Jonathan Clements's Blog, page 77

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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Our Nomadic Life

WE'RE IN OUR SECOND year as nomads, having sold our Texas home and driven away from our storage unit in November 2022. In the few years before that, we often talked about where we wanted to move, but could never quite decide.

When I retired in 2021, we traveled for most of the next 12 months. At the end of it, we still hadn’t decided where we wanted to live, but we knew we wanted a change, so we just pulled up our roots. We have yet to put down new ones.

How is this working for us? We’ve spent time in previously unknown parts of the U.S., England, Italy, Spain and Portugal, but our intent isn’t to “travel the world.” We were fortunate to do a fair amount of that during our careers. We have some destinations in mind, but ticking off a list or saying we’ve been to [insert number] countries isn’t driving us.

While we enjoy visiting new places, we’re also happy to revisit places we like and just be wherever we are. Our stops aren’t necessarily hot spots, just pretty places to spend time. When possible, we like to stay in one place for weeks at a time. As I write this, we’re enjoying our first visit to New Hampshire. We’ll be in France in September and England in November, but that’s the extent of our plans, and there are a lot of gaps between now and then.

We have considerable flexibility, though that’s been limited by visa rules. European countries that are party to the Schengen agreement—which most of them are—allow visitors to stay just 90 days in a rolling 180-day period without a pre-arranged visa. The positive is that we can travel anywhere within the Schengen area without visa or border formalities. The negative is that once we enter any Schengen country, the clock starts for the whole area. Fortunately, the U.K. and Ireland aren’t parties to the agreement, and the former graciously allows us to stay for up to six months.

While we’re outside the U.S., our car is professionally stored, along with extra belongings we don’t normally carry with us when abroad. This has a cost, and the storage location is a bit inconvenient. But overall, it’s been a good solution, and we intend to keep doing it. Meanwhile, we have yet to rent a car internationally, usually relying on public transportation, along with the occasional taxi.

We use a mail service that opens our mail and scans it. We rarely need to have anything forwarded to us, but that’s worked fine when we’ve needed to do it. All our bill paying is automatic, and we do our usual necessary business online, with appropriate attention to internet security.

We pay for an international cellphone plan with unlimited data. When we first started our travels, we avoided this expense, instead trying to rely mostly on apps that used wi-fi. This worked okay, but we found that having our phones fully functional at all times, without needing wi-fi, to be worth the cost. It enables us to use our phones for navigation, and it ensures our four elderly parents can reach us anytime.

We’re also part of a network through which we provide house- and pet-sitting services. This has been enjoyable, partially subsidizing our lodging costs, helping us meet local people and creating some interesting opportunities to experience wherever we are. When not sitting, we stay in vacation rentals, inns and hotels.

We’ve learned to live with very little and found that we don’t miss many things. We haven’t been within 500 miles of our storage unit since we left it. Unless we’re using our car and the items stored in it—which is rare—we each have a European-size carry-on bag and a day pack. Otherwise, we wear the same clothes again and again, and replace them when necessary.

The British culture of charity shops has been a fun and useful surprise. They’re everywhere, run by more charities than you could count on both hands, and often have good quality items. We’ve been known to buy something at a charity shop, use it for a few months, and donate it back or to another shop before we leave.

Unlike others who take long trips, we aren’t “coming home” afterward. That creates a few challenges. For instance, prescription medication has been a hassle. It’s tough to get our medications for longer than 90 days, and longer than six months seems next to impossible. We haven’t been out of the country for longer than that at a time, but we certainly could be.

We could have our mail service forward prescriptions to us when we’re abroad, but we haven’t tested that yet. In a pinch, we could get a local prescription wherever we are, but neither the doctor visit nor the medications would be covered by insurance. As a retired military officer, one option might be space-available care at a U.S. military base. But we haven’t tested that, and it’s obviously location-dependent. All things considered, it may be more predictable and less annoying to just plan to be in the U.S. often enough to get prescriptions renewed.

My wife fell down some stairs early in our travels, and luckily got away with only a broken foot. We were in the U.S., but we still had to turn to the only urgent-care clinic in a small town. We delayed our departure overseas and extended a planned stop in the Washington, D.C., area so she could get physical therapy. Had we been outside the U.S., our insurance would have covered the initial treatment, but I’m not sure about the physical therapy.

Dental care has also involved some hassles. Ever tried getting in for a cleaning while passing through a new town? Almost every practice in the U.S. wants to do a full exam for a new patient, which insurance is only going to pay for once a year. In many cases, they won’t schedule the cleaning until after the initial exam is done, so we would have to be there for some period. Our last dental visits were in England, where some providers follow a similar process, but others offer “direct access” through which a new patient can come in and pay cash for service. Our cleanings weren’t covered by our insurance, but getting them done was worth the cost.

When we last stopped in to see our parents, we established ourselves as new patients for dentists and primary care providers, so now we can at least get in the necessary checkups when visiting them.

Looking at our expenses over the past year or so, they probably weren’t much higher than if we’d stayed in our home. I have no doubt that, when we do settle somewhere, our expenses will be more than they were in our previous home, and more than they are now. Wherever we end up, our cost of living will likely be higher than it was in Houston, and we’ll likely still be traveling a lot.

Not long ago, my wife asked if I missed going on vacation. It was a great question. Think of the enjoyment of planning a vacation, anticipating upcoming activities and, of course, anticipating time away from work. The actual vacation is often also a time of eating and drinking a bit more than usual, maybe skipping workouts for a while, and shopping within wider limits.

This isn’t a vacation for us. It’s our life. We need to keep our eating, drinking, fitness and the rest of our lives balanced. We’re thinking about where we’ll be next, but that’s an ongoing task as much as eager anticipation. We’re not spending to excess. We basically buy no souvenirs, clothing or anything else we can’t eat, partially because whatever we buy, we must carry around. Someday, we’ll have a digital photo display.

So, do I miss vacations? Not really, but there are a few things I do miss, and a few more things that I’ve never had but sometimes think about having. In the former category, the one thing I miss most is my home gym. I could go on and on about this, but I’ll spare you.

Overall, we’re happy with our lifestyle, and we’re in no rush to change. For now, we’ll continue to happily repack our bags.

Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. Check out his earlier articles.

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Rolling Right Along

I BEGAN MY CAREER as a part-time employee for an engineering consulting firm. At the time, I was working on my master’s degree in mechanical engineering. I shifted to full-time when I’d wrapped up my coursework but before completing my research and oral defense.

Over the next four years, I finished that degree and passed the national exam to become a registered professional engineer. I also got married, and bought a dog, a second car and a house. In other words, I jumped straight into middle class life.

I was the company’s seventh employee. The firm grew and I progressed. When I turned age 30, I opened IRAs for both me and my wife, thinking we’d never work for companies that provided pensions. An acquaintance recommended I choose Vanguard Group’s S&P 500-index fund (symbol: VFIAX) and Windsor Fund (VWNDX). At the time, an individual’s annual IRA contribution was limited to $2,000. In the early 1980s, my employer introduced a 401(k) plan and I immediately joined. The plan was administered by a bank and the fund offerings were less than stellar, but it allowed me to contribute more than $2,000 a year.

Meanwhile, after some years of success, the company started to struggle. A slowdown in our core business led to shrinking paychecks for principals like me, so I ceased contributions to the 401(k). Everyone else did, too. I found out the company hadn’t made all the plan contributions for months, even though the money had been withheld from our paychecks. We later learned that the same was true for state and federal tax withholding.

The chief financial officer monitored the mail for checks every day. One day, he received a check large enough to cover all missed contributions to the 401(k). When he returned from the bank, he turned in his resignation, cleared out his desk and left. He later told me he felt obligated to make sure the 401(k) plan was whole before he quit. What about the unpaid tax contributions? He said those were the owner’s fault. The company eventually folded, and I rolled my 401(k) balance into my Vanguard IRA. It was an empty feeling to have devoted 14 years to the company, only to see it fail so terribly.

When I was at the firm, my largest client was a local power company. It offered me a job almost as soon as I was available. This was a large company that offered a 401(k) and a pension plan. After a year with a regular engineering group associated with plant repairs and upgrades, I was assigned to a problem-solving group with higher visibility and more responsibility. I enjoyed the work, but the administrative and bureaucratic requirements were tiresome. I made regular contributions to the 401(k) and received matching contributions in the form of company stock. The 401(k) match vested after five years.

But the board of directors brought in a new, aggressive CEO who promptly announced layoffs—which included me. A “transition benefit” was immediate vesting of 401(k) matches. The financial markets approved of the new CEO, so the company’s stock was performing well, and my four years’ worth of matching contributions tripled in value. As soon as I was laid-off, I liquidated the 401(k) and rolled the proceeds into my Vanguard IRA.

My next employer was a small technology company developing a filtration process for extracting particulate matter from hazardous waste streams. This was an exciting time. The patent had just been awarded and the founders were assembling a prototype for testing. I authored several Small Business Innovation Research (SBIR) proposals that were ultimately funded by U.S. government agencies.

I stayed there four years, contributing part of my earnings to a SEP-IRA. During the final year and a half, it became clear that the filtration test results weren’t as good as expected. Company income, totally dependent on SBIR contracts, was falling. So were our paychecks. I left when it became obvious that the technology had no future. Again, I rolled my retirement money into my Vanguard IRA.

I quickly landed a new job as an engineer for a small software company. The software product was an engineering program that helped with design improvements. It was extremely popular with some engineering companies. The company had a Fidelity Investments’ 401(k) with a 4% match, along with a great selection of funds to choose from. I always contributed more than enough to obtain the company match, and typically increased my contribution rate by a percent each year.

The CEO who hired me was let go after I’d been there a year, but a new CEO was hired, one who had strong industry contacts that promised to translate into higher sales. A few years later, my wife left me. While she’d contributed to her IRA for the prior two decades, my combined IRA plus 401(k) balance exceeded hers, so I was required to transfer some of my retirement savings to her via a QDRO, or qualified domestic relations order. Our other investment and savings accounts were also affected.

The separation and divorce negotiations were difficult. Once it was all over, my finances were a bit of a wreck and my retirement savings had taken a hit. Around the same time, my employer was acquired by a large software company, and we were brought in as a division of the larger firm. This is when some magic happened for me. Over the course of three years, my pay increased substantially. I started maxing out my Fidelity 401(k) and refilling my emergency fund. My Vanguard IRA balance also continued to grow.

Meanwhile, a modest inheritance from my parents became part of my investment account. I left that money to grow, and haven’t yet needed those funds. Other than the divorce settlement QDRO, I never took any money out of my IRA or 401(k) during my career. In mid-2020, just after turning age 67 and after working 20 years in the engineering software business, I pulled the plug and retired. I rolled my Fidelity 401(k) into my IRA.  

I didn’t take Social Security until last summer, when I turned 70. While I waited to claim benefits, I spent from accumulated cash and took monthly draws from my IRA. Now that I’m receiving Social Security, I continue to make regular withdrawals from my IRA, with an eye to lessening the tax hit when I have to begin required minimum distributions in a few years. 

There are many potential pitfalls with IRAs and 401(k)s. I know multiple coworkers from my first job who spent their 401(k) proceeds, rather than rolling them over. I had a friend from the software company who borrowed from his 401(k), but then had trouble repaying the loan when he left the company. But these retirement accounts worked well for me. By contributing regularly over many decades and rolling over my retirement balances to my IRA whenever I changed jobs, I feel like I’m the poster child for how to make the most of tax-deferred accounts.

Jeff Bond moved to Raleigh in 1971 to attend North Carolina State University and never left. He retired in 2020 after 43 years in various engineering roles. Jeff’s the proud father of two sons and, in 2013, expanded his family with a new wife and two stepdaughters. Today, he’s “Grandpa” three times over. In retirement, Jeff works on home projects, volunteers, reads, gardens, and rides his bike or goes to the gym almost every day. Check out his previous articles.

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Don’t Be a Hero

WHEN I WAS A KID, my father would take me trout fishing at the many small lakes of California’s Eastern Sierra mountains. We’d usually “fish off the bottom” using a wad of floating bait attached to a weighted line. We’d then sit on a rock or in our little rowboat, and wait for a fish to come along and take the bait.

It seemed to me that some mornings we waited an awful long time. If I didn’t get a bite within five minutes, I’d reel in my line and cast out again. Oftentimes, after reeling in, the hook at the end would be covered in moss and the bait gone, having been ripped off as the line passed through the mossy lake bottom. I’d need to rebait the hook before casting out again. Once I had baited the hook again, I would repeat the process: cast, wait five minutes and—assuming there was no bite—reel in.

While I was busy fiddling with my bait and hook every five minutes, my dad just sat there with his line in the water. He gazed at the glassy lake surface, up at the blue sky, at the waterfall feeding the lake. He seemed at peace. Then suddenly—bam—a fish would strike his bait, shattering the serenity of the scene.

My dad almost always caught a fish before me—and then another and another. “How could this be?” I thought to myself. “Surely there must be more to it than just sitting there?”

Of course, as I’d learn years later, there was more to it. My dad possessed a fishing skill I lacked: patience. He was willing to be still and wait. He didn’t frantically chase after fish he couldn’t see. Rather, he cast his line and then waited for the fish to come to him. He was content to wait. In the long run, it was a winning strategy.

While my dad and I were both trying to catch fish, we weren’t doing the same thing. We were using the same equipment, going after the same species of fish and dropping our lines in the same lake. But our methods differed greatly. This difference ultimately affected our results. My dad would catch two fish for every one that I caught.

As a fisherman, my dad had faith in the process. He had confidence in his proven technique, one that had succeeded for decades. He was content to wait. Of course, some weekends, the fish just weren’t biting. It was disappointing, to be sure, but my dad didn’t rush out and buy new gear, nor did he abandon the holes he’d been fishing for years in favor of “better” spots, and he certainly didn’t quit fishing all together. Instead, he simply made plans for another fishing trip in a few weeks’ time.

Today, I approach investing in much the same way that my dad approached fishing—that is, passively. I own and continue to contribute to a few globally diversified index funds. While I occasionally rebalance my portfolio, I don’t move in and out of the market. Put another way, I leave my line in the water.

The Oxford Dictionary defines passive as “accepting or allowing what happens or what others do, without active response or resistance.” In other words, to be passive is to go with the flow. Yet one can be passive and still possess intent.

My dad’s intent was to catch fish. My intent as an investor is to enlarge my portfolio. While passively pursued, both activities have a goal in mind.

But the notion that we can passively attain our goals is alien to Western ears. We prefer men of action with elaborate plans, colorful maps and a rugged, individual genius that sets them apart from the herd. We idolize the active man, while disparaging passivity as feminine and somehow lacking the right stuff.

We also find it difficult to fathom how we can possibly reach a goal without taking on a great deal of risk and while expending only modest effort. Such a strategy doesn’t strike us as particularly heroic.

It isn’t.

Passive investing through an index fund is not about being a hero. It’s not about beating the market or impressing our peers with some genius market move that happened to work this year. Rather, it’s about reaching our financial goals by simply matching the market’s return with as little risk and effort as possible.

Let the heroes risk life and limb in their quest for glory. I’d rather be fishing.

Jamie Seckington grew up on the beaches of Southern California listening to punk rock and raging against the machine. Decades later, he now lives a quiet life in north Idaho and reads HumbleDollar regularly. He has learned to appreciate the many ironies that life offers. Jamie's previous articles were Where's the Value and Testing My Faith.

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Not a Problem

WHEN I WAS A TEENAGER, I didn’t have a girlfriend. Now that I’m older, I realize not everyone had a girlfriend during their junior high or high school years. But at the time, I felt like I was the only one.

By this time, my father had passed away, so I only had my mother and older brother to confide in. My brother thought I might have a problem that prevented me from seeking female companionship, so he told my mother I should get counseling. This was the brain trust’s thinking, not something I wanted. Still, not having a better solution, I went along with the idea.

My first counseling session didn’t go well. I sat there and waited for the counselor to ask me a question. He didn’t. I stared at him and he stared at me.

The next time we met, I said, “Don’t you want to ask me a question?” He said he was waiting for me to tell him what I needed or why I was there. I told him the things that my brother and mother thought were my problems. His response has stayed with me to this day. He said, “If it’s not a problem for you, it’s not a problem.”

He also let me know that he didn’t feel I had any major issues. I was just shy. I thanked him and, with this new awareness of myself, left. My female relationships moved on from there, including taking a girl to a local drive-in theater in my first car. But my shyness was ever present back then. Things changed when I was a senior in college and met my first wife.

The advice from the counselor has helped me deal with the critics in my life. Those critics might ask, “Why the heck would you do that?” As a defense, I developed a routine of slowing down my decision-making process. Knowing the critics would be circling, ready to challenge my decision, I wanted to make sure any decision wouldn’t be a problem for me—and that meant making sure I wasn’t allowing others to make my choices.

How often are we influenced by those around us, including how we should use our money? It might be our choice of house, car or vacation, or perhaps the decision to save rather than spend. If we feel we need help making a decision, we might seek input from others. But allowing others to make decisions for us is, I think, a mistake. If we take their advice and it turns out badly, we have only ourselves to blame.

For instance, we’re often advised to hire a financial advisor. People who have busy lives are encouraged to focus their energies on the rest of their life and let a “professional” handle their finances. I believe this is a reasonable approach—as long as you make the final decisions or, at a minimum, you’re comfortable with those decisions.

If not, you’re letting others make choices for you. That can be dangerous. Making decisions with the benefit of other people’s opinions, ideas or experience can be helpful. But in the end, we need to own the decisions that we make.

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On the Fence

BRITISH PHILOSOPHER G.K. Chesterton, in his 1929 book The Thing, introduced an idea now known as “Chesterton’s fence.”

Here’s how he explained it: Imagine two people walking along a road when they discover a fence blocking the way for no apparent reason. As Chesterton tells it, the first person looks at the fence and says, “I don't see the use of this; let us clear it away.” But the second person disagrees: “If you don't see the use of it, I certainly won't let you clear it away.”

Why not remove the fence? The second person explains his reasoning. “Go away and think,” he tells the first person. “Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

In other words, Chesterton is saying don’t remove something before understanding why it’s there. Indeed, even when something appears counterproductive—like a fence blocking a road—there’s likely a reason behind it. People don’t construct things for no reason.

Chesterton’s admonition, then, is that we should seek to understand why something exists before deciding to change it. Why is this so important? As Chesterton explains, the key risk in making any change is that it may trigger unintended consequences.

Perhaps the most famous example of this phenomenon occurred in China in the late 1950s. The Communist government decided that sparrows needed to be eradicated because they were damaging crops. A nationwide campaign encouraged citizens to kill sparrows, along with other pests. But because birds feed on locusts, the unintended consequence was that the locust population boomed. This resulted in even greater crop damage, triggering a famine that killed an estimated 45 million people.

That's an extreme example and, to be clear, Chesterton wasn’t arguing we should never make any changes. Rather, he was simply advocating for a more structured approach to decision-making—including financial decisions. Considering a change? Here are five questions you might ask:

1. Urgency. A key challenge in making financial decisions is that, more often than not, the questions aren’t simple. Suppose you’re considering a change to your portfolio’s asset allocation. A single change could have at least three effects: If you’re making the change in a taxable account, it might generate a capital gain or loss. A shift in your asset allocation might also change your portfolio’s growth trajectory. Finally, it might change your portfolio’s risk profile. Because of this uncertainty, it’s easy to get stuck on a financial decision.

There’s a solution, though. In my view, there are three priorities to weigh in making financial decisions. They are, in order: managing risk, pursuing portfolio growth and, where possible, managing taxes. Evaluating decisions through this lens can be useful because it helps to answer the question, “How urgent is the proposed change?”

If you’re changing your asset allocation to reduce your portfolio’s risk level, you might decide that’s the most important thing—more important than whether it affects the future growth of your investments or if it results in a tax bill. On the other hand, if the reasons behind the proposed change are lower down on the priority list, you might proceed more deliberately, spending more time thinking about the potential for unintended consequences. For example, I’ve discussed the “magazine cover indicator.” Financial headlines have been found to be contrary indicators and shouldn’t be relied upon to drive financial decisions. With news headlines, in other words, the risk of unintended consequences is high.

In fact, we just marked the 25th anniversary of one of the more famously incorrect predictions. The cover of Barron’s magazine on May 31, 1999, declared that Amazon was a “silly” idea and dismissed Jeff Bezos as “just another middleman.” To be sure, Amazon’s stock could have gone either way. Still, this is an example of where Chesterton’s fence could have been helpful.

2. Importance. Another reality of financial decision-making: Some decisions are simply more important than others. A change to your asset allocation—moving dollars from stocks to bonds, for example—might have a very significant impact. It would thus be worth careful consideration. But with other decisions, the impact might be more limited.

Author Karsten Jeske, who runs the Early Retirement Now blog, is highly analytical, often carrying calculations out to three decimal places. But for some decisions, his recommendation is—unexpectedly—to “just wing it.” If we can’t be sure how a decision will turn out, but it wouldn’t make a big difference either way, we shouldn’t get too hung up on it. In those situations, in Chesterton’s terms, we don’t have to worry as much about upsetting the status quo.

3. Probability. In his 2023 book Decisions about Decisions, Harvard Law School professor Cass Sunstein offers a recommendation: Don’t focus on the likelihood of being right or wrong with any given decision. In many cases, that’s simply too difficult to know because the decision involves making a prediction. For that reason, Sunstein suggests not trying to forecast the likelihood of an event. Instead, where possible, he suggests weighing the cost of being wrong against the benefit of being right, both of which are easier to estimate without having to make a forecast.

4. Tax impact. Another key investment challenge: Decisions often involve weighing multiple unknowns against each other. Suppose you have an investment you’d like to sell but aren’t sure if it’s worth the tax impact. You can’t know the answer to this question because you don’t know how each investment will perform in the future. If you’d sold Amazon 25 years ago, you would have been very unhappy. If you’d sold Enron, on the other hand, you might have paid a bundle in taxes, but you’d also have sidestepped its subsequent bankruptcy.

What’s the solution? No amount of research can help investors predict which way a stock will go. But if you own a mutual fund and are considering selling it, the task might be easier. According to the data, high-cost funds underperform low-cost funds, on average. So, if you own a high-cost fund, you could weigh its annual expenses against the tax cost of selling it.

Suppose you have a $10,000 investment in a mutual fund that charges 1% in annual expenses. That would be $100 a year. If you switched out of that fund and into an index fund charging, say, 0.03%, you’d save nearly $100 each year going forward. Now let’s consider the tax side of the equation. If you have a $1,000 gain on the fund you own and pay 20% in taxes on that gain, the tax cost would be $200. Result: After two years, you’d come out ahead on this decision, and you might decide to proceed.

5. Alternatives. In the tax example above, you’ll notice I left something out: I assumed that the only difference between the two funds was their expense ratios. But that’s an oversimplification. Any two funds will likely perform differently going forward, and that difference could easily change the result. Very few financial questions can be evaluated with simple calculations. That’s why, especially where there’s less urgency and more uncertainty, I recommend viewing decisions in less binary terms. Instead, look for ways to split the difference, so you remain in the center lane.

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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May’s Hits

MAY WAS AN ECLECTIC month for HumbleDollar, with a wide array of articles published. But judging by the 10 most popular pieces, readers were intrigued:

When interest rates headed higher in 2022, Tony Wilson moved almost all his portfolio into money market funds. He plans to leave the money there—until there's a major market correction.
Planning your estate? Adam Grossman lists five key issues to consider before you commit to any complicated estate-planning strategies.
"I think I was looking for a sign that would guide me toward one retirement date or the other," says Dana Ferris. "Then I got some news that has made it crystal clear to me that I want out as soon as possible."
Read about the time ChatGPT ended up stuck in an elevator with Jack Bogle. This piece was part of our eight-article experiment with artificial intelligence, described here.
Rick Connor's 150th article appeared on HumbleDollar last month. To mark the occasion, he considered offering 150 observations—but settled for 15.
A popular narrative declares that today's young adults are at an economic disadvantage. John Yeigh disagrees—for 10 reasons.
Steve Abramowitz's friend compensated for a penny-pinching childhood by spending lavishly through his adult years. But now he's 73 and retired—and facing the prospect of losing half his wealth to divorce.
Yes, when drawing up your financial plan, you need to run the numbers. But you also need to ponder your life's circumstances and what you care about, says Adam Grossman.
"It’s worth taking a step back and thinking about the spectacular wealth available to us," says Rick Connor. "I don’t include it when I calculate our net worth, but it would swamp anything we’ve acquired."
"The plan I constructed took into account my money beliefs," recounts Venicio Navarro. "It was conservative on purpose. When the markets inevitably crashed, my reaction was no action."

What about HumbleDollar's twice-weekly newsletter? Last month's best-read Wednesday newsletters were Jeff Bond's Unsettling Experience and Bob Dailey's My Death Odyssey, while the most popular Saturday missives were Paying to Avoid Pain and Long Odds, both written by me. Don't get our free newsletter? You can sign up here.

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