Jonathan Clements's Blog, page 40
July 10, 2025
Securing Lower Taxes
John Yeigh posted excellent information yesterday entitled Roth Conversion Opportunities Extended
Despite my feeling that I am fairly well conversed in this matter I still read everything I can, assuming correctly, that I don’t know everything. When reading the article below:
https://humbledollar.com/2023/01/securing-lower-taxes/
This line struck me:
Take earlier IRA distributions and invest that money in a taxable account. Subsequent gains would be taxed at lower capital gains tax rates. If held until death, the investments could receive a step-up in basis and pass income-tax-free to heirs.
As I have written before I am trying to convert all of my wife’s traditional IRA into a Roth 100% invested in a world stock fund so: 1) I will only have to take RMDs from my traditional account, thus reducing our portfolio maintenance requirements, 2) my children can potentially inherit it and decades of gains tax free, and 3) lower my RMDs when I turn 73. Today I posted a comment on another of John’s linked articles on how reducing the balance in my wife’s traditional IRA to zero is harder to accomplish, due to compounding growth, than I realized (Truly a problem of the affluent)
After hopefully completing the Roth conversions and before we turn 70 (and claiming our Social Security benefits) I figured we would only withdraw funds from my traditional IRA in what limited amount was necessary to meet our expenses.
After reading this article I’m now considering continuing to withdraw enough from my traditional IRA to top off the 12% tax bracket each year until we turn 73 and investing the unspent balance 100% in a world stock fund in our taxable account. These funds could also be inherited tax free due to the step up in basis. I was already planning to increase our portfolio’s stock allocation once we claim Social Security as our income will meet most if not all of our expenses. This plan seems to make more sense than adjusting our stock allocation in my traditional IRA.
Two questions the:
1) Does this plan make sense?
2) Are others also topping off their top tax rate with the same philosophy?
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Financial AI: Benefit or Danger? I don’t Know.
Truthfully, the maths was beyond me for a quick article, but I thought this was maybe something I could test with one of the shiny new LLMs that are popping up everywhere. I chose Google's Gemini, and after politely introducing myself, I posed a question:
"Can you quantify the difference on a standard 60:40 $1,000,000 portfolio of holding a five-year cash buffer during a three-year 20% market drawdown, and project out to two years after the recovery at average market returns?" Here's the LLM's condensed summary:
"For retirees with a $1,000,000 60:40 portfolio, a $200,000 (5-year) cash buffer significantly mitigates 'sequence of returns risk.' Our analysis shows that during a hypothetical 3-year, 20% market drawdown, the buffered portfolio avoids forced selling of depressed assets. After the drawdown and two subsequent years of average returns, the portfolio with the cash buffer would be worth $916,649. The unbuffered portfolio, forced to sell assets at a loss, would stand at $886,906. This $29,743 difference highlights the cash buffer's crucial role in preserving capital and enhancing long-term portfolio resilience, especially when regular withdrawals are necessary. It demonstrates how avoiding sales during downturns allows the invested portion to recover on a larger base, ensuring greater financial stability."
This seems a reasonable outcome to me and highlights a possible benefit of holding cash if you are of the opinion there's going to be a large prolonged drawdown. Then again I've no clue about the calculations the AI used to come to these conclusions.
But what has captured my imagination, and is, I think, something worthy of serious debate going forward as these AI systems develop in complexity in the coming years: Could this be the start of a democratization of financial advice for each individual, with the ability to perform very powerful financial simulations on portfolios that only a few years ago would have been nearly impossible? There are deep implications for this going forward.
I can think of a few areas of concern. When I was a young teenager, I loved programming but always had to be careful of the "garbage in, garbage out" mantra. This would definitely apply here. Other things that come to mind include fundamentally trusting the outputs and issues with privacy of the data used in the simulations, maybe even people over-relying on their AI models. But it offers intriguing possibilities for personal portfolio management in the coming decade and I think very new and unique dangers to navigate.
The simple fact that this morning I could, within minutes of watching a news article, come up with a powerful simulation using an AI is thought-provoking and, in some ways, an alarming demonstration of technological advancement. Let's hope we can successfully embrace its benefits.
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Extra Innings by Jonathan Clements
I like to think I took my diagnosis in stride. I moved quickly to simplify my financial affairs, toss unwanted possessions, get new estate-planning documents and change HumbleDollar’s direction so the site could live on after my death.
I also focused on getting the most out of each day. Partly, that meant taking some special trips and spending more time with family. But it also meant continuing to do the work I love and relishing the joys of everyday life.
For me, at least, the prospect of a short life brought a feeling of urgency, greater gratitude for each day and a stronger sense for what’s important. Over the past year, I’ve never been more aware of the finiteness of time. It might sound odd, but that has struck me as a privilege. It’s made me think harder about what I do each day, and it’s heightened my appreciation for the world’s beauty and the goodness of others.
Problem is, my 12-month “deadline” has passed—and I’m still here.
Don’t read too much into that. My prognosis remains poor. Right now, I’m dealing with my four horsemen of the Apocalypse: back pain, fatigue, constipation and loss of appetite, plus some nasty mouth sores. The cancer has spread to my spine and continues to attack my brain, requiring multiple rounds of radiation, as well as the insertion of bone cement to shore up my back. The spreading cancer means my initial treatment plan is no longer working, and I’m now on a new set of meds. I’ve also been trying various medical marijuana products—not something I ever imagined doing—and my hair has all fallen out.
It isn’t clear how much extra time the new treatment plan will buy me. But it is clear I’m not disappearing on schedule.
What should I do with the extra months? Time—which 12 months ago seemed so precious—no longer feels quite so precious. Over the past year, spurred on by my diagnosis, I wrote a slew of articles for both HumbleDollar and a handful of major publications, helped with a book that compiles some of my best Wall Street Journal articles and drafted another book that I hope will appear after my death. With major help from my wife Elaine, I've also continued to spend time every day both keeping HumbleDollar going and preparing the site for life without me.
But what now? What should I do with the additional months that I’ve been given? Is it time for new goals?
All this may seem a little manic, and perhaps it is. But I can’t see myself spending my remaining time reading novels and binge-watching Netflix, while I await the final deterioration in my health. At the same time, because of the fatigue, I don’t have much energy for anything else.
For now, I’m hoping the fatigue will pass, as the effects of my recent 10 consecutive weekdays of total brain radiation fade. It would be great to feel like my old self, or somewhat close, for at least a few months. But as I sit here at the breakfast table, my brain sluggish from the radiation and the chemo, it feels like relief is still weeks away.
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July 9, 2025
A Quick Question about Retirement Vacations
I've been at my holiday home for 10 days now, feeling relaxed and enjoying myself. It's the first 'holiday' since retirement. What piqued my interest, though, is a subtle but distinct difference: this break feels less intense, is probably the word, than vacations I took while still working. It's not the same kind of escape. Has anyone else noticed this after retirement?
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Roth conversion opportunities extended
Who should Roth:
https://humbledollar.com/2020/05/to-roth-or-not/
How Roth conversions can impact Medicare premiums:
https://humbledollar.com/2023/04/that-28000000-tax/
Rothing can lower future taxes especially when considering the widow's tax after the first spouse passes and estate tax impacts:
https://humbledollar.com/2023/01/securing-lower-taxes/
Rothing may not gain ground on future RMD tax obligations due to growth in tax deferred accounts:
https://www.theretirementmanifesto.com/my-biggest-surprise-in-retirement/
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Here is my favorite word. What is your favorite word? Perhaps frugal, Roth, spreadsheet, planning, Monte Carlo, dividends?
I believe that missed opportunities, stress, poor decisions of all types, just many of the things we complain about result from not being aware of what is happening around us.
Being aware means having knowledge or perception of something. It involves noticing, recognizing, or being conscious of what’s happening either around you or within you.
In essence, being aware is about being connected to what is happening, both internally and externally, and having a sense of understanding or perception about it.
Being aware was brought to my attention during basic training in the army decades ago. They try to keep you off balance, to stress test you, to create illusions. If you don’t exercise awareness, you are always stressed. One night we had to crawl under live machine gun fire with tracer bullets to add to the fear. We were told the guns we’re aimed three feet above the highest point on the range. Most of the guys assumed that meant three feet above our heads, but being aware you would notice the highest point was actually a pole some eight feet high. More awareness, less stress.
Dealing with finances requires awareness for sure, especially when thinking - or not, about the future. Buying decisions, investing decisions, borrowing decisions are all aided by awareness of things around you. And in the 21st century that means a global awareness.
Are you aware of what may happen to Social Security and Medicare, taxes, interest rates, tariffs, new technology on the way, global droughts, how the Saudi’s pump oil. It all matters to your finances.
Heck, are you aware that you cell phone battery is about to run out? 😱 Or, that dream car from Germany will soon cost significantly more?
This awareness thing is made more difficult by the trash and misinformation on social media. Many people seem to simply accept what they read as fact and then act on it or pass it around.
Sadly, my perception is that the majority of us, walk around in a dome of obliviousness happy in our state - and suffer the consequences.
Take a lesson from the Boy Scouts - Be Prepared- Be aware.
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Coast FIRE! Who would have thought that FIRE could have so many flavors?
Coast Fire sounds like a logical evolution of the FIRE (financial independence-retire early) idea. Not everyone thinks ending work is the greatest idea, but a lot of people might prefer less demanding jobs, such that they can both work and enjoy a lower stress life.
When I look at the technology and tools available to help people organize their personal finance and take over their lives I'm truly envious.
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My Favourite Day: Retirement Payday Wednesday
I like Wednesday now; it's my favorite day of the week. When I was organizing everything before selling my business and retiring, I was so uptight and stressed about sorting out a cash flow stream for our everyday spending. I decided to pay ourselves weekly, reasoning it would make things easier to track what we spent this way. If you think about it, it's a silly thing to do. It's not like it was a surprise to me what we spent; I'd been funding that for countless years.
I ran a small business with a multimillion-dollar turnover. My focus was on optimizing cash flow, generating income, and maximizing profit to keep the enterprise healthy and flourishing. Paying staff and suppliers was an easy thing for me to do. Surprisingly, I had a harder time paying myself. Taking the business's life-giving cash to fund my lifestyle always deeply bothered me. Definitely a weird tension for a business owner!
But now I don't have this issue. It's just a joy to see the money drop into our account every week. I actually log into my online banking on a Wednesday morning, coffee in hand, just for the satisfaction of seeing the deposit. I'm easily pleased! Prior to pulling the trigger, I had spreadsheets about retirement income streams coming out of my ears. I would obsess over them nearly every day and get an itch if I hadn't looked in a while. Totally and utterly over the top.
Nowadays, I really don't even think about them. I've set my sail, chartered my course, and it's on autopilot. It's a revelation to seemingly receive cash on a weekly basis without having perceived to hustle and work for it. It's a wonderful feeling that I know will fade when it becomes mundane everyday, but at the moment, I'm enjoying it immensely and wanted to remind you old-time retirees what a super thing it is to seemingly get money for nothing. Now all I need is the chicks for free!
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July 8, 2025
The High Cost of Financial Advice: A Tale of Two Portfolios
My wife's portfolio is approximately 50% larger than mine but pays 900% more in fees. And no, I didn't make a mistake with an extra zero. The difference in absolute fees becomes even more substantial as the portfolio grows. While my Vanguard fees benefit from the platform's fee cap, Suzie's fees continue to scale directly with the size of her portfolio. This illustrates how the impact of higher percentage fees becomes increasingly significant, dramatically reducing the potential for long-term compound growth on larger sums of money.
For simplicity's sake, if I take a 7% average gross return, my portfolio will be bigger than Suzie's within 25 years. If that doesn't work as a stark reminder about the corrosive effect of fees, I really don't know what will. (I got Google Gemini to work this out for me)
The question is whether the additional services provided by Suzie's wealth manager justify the significantly higher cost, especially when simpler, lower-cost alternatives exist. Luckily for me, I'm in the privileged position that Suzie is my wife and doesn't mind me logging into her portfolio's access portal and nosing around. Our portfolios are substantially similar in makeup. I've a slightly higher equity allocation, and Suzie has more infrastructure and utilities, which I think is the reason it had slightly less volatility during the recent market turmoil. But our performance before fees is not much different. In fact, I'm performing slightly better, which might be my marginally higher equity percentage in play.
But I can categorically state there is no massive outperformance in the high-fee option.
"How could you have let this come about?" you may be thinking to yourself. In my defense, until very recently, I was consumed by running my business and, at the end of the day, it's not my portfolio, although it's intimately linked to mine and my wife's future financial well-being. The fact of the matter is it's Suzie's portfolio.. But the question has definitely been on my mind to the extent it was causing me sleepless nights
I did what all married couples in a strong, loving relationship would do. I broached the topic, and we talked. I even used the figures in this article to illustrate my point, and thankfully, I've had some success. Recently, we sat together and opened an account with Vanguard for Suzie. It's only been funded with the minimum opening requirements so far. I wait for my wife to gather the courage to speak with an advisor who was a long-term work colleague and friend about moving her funds from his business.
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Quinn rants about taxes-but maybe not what you think.
Like most Americans I pay taxes, income taxes both federal and state, sales taxes, property taxes and for fifty years, payroll taxes and I’m still, at age 81, paying income, sales and property taxes - plus assorted other miner taxes and fees on goods and services.
Like any normal person, I think it would be nice not to pay taxes and keep all my money. But unlike too many of the uninformed people ranting on social media these days, I understand why taxes are necessary.
Oh yes, money is used inefficiently by government - just as it is, at times, similarly misused by charities, political organization and profit making businesses.
And some Americans - individuals of all sorts - commit fraud and steal money from taxpayers. That has been going on since there have been governments.
Medicare has uncovered tens of billions of dollars in improper payments in the last five years alone - mostly fraud perpetrated by health care providers of some type, often in concert with patients.
Some social media rants are about money spent on foreign aid and welfare. All welfare programs equal about 7% of the budget and foreign aid around 1.2%. On the other hand Social Security and Medicare combined equal about 33-36% of the budget.
None of that changes the need for taxes and all the things taxes support. None of that justifies the calls for no taxes, especially from older Americans based on previously paying their dues. And certainly avoiding taxes should not be based on the job a person does or hours worked.
Over fifty years I paid $230,000 in Social Security and Medicare taxes. Not counting income taxes paid to those trusts after retirement.
However, during our 15 retirement years so far Connie and I have collected in SS and Medicare benefits way more than I paid in taxes.
Also, I estimate that since I retired in 2010 I paid $195,000 in property taxes. Those taxes pay to run my town, county and our school system. My children received a good education paid for by other citizens young and old both with and without children, so why shouldn’t I do the same? What makes 21st century seniors different?
Some people claim the wealthy don’t pay their fare share and that if they did others could pay less. That’s not accurate either. Even the wealthy don’t have enough cash given the federal government alone spends about $18 billion a day.
The current American rant against taxes is short-sighted and unfounded - and fiscally risky at best.
Americans seem unable to make the connection between wants, needs and desires from their collective society and paying for them. In fact, even now we turn our backs on paying the bill. Interest payments alone are about 14% of federal spending and rising.
The United States is among the lowest taxed and highest indebted of developed countries. And still many Americans expect - demand - lower taxes.😱
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