Jonathan Clements's Blog, page 67

A Veteran’s Viewpoint

It’s rough out there but peeking at your balances  does little to alleviate angst over the market meltdown.  A recent Barron’s article reminded me that “it’s all paper losses anyway, unless you sell.  if you do that, you lock in your losses, and then you have to worry about getting back in. Typically, by the time Investors feel comfortable returning to the market, stocks will have  already appreciated and investors will have missed.out on the recovery.”

Many are looking to this week to provide a clearer picture as to the markets direction.  This is not my first rodeo so I have a good idea of my strength of resolve to stay the course.  I just hope the ride isn’t too bumpy.  The first time I faced a serious downturn in the market I was younger. I regretfully  sold.  Stay the course can be less comforting to new retirees who stand to risk the most in a market rout.

Older, wiser and situated better, financially,  I’m hoping all my favorite names will be on sale.

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Safety Net or Gambling Chip? Wrestling with Wealth and Wisdom”

I’ve recently lived by the principle of keeping about 20% of my assets in cash as a safety net—not as “dry powder” ready to be fired off in some speculative move. But lately, I’ve caught myself eyeing that safety net differently, wondering if it could be more than just a cushion. Am I starting to see it as dry powder after all?

I keep hearing the word “play” tossed around in financial circles. “What’s your play?” they ask. To me, “play” sounds like something you’d hear at a poker table, not a portfolio review. It reeks of gambling, not investing.

Here’s the math that’s been spinning in my head: If the markets drop 25% and I invest $100 from my cash reserve, I could see a profit of about $33 if prices climb back to where they started. That’s a tidy gain. But what if the markets don’t stop falling? Another 25% drop after I buy means I’m down $25, and suddenly my safety net isn’t looking so safe anymore. I’ve chipped away at my buffer for a shot at a win.

Is this the investor’s dilemma—balancing risk and reward—or the gambler’s itch, chasing a thrill? I can’t quite tell.

Then I look at the S&P 500 chart, stretching back decades. It’s a steady march up and to the right. Always has been. That long-term optimism whispers reassurance. But a nagging voice counters: What if this time is different?

Maybe I should dip a toe in—say, $50 instead of $100. But even that feels like I’m turning my safety net into dry powder, bit by bit. If I start this game, where does it stop? How do I know when I’ve crossed the line from prudence to recklessness?

So here I am, asking: What should we do?

Ecclesiastes 7:12 offers a steadying hand:

“Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this: Wisdom preserves those who have it.”

Maybe the real answer isn’t in the numbers or the charts, but in the wisdom to know when to hold tight—and when to let go.

WDH

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Tempus Fugit

I'm back in the Philadelphia suburbs today, heading to a funeral later this morning. My best friend's Mother passed away at 91. She's the last of my friend's parents to go.  Of my in-laws, two mothers are still alive - one healthy and super-sharp, one quite infirm.  We attended a neighbor's funeral last Friday at the Jersey Shore. She made it 85, and lived an active life almost to the end. An acquaintance recently died suddenly at 80. He was a successful contractor, and worked right to the end.

I take this as a sign of getting older. It highlights that we have a finite, unknown, amount of time left. I'm trying to use these recent milestones, and the current uncertainty, to focus my thoughts on our retirement. We are blessed with a great family, and they are the most important part of our lives. We also have places we want to see, things we want to experience, and things to accomplish. Chaotic markets, and thoughts of time flying by, make me want to refocus on my health, and make sure our financial plan is solid with lots of margin of safety. Engineers hate uncertainty, but uncertain the world is.  I'm grateful to the HD community for their wisdom, expertise, and caring. It definitely helps.

 

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First Quarter 2025 by Ken Cutler

In January, I outlined a host of money moves I’d made in the first 16 months after retiring from full-time work. Financially, things did not slow down in the first three months of 2025. Here are some of my first quarter financial actions and experiences:

Distributed gifts to charity. We cluster charitable contributions so that we can itemize on our Federal tax return every other year. During the year that we take the standard deduction, I “write off” the funds earmarked for charity in my financial spreadsheets. When January of the itemizing year arrives, I distribute the previous year’s accrued charity funds. 2025 is an itemizing year, so I wrote some relatively large checks in January.

Redeemed more U.S. Savings Bonds. I’ve become increasingly uneasy about the complexities that may arise in the future with respect to cashing in paper savings bonds. Marjorie Kondrack’s excellent post about savings bonds and the associated comments kept that concern in my thoughts. I ended up making three trips to the bank this year and have now completed a three-year process of cashing in all my savings bonds with a face value of $1000 or more. I hesitated to sell the last three I Bonds as they had a generous fixed rate of 3%. But as I imagined the frustration if I—or worse, my heirs—were forced to deal directly with the Treasury Department, I felt it was best to just redeem them now, while my bank still offers the service. I’d held those bonds longer than expected anyway, as the original intent was to use them for my kids’ college tuition.

Purchased Certificates of Deposit. It’s so convenient to open a new CD at my credit union. I can make a phone call and within 10 minutes the new account is active. Of course, there are a lot of security questions asked for identity verification, but I’m happy to go through that routine each time. I’ve moved the money from the redeemed savings bonds into CDs paying 4.2%.

Began ramping down my part-time work hours. I often worked 25 hours or more a week between November and March. I wanted to be busy in the winter, and with two simultaneous employers, I was. But it started feeling too much like work and not a retiree’s hobby. I even felt some stress, which was entirely self-imposed. Accordingly, I gave notice that I plan to only work 10-15 hours a week now that the weather is nicer.

Funded and fine-tuned our Roth IRAs. I’ve earned enough income to fully fund both my Roth IRA and my wife’s for 2025. Those of you who read my old article Nothing Odd might recall that I’m a bit quirky about numbers. Accordingly, I made some minor tweaks to our holdings to scratch that itch.

Increased monthly withdrawals from my 401(k). After running numerous Monte Carlo analyses, I decided I was being too conservative with my withdrawals. My initial disbursements were at an amount that would total about 1% of the balance annually. I’ve upped that to just under 3%. The money is automatically deposited into my bank account each month and arrives roughly the same time as my pension payment. I’ll keep an eye on this as the year progresses and reduce the monthly payout if warranted. I’d like to avoid unnecessary IRMAA surcharges when I go on Medicare in 2027. Medicare will be looking at my MAGI from 2025 to make that determination, unless the rules change by then.

Avoided temptation to tinker with my 401(k). As I’ve stated before, I don’t rebalance my 401(k)’s allocation of stocks and bonds. Still, I do sometimes adjust the relative weightings of my holdings within the stock or bond category. Early in the year, I was tempted to move a large percentage of my TIPS fund holdings into an even more conservative investment choice. I decided not to make that change and in retrospect, it seems I made the right decision. The TIPS fund has had the highest return of all my 401(k) funds so far this year.

Experienced an unexpected pension “windfall”.  I knew that I was eventually due a small increase to my monthly pension once it was recalculated to account for my final bonus payment. By my estimation, I was due a bump of less than $10 a month.  When the recalculation was finally performed in January, more than a year after I’d retired, the increase was determined to be over $120 a month. Besides factoring in the bonus, the recalculation made some favorable adjustments based on final IRS code Section 417(e) interest rates applicable to the annuity I’d elected for my cash balance pension. I also received a one-time payment to make me whole for the first 13 or so months of reduced payments. 

How did our investments perform in the first quarter of 2025? Our retirement portfolio (401(k) plus Roth IRAs) lost 0.7% as of April 1. Our net worth ticked up by 0.95% in that same period. I’m now considering my plan to make changes in response to the current crazy market conditions that have characterized the start of the second quarter. Don’t expect another article as there will likely be nothing to write about.

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Risky Business – Challenging Times

I remember getting calls from potential clients asking me to help them after they moved all their money out of equities in response to a major market downturn  - particularly during the 2007-2009 recession caused by the mortgage crisis.

I would tell them that I wish they had called me before taking such a drastic step as I could have helped them modify their asset allocation rather than get out of the market entirely.

Everyone has a great risk tolerance when the market is hot. But you need to consider that markets fluctuate and have an asset allocation that you can live with during times when markets are down.

Even the most famous economists don’t know for sure what the markets will do. Market timing doesn’t work.

Perhaps some people are finding out now that they need to de-risk a bit. People who have recently retired or are about to retire need to consider sequence of return risk as big losses during this period can have a serious long term impact on their investments.

The value of guaranteed income in retirement can’t be overstated. That’s why I’m a big fan of delaying Social Security for at least the higher earning spouse unless both spouses have short life expectancies or there are other unique circumstances. It’s the best annuity money can buy and offers inflation protection without any market risk.

As for possible cuts in Social Security benefits down the road due to underfunding, I find it hard to imagine people who are already collecting benefits being affected as it would be political suicide.

Everything has some risk. Annuities have carrier risk and some also have market risk.

I suggest getting professional advice if you need assistance. It's worth the money!

Francine Duke

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Lesson Three From Taking Care of a 102 yo in Her Last Year of Life- The Role of Faith in Dying

From the outset let me be clear I am not a religious person for several reasons, one being my personality. My personality is the type that has to see something to believe it. However there is song  Walk On by U2 which has some of the most poignant lyrics in music history. There is a phrase that goes, “

“You're packing a suitcase for a place none of us has been.

A place that has to be believed to be seen.”

Why am I quoting U2? It’s because my mother in law was religious and fully believed in this concept.

In the last days of her life she told my wife and I, “I don’t want to die, but I have talked to God many times and have asked him to take me. I think I’m going to heaven.”

(This gave me an opening to say to her something that I had been thinking of for months. I said to her, “Ma if anyone is going to heaven it’s you. You are the best Christian I have ever known. Every day you practice what Jesus taught.”)

She replied in a way that demonstrates what a great sense of humor she had, “Besides, I know a lot of people there.”

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Making Lemonade by Jonathan Clements

None of us is smarter than the collective wisdom of all investors, as reflected in today’s share prices. So, why did investors dump stocks, causing the S&P 500 to plunge 10.5% over two days? The selling was likely driven by both a distaste for uncertainty and an expectation of slower economic growth, though we don’t know the precise combination of those two factors.

Investors hate uncertainty, and there’s a lot of that right now. Still, that uncertainty should fade in the weeks ahead. More worrisome is investors’ collective bet that economic growth will slow and perhaps turn negative. That would put a dent in corporate profits, and hence stocks should indeed be worth less. Unless the Fed cuts interest rates or the politicians in D.C. take steps to spur economic growth, the current stock market slump could drag on for a while.

But however this decline plays out, you never want to let market mayhem go to waste. Here are six steps to consider:

Take tax losses. If you have stocks or stock funds in your taxable account that are below your cost basis, you might realize the capital loss, which you can then use to offset realized capital gains and up to $3,000 in ordinary income each year. What if stocks fall further? You could always do another round of tax-loss harvesting. The only costs are transaction expenses, which are likely minimal, and some modest extra complexity at tax time.

Sell unwanted winners. Got individual stocks or stock funds in your taxable account that you’d like to unload, but you’ve been reluctant to sell because it would trigger a capital-gains tax bill? Thanks to the market decline, the potential tax bill may now be smaller, and you may even be able to offset the gains with realized losses.

One caveat: Keep in mind that if you bequeath appreciated taxable-account investments, your heirs will get a step-up in cost basis and hence the capital-gains tax bill will disappear—a key consideration, especially for older investors.

Convert to a Roth. When stocks plunge, another popular strategy is to convert the stock portion of a traditional IRA to a Roth. Yes, that’ll result in a tax bill, but it opens the door to earning tax-free gains as the stocks purchased within the Roth rebound. Assuming you pay the tax bill using non-IRA money, you’ll boost the after-tax value of your retirement-account savings—and effectively increase your stock exposure.

But is this the right time to convert? If you knew the stock market would fall further, it would be smart to wait because you’d later be able to convert a larger portion of your traditional IRA for the same tax cost. Problem is, we don’t know, so we’re compelled to become market-timers.

One strategy: Split the difference, converting part of your traditional IRA now and more later. But I’d probably hold off for a bit. The fact is, for the year to date, the broad U.S. stock market is down just 14%, while the broad international market is down just 2%. Despite all the handwringing, this hasn’t exactly been a blood bath.

Rebalance. As with Roth conversions, market declines offer the chance to rebalance—selling bonds and cash, and buying stocks, to bring your portfolio back into line with your target percentages. That would set you up well for a stock market rebound. Such rebalancing is typically best done within a retirement account, so none of the trades generates a tax bill. But as with Roth conversions, I wouldn’t be in a big rush because the relatively modest stock market decline suggests we aren't currently looking at some great buying opportunity.

Straighten out badly diversified portfolios. Lots of U.S. investors entered 2025 with portfolios heavily tilted toward large-cap U.S. growth stocks. Those stocks have taken it on the chin this year. Would you prefer to be better diversified, with more allocated to small, value and foreign stocks? Amid the chaos of today’s market, perhaps you’ll find it emotionally easier to bite the bullet and make the trades needed to straighten out your investment mix. Again, for tax reasons, such trades are best made within a retirement account.

Save more, spend less. As share prices fall and expected long-run returns rise, saving and investing become more appealing, and that might prompt you to cut back spending and divert those dollars to your portfolio. Indeed, the ability to vary spending is a lever available to almost all of us, but one that doesn’t get nearly enough attention.

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Reality Check

When the market is down, I purposely avoid looking at my retirement account.  Over the past couple of weeks, my perception was that my balance was likely lower than it had been in years.

Today I logged in to take a look. Because I can view the history of my account, I was able to see that the value it sits at today is still higher (by a fair amount) than it was just a year ago. And yet my perception was that it would be far, far less than that.

I don't know if it's the generally pessimistic outlook I hold in my life that creates this illusion or not.

 

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Giving Advice

WHEN STEWART MOTT graduated college in 1961, he received $6 million from his father, an auto industry entrepreneur who was one of the founders of General Motors. On top of the $6 million, a family trust began paying Mott an annual stipend of $850,000.

That allowed Mott to spend his adult life pursuing a variety of eccentric endeavors. He funded research on extrasensory perception. Inside his Manhattan apartment, he built a 10,000-square-foot garden, along with a chicken coop. He also spent time living on a junk in the Hudson River. In addition, Mott loved politics, so much so that, at one fundraiser, he arrived with a live elephant and two donkeys.

While Mott was unique, stories like this are not uncommon. Inheritances can yield unintended consequences. That’s why Warren Buffett always said that his goal is to leave his children “enough so that they can do anything, but not so much that they can do nothing.” This may be easier said than done. 

How can parents best help their children? In my experience, this is one of the hardest questions in personal finance. In fact, I believe it’s the hardest question because it lies at the intersection of several other complicated questions. It isn’t strictly a financial question, or a tax question, or a parenting question. Rather, it’s all of the above. If you have children and are trying to think through this topic, you might consider these seven steps:

1. To start the process, I suggest this: Imagine you had a magic wand and were able to cut through all the complexity to create the perfect outcome for your family. What would it look like?

To better illustrate this question, imagine a spectrum of parenting approaches. Stewart Mott’s father, who enabled his children to lead lives of luxury, would be at one end of the spectrum. Meanwhile, someone like Mick Jagger, who has communicated to his eight children that they’ll need to be self-sufficient because he may leave all of his assets to charity, is at the other end of the spectrum.

While these are extremes, they may serve as reference points as you develop a picture of what you’d like for your own family. For example, some parents want to help their children graduate from school without student loans, while other parents want to help their children purchase their first home. Some parents simply want to do as much as they financially can.

I suggest starting at this big-picture level because the topic is so complex. By doing so, you avoid details that may cause you to see obstacles before you find solutions.

2. If you have more than one child, consider your definition of fairness. For some parents, this means treating each child exactly the same, regardless of differing financial circumstances or needs. For others, helping each child according to their individual circumstances may work best. For example, if one child is a physician and the other a schoolteacher, some parents feel it would be unfair to treat them equally.

Children can differ in other ways. One child might be thriftier, while another has trouble managing money. One child might simply live in a more expensive part of the country. Some children have disabilities that require ongoing care. Should all these children be treated equally?

3. Another consideration is how much complexity you’re willing to embrace to get the outcome you want. For example, you could move assets into an irrevocable trust. This type of structure can help moderate future estate taxes and provide other benefits, such as greater control of the bequest’s assets. Would you like to avoid a Stewart Mott scenario? Trusts like this typically limit distributions to uses that are deemed productive, such as buying a home.

But setting up an irrevocable trust requires legal services and thereafter careful accounting. This type of trust also requires the ongoing involvement of a trustee, who might ask to be compensated. And even the most intricately thought-out provisions aren’t guaranteed to produce the desired results. Trusts that are too restrictive can lead to resentment. Some trust beneficiaries spend their entire adult lives battling tightfisted trustees. That’s why some families prefer a simpler path, even if it means relinquishing some control, along with potential tax benefits.

4. If charitable giving is important to your family, make it part of your plan. Some families try to dovetail estate tax planning with philanthropy by specifying that any part of their estate that is over the lifetime exclusion—or in excess of some other specific number—should be donated to charity.

5. If your estate includes unique assets, such as a vacation home or a business, be especially careful. These can be the most difficult to divide among children and can also carry the most emotional baggage.

6. Another key decision: When would you like to make these gifts? Some parents prefer giving during their lifetime since this allows them to see the impact of their gift—such as helping a child buy a first home. It also gives them the opportunity to see how children handle smaller amounts of money before giving them larger sums. These early gifts can be particularly helpful to children in their young adult years, when life is most expensive.

On the other hand, some families prefer to bequeath all assets to their children. In doing so, parents avoid struggling with the question of how much they can afford to give during their lifetime. Another reason some families prefer this approach: They don’t want money to become a factor in their relationship with their children. In addition, giving only by bequest can help avoid diminishing their children’s work ethic during their early adult years.

7. Money can be a taboo subject. Still, I suggest transparency when it comes to family gifting. Let your children know your plans—and the thinking behind it.

In a recent letter, Warren Buffett mentioned that he updates his estate plan every few years. While he may be at a different financial level than the rest of us, it’s a reminder that the plan you develop today need not be the permanent plan. Some plan is better than no plan. Follow Buffett’s lead in updating your plan as circumstances—and your thinking—evolve.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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Direct Dealings by Marjorie Kondrack

You can’t put 10 pounds of potatoes in a 5 pound bag, but all my life  I gave it a good try, and had a lot of interesting life experiences. I thought of ideas for a small, part time business venture that might provide a new opportunity to explore my creativity, with a flexible work schedule.

I got my chance— a neighbor invited me to a home demonstration party she hosted for a Beauty Consultant who sold cosmetic products.  I found it interesting and something I might have a natural  affinity for.  I was self-motivated and enjoyed meeting people.

The products emphasized skin care with a complement of a few basic make up items. They were quality products, attractively packaged and priced at an affordable mid-price range. But little did I realize I had wandered into a field known as Direct Sales. Of course I wasn’t aware of all the pitfalls—you don’t hear much about those, and sometimes it’s best not to hear.  Would any of us embark on anything if we knew what hurdles we would have to overcome?

The company, however, provided you with high level training and unlimited support.  They had a successful business model and I  learned from other consultants who  were kind, respectful, and helpful.  All I had to do was sell. Figuring it all out was the challenge, especially for someone who never sold anything before. A common mantra was “fake it ‘till you make it.”

I had my own little business; started with low investment capital, mainly to pay for my own inventory.  Customers sampled products, got individualized attention, and went home entertained, enlightened and satisfied. I  never touched the women who participated in the demonstrations but would walk them through giving themselves an actual facial.  They loved it.

It was an age thing too.  My most enthusiastic customers were around 40 years old—the age the first lines around the eyes begin to appear and aging becomes a reality.  Care of the skin becomes a priority.

Meanwhile, finding hostesses for the demonstrations was an ongoing quest. I had to be inventive there.  I developed several methods to assure enough bookings and I put everything I had into a given session.  Since my best candidates came from women at the presentation, I took advantage of the captive audience.

No matter the product or service, selling is selling—but first you have to sell yourself.  Everything depends on your resourcefulness.  A prospective hostess would size you up and decide if you were someone they would invite into their homes to meet their friends in an intimate setting.

I achieved a level of success and especially enjoyed the fellowship among the consultants.  But real success requires hard work and building networking relationships.  The real money was in recruiting  and training new consultants for which you received additional compensation, but that also required more time, effort and attention.

The demonstrations were held at night.  I  had to be on my toes at all times, never wavering in any aspect of product knowledge, and confident in my delivery.  Putting it all together required longer hours than I had anticipated.  I wasn’t making very much money.  But I gave it everything I had.  I learned to overcome obstacles and increased my level of comfort in speaking to a group.

Nothing, however, remains stagnant.  You either forge ahead and advance your position, or assess the future.  And my reality was that it was encroaching on my obligations at home—everything came in second to that.

Once you decide something is not really for you, the endgame begins. But I learned so much about the psychology of selling and human behavior, and met many interesting people who invited me into their homes, trusted and befriended me.

It was a positive experience which added to my personal development and provided invaluable insight in how to engage positively with others. I learned so much about selling and marketing skills. And I had some memorable adventures along the way—no regrets—But no Mary Kay pink Cadillac.

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