Jonathan Clements's Blog, page 93

Aiming High

MY WIFE NEEDED KNEE replacement surgery a few years ago. Her health plan, which was provided through the school district where she worked, was a preferred provider organization with a large network of doctors. After some research, my wife decided she wanted her operation done at New York City’s Hospital for Special Surgery.

I love hearing about people's lives. I’ve long read biographies to learn how others gained their fame or fortune, hoping for pointers that would help me with my own life. I also pepper people with questions about their background.

When we met my wife’s surgeon, I knew he’d graduated from Princeton University, which is near where we live. But I wanted to know more. I asked him what his major was.

When I found out, I was surprised. “Art history? That’s a big leap to orthopedic surgery.”

“My father knew that I’d have to work hard in medical school, so he wanted me to enjoy my undergraduate years.”

“Did you know where you were going to med school?” I asked.

The surgeon’s response: His father had graduated from Columbia University’s medical school, and he’d make sure his son got in.

Early in my career, a manager once told me that “rank has privileges.” The rich have always enjoyed benefits that elude others. Clearly, my wife’s surgeon was part of the 1%, getting the benefit of an Ivy League education, plus guaranteed entrance to medical school. It must be nice.

Knowing what the 1% have can either inspire us or defeat us. In his book The Magic of Thinking Big, David J. Schwartz makes the argument that the higher you aim, the higher your final landing spot will be.

I’ve always wanted to be rich. Did I get it all? No. But my lofty goal meant I probably ended up with more than I otherwise would. Today, I’m satisfied with what I have based on the effort I put in.

What about my wife’s surgery? It went beautifully. Her surgeon was a great guy, with a good sense of humor, and he didn’t get upset with my interrogation. Yes, he had advantages that my wife and I never had. But we were also able to take advantage of his talents and his training. We shouldn’t be jealous of what others have. Instead, when we get the chance, we should utilize their skills and training for our own benefit.

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Farewell to Forever

WHEN I WAS YOUNG, I felt immortal. We all did. It’s natural and likely hardwired into our brains. Such feelings of immortality have an evolutionary advantage, encouraging us to take the risks necessary to succeed.

When I planned for retirement, the notion of immortality was front and center. I consider myself in excellent health. I eat right. I’m not overweight. I stay active. I have a close circle of friends and an active social community from which to draw strength. Heck, I can do 25 pushups without breaking a sweat.

But I also wear a thick set of health blinders.

Both my parents exhibited dementia shortly after turning age 80. My father passed away from cardiac stenosis at 83, in many ways sparing him the loss of mental function. Unfortunately, both autoimmune disorders and neurological dysfunction are rooted in my family tree.

Meanwhile, I have high blood pressure, a genetic variant of hyperlipidemia, esophageal Barrett’s syndrome and the common benign prostatic hyperplasia that all men get as they age. I’ve had two heart attacks requiring stent placements. In addition, I live with autoimmune gluten sensitivity. My physician daughter tells me that I have signs of a tremor. To top it off, I have crooked teeth (although my breath is minty fresh).

Oh yes, I also had a brain tumor excised last year. Almost forgot that one.

Yet I still think of myself as immortal.

Our retirement plan incorporates an “immortal” timeline, with a 40-year survival expectancy for both my spouse and me. For decades, our investment strategy was set to nearly 90% stocks. When I turned age 59, I moved to 80% stocks and 20% bonds and cash—an asset allocation that reflects my conviction that we’ll live for many more decades. I rebalance semi-annually to those asset allocation targets.

We expect to delay taking my Social Security benefits until I’m 70. In addition to our core retirement portfolio, we’ve set aside three years’ worth of expenses for necessities, travel, projected taxes, charitable giving, and modest annual gifts to our children. Perhaps our three-year buffer is excessive, but it allows us to sleep at night.

I rely on predictive spending models to convince myself that our portfolio is large enough to carry us through four decades. I love FIRECalc and the Bogleheads’ “variable percentage withdrawal” spreadsheet. I test spending levels using an inflation-adjusted 4% withdrawal rate or less. I also take advantage of Monte Carlo simulations and other predictive calculators, such as those at DQYDJ, to reconfirm our spending plans.

My wife and I are confident that we’ll be able to cover future expenses—including taxes and adjusting for inflation—until we both reach the centenarian mark. Overall, we’re extremely comfortable with this “immortal” outlook. What if we die before we reach age 100? We’re happy to leave monies to our heirs and charity.

Which brings me back to what happened almost exactly one year ago. Simply put, I had a brain tumor diagnosed and then removed. This type of life-changing event can definitely mess with one’s sense of immortality.

My neurosurgeon said, “If you have to have a brain tumor, this is one of the best kinds to have.” Reflexively, I imagined giving him my best Rocky Balboa right-jab left-hook combination, but deep down I knew that I was truly fortunate.

Without treatment, the tumor would have constricted two blood vessels, leading to a stroke or hemorrhage. The growth itself, if left unheeded, would have caused permanent right-side motor deficits and immobility. I wouldn’t have survived to collect full Social Security benefits.

Surgery and radiation treatment were successful. The tumor was benign and I’ve made a nearly complete recovery. I’m told that I can, and should, lead a normal and healthy life. I was lucky.

Very, very lucky.

In light of recent events, I’m inclined to reevaluate our 40-year retirement horizon. Maybe I’ll lower expectations, at least for me, to a more realistic 25 or 30 additional years. Perhaps we’ll live a little larger, a little less frugally, and travel more in the near future, rather than wait until the perfect time arrives.

I don’t want my positive outlook on life to change. I’m committed to living each day to its fullest. I still want to think I’m immortal. Only now, the small voice in the back of my head recommends that, for the sake of financial planning, my statistical life expectancy should be reduced.

Perhaps I’ll now consider myself only 80% immortal.

Jeffrey K. Actor, PhD, was a professor at a major medical school in Houston for more than 25 years, serving as an academic researcher with interests in how immune responses function to fight pathogenic diseases. Jeff’s retirement goals are to write short science fiction stories, volunteer in the community and spend time in his garden. Check out his earlier articles.

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QCDs and Me

SOME 90% OF TAXPAYERS claim the standard deduction on their tax return. Thanks to 2017’s Tax Cuts and Jobs Act, today’s standard deduction is larger than the itemized deductions of most taxpayers, including those who previously itemized.

But my wife and I are among the 10% of taxpayers who have continued to itemize, including each of the five years since I retired in 2018. Despite the much higher standard deduction for married couples over age 65, we still had enough itemized deductions to make it worthwhile.

But that changed in 2023.

Prior to 2023, about half of our itemized deductions were charitable contributions. When I turned age 70½ last year, I became eligible to make qualified charitable distributions (QCDs) from my IRA, and started going that route instead of donating directly to charitable organizations.

If you aren’t familiar with QCDs, they’re tax-free withdrawals from a traditional or Roth IRA—401(k)s don't qualify—that are sent directly from the IRA custodian to a qualified 501(c)(3) charity. Not only is the withdrawal not taxed, but you can use it to help meet your required minimum distributions, which now kick in at age 73.

I've been looking forward to doing the taxes this year to see how my QCDs would affect them. I know that sounds a little ridiculous. Who likes to do their taxes? Maybe only personal finance nerds who write for HumbleDollar.

Since I use Intuit's TurboTax software to do our taxes, all I needed to know to get started was our income, the tax withheld and an accounting of all my QCDs. Because I have all my retirement accounts consolidated at Fidelity Investments, I get one statement detailing all my IRA distributions and withholding information.

When I’ve itemized in the past, I had to gather a lot of additional documentation on our deductions, including charitable contributions, property taxes, medical expenses and so forth. Once I had all the information, I'd enter it into TurboTax. But since we’ll be taking the standard deduction in 2023, I didn't need to compile all that information to get started on our taxes.

Our 2023 income came mostly from taxable IRA distributions. A close second was our Social Security benefits, 85% of which is taxable at our income level. We also had a small amount of interest from a savings account, plus some business income from book sales and a speaking engagement.

As you probably know, taxable income all starts with your adjusted gross income (AGI). According to the IRS, AGI "is defined as total income minus deductions or 'adjustments' to income that you are entitled to take." But things get a little tricky when it comes to accounting for QCDs.

Your custodian reports QCDs and other distributions from an IRA on IRS Form 1099-R. They’re included with taxable distributions and reported on Lines 1 and 2 of Form 1099-R.

But there's a problem: Nowhere on the 1099-R is the QCD amount reported. You also won't find a box or a code on Form 1040. You'll have to do this AGI adjustment yourself. Fortunately, it's easy. You just have to do some simple math and fill out two fields on Form 1040.

Here's a simple example: If you withdrew $25,000 from your IRA, of which $5,000 went directly to charity using a QCD, you’d take the gross distribution listed on Form 1099-R’s Box 1 and enter it on Line 4a of Form 1040 (IRA distributions). Then you’d subtract the $5,000 QCD and enter $20,000 on Line 4b (taxable amount). If the entire distribution is a QCD, you would enter $0 on line 4b. If you’re using a paper form, you can write "QCD" next to line 4b. For more details, see the instructions for 2023’s Form 1040.

Since I use TurboTax software, I didn't have to worry about this. I was pleasantly surprised that TurboTax asked about QCDs and did the calculation for me. All I had to do was enter the total of my QCDs for the year.

If someone does your taxes for you, and you give them your 1099s and charitable contribution statements, the preparer won't automatically know about your QCDs. You'll need to tell the preparer, and include the amount, so it gets reported correctly.

Keep in mind that your only proof of the QCDs is a statement from a qualified charity acknowledging that it received the IRA funds. If you’re ever questioned or audited, you'll need this, along with your financial institution's records of the QCD amounts.

Once I entered all the information, TurboTax calculated our AGI by reducing our gross income by the total amount of my QCDs. The software treats it as a "pre-tax deduction," like a contribution to a traditional IRA. Next, the software calculated our taxable income by reducing our AGI by the standard deduction amount for a married couple over age 65 filing jointly, which for 2023 is $30,700.

The resulting taxable income put us in the 22% marginal tax bracket, but our effective tax rate was 8.1% because most of our income was taxed at a lower rate than our marginal rate. Did doing QCDs help or hurt our overall tax position? The short answer: It helped. The longer answer requires some qualification.

Because we already realized some tax benefits from our itemized charitable contributions, it didn't help as much as if we’d previously been taking the standard deduction and started making QCDs for the first time.

By using QCDs for the 2023 tax year, we reduced our overall tax liability, compared to what it would have been if we’d itemized our charitable contributions. The reason is that the total of our standard deduction and the qualified charitable distributions (QCDs) exceeded the amount of our itemized deductions, further reducing our taxable income.

To estimate our tax savings, I compared our 2023 standard deduction, combined with my QCDs, to our 2022 itemized deductions, and then calculated the potential tax savings. Since we’re in the 22% marginal tax bracket and QCDs reduced our taxable income by an additional 7.6%, our additional tax savings as a percentage of our taxable income was 1.7% (0.22 x 0.076 = 0.017), a significant but not substantial tax savings.

From this, we can conclude that QCDs may be beneficial in four basic scenarios:

Scenario No. 1: If you itemize your deductions and charitable contributions are a significant part of the total, it's likely that making QCDs when you're eligible will result in a slightly lower federal income tax bill.

Scenario No. 2: If you make charitable contributions but weren't previously able to itemize, making QCDs may lower your taxes even more because you'll still be able to take the standard deduction, plus you'll reduce your taxable income by the amount of your QCDs.

Scenario No. 3: If you haven't been making charitable contributions but would like to start once you reach age 70½, QCDs are a great way to go because your IRA distributions are tax-free whether you’re currently itemizing or not.

Scenario No. 4: If you use QCDs to help satisfy your annual required minimum distributions, you’ll reduce your taxable income by the amount of your QCD.

QCDs helped my wife and me, though the tax savings would have been greater if we hadn't previously been itemizing our charitable contributions. And they'll probably help you, too, no matter which of the above scenarios you're in.

Chris Cagle retired from his career as an IT manager in the financial services industry in 2019. He now spends his time writing on his own site, RetirementStewardship.com , volunteering at his church, and hiking and fishing when he gets the chance. Chris has also written three books on retirement, Reimagine Retirement (2019), The Minister’s Retirement (2020) and his most recent, Redeeming Retirement: A Practical Guide to Catch Up (2021). Chris and his wife have been married 50 years and have six grandchildren. Chris's previous article was Time for a Ladder.

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Fit for Retirement

I HAD A REVELATION while shoveling snow earlier this year. When I was age 40 or so, digging out after a snowstorm was always an ordeal for me, even with the aid of a snowblower. I’d need to take frequent breaks and would be wiped out for the rest of the day. Multiple body aches would appear over the next 24 hours, and full recovery might take a few days.

But in January, at age 61, digging out from two snowstorms within four days was no big deal. I didn’t even bother to fire up the snowblower for the first storm, which dropped about four inches on our area. I was a bit tired immediately after shoveling, but recovered within a few hours. The only pains I felt the next day were mild aches in my right hand and forearm, presumably from exercising lesser used muscles while handling the shovel.

After college, I joined the local YMCA and would work out occasionally. A couple of years later, I decided I wasn’t using the membership enough to justify the cost and canceled it. Through my late 20s, 30s and most of my 40s, I engaged in very little intentional exercise.

This changed in my late 40s, when my athletic son, Dan, convinced me to join the YMCA with him. My first workout there harkened back to my earlier snow removal experiences: I was sore for a week afterwards. Still, I continued to work out regularly because I was my son’s transportation to the gym. After a year, I looked back at the paltry weights and minuscule number of repetitions recorded on my initial workout card and marveled at the progress I’d made.

Dan eventually started doing his workouts at home and I canceled our memberships. I joined the gym at my place of work and used their limited set of equipment. My workouts there weren’t as intense—a significant step backward from the YMCA workouts. I typically did a few different upper-body weight exercises, and my sessions rarely lasted more than 15 minutes. I needed to record 20 visits a quarter to get reimbursed by my company for the gym fee, so I made sure I did at least that.

More than 10 years ago, I read a book titled Younger Next Year. Its key message: consistently engage in vigorous exercise to combat the inevitable effects of aging. Although not everything in the book was my cup of tea, it was an entertaining read and made me think more about the importance of changing my largely sedentary lifestyle. Reading the book should have motivated me to take action, but it didn’t. Still, I absorbed many of the book’s concepts.

My son was never shy about giving fitness feedback to me. A few years ago, his persistent message—that I was neglecting my leg muscles—sunk in. I’ve read that a person’s typical walking speed correlates with longevity—faster walkers tend to live longer. More important, it just makes sense that, if I want to stay mobile for as long as possible, I need to keep my legs in good shape.

In summer 2021, my wife Lisa and I joined a Planet Fitness gym a mile or so from our home. This has turned out to be one of our best investments. My membership only costs $10 a month, plus a modest annual fee. The facility is amply equipped, clean and well managed, with a super-friendly staff.

I regularly use 11 different weight machines. Exercises that strengthen my core and legs are emphasized equally with my upper-body workouts. Readers won’t be surprised to learn that I monitor my progress using a spreadsheet. I’ve never been as disciplined and consistent at exercising as I have been these past few years.

Lisa is even more of a gym enthusiast. She takes fitness classes and has upgraded her membership so she can enjoy more perks. The money she’s saved by avoiding chiropractic visits for her back issues easily covers the cost of both our memberships. A virtuous cycle has been created.

Why am I writing a HumbleDollar article about my exercise history? I understand more than ever that a key component of a satisfying retirement is maintaining our fitness and health. It’s a store of wealth that can’t be quantified in dollars, yet it’s essential to enjoying our golden years.

I’m inspired by my recent snow removal experience. It confirms that I can make significant improvements to my physical condition despite the advancing years. I know I have much work ahead to climb to the top of the fitness ladder. Still, it’s gratifying to know I’m no longer stuck on the lowest rung.

Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. Follow Ken on X @Nuke_Ken and check out his earlier articles.

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Retiring on My Terms

I OFTEN READ ABOUT the difficulties people face after retiring—difficulties that have nothing to do with money. Loss of identity, depression and boredom are all mentioned. It takes serious planning beyond finances to retire, we’re told.

As an employee, I was a type-A personality. I worked seven days a week, in and out of the office. I worked on vacations. My job required me to work with the organization’s most senior executives.

If there was anyone set for a fall upon retiring, it should have been me. I had little social life beyond family, and few friends not related to work. Most of my work “friends” quickly disappeared once I retired. I never thought about retirement planning beyond finances—despite conducting hundreds of classes telling other employees to do exactly that.

Why haven’t I had a problem with retirement? I believe it’s because I waited until I knew it was time. My work situation was changing and I was ready to move on. I retired at age 67 on my own terms.

What were my terms? To begin with, I started a phased retirement the year before, when I began collecting my pension. During that final year, I worked no more than 20 hours a week, and I gradually found it harder to go to the office.

When I retired, my wife made it clear she was continuing all her activities that didn’t involve me. No problem. I wouldn’t expect otherwise. A day with nothing to do isn't unwelcome to me.

The first thing we did after retiring was take a three-week river cruise from St. Petersburg to Moscow. I wouldn’t do that trip again. But it motivated me to travel as much as possible. While traveling, we’ve made some lasting friendships in Europe.

We’ve been to 45 countries, on several cruises and completed our goal of visiting all 50 states. We travel to our vacation home throughout the year, and also spend part of each winter in Florida. None of this would have been financially possible if I’d set a goal to retire in my 50s or even early 60s. There are tradeoffs.

Communications were a big part of my job. I’m the same person before and after retirement. Why would it be otherwise? Shortly after retiring, I started a website and then a blog, so I’d have a place to rant. That blog still keeps me busy for a few hours a day.

To some readers’ regret, back in 2018, I discovered HumbleDollar. Reading, writing and commenting here takes time each day. I enjoy the back and forth. I’m certainly not bored.

Routine activities take time as well. Food shopping, cooking and assorted errands aren’t depressing to me. Of course, with 11 grandchildren all living within an hour’s drive, there’s plenty of family time, activities to attend, sporting events, birthdays and such.

Five years ago, we moved to a 55-plus condo community, which in reality is more like 70-plus. We have new friends here, plus lots of activities if we want to engage in them. I play golf twice a week in the season. My wife still does her thing, as she has since I retired in 2010.

Perhaps the key to my happy retirement was not planning what I’d do in retirement, and not creating expectations that required effort to meet them. There were no expectations to take up fly fishing or volunteering in the local thrift shop.

I say go with the flow. Don’t try to plan your way to contentment. Just grab every opportunity that makes you happy.

One remnant of my working years remains: I still wake up by 5:30 a.m. each day and look forward to continuing to do so—even with the occasional afternoon nap.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on X (Twitter) @QuinnsComments and check out his earlier articles.

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Mind Games

IN MY ENGLISH CLASS in junior high school, we read a play called I Remember Mama. It was a story about a poor Norwegian immigrant family living in San Francisco in the early 1900s.

The mother ran the household while her husband went to work and the children went to school. The mother was in charge of the family’s finances. Any time a family member needed extra money, he or she would have to ask Mama for it. She’d listen to the request and, if it was critical, she’d get the money from the petty cash fund. If there wasn’t enough petty cash, she’d ask the person if it was important enough to justify withdrawing money from the bank. Upon further review, the person would say it wasn’t.

The big surprise: As we learn at the end of the play, there was no bank account. Instead of saying, “we can’t afford it,” Mama wanted family members to decide on their own that the item wasn’t important. This would allow them to save face and not feel poor. They squelched the desire themselves and moved on.

My mother-in-law would tell me of her upbringing in New York City. Her parents were Chilean immigrants who didn’t have a lot of money. They raised their six kids on her father’s salary. They were poor, but so was everybody else in the neighborhood, so they never thought of themselves as poor. My mother-in-law’s life was just like the characters in the play. With money so tight, she constantly had to decide that some purchases just weren’t important.

A digression: Two famous actors came from the neighborhood. When they were kids, Lauren Bacall and Burt Lancaster were friends with my mother-in-law’s siblings.

What I found most interesting about I Remember Mama: Because family members believed the bank account was only to be used for the most important items, it made them reconsider what they wanted.

I’ve inadvertently adopted the same mindset. Money that’s automatically deposited into my checking account is used for daily expenses. Once I move that money to a savings or investment account, I never use it. I could, of course. But in a classic example of mental accounting, I think of this money the way Mama’s family thought about the bank account. It’s never to be used except for the most important things.

I’m not suggesting this approach is for everyone. I’m cheap. Moving money out of the checking account makes these dollars sacred and not to be used. The benefit of my mental lockdown is that my money grows at the expense of a luxurious lifestyle.

By contrast, money burns a hole in my son’s pocket. When I give him money, he can’t wait to spend it. The problem is, he never decides what he wants to spend it on. He just wants to spend it. The result: Tip jars are filled and money is left on the restaurant table, even if we leave a tip using our credit card. My son would benefit from this “sacred dollar” mentality, but it’ll never happen.

Still, for spendthrifts, adopting some mental trickery could allow them to reduce their debts and build up an emergency fund. They must believe the emergency fund is crucially important and the items they’re tempted to buy hold less value than maintaining that rainy-day fund. If not, the money will be spent—and they’ll never enjoy the peace of mind that comes from having a cash reserve.

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Yesterday’s Influence

MY FIRST DAY IN the investment industry was—unfortunately—not so great. On the morning of Sept. 15, 2008, the investment bank Lehman Brothers filed for bankruptcy, sending the stock market into a free fall. The rest of 2008 was equally ugly, with the S&P 500 losing 37% for the year. But that experience provided investors with a valuable lesson—about the power of recency bias.

Recency bias is the mind’s tendency to extrapolate. When things are terrible, as they were on that day in 2008, it’s hard to imagine how or when things might ever get better. On the other hand, when markets are rising, it’s hard to imagine what might cause that positive momentum to slow.

Recency bias causes us to look backward—to assume that what happened yesterday will happen again tomorrow. That can lead investors to do the opposite of what would be best. Consider what we’ve experienced in just the past two years.

At the beginning of 2022, the stock market was on a tear. After hitting bottom in the spring of 2020, investment markets had been delivering steady gains for nearly two years. The economy was strong, and it looked like this good fortune would continue. But it was at that point that inflation readings began to become more problematic and, in response, the Federal Reserve began lifting interest rates. In all, the Fed raised rates seven times in 2022. The result for investors was punishing, with both stocks and bonds dropping at the same time—a rare occurrence. Stocks lost nearly 20% for the year, and bonds lost more than 10%.

By the end of 2022, investors weren’t feeling so good. Markets were down, inflation was still running high, and it was hard to see how things could improve. The notion that the Fed could engineer a “soft landing”—bringing down inflation without causing a recession—appeared remote. But just when sentiment seemed to be at its worst, inflation turned a corner. The Fed did continue raising rates into 2023, but the increases were smaller and sentiment improved. The result: Just when investors least expected it, stocks took off, gaining more than 25% for the year.

This describes just the past two years, but it’s a microcosm of investors’ experience nearly every year. Just when one trend appears to be well entrenched, something changes, upending expectations. It’s at times like this that recency bias can lead us astray. What can you do to combat it?

The simple answer would be to ignore the news. In fact, a famous study once tested this idea. Participants were given paper portfolios to trade and were split into two groups. The first group received regular news reports on their investments, while the second received less information. The result: Those who received less news ended up doing better with their investments. Having less information helped them avoid the confounding effects of recency bias. This finding was interesting. But unfortunately, it doesn’t have much practical value. It’s unrealistic for real investors with real portfolios to simply ignore the news. What else can you do?

My first recommendation is to study history. Look back at a chart of the stock market over the past 100 years, and you’ll see that, over time, it’s delivered gains of about 10% a year, on average. With the exception of the period following the 1929 crash, most downturns end up looking minor with the benefit of hindsight.

Another important step is to write out a formal investment policy with asset allocation targets—70% stocks, for example. This document should also include rebalancing guidelines, spelling out how you’ll move your portfolio back to those targets when it deviates. This type of investment policy is standard for investors working with advisors, but I recommend it even if you’re managing your own portfolio. Written guidelines can help investors overcome recency bias when it’s needed most.

What might you include in an investment policy today to help combat recency bias? Starting on the bond side, the key is to avoid fighting yesterday’s battles. Yes, the bond market has been through a difficult period, losing 13% in 2022, but it made back some of that ground in 2023. And it’s possible—and even likely—that this year will see further gains. With inflation much lower, the Fed has slowed its pace of interest rate increases. If the next step is for rates to decrease, that will be very positive for bonds. The upshot: To combat recency bias, try to look forward. Even though bonds have been an unpleasant place to be, that time may be past.

On the stock side of your portfolio, how can you sidestep recency bias? If there’s one longstanding trend that’s been testing investors’ patience, it’s the dismal performance of international stocks. While long-term data support international diversification, the outperformance of U.S. stocks for nearly 15 years has led many investors to question whether the world has changed. Since 2009, the S&P 500 has gained 646%, including dividends. Meanwhile, a diversified basket of international stocks has gained just 88%.

That gap is enough to test anyone’s faith in international markets. But it’s precisely at times like this that a written investment policy can be most helpful. That way, you can rely on the policy and avoid being influenced by where the market has been.

I’ll acknowledge that this isn’t easy, but this is where it can help to reference market history. Go back to the period between 2002 and 2008. Domestic stocks lost 4.5%, while international stocks gained 36%. History tells us, in other words, that the outperformance of U.S. stocks in recent years may not be permanent.

What else can you do to combat recency bias? Another key is to avoid volatile investments. Let’s look again at 2022. When the S&P 500 dropped 18%, stocks like Amazon and Netflix each lost about 50%. The tech company Shopify lost 75%. The lesson: Broad diversification helps moderate the ups and downs of a portfolio, and this can make it easier to avoid reacting to recent performance.

This applies to bonds as well. In 2022, when the overall bond market lost more than 10%, some bonds fared much better than others. Vanguard’s Short-Term Treasury ETF (symbol: VGSH), for example, lost less than 4%. As you structure your investment policy, remember that diversification is important for bonds too.

A final strategy to help combat recency bias: Always ask yourself, “What does this mean for me?” With so much market commentary out there, it’s easy to lose sight of what’s important. Suppose you’re in your working years and see the market drop. Counterintuitive as it might seem, a market decline is generally a good thing. It allows you to add to your investments at lower prices.

What if, like today, the market is hitting new highs? Some investors worry about the opposite problem—that it will be hard to make money buying at higher prices. There’s a logic to that, but this is again where market history can be helpful. Look back at other periods when the market was hitting new highs, whether it was 2000, 2007 or 2019. In each case, the market did indeed drop—but only temporarily. Today, the market is much higher than it was at any of those prior highs. It isn’t always easy, but—to the extent you can look forward rather than back—that’s usually an investor’s best bet.

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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Comfort Has a Cost

INVESTING IS MESSY. Get used to it.

In the financial markets, you’ll typically pay a high price for certainty. That price is paid in lower investment returns, and sometimes also in greater financial hassles. Yet I see investors paying that price again and again.

Consider equity-indexed annuities. Investors imagine they’re getting stock market returns without any downside risk. But in truth, what they’re buying is an overhyped investment that captures only a portion of the stock market’s gain, plus there's a hefty back-end sales commission if folks cash out early.

Even good investment products that offer some measure of certainty can turn out to be so-so choices. At issue is everything from Series I savings bonds to certificates of deposit (CDs) to holding individual bonds to maturity. None of these is an unreasonable choice for a modest portion of your money. As nervous investors ponder their likely portfolio performance, all three strategies offer the sort of comforting numerical precision that can make investing seem less scary.

Still, while these strategies provide an escape from stock market turbulence, they also all have drawbacks—and the certainty they apparently offer can prove illusory:

Series I savings bonds can’t be sold in the first 12 months and there’s a three-month interest penalty if you sell in the first five years. What about after that? While you’re typically guaranteed to earn at least the inflation rate, and perhaps a small fixed return on top of that, you could find you’re falling behind inflation once taxes are figured in. In fact, the higher inflation is, the worse your after-tax return will be. How so? Suppose your I bonds merely match inflation and your tax bracket is 22%. If inflation is 5% and hence that's also your yield, you'd fall behind inflation by 1.1 percentage points once income taxes are deducted. What if inflation is 1% and thus so is your yield? You'd lose far less to Uncle Sam—just 0.22 percentage point.
CD owners also face withdrawal penalties if they cash out early. And while a CD’s nominal return may be certain, its after-inflation, after-tax return sure isn’t.
Individual bonds can be treacherous to sell if you need to unload them before maturity, plus they represent an undiversified bet and you can’t easily reinvest your interest payments, like you can with a mutual fund. What if the issuer doesn’t go bust and you hold to maturity? While the nominal return on conventional, fixed-rate bonds may be known with some precision, your after-inflation, after-tax return is up in the air, just as it is with a CD. Given all that, I’m baffled that investors prefer the illusory safety of individual bonds held to maturity to the much greater safety offered by bond mutual funds.

That brings me to a retirement-income strategy that’s lately enjoyed some buzz: building a laddered portfolio of Treasury Inflation-Protected Securities, or TIPS, with the bonds maturing gradually over the next 30 years, thereby delivering a guaranteed, inflation-protected income stream. Indeed, there are folks I respect—and consider friends—who have endorsed this strategy.

No doubt about it, there’s a mathematical elegance to the strategy and it offers an appealing degree of performance certainty. I’ve even had readers suggest to me that a TIPS ladder is all a retiree needs and that I’d be a fool not to take advantage, especially given today's relatively high after-inflation yields offered by TIPS. Am I a fool? I have money in TIPS mutual funds, and I think building a TIPS ladder is a clever strategy.

But I’m still not wildly enthused, for four reasons. First, what happens if you live longer than 30 years? Unlike Social Security or an immediate annuity that pays lifetime income, a TIPS ladder doesn’t offer longevity insurance. What if it's year 25 of your 30-year TIPS ladder, and death is nowhere in sight? That's not the sort of conundrum I want to face in my 90s.

Second, building a TIPS ladder is complicated. To see the array of bonds you might need to purchase, try TIPSladder.com. Just one of the problems: There aren’t TIPS maturing every year for the next 30 years. In fact, to construct a TIPS ladder for a client, an advisor I know—who's an expert on the topic—told me he had to spend 30 minutes on the phone with Vanguard Group’s bond desk, specifying which bonds to buy and in what quantity. And remember, this is a guy who knows what he’s doing.

Third, while keeping up with inflation is often presented as the gold standard for retiree income, those who meet this goal may find themselves feeling shortchanged. How come? The standard of living rises not with inflation, but with per-capita GDP, which has climbed 1.7 percentage points a year faster than inflation over the past 50 years. Suppose your neighbors’ income rises with per-capita GDP, while you merely keep up with inflation. After three decades, your inflation-adjusted income will be the same, but theirs will have climbed 66%—and you may find yourself feeling increasingly poor.

Finally, if you had 10 years or longer to invest, why wouldn’t you own stocks rather than TIPS? Sure, there’s the “if you’ve won the game, stop playing” argument. But owning some stocks may allow your standard of living to keep up with per-capita GDP growth, while also leaving a larger bequest to your children and your favorite causes.

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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February’s Hits

WHAT GOT EYEBALLS in February? Here are the 10 most popular articles and blog posts published last month by HumbleDollar:

We all make financial mistakes. Adam Grossman's advice: Strive to sidestep those that are easily avoided. Adam offers 11 examples.
What will get you out of bed in the morning once you're retired? If that sounds like a silly question, Mike Drak has a story for you—about an old banking client called Gino.
Worried because the U.S. stock market is hitting all-time highs? Adam Grossman digs into today's valuation yardsticks—and offers three pieces of advice for nervous investors.
Are we too focused on amassing huge sums for retirement? Should we strive to remain useful throughout our life, rather than abandoning work in our 60s? Ken Cutler discusses these two thorny questions.
He may be retired, but Dennis Friedman is still learning. He discusses five key lessons that his retirement years have taught him.
If 2017's tax cuts sunset in 2026, most Americans still won't be subject to estate taxes. Still, married couples and those with large IRAs may want to take steps now to reduce the income-tax bite for their heirs, says John Yeigh.
Ken Cutler has given up rebalancing his portfolio. He figures it's better for his investment performance.
Tom Short and his wife just finished their retirement's first full calendar year. Their biggest challenge: making sure they weren't derailed by sequence-of-return risk.
"People put a lot of faith in planning software, betting their financial life on assumptions, projections and past performance," notes Dick Quinn. "The assumptions are usually theirs, but are they accurate?"
Want to save a few bucks? Adam Grossman offers a slew of money-saving suggestions for banking, mortgages, cell service, online shopping and more.

What about HumbleDollar's twice-weekly newsletter? The most popular Wednesday newsletters were Jesse Cramer's Horse Then Cart and Robert Dailey's For the Fun of It, while the best-read Saturday newsletters were Fire Meets Ice and Forget Me Not, both written by me. Don't get our free newsletter? You can sign up here. We also put out a free daily alert about the site's latest articles, which you can sign up for here.

The post February’s Hits appeared first on HumbleDollar.

Making It Easy

ONE OF MY BIGGEST retirement surprises: how difficult it is to maintain a robust social network.

My wife and I decided last Thanksgiving to travel overseas. In the past, we would have spent the holiday with family and friends. But now, most are no longer near us—or with us.

My mother passed away about four years ago. Afterward, my sister and brother-in-law moved to Tennessee to be closer to their son. My cousin Barb and her husband moved to Florida to be near their daughter. Elaine, my other cousin, moved to Colorado, where her son lives. My wife’s longtime friend Tina and her daughter Jessica no longer live close by. My stepson, who lives in Virginia, was planning on visiting at Christmas, instead of Thanksgiving.

Meanwhile, I had lunch with my three old high school buddies from my 1969 graduating class. Seeing my old schoolmates reminds me of the good old days, but also the uncertainty that lies ahead. There used to be five of us, but now there are only four. Jeremy passed away a year ago. Bob, who attended the lunch, has cancer. He was given six months to live, but he’s beaten that dire forecast.

While our social network is shrinking, we still have close friends in the area. But most of them are about our age. The rest of our family are scattered across the country. If we stay in California, I can see us becoming more socially isolated as time goes by. Maybe we won’t have the support we need in our later years, especially when it comes to our financial affairs.

That’s one reason we decided to have Vanguard Group’s Personal Advisor Select help us manage our money. If we were basing that decision strictly on cost, we might be making a mistake. But I’ve learned not all financial decisions can be made with a spreadsheet. In our case, there’s a human element involved. We might find ourselves alone one day, with no trusted acquaintances close by. Getting a financial advisor on board now seems like a wise move.

Here are four other strategies we’ve adopted to make it easier to manage our financial affairs in our declining years.

Keep it simple. I’ve found that, when you have fewer things to deal with, you have a greater sense of control over your life. You’re also likely to make better decisions, because there are fewer opportunities to make a mistake.

For these reasons, we’ve simplified our finances by consolidating investments at Vanguard, while keeping all our savings and checking accounts at our local credit union. It makes managing our money so much easier. Indeed, in my head, I can calculate our net worth in a matter of seconds.

All I have to do is add up our total assets at Vanguard and the credit union, plus the equity in our home and cars. Then I subtract our total debt, which is zero. This is our total net worth.

Our emphasis on financial simplicity is also a plus during tax season. Our uncomplicated finances allow us to easily file our own income-tax returns.

Do nothing. I learned an important lesson during my 30-year career in manufacturing: You never want to make changes to something you’ve already built unless absolutely necessary. Why? There’s always the risk you could make things worse.

I remember overseeing the delivery of a digital signal processor unit for use in a satellite. After the unit was assembled, we had to replace an electrical component that didn’t meet specification. In the process of removing and installing the new part, we damaged the other components around it. Not only did this rework cost us a lot of money, we missed our delivery date. We made a bad situation worse.

The same thing can happen with your investment portfolio. Whenever you make changes, you run the risk of incurring trading costs, triggering taxes, and selecting an inappropriate or underperforming investment that can lead to lower returns. This is why doing nothing, except for rebalancing, is usually the best strategy when managing a portfolio.

Delay Social Security. I made a lot of bonehead mistakes with my money during my lifetime. But waiting until age 70 to claim Social Security benefits was one of the best financial decisions I’ve ever made. It helps address one of the biggest threats to our retirement: running out of money.

If you can afford to wait until 70, your monthly check might be 77% higher than at age 62, plus you get an annual cost-of-living adjustment on this larger sum for the rest of your life. According to the Social Security Administration, “About 1 out of every 3 65-year-olds today will live until at least age 90, and 1 out of 7 will live until at least age 95.” In addition, married couples at age 65 have a 50% chance that at least one of the spouses will survive beyond age 90.

Autopay bills. To combat scams, it’s best to avoid writing checks and to keep tabs on all money going out. An easy way to do that: Autopay your bills using a credit card. That also ensures your bills get paid on time.

But when it comes to paying critical bills—such as gas, water, electricity and cell phone—credit cards can be risky. What if the credit card is denied because the card is compromised or you forget to update the expiration date on a company’s website when a new card is issued? To avoid the potential disruption to our life if these bills aren’t paid, we autopay them using our checking account.

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. Check out his earlier articles and follow him on X (Twitter) @DMFrie.

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