allocate your resources.

And it’s not just cash. People often struggle with financial decisions when the “right” answer from a numerical standpoint doesn’t feel like the right answer from an emotional standpoint. Consider three examples:

Suppose you live in New York City, where the cost of living is 50% or 100% higher than it might be somewhere else. Yes, you could move and keep more money in your pocket. But you’d also be giving up a lot in terms of quality of life, so you stay.
Let’s say you have a very low-rate, 30-year mortgage. The math would say that you shouldn’t pay down this mortgage any faster than you need to, even if you have the financial wherewithal to do so. But emotionally, you like the feeling of being debt-free, so you pay it off.
Suppose your grandmother left you a handful of shares in a collection of companies that you don’t completely understand. Sure, you could sell them and diversify the proceeds. But each time you open your monthly statement, the shares remind you of your grandmother, so you decide to keep them.

I wouldn’t criticize any of these choices. Just because they seem like purely financial decisions doesn’t mean that they need to be decided on a purely quantitative basis. I don’t see them as being any different from the choices I mentioned earlier—to drive a fancy car, for example. All of these choices are, in fact, rational decisions in the sense that they bring the individual happiness or security. For that reason, you shouldn’t worry if you make such decisions.

I will, however, add one caveat: Decisions like this are all okay as long as they are in the context of an overall financial plan that is designed to get you where you want to go. I definitely would be concerned and would recommend a change if your excessive cash holdings, your sentimental attachment to a stock or your decision to live in a high-cost city were jeopardizing your retirement. But if a certain financial choice will bring you happiness—and it won’t greatly hurt you—then I wouldn’t be concerned. Your financial assets should bring you happiness and peace of mind. If that means burying them in the backyard, that’s okay. Just don’t forget where you put them.

Adam M. Grossman’s previous blogs include Laying Claim, Proceed with Caution and  Old Story . 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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