Jonathan Clements's Blog, page 75

My House Divided

I'M A HOUSEHOLD of one—in theory. True, one adult child lives rent-free in our family home in California. Her first full-time job’s wages are too low for her to afford an apartment in our expensive urban area.

I’m also paying college expenses for another daughter living on campus 80 miles away. She’s working part-time and will graduate this coming spring semester. With a STEM (science, technology, engineering and math) degree, I hope she’ll find gainful full-time employment soon after.

My son is in Wyoming finishing up an alternative high school program. He just landed his first paid internship at an agricultural lab, the first step toward a career in environmental science. I provided the security deposits to get him into his first apartment. I also drop a bit of money into his bank account at random intervals. I do the same for his sisters, just to take the edge off early adulthood.

Finally, wherever I reside, I share quarters with the family dog. So, I’m never entirely a household of one. Yet I wonder if my living situation will simplify as my children take flight.

Due to my frugality and some luck, I have choices when answering these four key questions:

Where do I want to be?
What do I want to do?
Who will accompany me?
How much will all this cost?

This last financial question causes me more angst than the existential where-what-who kind because there’s less opportunity to recover from any significant money mistakes I may make in retirement. To ease my concerns, I’ve considered selling the family house in California, rather than continuing to spend energy and money tending to it.

After half a lifetime there, however, I wonder how it would feel to lose my old neighborhood. A song from the scouting bonfires of my youth comes to mind: Make new friends, but keep the old. One is silver and the other gold.

When I look around, though, my neighborhood has more youthful faces of late and fewer longtime residents like me. Shops and restaurants have also changed, to match newcomers’ preferences.

So, where do I truly want to live? There’s no contest. I’m passionate about my recently acquired immobile home in Tucson. It’s been an exciting challenge to maintain my new, fragile manse, while also enjoying local treasures like the Arizona Sonoran Desert Museum.

My brother and sister-in-law live here, and I’m also forming new friendships. Driving over the cinematic Gates Pass, I explore the sprawling metropolitan area I now call my second home, winter and summer.

Still, I’m unprepared to sell the family home in California. To begin with, I’ve filled every corner and cupboard to the rafters. Clearing it out is proving a slow chore.

I also have a sensual connection. When I’m in the old place, I savor walking its red oak floors barefoot, a sensation that’s hard to replicate on vinyl planks in my ersatz fishing cabin.

When given a choice, do both. The B-side to life could see me living in my tin shack with periodic visits to the big house. Whenever I’m at the old place, I enjoy the kids’ company. For now, I’ll age in two places until I can no longer enjoy both houses or can’t manage the travel. Thankfully, I have the health and cash flow (almost) to support this strategy.

Still, I’d like to reduce my fixed costs. The big house’s single biggest fixed expense is its property tax bill, which is manageable. I can pass along my relatively low property tax rate to my children. This oddity of California real estate law has created a strategy of families passing houses down, more in the European style.

One home on my block will eventually belong to the great-granddaughter of its original builder. It’s conceivable that a similar future awaits my home as well.

To be sure, my overall tax expense is pretty high. Happily, most of this obligation derives from adequate income rather than my property taxes. Still, state and federal income taxes, property taxes and sales taxes amount to a big bite when combined.

Arizona’s flat personal income tax is 2.5%, while California’s progressive income tax ranges from 1% to 13%. Last year, I paid 3.6% of my California adjusted gross income to the state. The lower rate in Arizona does reduce my overall income tax payments a bit. The savings are enough to cover my weekly hamburgers with my brother over at Tiny’s on Ajo Highway.

Part-year living in Arizona reduces my gasoline expenses, as well. The gas tax is 19 cents a gallon in Arizona, versus 68 cents in California. A gallon of gas costs $3.39 in Arizona, while California’s gasoline recently averaged $4.74 a gallon. Another half-dollar price increase could result from the latest change in the carbon standard for California’s special blend.

I don’t drive all that much, though, so my savings are comparatively small. Despite all my grumbling when filling my car’s gas tank in California, I calculate my gas savings at less than $500 a year.

Arizona’s state sales tax is 5.6%, though Tucson’s local additions push it to 8.7%. Meanwhile, California’s state sales tax is 7.25%, but my local rate there is 8.75%. That makes shopping in either city roughly comparable. I can achieve greater savings by simply not buying things I don’t need.

As a thought experiment, I imagine how much I’d save by leaving California behind for good. If I sold the house, I’d save $1,095 annually in property insurance, $4,611 in property taxes, $2,364 for city utilities (trash and sewer), and around $3,200 for natural gas and electricity.

As I compare fixed costs, it helps to have already chosen an affordable landing zone. In Arizona, I only pay about $500 a year in property tax and insurance, a tenth of my California expenses. My tin can casita is all-electric, which I estimate will cost around $700 a year.

All in all, I’d be saving $11,570 in fixed expenses by becoming a year-round resident of the desert. With savings like these available, it should be no surprise that some 700,000 California residents moved out of the state in 2022, according to the California Legislative Analyst’s Office.

Yet I’m choosing to maintain two homes, an admittedly costly position. To defray my expenses, I could start charging my kids rent of $1,000 a month. That would be a bargain over what they’d pay elsewhere. Still, since much of my estate will go to them later, charging rent seems like taking money out of one pocket and putting it in another.

One of the heaviest expenses I shoulder is the cost of insurance, which will reach $24,875 in 2025. This covers a lot of policies: medical and dental for me and two of my children, a small life insurance policy and long-term-care insurance for me, auto insurance for me and two young drivers and, finally, two homeowner’s policies.

I might be overinsured. But in the five years since my spouse’s unexpected death, I’ve leaned toward extra protection. To save on insurance, I plan to up my deductibles and reduce coverage.

I have other ideas about cutting my expenses, starting with dropping the Disney Channel. I also plan to sell an actively managed fund to invest in a lower-cost index fund.

Finally, I’ll be easing the kids off the family phone plan. This may not be cutting the apron strings entirely, but it’s a start.

Catherine Horiuchi is retired from the University of San Francisco's School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine's earlier articles.

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As Evening Approaches

I'VE BEEN THINKING a lot about my mortality. I’m sure it has to do with Jonathan's battle with cancer, along with losing some close friends over the past few years. Maybe that’s one reason I've been thinking about contacting some long-lost friends.

Roger was a college friend who I’ve considered getting in touch with. I believe I’ve found his current address, and I was going to reach out to him by sending him a Neil Young album with my phone number attached. We were both huge fans back then.

I was 23 when I last saw Roger. It was 1974, at the old Fox Theater in Venice, California. He called to tell me that Neil Young’s movie, Journey Through the Past , was playing there. It was a late-night triple feature, which included two Jimi Hendrix films. I still remember all those folks dressed up like Hendrix. Roger and I were dressed like Young, wearing our old flannel shirts and worn-out jeans.

But I decided it might not be such a good idea to contact Roger because, when I read some of my old high school friend’s comments on social media, they weren’t anything like what I thought they’d be. Maybe it's best that I just keep the memory I have of Roger when we were young.

There’s one person from my past who hasn’t changed over the years: my old neighbor Jane, who I’ve known for about 35 years. I’ve always admired Jane. She has the kind of relationship I always thought I wanted.

Ever since I’ve known Jane, she and Bill have been a couple. During all those years, they never married. When they aren’t at each other's place, they both have their own homes where they can spend time alone. I used to see Bill in the apartment building’s lobby, getting the Sunday morning newspaper in his robe and slippers. I would sometimes see him drop Jane off in front of the building, with her overnight bag.

When Rachel and I were an unmarried couple in our 60s, we both wanted something more than what Jane and Bill had. We tried living like them. But we both knew that not sharing a residence wasn't going to work for us. We wanted to commit to an enduring relationship. We married, sold our homes and moved into the house I inherited.

Not too long ago, I was having lunch with a friend and he asked if I had a prenuptial agreement before I got married. I told him no. He then reached out to give me a fist bump. I didn’t really know what to make of it. Brian is a lawyer and I thought he would have advised me to get one. But he didn’t.

Now, when I think about our marriage, I believe Rachel has more to lose than I do. She also has significant assets, but—because of our age—she’s more at risk of losing her physical and emotional well-being if she becomes my caregiver. I’m 73 and she’s 67.

It’s why I have become more open-minded about living in a continuing care retirement community, or CCRC. I don’t want to burden Rachel with the responsibility of taking care of me. It’s also the main reason I work hard at taking care of my health. I don’t just owe it to myself. I also owe it to her.

Of course, we don’t know how our lives will play out. Which one of us will need long-term care and for how long? Maybe neither of us. But for now, we both decided to stay where we’re at. We’re still more than capable of taking care of ourselves.

There is, however, a CCRC that’s not too far from where we live. It's a nonprofit, and within walking distance to a major university and large park. It has independent living apartments, along with assisted living, long-term skilled nursing, short-term rehabilitation and memory care, all in the same location. The CCRC requires a refundable or nonrefundable deposit, with the latter giving you priority entrance to their medical facility.

But there’s one major hurdle that I don’t think I can get over: After being released from hospital, my mother died in the CCRC’s rehabilitation facility. I don’t like driving past the place, let alone the thought of one day finding myself there as a patient. It brings back too many unpleasant memories.

We’ll continue to look into CCRCs, while hoping our health holds up like our neighbor Sue. She’s in her 90s and lives alone, with some help from her daughter. I wrote about not seeing her for a while. We thought something terrible might have happened to her when her daughter drove off with some of her belongings. We found out later she was on a cruise.

That, unfortunately, is what happens when you don’t see an elderly person for a while: You fear the worst.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Follow Dennis on X @DMFrie and check out his earlier articles.

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One Man’s Junk

IN MY NEIGHBORHOOD, there are signs saying “we buy junk houses” and “we buy ugly houses.” These businesses target undesirable homes—those that have fallen on hard times and can’t be easily sold.

Maybe the homeowners couldn’t afford the upkeep or got tired of caring for the place. Whatever the reason, the result is houses that look sad and have lost market value. Contrarian buyers see the houses not for what they are, but for what they could be. They need to have a vision, plus the money and skills to turn a beast into a beauty.

You’ve probably seen these buyers profiled on TV shows about house flippers. They tear out the ugly and replace it with stylish features that appeal to today’s buyers. Sleek kitchens. Remodeled bathrooms. Updated entertainment areas. Potential buyers flock to these formerly unloved houses.

I’m witnessing a similar trend among old cars. Auctioneers routinely sell cars from the 1950s and 1960s that have gone through a makeover. The cars are either returned to their original showroom sparkle or they’ve been customized.

The customized cars, like the remodeled houses, are transformed according to the designer’s wishes. Years ago, these transformed cars didn’t find a strong market. Buyers preferred cars that had been restored to their original condition.

Then the market turned. Customized cars had better brakes, power steering, more reliable engines, and creature comforts like air-conditioning and a booming stereo. What buyers got was a car that appeared vintage but worked like a new model. That combination—a car that looked like you might have driven it in high school, but now with up-to-date features—has proved irresistible.

In my neighborhood, when people no longer want something, they leave it at the curb. If the neighbors want it, they’ll grab it. Otherwise, it will get scooped up by junkmen who circle the neighborhood in the early morning hours, piling old stuff into pickup trucks.

There’s also a population of artists who take discarded relics and transform them into sculptures. When you see their work up close, and realize what it’s made from, it’s alluring. An unwanted item has been transformed into a thing of beauty.

There’s even a cycle like this for people. At some stage in our careers, we were a thing of beauty. We were desired by our employers. We could switch jobs and negotiate a higher starting salary. We had the talents, skills and abilities that were in demand. We could market ourselves as someone desirable. We were the “in" thing.

Then we retire. Some of us start to feel like that neglected house, rusted car or unwanted sofa on the curb. We no longer shine. We can’t keep up with others. We step aside, willingly or not.

What can we do? We can remodel ourselves. We can go from what was to what could be. We can open ourselves up to new possibilities. We don’t have to accept rejection as the final word.

We can think, “What if?” When we adopt this kind of thinking, we change our focus from looking down to looking up. Remodeling ourselves may not be easy. We may not be able to do what we once did, so we have to look at our life from a different perspective. What can I do next?

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Blame Game

FIFTY YEARS AGO, when the first index funds were getting started, critics wasted no time attacking the idea. They called it “un-American” and a “sure path to mediocrity.”

But over time, indexing has grown to the point where it now accounts for more than half of all U.S. mutual fund assets. Last year, research firm Morningstar declared that “index funds have officially won.” But this victory seems to have only increased the level of criticism.

In an interview last year, David Einhorn, a longtime hedge fund manager, argued that markets are “fundamentally broken” and that passive investing—that is, index funds—are the cause. Here’s how he explained it: As more investors go the route of indexing, the result is that more active managers close up shop. That, in turn, means that fewer research analysts are following individual stocks. In Einhorn’s words, there is now, as a result, “complete apathy” in certain parts of the market.

Many smaller companies, Einhorn says, are almost entirely overlooked. “There’s entire segments now… where there’s literally nobody paying any attention.” That’s because the remaining active managers tend to focus their energies on larger companies. Now, even when small companies issue positive news, Einhorn says, their stock prices often don’t react because there aren’t enough investors following them. “These companies could announce almost anything other than a sale of the company and nobody would notice.”

This is a problem, Einhorn says, because he feels it’s caused share prices in many cases to become distorted. The large stocks that dominate the top end of the market—Apple, Amazon, Microsoft and so forth—continue to rise because they’re so visible. But lesser-known companies can see their stocks stagnate even when they’re doing well.

Einhorn quotes a colleague, who liked to say that, “a bargain that remains a bargain is no bargain.” In other words, a growing number of active managers these days are giving up on stock-picking because they worry that they won’t be rewarded even if they do everything right. To the extent that successful stock-picking was always difficult, it’s become even harder. “So what happens is instead of stocks reverting toward value, they actually diverge from value,” he says.

Academics have looked at this question and reached similar conclusions. In a paper titled “How Competitive Is the Stock Market?” a team of researchers confirms that the stock market has fundamentally changed. By examining the trading decisions of institutional investors, they found that investors today exhibit the “apathy” that Einhorn has observed. This is a problem because it means that share prices today are less reflective of companies’ true value.

Versions of this debate have been around for years, with market observers worrying what might happen if, over time, everybody became index fund investors. In theory, under that extreme scenario, stock prices would never change—because there would be no research analysts following the developments at each company, and thus no one would be motivated to bid stock prices up or down. Einhorn’s picture of “literally nobody paying any attention” would be extended to the entire market.

But what if something short of 100% of the market were indexers—what if maybe 90% or 95% of investors chose to index? Would the remaining 5% or 10% be enough for the stock market to remain efficient—that is, to help keep stock prices in line with the profits of their underlying companies?

For years, as index funds have grown, this is how the question has been framed. But in a paper published last year, the economist Owen Lamont argued that this isn’t the right perspective. Whether the market remains efficient doesn’t depend on how many active investors remain. Instead, Lamont says, what matters is which active investors remain.

“If the 50 smartest and best-informed investors switch to passive, then yes, it could make prices less informative.” But, Lamont says, “If the 50 craziest and least informed switch, then maybe market prices get more informative. What matters is who stays in the market.”

That certainly makes sense. Even if just a small number of active investors remain, stock prices could nonetheless remain reasonable, as long as the remaining active investors aren’t the ones who are “the craziest and least informed.”

On this point, one market observer has weighed in with a discouraging observation. Cliff Asness is a longtime hedge fund manager. In a recent paper titled “The Less-Efficient Market Hypothesis,” he argues that the internet—and social media, in particular—have caused the market to become less efficient. In his view, what we’re seeing is indeed closer to the 50 craziest investors taking over active management rather than the 50 smartest and best-informed.

Asness calls the investors who dominate social media today “a coordinated clueless and even dangerous mob.” You’ll recall, for example, the so-called meme stock craze from 2021. A YouTube personality calling himself Roaring Kitty took the lead in driving up the share price of the failing retailer GameStop to irrational levels.

What’s the implication for individual investors? While notable, the GameStop episode was a mostly isolated incident, and the reality is that we don’t know right now which way things will go—whether it will be the “clueless mob” or “the 50 smartest people” who will have more impact on share prices going forward.

If current trends continue, though, one conclusion is that those who continue stock-picking may experience markets that are more volatile and more unpredictable. That’s because, as more active managers exit, a smaller and smaller number of investors will be able to trigger more significant price moves. And because social media gives greater visibility to online personalities like Roaring Kitty, those price movements may be more irrational than they were in the past.

What are the implications for index fund investors? Einhorn’s observation about the ghost-town effect among smaller stocks suggests that broad-market indexes may be relatively more stable—for now. The reality, though, is that no one can say for sure, because the market hasn’t gone through a transition like this before.

It’s also a difficult phenomenon to quantify. There’s no reliable barometer for the level of irrationality in the market. We can point to individual cases like GameStop where prices clearly became irrational. But that was the exception. When, for example, Nvidia shares dropped 17% in one day last week, was that a rational move? It’s an open question.

The bottom line: The market is definitely in the midst of a transition, but the exact contours of this transition are still an open question. In the past, I’ve felt that investors’ best and only defense was to diversify broadly. That may be even more true today.

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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Taking It Personally

WHICH FINANCIAL dangers should we focus on? The possibilities seem pretty much endless. In fact, five years ago, I decided to make a list—and ended up offering readers 50 shades of risk.

Yet our notion of risk used to be far more circumscribed.

In the late 1980s, when I started writing about personal finance, insurance was considered important, but it wasn’t much discussed. Instead, the only risk that seemed to merit serious analysis was investment risk, and that could supposedly be captured by a single, objective measure: volatility.

This approach had intellectual appeal. By focusing on volatility, experts could sidestep a thorny issue—the fact that some investors were totally freaked out by investment price swings, while others remained unperturbed.

As data on historical market returns became more readily available, talk of short-term volatility was joined by discussion of longer-term risk. How likely was an investment to make money over one, five, 10 and 20 years? Once again, it was all about the numbers, with investors themselves strangely absent from the conversation.

The good news: Today’s discussions of risk are more nuanced, reflecting an awareness that the danger from misfortune is matched by the damage that can be done by our own behavior. Consider the typical stock-market cycle. Thanks to research by behavioral-finance experts, we now have a pretty good idea of how investors’ thinking changes along with the market.

What goes up. The goal of investing may be to buy low and sell high. But at market bottoms, when stocks might be available at 30% or 40% below their bull-market peak, we’re often frozen in place, fearful our own actions will make matters worse. Sins of commission and sins of omission can both cause financial pain, but sins of commission are much more likely to trigger pangs of regret.

As share prices tick higher, some of us will look to sell, as we recoup part or all of our losses. We’re anchored to the price we paid for our investments or to our portfolio’s highest value, and we’re anxious to sell before recent gains turn to losses once again. It’s the old “get even, then get out” syndrome.

Others, meanwhile, take the market’s short-term gain and extrapolate it into the future, prompting them to invest even more in stocks. Like the soothsayers of old, we study the market’s entrails, trying to divine the future by spotting patterns in today’s share-price movements. Our portfolio’s rising value makes us more confident not only about the rally, but also about our own investment acumen, as we attribute our gains to our own brilliance.

Among some investors, the rising market may even trigger the so-called house-money effect. What’s that? Like casino gamblers who get lucky early in the evening, bull markets can make us feel like we’re ahead of the game, prompting us to trade more and take additional risk.

What do we buy? Often, we’re drawn to the familiar, such as our employer’s shares or companies whose products we use. Alternatively, we might flock to soaring stocks and funds that are in the news or that others are currently raving about.

Taken together, such investments may leave us with a badly diversified portfolio, and yet familiarity and popularity can make these stocks feel like a safe bet. Buoyed by the enthusiasm of others, we end up with a far more aggressive portfolio than we owned at the bull market’s inception—setting us up for hefty losses when stocks turn lower.

All fall down. As share prices slide, we shrug off the setback, ignoring negative news and the market’s rich valuations. Instead, we seek validation in the words of Wall Street’s bullish pundits, taking courage from their upbeat market assessment.

But then stocks’ losses deepen, the pundits grow more equivocal and our confidence ebbs away. Initially, we’d expected the decline to reverse. Now, we start extrapolating the losses, wondering how much worse things will get.

At the market’s peak, we would boast to others about our high tolerance for risk and our hefty allocation to stocks. But that bravado evaporates along with our portfolio’s gains, and now we wish we owned a far less aggressive portfolio.

Enter loss aversion—our tendency to get far more pain from losses than pleasure from gains. Stung by our portfolio's decline, some of us sell in a panic, because our investments are now underwater and we imagine things will get far worse. Alternatively, we might “double down” on our stocks, with an eye to speeding our portfolio’s recovery should the market rally.

But most of us simply sit tight. During the bull market, we took great pride in selling our winners, even if the result was hefty capital-gains taxes. But now that tax losses are readily available, we’re loath to take advantage, because we hate the idea of selling for less than we paid. Instead, we comfort ourselves by saying “they’re only paper losses.”

What about buying? Everything tells us not to: The news is relentlessly bad, the pundits declare that the bear-market bottom could be months away, and the market’s decline make further losses seem inevitable. Stocks may be on sale, our wise neighbor declares that this is a great opportunity and we might even agree—but buying simply seems too risky.

Check out the three earlier articles in this six-part series: Money Grows up,  Taking Center Stage and Mind Over Money.

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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Trouble Ahead

TED BENNA IS OFTEN called the “father of the 401(k).” In 1980, he implemented the first 401(k) plan based on his somewhat bold interpretation of the Revenue Act of 1978. He certainly couldn’t have envisioned the $11.4 trillion in “defined contribution” 401(k) and 403(b) accounts that we have today.

Individual retirement accounts also took off in the early 1980s, and traditional IRAs now hold an additional $11.3 trillion. Combined, that’s an impressive $23 trillion in tax-deferred retirement assets. On top of that, Roth IRAs hold an additional $1.4 trillion.

The catch: Other than Roths, these accounts come with significant embedded income-tax bills. Perhaps as much as 30% of the total will eventually be paid to Uncle Sam and the 37 states that tax retirement-account distributions.

This "ticking tax bomb" is particularly onerous when the distributions are taxed at higher rates than when the original contributions were made. The risk of steep tax bills in retirement was often little discussed—if it was discussed at all—when today’s retirees started funding their 401(k)s decades ago.

Here are 10 tax-bomb realities that weren’t on my wife’s and my radar screen when we excitedly started contributing to 401(k)s and IRAs in 1982:

Our marginal federal tax rate when we take required minimum distributions (RMDs) in a few years will be higher than the rates at which we deducted our contributions during our early working years. Throughout our early working years, financial advisors regularly reassured us that “your tax rate will be lower in retirement.” We and they didn’t foresee the impact of tax-bracket creep—the rising marginal rate we’d pay as our income grew.
No early advisors recommended some balance of taxable accounts and retirement accounts. The 1980s and 1990s playbook was to max, max, max 401(k) savings.
Taxable-account investments have three advantages that don’t get enough attention. First, any appreciation is taxed as capital gains, rather than at the usually higher ordinary income-tax rate. Second, investors get to determine when to take capital gains—and potentially also offsetting losses—rather than being forced by RMD rules. Third, heirs can avoid tax on the embedded capital gains, thanks to the step-up in cost basis upon death.
RMDs can result in hefty taxes on Social Security benefits. To make matters worse, the thresholds at which Social Security gets taxed aren’t adjusted for inflation, so half of retirees now pay income tax on their benefits. Nine states also tax Social Security.
RMD income can also trigger the Medicare premium surcharge known as IRMAA, or income-related monthly adjustment amount. IRMAA now hits some 8% of Medicare recipients. The cost can be as much as $6,000 a year for individuals and $12,000 for married couples.
When retirement-account assets reach a level where future RMD income might put folks in, say, the 22% or 24% tax bracket, savers may want to back off contributions above what’s necessary to get the employer match. For married couples, the alarm bells might ring when their traditional retirement accounts reach perhaps $1 million or $2 million.
A booming stock market has made the tax bomb significantly worse. We never anticipated that the market would nearly triple in the eight years since we retired. Even more modest returns might cause retirement savings to double over the 10 or 15 years between retirement and when RMDs start.
Once RMDs begin, tax-bracket creep may continue if retirement savings grow faster than the sum that’s required to be withdrawn each year.
When the first spouse dies, the surviving spouse must take similar RMDs, but pay taxes using half the standard deduction and less generous individual tax brackets.
We funded retirement accounts for four decades assuming that our children could “stretch” withdrawals from the accounts that we’ll bequeath them over their lifetime. But that stretch was nixed by the 2019 Secure Act. Our children must now drain inherited tax-deferred accounts over 10 years, handing them additional taxable income when they’re already in their peak-earning years.

For retirees with large traditional retirement accounts, Roth conversions before RMDs begin may be the only way to defuse the tax bomb. Meanwhile, thanks to the advent of Roth 401(k)s, Roth IRAs and health savings accounts, younger generations can avoid getting ensnared in these tax-bomb traps. These younger workers should favor Roth accounts while their marginal tax rate is low, while also making the most of health savings account if they’re eligible.  

Finally, we retirees should advise our children and grandchildren about the benefits of saving in all three tax buckets—taxable accounts, traditional retirement accounts and tax-free accounts. That tax diversification should help defuse the tax bomb caused by focusing too much on traditional 401(k)s and IRAs.

John Yeigh is an author, coach and youth sports advocate. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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On My Own Time

WHO OWNS TIME? WE speak of “my time” and “your time” as if it were a possession we hold in our hands. But we can’t stash it away for future use, nor can we trade or transfer our allotment to another person. Is it truly ours? For the moment, let’s say that it is.

Appraising time. How much do we value our time? Some days, we treat it as a precious commodity. On those days, if we’re in a generous mood, we’ll share minutes with a friend or donate them to a cause that stirs our passions. Alternatively, we might be time-stingy. We value our seconds more than people. We zealously horde our hours, begrudging the moments others manage to wheedle away from us. Either way, it’s obvious that time is a treasure.

But we can also be careless with time. We may mindlessly go about our workday, going through the motions until quitting time arrives. Once home, we aimlessly click on internet articles or flip through television channels, lingering until the clock or exhaustion announces our bedtime. Instead of managing time well, we just manage to make it to the ends of the weeks that become months that accumulate into years.

What does it matter? If I’m indeed master of my time, who’s to say I can’t treat it as I please? Maybe no one. But consider a couple of other perspectives.

Some religions, including my own Christianity, believe time is part of creation. God is eternal, and therefore outside of time, but all else is subject to the ravages of time’s relentless passage. It’s a gift to be used wisely, like all resources entrusted to us. Though I may fall short of that mark, my failure doesn’t relieve me of my responsibility.

Even if we don’t hold this view, perhaps we’ll still admit that time is a gift. For starters, we’re given a life. Some lifetimes are longer than others, it’s true, and furnished with more of what makes us happier. But few of us would choose to never start at all. And once we’ve arrived, we’re loath to leave.

We’re also granted time by the efforts of others. Our material possessions and conveniences represent the accumulated contributions of countless generations preceding us. Do you like cooked food, clean clothes and living indoors as much as I do? Think of the time and labor our ancestors once devoted to providing these basic needs. We enjoy the fruits of their quest for an easier, more efficient life, including the surplus of time gained from not scratching in the dirt for our necessities.

Spending time. With this bonus of bestowed time comes a choice: How should we part with our portion of it? At this juncture, I’m not offering advice. As owners, we each decide how to spend what’s left—after we pay off our employer, our spouse and whomever else stakes a claim to our daily allowance of time. But I do have a suggestion, fitting for HumbleDollar readers, to amass even more time: the index fund.

Indexing is nearly five decades old, but is still a child as far as investments go. Even so, it’s maturing into a powerful wealth-builder. Its premise is both humble and sophisticated: Admit from the outset that even smart mutual fund managers don’t perform well against a simple index of stocks or bonds that represents the broad market, or can’t repeat their success year after year, and then seek to closely match the index to capture each year’s hidden stars.

Now, there’s nothing wrong with taking an active role in our investing. Since we command our time, we can spend it as we choose. We can draw upon our ration to pore over company data, searching for future market winners and losers. With the information we’ve gleaned, we might look to latch on to a growing company or seek to profit from stock price movements, whether up or down. But if even a world full of super-smart, intensely driven money managers, backed up by a team of overworked analysts, can’t outpace the index fund, shouldn’t we admit that our part-time effort is really an intensely interesting hobby, rather than the road to riches?

Saving time. I’m also not implying that hobbies are a waste of time or that active investing is wrong. My gardening indulgence eats up a nice chunk of my time, and I won’t pretend it’s the most efficient way to put food on our table. But it nourishes me in a way I think is worthy of the hours it consumes.

I understand investing offers similar sustenance to others, and that many investors are likewise cognizant of the hobby status of their endeavor. Even so, for those looking to harvest more time for other pursuits, indexing delivers the goods. Regular contributions from each paycheck into a low-cost, globally diversified index-stock fund in a 401(k) or IRA over decades can produce an enormous yield, all in exchange for a trifling amount of time.

Of course, the idea of amplifying time through efficiency is an illusion. We can’t add more actual time to our account. We just rescue time we possess from the clutches of a chore we don’t love and then apply it to another purpose. Perhaps the closest we can come to creating more minutes is striving to maximize our longevity. No, we can't change our genetic legacy, but we might squeeze a few more years from our DNA with regular exercise, healthier food and routine checkups with our doctor. This regimen may stave off death to increase our lifespan, giving us more real time.

Returning time. Back to the question I posed at the start: Who owns the time that flows steadily into our hands? If it’s truly a gift, the implication is that we do. But don’t such gifts come with an obligation attached? How harshly do we judge a child who trashes a new car from his parents, or squanders an inheritance that took a lifetime to build? To me, at least, with ownership comes responsibility.

I think it’s a mistake to think of time as my selfish possession. True, I do direct its use, much like the money in my financial accounts. But like money, I had help filling my time account, thanks to the cumulative efforts of previous generations. Even today, I benefit from and depend on the muscles, minds and time of the myriad people I live with in complex cooperation—those in my workplace, in public service and so on. Even if I woke up in a simple world of dirt, rocks and trees, and had the skills to make use of them, how long could I survive without the strength of a community to draw on?

My thoughts were tested and further refined in 2018, after my wife’s brother announced that he was relocating to Georgia for our help in dealing with his disease. Over the five years he pulled from our pool of time, until his death, my wife and I had a running conversation thrashing out the obligation we had toward him. I eventually reached an uneasy truce between my thoughts of charity on one hand and resentment on the other, but with also a growing conviction that giving time to another—within limits—is payment for that which is loaned to me. Deciding where those limits lie, however, is still unresolved.

Remember the index fund, that potent liberator of time I referenced above? By diligently stuffing it with dollars in a retirement account during our working lives, we should eventually free ourselves from our jobs. This newfound free time is teeming with possibilities. I’ll stop short of suggesting activities that I consider worthy. But during a retirement brimful of days of long-delayed leisure, I hope we all discover the pleasure of balancing our fun with a purposeful use of time.

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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Simplicity Is a Virtue

FORD MOTOR COMPANY introduced the world to the convertible hard top in 1957 with a car called the Skyliner. It was a marvel of engineering.

To retract, the Skyliner hard top first tilted up and away from the front windshield. Then the top folded in half overhead. The trunk lid opened wide. The folded hard top swung into the trunk, which then closed. All by flipping a single dashboard switch. You can see it in operation in this commercial featuring Lucille Ball and Desi Arnaz.

To make this contraption work, Ford engineers installed seven electric motors, four jack lifts, 10 limit switches, 10 solenoids, four locking mechanisms for the roof, two locking mechanisms for the trunk and 610 feet of wire. It's hugely complicated—and difficult to repair.

I’ve never been a fan of complicated. This applies to investing as well as cars. My introduction to investing came from opening a savings account at my local bank when I was a kid. With time, I could see how my money grew in value if I just left it alone. Simple.

For years, I invested in either savings accounts or certificates of deposit. It wasn’t until I worked for a company with a 401(k) plan administered by Vanguard Group that I dove into the stock market. I chose a one-stop shopping 60% stock-40% bond balanced fund. I contributed an amount that I felt comfortable losing, should things go badly wrong. I knew I had cash in the bank to cover whatever surprises might arise.

I’m sure many others enjoy deciding when, where and how they’re going to invest next. Yet everything that I’ve read tells me the key isn’t timing the market, but time in the market. Just invest and wait patiently.

I keep in mind the old saying, “A watched pot never boils.” Just forget about it until you need the money. Then look up your balance.

Could I have done better with a more complicated investment approach? Maybe. But who cares? As long as I have money in the bank, I’m good.

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Too Hot to Handle

MARVIN STEINBERG was a psychologist who founded the Connecticut Council on Problem Gambling. During his career, he made some uncomfortable observations about the behavior of stock market investors. In many cases, he felt, investors’ behavior veered awfully close to gambling.

This is the sort of observation that seems like it could be true, but it also seems difficult to quantify. That’s why a recent study by Morningstar analyst Jeffrey Ptak caught my eye.

Ptak wanted to examine investors’ experience with so-called thematic funds. These are funds designed to take advantage of a trend, such as artificial intelligence, green energy or cybersecurity.

In theory, these funds make sense: If there’s an area of the economy that’s growing, it seems like an obvious place to invest. But that’s not what the numbers show.

In his analysis, Ptak conducted two sets of comparisons. First, he looked at investors’ returns in thematic funds compared to the S&P 500. Since the S&P 500 has done exceptionally well in recent years, and thus represents a high bar, Ptak also compared thematic funds to a set of more broadly diversified stock funds.

The findings? During the period studied—the three years ending Nov. 30, 2024—the S&P 500 returned an average 11% a year, while the more diversified stock funds returned 7% on average. The thematic funds, by contrast, lost an average 1% per year over that time period.

That would be bad enough, but then Ptak looked at what’s known as dollar-weighted returns. This is a methodology that seeks to capture investors’ actual returns in an investment. It does this by taking into account not only an investment’s returns but also the timing and magnitude of investors’ purchases and sales of that investment—in other words, their trading decisions. The results were sobering: On a dollar-weighted basis, investors in thematic funds lost 7% a year—far worse than the S&P 500’s gain of 11% or the diversified stock funds’ 7% a year.

To quantify that, if you had started with $10,000 and invested it in the S&P 500 for the full three years, you would have ended with nearly $14,000. If you’d invested in the diversified stock funds, you would have ended with about $12,000. But if you’d invested in the thematic funds, your investment would have dropped to $8,000.

What explains these results? Ptak cites three factors. First is valuation. Fund companies have a knack for timing the rollout of new funds to take advantage of trends that are in the news. The problem, though, is that the stocks of the most popular companies at any given time often end up being overvalued. But they don’t stay overvalued. After a time, stocks that have been driven up to unreasonable levels often fall back down into more reasonable territory.

The result: Thematic funds tend to be rolled out precisely when valuations are at their highest, attracting investors just in time to see the bubbles deflate. In Morningstar’s research, that explains approximately half the underperformance experienced by thematic fund investors.

The other half of the performance gap was explained by investors’ timing decisions. On average, thematic fund investors tended to buy at high prices and sell at low prices. While unfortunate, this makes sense. If the pattern of these funds is to launch when prices are peaking, it’s understandable that investors quickly regret their decisions and head for the exits.

In fairness, Ptak points out, there’s almost always a gap between a fund’s total return over a given period and its dollar-weighted returns. That’s because investors are always buying and selling shares for their own reasons. Sometimes, they’re investing new savings, and sometimes they’re withdrawing funds to meet expenses. But the difference is typically small. In this study, the gap between the funds’ returns and investors’ returns in the diversified stock funds was 0.65%—much less than the six-percentage-point gap experienced by investors in thematic funds.

What about fees? Thematic funds are much more expensive than standard index funds, costing 0.77% on average. By way of comparison, the best index funds these days cost less than 0.05%.

In addition to the most obvious conclusion—to avoid investing in “shiny object” funds like these—what other lessons can we draw?

In 1987, a Harvard psychologist named Paul Andreassen conducted a study that has earned him a place on the Mount Rushmore of investment research. He created a simulated trading environment and gave participants funds to invest.

Andreassen split participants into two groups: The first received regular news on their investments and were permitted to make trades based on the information they received. The second group were also permitted to trade if they wished, but didn’t receive any news on their investments.

The counterintuitive finding: Those who received no information on their investments ended up making better trading decisions than those who were better informed. More information, it turns out, causes investors to place trades more frequently, and these trades end up being counterproductive. Why? Successful stock trading requires investors to be right twice: First, they need to make the correct investment choice, and then they also need to time their trades correctly. In other words, an investor can buy the right stock but at the wrong time.

Andreassen’s research, I think, helps to explain Morningstar’s findings on thematic funds. To make money in the market, it seems like the right thing is to be informed and to make decisions in line with current trends. But for the reasons Ptak identifies, this turns out not to work. In fact, it’s one of the more effective ways to lose money.

What’s a better way to make investment decisions? The research is clear: As intuition would suggest, and the data confirm, the most important decision is the split between stocks and bonds in a portfolio. While “hot” stocks get all the attention, our best bet, on average, is to avoid what’s in the news and instead to focus on the seemingly more mundane asset allocation decision.

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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Mind Over Money

I LIKE TO THINK I'M rational in the way I spend my dollars, and I suspect most readers do, too.

We are, of course, deluding ourselves.

Spending is never simply about buying what we want or need. Instead, behind every dollar that leaves—or doesn’t leave—our wallet is a complex mental dance that reflects how we feel that day, the influence of others, how we want to be perceived, and our own financial history. We might declare that we're using our money to buy happiness. But the truth is far more complicated.

To make matters worse, it can be hard to tease out why we’re behaving the way we are. How exactly are others influencing us? What precisely are we trying to signal to family and friends with the way we use our dollars? Why were we disciplined yesterday but spending impulsively today? Which of our past financial experiences is driving our behavior?

Want to be a little more sensible in how you deploy your dollars? Here are just some of the things that are likely driving your behavior:

Needs. Folks will declare that they need certain items. But our true needs—basic nutrition, shelter, medical help when sick, transport to our place of work—are pretty modest and, if we were inclined to skimp, would likely devour a small percentage of our income.

Wants. Because our “needs” are rarely just that, it’s often hard to separate them from our “wants.” A Caribbean vacation is clearly a want. But what about the imported parmesan that we sprinkle on our salad? It would be hard to argue that it’s merely a cheese that delivers part of our daily protein needs.

Mood. Why do folks spend more freely when they’re on vacation, or splurge when they’ve had a rough day at the office, or treat themselves when they feel they’ve behaved well? Clearly, our mood affects our willingness to spend.

I’m especially intrigued by the idea of a “willpower budget,” perhaps because I see it in my own behavior. If it’s been a taxing day and my willpower is at a low ebb, I’m much more inclined to eat less healthily for dinner and perhaps have that second glass of wine.

Others. Whether it’s the items we buy, the places we vacation or the investments we purchase, we’re often influenced by others, whether we know it or not. We might be responding to a casual comment from neighbors or spurred on by the latest corporate advertising blitz. The danger: We’re nudged into spending money in ways we later regret or that don’t reflect our desires and priorities.

Signaling. Even as we get nudged on our spending, we’re also hoping to influence others. Whether it’s the second-hand car that says we’re frugal or the carefully cultivated garden that says we prize beauty and order, we’re constantly trying to tell the world who we are and what we value. And, no, we don’t necessarily have to spend to get our message across. For instance, simply alluding to our portfolio’s size or our home’s value can boost our standing in the eyes of others.

History. Even as we look to the future, we’re all shaped by the past. My parents and grandparents were all careful spenders, whether out of necessity or because they viewed extravagance with distaste.

This was reflected in the family stories that got told. My paternal grandfather would talk about how he was all but starved by the aunt who raised him. My mother often recounts how the great family fortune was frittered away by the prior generation. My father would regale others with his mischievous penny-pinching, such as how he’d use the facilities at Virginia’s Homestead Resort while staying at a nearby motel.

Security. One of money’s most important roles is to deliver a comforting sense of financial resilience. That, of course, stems from the dollars we opt not to spend. How much do we need to set aside to feel safe? The answer will vary for each of us.

If we’re constantly in danger of getting laid off, it would be rational to keep a fat emergency fund. What if there’s scant risk we’ll lose our job, but we have visceral childhood memories of our parents struggling to find work? A fat emergency fund might not be a financial necessity for us—but it could still be crucial to our peace of mind.

Future self. We use our dollars not just to buy a sense of short-term financial security, but also to give us confidence about the decades ahead. How concerned are we about our future self, and hence how much are we willing to sacrifice today so we can have a more financially comfortable future? This is a puzzling one, with a minority of folks making ample provision for their later years, while most folks put aside surprisingly little, even as they frequently lament their lack of retirement savings.

Legacy. We save money not just for ourselves, but also for future generations—and this isn’t just something the wealthy do. How many retirees view their home’s value as untouchable, because they want at least that money to go to their kids? It’s a sentiment I’ve heard countless times over the years.

Giving. We give not just to family, but also to others, including charitable organizations and our place of worship. I’d never want to impugn the motive of those who give generously. Still, it’s clear that giving can bring as big a smile to the giver as the recipient. Why does generosity make us happy? As with all uses of money, there’s no single answer—and instead, for each of us, the challenge is to understand what drives our own behavior.

Check out the two earlier articles in this six-part series: Money Grows up and Taking Center Stage.

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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