Jonathan Clements's Blog, page 87

Exercising Caution

I TOOK MY REQUIRED minimum distribution, or RMD, at the end of July. I was planning on taking it at the end of the year, but my allocation to stocks was more than five percentage points above my target of 40%. I thought selling some of my stocks would be a good way to rebalance my portfolio and fund my RMD, so I sold a portion of my overweight in Vanguard Total Stock Market ETF (symbol: VTI).

I’d been thinking about increasing my stock position from 40% to 45%, but I decided against it. I recalled the saying, “Bulls make money, bears make money, pigs get slaughtered.” Although I have a fairly conservative portfolio, I thought greed was the real reason I wanted to change my asset allocation.

The stock market had been posting solid gains up to that point. I’m not saying my desire to own more stocks was some type of sentiment indicator predicting a market correction—though it did turn out that way. I would, however, suggest you periodically look at your asset allocation to make sure it hasn’t strayed too far from your target.

Our current portfolio of 40% stocks, 55% bonds and 5% cash investments has served us well. It’s given us enough growth and income to fund our six-figure living expenses, which includes $45,000 for travel this year. I know to some that might sound like a ridiculous amount, and I wouldn’t disagree. I never would have thought we’d be spending this much in retirement. But I also know, at age 73, that I don’t have much time left to do the things I want to do while I’m still healthy.

Our income from our Social Security benefits and my RMD is enough to cover our expenses. In addition, my wife will start taking her RMD in six years. If we can live off our Social Security and RMD, we should never run out of money. According to Vanguard Group’s Personal Advisor Select, our portfolio should continue to grow over time.

I realize we'll probably have to rely more on our investments as we grow older, because there are major potholes you sometimes can’t avoid and which can derail your retirement. Failing health is one of them. I was reminded the other day of how fragile my health is.

I was walking down the street to my car when I tripped over the uneven surface between the sidewalk and the curb. It felt like someone grabbed my right foot. I instinctively put out my arms and hands to break my fall. I was able to keep most of my body and face from hitting the pavement. I ended up with a cut lower lip, a small scratch on my right knee, a bruised right hand—and my pride wounded.

My wife said I was lucky. “You could have lost some of your teeth or broken a bone.” She’s right. I was very fortunate. Still, I’d like to think exercising played a major role in keeping me from getting seriously injured. All the weight-bearing exercises, including pushups, gave me the upper-body strength to keep myself from hitting the pavement harder.

I often wondered how much exercising can improve your health. I hadn’t really seen the true benefits until I took that spill. Now, I know.

It goes to show that all our good work doesn’t always produce significant results right away. You sometimes can’t see the benefits even when it does. It reminds me of one of my visits to see my primary care physician.

Many years ago, I saw Dr. Riley about my arm, which was bothering me. He wanted to give me a shot. He said it was the same shot he took when he had a problem with his shoulder. After he received the injection, he was immediately able to lift his arm above his head.

“I believe this shot can help you, too,” he said. He could see I wasn’t convinced. Then he sat down and looked me in the eye. “I want to level with you. Very rarely do I get a chance to see a patient walk out of my office feeling remarkably better than when they walked in. I know I help my patients, but I often don’t get a chance to see it.”

I took the shot thinking it might not only make me feel better, but also Dr. Riley.  Unfortunately, I didn’t feel any different when I left his office. My arm did start feeling better that evening and I believe it sped up my recovery. Dr. Riley just didn’t get a chance to see it.

We all yearn to see the results of our hard work and good deeds. I remember when I was working, while driving home, I’d think of all the things I accomplished that day and how my work made a difference. It made me feel good. I miss that part of my job, more than the paycheck. We can feel we have enough money, but I don’t think we can ever get enough of the pleasure that comes from achieving our goals.

Nowadays, I still take a mental inventory each day of the things I accomplished. Those accomplishments might not be as important as when I was working, but it still makes me feel good about myself. Maybe that’s because—deep down inside—I have a desire to show that, as an elderly person, I still have something to offer.

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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Armed and Ready

COULD SOMETHING like the Great Depression happen again? During that unpleasant episode, the stock market dropped 90%, unemployment rose to 25% and gross domestic product fell 30%. In making a financial plan, is this a scenario we should worry about?

While no one can predict the future, it’s worth taking a closer look at one key variable: the Federal Reserve. Today, the Fed has a reputation for helping smooth out economic cycles. But those who worry about Depression-like scenarios point out how powerless the Fed was to prevent the collapse that occurred in the 1920s and 30s. How should we think about this?

As a starting point, it’s important to understand the Fed’s origins. The Federal Reserve System was created by Congress in 1913 in response to an event known as the Panic of 1907, which saw a number of banks fail and the market drop 50%. The crisis only came to an end when J.P. Morgan committed his own personal funds to help shore up the system.

Seeing how vulnerable banks were, Congress decided that the government needed to take a more active role in regulating and supporting the banking system. Thus, when the Federal Reserve came into being, its focus was limited almost exclusively to that role. This explains, in large part, why the Federal Reserve did little to avert the Great Depression. That simply wasn’t its job.

The Fed’s structure also contributed to its hands being tied during the Depression. Because its primary role in those days was to support local banks, decision-making authority was decentralized. While its headquarters and overall governance were in Washington, the Fed’s 12 regional banks operated independently and weren’t necessarily required to cooperate. Authority was so decentralized that each regional bank could even set its own interest rates. This probably seems surprising today, but it helps us understand why the Fed wasn’t more organized and more proactive in trying to avert the Depression.

In the years after the Great Depression—and largely in response to it—the Fed did begin to expand beyond its narrow role as a bank regulator. The 1933 Banking Act created a new entity within the Fed called the Federal Open Market Committee (FOMC). As its name suggests, this new committee gave the Fed the ability to engage in market operations, buying and selling securities to help influence market prices and interest rates.

During World War II, the Fed used these new powers to help the government finance the war. By purchasing U.S. Treasury bonds, the Fed allowed the Treasury to borrow at very low interest rates. It wasn’t until 1978, though, that the Fed’s mandate was formally expanded to include the language that today is known as the “dual mandate.” This gave the Fed responsibility for managing both inflation and employment, and gave it broad powers to carry out those goals. In the years since, the Fed has been increasingly active in exercising these powers.

The first test of this new mandate came in 1998, when the hedge fund Long-Term Capital Management (LTCM) teetered on the edge of bankruptcy. LTCM was highly leveraged, and the Fed feared that, if the firm failed, it could bring down other firms with which it had trading relationships. To avoid this, the Fed organized a bailout of LTCM, pulling together 14 financial institutions, which—at the Fed’s urging—agreed to commit an aggregate $3.6 billion to stabilize the situation.

During the 2008 financial crisis, the Fed was even more active. In addition to dropping rates quickly, it engaged in significant open market operations, purchasing government bonds to help provide liquidity to the system. It backstopped money market funds when one “broke the buck,” and it provided liquidity to financial institutions when markets dried up. It also worked to rescue banks and major employers that were at risk of failing.

Despite the Fed’s increasingly active role, former Fed Chair Ben Bernanke used to joke that his job was actually 98% talk and just 2% action. This highlights another way in which today’s Fed is a far different institution from the one that stood idly by during the Depression. Until just 30 years ago, the Fed didn't even communicate its policy decisions, but that has changed significantly. In 1994, the FOMC began to issue press releases following each of its meetings. In 2004, the committee began to telegraph its thinking in advance with a practice it calls “forward guidance.” A further step came in 2011, when Bernanke began holding press conferences four times each year. Current Chair Jerome Powell doubled this to eight.

The Fed now also publishes a document it calls the Summary of Economic Projections. It provides insight into FOMC members’ thinking, with multi-year projections for inflation, GDP, interest rates and other economic measures. This type of detailed communication is another way the Fed works to maintain stability.

Along with this increased communication has come increased action. When the pandemic struck in 2020, unemployment spiked, GDP dropped and the stock market sank more than 30%. In response, the Fed dusted off many of the tools it had employed in 2008—and then went further. March 23, 2020, was a particularly notable day. In a single press release, the Fed announced a long list of new policy actions and programs to support nearly every corner of the economy and of the market.

In addition to the standard Fed actions—lowering rates and purchasing Treasury securities—additional actions included backstops for money market funds, banks, municipalities, brokers, large employers and holders of consumer debt. In a move that was particularly novel, the FOMC said it might even purchase corporate bonds and exchange-traded funds holding corporate debt. Prior to that, open market operations had been limited to Treasury securities. The result? Precisely on the day of the Fed’s announcement, the stock market reversed its slide. By August, it had fully recovered its earlier losses and continued rising higher.

In the absence of these actions, it’s anyone’s guess how much worse the situation would have gotten—and how much longer it would have taken to recover. In my view, the Fed’s posture in 2020 illustrates how much the institution has changed over the years. Ironically, critics of the Fed now argue that it has become too willing to intervene in times of crisis. But I think this helps answer the earlier question: In making a financial plan, is it necessary to plan for a Depression-like scenario? While every crisis takes a different form—and while it always makes sense to maintain a diversified portfolio to guard against an uncertain future—I do think that the Fed is different enough today that we shouldn’t worry about a repeat of the 1930s.

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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What We Believed

THE OLDER WE GET, the easier it is to see the progress we’ve made, both as individuals and as a society. But I’m not just thinking about personal wealth, higher standards of living, better health care and extraordinary technological advances.

As I look back, I also see impressive progress in our financial thinking. Here are eight notions that were conventional wisdom half a century ago—but which today aren't universally accepted and, in my estimation, ought to be discarded.

1. Wall Street sells wisdom. Remember John Houseman in those old Smith Barney ads? “They make money the old-fashioned way. They earn it.” Today, the notion strikes me and many others as laughable.

Wall Street doesn’t sell wisdom. Rather, it sells whatever it can get folks to buy—and that’ll also make a heap of money for the Street. What about making money for customers? That, it seems, falls into the category of “happy accidents.”

2. The goal is to beat the market—and, with hard work, we can do it. The reality: Millions of investors have tried to beat the stock market averages and failed, which is why today there’s more money invested in index-mutual funds and exchange-traded index funds than in actively managed funds.

But this massive vote in favor of index funds doesn’t just reflect the realization that beating the market is unlikely. It’s also dawned on many investors that outperforming the market is unnecessary. Instead, by saving diligently, settling on a sensible stock-bond mix, and simply collecting the financial markets’ returns while incurring minimal costs, we should have a great shot at achieving our financial goals.

3. The rich and famous have better lives. The myth: They live in a magical world that we mere mortals can only dream about. This belief was fed by Hollywood publicists and the fawning celebrity journalists of decades ago.

But celebrity journalism isn’t nearly so fawning today. As we’re reminded by the media on a daily basis, the lives of the rich and famous aren’t nearly as wonderful as we imagine. Surprised? Maybe we shouldn’t be. Like you and me, the rich and famous have sleepless nights, indigestion, self-absorbed teenage children, constipation, quarrels with their spouse, and all the other struggles that come with being human—things for which money and fame are not magic antidotes.

4. You can tell who’s rich. As a child, I remember assuming that those who appeared rich—with big houses and fancy cars—were rich. The bestselling book The Millionaire Next Door burst that bubble, pointing out that folks with a seven-figure net worth were often the quiet couple down the street who lived in a modest home, drove older cars and didn’t sport designer clothes. Their thrift, of course, meant they could save great gobs of money.

Indeed, if you listen carefully to what your supposedly wealthier acquaintances say, you can often pick up clues about the true state of their finances. Do they still have a mortgage? Are their cars leased? Are they limiting their children’s college choices? While there might be sound reasons for doing such things, these could also be signs of financial stress—and your purportedly wealthy friends might not be nearly as wealthy as they pretend.

Some years ago, I met an older man through his middle-aged daughter. He was full of bravado and appeared quite wealthy. Still, not all seemed quite right.

When he described the investments that he owned and what drove his trading choices, it was hard to imagine his results were all that great. And when he mentioned that there was still a mortgage on the huge house that he owned, I grew even more suspicious. Even though I gathered he had a five-figure monthly pension, it didn’t appear to be enough to support his lavish lifestyle.

I never learned the true state of his finances. But when his daughter was struggling to cope, financially and otherwise, his response wasn’t to write a check. Instead, his daughter told me, he made a special visit—to help her develop a budgeting spreadsheet.

5. Money buys happiness. A half-century ago, most of us simply assumed that money bought happiness. Today, most folks—including me—still think that’s true. But thanks to some fascinating research, our view is now much more nuanced.

For instance, there are many other factors that affect happiness—friends, faith, divorce, unemployment, age—including the biggest factor of all, which is our innate happiness “set point.” Moreover, much depends on what we buy with our money. Do we use it to create special times with friends and family, to pursue meaningful activities, to favor experiences over things, and to be generous with the causes and people we care about? Research suggests such spending is more likely to boost happiness.

6. More is better. When I say “more,” I don’t just mean more money. Folks spend their lifetime pursuing more of many things, including more career successes and more possessions. But this pursuit can leave us running fast on the hedonic treadmill, sure that the next item will bring greater happiness, only to find we’re running in place. What to do? I’d suggest that each of us should figure out what we’d consider enough, including both enough money and enough worldly success.

7. Employers care. My parents worked for a paternalistic employer, and I certainly thought of my initial employers in those terms. But how many folks today believe that, if they work hard, their employer will return that loyalty and that their job is truly safe? The evisceration of that social contract has, I believe, left us all worse off, both workers and their employers.

8. Time to relax is the big reward. Amassing enough to live without a paycheck is our life’s great financial task. But with many folks reaching retirement in good health, and with potentially many decades ahead of them, retirement from the workforce is no longer about retiring from life.

Rather, it’s about starting new adventures, whether those adventures involve hobbies, travel, volunteering, further education or second act careers. Forget sitting at home in an easy chair with the cat and the TV. Perhaps our retirement might end that way. But many folks embarking on retirement today are looking for much more from life’s final chapter.

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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Don’t Pick Up

I WAS A VICTIM OF identity theft. It wasn’t anything I did. Rather, it was what my former employer did.

During the pandemic, many employees were working remotely, including a member of the human resources department. She received an email from the CEO requesting that she send him the W-2s for all employees. So she did. Unfortunately, the email wasn’t from the CEO. It was sent from a shopping mall in Saudi Arabia.

As soon as she hit send, she realized she’d done something wrong, so she contacted the CEO. He took steps to minimize the damage, but our private information was now public.

Since then, there have been multiple attempts to take advantage of me financially. Luckily, so far, none has been successful. My primary line of defense was freezing my credit.

This hasn’t been a problem because I’m not interested in borrowing money. The credit cards that I already have are all I’m ever going to have. The house we live in will probably be the last house we buy, so I won’t need to take out any loans.

While identity theft has caused me to take precautions, I’ve been able to live comfortably within these restrictions. Still, I’m aware that new problems are waiting for me around every corner.

Lately, I’ve seen articles and news reports about senior scams. Apparently, on top of my identity being compromised, I now need to be aware of people trying to trick me into giving them money. Oh great, just what I need.

One unusual thing about me: I don’t use a cell phone. I have one. I just don’t use it. When I’m asked what my cell phone number is, I lie and say I don’t have one.

I do this because, as soon as you give a business your cell phone number, everything that you get from then on is to your cell phone. In my case, the business could say, “We sent you a text message.” That might be true. But I likely wouldn't see the message in time since I don’t look at my phone consistently. To make life simpler, I give out my home phone number.

When the phone rings, I check caller ID and don’t pick up unless I recognize the caller. If I don’t know who it is and the call is important, I hope the person will leave a message. Not many messages get left, so I assume these folks don’t have anything important to tell me or my family.

These people might be senior scammers who want to tell me my son has been in a car accident. Or that my wife is stuck on the side of the road and needs a gift card sent to her. Or it might be one of the grandkids I don’t have who desperately needs college tuition money.

For people like my wife, who feel the need to pick up the phone every time it rings, my approach is torture. The ringing of the phone makes her feel it has to be someone important and she must answer. Otherwise, the world will come to a screeching halt.

I don’t feel that way. I’m happy to let the phone ring and ring, and not pick up. The one exception is when my wife is out. I always pick up when she calls, in case there’s a problem. I’ve also trained my son not to pick up unless the caller ID indicates it’s my wife. Result: I enjoy a simple, quiet retirement—one that’s free of scammers.
I've Been Robbed

FIVE TIMES IN MY LIFE things have been taken from me without my permission.

The first time was my fault. I left my spring coat in the dormitory lounge where my girlfriend lived. A few days later, I saw another guy wearing it. Instead of asking for my coat back, I decided it was best not to admit that I’d forgotten it. As the saying goes, "Finders, keepers; losers, weepers."

The second theft happened in the parking lot of my auto repair class. Emerging from class, I discovered that my 1969 Mustang was up on milk crates, with the two front tires missing. I had one spare in the trunk but not two. A classmate drove me to my mother’s house, so I could get my snow tires and drive my car home.

The third loss was after a night of drinking in New York City. I was descending the stairs to the subway when I took out my wallet to get my transit card. All of a sudden, someone grabbed my wallet and ran down into the subway station. I wasn’t in the best condition to give chase because of the amount of alcohol I’d drunk.

This loss created a follow-on problem. I was scheduled to fly to England two days later. The thief now had all my credit cards and identification. Luckily, I’d bought traveler’s checks two days before. They were safe in my apartment in Brooklyn, along with my passport and plane ticket. The only thing I needed was cash.

When I went to my bank, however, the teller asked to see my identification. I didn’t have ID because it was in my stolen wallet. I pleaded with the bank employee, who took pity on me and gave me money from my savings. I was still able to go to England, short on cash, but with enough to get by.

The fourth time I was robbed was when I came home to my Brooklyn apartment to discover someone had broken into the place from the fire escape. The thief took my college ring, my stereo and my TV. To prevent future burglaries, I had metal bars installed on the window.

What was the fifth robbery? It's the incident described above, when my identity was stolen. Someone working in human resources at my employer thought she was sending everyone’s W-2 to our CEO—but she was responding to a scam e-mail from someone logged on from a shopping mall in Saudi Arabia. If I hadn’t frozen my credit, I could have lost a lot of money.

All five times my property was stolen, I chose not to wallow in self-pity. Rather I did something about it, like fetching those snow tires for my Mustang. Sure, I like my belongings as much as the next guy, but I also know they can disappear when you least expect it.

I’ve learned not to get too attached to most things. Still, some belongings have sentimental value. These are the hardest to lose. I make copies of things like family photographs, so I can still enjoy them even if the originals are lost.

Insurance will reimburse you for some property losses. The best way to collect is to keep accurate records of your covered belongings. Taking photos of your stuff and saving receipts can help with an insurance claim.

Just know you probably won’t come out whole because of things like the policy deductible and depreciation. When my tires were stolen, I learned what depreciation meant. I wanted new tires. The insurance company asked me how many miles I had on them. After I told them, I didn’t get enough from the insurance proceeds to cover the new tires. Lesson learned.

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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My Dream Hideaway

WHEN I ASKED MY brother what to bring to my newly purchased winter home in Tucson, his response was succinct: “Money. Lots. And extra credit cards.”

The voice of experience, he bought a so-called park unit five years ago before home prices soared, up 47% since early 2020 . My expenses in buying my place—and making it into what I wanted—had me selling beaten-down shares in a total bond fund to refill my cash accounts.

These bond share sales come with a realized loss, which should minimize any tax hit I face. A lifetime of thrift has made me an expert at putting money into accounts. What about taking it out? That, I’m not so good at.

Before my arrival in Arizona, my brother and I scrutinized an inspector’s 33-page report for the unit I’d bought “as is.” The report recommended repairs, and described unfamiliar construction methods and materials.

I bought John Krieger’s Your Mobile Home and pulled out the classic A Pattern Language for the first time in decades. Its planning patterns include A Home for One Person, Old People Everywhere and A Home for an Older Person.

These age-related patterns and others have helped me revise a 40-year-old tin can into my dream hideaway. If my immobile home were the subject of its own book, it would showcase a Half-Hidden Garden, Tapestry of Light and Dark and Private Terrace on the Street.

By definition, a park unit is temporary housing less than 400 square feet. Try pouring a lifetime of preferences into that square footage.

I could have lived a frugal, simple life in my longtime home indefinitely. But this year is one of my go-go retirement years. I also need to master the habit of decumulation, recognizing that we save in our 30s to spend in our 70s. I’m ratcheting up spending on fun and adventure, and experiencing fresh places and new people.

My existing house in California is becoming a part-year home base, filled with accumulated memories. With the mortgage paid off and familiar fixed expenses, it also serves as a financial pillar for my family. It houses young adults in transition, who I hope will one day move out as easily as they move in.

Later on, I may age in place in one of my two homes, before they become part of my estate. It’s possible that a child might keep one as his or her own house, providing their siblings are bought out.

I traveled and lived overseas when I was younger. Now, I’m staying put in this modest Sonoran Desert age-restricted resort, learning from others about how to be single, independent and retired.

The younger, 55-ish park dwellers still have jobs. They arrive in conventional recreational vehicles at the park, which offers desirable amenities for a mix of both fixed units and those that move.

Snowbirds who no longer want the exertion of vehicle maintenance park their RVs year-round and travel to Tucson by air. As winter ends, temporary residents host farewell parties, close up and head north, leaving behind hardy souls who comprise the core of this 55-plus community.

The year-rounders endure summer monsoons, heat and rattlesnakes. My brother and sister-in-law are among them, fully retired and no longer interested in maintaining two homes.

I enjoy my brother’s daily company. We last lived in the same city 40 years ago. It feels right to be together again. He loves do-it-yourself YouTube videos on everyday repairs and maintenance. His shared videos supplement my books.

Whenever I walk the park—which is often, thanks to the family dog—I see neighbors working on all sorts of tasks. I muse whether each chore is something I need to do, too. Most residents are happy to share the particulars of the projects they’ve got underway.

My “as is” unit boasts a 39-year-old over-the-range microwave that I use daily. Initially, performance was lackluster. After a thorough cleaning of its fan filters, it’s humming along and may last another 39 years.

I’m not averse to updating, but the microwave’s dimensions are dissimilar to current models. Replacing it would require removing two cabinets to fit a new one or, alternatively, putting a fan over the range and buying a countertop microwave, when there’s hardly any counter space already.

Cleaning frequently solves performance issues, as it did here. It’s a useful habit that has delayed expensive and unnecessary home improvement projects all my life, leaving money to grow in my retirement accounts.

My tiny kitchen includes a 30-inch range. I’m considering replacing it with a modern 30-inch electric induction range. Maybe the prosperous buy 36-inch designer ranges, but 30-inch ranges remain widely available.

I haven’t cooked on an electric stove in decades. I don’t like the time a burner takes to heat up or turn off. I guess I’ve been spoiled by the responsiveness of a gas range. I’m tempted to buy a new stove, but as a part-time resident it hardly seems fiscally prudent to change out a stove that still works.

Another appliance that has changed substantially is the refrigerator. A decade ago, neighbors back in California remodeled and bought a counter-depth refrigerator. In my ignorance, I hadn’t ever heard the term before. They found many refrigerators 24 inches deep.

Fast forward to my Arizona kitchen today, where I saw an unused water line to a bare-bones refrigerator that didn’t feature icemaking. I considered replacing the fridge with a model that makes ice. I enjoy the creature comfort of chilled filtered water and plenty of clear ice.

A preference is not a need, however, plus any water line adds complexity and risk. In addition, when I shopped for a new refrigerator—for the first time since 2007—I  learned the dimensions of my kitchen don’t fit the fridge I’d hoped to purchase.

Refrigerators have become larger and much more expensive. I could remove the cupboard above the refrigerator to put in a new one. But I’m aiming at a lower-cost no-remodel refresh in this tin shack, so it’s time to watch more of those home remodeling videos.

Catherine Horiuchi is retired from the University of San Francisco's School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine's earlier articles.

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The Greater Good

ANY BABY BOOMER WHO grew up around New York City is probably familiar with the name Robert Moses. He was the city planner who wielded enormous power over the development of New York from the 1920s to the 1960s.

Having grown up on Long Island, I saw his work firsthand in two main highways, the Long Island Expressway and the Northern State Parkway. They were designed to appear park-like, with arched bridges, wide grass run-offs and trees alongside the entire route.

Then there’s Jones Beach State Park, another Moses project. Alongside wide expanses of sandy beach, there are swimming pools, a two-mile-long boardwalk, refreshment stands and enormous parking lots. I’m among the estimated six million people who visit the park each year. My wedding reception was held at a Jones Beach restaurant.

Moses couldn’t stop the Brooklyn Dodgers from moving to Los Angeles, or the New York Giants going to San Francisco. He did, however, build Shea Stadium on the World’s Fair grounds in Flushing, Queens, to house the New York Mets, a recent expansion team.

Moses’s contributions to the New York region are sweeping—and controversial. He bulldozed neighborhoods to make way for great highways and towering bridges. Few had the power to stand up to his far-reaching plans. I remember the expression used to justify his decisions: “the greater good.”

When you cross the George Washington Bridge into New York City, most of the traffic flows onto the Cross Bronx Expressway. You’ve probably been stuck on the Cross Bronx because its width is no match for the volume of traffic it now gets.

As the name implies, the expressway cuts right through the Bronx. In building the road, Moses leveled many old neighborhoods, sending the South Bronx into steep decline. Before, neighbors talked and played along the avenues. After, they were cut off, and property values fell nearby because of the din and pollution of the expressway.

The justification for this neighborhood’s destruction? It was “the greater good,” according to city planners like Moses. Neighborhoods were leveled so automobiles could pass through the city more rapidly. Drivers were the greater good, apparently, and the city’s residents—often poor and black—were not. This urban highway model was adopted by other cities, wrecking many older neighborhoods.

These roads might have been built above the streets, like the elevated train tracks in Chicago. This wouldn’t have disrupted the lives of so many city residents. The powers that be, namely Robert Moses, decided differently, however.

These overbearing policies still exist today in other forms. We all endured the COVID-19 pandemic. The powers that be decided that, for the greater good, we needed to stay home and shelter in place. I’m not arguing against the need for the lockdown. The public health measures saved many lives.

But what about the individual? We have to live under whatever rules are imposed on us, figuring out how to make these difficult situations work for us. By doing so, each of us can also contribute to the greater good.

Working within the rules and turning them to our advantage isn’t a selfish act—it’s a matter of survival. The more people take care of themselves, the better off we all are. If too many people rely on someone else to look after them, the whole community suffers.

Self-reliance isn’t selfish. It’s a strength. Saving a portion of what you earn is a strength. Learning what benefits your employer provides, and using them to your advantage, is a strength. Understanding how to get a higher Social Security benefit is a strength. Making the right health insurance choice is a strength.

No, we don’t get to decide everything in our lives. But it’s up to each of us to take responsibility for our own well-being, so we don’t become a burden to society. That’s helping the greater good.

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Unwanted Attention

I MAY BE WRONG, but I’m pretty sure Vanguard Group doesn’t have a secret plan to control the U.S. banking system. Not everyone is so confident, however.

There’s a federal regulation that no investor can buy more than 10% of the shares of a U.S. bank without regulatory approval if it’s seeking to “control” the bank. Thanks to the popularity of its index funds, Vanguard funds collectively owned 12.5% of State Street’s shares as of June 30. They also owned 9.9% of Bank of New York Mellon and  9.4% of JP Morgan Chase.

Does that worry you? It does one Washington, D.C., regulator.

Jonathan McKernan, a director at the Federal Deposit Insurance Corp., suggests that FDIC regulators may need to supervise Vanguard’s bank share purchases to ensure they aren’t “improperly influencing [bank] operations.” Such reviews can take months to complete.

They would also end an informal understanding that investment companies can break the 10% limit so long as they stay passive investors. There’s a similar regulation against owning too much of a utility’s shares. The Federal Energy Regulatory Commission can undertake regulatory approvals if an investment company seeks to acquire more than 20% of an electric company’s shares.

Vanguard says that it isn’t trying to control banks and meets the passive investor test. This April, Vanguard told fund shareholders that regulatory hiccups could disrupt the smooth operation of its index funds.

“These ownership restrictions and limitations can impact a fund’s performance,” Vanguard wrote. “For index funds, this impact generally takes the form of tracking error, which can arise when a fund is not able to acquire its desired amount of a security.”

Vanguard is exploring workarounds, like buying derivatives to stand in for any bank shares it couldn’t buy directly. Such tactics could add to the costs and risks of its funds, not to mention depress the value of bank shares it couldn’t buy. The ownership limits could also crimp BlackRock’s and State Street Global Advisors’ index funds. Together, the so-called big three own nearly 25% of the shares of many U.S. companies.      

In a speech last January, the FDIC’s McKernan cited a study suggesting the big three money managers could one day own 40% of publicly traded shares in U.S. banks if present trends continue. In theory, the big three indexers could call the shots at America’s banks when they vote stock proxies on behalf of fund shareholders.

Domination of the banking system, though, doesn’t get a mention in Vanguard’s published guidelines on how it votes proxies. Instead, Vanguard says it seeks to support four pillars of good governance: board effectiveness, oversight of strategy and risk, the size of executive pay and issues related to shareholder rights. The plank about the size of executive pay could get spicy. Still, overall, Vanguard’s proxy policies sound like they’re intended to help companies make money for shareholders.

A few years ago, fund companies got a bit chirpy in supporting ESG—environmental, social and governance—issues when voting proxies. The attorneys general of some states, who didn’t share the same views, sued, arguing fund managers were violating their fiduciary duty to put shareholders’ interests first. That sparked a slow retreat by the fund industry to avoid such conflict going forward.

The FDIC’s McKernan linked the threatened enforcement action to ESG votes in his speech last January. “The Big Three insist their index funds are passive. If that were truly so, there might not be much issue under the banking laws,” McKernan said. “But to the extent the Big Three leverage their purportedly passive index funds to advance ESG objectives or otherwise influence corporate policy, then there is a real and significant problem here, and it’s one that the FDIC and the other banking regulators need to get in front of quickly before the influence of the Big Three grows even larger.”

Vanguard and other fund companies will have to step up their lobbying presence in Washington to head off such regulatory headaches. In the meantime, index investors like me may wonder if Jack Bogle’s ingenious invention will be left unmolested to work its magic. Its delicate machinery can deliver riches to millions—provided it’s allowed to work freely.

Greg Spears is HumbleDollar's deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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Yielding No Advantage

DIVIDENDS ARE a seemingly mundane topic. But like many areas of personal finance, it’s one that still generates debate. The most common question: All else being equal, if one stock pays a dividend and another doesn’t, shouldn’t an investor prefer the one that pays the dividend? We’ll examine this question, and then broaden the lens to look at dividend strategies more generally.

To better understand how dividends work, let’s look at Procter & Gamble. Last year, it generated $84 billion in revenue and $15 billion in profit. This year, it’ll deliver a bit more. With those profits, P&G’s management has a number of options. It could reinvest the money back into the business by, say, building a new production plant. Management could acquire other companies. It could buy back shares. Or it could simply keep that cash in the bank for another day. But if there’s still a substantial amount of cash left over, management could distribute it to shareholders. That’s what a dividend is—a share of a company’s after-tax profits.

In the case of Procter & Gamble, it chose to distribute about 60% of profits, or $9.4 billion, to shareholders this year. Since there are 2.35 billion shares outstanding, that works out to $4 per share. So, in addition to whatever price gains P&G’s stock delivers, shareholders will also receive $4 in cash for each of their shares. It’s this dynamic that often leads investors to ask a question: If P&G shareholders receive that $4 regardless of whether the stock goes up or down, isn’t it preferable to own P&G shares rather than the stock of another company that doesn’t pay a dividend?

To answer this question, let’s consider a thought experiment: Suppose another company was exactly like Procter & Gamble in every way except that it didn’t pay a dividend. What would be the effect? If this alternate company’s business were truly identical, it would be worth exactly the same as P&G, except that it would have an extra $9.4 billion in the bank. The result, then, would be that the alternate company’s value would be higher by $9.4 billion, and that additional value would be reflected in its share price. On a per-share basis, that would be $4, so this other company’s share price would be $4 higher than P&G’s.

What conclusion can we draw from this? What the math tells us is that, from the shareholder’s point of view, it should make no difference whether a company pays a dividend or not. The shareholder receives the same $4 of value either way—as a dividend or in the form of a higher share price.

If that’s the case, why do companies pay dividends? Why wouldn’t they simply hold on to the cash they generate? Many companies do just that. A typical pattern for newly public companies is that they’ll hold on to their profits during their early years, because managers of young companies are happy to reinvest every dollar they can back into their growing business.

But at a certain point, as companies expand and become more profitable, they tend to reach a point where there’s simply too much cash to productively reinvest. While it’s an extreme case, that was the situation at Apple back in 2011. Its cash pile had grown to nearly $100 billion. For a long time, the company felt that it was best to hold onto its cash to preserve flexibility. It was only when activist shareholders began to agitate for the company to do more that it initiated sizable dividend payments. Sharing a modest portion of its cash balances “will not close any doors for us,” CEO Tim Cook said at the time. Faced with the same problem—too much cash with too few ways to use it—tech companies Salesforce and Meta also recently initiated dividends.

This makes sense, but it raises a question: If, according to the math, dividends don’t make shareholders any better off, why are they so popular? For starters, many investors—especially those who are retired—like dividends because they feel like a paycheck. Suppose you held a position in Procter & Gamble and needed cash to meet your monthly expenses. You could sell some of your shares. That isn’t too difficult, but there’s nonetheless an appeal in receiving dividend payments because they don’t require any work at all.

There’s an emotional component, too. As we saw earlier, there’s no mathematical difference between a company that pays a dividend and one that doesn’t. When a company pays a dividend, its share price may dip a bit. But that dip is almost imperceptible to shareholders. By contrast, when an investor has to sell shares, that change is noticeable, even though the difference is only in the optics.

There’s also an element that isn’t simply emotional: Because companies are often hesitant to reduce their dividends, dividend rates tend to be much more stable than share prices. P&G, for example, notes that it has paid a dividend every year for more than a century. Moreover, for 68 years in a row, that dividend has increased. Meanwhile, P&G’s share price has experienced significant ups and downs over the years. For investors drawing on their portfolios, dividends deliver both greater simplicity and greater reliability.

There are other reasons that companies like to pay dividends. Many trusts, for example, prefer stocks that pay dividends because beneficiaries are in many cases limited to the income that the trust generates each year. And whether it’s rational or not, many investors view companies that pay dividends as being higher quality. One popular index is called S&P 500 Dividend Aristocrats. It includes companies that have increased their dividends every year for at least 25 consecutive years. There are also the so-called dividend kings, which have boosted their payout for more than 50 years in a row. Dividends, in other words, have a very positive connotation.

Does that mean you should tilt your portfolio toward higher dividends? Despite the benefits, I don’t recommend it, for two reasons. First is the nature of companies that pay dividends. Because newer companies tend not to pay dividends in their early years, companies without dividends tend to be faster growing, on average. In other words, a portfolio that’s tilted toward dividend-paying companies will end up being tilted toward older, slower-growing companies. For example, Tesla and Netflix don’t pay dividends but have, of course, delivered strong share price gains.

The second reason I don’t recommend going out of your way to hold high-dividend payers is because, all things being equal, dividends are tax-inefficient. If you’re in your working years and have no need for current income from your portfolio, dividend payers—in a taxable account—will only serve to generate more taxable income. Going back to the Procter & Gamble example above, it would be more tax-efficient for the company to not pay its $4 dividend and instead for its share price to be $4 higher.

If you own a diversified fund tracking an index like the S&P 500, it will hold a significant number of dividend-paying companies—including Procter & Gamble—and that’s okay. But I see no need to go out of your way to add individual stocks or funds that specifically favor dividend payers.

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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A Time to Give

DEATH AND TAXES are inevitable—and, as I keep getting reminded, also inextricably entwined.

I’m not so fortunate that I need worry about federal estate taxes. That privilege belongs to those who die with $13.61 million in 2024. But that doesn’t mean the taxman isn’t hovering over my demise, raising a host of lesser issues.

Paying the piper. Over the past few years, my focus has been on making big Roth conversions while staying within the 24% federal income-tax bracket. The goal: Build up my Roth and then bequeath it to my two children, while also shrinking my traditional IRA, so required minimum distributions in my 70s and beyond wouldn’t push me into a much higher income-tax bracket.

This year, I’m still aiming for the top of the 24% tax bracket—but I’m not planning any more Roth conversions. Instead, given my cancer diagnosis and likely short life expectancy, my new focus is on making gifts to my wife Elaine, my two children and my two grandchildren. Federal estate taxes may not be a worry, but Pennsylvania’s inheritance tax is. The latter isn’t an issue for Elaine, because spouses are exempt. But it’ll nick 4.5% out of any money I bequeath to my kids and grandkids.

The inheritance tax could also take a bite out of the money I give them now if I don’t live at least a year after making those gifts. That creates an incentive to give away money as soon as possible, and I’ve been doing just that. How much could I give? In the past, I've been guided by the gift-tax exclusion, which is $18,000 in 2024.

That's the amount anybody can give another person each year without filing a gift-tax return. Anything above that sum gets deducted from the sum you can bequeath free of federal estate taxes, and would necessitate filing a gift-tax return. But given that I won't be bequeathing anything close to the $13.61 million federal estate-tax exclusion, gifting more than $18,000 is no big deal.

The money I’m giving away is coming from a mix of my earned income and withdrawals from my traditional IRA. I have roughly 10% of my overall IRA—both Roth and traditional—in bonds, and I’m dipping into those bonds to make gifts. I may also sell some bonds to cover living costs if my earned income is less than I expect or if our travel expenses prove greater than I imagine. In my mental accounting, I’m free to use this bond-market money during my lifetime.

Passing it on. The other 90% of my overall IRA—again both Roth and traditional—is earmarked for Elaine and the kids, and that money is entirely in stocks. While my time horizon is now short, that of my beneficiaries hasn’t changed. Fingers crossed, they should have plenty of time to ride out any stock market downturn and notch handsome gains.

Elaine will be able to treat my IRA as her own and draw it down over her lifetime. Meanwhile, my two kids will be required to empty the IRA money they inherit over 10 years. Hannah and Henry will also owe Pennsylvania’s inheritance tax on the money.

All the money for Elaine is coming from my traditional IRA, while my two children will get my Roth accounts, plus a portion of my traditional IRA. Why earmark the entire Roth for Hannah and Henry? All their withdrawals will be tax-free. That means those withdrawals, when layered on top of their earned income, won’t push them into a higher tax bracket.

I briefly pondered withdrawing from my Roth and giving the money to the kids now. If I live a year after making those gifts, they'd avoid the Pennsylvania's inheritance tax. But the fact is, even a modest amount of tax-free growth would pay for the inheritance tax, so it's better to leave the Roth untouched and let the kids empty the account.

The IRS recently issued rules compelling some IRA beneficiaries to empty the accounts gradually over 10 years, but those rules won't affect my kids. I’ve told Hannah and Henry they should delay tapping the Roth until near the end of the 10-year withdrawal period, so they squeeze the most out of the tax-free growth. Meanwhile, my kids should probably draw down the traditional IRA slowly over the 10 years, so they spread out the taxable income, plus they can use their withdrawal in the year after my death to pay Pennsylvania’s inheritance tax.

Do I now regret my earlier Roth conversions, and the big tax bills I paid as a result? Far from it. My best guess is that the tax arbitrage has worked in my family’s favor, meaning the tax rate I paid on my Roth conversions is less than what my children would now face if I hadn’t made those conversions, and they were instead looking at emptying a big traditional IRA.

Taxing matters. Readers might recall that, back in 2015, I wrote a mortgage to help my daughter purchase her current home. In July, I forgave the loan. That loan forgiveness is potentially subject to the state’s inheritance tax if I don’t live at least a year after making that gift. Still, I’m assured the forgiven loan won’t be considered taxable income for Hannah—something that could happen if, say, you’re drowning in credit-card debt and persuade your card company to forgive that debt.

That brings me to two other tax issues—one I’m no longer focused on, one that could be an issue. The new non-issue: the Medicare premium surcharge known as IRMAA, or income-related monthly adjustment amount. Before my cancer diagnosis, I’d planned to limit my taxable income starting in 2026, when I would turn age 63. Why? My IRMAA surcharges two years later, when I’m 65 and qualify for Medicare, would be based on that income. But now, it’s unlikely I’ll live that long.

Meanwhile, I’ve been assiduously tracking my medical expenses this year, thinking I’d be able to deduct them on Schedule A. But at $29,200, the standard deduction for a couple is sufficiently high in 2024 that I now suspect I won't have enough itemized deductions, especially given that my health insurance has a $5,800 out-of-pocket maximum and given that these expenses are only deductible if they exceed 7.5% of adjusted gross income. Still, that relatively low out-of-pocket maximum is a godsend. I hate to think how much I’d be paying out of pocket if my cancer treatment was happening before the 2010 passage of the Affordable Care Act.

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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Final Countdown

I'VE DECIDED UPON MY retirement date: July 1, 2025. We just passed the one-year countdown point, so I thought I’d share some of my ideas and plans for my final year in the workforce.

This countdown idea, of course, isn’t original with me. Indeed, there are apps that you can put on your phone to count down the time until retirement. I was primarily inspired by a retirement blogger named Fritz Gilbert. He’s way more decisive than I am. Gilbert started his blog several years before his planned retirement date, and has meticulously documented his journey leading up to retirement and the time since.

Besides setting a date, I’ve already completed a couple of preparatory steps. I’ve attended several retirement webinars offered by my current university’s retirement program and my previous university’s program. I now understand the timelines for filing retirement paperwork, and I have those dates on my calendar for next spring.

One year to go: Financial tasks. One thing I thought I’d be doing during this final year is stress-testing our retirement spending plan. We have a spreadsheet of sorts that roughs out what we think our monthly expenses will be. But since my husband may not retire next year when I do, we don’t need a trial run of our more austere spending plan—yet. Instead, I’ll need to think about a household budget that will change in two distinct and related ways.

First, my take-home income will go up. I’ll be receiving pensions from two university systems, and together they will replace more than 80% of my current gross income. Meanwhile, I’ll no longer be making contributions to my university pension, Social Security and Medicare, and my 403(b) and 457 retirement plans. These contributions, together with federal and state tax withholding, easily devour more than 50% of my gross pay. Once I’m retired, the only deductions from my pension checks will be for federal and state income taxes.

Second, we’ll have more taxable income. My pension contribution and my voluntary contributions to retirement plans are all “above the line” deductions that reduce my adjusted gross income. When those are gone, my tax liability will increase.

So, one of my financial tasks this year is trying to figure out what the bottom line will be and what to do about it. For example, perhaps I should be looking into tax-smart ways to invest my extra take-home income.

I also need to think about what I’ll do with my current retirement accounts, which are with Fidelity Investments. In addition, I have a rollover IRA with Charles Schwab from my previous employer. I don’t have to do anything in particular with these accounts, and required minimum distributions for me won’t start until 2035, when I’ll be 75 years old.

But I’m a fan of simplicity and want all of those accounts in one place. Will it be Schwab, Fidelity or perhaps Vanguard Group? My IRA at Schwab is all invested in Vanguard funds. If I roll my Fidelity accounts into my IRA, do I sell the funds I currently own and invest the money elsewhere?

Finally, both my husband and I will turn 65 next year and become eligible for Medicare. He previously worked for California’s state government, and we’re both currently covered by the health benefits from the state’s retirement plan. Once we’re Medicare-eligible, that will become secondary coverage, so we’ll have to investigate our options—there are several—and make our decisions.

One year to go: Personal tasks. I’ll need ideas about how to fill my time purposefully and pleasurably. I have some things I’d like to do, or at least try, but I need to think those through. Happily, I have the perfect space in which to do this, as I have a winter quarter sabbatical from work approved.

My primary objective for those 10 weeks will be to map out some goals for the first year or two after I quit the day job. For example, I’m sure I’ll look into ways to work on my health and fitness regimen once I have more time. I also may take private swimming lessons at a local club. I’ve never been a very good swimmer, and would like to do laps for exercise and feel more comfortable in the ocean, since we live in California and like to travel to Hawaii.

I also want to devote more time to some of my existing hobbies, such as cooking. I’d like to improve my baking skills and learn how to make amazing salads with a spiralizer. Right now, my cooking choices tend to focus on what I can accomplish most quickly and with the fewest ingredients possible. I think I’d enjoy slowing down and spending more time creating delicious, healthy food.

Purposeful activity will be important for me, as I’ve never been one who could tolerate too much leisure. I already do some volunteer leadership work at our church that draws on my teaching and writing skills, and I expect to continue doing some or all of those things. I’d also like to find a local nonprofit where I can volunteer. I’m not sure where I’ll land, but I like the idea that I can try and discard various options until I find what’s right.

Finally, I want to devote more time to relationships. I’ve been doing this more and more in recent years. With additional free time, I can initiate things like walks or coffee with friends, or perhaps hosting people for dinner, movie night or to watch sporting events. I think I’m capable of being a generous friend to people, but I’ve always had to be somewhat protective of my time and energy because my work takes up a lot of it. 

Many people don’t have the luxury of planning for retirement in such a precise way—they retire abruptly because of failing health, family issues or job concerns—or they may not be in a financial position to retire at all. I know I’m privileged, and I hope to use the time and space I’ve been gifted to get retirement off on the right foot.

Dana Ferris and her husband live in Davis, California. She’s a professor in the writing program at the University of California, Davis, and is the author or co-author of nine books on teaching writing and reading to second language learners. Dana is a huge baseball fan and writes a weekly column for a San Francisco Giants fan blog under the nom de plume DrLefty. When not working, she also loves cooking, traveling and working out. Follow Dana on X @LeftyDana and on Threads, and check out her earlier articles.

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