Jonathan Clements's Blog, page 76

Getting Going

WITH THE ADVANTAGE of advanced age and flawless hindsight, I now believe the three most important contributors to retirement prosperity are a robust savings rate, an aggressive allocation to stocks and funding tax-free accounts, both Roth and health savings accounts (HSAs).

What about other financial factors, such as the investments we pick, whether we buy income annuities, when we claim Social Security and what Medicare choices we make? These matter on the margin, but I don’t think they’re as crucial to a successful retirement.   

My three key contributors to a financially comfortable retirement are, I believe, especially critical in our early adult years. At that juncture, young earners have a long runway to capture the benefits of compounding, an aggressive stock allocation comes with relatively little risk and their low marginal tax rate makes tax-free accounts particularly appealing.

Save big early. I’d argue that the FIRE movement—financial independence, retire early—promotes a level of frugality that’s too extreme and that its “retire early” concept is unnecessary for most folks. The usual recommended savings rate of 10% to 20% of income is far more palatable than FIRE’s 50% to 70%.

Still, FIRE’s emphasis on saving early in life is spot on. My children’s small Roth contributions when they were 15-years-old will likely deliver more bang for their retirement buck than maxing out their 401(k) contributions at the end of their career. Similarly, a number of my wife’s and my early investments, made during the 1970s and 1980s, are now 20-baggers or more.

We tend to zero in on our retirement finances during our later working years, as we approach retirement. At that point, we also often have ample discretionary income to ramp up savings. The 401(k) and 403(b) rules even allow extra contributions after age 50, appropriately named “catch-up” contributions. But while such late-stage savings are good, incrementally higher savings rates during the first 30-years are a far more powerful contributor to investment compounding.

Go all stocks. Along with paying off personal debt, establishing an emergency fund and purchasing a primary home, those in their 20s, 30s and 40s also focus on stashing their savings in stocks and bonds, with an eye to reaping the rewards of compounding.

Stocks are clearly more volatile than bonds, but I’d argue they aren’t very risky if we’re investing for the longer-term. In fact, stocks are undefeated over 20-year time horizons and have always scaled investors’ “walls of worry.” This is nicely reaffirmed by financial writers Nick Maggiulli and Sam Ro.

Over our lifetime, we’ll encounter financial risks that can be more damaging than the occasional bear market, including decades of inflation, a surprisingly long retirement, health issues, getting laid off, forced early retirement, increased tax rates and all sorts of family challenges.

My contention: Young workers should maintain an aggressive tilt toward stocks, preferably using index funds, and even consider a 100% stock allocation if they can stomach the volatility. As Teddy Roosevelt once stated: “Old age is like everything else. To make a success of it, you’ve got to start young.”

Fund Roths and health savings accounts. We boomers didn’t have Roths or HSAs until the end of our careers, plus the Roth IRA’s income limits often stymied our ability to play. By contrast, today’s younger workers can profit by funding these tax-free accounts during their career’s early low tax-rate years. Roth accounts are winners when retirement tax rates end up being higher than those during the contribution years.

Today, 90% of workplace savings plans offer a Roth option, plus individuals can fund Roth IRAs up to $7,000 a year if they fall below the income thresholds. Meanwhile, more than 50% of employer benefit plans offer HSAs, the only savings vehicle that offers both tax-deductible contributions and tax-free withdrawals.

Over our lifetime, many of us suffer tax-bracket creep. Like me, retirees are often surprised to discover that their marginal tax rate easily exceeds their tax rate early in their career, especially once required minimum distributions start. On top of this, government deficits are growing and Social Security will require additional funding, so there’s a decent chance that tax rates will climb.

For those in the workforce, if tax rates rise or their own marginal rate increases, they can always redirect new savings from Roth accounts to traditional, tax-deductible retirement accounts. What if their tax rate declines once they retire? They can again look at funding Roth accounts, but this time via Roth conversions.

For today’s retirees, it may be too late to take advantage of the above three strategies. But we can still promote these strategies to our children and grandchildren, and maybe even help fund their accounts. Do your adult children need financial guidance to help them get going? Here are four websites I like: OfDollarsandData, AffordAnything, YoungMoney and Kyla’s.

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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Better Than Ever

MY WIFE WENT TO New York for five days with a friend. I don’t mind because I could use the rest. Over the past year, we’ve traveled from the West Coast to Europe three times, flown across the country to visit my sister and brother-in-law in Tennessee, and taken a number of car trips.

My wife loves traveling and has a lot of energy. Because of all the air miles she’s logged, she’s now qualified for United Airlines Premier Gold status. She can board the plane early and get a free economy-plus seat with extra leg room. These benefits also apply to me when we’re traveling together.

If we were a younger, working couple, I might not be as enthusiastic about my wife traveling with her friends, while I’m doing my own thing. But we still have plenty of quality time together and, at our age, I like that she has friends she can turn to if something happened to me.

There’s also an age difference between us. At 73, I’m six years older than Rachel. That might not sound a lot when you're in your 40s or 50s. But as you grow older, that six-year gap can seem significant. I realize there’ll come a time when I might not be able—or willing—to keep up with my wife.

I walk about seven miles most days, do weight-bearing exercises and try to make good food choices. But there’s only so much you can do to slow down Father Time.

You can hit a wall where your mobility declines fairly quickly. After my father passed away, I would take my mother to Georgia to visit her family. We would fly into Atlanta, which is a large airport. It required quite a bit of walking to get to the rental car agency. But my mother made it easily. The next year, she couldn’t walk the whole distance without sitting down to rest. The third year, she needed a wheelchair.

You might think that I’m not thrilled about being a senior. That’s the furthest thing from the truth. I like my age. I think my wife and I enjoy a better life at our current age than we would if we were young again. Here are four ways life is better as an elderly person:

1. Better housing. I’ve mentioned before how much I love where we live. We were lucky to inherit our home from my parents. It’s in a great neighborhood with a lake, parks and an abundance of trees in one of California’s safest cities. It attracts many families because of the excellent school system and a thriving job market.

Unfortunately, the price of housing has skyrocketed. It’s gotten so bad that, according to a poll reported in the UC Irvine News, high housing costs were the primary reason a third of residents are considering moving out of Orange County, with the cost of living a close second.

We’d probably be one of them if we were younger. I can’t imagine our younger selves being able to afford a home, which costs more than $1 million on average in our community. Even if we could, I think our frugality would get in the way.

2. Better equipped to deal with inflation. I complain a lot about the high cost of groceries, insurance, gasoline and all the other stuff we need or enjoy. But the truth is, these higher prices haven’t affected us like it would if we were younger.

All those years of saving and investing have allowed us to build a nest egg large enough to thwart inflation’s effects on our lifestyle. We still travel, attend concerts and eat at our favorite restaurants.

3. Less stress. I can still remember the first day I was retired. That morning when I woke up, it felt like a 50-pound weight had been lifted off my shoulders. I felt so relaxed.

No more unrealistic deadlines, unruly coworkers, 12-hour work days, battling morning and evening rush hour traffic, sleep deprivation and money worries. All the things that can stress you out.

Now, I can choose who I spend my precious time with. I can enjoy the day, while many folks are stuck at work. I can get plenty of sleep and even take an afternoon nap. More important, the days of saving and worrying about whether we’ll have enough for retirement are over. Now, we can relax and know all our hard work has paid off.

4. Sense of accomplishment. I don’t think I ever felt more satisfied with myself than I do today. When I was younger, most of my accomplishments were derived from my job.

But now that I’m retired, I realize those work accomplishments aren’t as important as some of the things I’ve done since retirement. I take great pride in having cared for my elderly parents during their time of need, and in helping make my wife’s life more enjoyable and less worrisome.

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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Whither Taxes?

IN WASHINGTON, 2025 is beginning to look a lot like 2017. Republicans again control the White House, the Senate and the House of Representatives. But a key difference between then and now is that today the Republican majority in the House is far narrower.

This means more negotiation will be required, and agreement on a new tax bill may take months. In the meantime, here are some key areas that investors will want to keep an eye on.

Income tax rates. The 2017 Tax Cuts and Jobs Act (TCJA) cut ordinary income tax rates virtually across the board. A key feature of that legislation, however, was that the cuts were temporary. They’re set to expire at the end of this year. That’s why, in a recent interview, incoming Treasury Secretary Scott Bessent noted that his top priority is to maintain the current rates and ideally to make them permanent. This will likely be the centerpiece of any new tax package.

SALT cap. The TCJA cut rates and, at the same time, broadened the income ranges covered by each bracket. Consider a married couple with gross income of $400,000 in 2024. In the absence of the TCJA, that couple would have been squarely in the middle of the 33% bracket. But with the benefit of the TCJA last year, that couple landed in a far lower 24% marginal bracket. But to help pay for those substantial cuts, the 2017 law imposed a new restriction that, for some taxpayers, resulted in a tax increase.

Prior to 2017, state and local income taxes—often abbreviated as SALT—were fully deductible, providing an enormous benefit to those with higher incomes. But since 2017, the SALT deduction has been capped at $10,000. As a result, it’s not uncommon for those with higher incomes, or with high real estate taxes, to lose tens of thousands of dollars in deductions.

For that reason, the SALT cap is extremely unpopular, and it’s seen as unfair, penalizing those who happen to live in high-tax states. Compounding the unfairness, some states have enabled a workaround to skirt the SALT cap, while others haven’t. That’s why congressmen like Rep. Mike Lawler of New York have already begun lobbying for a change.

If the TCJA is extended, Lawler has proposed that the cap be raised from $10,000 to $100,000 for individuals and $200,000 for married couples. Other proposals are more modest, but the SALT cap is clearly a key focus. As Andrew Garbarino, another New York House member, put it, “There’s about five or six of us that will die on this hill.”

That means they may have significant leverage, since the Republican majority in the House may be no more than five seats. Representatives from higher-tax states have wasted no time reminding the incoming administration that when the TCJA first passed, 11 Republicans voted against it, largely because of opposition to the SALT cap. It seems likely that any new tax bill will include at least some relief in this area.

The implication for taxpayers: If you have significant state or local taxes, a change to this provision might deliver a meaningful benefit as soon as this year, and that might change the calculus on tax strategies such as charitable giving. Of note, high-income taxpayers who haven’t been able to itemize deductions in recent years may be key beneficiaries of a change to the SALT rule.

Social Security. An unwelcome surprise for many taxpayers is the fact that Social Security benefits are often subject to tax. For individuals with so-called combined incomes north of about $34,000 or couples with incomes over $44,000, the IRS taxes 85% of Social Security checks. One of the new administration’s more popular proposals is to make Social Security entirely exempt from tax. Unlike the SALT cap, this is one that cuts across geographies and party lines.

The only downside is that the cost would be significant because Social Security is such an enormous part of the federal budget (about 22%). There’s only limited appetite in Congress for further ballooning the country’s debt load. But this is another provision to keep an eye on this year. If it does pass, it would be of particular benefit to those in retirement who regularly complete Roth conversions, because it would provide room to complete larger conversions in any given tax bracket.

Spending cuts. How will the government pay for these potentially expensive tax cuts? The new administration has ambitious plans to cut spending. To that end, a new Department of Government Efficiency will soon open its doors. Scott Bessent, the incoming Treasury secretary, has said that his goal with spending cuts isn’t just to pay for new tax cuts but to also reduce the government's deficit. His target is to cut the deficit in half.

If this can be accomplished, it would likely have salutary effects on investment markets. Smaller deficits would allow the government to pay lower rates on new debt offerings, and these lower rates would ripple through the economy, bringing down everything from credit card to car loan to mortgage rates. And lower rates generally provide a lift to stock prices.

A smaller deficit, therefore, should be a welcome development. On the other hand, if the government tightens its belt, the effects might not be all positive. Unemployment could tick up, and certain businesses could see their revenue hurt. It’s too soon to tell how the effects will net out, so this is a reason to remain diversified—both between stocks and bonds and within each asset class—and to avoid trading based on expectations.

Tariffs. As I discussed a few weeks back, the Trump administration’s proposal to increase tariffs has been met with raised eyebrows. That’s because there’s near universal agreement among economists that tariffs aren’t a good idea. They cause prices to rise and result in what’s known as “deadweight loss” to the economy. But Bessent argues this view is too simplistic.

For starters, he points out that imports make up only a small slice of consumer spending—just 10%, he says, though others argue that it’s higher. Second, any price increases would be just one-time increases, since tariffs wouldn’t necessarily rise every year. Also, if foreign producers want to remain competitive in the U.S. market, they might cut their own prices, thus moderating the impact on consumers. Finally, Bessent notes that the dollar might strengthen, further offsetting the effect on consumer prices. In other words, we shouldn’t worry that tariff increases are guaranteed to result in the inflation that many fear.

Estate taxes. A final area where there’s likely to be horse-trading this year: potential changes to the estate tax. A generous bump in the lifetime estate-tax exclusion is scheduled to expire at the end of this year. This appears to be another area where the new administration would like to take uncertainty off the table by making the current rules permanent.

A key challenge, however, is that no legislation is ever truly permanent and, because the estate tax is a political football, it’s volatile. It can change with each administration. Ultimately, the only rate that matters is the rate that’s in effect in our own final year. That’s why, even if current estate-tax rules are extended, it’s still worth keeping ongoing tabs on the developments in Washington if your assets fall somewhere between the old limit and the new one.

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 Center Stage

IT'S THE ONE ASSET we’re all born with, and it pretty much defines our financial life. I’m talking here about our human capital, our ability to pull in a paycheck.

That paycheck—or the lack thereof—drives our ability to save, service debt and take investment risk. It also dictates our insurance needs and how much emergency money we should hold. Put it all together, and our human capital should arguably determine how we manage our money over our lifetime.

Let’s start with our early adult years, which are often marked by substantial borrowing as we pay for college, buy that first car and purchase a starter home. Yes, the amount of debt involved can be frightening, and we should be careful not to overdo it.

Still, borrowing in our 20s and 30s is often a rational strategy, allowing us to jumpstart our financial life. After all, if we couldn’t borrow and instead had to pay cash for college or for our first home, many of us would have to spend a decade or two scrimping and saving before we notched those two milestones.

Indeed, borrowing to pay for college or technical training can be a smart investment because it can greatly boost our human capital's value. One obvious payback: The resulting larger income will allow us to save more each month. The goal: amass enough money so one day we can live solely on our financial capital—and we no longer need the income generated by our human capital.

Human factor. How should we invest our savings? We might view our human capital as similar to a bond with its predictable stream of income. That regular income frees us up to invest heavily in the stock market. How much of our portfolio should we stash in stocks? We might ask ourselves three questions.

First, how stable is our job? The more secure it is, the more we could potentially invest in the stock market, knowing it’s unlikely we’ll need to tap our portfolio to pay for a long period of unemployment. Second, how much will we likely save in total between now and when we retire? We might view those future savings as part of our portfolio’s bond and cash holdings, allowing us to be even more aggressive in allocating our portfolio to stocks.

Third, how near are we to retirement? When we get within 10 years or so, we’ll likely want to boost our portfolio’s bond and cash holdings, so we have a pool of conservative investments that we can draw on for spending money and which can replace the soon-to-disappear income generated by our human capital.

What if, during our working years, misfortune strikes and we find ourselves without a paycheck? That might happen if we lose our job, become disabled or fall ill. We might even suffer an untimely demise, leaving our family without any way to support itself. This is the reason to have both an emergency fund and three crucial insurance policies: health, disability and life insurance. We can think of these precautions as protection for our human capital.

Making progress. Our human capital doesn’t just allow us to pull in a paycheck. It also offers us the chance to enjoy that pleasant feeling that we’re being productive and making progress. Of course, we don’t need a job to feel productive. Instead, we might volunteer, or help with the grandchildren, or work on our health, or do countless other things.

Even though my cancer diagnosis means I have limited time left, I still hunger for a sense of progress. I find it hard to devote a day to deliberately doing very little or focusing solely on activities for my own enjoyment. I feel better if I’ve spent the day being productive, and doubly so if I feel I’ve been helping others.

I suspect that most folks aren’t as restless as I am. But I also suspect almost all of us feel better when we end the day with a sense of accomplishment and devote at least part of the day to activities that help the wider community.

That brings me to retirement. Even after we quit the workforce, we’ll likely find we still hunger for the sense that we’re being productive, hence my frequent suggestion that folks continue to make use of their human capital during their initial retirement years—by working part-time.

That part-time position may make for a financially less stressful retirement, while also offering the sense of accomplishment we humans crave. Looking ahead to retirement? To our to-do list, here’s one more item to add: Think about how we might continue to make a little money by working a few days each week. Maybe folks will ultimately decide that isn’t something they want to do during their retirement years. Still, it can’t hurt to give it some thought.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles, including last week's installment of this six-part series.

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Give It Away Already

DRIVING CROSSTOWN, my brother and I stopped at an onramp, where a man held a cardboard sign.

“Does anyone give these people money?” my brother asked, then immediately answered his own question by mentioning a friend who hands out bottles of water instead. “Anything helps,” read the man’s sign.

“Sure,” I said. “I’ve seen people pass $5 bills out the window.” A single dollar used to be enough for a panhandler to end his shift and shuffle off to the nearest mini-market. But inflation has changed that.

“I once tried to give a person $5,” my brother started. “Long ago.”

Here we go again, I thought. Another tale from his hippie youth. If it was a story I recognized, I could probably stop him mid-sentence. Thankfully, most stories are short, though the moral of his fables are harder to determine than Aesop’s.

“Oh?” I tried to sound noncommittal. Maybe he’d veer into another topic. World politics perhaps.

“Yes, I was in Jennifer’s car with her and a couple other people. Some guy had a sign, ‘Need $$$.’ I pulled a fiver from my pocket. One moment, I had it in my hand. Next thing I knew, Jennifer was stuffing it into her purse. She drove on without a word.”

“Charity begins at home,” I said, not really sure if this was the moral he had in mind.

“Jennifer was in a hard spell,” he agreed amiably. More than half a century had passed since the day he tried to give a stranger $5, blocked by his friend’s more urgent need. I was hearing about this for the first time, and I’ll remember it, too.

That’s because I’m decumulating, though slowly. My calculations and advisors indicate that I’ve likely saved enough to last for the rest of my natural life and a bit more, even with recent high inflation.

After decades of saving, deciding on a spending target beyond my essential needs isn’t easy. I want to reserve a reasonable amount to cover inevitable errors in my expectations and calculations. I’m not interested in simply leaving behind a legacy for the kids, with a lump sum set aside for the alma mater.

Instead, I’m developing an ongoing, informed altruism toward them and others, while I’m still around to enjoy it. I’m aiming for a style of giving that acknowledges the challenges and delayed gratification involved in any of us saving for an uncertain future. I want an altruism that expresses gratitude for my life and respects its hardships, too. I’m hoping to create value in giving that reflects the effort it took to amass the money involved.

I’ve worked with nonprofits, charities and university advancement offices before. Each fall, I receive gift solicitations, triggered by decades of employment in public agencies and private education, along with a personal history of memberships and annual gifts. I’m not famous, important or rich enough for a building or even a department chair to carry my name, much less an entire hospital or stadium.

Then again, I’ve seen names removed from buildings lately, so a naming gift isn’t something that interests me anymore. Besides, I have the reflected glow of a public works building named after my brother-in-law, a longtime local elected official who saw that potholes were promptly filled and streets repaired.

I could send money to political campaigns. Last fall, requests flooded my inbox and mailbox. That would require me to believe that a campaign’s glossy hit piece, which will likely go straight into the recycling bin, is good compensation for a lifetime of eating homemade sandwiches sitting at my desk.

Instead, I’m amping up past practices, and modifying a strategy learned from my late spouse, who was a professional at giving away money. Literally, it was his job. He worked for a Class I railroad and annually parceled out a portion of his company’s charitable funds across two assigned states. He liked to say that his universe was 25 feet wide and 30,000 miles long, though his territory involved just a portion of that, about 4,500 of those miles.

As a result, he spent much time on the road visiting every burg and fat spot where peoples’ lives and those tracks converged. Over the years, he spoke to thousands of nonprofit executive directors and employees, who explained their agency's efforts to support local communities, and what they’d do if they had a few dollars more.

Without the funds of a major endowment, and being naturally frugal, my spouse wanted his donations to go a long way. While he’d give to the largest nameplate charities, he capped annual donations at an amount too small to interest most professional grant writers but large enough to make a difference to a lesser charity.

He created a one-page application form, to match the more modest amounts he was doling out and the likelihood that an executive director would be filling out the form. He spread his company’s gifts as widely as possible. He’d end the season with a road trip delivering checks in person, and hosting an annual luncheon for those receiving grants to come together in our city, where they could talk together about their communities, what their agencies were doing and their vision for what might be accomplished next.

I’ve lived a life of donated time and money, and now that I’m retired, I’m ready to do more. Massive, gleaming headquarters for nonprofits trouble me. Soaring spires invoke the same reluctance. I’d rather see a tiny cement clinic at the end of a dirt path. Below is my initial plan for charitable giving. What’s yours? And what am I missing?

When visiting museums, I’ll often join as an annual member—especially if there are school busses parked nearby, as every field trip taken as a youngster was a great day for me. Understanding the past, other peoples, the world we live in, and the arts and crafts of the creative class: This is the work of museums.
A mom or dad at a folding table selling caps or T-shirts to their friends and neighbors? That’s got me reaching for a $20 bill. My retirement wardrobe prominently features “Friends of…” garb. These make better travel souvenirs than dust-collecting mementos.
I like dual-purpose operations, where good intentions are turned inward and outward—such as a nonprofit that provides dignity and direction to the developmentally disabled, while also operating an important native plant nursery.
For larger gifts to nonprofits, I like to check IRS filings.

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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My Own Thing

WHEN I WAS a teenager in the 1960s, the popular expression was, “Do your own thing.” We baby boomers were supposed to reject our parents' ways of thinking and do what we thought better. These better things included growing our hair long, wearing blue jeans, having beards, not wearing bras and making love, not war.

I liked this “do your own thing” way of thinking. But I also discovered that doing your own thing, when others were doing things differently, required strong convictions. That was not me. I preferred to blend in.

This changed when I retired. I decided I was going to live without the restrictions society had placed on me. Just because I was expected to act in a certain way didn’t mean I would.

I’m constantly pushing the envelope to see how far I can go. I’ve grown a beard. I’ve let my hair grow longer. I’ve donated most of my suits, white shirts and dress shoes to charity. Today, my wardrobe consists almost entirely of jeans and sweatshirts.

I’m not totally free, however. My wife expects me to behave in an acceptable manner, so I haven’t gone completely off the rails and rejected all standards. I just try to do only the things I want to do, and in the way I want to do them.

How does this relate to money? For me, the most important part of “do your own thing” is to lead a less-stressful life.

One of my life’s goals has been to become rich. Other goals formed when I was young turned out to be elusive, like going to Harvard and being named rookie of the year with the New York Yankees. Yet being rich seemed still within reach. I started on the path to wealth by spending less than I made and saving the excess.

How should I invest this surplus? That was the big question. I thought about all the different ways to become rich. Should I buy rental properties? Should I purchase individual stocks? Should I start a business? Should I marry a wealthy woman?

I’ve known people who achieved some degree of wealth using one or a combination of these. The problem is, I could never get comfortable going all out on any one of them. I was, and still am, a saver.

So, I limit my options with my excess money: I spend it on stuff, put it in a bank account or buy additional shares of my stock and bond mutual funds. Limiting my options this way has reduced my stress.

I recently watched a preview of some stock analysis software. Knowledge might be power. But to me, it’s information overload. How do I use all that information?

I’m a black and white guy. In mathematics, it’s known as binary thinking: 0s or 1s, yes or no, good or bad. Gray doesn’t work for me. Buying a stock with all the available information would require me to weigh each factor, and decide which are important and which ones I can discount. That’s too much for me.

See, I’m no Warren Buffett, and that’s okay. It’s important to be true to myself—to do my own thing. Life’s less stressful that way.

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Reality Check

A QUOTE OFTEN attributed to Mark Twain goes as follows: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

This certainly applies to personal finance, and it’s why it can be helpful to take a step back sometimes to revisit widely held notions—including these six.

1. Social Security. You may have heard of Social Security’s “earnings test,” which can reduce the size of monthly checks for those who continue working after claiming benefits. It’s often perceived as a penalty, and indeed it can be substantial. Benefits are generally reduced by one dollar for every two dollars earned. For that reason, some people stop working just to avoid having their benefits cut.

What is often overlooked, however, is that the earnings test only reduces a worker’s benefits temporarily, until he or she reaches full retirement age (FRA) of 66 or 67. Once a worker reaches FRA, his or her benefit is increased by an amount that makes up for the earlier cut. Despite its reputation, the test shouldn’t be a disincentive for those who want to continue working after starting Social Security.

2. Portfolio withdrawals. You may be familiar with the 4% rule for taking withdrawals from a portfolio in retirement. This 4% figure came out of research first conducted in 1994 by financial planner William Bengen, and it’s come to be seen as the gold standard for a safe retirement withdrawal rate. But in all his presentations and writings over the years, Bengen has emphasized a key point: that we really shouldn’t be so wedded to 4% that we treat it as a rule.

Bengen notes that, in his own practice, he always used 4.5%, and he argues that a withdrawal rate of 5% or higher might be justified. Yet investors—myself included—always seem to come back to 4%, despite Bengen himself telling us that this isn’t the only answer.

That dissonance, I think, is instructive. It illustrates how easy it is to become anchored to rules of thumb—and why it’s so important to revisit first principles before making big decisions.

3. Bubble worries. Quite frequently, investors will challenge me to explain why a crash like the one we saw in 1929—when the stock market dropped 90%—couldn’t happen again. There are several reasons I believe a crash of that magnitude would be unlikely. At the top of the list: I believe the Federal Reserve would step in and wouldn’t let markets simply plummet.

But there’s another, more basic factor to understand: The crash that started in 1929 didn’t come out of nowhere. It was preceded by a period of excess—the Roaring Twenties—that caused the market to become extremely overvalued. The Dow Jones Industrial Average had risen six-fold in the eight years leading up to the crash. It was clearly in dangerous territory. That’s another reason we shouldn’t view 1929 as the sort of thing that could happen again at any time and with no warning.

4. Market valuation. Those who worry most about today’s market often point to the CAPE ratio, a valuation indicator created by Robert Shiller, an economist at Yale who won the Nobel prize for his work studying market behavior. Given Shiller’s background, many take the CAPE seriously and worry that it’s at an elevated level.

There are reasons, however, this might not be the ominous sign that it appears to be. According to a recent analysis, one of the CAPE’s key strengths is also one of its weaknesses: Shiller’s data set goes back more than 100 years. But since markets change over time, it may not be an apples-to-apples comparison to measure today’s CAPE reading against historical levels.

For example, the profits of today’s market leaders are increasing more quickly than companies in the past. That means they might “grow into” their elevated valuations. There are also more technical, accounting reasons the earnings of companies today may not be directly comparable to profit figures from the past. In short, the CAPE ratio may not be telling us what it appears to be telling us.

5. Stock-picking. You may recognize the name Benjamin Graham. He’s often referred to as the father of investment analysis. And he’s revered, especially by stock-pickers, because he was Warren Buffett’s teacher and mentor.

But that overlooks a key change in Graham’s thinking late in life. In a 1976 interview, this is what he had to say about the usefulness of stock-picking: “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook ‘Graham and Dodd’ was first published; but the situation has changed a great deal since then…. I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost.”

6. Private funds. In the past, I’ve cited research on private funds, such as private equity and hedge funds. What the data show is that the gap between the best and worst private funds is much wider than the corresponding gap among standard, publicly available funds. In other words, the best private funds are dramatically better than average, and the worst private funds are dramatically worse than average.

Since private funds are capped by law at a relatively small number of investors, it’s very difficult for individual investors—even very wealthy individuals—to access the best funds. Those slots are reserved for the largest endowment funds, because they can write the largest checks. That exclusivity has led to the perception that these elite funds are delivering top-notch returns.

But that may not be the case. Comprehensive data on private funds aren’t available, but a handful of data points suggest that they may not be doing as well as we think they are.

Gregory Zuckerman covers hedge funds for The Wall Street Journal and knows the industry well. In a recent post, Zuckerman provided these figures for 2024: “David Tepper, David Einhorn and Alan Howard are three of the most successful investors of their generation. Their key funds gained 8%, 7.2% and 4.7% last year.” In other words, the S&P 500, which rose 25% in 2024, ran circles around the “best” funds.

Another data point from an insider: Last year, former Harvard president Larry Summers commented on Harvard’s endowment, more than 70% of which is invested in private equity and hedge funds. Despite it having access to the very best funds, Summers argued that Harvard’s endowment has lagged its peers so much that it would be $20 billion larger today if its returns had been just average.

According to more than one analysis, individual investors should actually be grateful that we don’t have access to these exclusive funds. As Mark Twain might have said, the notion that Ivy League schools are enjoying steady market-beating returns “just ain’t so.” Indeed, the data suggest a simple mix of stock and bond index funds has delivered better results than these elite private funds.

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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Money Grows Up

I MOVED FROM LONDON to New York City in 1986, when I was age 23. That’s when my financial education truly began.

I’d previously studied economics for three years and spent a year writing about the international financial markets for Euromoney magazine. Still, I knew almost nothing about investing, insurance, homeownership and other topics crucial to managing a household's finances.

I’ve learned a ton since, and the focus of that education keeps changing, providing endless fodder for articles during my long career as a financial writer. The fact is, the way we think about money today is totally different from four decades ago, and that's a huge plus. How so? We're now focused less on determining the "optimal" financial products and strategies—and more on how money can be used to improve the lives of everyday individuals.

Investing. As with almost everybody else, investing was where my financial journey began. I worked at Forbes magazine from late 1986 to early 1990, focusing principally on mutual funds.

The standard article was the fund manager profile. It was fairly formulaic: Interview a guy (yes, it was almost always a man) with a decent track record, cook up some theme for the article, describe his investment strategy, and then offer three or four stock picks that illustrated his approach.

I felt like I wouldn't be a real journalist until I worked for a daily newspaper. That opportunity came in January 1990, when The Wall Street Journal hired me to write about mutual funds. But by then, it was starting to dawn on me that few star fund managers remained stars, and it was impossible to figure out ahead of time who they’d be. Thus began my passion for index funds.

As I relentlessly advocated for broadly diversified, low-cost index funds, I briefly imagined that I knew pretty much everything I needed to know about managing money. But in truth, I’d barely scratched the surface.

Personal finance. With the investing problem “solved” with index funds, I went looking for other subjects to tackle in my weekly Journal column, which first appeared in 1994. In the years that followed, I found myself writing about personal-finance topics such as taxes, Social Security, college funding, insurance and estate planning.

Unlike investing, where folks were unlikely to do better than a simple portfolio of low-cost index funds, there was ample room for improvement in these other areas of money management. Indeed, a modest effort could greatly bolster a family’s financial position, and yet these topics were largely ignored by financial advisors and Wall Street investment houses.

Behavior. Even as I dabbled in subjects other than investing, I developed an interest in behavioral finance and evolutionary psychology. Why did investors resist indexing, despite its obvious advantages? Why did they misjudge their appetite for risk? Why do folks spend so much today and save too little for retirement?

The broad parameters of what constitutes smart financial behavior are pretty much agreed upon, even if experts might quibble about the details. Problem is, knowing the right course of action isn’t enough. It’s like losing weight or improving our fitness. The big issue isn’t figuring out what to do. Rather, it’s getting ourselves to do what we know is right. That can require a huge effort—because we need to overcome our hardwired instincts.

Meaning. Money isn’t simply the vehicle we use to put a roof over our head and food on the table. Instead, our relationship with money is far more complicated. We use it to try to make ourselves happier, to recreate our most treasured memories from childhood, and to tell the world who we are and what we value. In other words, we take money and we infuse it with meaning.

Around 2005 or so, I became fascinated by happiness research, and whether money can indeed boost our satisfaction with our lot in life. The answer is “yes,” but the research also highlighted money’s limitations. For instance, the boost to happiness from a new car or a pay raise can be remarkably brief, while the impact on happiness of a seven-figure portfolio pales in significance compared to folks’ predisposition to be happy—whether they have a high or low happiness set point.

Self-knowledge. Behavioral finance helps us understand why we behave the way we do, while happiness research offers ideas for how to get more satisfaction out of our dollars. But which insights resonate the most? The answer will be different for each of us.

That brings me to what, I suspect, will be an increasing focus of the financial world: offering folks insights into who they are, so they can be better managers of their own money. How can we figure out what our true risk tolerance is? What mix of the five personality types do we possess, and how does that affect our financial decision making? What from our past continues to play a role in the financial choices we make today? These, I think, are fascinating questions—and I suspect folks will be much better able to answer them in the years ahead.

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

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Home Free

TWELVE PERCENT. THIS is a pivotal number in my financial life.

What does it refer to? Is it the average annual return on my investments? I wish. Is it the percentage of my pre-tax income that I dedicate to retirement savings? No. That number, including pension and 403(b) contributions, is closer to 25%.

Instead, that 12% is the slice of my pre-tax income reserved for housing. When picking a place to live, I’m a cheapskate.

In the early 1990s, during my first few years in the workforce, I paid about $300 a month for a room in a house that I shared with a band in West Philadelphia. Having grown up in a small house in Erie, Pennsylvania, and never having developed a taste for big homes, I saw lifestyle creep fly by me like locusts, leaving me unscathed.

There have been only two years when my housing expenditures have exceeded 20% of my gross income. Conversely, for a few years, this percentage actually stood in the single digits. I currently pay $860 a month for a one-bedroom apartment. I’ve never shelled out more than about $1,000 a month for a pad.

My greatest triumph as a housing cheapskate came during my years in Roswell, New Mexico. In 2017, when I received a job offer, I flew down to the city of aliens. After scouting out a small one-bedroom apartment, I asked the property manager the price.

Her response shocked even me: $450 a month. I actually said, “Come on. I’m tired. How much is it, really?” She responded that the price was accurate and asked where I was coming from. “Pittsburgh,” I said.

She replied that Roswell was a very cheap housing market. English professors in Roswell don’t make much. By the time I left the Land of Enchantment in 2020, I was clearing about $60,000 a year, and my rent had increased to a whopping $470 a month, so I was spending 9.4% of my income on housing.

Why my obsession with low rent and my refusal to buy, even though I could easily afford to do so? There are four reasons.

First, paying so little for housing allowed me to survive debt-free when money was tight and to put away a high percentage of my income after things got better. I currently salt away about 32% of my take-home pay. I’ve never adjusted my lifestyle upward by much when my income has increased.

Second, you never know where a better job will be. In the profession I chose, that next position could be half a continent away. Since 2010, I’ve lived in Minneapolis, Orlando, Pittsburgh, Roswell and suburban Kansas City. In addition, I don’t plan on staying in Kansas when I’m finished with full-time work. I want to be able to quickly leave the sunflowers behind without having to sell a house or apartment.

Third, I generally spend in line with my values. An apartment or house will, for me, always be just a place to sleep and shelter from the weather. I know so many people who take what I see as inordinate pride in overpriced housing that pushes them to the brink of financial insolvency. Thanks, but no thanks. I place little value on the status that homeownership conveys. I generate meaning from what I do, not what I buy.

Some people, who know my housing situation and my net worth, have tried to convince me to purchase a house. I’m not swayed.

In the personal finance-focused composition course that I teach, I do an exercise with students that opens their eyes to the realities of homeownership. I tell students that my parents bought my childhood house for about $22,000 in 1968. I sold the house for $140,000 in 2006. On the face of it, my parents saw a return of more than 600% over 38 years, or $118,000. But if you back out mortgage interest, property taxes, a new roof, new siding, a new furnace, a new kitchen, air conditioning, new carpet and plumbing work, they cleared about $30,000. Students, who have been propagandized by well-meaning parents into believing that a house is the “best investment you can make,” are stunned by these numbers.

If you rent cheaply and invest the difference, the profits can be—and have been for me—quite nice.

Fourth, while I don’t value housing, I do cherish my lattes. The truth is, it’s not the little purchases that sabotage finances. It’s the big ones. In addition, by keeping housing costs low, I can not only invest, but also spend on the things that bring me pleasure. For instance, I recently attended the Kansas City Symphony’s performance of Mozart’s Requiem in a near front-row seat. I bought good parking and had a glass of beer while I gazed at the city lights from Helzberg Hall during intermission. The cost? About $100. The value? Priceless. I also indulge myself by seeing multiple independent movies each month, and I visit two great bookstores in the area: Rainy Day and Prospero’s.

I’d rather invest in the financial markets and spend my money on concerts, books and films—experiences I’ll remember for the rest of my life—than on furnaces, carpets, appliances and dubious status.

When you spend 12% of your income on housing, you can buy the experiences that make life grand. As Aldous Huxley said in the 1946 foreword to Brave New World, “You pays your money, you takes your choice.”

Douglas W. Texter is an associate professor of English at Johnson County Community College in Overland Park, Kansas. Doug teaches a composition I course that focuses on personal finance. His essays and fiction have appeared in venues such as the Chronicle of Higher Education, Utopian Studies, New English Review and The Writers of the Future Anthology. Check out Doug's previous articles.

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What I Watch

MANY FINANCIAL planners say you shouldn’t look at your investment portfolio too often because it may prompt you to make poor decisions based on short-term stock market performance. I try to follow this advice, even though it would be easy for me to take a peek, because we have almost all our money with Vanguard Group.

Ever since we consolidated our investments, I’ve noticed a change in my wife’s attitude toward money: Rachel is more willing to spend. Maybe it's the visual of having one large balance at Vanguard, rather than smaller balances spread across multiple financial institutions, that makes her feel more financially secure. It becomes clearer to her how much money we really have when it’s parked in one spot.

What about me? Although I don’t look at my portfolio too often, there are four other things I pay close attention to.

1. My Social Security deposit. Around the seventh of every month, when my Social Security is scheduled to be deposited, I check to see if it’s been posted to my account. Then I log that payment on a spreadsheet to track the total amount I’ve received. I don’t track my wife’s benefit, just mine.

I waited until age 70 to take Social Security. I’m approaching 74 and, so far, I’ve received $176,750. I don’t really know the significance of this number or why it’s so important to me.

My friend Art also waited until 70 to take Social Security. About a month later, he was diagnosed with incurable pancreatic cancer. Could that be the reason I track the total benefits I’ve received? Perhaps. I'm concerned about not reaching my breakeven point, which is around age 81.

Yet that shouldn’t be my focus. After all, the main reason I delayed my benefit is to provide a larger income stream later in life, when there’s a risk of Rachel and me running out of money.

Thanks to delaying, not only do I get a larger initial check, but also a larger dollar amount in annual cost-of-living increases. Those increases compound over the years, resulting in exponential growth that could give us significant income down the road. Remember, although all recipients got the same 2.5% inflation increase for 2025, the actual dollar amount is based on the amount of your benefit.

2. My credit card balance and transactions.  Every time I charge something, I look at the Citi app on my smartphone to make sure the amount charged is correct. It’s easy to do. The app has a snapshot feature where I can see the transactions without logging in.

Another reason I keep close tabs on our primary credit card: I found if I keep the balance under $2,000, my FICO score is higher. I’ll usually make multiple payments during the month to keep it below the desired amount. It seems to work. My current FICO score rose to 816 because my credit utilization ratio—how much I owe creditors relative to how much credit I have available—is so low.

The other day, we were purchasing some vinyl windows for our house. The window manufacturer had a special financing promotion: no money down, no monthly payments and no interest for 12 months. Since I froze my credit because my personal information was compromised, I had Rachel apply.

The sales representative was surprised at how fast Rachel’s credit application was approved. “I’ve never had anyone approved that quickly,” she said. I wasn’t surprised. My wife’s FICO score is 840.

We’ll probably pay off the windows as soon as they’re installed to our satisfaction. We both hate owing money.

3. My blood pressure. Why is it so important to monitor your blood pressure? Because it’s a silent killer that often goes undetected until it causes harm. More Americans die from heart disease than any other illness.

My best friend Jeremy died of a heart attack. Maybe all his drinking caught up with him. My longtime coworker John also died from one. Could all those burgers and fries from the lunch wagon have caught up with John? Who knows?

I know that, at my age, I’m at more risk of dying from heart disease. My mother did. I check my blood pressure a few times a week at home, where I feel I get a more accurate reading than during a one-time visit to my doctor’s office. When I go to see the doctor, my blood pressure is usually high. I have what they call white-coat hypertension.

When I check it at home, it’s usually below the recommended level of 120 over 80. I keep a log on my smartphone of my blood pressure readings by date and time of day, so I can easily show my doctor. Based on the reading in the doctor’s office, I’d probably be on unnecessary medication.

4. My daily steps and distance walked. I try to walk seven miles a day. My father walked a lot. In fact, I take the same route that he used to walk.

I didn’t realize how much walking meant to him until his final days. When he was in hospice care, he still wanted to go for his daily walk. We told him it was too dangerous because he didn’t have the strength. He said, “How can I get better if I don’t walk?”

I’m like my father. I believe walking can make my life better. I’m hoping all those steps will lead to a longer, healthier life.

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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