Jonathan Clements's Blog, page 78

Buying Freedom

IF 20-SOMETHINGS ASK me for financial advice, I suggest getting a job right out of college and saving like crazy, so they quickly get themselves on the fast track to financial freedom.

If 60-somethings ask me for advice, I advocate a phased retirement, seeking part-time work in their initial retirement years and, if they enjoy it, perhaps keeping it up into their 70s.

Yeah, I know, I sound like a real killjoy. My advice raises an obvious question: Is there ever a time when we should cut ourselves some slack and not have a job?

Let me start with this: If you have a burning passion—perhaps to establish yourself as an artist in your 20s or to commit yourself to religious study in your 60s—you already know what you need for a fulfilling life. Everybody else’s opinion, including mine, is of little import.

But what if you don’t have a calling? It’s worth keeping five key ideas in mind:

First, in crass economic terms, adult life is about using our human capital—our income-earning ability—to amass financial capital, so one day we no longer need to rely on our human capital. This “no longer relying on our human capital” is what non-economists call retirement, and it often takes three or four decades of saving and investing to accumulate enough.

Second, beyond paying for retirement and other goals, it’s desirable to amass money because it provides a sense of financial security and it gives us the flexibility to lead our life as we wish. If we sock away a moderate amount of savings early on, we’ll remove one of life’s biggest stressors.

Third, most of us aren’t very good at anticipating what our future self will want. Maybe our greatest desire will be to retire early. Perhaps, in our 40s or 50s, we’ll want to swap into a career that’s less lucrative but more fulfilling. Or maybe we’ll be happy to persevere with our current job. It’s hard to know what we’ll want, which is another reason to save diligently starting early in adult life. The larger our nest egg, the more options we’ll have.

Fourth, our focus often shifts as we grow older. We become less motivated by the prospect of pay raises and promotions, and more focused on doing what we personally care about. With any luck, once we have a better handle on what we really want, we’ll get the chance to pursue those passions more fully during a second career or once we’re retired.

Finally, most of us enjoy striving toward our goals. To be sure, we imagine that the greatest happiness will lie in achieving those goals. But in truth, it’s the striving that offers the great pleasure. This pleasure is captured by the notion of flow, those times when we’re engaged in activities that we’re passionate about, we find challenging, we think are important and we feel we’re good at. At such moments, we can become totally absorbed and lose all sense of time. We should design our life—including our retirement—so we enjoy frequent moments of flow.

The five ideas above help explain why we should save early in life to prepare ourselves for later, when we might want to change how we spend our days. But that still leaves one question unanswered: Why, come retirement, should our days necessarily involve working part-time?

The short answer is, it isn’t necessary. Unless you don’t have enough saved, there’s no need to work part-time in retirement. But I think it’s an idea that deserves more attention. Today, retiring as early as possible is considered a badge of honor, and continuing to work later in life is viewed as somehow offensive to the whole notion of retirement.

But as I’ve argued before, there are all kinds of reasons—financial and otherwise—to continue earning money through our 60s and into our 70s. It can feel good to be a productive member of society, plus retirement can be a whole lot less financially stressful if we still have a little money coming in. What about those savings we earlier amassed? Even if we keep earning money, we’ll likely still find plenty of uses for our savings, including travel, helping family members, supporting our favorite charities and perhaps paying long-term-care costs.

I’m not saying that working part-time in retirement is the right choice for everybody. But if there are activities you find fulfilling, and you can make a little money doing so, why not?

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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Plans Interrupted

"YOU’LL STILL HAVE a retirement. It just won’t be the one you planned on."

I’ve had to share this sobering assessment with many patients who were hoping to be rewarded for a lifetime of hard work and responsible saving, only to have those hopes dashed by an unforeseen health crisis. The culprit may be an external event like a disabling car accident or crippling fall, or an internal one like stage-four cancer or early onset dementia.

Such family health catastrophes can interrupt retirement savings, or disrupt a retiree’s plans to travel or pursue long-neglected hobbies. I know all about this—because I’ve seen it happen in my own family.

Stroke of misfortune. My father was an impoverished immigrant who started with nothing and wound up with something, but not what could have been. When only age 66, he suffered a major stroke that impaired his judgment and paralyzed him on the left side—a devastating blow for someone who’d previously exuded invincibility.

A Jewish redneck, if there is such a thing, my father wasn’t averse to letting you know he was a man’s man. When I was felled by a serious depression in midlife, he told me to “hurry up and snap out of it.”

My dad was a wily character who first cashed in on the TV bonanza of the 1950s. He soon pivoted, riding the gravy train of commercial New York real estate over the ensuing three decades. His modus operandi was rehabilitating poorly maintained commercial buildings whose upside rent potential could be tapped with minimal upgrading.

Partly by chance and partly through shrewdness, my father concentrated his investments beneath the glamour of Midtown. He often invited me to accompany him to his office in Lower Manhattan, where he would have me stand by the window as he waved his right arm in an arc and tapped me on the shoulder. “Stevie, they have no more room up there, so they’ll have to take all their ruckus down here. Maybe not in time for Mommy and me, but for you and Richie.”

But for all his bluster, my father was no match for his stroke. The paralysis punctured his bloated sense of masculinity and mastery. Feeling vulnerable and frightened, he abruptly unloaded all his buildings in one mad dash. Insecurity about his health prompted an impulsive cashing out that meant paying large sales commissions, closing costs, legal fees and capital gains taxes.

The untimely selling spree included dumping the property at 591 Broadway, which cuts across the center of gentrified and tony SoHo. It’s now leased to an expansive Victoria’s Secret, whose monthly rent alone dwarfs the price my father received for the sale. In concert with his other nearby properties, it would have “made us a small player on the SoHo scene,” says my brother Richie. “Broadway was his crown jewel. No way he would have let it go,” were it not for his stroke.

Back into surgery. “Richie, how goes it? The day after the surgery, you were in a lot of pain.”

“It’s still really bad. It cuts right through the painkiller. And I can’t walk outside without a cane.”

“What? You’ve got to be kidding me.”

“It’s worse than that. I can’t bend. I need one of those grabbers to pick my dirty socks off the floor. How can I run a law practice when I can’t sit for very long? What a mess.”

“Holy smokes, your back situation is worse than it was before. What do they tell you?”

“That I should feel some relief in a month or two.”

“Well, sounds like you just have to hold on for a while.”

“No, Stevie, I’ve already gotten a second opinion. The guy looked at my records and scans, and thinks the operation was botched. Standard lower back surgery shouldn’t take eight hours.”

“Oh, boy. Now what?”

“He thinks I should first try to get some relief by removing the two loose screws. We’ll go from there. Why did this happen to me? I’ve exercised like a madman, using a treadmill for more than 25 years. Now they think all that stomping may have contributed to the spinal deterioration. Here I was looking to wind down from the law business and enjoy the retirement I deserve. I had it all figured out. I would combine Social Security and my Roth with the net rents from the properties to create a hands-off income stream.”

“Oh, Richie, I’m so sorry this happened to you. Sometimes life can be so random and unfair.”

Short tenure. “And how about what your depression did to your career, Stevie?” my brother asks. “No more graduate students, no more research and eventually no more job. Your currencies were publications, grants and tenure rather than money, but it’s really all the same thing.”

“Yeah, it was a rough go. The depression made me wise before my time about people, families and the role of just plain luck. I had the good fortune to have a phenomenal disability benefit with the university. By classifying me as disabled rather than retired, the medical school credited me with many years of continuous ‘employment’ that vastly increased my pension.”

I continued: “Richie, my close friends were great, and gave Alberta and me loads of support. But my colleagues at the university disappeared. That really hurt, especially because some of them owed their tenure to my ghostwriting.”

“Mommy and Daddy came through, though, right?”

“Boy, you’re not kidding. Even though he thought that depression was just a psychobabble cover-up for laziness, Daddy paid for all those years of therapy. Our father was a real character, so difficult but so loyal.”

“But Stevie, all your retirement planning got waylaid.”

“It would be easy to say yes, but it was more complicated than that. Early on, I was a trigger-happy investor, particularly when I was trading stocks. Back then, long-term meant over the weekend until the market opened again on Monday. But when the depression hit, I had so little energy. I simply wasn’t able to flip properties or play the market. Benign neglect allowed me to have more than 20 years of uninterrupted appreciation and compounding.”

“Unbelievable. You made out like a bandit in spite of yourself.”

“Just think, Richie, if we didn’t have the financial wherewithal to support us through our health ordeals. So many people approaching retirement don’t have that kind of cushion. A healthy lifestyle can turn the odds in your favor, but it can’t remove all the uncertainties. Everyone needs to prepare for the possibility of a health catastrophe that sabotages retirement in ways that seemed unimaginable only days before.”

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

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Me and the Dow

WHEN I WROTE ABOUT the Dow Jones Industrial Average reaching 35,000 in 2021, it’ll surprise few to hear that I—like the stock market—was euphoric. I’ll confess that in 2022, as stocks plunged, I felt silly for having written the article.

But here I am again, writing about the latest milestone for our old friend. After flirting with the number in mid-March, the Dow hit an intraday high topping 40,000 on May 16 for the first time in its history. The next day, it closed above that level for an all-time high.

I agree with a recent Wall Street Journal article that the Dow is a “terrible” index. That’s mostly because it’s a price-weighted index, as opposed to its cousin, the Standard & Poor's 500, which weights companies according to their total stock market value. Nevertheless, I—perhaps like many of you—have followed the Dow almost my entire life, even when I didn’t really know what it was.

The reason for my Dow 35,000 article: I was trying to gauge at what Dow level I’d have enough to retire. I was using an admittedly unscientific approach to come up with that figure. Three years ago, I mentioned that my wife and I wanted to retire in 10 to 15 years. We’re still on track for that goal, which is now nine to 12 years’ away. I postulated that at Dow 50,000 we might have reached our goal.

Our magic Dow number is still a bit tricky and unclear. Let’s assume our investment nest egg is half of what I’d like it to be at retirement. In other words, I need it to double to retire. Using the rule of 72, if the Dow notched 7.2% a year, including dividends, the nest egg would double in 10 years. At 10%, it would double in 7.2 years. Reinvested dividends, of course, aren’t reflected in the headline Dow number.

What if folks don’t think market returns will be so high, and want to use less rosy projections? And what about dividends? With the Dow companies’ dividend yield at roughly 2%, if the Dow’s index level increased by 4% a year, that would result in a 6% compound growth rate. What then?

At that rate, a nest egg would double in roughly 12 years, right on track for yours truly. Because dividends accounted for a third of that growth, we know that the Dow won’t have gained another 40,000 points, landing at 80,000. So, if we discount the 40,000-point gain by one-third—the amount that dividends would account for—that would leave us at Dow 66,667.

What this analysis doesn’t reflect is any additional savings added along the way. The last time I was roughing out this math, I guessed that Dow 50,000 might be the magic number for my wife and me. Given that we continue to invest considerable sums each month, that 50,000 figure is still probably about right. Much of this, of course, will depend on how quickly the Dow reaches 50,000. If it happens in 20 years, that will not be very satisfying for me or many investors. If it happens in 10 years, I’ll likely be celebrating. But again, the Dow number is not really the key to our investment success. Rather, it’s the annual compound growth rate.

Because our youngest child won’t graduate high school for 12 years, my wife and I will likely continue working at least through then before enjoying an “early” retirement starting in our mid-50s. While Mr. Dow and I still have a little way to go before we reach that magic number, I can’t help feeling a little excitement at the most recent milestone.

And even if the market takes a hit after this record high, I’m confident that we’ll continue with our investment plan of steadily buying into the market every month. If the Dow does plummet over the next year or so, I’ll try not to feel too sheepish this time—and at least I’ll have the comfort of knowing our new savings are buying at cheaper prices.

Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters. Since 2009, Ben's made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts. Check out his earlier articles.

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Risk at Every Turn

DEAR DAVID: LAST WEEK, you emailed me, “If you had $20,000, didn’t want to take risk and wanted the best return, how would you invest?” It’s a timeless issue, most likely first asked the day after money was invented.

You may be wondering why, besides asking where your money is currently invested, which turns out to be Bank of America at 0.2%, I haven’t asked about your risk tolerance, current financial situation and future financial needs. This was done on purpose.

I know you’re in your 50s and that you’re currently employed. But I also know most people resist sharing their innermost thoughts about money with a financial advisor, let alone a friend. Also, too much information generally leads to confusion and, even worse, to more questions. Most recipients of financial advice are reluctant to take it, and asking more questions usually won’t make them more receptive.

As I see it, these are your options:

High-yield savings or money market accounts. There are differences between the two, but not enough to matter. They’re both insured by the FDIC, currently offer rates north of 4% and allow immediate access to your money. One downside: Rates will fluctuate and may decrease.
Certificates of deposit (CDs). I’m sure you’re familiar with them. You agree to keep your money in the CD for a specified length of time. Withdrawing early means paying a penalty. While some CDs have a variable rate, most fix the yield at time of purchase.
Bonds, which you can buy individually or via a mutual fund. They come in many shapes and sizes: municipal, corporate, government, short-term, long maturity, high-quality, junk, foreign and so on. I don’t have any in my portfolio because I don’t find they’re worth the hassle. Instead, I prefer long-term CDs.

Now, it may appear that Nos. 1, 2 and 3 are your safest options, but their returns are limited and they’re susceptible to the risk of inflation. That’s why you should look at a few other options.

Dividend stocks. These have many fans, who argue that the dividends paid not only provide income to live on, but also are an indicator of likely returns. I’d like to think I busted this myth in an earlier article.
Stocks, both dividend and non-dividend. Picking individual stocks is just plain hard work, and best left to professionals and amateurs who live and breathe stocks. Another issue: loss aversion, a phenomenon where the pain felt when a stock holding falls $5,000 is far greater than the joy felt by a comparable increase. This can be an obstacle to good decision making.
Actively managed stock mutual funds. You might think hiring one of the aforementioned professionals is the way to go. Unfortunately, I’ve found they generally don’t do a good job and charge too much. Their collective efforts, hustle and intelligence tend to offset one another, making it difficult for any of them to outperform the market.

You might also think that buying active funds would simplify investing. But as there are more actively managed mutual funds than individual stocks, it can actually complicate it.

Broad-based stock index funds. I’m saving the best for last. These will allow you to capture the market’s return at the lowest possible cost. An added benefit: They’ll reduce your loss aversion.

I’d recommend investing $15,000 in a broad-based stock index fund and $5,000 in a five-year CD, where you should be able to notch a 4% yield. This will give you a 75%-25% split between stocks and conservative investments, which sounds about right for you. Feel free to adjust the amounts to better suit your appetite for risk. Please realize that this recommendation comes with some risk. But there’s no such thing as an investment without any. Even keeping $20,000 under the mattress entails considerable risk.

I invest in CDs through Capital One. It has a money market account with a competitive rate, a good selection of CDs and an easy-to-navigate website. Meanwhile, I use Schwab Total Stock Market Index Fund (symbol: SWTSX) as my broad-based index fund. It has low annual expenses of 0.03%, or three cents a year for every $100 invested. It also invests in the entire U.S. stock market, not just the S&P 500, offering greater diversification. Similar funds sold by Fidelity Investments and Vanguard Group would also do just fine.

I’m assuming you have an emergency fund and no credit card debt, and won’t need any money invested in the broad-based index fund for at least 10 years. By the way, consider changing banks. You can do better than Bank of America.

If you have any other questions about personal finance, affairs of the heart or economical travel, feel free to give me a call.

Regards,

Mike

P.S. Regarding your other question: Decentralized finance, also known as DeFi, uses cryptocurrency and blockchain technology to manage financial transactions. It’s another name for a screw job if you’re on its business end. Stick with centralized finance and you’ll do fine.

Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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Overcoming My Fears

I PASSED ON MANY activities when I was younger because I didn’t think I could do them. I simply didn’t have a great deal of self-confidence. It was only after I had some accomplishments to my name that my attitude changed and I became bolder in my efforts.

Along the way, a saying I came across helped me overcome my lack of self-confidence. It’s attributed to Henry Ford, the father of the first broadly affordable mass-produced American automobile, the Model T: “Whether you believe you can do a thing or not, you are right.”

Look at the logic of this statement. He doesn’t mention your skills, abilities, gender, height or parents’ wealth. Ford considered your attitude—your willingness to try—as the most important contributor to success.

Think of phrases we frequently use. “I can’t do that.” “That’s too hard.” “We can’t afford that.” As soon as we say such things, we stop trying, and once we stop trying, success is no longer possible.

One way around negative thinking is to be open to possibilities. Instead of “we can’t afford that,” we might turn it around and say, “How can we afford that?” See how our thinking changes from closed-minded thoughts to possibilities? It’s magical.

During my time working in training and development, I learned about a tool that also helped me achieve my objectives: a job aid. It provides clear instructions on how to complete a task. A job aid helps me work in an organized, logical manner.

A common example of a job aid is a pilot’s checklist. No matter how many times a pilot has flown, he or she must follow the checklist to be sure all the requirements are in place for a safe flight. Many pilots could complete the steps from memory, but they’re required to use the checklist.

For years, I was afraid to buy stocks because I worried about buying the right companies. I studied all the aspects of analyzing a company and its stock, and yet I knew there were many ways I could get tripped up. Where would I gather the necessary information to help me make a decision? How reliable is this information? How much will it cost me to secure the information?

All these questions led me to do nothing. I didn’t have a checklist for individual stocks that worked for me. My solution: Buy stocks through an index fund. There was no need for me to decide whether or not to buy a particular stock. Someone had done that work for me—the members of Standard & Poor’s selection committee. They must think these 500 stocks are worth owning. That worked for me.

Owning 500 different companies also reduced my fear of making a bad decision. The way I saw it, the value of 500 companies can go down, but the probability of all 500 going out of business is infinitesimally small.

I’ve always been a saver, and felt comfortable putting money into a savings account or certificate of deposit. Buying shares of an index fund feels as easy to me as putting money into a savings account. You send money to your bank or you send it to Vanguard Group. Either feels the same to me.

Overcoming my financial fears was important to my well-being. Using job aids and the power of positive thinking helped me to move forward. They may help you as well.

Fun fact: Henry Ford is credited with successfully marketing a car powered by an internal combustion engine. Elon Musk is credited with successfully marketing a vehicle powered by an electric motor. Do you know what Henry Ford’s wife drove? A car called the Detroit Electric manufactured by the Anderson Electric Car Company. What goes around comes around.

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Life’s Potholes

PEOPLE DEBATE JUST about everything in personal finance. Among these arguments: how best to measure risk. Partisans on this topic tend to fall into one of two camps.

In the first group are those who believe risk can be distilled down to a single number. For these folks, the most common numerical yardstick is portfolio volatility—that is, the degree to which a portfolio’s price bounces around from year to year. Portfolios exhibiting lower volatility are deemed safer.

On the argument’s other side are those who believe it's misleading to summarize risk with a single number. That’s because volatility can mean different things in different situations. When a stock declines rapidly, that’s called downside volatility, and no investor welcomes that.

But there’s also upside volatility—when a stock has risen rapidly. Take a highflying stock like Apple or Amazon. Because their prices have risen much faster than the overall market, they too have exhibited above-average volatility. According to textbook theory, they’re very risky. But they’ve also been very profitable. It’s for this reason that many view volatility on its own as a less-than-perfect tool for investors.

Another problem with quantitative measures of risk: They ignore the human element. Consider a portfolio with 15% average volatility. Is that good? It’s hard to say because no portfolio exists in a vacuum. Rather, portfolios belong to people or to institutions, and every individual and every committee is different.

It’s for these reasons that I’m wary of quantitative measures. Risk, in my view, is multifaceted and, to a great degree, personal. That said, if risk can’t be measured quantitatively, how can it be measured? This is admittedly difficult. That’s why I suggest that we not worry so much about measuring risk and instead put more focus on managing it. To that end, below is a brief risk-management playbook.

Early years. If you don’t yet have significant savings, risk management might not seem like a concern. But it is. During these early years, it just takes a different form.

As we move through life, we have, in a sense, two account balances. First is the traditional type of balance—what we have in financial assets. The second type of balance is what’s known as human capital. This refers to our future earning potential. Over time, as we log more years in the workforce, our human capital will decline. But at the same time, our financial capital should increase.

If you’re early in your career, the most important thing you can do is protect your human capital. What does this mean in practice? The key is disability insurance and, if you have a spouse or children, life insurance. While not inexpensive, these two types of coverage can help protect your human capital during the early years.

Working years. Over time, insurance will still be important. But as you build up savings, you’ll want to take steps to protect your financial assets as well. How? The key lever here is asset allocation. Because the stock market can be erratic, investors need to maintain enough outside of stocks—and in cash or bonds—to carry them through future market downturns.

If you’re a net saver, though, you might question whether this is even necessary. Indeed, it’s a question many people ask: If I’m adding to my savings and not withdrawing, why not invest every dollar in stocks to maximize growth? That certainly has intuitive appeal, but there are two reasons you might opt to be a bit more conservative.

You may have heard the term “black swan.” Popularized by a book of the same name, a black swan is an event that’s completely unexpected. The term’s origin is helpful in appreciating its meaning. In many parts of the world, including Europe, all swans are white, so historically it was always assumed that swans everywhere were white.

But in the 1600s, when Dutch explorers landed in Australia and found that black swans were prevalent, they learned a lesson, one that’s applicable to personal finance: We should be careful not to dismiss possibilities—or risks—just because we’ve never seen them before. The risk of a “black swan” event is the first reason you might choose to be more conservative with your portfolio during your working years, even when you have no specific need to draw on your savings.

What does this mean in practice? For younger families, I don’t normally recommend a traditional portfolio with specific percentages in stocks and in bonds. Rather, I recommend deciding on a specific amount of cash and simply holding that at all times to guard against a potential black swan.

There’s another reason you might consider holding a cash buffer like this. The psychologist Daniel Kahneman, who recently died, jointly developed an idea called prospect theory. In short, Kahneman and his colleague were the first to recognize that people dislike losses disproportionately more than they enjoy gains. Since bonds can moderate losses when the stock market falls, this is a second reason you might want to hold some savings outside stocks even when it doesn’t seem necessary.

To be sure, asset allocation should never be our only focus. Other priorities include managing taxes, keeping costs low and avoiding complexity. But I see these as secondary. During the arc of your working years, the stock market will likely go through multiple cycles. If your portfolio is structured so these ups and downs impact you less, that, I believe, is the most important thing.

Retirement. As you approach retirement, risk management takes a different form. At this stage, you’ll likely no longer need life and disability coverage. Instead, managing portfolio risk will be paramount. This is a topic I’ve addressed before. But in short, to arrive at an appropriate portfolio structure, I suggest asking these three questions:

How much risk do I need to take?
How much risk can I afford to take?
How much risk can I tolerate?

There’s a fly in the ointment: If you work through those questions, I suspect you’ll find there isn’t just one answer. For most people, there’s a range of asset allocations that can make sense. How can you settle on an answer? Psychologist Gerd Gigerenzer has spent his career studying risk and decision-making, and suggests an approach he calls “fast and frugal.”

His advice: Avoid trying to over-engineer an answer. Because the stock market is inherently unpredictable, greater and greater levels of analysis may only make us more confident in conclusions that are still ultimately just guesses. As a result, counterintuitively, trying too hard to reduce risk can actually result in greater risk. Gigerenzer cites the collapse of the hedge fund firm Long-Term Capital Management as an example of this phenomenon.

The bottom line: As long as you’ve given a good amount of thought to the three questions outlined above and favor an asset allocation that’s in the appropriate range, you shouldn’t worry any further. As the English philosopher Carveth Read once wrote, “It is better to be roughly right than precisely wrong.”

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 on Threads, and check out his earlier articles.

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What Mom Wrought

GRIEF IS A HEAVY cloak, but when it's entangled with the financial fallout of a loved one passing without a will, the weight can become unbearable. This was my reality when my mother passed away unexpectedly. There were no clear instructions, no designated beneficiaries, just a confusing mess of assets and debts that threatened to drown me in a sea of paperwork and emotional turmoil.

The Intricacies of Intestacy. Since Mom didn't have a will, her estate fell under the jurisdiction of intestacy laws. These vary by state, but generally, they dictate how the court distributes assets to surviving family members. In my case, it meant my brother and I would split everything equally. Sounds fair, right? Well, on paper maybe, but reality rarely follows such neat lines.

Unraveling the Assets (and Debts). The first hurdle was figuring out what Mom actually owned. We spent weeks sifting through bank statements, combing through drawers for forgotten account information, and even contacting the safety deposit box company. There were a few small savings accounts, a paid-off car, and a house with a hefty mortgage still attached.

The surprise, however, came in the form of outstanding credit card debt. The statements, buried under a pile of old magazines, revealed a level of spending I never knew about. Intestacy laws are silent on debt—it becomes the responsibility of the estate, which in turn, meant it became my and my brother's responsibility.

The Emotional Toll. Grief is a deeply personal experience, but navigating the legalities of intestacy added a layer of frustration and anger. Disagreements arose with my brother regarding specific possessions, and the constant financial worry cast a long shadow over our ability to mourn Mom properly.

Beyond the immediate family, there were also extended relatives who felt entitled to certain belongings. The lack of a clear directive from Mom fueled these expectations, creating further tension.

The Financial Repercussions. The credit card debt was a significant blow. While we were able to sell the house to cover most of it, the leftover amount significantly impacted our personal finances. Suddenly, paying bills and planning for the future felt like a constant uphill battle.

The impact wasn't just financial. The stress of dealing with the estate fractured my relationship with my brother for a while. We had to learn to communicate openly and make compromises—a difficult feat while grieving such a significant loss.

Lessons Learned (the Hard Way). The experience left a deep imprint. Here are some crucial things I wish I (and Mom) had known:

Estate Planning is for Everyone. It's a common misconception that estate planning is only for the wealthy. Even with a modest estate, having a will can save your loved ones a lot of trouble and heartache.
Communication is Key. Talk to your family about your wishes. Let them know what's important to you and how you'd like your assets distributed. Open communication can significantly ease the burden during a difficult time.
Get Professional Help. An estate planning attorney can guide you through the process, ensuring your wishes are documented correctly and in accordance with state laws.
Prepare for the Unexpected. Life is unpredictable. Having an estate plan in place offers peace of mind, knowing your loved ones will be taken care of in your absence.

Moving Forward. The process of settling Mom's estate took months, and the emotional and financial scars remain. However, we eventually reached a resolution, and the experience, though painful, has served as a stark reminder of the importance of estate planning.

Now, both my brother and I have wills in place. It's not a pleasant conversation, but it's a necessary one. We don't want to leave the same burden on our loved ones that we had to endure.

While the financial fallout may linger for a while, the memory of Mom is what truly matters. Losing her was a devastating blow, but the lack of an estate plan needlessly complicated the grieving process. This is a lesson I hope others can learn from, so they can focus on what truly matters—cherishing the memories and honoring the legacy of their loved ones.

The above was created by Google Gemini based on this request: "Write an 800-word article about how my mother died without any sort of estate plan and the financial fallout for me." To read more about this experiment, check out Man vs. Machine.

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Seizing the Moment

AS RETIREMENT approaches, one of the pivotal decisions many individuals face is when to start claiming Social Security benefits. It's a choice that carries significant implications for financial security in the later stages of life. While the full retirement age (FRA) for Social Security benefits is typically between 66 and 67, many opt to claim benefits as early as age 62. This was the case for my husband and me, and our decision was guided by a blend of personal circumstances and financial considerations.

At the heart of our decision was the recognition of our individual retirement goals and health considerations. Like many, we began considering our Social Security options well in advance of reaching retirement age. While delaying benefits until full retirement age or beyond can result in higher monthly payments, we weighed this against our desire to enjoy retirement while we were still relatively young and healthy.

For us, claiming Social Security at 62 aligned with our plans for an active retirement. We wanted to seize the opportunity to travel, pursue hobbies, and spend quality time with loved ones. By opting for early benefits, we were able to kickstart these plans without delay. This decision was rooted in the understanding that life is unpredictable, and while delaying benefits might offer higher payments in the future, there are no guarantees concerning health and longevity.

Financial considerations also played a significant role in our decision-making process. We evaluated our overall retirement savings, investments, and anticipated expenses to determine the optimal time to start claiming Social Security. While delaying benefits can lead to higher monthly payments, it requires drawing upon other retirement assets to cover expenses in the interim.

In our case, claiming benefits at 62 allowed us to preserve our other retirement accounts for longer, providing a buffer against unexpected expenses and ensuring financial flexibility in the years ahead. Additionally, by claiming early, we could potentially reduce the need to tap into retirement savings during market downturns, thereby safeguarding our long-term financial security.

Furthermore, we considered the impact of claiming Social Security on our tax situation. While benefits are subject to federal income tax, the extent of taxation depends on various factors, including total income and filing status. By claiming benefits earlier, we could potentially manage our tax liability more effectively, especially if we anticipated higher income in the future from sources such as pensions, part-time work, or required minimum distributions (RMDs) from retirement accounts.

Another crucial factor in our decision was the ability to maximize survivor benefits for the surviving spouse. Claiming Social Security early can impact the survivor benefit amount, potentially reducing it if the primary earner passes away before reaching full retirement age. However, by considering our respective life expectancies, health status, and overall financial picture, we felt comfortable with our decision to claim benefits early, knowing that it would still provide valuable support to the surviving spouse in the event of one partner's passing.

It's important to acknowledge that the decision to claim Social Security at 62 is not one-size-fits-all. Each individual or couple's situation is unique, influenced by factors such as health, longevity, financial resources, and personal preferences. While some may prioritize maximizing monthly benefits by delaying claiming, others may value the freedom and flexibility that come with early benefits.

Ultimately, the decision to claim Social Security at 62 requires careful consideration and planning. It's essential to evaluate the trade-offs involved and assess how claiming benefits aligns with your broader retirement goals and financial strategy. For my husband and me, claiming benefits early provided the opportunity to enjoy retirement on our terms while maintaining financial security and flexibility for the future. It was a decision that reflected our values, priorities, and vision for the years ahead.

The above was created by ChatGPT based on this request: "Write an 800-word article on why my husband and I claimed Social Security at age 62." To read more about this experiment, check out Man vs. Machine.

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Bucking the Trend

RETIREMENT. THE GOLDEN years. A time for travel, relaxation, and maybe a move to a quaint, low-maintenance condo. At least, that's the image often portrayed. But for us, retirement wasn't about shrinking our lives. We decided against the downsizing trend, opting to stay put in our familiar home filled with memories. Here's why we chose comfort over perceived practicality:

The Heart of Our History. Our house isn't just bricks and mortar; it's a chronicle of our lives. The chipped floorboard marks where our daughter learned to ride her bike. The worn patch on the couch whispers stories of countless movie nights. Downsizing would mean parting with these tangible reminders, a process that felt emotionally wrenching.

We'd witnessed friends struggle with the emotional toll of downsizing. Saying goodbye to cherished belongings, navigating the logistics of parting with furniture that wouldn't fit the new space, and the sheer exhaustion of the move—it cast a shadow over their golden years. We wanted our retirement to be a time of joyful reminiscing, not a whirlwind of decluttering and goodbyes.

Rooted in Community. Our neighborhood is more than just an address; it's a close-knit community. We've watched children grow up, shared countless barbecues with neighbors, and built a network of support. Downsizing often means uprooting from established communities, a prospect we found daunting.

The familiar faces we see on our daily walks, the friendly chats over the fence—these connections are a source of comfort and belonging, especially as we age. We worried that downsizing would isolate us, leaving us to navigate retirement in an unfamiliar environment.

Space for the Future. While some envision a retirement focused solely on the present, we wanted a home that could accommodate future possibilities. Our children, scattered across the country, might decide to visit more often when they have families of their own. The extra bedrooms would provide a welcoming space for them, fostering those precious moments with grandchildren.

Perhaps one of us might require in-home care down the line. Our single-story layout already offers easy accessibility, and the extra space could be adapted to accommodate any future needs. Downsizing, with its limited square footage, might not have offered this flexibility.

Financial Considerations. The financial "wisdom" often associated with downsizing wasn't entirely persuasive for us. The moving costs, realtor fees, and potential capital gains taxes would eat into our retirement savings. While a smaller home might have lower property taxes and utilities, the initial financial burden of selling and buying wasn't appealing.

Additionally, the housing market can be unpredictable. Downsizing might have meant locking into a new mortgage payment, a financial commitment we weren't keen on in retirement. Staying put, with our existing mortgage nearing its end, offered financial stability and peace of mind.

Embracing Minimalism, Not Downsizing. Downsizing doesn't equate to living a minimalist lifestyle. We did embrace a decluttering process, getting rid of unused items and streamlining our belongings. However, this wasn't a precursor to a move; it was about appreciating what truly mattered within our existing space.

We found creative storage solutions, maximizing vertical space and utilizing out-of-the-way corners. Sentimental items were carefully organized, ensuring they were cherished, not merely collecting dust. This decluttering exercise wasn't about shedding our past; it was about creating a more organized and functional present.

Retirement Redefined. Ultimately, downsizing isn't a one-size-fits-all solution. We opted for a different path, one that prioritized comfort, familiarity, and the ability to adapt to the unknown. Our retirement is filled with travel adventures, rekindled hobbies, and spending time with loved ones—all within the walls of the home that holds our life's story.

This isn't to say downsizing is wrong. For many, it offers financial freedom and a fresh start. But it's important to challenge the societal pressure to shrink your life in retirement. There's beauty in staying put, in cherishing your memories, and in embracing a future that unfolds within the familiar walls of your haven. Retirement is a time to redefine what a fulfilling life looks like, and for us, that meant staying put, not downsizing.

The above was created by Google Gemini based on this request: "Write an 800-word article about why we chose not to downsize when we retired." To read more about this experiment, check out Man vs. Machine.

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All You Need Is Three

IN THE DYNAMIC AND often volatile world of investing, simplicity can be a powerful ally. While the allure of complex strategies and exotic investments may seem appealing, many investors find themselves overwhelmed and underperforming as a result. Enter the three-fund portfolio—a straightforward, diversified approach that offers numerous benefits to investors of all levels. In this article, we delve into why investors should embrace this minimalist strategy and explore specific index funds that can help build a robust portfolio.

Understanding the Three-Fund Portfolio. At its core, the three-fund portfolio is built upon the principles of diversification, low cost, and simplicity. The strategy involves investing in just three broad asset classes: U.S. stocks, international stocks, and bonds. By allocating funds across these three pillars, investors can achieve a well-rounded portfolio that balances risk and return.

The Benefits of Simplicity. One of the primary advantages of the three-fund portfolio is its simplicity. With just three index funds, investors can construct a diversified portfolio that requires minimal maintenance. This simplicity is particularly beneficial for novice investors who may feel overwhelmed by the complexities of the financial markets.

Moreover, the three-fund portfolio offers cost-effective exposure to a wide range of asset classes. Index funds, which aim to replicate the performance of a specific market index, typically have lower expense ratios compared to actively managed funds. This cost efficiency can significantly impact long-term returns, allowing investors to keep more of their hard-earned money.

Harnessing the Power of Diversification. Diversification is a cornerstone of prudent investing, and the three-fund portfolio excels in this regard. By investing in U.S. stocks, international stocks, and bonds, investors spread their risk across different asset classes and geographical regions. This diversification helps mitigate the impact of market fluctuations and reduces the overall volatility of the portfolio. Specific index funds for the three-fund portfolio:

1. Total Stock Market Index Fund (U.S. Stocks). Vanguard Total Stock Market Index Fund (VTSAX) is a popular choice for gaining exposure to the entire U.S. equity market. This fund tracks the performance of the CRSP US Total Market Index, which includes large, mid, small, and micro-cap stocks. With a low expense ratio and broad diversification, VTSAX is an excellent core holding for the U.S. stock portion of the portfolio.

2. Total International Stock Index Fund (International Stocks). For exposure to international equities, investors can consider funds like the Vanguard Total International Stock Index Fund (VTIAX). VTIAX seeks to mirror the performance of the FTSE Global All Cap ex US Index, providing access to stocks from developed and emerging markets outside the United States. With holdings spanning various countries and industries, VTIAX offers diversification beyond domestic borders.

3. Total Bond Market Index Fund (Bonds). Bonds play a crucial role in balancing the risk of a portfolio, and the Vanguard Total Bond Market Index Fund (VBTLX) is a top choice for fixed-income exposure. VBTLX tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which includes a diverse mix of investment-grade bonds, such as Treasury, corporate, and mortgage-backed securities. By holding a broad range of bonds, VBTLX helps stabilize the portfolio during periods of market volatility.

Conclusion. In an era marked by complexity and uncertainty, the three-fund portfolio stands out as a beacon of simplicity and effectiveness. By investing in just three index funds—representing U.S. stocks, international stocks, and bonds—investors can build a well-diversified portfolio that is easy to manage and low in cost.

While the specific index funds mentioned above are popular choices, investors should conduct their own research and consult with financial advisors to determine the most suitable options for their individual needs and risk tolerance. Whether you're a seasoned investor or just starting your journey, embracing the three-fund portfolio strategy can pave the way for long-term financial success.

The above was created by ChatGPT based on this request: "Write an 800-word article on why investors should own the three-fund portfolio, naming specific index funds." To read more about this experiment, check out Man vs. Machine.

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