Jonathan Clements's Blog, page 76

Not So Simple

MY WIFE AND I HAVE divided household duties over our 36 years of marriage. I’m responsible for the upkeep of anything mechanical. Lori has the last word on almost everything else. In essence, my wife presides over functions that make the household a “home,” while I take credit and blame for keeping the nuts and bolts operational.

I also hold primary responsibility for trafficking the family’s money. I pay bills, ensure accounts are reconciled, assemble and submit tax information, and monitor financial accounts. Whereas Lori gets to spend current dollars, I’m responsible for tracking past, present and future expenditures.

This isn’t as draconian a split as you might think. We’re on the same wavelength when it comes to saving and spending. Our overall money philosophy is surprisingly similar, which likely contributes to our marriage’s longevity. We share major financial decisions and I readily bounce ideas off her prior to key investment moves.

We discuss things like rebalancing, IRA contributions, and bond and certificate of deposit (CD) purchases and sales. We also discuss strategies to meet our goals, including the best time to claim Social Security. Granted, these are short discussions, yet they keep us moving together toward our financial targets.

A medical emergency last year demanded that Lori take over financial activities during my extended recovery period. We had a few weeks’ notice to prepare, allowing us to review our accounts and cash flow. During this time, we went over monthly and semi-annual bill payments. I made sure Lori was able to access files containing passwords and electronic links. We also examined various financial spreadsheets I’d created.

Together, she relearned how to move money between accounts to keep the household running. I admit it was slow and painful to watch, mostly because it had become second nature for me. Having her perform these tasks was reassuring for both of us. We felt confident she could cope until I was back on my feet.

But there was one major hurdle that my wife had trouble overcoming. It wasn’t obvious to her which funds she should tap for monthly transfers to the bank account we use for paying bills.

I thought I’d simplified our cash flow system as we got closer to retirement. Indeed, I consolidated most of our retirement accounts at a single financial firm, automated payments for major utilities and health care expenses, and ensured that expenditures flowed through a single bank account.

I also created a multi-year cash buffer to minimize sequence-of-return risk once our retirement withdrawals began. This allows me to sleep easier at night, no matter how my Vanguard Total Stock Market Index Fund (symbol: VTSAX) and Vanguard U.S. Growth Fund (VWUAX) are faring.

But the monthly transfers to our bill-paying account were one thing that wasn’t automated. Rather, I simply pulled from different accounts as we needed cash. The sum transferred each month was dictated by a complex mental juggling act depending on which asset class had done well over the prior few weeks.

In addition, I introduced further complexity by adding some new cash buckets: a high-yield savings account and laddered CDs at Ally Bank, Series I savings bonds at TreasuryDirect, and Vanguard Federal Money Market Fund (VMFXX) in a regular taxable account. I also added the Vanguard money market fund to my IRA, so it could receive the income distributions from my Vanguard Total Bond Market Index Fund (VBTLX).

It finally dawned on me that these changes might have reduced risk, but they hadn’t reduced complexity. In fact, figuring out how much to withdraw and from which account is no simple task.

I clearly need to create a detailed step-by-step description of the mechanics involved. This feels like a Herculean task. I’ve decided the first step is to be humble, and ask for help. What would readers recommend as a good, simple strategy for pulling money from long-term investments to pay for upcoming expenses?

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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Where It Nets Out

I SOLD A MUTUAL FUND in my taxable account that was up an average 6% a year over the past 10 years—and ended up with a tax loss. That’s right, I took a loss on this international fund, even though it had returned 6% a year. How does that happen?

Suppose you bought one share of a mutual fund for $12 on Jan. 3. Over the course of the year, the fund’s investments fare well. On Nov. 15, the fund’s shares are worth $14. The manager sells the fund’s winners at a profit. The fund’s shares are still worth $14, but now—instead of the winning stocks—the fund has the cash from selling those investments.

On Nov. 30, the manager declares a $4 capital-gains distribution, payable on Dec. 1. On Dec. 2, the fund’s shares are now worth $10 and you have a check for $4. All told, you still have $14. If you sell the fund on Dec. 2, you’ll realize $10, less than your $12 purchase price. You’ll take a loss of $2, even though your pretax wealth has increased by $2.

All is good—until tax time. That’s when you’ll report the $4 capital-gains distribution that’ll be shown on Form 1099-DIV. The manager reports that the distribution includes $2 in short-term gains and $2 in long-term gains. How can you receive long-term gains when you only owned the fund for 11 months? Whether they’re long-term or short-term gains will be based on when the fund bought the stocks that it sold.

Meanwhile, you will take a $2 loss for selling the fund, which you bought for $12 and sold for $10. Netting all this out, you pay tax on a long-term gain of $2. In effect, your tax bill as a fund shareholder depends not only on the fund manager’s actions, but also on your decision to sell the fund.

IRS rules require mutual funds to distribute 95% of their net income and realized capital gains each year. Funds are pass-through structures for tax purposes. A mutual fund itself doesn’t pay any taxes. Instead, gains and dividends flow through to the fund’s shareholders.

When I started saving 30 years ago, I found dividend reinvestment plans (DRIPs) to be a simple and efficient means to amass shares of individual stocks, including by reinvesting dividends. DRIPs offered low costs and the ability to buy a fraction of a share. Similarly, mutual funds allowed me to reinvest dividends and capital gains with no minimums.

Since then, the cost of investing has dropped and I’ve become more tax sensitive, leading me to invest more in index funds. They have lower turnover, meaning they’re slower to sell their winners, plus they have other methods of reducing their capital-gains distributions.

What do you do if you have a capital gain on a fund that you’d like to sell because it isn’t tax-efficient? First, check that you really have a taxable gain with the fund, by making sure you’re calculating your cost basis correctly. That cost basis would include both your investments in the fund and any distributions that you reinvested in additional fund shares. Funds and brokers have only been required to keep track of an investor’s cost basis since 2010. Their reported number may be different from your actual cost basis.

Next, stop reinvesting fund distributions. Instead, direct those distributions to a more tax-efficient fund.

What if you really want active management? Ideally, you’d invest with the active manager through your IRA. What if you’re considering buying an actively managed fund in your taxable account? Look at the fund’s embedded gains. These are the unrealized gains that will be realized if the manager sells. A fund’s annual report will include information on unrealized gains. Compare these unrealized gains to the fund’s total assets to see how significant they are.

A final tip: If you’re purchasing index mutual funds in your taxable account, look to invest in a fund that has a companion exchange-traded fund—a so-called dual-share-class fund. These funds tend to be especially tax-efficient. Vanguard Group owned a patent on this structure that recently expired, so other managers are now creating dual-class funds, including Morgan Stanley and Fidelity Investments.

Matt Halperin, CFA, is the founder of Act2 Financial , an app that helps seniors avoid financial fraud. For 30 years, he worked as a portfolio manager and risk manager at large U.S. money managers. Matt currently serves on the investment committee of two endowments.  He has a BA and MBA from the University of Chicago, and resides outside of Boston.

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Do Who You Are

THE ONLY DREAM I HAD for my son was that he’d get a job. To most parents, this probably seems like small thinking. Why wasn’t I dreaming of him walking across the stage after earning his medical degree, or walking down the aisle with his new bride, or the joy of him holding his first child? Because that would not be his reality.

It took me a while to accept this. Based on my life, I always felt folks could overcome most obstacles if only they tried harder. I thought my son was no exception. All his mother and I had to do was guide him through his public education and it would all work out.

Well, that was not meant to be.

My wife and I are totally different people. To those readers whose spouse is always on the same page, God bless ya. My wife and I disagree more than we agree. Our saving grace is that we can make each other laugh. This is a blessing, especially when you’re raising a special needs child.

Every time I’d talk about his future career success in a 40-hour-a-week job, my wife would say, “You’re nuts.” She would tell me she sees him working maybe one or two days a week, with the balance of his time in adult daycare centers or volunteering in our town.

This was unacceptable to me. I wanted him to carry his weight in society. I wanted him to contribute to our community. To Republican readers out there, I’m sure this is how you’d like all citizens to live. I can’t disagree. But matters didn’t turn out as I wished for my son.

When he was in our public school system, he was exposed to many facets of education, as all students are. To the students who are destined to go on to college, academics are the focus. To those students who love to work with their hands, trade schools or technical high schools are available.

My son was shown different jobs that they thought he might be able to do. The list was not extensive. It merely consisted of those businesses that the school had connections with. This was referred to as “job sampling.” I thought this was the key to his success and future career. Surely, when employers saw my son in action, they’d jump at the chance to offer him a full-time job after he graduates from high school? That never happened.

There’s a book titled Now, Discover Your Strengths by Marcus Buckingham and Donald Clifton. The premise is, we’re all given gifts and talents by God. If we apply training to these gifts, they will become our strengths. If we seek employment that utilize these strengths, we will have successful careers.

To identify our gifts and talents, we simply need to notice what things come naturally to us. For those who like numbers, maybe a career as an accountant would work. For those who enjoy engaging with and convincing others, maybe a career in sales is the way to go.

In my son’s case, he obsesses over chairs that aren’t pushed into the table after you leave. I thought, “Who does this for a living?” I decided he should become a school janitor. With this new awareness, I asked the school to have my son work with the janitors as part of his job sampling. Made sense to me.

Unfortunately, my son’s skills as a janitor started and stopped with pushing chairs back into place. When you tell my son to wipe down a table, he does it. But for those who expect a thorough wiping, he doesn’t do it. Regardless of how many times you attempt to instruct him on the proper technique for wiping tables, it just doesn’t stick. A career as a janitor was off the table.

In speaking with his school’s job coaches, the one job that he did without prompting or continual instruction was when he worked at a local supermarket collecting shopping carts. His gift was he recognized when a shopping cart was not in its proper place—the shopping cart corral—just like when he saw when a chair wasn’t pushed in.

Eureka. I’d found the perfect job for him. It took us a while to get him that job, but we finally did with the help of Easterseals. Up to this point, he worked in an Easterseals workshop. The workshop paid him by the piece, which is less than minimum wage. These workshops are allowed to pay less than minimum wage because they get an exception from the Labor Department because they’re “employing” people who couldn’t work elsewhere.

The grocery store is considered “competitive employment,” since he would be competing against “typical” workers, not just “special needs” workers. Therefore, he’d be paid minimum wage, which would be far greater than his piecework pay. All looked good—until he started work.

He was good at collecting shopping carts. The problem occurred with the human resource rules—in particular, taking breaks and stopping for lunch. My son can read time, but he can’t measure time. He can read that it’s 3 p.m. But if you tell him we’re leaving in 15 minutes, it doesn’t mean anything to him. Moreover, the store changed his hours every day, so his break times weren’t always the same.

He had an older smart phone that his mother passed down to him. I set up the timer feature on the phone so an alarm would go off at the break times for that day. I gave him a three-by-five-inch index card for that day showing him when his break times and lunch time were. When the alarm went off, he could read the time and match it up to the card to know whether it was a break or lunch. That worked well, except he didn’t have to clock out for his breaks or to go to the bathroom, but he had to clock out for lunch. The problem: He’d forget to clock back in after lunch, thus losing his pay for that day, because it would appear he’d clocked out and left work.

My career dreams for my son came to an abrupt end when COVID-19 hit. His mother didn’t want him to work under these conditions. As much as I hated to see his job end, she was right. As the world quickly learned, people were dying from the virus.

He would never get his job back.

My son is hardly the first person to find it difficult to identify the right job. To those who struggle at work, does the position utilize your strengths? Just because you have the knowledge to do the job, are your gifts being used? Are you a doctor who should have been an artist or a fashion designer who should have been a librarian?

Working a job that isn’t right for you leads to a difficult life. My advice: Don’t swim upstream. Do who you are.

David Gartland was born and raised on Long Island, New York, and has lived in central New Jersey since 1987. He earned a bachelor’s degree in math from the State University of New York at Cortland and holds various professional insurance designations. Dave’s property and casualty insurance career with different companies lasted 42 years. He’s been married 36 years, and has a son with special needs. Dave has identified three areas of interest that he focuses on to enjoy retirement: exploring, learning and accomplishing. Pursuing any one of these leads to contentment. Check out Dave's earlier articles.

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One Life to Live

DURING A GATHERING of retired friends, the topic of wills came up. Many had completed their wills and had their finances in order, while others were working on updating their wills. But there were several who hadn’t even started thinking about it. One of them said, “As a retiree, I’m just starting to enjoy my freedom and have some fun. It’s too stressful to think about death. I’ll get to it someday.”

As you might imagine, prioritizing tasks in retirement is a challenge. During your working years, your boss kept you on your toes. In retirement, there’s no such pressure, unless it comes from you or your family. Things can be put off for days, weeks or even longer.

Life has a way of forcing us to make quick decisions. I saw a friend get a life-changing medical diagnosis. He was given 18 months to live, leaving him scrambling to get his finances in order.

I’d hate to be faced with that sort of stress. How do we get ourselves to take action on important matters once we’re retired? Here’s a thought experiment that helped me: Imagine you’re in your doctor's office and you’re told you have only five months or, alternatively, five years to live. What would you do?

Five months to live: You must focus on the things most important to you. In all likelihood, organizing financial records, updating wills and spending time with loved ones would take priority.

Five years to live: You might have time to do something meaningful. But again, you need to focus on your priorities with a sense of urgency.

This exercise, I found, brings life into sharp focus. It helped me clarify the most important things to do—and I’m now focusing on those things.

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Missing Out? Maybe Not

ARE HEDGE FUNDS a good investment? To answer this question, let’s take a look at three well-known funds. The first is Renaissance Technologies.

Renaissance was founded in 1982 by academic James Simons, who’d been chair of the math department at Stony Brook University and, before that, a code-breaker for the U.S. military. Because he didn’t have a background in finance, Simons instead relied on mathematics, developing the first purely computer-driven trading system.

The result: As his biographer put it, Renaissance “solved” the market. Over a roughly 30-year period through 2018, Renaissance delivered average annual returns of 66%, far ahead of the S&P 500’s 10.2%. When Simons died in May, his net worth was in the billions.

The second fund we can look at is Long-Term Capital Management (LTCM). Unlike Renaissance, the founders of LTCM were all well-known figures in finance. John Meriwether had been vice chair of Salomon Brothers, while Robert Merton and Myron Scholes had been finance professors at MIT. Merton and Scholes later shared a Nobel prize in economics and, for several years, LTCM’s performance reflected this pedigree. Relying on highly engineered bets, mostly on bonds, LTCM’s returns in its first four years averaged 38% a year, about 15 percentage points ahead of the S&P 500. But in 1998, one of the firm’s bets went badly wrong. 

In isolation, a single bad trade wouldn’t have been a problem for Long-Term Capital, but it was highly leveraged and that left it little room to maneuver. Its leverage ratio was 28-to-1, meaning it had borrowed $28 for every $1 it had on hand. Thus, a small miscalculation caused the firm to become insolvent in a matter of days.

Ironically, because it had borrowed so much from so many other Wall Street firms, LTCM was in the “too big to fail” category. Fearing that its web of debt might drag down other firms, the Federal Reserve Bank of New York coordinated a group to take over Long-Term Capital’s assets, allowing for an orderly liquidation. But investors lost essentially everything. That was more than two decades ago, but it remains one of Wall Street’s most notorious failures. The definitive account of Long-Term Capital was titled, fittingly, When Genius Failed.

The third fund we’ll look at is Integral Investment Management. Unlike the group of professors who founded Long-Term Capital, Integral’s founder was more unconventional. Conrad Seghers held a PhD in biology and had only limited trading experience. But his firm got off to a fast start. It claimed not to have had a single losing month and, as a result, “the highest Sharpe ratio in the industry.”

The Sharpe ratio is intended as a measure of a fund’s returns adjusted for its risk level. Impressed by these metrics, investors including the Art Institute of Chicago invested tens of millions with Seghers. But it didn’t end well. Most of the fund’s value vanished in a short time, and Seghers was ultimately convicted of securities fraud.

What do these three funds have in common? Knowing how things turned out, they couldn’t have been more different from one another. But in their early years, that would have been difficult to see. Of the three funds, Renaissance might have seemed the least promising. In contrast to LTCM and Integral, which were fast out of the gate, Renaissance stumbled. In its first year, Renaissance underperformed the S&P 500 by seven percentage points and, in its second year, it trailed by 34 points.

It was only later that investors were able to see the differences—that Renaissance was on its way to becoming the most successful investment fund ever, while LTCM was a house of cards and Integral was a fraud. This highlights one of the key risks of hedge funds. Because they aren’t subject to the same scrutiny as publicly traded funds—and are often pursuing esoteric strategies—hedge funds can be black boxes. Investing, to a degree, becomes an act of faith. This lack of transparency is a key reason I don’t view hedge funds—and private investment funds in general—as a good idea for individuals.

Private funds pose other challenges, too. In general, they carry higher fees and are less tax-efficient than standard, publicly traded funds, such as mutual funds and exchange-traded funds. Private funds also limit withdrawals in ways that can pose challenges to even the wealthiest investors.

But all those challenges with private funds are, to an extent, manageable and might even be tolerable. A much more significant challenge, however, is access. Specifically, the best funds aren’t open to individual investors. That’s because of their structure. Private funds are eligible for a valuable exemption from registration with the Securities and Exchange Commission, but only if they have fewer than 100 investors. As a result, funds with strong track records can be choosy about who they allow to fill those 99 slots.

Typically, private funds favor investors able to write the largest checks. More often than not, that means university endowments and large foundations are first in line. Individual investors, even if they can write six- or even seven-figure checks, have a hard time competing with institutional investors who can afford to put $10 million or more into a single fund. Thus, individual investors who want to invest in private funds are, almost by definition, relegated to inferior options. By contrast, the best-performing publicly traded funds are typically always open to new investors.

This issue is compounded by another difference between public and private funds: The performance gap between the best and worst private funds is much wider than the corresponding gap between the best and worst public funds. To put it another way, for all the hand-wringing over the differences between high-cost actively managed mutual funds and low-cost index funds, that difference pales next to the differences between the best and worst private funds.

In a study by the investment firm Blackstone, the annual performance difference between top-quartile and bottom-quartile public funds was less than two percentage points. But the difference between the best and worst quartile private funds was significantly wider—as much as 15 points. Cambridge Associates, a consulting firm that advises on private funds, describes the dispersion among private funds as “immense.”

That dispersion gap is, in my view, the most important reason individual investors are best served by sticking with publicly traded funds. As I’ve noted before, there’s nothing wrong with a simple portfolio. And, as the above data show, it’s likely also the better way to go.

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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Sailing Away

I HAVE A FRIEND—we'll call him Dave—who retired from Wall Street perhaps eight years ago, when he was in his early 50s. Soon after, he designed a sailboat and had it built, and he’s been sailing around the world ever since. In fact, judging from his Instagram updates, Dave is now on his second or third self-designed boat. Or is it a yacht? I don't know anything about sailing.

At this point, you may be sighing with envy. But ask yourself: Would you actually want that life for yourself? 

If your answer is, "I just want to be rich enough to do whatever I want," I get it. But just for kicks, let's examine this question a little more closely. 

Dave is obsessed with boats. When he designs them, he doesn't just make a pretty drawing and throw some money around. He’s deep in the weeds on every detail, from technical specifications to the brand of winches to the colors of the rig lines. He mostly either lives on the boat or visits his friends' boats. He has other interests, like bike racing, marathons and military history, which keep him busy even when he's alone in a new state or country. 

Here's the thing: When Dave retired, he knew he wasn't simply walking away from a career that was core to his identity. Rather, he was walking toward something new and exciting that he’d been pondering in detail for some time.

Along these lines, Morningstar recently published a study about setting financial goals. When participants were asked an open-ended question about their long-term goals, their top three answers were owning a home, retirement and travel, followed by "being able to afford small luxuries," which came in a distant fourth. Pretty predictable, right? 

Then it got interesting. When participants were presented with a new version of the question, in which they were nudged with a pre-set list of 17 goals they could choose from, including the ones above, almost 75% changed their answers. The new top three were living a healthy lifestyle, donating to charity and having meaningful hobbies, with "having fulfilling work" sitting a distant fourth. It seems we’re less clear on what we want than we imagine.

Coincidentally, I read a beautiful, compassionate essay this week by Carrie Ditzel, a geropsychologist—a psychologist who specializes in older people—titled How to Feel Less Lonely as You Get Older. She cites the well-documented issue of loneliness among older adults, but suggests that loneliness isn’t inevitable if you have the right mindset.

Unsurprisingly, much of her advice aligns with what we already know about the importance of social connections to our mental health—that we should nurture relationships, cultivate hobbies, participate in our community, establish a daily routine, give back by volunteering and donating, and exercise, even if our mobility has declined.

Perhaps at this point you're rolling your eyes and thinking, "Yeah, sure, like I have time for hobbies." Or maybe you’re saying, “Excuse me, I'm still in my prime, why should I be thinking about this?" Again, I get it. But planning ahead is helpful, even if your kids are still little or even if your career is still thriving. 

Saying "someday I won't have to work, and I'll have money to do whatever I want" is pretty vague. Moving to the South of France sounds great, but unless that idea is accompanied by specific things you’d do there—learn French, open an American bar, write your memoirs—and by strategies for making friends, you’d probably end up bored and sad, even if you have loads of money. 

In addition, having an idea of how much your future life will cost, and whether you'll potentially still be earning some money, helps clarify how much money to save and how long you'll need to keep working. It can also help you identify the skillsets and connections you might want to start developing. 

It's common to look up from our insane to-do lists and suddenly realize we haven't managed to cultivate outside interests. Here are three ideas for how to identify possible hobbies that could turn into regular social activities once you have more time on your hands: 

Evaluate what you already enjoy, and explore how to move from passive to active enjoyment. A foodie might take a culinary course, a sports fan could join a local league, an art lover can learn to paint, a pop-culture aficionado can join a trivia team and animal lovers might try volunteering at a shelter.
Revisit things you used to love when you were younger. Refresh your dance skills if that was your thing. Join a knitting club if you used to be into arts and crafts. Perhaps pick up your dusty tennis racket or your old guitar. 
Make a bucket list, and choose something that would require regular practice or comes with opportunities to meet others. That might mean joining a running club, foreign-language conversation group or photography club.

Last week, I exchanged messages with Dave. He told me he misses work and the camaraderie of the trading floor, and that he now basically works full-time to find other things to fill his life. Luckily, he considers fitness and sailing to be rewarding both mentally and physically, so that's what he focuses on, treating them as full-time occupations.

It's probably no accident that both of these "hobbies" are quite social and have given him a global community of new friends that share the same interests. To be clear: Financial security has given Dave the freedom to live a life he enjoys. But it took more than money to get there.

Alina Fisch is the founder of Contessa Capital Advisors , an independent fee-only investment advisor. She’s worked in financial services for more than 25 years. Her focus today is on helping single and divorced women with their finances, a topic she also loves to write about. In her free time, Alina is an avid reader, animal lover, hiker, traveler and vegetable farmer.

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Confusing Ourselves

I'VE OFTEN BEEN TOLD that I’m too direct. To me, “direct” means to focus on the facts, get to the point, eliminate the fluff, keep matters as simple as possible.

Guilty as charged.

Think of all the time wasted by fluff. After making something more complicated than necessary, somebody is ready to provide a solution to what may or may not be a problem. Fluff thrives on confusion. It can scare folks unnecessarily. Most Americans don’t know how to deal with financial fluff. A recent survey proclaimed that 43% don’t even know what a 401(k) is.

Retirement planning is too complicated. Did you run a financial analysis before getting married or having your first child? I suspect you made those major life decisions without a detailed budget or a professionally crafted spreadsheet, and—even if you were so obsessive—you likely ignored the depressing results and just went ahead.

Search the internet on the retirement topics below. You’ll find so many different opinions that it’s hard to know what the right answer is.

Can I retire on $1 million?
Is 4% the right withdrawal rate?
Which assets should I spend first in retirement?
Will I run out of money?
Do I need a budget?
How do I offset inflation’s impact?
What percentage of my working income do I need to replace in retirement?
When should I begin Social Security?
Will my expenses go down in retirement?

You can get answers to all of these if you make assumptions, but those assumptions will often turn out to be flawed. Facebook groups are full of posts by folks who can’t understand the results generated by retirement planning software.

Can a person retire comfortably with $1 million? Sure, but most don’t. You can find people demonstrating how it is indeed possible, but they often fail to ask about the retiree’s desired lifestyle. A recent article in USA Today says Americans think they need $1.47 million to retire. Based on what? Millennials apparently believe they need $1.65 million. A Schwab survey says $1.8 million. Meanwhile, less than 1% have $1 million in their 401(k). Want to know how long $1 million will last based on where you live? You can find the answer here.

If you earn $75,000 and feel you can live on 80% of that amount, your goal is $60,000. Social Security at full retirement age in 2024 is typically about $24,500, so that leaves you to generate $35,500. Using the 4% rule, you need to accumulate $890,000. Using Fidelity Investments' annuity calculator, a 65-year-old man could generate that income with an investment of some $600,000, including a return of unused funds and 2% annual income increases. But is 80% the correct number?

And how about that 4% withdrawal rate? Again, it’s all about assumptions. The experts seem to know the right number is between 3% and 5%. But for a more precise answer, it helps to know at what age you’ll die and what type of investor you are.

On one of the Facebook groups I frequent, the fluff is rampant. Among the suggested withdrawal strategies: Use a fixed percentage, incorporate something called guard rails, just take what you need each year for expenses, only take required minimum distributions. Then there's something called the Guyton-Klinger method, where you adjust annual withdrawals for inflation, but only in positive investment years and no more than 6%, plus a few more fluff rules. There are also portfolio management rules, including drain from overweighted assets, plus other complicated procedures. Suze Orman says just take the least amount possible. Now, that’s helpful.

Meanwhile, there’s no mention of buying an immediate fixed annuity.

Is there a right or wrong strategy? Probably not. But this fluff is way too complicated for the average person.

Will you run out of money? Monte Carlo calculations might show you’re good through age 95. Your portfolio might even grow. But doesn’t all this depend on the accuracy of your assumptions? There’s always the “cut back spending” strategy if Monte is wrong.

Do I need a budget? If a budget makes you happy rather than stressed, go for it. But I wonder: Is the withdrawal strategy built to match the budget, or is the budget determined by the amount that can be prudently withdrawn?

You need an understanding of how spending might change during retirement. When it comes to planning for health care spending, the big whammy always noted is long-term-care (LTC) costs. How real is the risk, and should we assume in-home care or institutional care?

Most LTC is provided in the home, often by family members. Only 2.3% of the elderly live in a nursing home, but many more require care at a facility for short periods. I’d encourage you to work through the fluff. For instance, rather than assuming that assets will be drained, calculate how much of your care might be paid with the income stream you’re already receiving—and keep in mind that, at that juncture, you won’t have travel costs, eating out and many other discretionary expenses.

Coping with inflation generates some creativity from those planning their retirement. One Facebook commenter suggested shopping at stores like Costco. Another said the secret was to move to Southeast Asia. One risk taker was inclined to simply invest more in stocks. My favorite comment: “When I retired, I was offered a $1,000-a-month pension with no cost-of-living adjustment. Instead, I took a lump sum payment and invested it in large-cap growth index funds. Has worked well so far.” I hope that “so far” continues.

What about the percentage of preretirement income needed once you’re retired? There’s no one answer. It all boils down to lifestyle, especially discretionary spending. Are you willing to retire, even if it means cutting back?

Discussions of when to begin Social Security seem endless. YouTube is full of suggested strategies. Lots of fluff here. Experts say delay to age 70. You maximize monthly benefits. But for most people, how practical is it to delay that long? My suggestion: Take your benefit when you need the income, and don’t worry about that breakeven fluff.

Will my spending go down in retirement? The experts say no, yes and then no. They call it the retirement spending smile. It parallels the go-go, slow-go and no-go retirement years.

Connie and I should be in our no-go years, but we’re fighting it. If our spending is declining, I need help finding out where. It sure isn’t our homeowner’s insurance, which just went up more than 20%. Our homeowner’s association fee and property taxes are also rising. I just bought some homemade candy. Two years ago, it was $18 a pound. This week, it was $30. No, I’m not cutting back.

My advice: Clear away the fluff. Keep things as simple as possible. Don’t plan on spending less during retirement. Build a steady, guaranteed income stream to sustain your lifestyle. Have a plan to deal with inflation and unexpected spending.

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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Getting Along

ONE OUT OF SIX of our nation’s children lives in a blended family, with 40% of today’s marriages defined as blended, meaning that one or both spouses had been previously married. I live in one of those blended households.

Three decades ago, the data on children from “broken families” weren’t encouraging. I can happily debunk that early data, which didn’t give our family much hope. My two exceptional stepchildren, and our biological daughter, are all productive and contributing adults. Thirty years after we married, Barb and I often reflect on our good fortune.

Still, what families—blended or not—don’t know is whether the children will get along and behave after the parents pass on. Is there a clear estate plan in place, are the beneficiaries aware of their parents’ wishes and will they be honored? Have the parents sat down and described their expectations in honoring their wishes for property, assets and personal effects? I would encourage you to do so.

Rick Connor, a frequent contributor to this site, recently reflected on his legacy and contribution. As a fellow aging boomer with his 70th birthday under his belt, I can happily empathize. Professionally, I know of too many circumstances where wishes have not been clearly stated, estate plans left unattended, and feuds or skirmishes have arisen over money or possessions.

I even know of one family where a half-brother openly extorted funds from his half-siblings, despite the estate plan created by the departed generation. Money and possessions often bring out the worst in people, when the circumstances should bring out the best.

Are Barb’s and my wishes clearly stated and memorialized? We think so, and we expect our offspring and blended family to “play nicely in the sandbox” when we’re gone. Are there any guarantees? No. But we did include a provision in our estate documents that, if anyone questions our intent, he or she runs the risk of losing out on any inheritance. And while we’re still around, perhaps for a decade or two longer, we’ll continue to make clear our expectations for when we’re not here.

If you’re a member of this blended demographic, I encourage you to take the time to plan, memorialize and discuss your plans. That way, you’re less likely to leave a mess when you become a memory on the wall.

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Seeking Shelter

YOU'VE HEARD OF asset allocation. But how good are you at asset location?

On that one, I’d have to give myself a failing grade, but I hope to pass the test someday. I’ve realized I could save myself hundreds of dollars a year in taxes by relocating much of my safe money to tax-advantaged accounts, while being more aggressive with stocks in my taxable account. Those moves would leave me with the same overall stock allocation, so my risk profile wouldn’t be much different.

In some ways, I’m a cautious investor, especially when it comes to my emergency fund. I’ve got a hefty allocation to stocks—currently about 70%—but I’ve also got a year and a half of living expenses in individual Treasurys, a certificate of deposit (CD) and money market funds. I figure my fixed expenses are $5,000 a month, so that’s $90,000 in safe money sitting in my taxable account.

With current short-term interest rates over 5%, my conservative stance is raking in some good bucks, but it’s too much safety and too much taxable income. One reason it’s so much: I’m trying to save up five years’ worth of portfolio withdrawals in bonds and cash by the time I retire. At that point, with Social Security benefits of more than $2,000 a month, I reckon I’ll need just $3,000 monthly from savings to maintain something like my current lifestyle. The cash cushion I’m accumulating will protect me from a prolonged bear market.

Intuitively, you might think emergency funds don’t belong in retirement accounts, which experts say should be invested for long-term growth. After all, who wants to raid an IRA to pay bills before they retire?

But the truth is, not all good investment advice is good for all people all the time. I’m over age 59½, so I can withdraw from my retirement accounts without penalty. Moreover, the only way I’ll need to draw heavily on my emergency fund is if I lose my job or am unable to work for an extended period. In that case, I’d be in a lower tax bracket, so pulling funds from an IRA wouldn’t have onerous tax consequences.

I got the novel idea of keeping my emergency money in my IRA from HumbleDollar’s editor. He advocates keeping tax-inefficient, interest-generating investments in tax-sheltered accounts, while going heavier on stocks in taxable accounts.

My first reaction to the suggestion: What if an emergency occurs when stocks are down? I could be selling in a bear market just to buy groceries and pay rent.

But here’s the trick: Yes, in my taxable account, I might find myself selling when stocks are down. But I can swap an equivalent amount from conservative investments to stocks in my tax-advantaged accounts, so my overall asset allocation stays the same and I don’t miss any recovery in the market.

Some suggest going as low as three months of living expenses in a taxable account. I’m more comfortable with at least six months’ worth—big, unexpected expenses can still crop up even if I don’t lose my job. But that still gives me a lot of room to increase my stock allocation in my taxable account, while correspondingly boosting my cash and bond holdings in my IRAs and 401(k).

How much is at stake? Suppose I reduce my emergency savings in my taxable account to six months’ living expenses, or $30,000, from the current $90,000. I could rearrange my asset location and thereby shed $60,000 of interest-bearing cash and bonds in my taxable account.

With 5% currently available on short-term Treasurys, CDs and money funds, I’m paying a 22% income tax rate on the $3,000 annual interest from that $60,000, or $660 per year.

Yet, if I took that $60,000 and invested it in a broad U.S. stock market index fund in my taxable account, I’d pay just a 15% capital gains tax rate on the 1.4% dividend yield. That’s just $126 in taxes per year, for an annual savings of $534.

Of course, eventually I or my heirs will owe taxes on withdrawals from my traditional IRA. But that could be at a lower tax rate and, in any case, it’s potentially many, many years down the road.

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on X @BillEhart and check out his earlier articles.

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Fish and Grits

MY RETIREMENT BUCKET list includes long drives across the U.S. in search of the unexpected.

Such trips appeal to my frugal nature. As a rule, the total cost of gas, hotels and meals is usually less than the total for roundtrip plane tickets, airport parking fees and baggage expenses. This might not be true for single travelers. But it’s a guideline that works for my wife and me.

We typically pack peanut butter and jelly sandwiches, fruit, drinks and cookies for roadside breaks, thus limiting our meal costs. Still, I love stopping at random eateries in small towns, filled with locals willing to share stories and tall tales. Indeed, I know my desires well enough, to the point where I snuck a small line item into our travel budget for “whim eating adventures.”

Recently, Lori and I drove from Texas to visit my mother on Florida’s west coast. It was a two-day venture that took us across rivers that were difficult to pronounce, and through places that were even harder to spell. We had no set itinerary. Rather, we simply wished to enjoy the sights along the way.

We stopped close to midnight halfway across Mississippi, finding a place to stay on the shoreline of the Gulf of Mexico, outside a postage-stamp-sized town whose name screamed for another vowel. We awoke hungry and searched for an inexpensive breakfast place before starting the second leg of our drive.

I punched the word “diner” into my iPhone. To my chagrin, there were no hits. Undeterred, Lori entered “cafe.” Lo and behold, 14 entries appeared, which was odd since the town’s population on a roadside sign was listed at just 18,387. No matter.  Perhaps we stumbled into a well-to-do suburb of Biloxi, rich in history and culture. More likely, there was a culinary training institution nearby, and the cafes catered to high-rolling casino visitors.

We picked a cafe with an engaging name, input the address into our driving app, and left with an appetite whetted for a meal filled with conversation and local food. We drove past homes with classic white pillared southern-style porches and perfectly arranged sugar magnolia trees, the beauty of which we missed during the previous day’s nighttime arrival.

My inner frugal spidey sense immediately tingled upon entering the establishment. A well-coifed hostess seated us at a marble-topped table. A waitress wearing Prada soon appeared with a glossy menu sporting breakfast entrees with fancy descriptions. While I was certain that their baked avocado and ricotta pancakes were scrumptious, all I wanted was a strong cup of Joe, sunny-side-up eggs and some cheese grits. You can always judge a breakfast establishment by the quality of its grits.

I should have listened to my gut and politely left to find a cheaper breakfast emporium, yet my empty stomach growled loudly in a forceful language all its own. Our server answered our questions politely, but was definitely not the garrulous type. Try as we might, we simply couldn’t engage her in meaningful conversation. We each ordered an overpriced omelet and biscuit. I had a mocha latte, while my wife had a chai tea.

Overall, the food was pleasant, although I left with a slightly sour taste in my mouth. I was aghast when the bill arrived, which included an opt-out box for a suggested 25% tip. There was also a 2.5% credit card convenience fee. The total represented more than our entire day’s food budget. I was physically satiated but disappointed. This place certainly didn’t satisfy my bucket list desire.

We had better luck on the trip home. We arrived at our hotel in Tallahassee, Florida, just as the late afternoon rush hour traffic was abating. Hungry and exhausted from traveling, we asked the desk clerk about local eateries. She handed us the hotel’s printed list. But then, almost as if taking pity on two weary travelers, she leaned over the counter and shared that there was a special place right across the street.

We gambled and took her suggestion. The first hint we’d hit pay dirt was the parking lot. A majority of the cars were as badly in need of a wash as our aging Honda CR-V. A pleasant vibe and conversational hum welcomed us. The place was full but not overcrowded. The staff sported well-worn and faded T-shirts adorned with the restaurant’s logo, which juxtaposed two energetic-looking fish caricatures.

The cashier called my wife “honey” and directed us to sit at any empty table. As we settled into a spacious booth, we heard several waiters greet locals by name, who reciprocated by peppering the servers with questions about their family.

The menu was simple: six types of fish prepared battered and deep fried, blackened or grilled. Each entrée came with two side orders and hush puppies. For those in the know, such as my wife who was raised in Louisiana, hush puppies are basically deep-fried cornbread balls. I grew up in Pennsylvania. There, Hush Puppies were a brand of shoe.

Our waitress wondered if we had questions about the menu or if we needed more time before ordering. I asked about the fish and grits. Her eyes sparkled, as if I’d stumbled upon a hidden gem only truly appreciated by regulars looking for fortification before starting their night shift. With an infectious grin, she asked if I wanted my base plain or cheesy.

I ordered blackened trout over cheese grits, accompanied with sides of homemade coleslaw and applesauce, plus a bottomless glass of iced sweet tea to wash it down. The second time she returned to our table, we struck up a conversation and shared tidbits about life in general. She was a November baby, loved the cold, and was going camping the following weekend. More important, we learned she was working her way through community college, earning a degree in hospitality administration and management. She treated us like regulars, letting her guard down to make us feel welcome.

The food nourished both our bodies and our souls. The price for two dinners, including a hefty tip for our waitress, was substantially less than the breakfast mentioned above. On a whim, I slipped an extra Jackson under my plate, our small way of supporting a working gal’s education dreams.

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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