Jonathan Clements's Blog, page 72

Wouldn’t It Be Nice

MY FAVORITE ROCK group is the Beach Boys. I particularly like their song Wouldn’t It Be Nice. It’s about young love, and how life would be so wonderful if only they were married and lived together.

I believe that phrase “wouldn’t it be nice” has been voiced by most of us at one time or another. The notion: If things were different, all would be good.

Unfortunately, few people display the persistence needed to turn their dreams into reality. How do you go from wishing to achieving? The method I’ve used is to break down a goal into the smaller steps needed to get me to what I wanted.

If I needed a job, I could wish for a fairy godmother to grant me my wish, or I could hope friends would do the heavy-lifting by identifying that ideal employer. These would fall into the “wouldn’t it be nice” category. But I assumed such things wouldn’t happen.

That’s why I did things like sign up for LinkedIn to build my professional network. I was supposed to invite only people I knew or friends of people I knew. But I didn’t think that would result in a large enough network. I simply requested to connect with anybody who was currently in the insurance industry in the New York metropolitan area. The result? Before LinkedIn told me to stop asking strangers to connect, I’d greatly enlarged my network.

Although this tactic didn’t land me a job, the one I did get was from someone who’d known me for years and saw my LinkedIn profile. The important takeaway from my LinkedIn efforts: It allowed me to do something productive, so I felt I was getting closer to my next job. Each LinkedIn invitation I sent out was a small step that helped get me closer to my goal.

Indeed, doing is the key element here. Regardless of the ultimate goal you’re seeking, taking action will make you less anxious and keep you focused.

How do salespeople meet their sales target? They try to sell to lots of people. Each sales call is a step toward their goal, and improves their odds of success. This same approach works with other goals. Even if the things you do each day don’t get you directly to your goal, you’ll probably gather useful new information.

This step-by-step approach also works if your goal is to be rich. Your first step is to get income. In most cases, that means getting a job. The next step is to acquire the habit of paying yourself first. Before your money goes to any bills, entertainment or other spending, be sure you sock away some money. Your next step might be to increase your income without increasing your expenses, so you can save even more.

As you complete each step, you should acknowledge that the step has been achieved. That will give you strength to achieve the next step. Inch by inch everything's a cinch. Yard by yard everything gets really hard. Go for the inches to achieve your yards.

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Off the Beaten Path

A NEW TYPE OF MUTUAL fund has captured investors’ attention. Known as buffer funds, they’re so appealing that one industry analyst has referred to them as “candy.” Why? As The Wall Street Journal describes them, buffer funds offer investors “the chance to chase stock returns while also protecting against a potential market slide”—a seemingly ideal combination, especially for those in or near retirement.

But funds like this are complicated—they rely on options strategies. They also tend to be expensive. One such fund, the JPMorgan Equity Premium Income ETF (symbol: JEPI) carries an expense ratio of 0.35%. By comparison, a simple S&P 500 index fund can cost as little as 0.03%. Buffer funds are also likely to be tax-inefficient due to the level of turnover within the funds. Finally, and perhaps most significantly, some question whether these funds will even work as promised during periods of market stress. Because they have such short track records, this is yet to be determined.

For all these reasons, I wouldn’t rush to buy an investment like this. But that doesn’t mean I would never buy one. While I generally recommend simple, low-cost funds, non-standard investments can make sense in a portfolio under certain circumstances:

When structuring a portfolio, investors often talk in terms of “core” and “satellite” positions. In my view, you should allocate a portfolio’s core—that is, the majority—to simple, proven investments. But if you wanted to hold a buffer fund, or something else unusual, you could hold it as a small satellite position. How large an allocation is appropriate? I generally recommend 5% or less. That way, even if something goes wrong, it’s unlikely to put a significant dent in your overall portfolio. At the same time, if it does well, 5% is enough to make a positive difference.
If you want to hold a particular investment because it aligns with your values, that would be a good reason to hold something other than standard index funds. Consider the S&P 500. Among its holdings are two tobacco companies, which I personally find abhorrent. If there were a fund that held the other 498 companies in the index, and excluded those cigarette makers, I’d gladly choose it. It might do a little better or a little worse than the standard S&P 500, but that wouldn’t be the primary consideration. The reality is that personal finance isn’t just about numbers.
We all have our area of expertise. While I believe it’s difficult to pick stocks, it can help tilt the odds in your favor if you lean on that expertise, choosing companies where you really know the market. I recall a cardiologist describing what it was like to see the first pacemaker back in the 1950s. He chose to invest in Medtronic, the device’s inventor, and did very well over the years. I’ve seen the same sort of thing more than once. While stock-picking is very difficult, and I don’t recommend it, this is another situation in which it would be reasonable to make a higher-risk bet.
Another circumstance in which it can make sense to pick stocks: when it’s an opportunity to learn. I’ll often recommend to young people that they try choosing a few stocks. It can be a useful exercise to see how corporate balance sheets and income statements translate—or don’t translate—into changes in share prices. Even if you rely mostly on mutual funds, it can be helpful to look under the hood and see how the stock market works.
Over the years, I’ve met a number of folks who have made angel investments. Some have scored home runs, while most acknowledge that their returns have been middling. But that’s not why they do it. Instead, what they enjoy is the opportunity to see new technologies and help entrepreneurs. Especially for folks in retirement, this can be enjoyable, and the financial returns are secondary.
For the past 10 years, the market has been driven by a handful of large technology companies—Apple, Amazon and so forth. And for years, investors have fretted about the market becoming more and more top-heavy. Despite this, the market has only continued to rise and to become even more top-heavy. Today, the three largest stocks in the S&P 500 account for more than 20% of the index’s total value. But as the standard investment disclaimer goes, past performance does not guarantee future results. At some point, these trends might reverse. That’s why it wouldn’t be unreasonable to choose an investment or two that deviate from the standard index fund methodology. There is, for example, a version of the S&P 500 that holds an equal amount in each of its constituent stocks, rather than weighting them by size. This would effectively sidestep the concentration risk.
A final reason you might include something a little different in your portfolio: because it’s fun. Working in personal finance, it’s my responsibility to emphasize the difference between investing and gambling. But again, as long as it’s just a small satellite position, I think it’s okay to have a few things that fit in the “fun” category. That might be a cryptocurrency, the stock of your favorite sneaker company or an angel investment in a friend’s startup. I’ve known folks who own stakes in everything from bowling alleys to minor league sports teams. In every case, they weren’t comparing their returns to a benchmark. These small investments were entertaining, and that was enough.

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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The Risks We Miss

TODAY'S FINANCIAL lesson: We can manage risk—but terrible stuff can still happen. This thought, of course, was prompted by my recent cancer diagnosis. But the notion is also all too relevant to money management.

But let’s start with health matters. In 1995, I began training for my first marathon, which I ran in May 1996 in Pittsburgh and finished in just under three hours. Ever since, I’ve been a bit of an exercise nut. Even today, I work out for an hour every morning and take a walk every afternoon.

Despite that, my cholesterol is a tad higher than it should be and I’m considered prediabetic, so I eat a high-fiber diet, and I strictly limit processed meats and fried foods. I also try to hold the line on vino, typically limiting myself to a single glass with dinner. These are the sort of health issues I’ve been focused on for years, and which I worried would come back to haunt me.

Instead, I got cancer.

It strikes me that managing money isn’t so different. We’re laser-focused on certain risks. Stock market crashes. Auto accidents. Our home burning down. Big medical bills. Losing our job. Hefty home repairs. All this drives the size of our emergency fund, the insurance we carry, and the sum we allocate to bonds and cash investments. But what if the risks we’re trying to contain aren’t the risks we get hit with?

I’ve long argued that, to build wealth, we should avoid chasing investment performance and instead focus on three less-exciting endeavors: saving diligently, keeping a tight lid on investment and other costs, and managing risk. This three-part approach is at the core of the frugal index-fund investor’s playbook—one I’ve followed for decades—and it’s also good advice for the rest of our financial life.

To me, of these three dimensions, risk management is easily the most fascinating, but it’s also the trickiest. Consider:

Limiting one risk can open us up to others—such as the cash-loving investors who fear stock market turmoil but end up getting decimated by inflation.
Dangers arise that never even occurred to us. The 2020 pandemic is a classic example. But before that, there was 2008’s financial meltdown, the 9/11 terrorist attacks and the 1998 financial shockwave caused by the collapse of hedge fund Long-Term Capital Management. The lesson: Purportedly low-probability events seem to happen with surprising frequency.
Some of our biggest financial hits come from an unlikely source: our own family. Think of the adult children who get themselves in financial trouble and need to be bailed out, the bitter divorce that enriches only the lawyers, or the elderly parents who gave no thought to their later years and suddenly need long-term care.
The apparently mighty often collapse with shocking speed. Remember the rapid demise of Bear Stearns, Lehman Brothers, Enron and WorldCom? For many employees of these firms, the result was not only a lost job, but also a portfolio full of worthless shares.
Folks often get into big trouble not because they purchase insurance that offers too little coverage, but because they completely neglect to buy certain policies. On that score, perhaps the two biggest oversights are disability coverage and umbrella-liability insurance.
I view the long Japanese bear market as perhaps the seminal financial event of my lifetime. Could something similar happen in the U.S. or Europe? Probably not—but it is indeed a risk, one ignored by those whose home bias leads them to stick largely or entirely with their own nation’s stocks.
If leverage is involved, our financial life can unravel fast. Consider the couple who own a few heavily mortgaged rental properties. The economy falls into a recession, their tenants get laid off and the rent checks stop coming in. Our landlord couple are left to cover the mortgage payments with their salaries, which is just about doable—until one of them also gets laid off.

It's easy to dismiss layoffs, disability, pandemics and long bear markets as low-probability events. But spare a thought for Pascal’s Wager. As 17th century French philosopher Blaise Pascal saw it, it was logical to believe in God. If you believed and God didn’t exist, your religious devotion might cause you to miss out on a little earthly fun. But if God does exist and you don’t believe, the price is considerably higher: an eternity roasting in hell. In other words, we should focus less on the odds of something happening and more on the consequences.

I don’t want readers to obsess about risk. But I would encourage folks to build financially resilient lives and to avoid big assumptions about the future. Risk has now arrived for me, and it’s taken a form I never imagined. Fortunately, I’m well-prepared financially, thanks to health insurance and a plump nest egg.

But what if my fate instead had been, say, decades of dementia? Would my nest egg have held up? I’m not sure there would be any way I could have reasonably prepared. Still, there’s an important lesson here: While we have only one past, we face all kinds of possible futures—and it’s worth asking whether there are futures we aren’t even considering.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.

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Clumsy With People

SOME PEOPLE ARE BORN clumsy. Tools never seem to fit their hands. Their hammer finds a thumb more often than a nail. For them, running looks and feels like an ungainly, uphill battle—even on level ground.

I don’t claim to be physically gifted. But my clumsiness shows up in a different way. I have a notable social deficiency: I’m naturally clumsy with people. Why is this important? It defined the first quarter-century of my life, including my finances.

Stumbling start. Had I been born in these days of heightened awareness, I might be fingered for testing and diagnosed with mild autism. Yes, I had friends, played grade-school sports and swarmed into class with the other students.

But my in-born emotional wall prevented true intimacy with my mates and resulted in a paralyzing anxiety that accompanied all public performances. I focused on the eyeballs in the stands, rather than the approaching pitch. A simple book report in front of familiar faces led to sleepless nights and a stuttering presentation. My personality traits hampered me from thriving during my childhood years.

Despite this, my childhood wasn’t all misery. My quietly loving parents gave me room to be different, maybe seeing a bit of themselves in their awkward son. The many hours devoted to hunting with my father were joyful, mostly because of the time we shared and the beauty of the woods and fields.

Meanwhile, seven summers with my maternal grandparents allowed an escape to a world away from people. The authentic rural landscape beckoned me on solitary walks of mental freedom, an indulgence missing from my life back home.

Though stunted by my social shortcomings, my studies were a bright spot. Good grades led to an offer to skip my senior year of high school. Instead, I enrolled in the local community college, taking a tentative step away from childhood anguish and aiming for a better adult life. I should have known I’d find more of the same, only amplified. I made it through the first year, but foundered during the second amid a fearful sea of strangers, thus halting my nascent career journey.

What followed were several years of wandering from one job to the next, initially running from people rather than toward a solid profession. Inexplicably, I drifted into a series of direct sales jobs. This shy, young man, who dreaded sitting in a doctor’s waiting room because he might be called upon to make small talk, found himself cold-calling potential customers.

Finding my feet. Needless to say, those jobs weren't a good fit and didn’t bring much money. But I felt compelled to continue challenging myself, and profited in a way that had lasting implications: I discovered the simple mechanics of conversation. For most folks, talk is innate and automatic, but it was a mystery to me. My linguistic technique, though clunky at first, became almost fluid with repetition, as I attempted to sway customers in my direction.

How could something as simple as chitchat be so daunting? Looking back, my painful ignorance is almost a faint memory. But it was a huge hurdle at the time. Cracking the code of conversation unlocked the key to getting on with people, and prepared me for the next step in my life.

That step, at around age 25, was the beginning of an awakening for me. I joined an older friend who was restarting his business building docks and boathouses. Our partnership lasted six years. During this time, I continued to hone my skills with people, and learned to relish the sales part of the business. I’ve found few experiences match the thrill of making a sale.

Our business was small, with the labor provided by my partner, me and a handful of employees. It wasn’t cushy work. I usually finished the long day mud-bespattered, either drenched with sweat or shivering with cold, bitten by sand gnats or sliced by oyster shells. I also picked up a couple of joint injuries that still linger today. Despite it all, the hard work of crafting a hand-made product that improved the lives of clients was gratifying. And the setting, beside the water in the midst of a bustling city, was a peaceful enclave akin to the brooks and fields I frequented as a child.

My idyll was interrupted a couple of months before my 30th birthday. The approach of that milestone threw me into a reflective mood. Why was a bookworm crawling in the mud day after day, while his true talents languished? On top of that, the money wasn’t great. Suddenly, I felt I was treading water, getting older—and growing uneasy about my future.

A better beginning. In a panic, I signed up for a couple of night classes at the same community college that had witnessed my implosion a dozen years before. But instead of the social struggle that characterized my first stint at school, this second round was smooth by comparison. I won’t say my maladroitness with people had turned to mastery, but I found I was making new friends and influencing others with an ease I hadn’t known before. More important for my financial future, I was back on the path to a satisfying, stable career with a steady income.

My early 30s were a time of rebirth. I traded long hours hammering nails for longer hours cracking the books. The living was lean, but I’d learned frugality from my parents. Money was scarce when they grew up, and they set an example of diligence and thriftiness. I learned my lesson. I’ve never lacked savings, even when I’ve lacked a large income.

Something was amiss in my financial plan, however. Even though I was now on track to a better income, I hadn’t thought much beyond that first post-college paycheck.

My perspective changed while reading my first book on personal finance, a guide published by The Wall Street Journal. This volume—which Jonathan Clements says was born out of a series of articles he suggested the paper run—covered a wide array of money topics, including investing money for the future. Investing? I was an accomplished saver, but knew nothing about investing. That book lit my fire to learn, but the subject had to stay on the back burner, since I was in the throes of becoming a physical therapist.

Thinking of the finish. Nearly three decades later, I’m just a short jog from retirement, and it appears the financial war of paying for it is essentially won. But the decisive battles were fought years ago.

After a slow start, I learned that shoveling money into stock- and bond-index funds is the key to amassing wealth. Accordingly, my wife and I began pouring dollars into our workplace retirement accounts and elsewhere, and we’ve been rewarded with a steadily burgeoning portfolio.

But that investment campaign couldn’t begin until I won the battle with myself. My natural instinct is to beat a hasty retreat from people, both physically and emotionally. Only by tempering this reflex could I begin my quest for a lucrative career. Nowadays, interaction with other folks is mostly habitual, but sometimes I still need to muster the familiar mechanical techniques needed to get the conversational cogs turning.

I’m most at ease when I have a role to fill, like my job as a physical therapist. The sales skills learned years ago serve me well, as I persuade a patient to put my advice into practice. Meanwhile, I garner great satisfaction from seeing my hands-on work help patients lead a better life beyond their present injury.

On a deeper level, fostering friendships that weather the vicissitudes of life and the vagaries of human nature has proven more elusive. Nevertheless, as I ponder retirement, I find comfort in the close relationships I have in my small community and my church. Some friends are dearer than others, but in aggregate they form a web of support. My life is woven into that web.

I’m still people-clumsy at times. Extemporaneous speaking is not a strong point, though I can usually muddle through. Likewise, parties are not my preferred environment. Still, I’ve found I can usually find a kindred soul or link up with a talker who loves a listener. No, I’m not “cured” of my autistic traits. But they no longer define me.

Ed Marsh is a physical therapist who lives and works in a small community near Atlanta. He likes to spend time with his church, with his family and in his garden thinking about retirement. His favorite question to ask a young person is, "Are you saving for retirement?" Check out Ed's earlier articles.

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Checking the Score

I'M DUMB MONEY, as are all so-called recreational gamblers. That’s why, during the recent basketball playoffs, we sports spectators were bombarded with wildly seductive commercials glamorizing sports betting.

Fortunately, I learned my limits early on. My last notable gamble ended badly more than four decades ago, when some IBM options I bought expired worthless.

But I’ve also come to appreciate that not all individual gamblers are dumb money. I’ve lately been serving as the sounding board for my 36-year-old son Ryan, who has become a successful sports bettor over the past two years. Here’s what I’ve learned.

Playing the game. It’s hotly debated whether sports betting is a skill-based activity or merely the latest come-on propagated by the casino industry. But whatever the case, it’s not going away anytime soon. The bourgeoning betting business makes dough for the media, sports teams and sports books, while putting tax dollars into state coffers.

In the short run and without a mathematically sound game plan, sports betting is unadulterated gambling, not unlike the frenetic trading of individual stocks and options. But taking a longer view—say, at least 100 wagers—a bettor with formidable sports knowledge and an intricate grasp of probability theory can eke out an edge that snowballs over time.

A former high school math teacher and basketball coach, Ryan has attended numerous seminars on sports analytics taught by faculty at some of our most elite universities. His betting season encompasses college and pro football, as well as college and pro basketball. As some readers might recall, his modus operandi is much like that of a mutual fund manager, making many simultaneous small bets over a large and diverse number of games.

Analyzing the bet. It’s instructive to look at how Ryan might attack one of the most frequently bet questions posed by casinos: “Which player will score the game’s first rushing touchdown?”

At first glance, this would seem to be more appropriate for your eight-year-old grandkid than for a savvy sports enthusiast. Obviously, you say, you’d pick the runner who has scored the most touchdowns so far this season. Probably, but not necessarily.

 The answer is more elusive than that. Let’s start with the injury factor. Is your guy playing with last week’s hamstring pull? Have you done your due diligence and checked his latest health status report? Maybe you should shoot an email to a local sportswriter. And when your touchdown maestro returns, will he be rested and recovered or rusty and unproductive?

If a ball carrier has been out for several games, his total rushing attempts and touchdowns may not reflect how often he’ll be called on today. Don’t overlook whether the team has someone built like a fire hydrant who trots in on short-yardage situations near the goal line. Ditto for the coach partial to using the quarterback sneak from one or two yards out, rather than risking a hand-off.

See what I mean? Not so simple. The situation gets even more complicated when you take the player’s supporting cast into account. You’ll want to know whether your likely choice is on a team that tends to grind it out rather than pass. Then there’s the red zone, football lingo for the last 20 yards before the goal line. How frequently has the team scored a rushing touchdown after entering the red zone? How conservative is the coach? Some are more likely to settle for a high-probability field goal than go for a less certain touchdown.

Fumbling the ball. Any of these developments could affect the likelihood that your pick will be the first runner on either team to reach the end zone. If, despite all these considerations, you can’t resist the temptation to bet, here are some additional caveats.

Don’t get fooled by randomness. Short-term results are often juiced by luck. Say Uncle Sammy boasts he has a system that beats the sports books because he won both of his bets on the NBA finals. But remember, by chance, getting two heads in two coin flips occurs 25% of the time—hardly insurmountable odds.
Avoid overestimating your resilience. So far, we’ve only touched on data readily available online. But serious sports bettors insert this information into predictive models to tease out statistical inefficiencies and oversights in the casino odds. The work is intense, exhausting and at times daunting. All else being equal, an outstanding sports bettor wins only 55% of the time. Can you withstand all the losing? If the idea of allocating some retirement money to a sector fund makes you queasy, dipping a toe into these waters probably isn’t advisable.
Resist surrendering to gut feels and hunches. If you can’t keep your emotions under control, the casinos will welcome you with open arms. The house knows far more than just which team should be favored and by how much, and that gets reflected in the odds offered. For instance, the sports bookies routinely bake in a halo effect around Alabama’s college football juggernaut. Similarly, earlier this year, Taylor Swift’s good vibes distorted Super Bowl betting on the Kansas City Chiefs.

Keeping score. You probably already know about meat-and-potatoes stuff like home court advantage and weather. But rely on them alone, and the house will gobble you up.

Instead, get up to snuff on the esoterica, like travel time and distance, schedule and fatigue and—I kid you not—Rocky Mountain altitude. Professional sports bettors are willing and, in rare instances, able to match wits with the casinos. I don’t have the requisite skill or endurance and, I suspect, neither do most HumbleDollar readers. The big boys are stalking folks like us—the dumb money hoping for a little fun, a few quick bucks and some ego-inflation.

So, after suffering the guffaws of many friends and extended family, how did our rogue son make out? After the basketball playoffs, Ryan flew in from Los Angeles, so we could run the numbers as a family. His mother Alberta and I hunched over the computer as he slowly moved his hand from left to right across the bottom of the page to reveal the reward he’d earned in return for a year of passion and determination.

I had to brace myself against a nearby table as I stared dumbfounded at Ryan’s six-figure profit.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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Exit Strategy

IF YOU’RE LIKE ME, you aren’t eager to spend down your investments. What fun is that? Aren’t you curious to see how big your portfolio could grow? Of course, you are.

After my wife and I are gone, my son will have dibs on the money we’ve amassed. We’ve set up a special needs trust to provide him with income when we’re no longer around. My son has no siblings, so we needed the trust to make sure he’s taken care of.

But until then, I view our portfolio as a beautiful garden that I need to nurture. I believe many investors are like me, and don’t really enjoy spending. Instead, they cultivate their wealth with an eye to passing it on to their heirs or their favorite causes.

But what about those investors who don’t have anybody lined up to take over their money after they’re gone? We’ve had wealthy celebrities, like Prince and Aretha Franklin, who died without clear instructions for how their estate should be handled.

I don’t understand such neglect. You’ve been caring for your portfolio with the goal of seeing how big it can get before you “kick the bucket.” That’s great. But you also have a responsibility to make sure your efforts don’t go to waste. You should have a plan in place for this thing you’ve enjoyed owning for so long.

Some investors say, “Oh, I don’t care what happens after I’m gone.” That’s the wrong attitude. You owe it to your wealth to see that it’s put to good use after your death. Just find someone or some cause that you feel would benefit from all your hard work.

Maybe your beneficiaries will fritter away your money. Maybe they’ll show respect for what you’ve done and keep your wealth growing. Maybe they’ll put it to good use and help many others with this gift you’ve given.

But no matter how your beneficiaries behave, the important thing is that you do your part—and have a plan for what happens after you’re gone. Once you’ve done that, you can go back to tending to your investment garden and making sure you don’t mess it up for the next owner.

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Paying the Piper

FROM THE COLOSSEUM in Rome to the palace at Versailles, look around Europe and you’ll find artifacts of once-great empires. What happened to them?

Each faced its own challenges, but there was also a common theme: They had poor financial management and became overburdened by debt. That’s why a recent analysis in The Wall Street Journal—titled “Will Debt Sink the American Empire?”—is worth our attention.

In 2024, the federal government’s budget deficit will come in at $1.9 trillion. That will be added to an existing debt load of nearly $35 trillion. To put that in perspective, the debt is now closing in on 100% of gross domestic product (GDP), up from just 70% in 2012. If the current trajectory continues, by 2028, our debt will exceed the prior all-time high of 106% of GDP, a record set in 1946 as a result of World War II.

Given these figures, why is there no political will in Washington to right the ship? As the Journal points out, deficits are—ironically—one of the only topics that unites the political parties. That’s because the two main levers to reduce deficits are to either raise taxes or to cut spending. Neither is appealing to politicians.

In part, the issue is also structural. So much of the budget is non-discretionary. This year, 47% of spending will be allocated to Social Security and Medicare benefits, 14% will be spent on defense and 13% on interest payments. In other words, even if there were more political will, there isn’t a lot of room for maneuver.

There’s a school of thought that views debt as a non-issue, arguing that the U.S. government can simply “print money.” While that’s technically true, another economic concept also applies: When governments go too far in printing money, a side-effect can be inflation. We saw that during COVID-19. When the government ramped up spending in 2020 and 2021, the result was 2022’s 40-year high for inflation.

This idea—that printing money leads to inflation—is not new. In the last years of the Roman empire, when the government began spending far beyond its means, the imperial treasury began to “print money” in what it thought was a subtle manner. It reduced the silver content in each of its coins—from 100% all the way down to just 0.5%. This led to inflation, and even hyperinflation in some years. In the year 210, inflation compelled the government to raise soldiers’ wages by 50%.

From there, things unraveled. Without any further ability to dilute the currency, Roman officials turned to burdensome tax increases in an effort to keep up with spending, but that only led to civil unrest. Ultimately, the empire fell when, as a result of financial weakness, it was no longer able to defend its borders. According to the Journal’s analysis, other empires, including those in France and in Spain, followed similar paths.

In economic terms, what happened to these ancient empires is known as “crowding out.” As interest payments consume a greater portion of a government’s budget, the result is that less and less is available to spend on everything else. What’s concerning is that the Congressional Budget Office sees this phenomenon beginning to occur in the U.S. According to a recent report, “The current law debt trajectory will reduce income growth by 12 percent over the next three decades.”

Does this mean we’re destined to go down the same path as Europe’s faded empires? Definitely not. Relative to where those empires’ finances were in their final years, our situation is still very manageable. That said, I think our debt situation warrants more attention than it currently receives. As I noted a few weeks back, a concept known as “rational ignorance” means that the media sometimes fails to focus on the stories that are most important. But this lack of attention doesn’t mean they aren’t important.

As an individual investor, what steps can you take? I believe that the greatest risk, ironically, is to the investment that’s typically viewed as the safest: U.S. Treasury bonds. With the debt load growing, Congress has found itself deadlocked over budget issues with increasing frequency, resulting in a number of government shutdowns.

So far, thankfully, it hasn’t gotten to the point where the Treasury has missed a payment to bondholders. But we’ve gotten close, to the point where it’s required the Treasury to employ “extraordinary measures” to avoid a default. The next time, we may not be as lucky. In an extended shutdown, the Treasury could run out of options and might be forced to default. For that reason, I suggest looking for ways to diversify your bond exposure. Below are three suggestions.

First, I recommend holding a significant portion of your bond portfolio in short-term Treasury holdings. Because a default wouldn’t happen overnight, short-term bonds might allow an investor to move funds out of the way before the situation deteriorated.

Second, another way to diversify would be to hold municipal bonds. Because state and local governments can’t print money the way the federal government can, municipal bonds carry more risk than Treasurys. Still, municipals might prove less risky if Congress were deadlocked over the federal debt ceiling, but municipal governments continued to pay their bills.

What’s the third way you might diversify a bond portfolio? Interest rates today are at levels we haven’t seen in more than 15 years. Most expect rates to drop—likely this year—but that’s not guaranteed. There’s a school of thought that interest rates may remain elevated, or even rise, if concern grows about the government’s debt load. To guard against rising rates, you might hold some portion of your bond portfolio as individual Treasury bonds, which you could hold to maturity.

What other steps could you take? Because Social Security benefits account for such a large portion of federal outlays—and because the fund on which the system relies is expected to be depleted in a decade or so—it’s not unreasonable to expect that Congress might trim benefits for future retirees.

The last time Congress made changes, in 1983, the cuts amounted to a 13% reduction. To address the current situation, benefits might be trimmed as much as 20% or 25%. But to make the cuts politically palatable, Congress would most likely avoid affecting those close to retirement age today, and it certainly wouldn’t reduce the benefits of those already in retirement. If you’re earlier in your career, though, and building a financial plan, it wouldn’t be unreasonable to assume a smaller benefit than your Social Security statement currently shows.

I don’t mean to be an alarmist. Indeed, in the mid-1990s, after years of rising deficits, the federal government actually ran a surplus for a period. Things can change. The current trajectory isn’t a one-way street, and debt wasn’t the only reason those ancient empires fell. But make no mistake: This is a topic that’s worth investors’ attention.

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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Looking Different

I'VE ALWAYS ASSUMED my financial life wasn’t so different from that of others—and that made writing personal-finance articles a whole lot easier. I, too, wanted to own a home, buy the right insurance, pay for the kids’ college, and amass enough for a long and comfortable retirement.

On top of that, I wasn’t some financial minority—a highly paid executive, or a successful business owner, or the recipient of a hefty inheritance. Instead, I was like most everybody else, trying to turn an everyday paycheck into something that looked like financial success.

But suddenly, I am the oddball. I’m a 61-year-old with perhaps as little as a year to live, and that means my financial life today doesn’t look like that of anybody I know—in seven key ways.

1. I no longer need to worry about funding retirement. That money I diligently amassed over the past four decades? Almost all of it will end up with my heirs. My carefully considered plans—continuing to work at least part-time, buying a series of immediate-fixed annuities that generate lifetime income, delaying Social Security until age 70—have gone out the window.

Of course, I had no clue my life would take this turn, so it makes no sense to regret the thought and money that I poured into retirement planning. Still, it’s sobering to think that I devoted a big chunk of my life to an endeavor that’ll do me scant good.

2. It doesn’t matter how much I spend—in theory. Should I start splurging? Even before my cancer diagnosis, Elaine and I had two trips to Europe planned for later this year. Since then, we’ve nixed one and revamped the other, so the timing fits with my chemotherapy schedule.

When I made changes to our flights, the airlines dinged me for a few hundred dollars. Supposedly, I no longer need to worry about how much I spend, and yet I couldn’t help but be irked. Yes, even now, my frugality still lingers.

In addition to the European trip we kept, we’ve booked three new trips for 2024. None is cheap. But again, even at this late stage, there’s a limit to how wide I’ll open my wallet. I looked at the price of business class flights, and I just couldn’t bring myself to do it.

I’d like to add a few trips for early 2025. I enjoy the planning and I like to have things on the calendar to look forward to. But for now, caution suggests I should wait until I have a better handle on how fast my health is deteriorating.

3. My portfolio’s time horizon just got longer. I’m not a long-term investor anymore, but Elaine and my two kids are, and at this point they’re the ones I’m investing for. The upshot: I have more than 90% of my portfolio in stocks—because that’s the asset allocation that makes sense for them, given where they are in their career and what other investments they hold.

Two days after my diagnosis, I sat down with Elaine and the kids, and talked to them about my estate. One thing I emphasized to my two 30-something children: They’ll be getting their inheritance far earlier than expected—but, if they’re smart in handling the money, they’ll end up as wealthy retirees. With some three decades to retirement, the money that Hannah and Henry inherit could grow eightfold.

How did I get to eightfold? According to the rule of 72, if money grows at an after-inflation 7% a year, its real value would double after 10 years, quadruple after 20 years and be up eightfold after 30 years. To be honest, I’m not sure the stock market will fare that well. Still, using 7% made the math easy, and I’m hoping the potential growth impressed Hannah and Henry.

4. Estate planning has become my top priority. My financial focus today is on giving away money and getting my affairs in order. In recent years, I’ve been moving to simplify my finances. Yet my diagnosis has made me realize there’s still much to be done.

Indeed, if my life had come to an abrupt end, I now realize my family would have had a surprising amount of work to do to settle my affairs. Fortunately, I can now do a lot of that work for them. Make no mistake: Leaving behind a well-organized financial life is a wonderful gift to your family.

5. I can stop fretting over my retirement’s tax bill. In recent years, I’ve been focused on the hefty income-tax bills I’d face once I reached age 75 and had to start taking required minimum distributions (RMDs) from my retirement accounts. I’d also worried about the Medicare premium surcharges known as IRMAA, or income-related monthly adjustment amount, that would kick in at age 65. But thanks to my cancer diagnosis, living that long is highly unlikely.

With an eye to minimizing both RMDs and IRMAA later in retirement, I’d shrunk my traditional IRA by making large Roth conversions. A lot of number-crunching lay behind those conversions. But like my lifetime focus on retirement, all that thought devoted to future taxes now looks like a heap of wasted time. That said, there is a silver lining: Those conversions will mean a handsome inheritance for my two kids, who are my Roth’s beneficiaries.

6. Many worries of other 60-somethings are no longer my concern. I won’t need to choose between traditional Medicare and Medicare Advantage. I can forget about long-term-care costs. I don’t need to fret over how long I’ll be able to stay in my home or whether I ought to move into some form of senior housing.

These are all topics others in their 60s should be thinking about, and I’ve certainly given them a lot of thought in recent years. Indeed, I’ve paid careful attention to HumbleDollar articles on these subjects, including those by Nancy Fagan, Howard Rohleder, Lucretia Ryan and Kathy Wilhelm. Even now, my web browser’s bookmarks include those for local continuing care retirement communities (CCRCs) that Elaine and I thought we’d visit down the road. But while Elaine will need to ponder the possibility of a CCRC, senior housing disappeared from my list of concerns the moment I got my diagnosis.

7. Social Security has become a different sort of conundrum. I could claim Social Security in January, when I turn age 62. But I won’t.

Instead, my focus is on the best strategy not for me, but for Elaine. How can she get the most out of Social Security? She could claim either her own benefit or she could claim survivor benefits based on my earnings record, with the option of later swapping from one benefit to the other. It’s an intriguing situation—one I’m currently researching and which I plan to write about in the weeks ahead.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.

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Pluses and Minuses

IS A 55-PLUS community for you? Do you want to spend your later years surrounded by folks just like yourself—mostly crotchety, demanding old people?

I'm joking, of course. But am I exaggerating?

My wife Connie and I made the move from our New Jersey single-family home to a nearby 55-plus community six years ago. Like the idea of a 55-plus community? Here are some factors to consider.

First, a 55-plus community requires defining. There are several types and sizes, from The Villages in Florida, covering 32 square miles with 145,000 oldsters and 230 pickleball courts, or mine with its nine three-story buildings on 15 acres and 108 condos total. A 55-plus community can include individual homes, townhouse apartments, condos or some combination of all three.

And don’t be fooled by the age designation. Fifty-five may be the minimum age but the typical resident is a lot older. The median age in The Villages is 74.6, meaning half the residents are older than that. My community is about the same. Only one of my golfing buddies is under age 80 and one duffer is 92.

This age thing brings up another feature of a 55-plus community: sirens and flashing lights. If you lump a lot of old folks in one place, you can expect health care emergencies on a regular basis and, yes, even deaths. It’s a constant reminder of our mortality and a bit depressing at times. In our building of 12 people, there are five widows, two of whom have lost their spouses since we bought our condo.

Will a 55-plus community save you money? Possibly, but don’t count on it. The total cost has many factors, including the size and design of the complex, how expenses are shared, and what maintenance is your responsibility. If you have an individual home, the outside care may be included, but not things like roof repairs. I, for one, overestimated how much we’d save by moving.

In 2018, our homeowners’ association (HOA) fee was $700 a month. Today, it’s $900, and expected to increase in a few months. There’s also a rumor we’ll get hit with an extra assessment to raise our community’s cash reserve.

The question is, would we be spending the equivalent—$10,800 every year—maintaining our old house? Years of experience say no. On top of that, my unit’s annual property taxes are $13,500.

Importantly, the homeowners’ association fee may not cover the HVAC systems if you own the property. Since buying our condo—built in 2011—we’ve replaced the water heater and air-conditioning at a cost of thousands. We live in one of the country’s highest-cost areas, so repairs here are also relatively expensive.

Homeowners’ association fees vary greatly. Other communities in our area have much lower fees, but they also have triple or quadruple the units. Size matters. The demands of the residents matter as well.

If you’re shopping for a 55-plus community, I suggest thinking about two things: avoiding hefty assessments and supporting resale values. If you want both, the community has to sink money into all forms of maintenance and amenities, even if it’s things you don’t use. Our community spends a great deal on landscaping and irrigation, but the expenditures are supported by residents and it clearly shows in the community’s appearance.

We bought our 2,000-square-foot unit for $580,000 in 2018. The same-size unit recently sold for $780,000 after a few weeks on the market. Maintaining resale values requires a commitment by the entire community to keep our standards high.

By contrast, low HOA fees and minimal cash reserves may put residents at financial risk. I have two friends in other states who were each assessed $20,000 for major building repairs to address deferred maintenance.

Rules are also an important consideration. If you have a home, there may be restrictions on the color you can paint the exterior. Pets are often regulated. In our community, dogs are supposed to weigh no more than 50 pounds, though we have yet to hire an inspector.

We can’t have gas grills on our balconies for reasons of fire safety, but electric ones are fine. Then there are rules about underage residents living with you. If you want your grandchild to stay, there may be a 30-day limit on the visit.

A critical issue is how many owners can sublet. Ask if there’s a limit on the number of units that can be rented. Our community limits rentals to 10% of units.

Amenities are valuable in varying degrees to different people. I don’t care much for our community pool, but many folks are there every day in the summer. The fitness center is used by some of the younger residents, while the pickleball courts are a clear winner.

If you favor a certain amenity, be sure it’s adequate for the number of residents wanting to use it. A friend lives in a condo community with more than 400 residents and one pool. They have to register in advance for a spot at the pool. Their clubhouse is also undersized for the community.

Amenities add value to your property when it comes time to sell. New buyers may imagine they’ll use them all, though that’s unlikely.

Most 55-plus communities have an array of activities. Even our small community has groups for cards, exercise, bocce, a book club, tennis and pickleball. There are occasional trips, parties and social gatherings. Some owners are always involved, while others just want to live there and be left alone.

Both approaches are fine. If you’re a private person, however, know that there are few secrets in a 55-plus community. We seniors are adept at texting and various other means of getting the word out about one another. We know who’s going to physical therapy, how many are missing a prostate, who owns another home and whether their car is leased. Inquiring minds want to know—and they do.

Who runs the place? Can you participate in the election? Our community has an elected board. Only owners can serve on the homeowner’s association board and vote on matters presented by the board. You don’t want a community with a significant number of residents with no financial stake in maintaining its value.

There are monthly meetings to report on issues, review finances—and hear complaints. Our board has hired a company to handle bids for various contracts, and deal with repairs and maintenance. It’s a tough job pleasing us seniors. Our community is on its third on-site manager since we moved in.

State laws have something to say about how things are run in these communities. Our pool, while private, is subject to public pool regulations, including the requirement to have a lifeguard on duty.

Following the catastrophic collapse of a Florida condominium in 2021, a new law was passed in New Jersey requiring periodic engineering inspections of buildings. The inspection will cost the HOA thousands of dollars. Let’s hope no major problems are uncovered. We’ve already sued the builder of our community for unfinished and shoddy work.

Before you make a move, visit different communities and think about long-term costs and your social wants. Ask about the rules, and look at the bylaws and the last financial report. The seller should have them all.

Considering everything, after nearly six years in a 55-plus community, I’m convinced we made the right move. We’ve made many new friends and the people in our building are helpful. Most of the work and worry of owning a house are gone. Our expenses are more predictable. And the location, less than a mile from our home of 45 years, means nothing else has changed in our lives.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Duty Calls

SOME THINGS YOU HAVE to do yourself.

A 2017 study concluded that spending money on time-saving services is correlated with greater life satisfaction. A subsequent article confirmed the finding. Rich or poor, we can boost our happiness by having others do undesirable tasks.

These studies confirm what HumbleDollar readers already know: Wealth is a tool that, if used wisely, can increase our life’s satisfaction. Pay a yard service to mow the lawn. Spend money on housekeeping services. Hire someone to do the shopping, cooking or laundry.

Now that I’m retired, I have plenty of time for activities I loathed to do while working. But thanks to a modicum of wealth, I have the choice to complete these tasks myself or pay others to do them.

Sometimes, however, there are time-consuming obligations that can’t be delegated. Last month, I received that dreaded letter. No, not an IRS audit notice. Rather, a summons for jury duty.

I contemplated if there was a way to escape this obligation. Unlikely. I have no prior criminal record and I’m not a student. I’m not yet 75 years old, nor do I take care of small children or elderly relatives. While I could possibly claim the immoral character exemption, it would be tough to provide proof.

My assigned session was scheduled for 8 a.m. midweek in the heart of downtown. I’ve been retired for a year, and forgot how much construction workers enjoy slowing rush-hour traffic. Nevertheless, I managed to arrive a few minutes early.

I entered the recommended city-owned garage. I’m partially colorblind, so all seven levels look identical to me. I took a picture to remember where my car was parked. There are a dozen similar photos on my phone, constantly resurfacing on my device as curated parking memories.

Security procedures entering a Texas court house are more draconian than those adopted by airport Transportation Security Administration workers. Shoes and jacket must be removed, pockets emptied, suspenders dropped. This is followed by a walk through a metal detector, the hand-wand check and a thorough pat down. Good thing I wore thick argyle socks, as the floor was unexpectedly sticky.

First order of business was to check in at one of the kiosks. Good news awaited. All potential jurors were given a debit card and told we’d receive a guaranteed $30 for the day. That amount rose to $58 if chosen to sit for a case.

My frugal side screamed, “Pick me, pick me.” Wait a minute, no. The cost-to-benefit ratio of losing my retirement’s free time was certainly not worth the gained dollars. Earning money by combining stress with lost time certainly wouldn’t increase my happiness quotient.

I entered the assigned jury room, noticing that the majority of early arrivals were retired, easily identified by the way they carried hard copies of well-worn library books showing Dewey decimal codes. The room steadily filled with harried workers, disheveled homemakers and annoyed professionals rushing to arrive before the clerk closed the main doors. The group was from all walks of life.

I understood my civic responsibility to serve as a juror, but what if I were actually picked? What if I were chosen as foreman? Would I make a fair decision? My anxiety rose as the minutes ticked by, with thoughts of being sequestered in small claims court arguing over the validity of suing the local TV station weatherman for wrongly predicted thunderstorms.

I immediately calmed when a clerk mentioned there was free coffee available. The word “free” put my mind at ease, even though I’m well aware my taxes fund the county court system and its free coffee.

The jury pool waited for what seemed like an eternity. The entire room felt edgy. A faint tinge of perspiration wafted through the room. Good thing I wore a COVID mask.

Over time, I noticed the group transformed from complete strangers to one that was bonded by common experience. We all held the same trepidation, uncomfortable with a common unknown. Our fates were linked in a manner regardless of social status, wealth or occupation.

My number wasn’t called in the first group, nor the second, nor the third. Each set of numbers was accompanied by an adrenaline rush, which I can only describe as akin to hearing ping-pong balls announced in a bingo hall.

My heart raced each time the clerk returned to the podium. Maybe I should have conferred with my cardiologist prior to committing to this obligation. The free coffee was no longer having its anti-anxiety effect.

The clerk returned a final time to thank the remaining potential jurors for our service. The “poolers” let out an audible sigh of relief. A bald man in front of me gave a whoop, and I swear the woman in the charcoal grey sweater seated in front evoked the Lord’s name.

I felt proud to have completed my civic duty, and carried that feeling with me through the rest of the day. Nevertheless, I secretly wished I could have paid someone to complete my obligation. It would have boosted my life satisfaction.

Jeffrey K. Actor, PhD, was a professor at a major medical school in Houston for more than 25 years, serving as an academic researcher with interests in how immune responses function to fight pathogenic diseases. Jeff’s retirement goals are to write short science fiction stories, volunteer in the community and spend time in his garden. Check out his earlier articles.

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