Jonathan Clements's Blog, page 82

My Big Brother

AUTO INSURANCE HAS been getting more and more expensive in recent years. There are many reasons: New cars cost more, extreme weather, folks seem to be suing more often, and so on.

Our daughter Brenda called me, asking if I could look over her auto policy to see if there was a way to lower her premiums. We have our car insurance with the same company. On the company’s website, I came across something called “Safe Pilot.” Many insurers have similar programs.

What’s involved? You download software to your cellphone that allows the insurance company to monitor your driving. If you’re a safe driver by the insurer’s standards, the company will trim your premium. My company first monitors your driving for about six months and then gives a discount going forward if it feels you earned it.

I told my daughter about the program. My wife Cindy and I decided we’d also try it. The premiums on our two vehicles have been climbing sharply.

Our insurer looks at two key areas: harsh braking and whether you use your cell phone while driving. Harsh braking indicates you were going too fast or perhaps tailgating other drivers. Yes, they can figure that out from your cell phone, even if it’s just lying next to you. The program on our cell phones immediately tells us what we did wrong on each trip and dings our score.

I think we’re very safe drivers. We don’t travel much out of the local area because I’m retired and Cindy only commutes two miles to work each day. We make a few trips each year to visit our kids, who mostly live about 150 miles away. In addition, I’ve only had two insurance claims filed in my 50 years of driving, with one for a cracked windshield. Cindy has had none in her 40-plus years of driving.

A lot of folks don’t like the idea of “Big Brother” tracking them. But Cindy and I don’t mind. I understand why insurance companies want to identify safe drivers, and then keep them by lowering their insurance premiums.

If you spend any time driving, you’ll see some ungodly drivers, especially on the interstate. I’ve seen cars career all over the road, while speeding and barely missing other vehicles. These are the drivers that cause most of the wrecks. I really don’t want to pay for their bad behavior with higher insurance premiums.

After we signed up, I told my other kids about the program. I was stunned to discover our youngest daughter Belle had been on the program for a year. Her current discount is 29%. Ours is projected to be 27%.

I’m sold.

A side benefit of the program: It makes us better drivers. We’re very much aware that someone is watching every move we make when we get behind the wheel, and that’s good for everyone on the road.

The idea of having a wreck and hurting ourselves is bad enough. But the idea of hurting or causing the death of someone else, when it could have been prevented by safe driving, is something you’d have to live with forever.

I’m glad to be a part of the program. Maybe you will, too.

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Special Care Needed

FATHERHOOD WASN'T one of my life goals. I didn’t feel like I had a wonderful childhood, so I didn’t think I had much to offer my offspring that would help them to lead a wonderful life. If children happened, okay, but it was never a goal.

My first marriage ended because I placed money over fatherhood. I thought not having kids would speed my path to wealth. My wife disagreed—and walked out.

When I met my current wife, I thought about the whole kids thing again. This time, I decided a life without children might not be so great. Unfortunately, having a family was easier said than done. My wife suffered numerous miscarriages.

Finally, we found a fertility specialist who got the job done. My son was born and we were off to the races—or so we thought. Our pediatrician noted that our son wasn’t walking as soon as he should. She suggested a neurologist. A neurologist? What’s his brain got to do with his feet? 

The neurologist discovered the first of many issues with our son. The good news: This was early on. As more issues arose, we were mentally prepared. I handled the financial end of things. My wife became the primary caregiver.

My goal for my son was for him eventually to have a job. I saw that as the first step on the road to independence. His public school education was in self-contained classes, not mainstream with all the “typical” students. Typical is the term used, not normal. Do you know what a normal teenager is? I don’t. They’re all weird.

During his high school years, which continued until he was 21, my son spent time "job shadowing" at local businesses. I assumed one of his employers would recognize his brilliance and give my son a job upon graduation. That never happened. He finally got a job at our local grocery store collecting shopping carts. But that job ended with the pandemic.

In those cases where children don't possess the skills, talents and abilities to lead a typical life, you need to come up with another plan. That alternative plan is to rely on government support, which comes in three main forms.

First, there’s the school system. The system’s goal is to ensure each child, regardless of his or her issues, gets a free, appropriate public education. Not the best. Just appropriate. The result: Many parents fight to get more than the school can give—but they can’t all win.

Second, there’s health care, which is often provided through Medicaid. Depending on a child’s needs, the health care received may not be enough. When it isn’t, the additional cost may have to come from the parents’ savings.

Third, there’s financial support from the government. Supplemental Security Income (SSI) is available to individuals who are disabled or poor. Think of this as welfare. It’s money you can receive regardless of whether you’ve worked. You aren’t allowed to have more than $2,000 in savings to get SSI. In New Jersey, everyone who is on SSI is automatically eligible for Medicaid coverage. Yes, it’s free, but sometimes you get what you pay for.

Once the parents reach retirement and they collect their Social Security retirement benefits, their child is entitled to Social Security if he or she is classified as a disabled adult child, or DAC. That’s the situation with our son. To qualify, children must have had a permanent disability prior to turning age 22 and they can’t be able to support themselves financially.

DACs also qualify for Medicare once they begin receiving Social Security. In addition, they may receive Medicaid. This is referred to as a dual-eligibility health plan. 

To receive SSI or Medicaid, you can’t have significant financial resources. For financially well-off parents, a common goal is to pass along their wealth to their children. But for the parents of special needs children, this is tricky. To ensure continued government support, the child can’t inherit the money directly and it can only be used for expenses outside of food and shelter. That’s where a special needs trust comes into play. If money goes directly to the DAC, he or she will lose the government support needed for food and shelter.

Many grandparents think they’re helping the DAC by including the DAC in their will. But it could have the opposite effect. The child will get the money, but it probably won’t be enough to live on. The DAC will have to reapply for SSI and may not get it. Many of my son’s classmates lost the government support they needed because the parents made their special needs child the beneficiary of their life insurance policy.

There’s one other program that deserves special mention. Many parents take advantage of 529 college savings plans. The idea is to shelter money from taxes that’s earmarked for education. The same general rules have been modified to help special needs students. In 2014, Congress passed the Achieving a Better Life Experience Act. The ABLE Act allows children to shelter up to $100,000, which can be used tax-free for qualified expenses, without losing their government benefits.

Parents of special needs kids have many of the same wishes and dreams as all parents. To the extent possible, we want our children to have happy, independent lives. But for that to happen, parents need to understand the programs available, so their child receives all the support he or she needs.

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

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Don’t Place That Call

AN ANCIENT FINANCIAL concept is gaining newfound popularity.

In his book Politics, Aristotle related a story about a fellow philosopher named Thales, who lived about 2,600 years ago. One winter, Thales made a prediction about the coming olive harvest. He felt that it was going to be a strong year. But because recent harvests had been weak, most people disagreed with him. To Thales, this meant opportunity. He approached the owners of olive presses in his town with a proposition. He offered them a small payment over the winter in exchange for the right to use their presses in the spring if the harvest turned out as he expected.

Thales was right, and he ended up making a fortune. Perhaps more important, with his payments to the olive press owners, he invented a new financial concept, now known as an option. Today, options exist across the financial world, and investment funds that employ options have been growing in popularity. According to the investment manager BlackRock, these sorts of funds have ballooned 20-fold over the past five years. But are they right for you? To answer this question, let’s first take a closer look at how options work.

The option Thales created was what’s now known as a call. It conveys the right—but not the obligation—to make a purchase at an agreed-upon price at a future date. Call options are the first and most common type of option.

Today, a second type of option exists. A put is the opposite of a call, giving the owner the right to sell an asset at a particular price at a future date.

How do options work in practice?

Call options are useful to investors who expect the price of an asset to rise. Consider Apple shares, which are trading at around $220. Suppose you think they’ll rise by year-end. You could buy a call option today with a “strike price” of $250 and an expiration date of Dec. 20. That would give you the right to purchase the stock at $250 at any point before Dec. 20.

Then, if the stock rises just a bit above $250, you’ll have a profit. That’s because the cost for an option like this is modest. Today, they’re trading at just 70 cents per share. This tiny cost is a reason options are popular with some investors. It requires far less capital to bet on a stock using a call option than by purchasing the stock itself.

A put option, on the other hand, could be useful to an investor who believes that a stock is at risk of falling. Consider Apple again. If you’re an Apple shareholder and worried the price might fall, one solution would be to buy a put option with a strike price of, say, $200. Then, no matter how low the stock fell, you’d be able to sell your shares at $200. In this way, put options are like portfolio insurance.

So far, we’ve looked at the benefits of buying options. But investors can also sell options. How would that work? Suppose you owned a stock and wanted to generate some extra income. You could sell call options on that stock to other investors. Continuing with the Apple example, if December call options with a strike price of $250 would cost 70 cents, you could sell those options and collect 70 cents per share. If the stock didn’t get above $250 before Dec. 20, you’d come out ahead.

Similarly, you could sell put options. In this case, you’d also collect a payment. In exchange, you’d agree to buy the stock from the option’s owner if its share price fell below a given price. This type of option is appealing to some investors because, in addition to the upfront payment, it’s a mechanism to buy stocks only when their prices fall.

Those are the benefits of options. But they aren’t without risks. For starters, all options have expiration dates, so if you’re buying either a put or a call, the benefits they confer will be temporary. If the stock doesn’t move in the expected direction, the option will expire worthless. This makes it easy to lose 100% of your investment.

If you’re the seller of an option, you face other risks. Suppose you own Apple shares and sell call options to generate extra income. If the price rises above the option’s strike price, your stock would be “called away.” In other words, you’d be forced to sell it. For that reason, selling a call means your potential gain on a stock will be capped.

Selling a put, on the other hand, means you’ll be obligated to buy a stock if its price drops. That can be a benefit since, all things being equal, buying a stock at a lower price is better than buying it at a higher price. But if something has gone wrong with a company—think Enron, for example—you might not want to buy the stock at any price.

These strategies have been around for a long time. But in recent years, a growing number of funds have started to incorporate options. These funds go by a variety of names, the most common of which is a “buffer” fund. The objective is to deliver results that are less volatile than the overall market—with less upside potential but also less downside risk.

The most common buffer funds employ a three-part formula. First, they buy exposure to an index such as the S&P 500. That provides upside potential. Then they buy put options on that same index, which limits downside risk. Finally, they sell call options on the index. This helps pay for the purchase of the put options, but in exchange for that, the fund’s growth potential will be capped.

In theory, this is a good structure, offering a less volatile way to invest in the stock market. There are, however, three challenges with funds like this. First is cost. The most popular buffer fund, the First Trust Vest Laddered Buffer ETF (symbol: BUFR), carries an expense ratio of 0.95%. For comparison, a standard S&P 500-index fund typically costs less than 0.05%.

Another challenge is complexity. Visit the BUFR website, and you’ll find a dense page of numbers that only an options expert would understand. On the website for its line of buffer funds, iShares includes this disclaimer: “The Buffer and Cap apply to Fund shares held over the hedge period. An investor that purchases Fund shares after the beginning of a hedge period, or sells Fund shares before the end of a hedge period, may not fully realize the Buffer or Cap for the hedge period and may be exposed to greater risk of loss.” Standard investment funds don’t need disclaimers like this.

This gets at the final risk with buffer funds. None of them has a long track record, so they may not perform as expected. Robert Merton is an academic who’s well known as one of the creators of the widely used options pricing formula known as Black-Scholes-Merton.

And yet, in an interview for the book In Pursuit of the Perfect Portfolio, this is what Merton had to say about complex financial instruments: “When I say I have a model, it’s a model of what should happen or what is expected to happen.” But Merton adds, “The model has an error term. It shouldn’t be there, but since no model is complete, you always have an error.” Options-based strategies, in other words, may or may not work out as expected.

This is the most important reason I’d avoid funds like these, and instead opt for simpler investments. Investment markets, in my view, are unpredictable enough without introducing the “error term” that Merton knows is unavoidable.

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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Second Guessing

I'VE BEEN HAVING DOUBTS about some of the financial decisions I’ve made. I don’t know if it has to do with age. They say you tend to lose confidence as you grow older. Life-altering events, such as the death of loved ones, health issues and retirement, can weigh heavily and sow doubt.

For instance, I’ve been thinking about whether I should have sold my condo in 2020, during the pandemic. If I’d kept it, it would be worth quite a bit today. But what bothers me even more is the missed opportunities to spend more time with my friends in the area. Our new home is about 25 miles from my old neighborhood and the traffic can be brutal.

On the other hand, I never wanted to be a landlord and we wouldn’t get much use out of it as a second home. We were able to use part of the proceeds from the sale to renovate our new home in 2020. We didn’t have to tap our savings. Also, I was able to take advantage of the $250,000 capital-gains tax exclusion on the sale.

Another money issue I’ve been pondering has to do with converting our investment holdings from mutual funds to the exchange-traded fund (ETF) version. Was that a wise move?

We were able to reduce our annual fund expenses. But I feel like we’re locked into our current holdings because of the bid-ask spread, which is a transaction cost we’d incur if we sold our ETFs. We were considering reducing the number of our fund holdings to two or even one. But I’m reluctant to pay the transaction costs on our seven-figure portfolio to make that wholesale change.

I’ve even been having doubts about using Vanguard Group’s Personal Advisor Select to manage our investments. Every time I log into our account and see the amount in advisory fees we paid, I ask myself if we’re getting our money’s worth.

But I do sleep well at night and we’re meeting all our financial goals. I like to think having a trusted advisor would make life easier for the one left behind, whenever Rachel or I die.

For now, I’ll follow a friend’s advice: “If it ain’t broke, don’t fix it.”

Although I have these doubts about my financial life, I’m confident we got it right on two of the most important decisions confronting a retiree: choosing the right Medicare plan and when to take Social Security.

We’re enrolled in federally run Medicare, UnitedHealthcare's Medigap Plan G and Wellcare Value Script's prescription drug plan. Because we have traditional Medicare, we’re allowed to see any doctor who accepts Medicare and there are no preapproval requirements. We pay more in premiums than we would for a Medicare Advantage plan. But I believe having more control over my health care is worth it.

When I was eligible for Medicare, I was a healthy senior who only needed to see my primary physician and ophthalmologist once a year. But after my father’s cancer diagnosis, I knew good health can disappear suddenly. I wanted a health care plan that would provide me with the best medical care.

When I turned age 70, I started experiencing a number of health issues: gross hematuria, leukopenia and melanoma. When I had a CT scan to find what was causing the blood in my urine, they saw atherosclerotic calcifications in the aorta, the main artery from the heart that supplies oxygen-rich blood to the rest of the body.

I was able to assemble a wonderful team of physicians, including a geriatrician, urologist, hematologist, cardiologist and dermatologist to address my medical needs in a timely manner. Having traditional Medicare makes me feel safe knowing I can get the care I need when I need it.

Taking Social Security at age 70 was another decision I never questioned. I knew exactly what I wanted—a larger monthly check. I’ve mentioned before how we want to limit our retirement spending to our Social Security benefits and required minimum distributions, or RMDs. If we’re lucky to avoid major health care expenses, we should never run out of money.

How are we doing? When I took my RMD in 2024, my combined withdrawal rate was 3.7% from my traditional IRAs. But if you add our Roth IRAs and other saving accounts, our total burn rate for our investment portfolio was about 2%, well below the often-recommended 4% rate.

Our expenses for health care were higher this year because we had to pay a premium surcharge, or income-related monthly adjustment amount (IRMAA), for Medicare Part B ($13,416) and Part D ($1,790). After our marriage, Rachel sold her home in 2022, increasing our income for IRMAA purposes two years later, in 2024.

Some other big expenditures we’ve incurred in 2024 include travel ($43,500), estimated federal and state income-tax payments ($20,500), homeowners’ association fees ($6,300), insurance premiums ($6,200) and property taxes ($2,200). Still, our Social Security benefits and my RMD should provide enough income to cover all of our 2024 expenses, including charitable donations.  

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

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Tracking My Progress

THOMAS JEFFERSON once said that eternal vigilance is the price of liberty, and the philosopher Socrates opined that the unexamined life isn’t worth living.

Although they were talking about political freedom and personal philosophy, respectively, Jefferson and Socrates could well have been discussing personal finance. One of the best ways to engage in financial vigilance and self-examination is to keep a daily financial journal.

I’ve kept a personal journal since I was 14 years old, and I’ve written a daily personal financial journal for the past 15 years or so. While both practices have been beneficial, here I’ll talk about how I keep a financial journal.

Every morning, coffee in hand, I sit down on the couch, fire up my laptop, and grab a pen and my journal. A date goes in the upper left-hand corner of the day’s page. The top third of my journal I dedicate to non-retirement matters.

On the top left go bank account balances. I also list a brokerage account not designated for retirement. These entries detail all the funds I have on hand. Checking these accounts daily ensures that incoming pay has actually been credited and that outgoing checks have cleared.

In the middle of the top of the page, I list a running total of the charitable contributions I’ve made for the year. This total confirms whether or not I’ve hit the mark on my charitable aspirations. Right below this number, I list any bills coming due. This item keeps me from forgetting about them and incurring late charges. I also list here upcoming quarterly state and federal tax payments.

Finally, I list my Discover and American Express running totals. Discover I use for big, unexpected bills like car repair or cat repair or Doug repair. My American Express I use for day-to-day expenses.

One of the benefits of checking and logging these numbers daily is to detect fraud promptly. Once, in the early hours, I was noting my American Express charges from the previous day.

Trip to Aldi. Check. Coffee at work. Check. Four Uber trips in a California city I’ve never been to? A quick call to American Express resulted in shutting down the account and eventual issuance of a new card.

A second benefit of checking American Express every day is that doing so makes it easier to track the quality and quantity of my day-to-day purchases. I can see relatively quickly whether I’m spending too much and will overshoot my monthly goals. In an article, Bola Sokunbi argues that “consistently keeping a spending journal will tell you exactly what’s happening with your money.” If you don’t track your expenses, it’s difficult to change them.

Under my credit card expenditures, I also list my two credit scores and my "membership rewards" points, which I faithfully transfer to my Delta Skymiles account every month.

After I finish with current accounts, I move to retirement. Starting with my tax-advantaged accounts, I list current values, making a note by each account detailing when it will be used and how. For example, by one account, I might write, “Post-70 annuity.”

On the right-hand side of the page, I list the current balance of a pre-Secure Act IRA I inherited in 2011. I also record the amount of the required minimum distribution (RMD) I’ve taken for the year. Below the inherited IRA, I list the current value of my Roth IRA.

The two accounts are listed together because they work in tandem. Every year since 2014, I’ve paid taxes on the RMD and deposited the remainder into the Roth. Checking these accounts helps me ensure that my contributions have actually made it into the Roth and that they aren’t sitting for months without being invested.

Below my tax-advantaged growth accounts, I list my two dividend accounts—a REIT index fund from Vanguard Group and a managed stock dividend account. I also note the dividends I’ve received for the year, and I make sure that these numbers are growing.

Finally, below my dividend accounts, I list my three non-stock core retirement accounts. First, I list the balance on my Calvert Community Investment Notes, and I also keep a running log of the dividends I’ve received for the year. Then I list the current value of my cash-balance pension plan. Every two weeks, I use an online calculator to run an income projection. I want to know where I’m going to stand in about 13 years. Finally, using my online My Social Security account, I run projections of my Social Security income at 67 and 70 every month or so.

Knowing where you stand is half the battle in personal finance. It can keep you from panicking and worrying.

Another advantage of daily tracking is that if—God forbid—there’s a security breach, I’ll know about it in almost real time. Ditto if I ever try to log in and can’t.

Finally, while I recognize that there are apps that’ll perform some of these functions, I don’t want to link my accounts, plus I get pleasure out of watching a blank page take shape every morning.

In 1852, Henry David Thoreau celebrated the keeping of a journal. While Thoreau was writing about personal journaling, his thoughts apply to keeping a financial diary: “The contemplation of the unfinished picture may suggest its harmonious completion. Associate reverently and as much as you can with your loftiest thoughts. Each thought that is welcomed and recorded is a nest egg, by the side of which more will be laid.”

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

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That Final Payment

IT'S IMPORTANT TO BE familiar with what happens with Social Security benefits when someone dies. Otherwise, you may find yourself in a long, painstaking battle to get the payment to which your loved one was entitled. I found this out the hard way.

My father-in-law Bernard died in September 2016. My wife was his executor and the agent under his power of attorney (POA). But I’d earlier served as POA and executor for my mother, so I handled Bernard’s estate as well, except for signing documents.

The Social Security rules relevant to this situation are as follows. First, the check you receive in any given month represents the benefit for the previous month. Second, you don’t receive a benefit for the month in which you die. You will, however, receive a payment in the month you die, since that payment is for the previous month. Your estate can keep that payment.

I wasn’t clear on these rules, which led to much frustration and gnashing of teeth.

Bernard died in September, and he received a payment that month—which was the payment for August. On Oct. 2, when Bernard would normally have received a direct-deposited Social Security payment for September, he didn’t get a payment, as Social Security had been notified of his death, presumably by the funeral home.

On Oct. 9, we received a letter saying Bernard “is not entitled to monthly benefits beginning September 2015." It also said, "Since we did not stop [Bernard]'s payments until October 2015, he was paid $2,041.20 too much in benefits." The letter concluded: "You should refund this overpayment within 30 days."

This was incorrect. The payment for September would have been received in early October, and Social Security didn’t send an October payment. I didn’t catch that error at the time. Instead, I did what the letter requested and sent a check on Oct. 10.

On Oct. 11, we received another letter from Social Security saying, “Since we were able to stop [Bernard]’s October 2, 2015 payment for $2,041.20, he no longer owes us any money."

Okay, I thought, Social Security won’t cash the check.

No such luck.

On Nov. 10, Social Security deposited the check, so it now owed us $2,041.20. In the months that followed, we called 10 times to try to get this resolved. Each time, we had to wait to get someone on the line, and each time we explained the whole sequence of events. We were assured they were “submitting an action” and to check back in two weeks or a month. Finally, on Aug. 9, 2016, we got a check. This was just in time to close Bernard’s estate before the one-year deadline, after which we would have had to pay for an extension. The rest of the estate had long been settled.

The lesson: If you get a notice from Social Security demanding money back, make sure you really owe money, because it’s hell to get Social Security to correct its errors after it has your money. In this case, if I’d carefully examined the letter it sent or just waited a couple of days, I could have avoided a seemingly endless hassle.

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The Hard Way

I RECENTLY MENTIONED to my wife’s cousin that I’m taking required minimum distributions from my IRA. He won’t have to—because he doesn’t have an IRA. Instead, he keeps his car trunk full of cash.

He’s in the car business. He buys and fixes cars, all out of his mother’s two-car garage. He keeps cash to buy used cars at rock-bottom prices. People are willing to sell a car cheaper if they can get the cash immediately.

His entrepreneurial style is the opposite of my approach to earning and investing. I followed the standard method—work for someone else and collect a paycheck. Pay my bills and save what’s left over. For me, an IRA made investment sense because it sheltered my money from taxes, at least until withdrawal. Later on, I switched to the 401(k) plan at work, which was an even better option for me.

My savings were automatically deducted from my paycheck and deposited into the 401(k). The amount I could contribute to the 401(k) was far more than the IRA contribution limit, which is $7,000 in 2024 or $8,000 for workers age 50 or older.

When I left my employer, I rolled my 401(k) into my IRA. And that’s where my money sits today because I was—and still am—basically a conservative saver.

I’m curious about my wife’s cousin and others like him, those who don’t have a 401(k) or IRA and who run greater risks than I’d ever be willing to take. A second person in this category is my wife’s childhood friend, who says she’s married to a man who’s “house rich and cash poor.”  

When my wife and I visited them at their summer home on the Hudson River, there was a bulldozer sitting on their property. My wife's friend said her husband bought it because someone needed cash and was willing to “let it go” at a low price. The bulldozer is now a lawn ornament. If he finds a buyer, that lawn ornament will be converted back into cash.

That’s not exactly as liquid as my IRA, but it does represent a store of value—provided someone wants to buy it. This isn’t the only real property her husband invests in.

Their Hudson River house is not their main home. Their main house is an old farmhouse sitting on many acres. Her husband rents it out. Any money he clears from the rental house he rolls into his next deal. Money doesn’t rest in his savings account for long.

Take their other vacation place, which is down in Florida, where they spend their winters. He bought an apartment building there, plus a condominium in a 55-plus retirement village. They live in the condo in the winter months, while he handles any maintenance needed on the apartment building. It may work for him, but it wouldn’t be my kind of retirement.

I have a third example of a non-traditional retirement investor. I recently asked my old college roommate what he’s doing about his RMDs. He said nothing—he doesn’t own an IRA. He was a math teacher who, at various times, worked in Catholic schools, high schools and colleges. His pension is less than those who spent their career in a single school system.

How does he supplement his pension? He’s a “picker,” someone who buys odds and ends with the hope of selling them for a profit. He goes to auctions and garage sales, and buys stuff he thinks he can resell for a higher price. His small house is chock full of stuff. His yard has plastic tarp mounds covering the larger items that won’t fit inside his home.

The problem with any market, whether it’s the stock market, the cattle market or the used car market, is that there are no guarantees you’ll be able to sell your goods for a profit. My old college roommate’s approach has that risk in spades.

All three of these men have an attachment to real property, whether cars, rental properties or odds and ends. Do any of these methods measure up against the tried-and-true method of acquiring wealth using an IRA or similar account?

If you have success finding bargain properties and selling them at a profit, it could work. I haven’t followed these three men’s endeavors long enough to gauge how they’re doing. I can say that if excitement turns you on, then dealing in used cars, bulldozers and apartment houses might be just the thing.

My approach to investing isn’t exciting. Just the opposite. Investing in an index fund within an IRA is like watching paint dry. To stomach this slow-but-steady approach to accumulating wealth requires a boatload of patience. If you don’t have it, you’re liable to buy too late in the cycle and sell too soon—and perhaps instead you should keep an eye out for unwanted bulldozers.

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

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Built for Success

THE NEIGHBORING TOWNS of Nogales, Arizona, and Nogales, Mexico, figure prominently in the work of Daron Acemoglu and James Robinson, who—together with a colleague—won this year’s Nobel Prize in economics.

In their book Why Nations Fail, Acemoglu and Robinson explain that these two border towns are identical in almost every way—from demographics to geography to climate. But they differ in one key respect: Nogales on the American side of the border is prosperous, while its southern neighbor is not. The authors use the Nogales example to illustrate why, in their view, there are economic differences from country to country.

Prior to Acemoglu and Robinson, academics usually attributed economic differences to factors such as geography, climate or the presence of natural resources. Some researchers pointed to education levels, cultural factors or experience with colonialism. Another popular theory argued that countries with warmer climates tended to be less economically productive because of the destructive impact of malaria. But places like Nogales—where there are essentially no differences in demographics, geography or climate between the neighboring towns—disprove many of these older theories.

Instead, Acemoglu and Robinson argue that differences in wealth stem mainly from differences in political and economic institutions. In the U.S., for example, the concept of patent protection is written into the Constitution. Robinson notes that the first Patent Board meeting was held in 1790, with Thomas Jefferson in attendance. That’s how important it was.

Robinson emphasizes the impact of patent rights on the early American economy, noting that they were granted broadly “to artisans, farmers, elites, non-elites, professional people, uneducated people.” For this reason, Robinson characterizes countries like the U.S. and its peers as having “inclusive” economic institutions. With the protection of patents and generally strong property rights, entrepreneurs are incentivized to start new businesses.

That’s in contrast to less developed countries, which have what Robinson calls “extractive” systems. In these countries, corruption is so widespread that prospective entrepreneurs are disincentivized from starting businesses. Robinson cites Robert Mugabe, the dictator who ruled Zimbabwe for nearly 40 years. In 1999, he awarded himself a 200% pay raise, then in the following year miraculously “won” the top prize in a government lottery. In Robinson’s view, countries aren’t corrupt because they’re poor; they’re poor because they’re corrupt.

This is why we see entrepreneurs like Sergey Brin co-founding Google in the U.S. rather than in his native Russia, or Elon Musk setting up his various companies in the U.S. rather than in his native South Africa. The list of companies founded by first generation Americans is extensive for the reasons Acemoglu and Robinson identified.

Why Nations Fail emphasizes the importance of patents and property rights. But it’s more nuanced than that. Developed countries, the authors argue, walk a fine line, allowing businesses to thrive, but not allowing them to become too powerful. To illustrate this, Robinson likes to show a picture of Bill Gates from 1998, when he was forced to sit and face an antitrust inquiry. Countries with weaker economic institutions don’t constrain monopolistic businesses, and often the government itself owns them.

Antitrust laws in developed countries, on the other hand, ensure that businesses don’t grow to the point that they become extractive, which stifles innovation and harms economic growth. While sometimes seen as heavy-handed, antitrust laws are the reason we have healthy competition today in markets from energy to telecommunications.

Critics of the inclusive-extractive framework often point to China, a country that’s produced significant economic growth but without inclusive institutions. Political power there is highly concentrated, and the government has a heavy hand in directing the economy.

At a presentation in 2015, Robinson discussed China as a potential exception to his rule. He acknowledged the country’s success but argued that it was unsustainable. “The impulse of the Communist party to suffocate anything that looks vaguely threatening to it politically is fundamentally inconsistent with… innovation.”

That was nine years ago. Recent evidence confirms that he was right, that China’s autocratic approach has indeed started to backfire, producing the sort of results Robinson predicted. Most notably, the government’s one-child policy created an imbalance in the numbers of young men and women, making marriage more difficult and damaging the fabric of society in other ways.

In the economic sphere, China’s leadership, which directs most economic activity, put too heavy an emphasis on construction. That resulted in a surplus of housing units at a time when, due to the one-child policy, the population was falling. According to one study, there might now be as many as 90 million vacant homes that will never be sold. That, in turn, has resulted in significant bankruptcies among property developers. None of this has been good for investors.

Japan’s approach to economic development provides an interesting contrast to China. In the past, Japan sought to direct the allocation of resources, but it always stopped short of the sort of iron-fisted approach favored by Beijing. A famous example dates to 1961.

Japan’s Ministry of International Trade and Industry decided that Toyota should make cars, while Honda should limit itself to motorcycles. It further tried to dictate that cars couldn’t be painted red. Soichiro Honda would have none of this. He ignored the government and began making cars, often in red. Today, Honda produces 14 million cars each year. The results of Japan’s lighter touch are consistent with Robinson’s hypothesis that inclusive systems are more successful.

What are the implications of this research for individual investors? A key debate in personal finance is whether it makes sense to include international stocks in a portfolio. Why Nations Fail highlights an important point: that international markets differ significantly from one another, so it’s important to distinguish among them as we allocate our dollars.

This means examining critically a country’s political and economic structures before entrusting it with our money. That’s the reason I generally advise against total international stock market funds, because they weight stocks only according to their size, ignoring political factors which may ultimately pose risks.

The starkest example of this: Russia. Until a few years ago, it was included in the most popular emerging markets and total international funds. But when it invaded Ukraine, it was zeroed out of these indexes.

Instead, I suggest separating your international investments into two groups. The first is easier: An index of developed markets will include all of the world’s major economies outside the U.S. These are the countries with the most inclusive political and economic structures. For this portion of your portfolio, you could use a fund like Vanguard Group’s FTSE Developed Markets ETF (symbol: VEA) or iShares’s Core MSCI EAFE ETF (IEFA). EAFE stands for Europe, Australasia and Far East.

Governmental institutions are more problematic in emerging markets. There, I don’t think any of the standard market indexes is a good choice because China tends to dominate them, with weightings in the neighborhood of 30%. That’s why I prefer an alternative index known as the Freedom 100. Unlike a traditional index, the Freedom index also takes into account political and economic considerations. Result: The index completely excludes China and, even before the Ukraine war, it excluded Russia.

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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Before You Quit

I MAY NOT BE THE best source of retirement advice. After all, I’ve called myself semi-retired for a decade and yet, faced with a grim medical diagnosis, I continue to work far too hard. Moreover, even if I opt to fully retire—which is doubtful—cancer will likely ensure my retirement will be all too brief.

On the other hand, I do run a website devoted to retirement issues, and that means I spend a lot of time reading and thinking about the topic. Here are five notions that I’d encourage those approaching retirement to ponder.

No. 1: Enough. This is the biggest conundrum for those approaching retirement, and it has multiple dimensions. The obvious question: Do I have enough? This prompts folks to apply the four percent rule to their nest egg, check their proposed retirement withdrawal rate using Monte Carlo analysis, consider what’s the best age to claim Social Security and more.

But we also need to ask: Have I done enough? Do I feel like I’ve accomplished everything that I wanted with my career? For many of us, the answer is likely to be “no,” because very few of us ever feel truly satisfied. But that doesn’t mean we shouldn’t retire. Instead, we might look to work on that missing sense of accomplishment after we quit the workforce.

No. 2: Phased retirement. If folks can, I believe they should try to ease out of the workforce by working reduced hours. Among other things, this will give them a chance to test-drive their retirement.

We humans are not very good at figuring out what we want. I’ve heard folks say they’d like to spend their retirement writing, or volunteering, or teaching, or woodworking. My first question when I hear a prospective retiree’s wish list: Do you do these things now? If not, you may discover these things aren’t really for you. After all, if you truly have a burning desire to do something, why aren’t you doing it already?

As academic psychologists put it, we miswant—and it’s through trial and error that we get it right. We shouldn’t assume we know what we want from our retirement years. Instead, we should prepare for a period of experimentation. An example: I was sure I’d love teaching personal finance. I taught for two semesters as an adjunct professor at a small private college north of New York City. Love, it wasn’t.

No. 3: Working part-time. This is closely related to No. 2—and, in fact, may prove to be the same thing. For a successful retirement, experts say we need a bunch of things: Not just income, but also a sense of purpose, an identity, a structure to our days, and social, physical and intellectual stimulation. But guess what? These are all things that we get from something called a job.

By the end of our career, we may hate what we do for a living. But don’t ignore all the benefits—financial and otherwise—that come with working. Forget the FIRE movement—financial independence-retire early. I’ve been pushing an alternative that I call ICE, short for “I’ll continue earning.”

I think that folks should consider working part-time through their early retirement years, perhaps as part of their phased retirement. I know some retirees strenuously object to the idea of doing anything that looks like a job. But that doesn’t mean working part-time isn’t a good idea for others. The fact is, work offers many benefits, and not just financial.

No. 4: Prepare to be shocked. Regular HumbleDollar readers will have heard that retirement has three phases: the go-go, slow-go and no-go years. From what I’ve heard and observed, there’s a lot of truth to this, and it’s a reason we should plan on being active in those early retirement years, whether it’s traveling or ticking off other bucket list items.

But I’ve also heard and observed that we can look at retirement as having three other phases: honeymoon, shock and redefinition. After the initial exuberance of escaping the work world, many folks suffer a sense of letdown, and they need to figure out what they’re going to do with the rest of their retirement that feels meaningful and that gives them a reason to get out of bed in the morning.

No. 5: Your retirement may last many decades. Mine won’t—but there’s a good chance yours will. Our brains may tell us that life is nasty, brutish and short. The numbers tell us otherwise.

For a couple both age 65 and in reasonable health, there’s a 60% chance that one spouse will live to age 90. It’s possible that some people will spend close to half their adult life in retirement. Obviously, that has financial implications. But it also has implications for what folks should do with their time.

I remember hearing a science professor talk about how, when he was in his 60s, he had one last research project that he wanted to tackle, but he decided he might not live long enough to finish it. The professor chuckled as he told the story—because he was now in his early 90s.

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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Prefer the Original

MEDICARE GETS A LOT of criticism these days. Some view it as socialized medicine. Others fret over the hospital trust fund, which covers Medicare Part A and is expected to run out of money by 2036.

Meanwhile, some policymakers want to cut back on traditional Medicare and promote privatization through Medicare Advantage plans, otherwise known as Part C. That reflects the philosophy that health care costs, access and quality will be improved if we obtain health care as we do other goods, by shopping for the best deal and choosing from among many competitors.

I vehemently disagree. Health care isn’t like obtaining and paying for other goods and services. The current system is working well.

Connie and I have been enrolled in Medicare since January 2010. Over the past 14 years, we’ve been admitted to both public and private hospitals, gone to labs and imaging centers, and seen both primary care physicians and specialists.

I’ve had one surgery since 2010, while Connie has received several types of surgery, both on an inpatient and outpatient basis. One procedure required her to continue treatments in Massachusetts while we were on vacation. She received highly specialized treatment for an eye injury when we self-referred to Wills Eye Hospital in Philadelphia. Over the past 14 years and through various treatments:

We’ve never been confronted with a non-participating provider who wouldn’t accept the Medicare fee allowed.
We’ve never been prevented from obtaining the care we chose or needed.
We’ve never been required to obtain preapproval for care.
We’ve had Medicare limit treatment only once, and that was a chiropractor.
Our out-of-pocket costs have been limited to our annual Part B deductible because we have Medigap Plan G.

From this patient’s point of view, Medicare works very well. It’s not socialized medicine or government-run health care. Instead, it’s government-run, taxpayer-funded insurance.

This is not to say there are no problems. It’s a bureaucracy, after all, and its ability to control costs is limited. But it works for more than 60 million Americans like Connie and me.

No doubt many players in the health care system and some individual providers would not share my positive sentiments, especially regarding Medicare’s fees, rules, regulations and requirements. Yet similar issues are true of private insurance as well.

Medicare isn’t cheap, especially if you’re subject to the premium surcharges known as IRMAA, or income-related monthly adjustment amount, that apply to higher-income people. And, as noted earlier, I must buy a Medigap policy to supplement our Medicare coverage.

For many, the cost of health care coverage after age 65 will likely be higher than it was with their pre-retirement employer-funded coverage. Some try to save money with Medicare Advantage, or Part C. More than 50% of Medicare-eligible beneficiaries enroll in Part C. The attraction is lower out-of-pocket costs and added benefits. Maybe.

The question that often isn’t asked is, how can a Part C plan charge a modest or no premium, add extra benefits and still make money? It can’t—not without some significant differences from original Medicare. Part C plans employ various forms of managed care. Here are three examples:

Limited network. Unlike traditional Medicare, which allows you to visit any doctor or hospital accepting Medicare, Medicare Advantage plans often restrict your network to contracted providers. This might limit your choice of doctors and specialists.

Prior authorization. Certain Medicare Advantage plans require prior authorization before specific treatments or procedures are covered. This can lead to delays in care.

Less flexibility. Switching doctors or plans mid-year can be more cumbersome with Medicare Advantage compared to original Medicare.

While Medicare Advantage is popular and growing, behind the scenes there are issues. The Department of Justice and the Office of the Inspector General have been looking into Medicare Advantage plans, including concerns that some plans use prior authorization requirements to limit care and deny claims.

If you don’t mind playing by all the rules, a Medicare Advantage plan can be a good deal. Yet, having managed various forms of health plan during my career, including health maintenance organizations, I’m sticking with original Medicare. If you decide differently, take a close look at your choices before you enroll. 

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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