Jonathan Clements's Blog, page 95

Money in the Middle

OUR COURTSHIP WAS both ripe with joy and fraught with tumult. One scene is emblazoned in my memory. Alberta and I had just finished lunch on the grass in front of the campus cafeteria. I was slumped over, exhausted by the frantic academic scramble to get published and disillusioned by the political intrigues.

Alberta read my mood and rested my head in her lap, as she ran her hand softly through my hair. Schooled by my parents to keep an eye out for retirement and advancing age, I thought to myself, “This woman is strong yet gentle. She would be able to take care of me if need be.”

The moment was prescient. I was soon blindsided by a devastating midlife depression that cost me a tenured and financially rewarding faculty position, and played havoc with my self-esteem. Alberta hung in there through 15 years that was characterized more by doctors’ appointments than fine cuisine and good theater.

I’d been raised in a family where money matters were ceded to men. Although I knew Alberta’s own family was not wealthy, she was susceptible to the life of plenty promised by nearby Hollywood and had an uncle who for a time owned the Indiana Pacers basketball team. She was no stranger to money largesse and had many of the makings of my feared antagonist, the formidable princess.

Alberta hadn’t done anything to cause me to doubt her responsibility with money, and yet I was terrified by the nightmare of ballooning credit card balances and gaudy jewelry. Fearing catastrophe to my supposed birthright as a man in financial control, I incredibly and insensitively presented Alberta with a homemade premarital contract. Alberta would agree to work at least half-time to “qualify” for sharing in our joint income. I proposed this outlandish arrangement even though she was already working full-time as a research associate at the university and was developing a private practice on the side.

Hurt and feeling betrayed, she refused to sign. Although Alberta has demonstrated her devotion to me many times over, she has never fully forgiven my breach of trust. I don’t blame her.

Fast forward two years into our marriage, when I tossed in another grenade, this time not of my own making. I suffered a full-blown anxiety attack while lecturing psychiatry residents on theories of psychotherapy. Drenched in sweat and heart pounding, I needed to be escorted back to my office. Thus began my deep anxiety-driven depression.

Throughout the ordeal, I somehow managed to sustain our stock fund and real estate investments, but barely. Just what was my erstwhile princess up to during my extended inability to perform many of the defined roles of husband and father? Did she find solace in an emotional affair? Maybe a caregiver to free up time for a shopping rampage or two? How about a European voyage with a likewise neglected friend to pump up those credit card balances? No such escapades materialized.

Frankly, what I remember most about our credit card bills are the charges and co-pays for my own treatments that led me down the rabbit hole of purported psychiatric remedies. There were more than 25 anti-depressant and anti-anxiety drug trials, topped off with a suicide attempt induced by an experimental medication. Alberta arranged numerous out-of-town consultations with renowned experts in depressive disorders and accompanied me to all of them. Each raised hope and ended with disappointment. With my hearing now significantly impaired, she acts as an interpreter at my annual physical and my visits to the cardiologist.

Alberta has her Social Security benefits deposited directly into our joint checking account, no questions asked, no grand spending schemes. She continues to find gratification three days a week helping her psychology patients overcome life’s hurdles, while I treat barely a handful. I owe her even for my return to practice. In the throes of the depression, the thought of ever working again seemed overwhelming and incomprehensible. When I announced I would let my psychology license expire and save $400, she insisted I cling to hope.

I handle our investments, including Alberta’s retirement plans, but she has become an invaluable asset in managing our rental properties. As a “people person,” she’s more effective than I am with renters and our new property manager, who may dislike me as much as I dislike him. Here’s where the rubber meets the road: Between her private practice and her share of our dividend and rental income, Alberta is responsible for two-thirds of our income.

Forty years ago, I feared a sense of masculine inadequacy if I lost control over our finances—and almost sabotaged our relationship. Don’t get me wrong. Alberta is no saint. She can hurl epithets and slam doors with the best of them. But she never became the princess I so dreaded. Instead, in an ironic reversal of fortune, she helped me to become more of a prince.

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

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What It Cost

MY DAD'S FINANCIAL ledgers were key sources of information for my article yesterday about my parents’ retirement journey. In these binders, my father kept track of a wide variety of financial information, all entered in his impeccable handwriting.

I have no doubt Dad would have loved Excel spreadsheets as much as I do, had they been available earlier in his life. When he was in his 80s, he purchased his first personal computer and was able to perform some rudimentary tasks. But by that stage in his life, getting the computer to do what he wanted was often a hassle.

I shared some of the nuggets I gleaned from his ledgers in yesterday's article. Here are other items I found interesting:

Electricity costs. In 1960, the total electricity bill for my parents’ home was $100.62. Using an inflation calculator, that would correspond to $1,038.87 today. In 1985, the electricity bill was $720.41, equal to $2,040.06 in today's dollars. The real cost had almost doubled in 25 years.

Heating costs. My parents’ house was heated using oil. In 1960, the heating bill was $198, or $2,038.21 adjusted for inflation. How about 1985? The heating bill that year was $1,200.56, which would be $3,399.75 today. Yikes. For our similarly sized house, which uses natural gas, annual heating expenses have never reached $900.

Real estate taxes. In 1960, the property taxes on my parents’ home came to $510.35. By 1985, they were $2,488.10. After accounting for inflation, their real estate taxes had increased 34% over 25 years. I expected the increase to be even larger, since rising real estate taxes were given as one reason my parents relocated from Moorestown, New Jersey, to Lancaster, Pennsylvania, in 1987. Still, the 1987 move did bring big savings: The tax bill on their Lancaster home was only about half of what they paid on the Moorestown house.

Phone costs. In 1985, telephone expenses were recorded as $713.87, corresponding to $2,021.54 today. Seeing that makes me feel a little better about the cost of our family’s phone plan, which is in the same ballpark but includes much more functionality and flexibility. And unlike my parents in 1985, we have no need to limit long distance calls to control expenses.

Overall household costs. In 1985, the total annual cost of operating my parents’ household was recorded as $5,559.32. This included real estate taxes, water, sewer, phone, insurance, heating oil and electricity. Note that food and vehicle expenses are not included in that amount. In today’s dollars, that would be $15,742.90. Surprisingly, when I compare that sum to our family’s corresponding expenses last year, the totals are within a few percentage points of each other.

Portfolio diversification. The ledgers contain investment records dating back to the 1950s. Living most of his life in an era before mutual funds became popular, Dad’s investment portfolio consisted of individual stocks and bonds.

I found his portfolio to be astonishingly undiversified, with 75% of his stock holdings concentrated in communications companies such as AT&T, Lucent, Verizon and Bell South. The other 25% included General Motors, Delphi Automotive and a couple of utilities. The idea of purchasing foreign stocks probably never crossed his mind.

Dad’s primary objective for his stock portfolio was probably to increase his day-to-day cash flow. Almost all of his long-term stocks holdings paid a healthy dividend. Portfolio growth was likely only a secondary consideration.

In Dad's day, there was no such thing as buying stock with a click of a mouse. He had to go through—and pay—a broker to make his purchases. I’m sure advice from his broker influenced his portfolio’s composition. Strategies that seem second nature to me, such as portfolio diversification, buying index funds and minimizing fees, simply weren’t in vogue during his era.

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The Downside of Up

SAVINGS YIELDS SOARED in 2023—and all that interest income is now showing up on people’s tax returns.

Forbes published historical average money-market rates based on FDIC data. The average rate in 2020 and 2021 was 0.1%. That jumped to 0.15% in 2022 and 0.59% in 2023. But remember, those are averages, and it isn't difficult to find higher yields. For instance, interest rates on high-yield savings accounts are up sharply since spring 2022.

I looked at the yield on my Capital One online savings account for the past few years. The rate was 0.4% on Jan. 1, 2022, 3.3% on Jan. 1, 2023, and 4.35% on Jan. 1, 2024. Let’s assume you had $10,000 in a Capital One savings account on Jan. 1, 2022. By the end of the year, it would have grown to $10,138, an increase of $138. If you didn’t touch it, during 2023 it would have continued to grow to $10,544, up another $406. The interest earned in 2023 was almost three times as much as in 2022.

Savings account interest—assuming the money isn’t held within a retirement account—counts as taxable income on your federal return, and also in most states. In the initial weeks of tax season, I’ve prepared returns for several clients who have seen significant increases in their interest income. One client went from about $6,000 to $24,000. Another went from $2,000 to $17,000.

Both were quite surprised by the increase—and by the tax implications. These two clients were in the 22% marginal tax bracket. Each additional $1,000 of interest meant an additional $220 of federal tax owed.

In both cases, the clients were also collecting Social Security benefits. They received an 8.7% increase in 2023. But there have been no changes in the limits on how much income you can collect before benefits become taxable. The combination of increased Social Security benefits and increased interest income meant more of their Social Security was taxable. This also led to significantly increased tax bills. One client owed about $6,000.

But that wasn’t the only shock. Our income tax system is a pay-as-you-earn system. The IRS expects us to remit income taxes throughout the year as we receive our income. For most workers, employers withhold taxes. Meanwhile, self-employed taxpayers are required to pay quarterly estimated taxes. Retirees may also have to make quarterly estimated tax payments if they don’t withhold enough during the year.

If you don’t pay enough taxes during the year, either through withholding or estimated payments, you could be liable for a penalty. And even if you made estimated payments but were late doing so, you could find yourself in the strange situation of paying a penalty even though you’re due a refund when you file your tax return.

How do you figure out whether and when to file estimated taxes? The IRS recommends you file estimated taxes if you expect to owe more than $1,000 when you file your return. The IRS has a useful tax withholding estimator.

Consider a simple scenario based on one of my clients. Mary is age 66 and retired. This will be her situation in 2024:

Mary’s pension will be $48,000, with 10% withheld for federal taxes.
Mary’s Social Security will be $24,000, with no taxes withheld.
Her expected interest earnings are $6,000.

In this scenario, Mary would owe $2,986 in federal taxes when she files her return, on top of the taxes already withheld. What if her interest income ballooned to $24,000? The federal taxes she owed would also balloon, to $6,946. Both amounts could lead to a penalty. How could Mary avoid a penalty? The IRS provides the following guidance:

Withhold enough—or make big enough estimated payments—through the year so you owe less than $1,000 on your return.
Through estimated payments and withholding, pay at least 90% of the tax shown on the return for the current tax year or 100% of the tax shown on the return for the prior year, whichever amount is less. For high-income earners, that 100% becomes 110%.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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My Parents’ Retirement

DAD WAS AN ACCOUNTANT. He graduated from the University of Pennsylvania’s Wharton School, taking classes at night while working full-time. He also studied engineering at another Philadelphia college, again taking classes at night. Dad would have enjoyed being an engineer, but he could only take on so much while working a day job. He never completed that degree.

Being sharp at math and having an organized mind, accounting was a good fit. Dad eventually became president of J.S. Collins & Son, a chain of lumber and hardware stores in southern New Jersey that was incorporated in 1912. Dad started his career with Collins in 1939, but left in 1942 to join the U.S. Army Air Force during World War II. When he returned after the war, his old job was waiting for him.

My father was forced into semi-retirement at age 58 when the company’s owner closed the business. But Dad wasn’t done working for Collins, though he had to take a significant pay cut. He spent the next three years selling and liquidating the company’s real estate. He also took care of all the tax returns and legal paperwork necessitated by the business’s closure.

When that work was done, Dad was out of a job. He was age 61. He received unemployment payments for a few months. Because his career ended earlier than he’d expected and he had a son—me—to put through college, he took Social Security at age 62. His payout started at $445 a month, about $1,700 in today’s dollars.

Based on the rules at the time, he received extra Social Security payments for me during the months I was enrolled as a full-time student. Those payments, coupled with the freshman engineering merit scholarship that I received, were generous enough to fund my first two years of college.

My mother was a homemaker. She’d worked until her marriage to my dad at age 27, but after that her work was running the household and bringing up my three sisters and me. Since her own Social Security credits were minimal, she received a Social Security payment based on my dad’s benefit. As Mom was four years younger than Dad, she didn’t receive Social Security benefits during the first several years of his retirement.

Dad’s pension for his 35-year career at Collins was fixed at $347.15 a month. It was initially worth about $22,000 a year, figured in today’s dollars. By the time of his death, inflation had eroded the pension’s buying power to about $7,000 a year. There was no survivor option, so my mom received no payments after he passed away.

In addition to owning their house free and clear, they had a modest portfolio of individual stocks and bonds. Several bank certificates of deposit rounded out their financial holdings. All in all, it was enough for a comfortable retirement, though my parents were hardly the millionaires next door.

How do I know all these details? Over his career with Collins, Dad produced a huge number of financial ledger pages—all by hand. He also kept ledgers for his personal finances. I have five of them in my possession.

Three of the ledgers are for estate trusts that he managed for decades. The trusts were set up for the benefit of his two mentally disabled brothers. Using a variety of specialized forms, he meticulously kept track of each trust investment and every expenditure. These ledgers were turned over to me when I became the successor trustee in 2001.

My father’s two personal finance ledgers are of more interest to me these days. What I discovered from looking through them is that, for many years into retirement, Dad continued to work as a private consultant and tax preparer for several wealthy clients, as well as some friends of lesser means. Among those clients was John S. Collins, Jr., the multi-millionaire owner of Dad’s former employer.

My father continued working until age 72, when he finished closing out Collins’s very significant estate. Although this part-time work didn’t make him rich, it often provided a decent supplement to my parents’ Social Security payments and Dad’s pension.

The first 20 or so years of my parents’ retirement went well. Two years after I graduated from college, they sold their home in New Jersey and moved to a new house they’d built in Lancaster, Pennsylvania, a few miles from me. They’d always liked Lancaster County. We took a number of vacations in the area when I was growing up, so the area was familiar to them. When I settled down there, it gave them even more incentive to move. The property taxes on their New Jersey home were also a factor.

Dad brought along most of his woodworking tools and set up a well-organized shop in the large garage at their new house. He enjoyed making things, including toys for his grandkids. He had a wealth of practical skills that I lack and was always eager to help if I needed a repair or something made.

My parents did some traveling in retirement, mostly road trips. The most ambitious of these was a month-long bus tour to the Rocky Mountains and other places out west. Conveniently, I was around to look after their house while they were gone. They had a great time and enjoyed getting to know their fellow travelers.

Mom was a reader, intensely interested in nutrition, and a bit of a homebody. She liked keeping her house in good order. She was also prone to worry. One of her greatest fears was alleviated when her only son got married at age 29 to a gal who received her wholehearted approval. Always having a soft heart toward children, she was ecstatic when, a few years later, more grandchildren arrived. Mom and Dad were able to visit us in the hospital when both of our children were born.

When our precious daughter was diagnosed with Stage IV cancer at age two, my parents were there to help out in any way they could. We were blessed to have a large support network during the biggest trial of our lives. Mom and Dad were an integral part. Although the ordeal was very difficult for them also, I think helping us increased their sense of purpose. Today, our daughter is a happy, healthy young lady in her late 20s.

My dad had an even-keeled temperament, which was a counterpoint to my highly strung mom. He enjoyed excellent health, relished his daily crossword puzzles and took pleasure in the simple rhythms of life. But his routine was eventually disrupted. Around age 82, his non-symptomatic prostate cancer took a turn for the worse and spread throughout his body. He had a year or so reprieve with medication, but eventually the effects wore off and he went into decline. He passed away in 2001, a few months before his 84th birthday.

After Dad died, Mom lived alone in their house. We visited her often and assisted her as needed. She started having some issues balancing her checkbook, so I began taking care of that for her. Occasionally, she’d say some strange things. It became clear that she was showing signs of cognitive impairment and would be better off not living alone.

On her own, she drove to a nearby church-related retirement home and initiated the entrance process. She sold her house and moved into independent living. Her condition worsened. She was moved to skilled care, which was very expensive. Meanwhile, my tender-hearted sister, Lynn, decided she wanted to take care of Mom in Texas.

We had a huge 85th birthday party for Mom at the retirement home. Immediately afterwards, she flew off to start her new life. I continued to manage my mom’s finances, while my sister took care of everything else. Mom lived her final, challenging years in Lynn’s spacious house. She was surrounded by my sister’s five fabulous cats and was close to several grandchildren and great-grandchildren. My family is indebted to my sister for her competent and loving care. Mom passed away at age 91.

My wife and I are now in the early stages of our retirement journey. We have no way of knowing how it’ll turn out. Our experience will certainly be quite different from that of my parents. Still, as Mark Twain reputedly said, “History doesn’t repeat itself, but it rhymes.”

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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Seven Reasons to Work

ARE YOU READY TO swap your office chair for a rocking chair? Hold that thought.

Before you dive into the world of endless vacations and gardening, consider that keeping a toe—and perhaps your whole foot—in the workforce might be the secret ingredient to a fulfilling retirement. Don’t believe me? Here are seven compelling reasons to keep working at least part-time.

1. Stay young at heart. Remember the excitement of landing your first job? That thrill doesn't have to end. Continuing to work, even part-time, keeps your brain active and challenged. It's like a gym membership for your mind, warding off the cobwebs and keeping you mentally sharp. Learning new skills and adapting to new environments can be the fountain of youth for your brain.

2. Social butterflies keep fluttering. One often-forgotten benefit of work is the social connections. Picture this: engaging conversations by the water cooler, team lunches, and the camaraderie of working toward a common goal. These interactions are invaluable and keep you connected to diverse groups of people, ensuring that your social life remains vibrant and dynamic.

3. Even more financial freedom. Who doesn't love an extra bit of cash? Continuing to work means more financial breathing room. You can fund those dream vacations, spoil the grandkids or simply enjoy the peace of mind that comes with a steady income. It's not just about the money. It's about the freedom and choices that money can provide.

4. Purpose, passion and pride. Work can be a significant source of all three. Whether you're mentoring younger colleagues, contributing to meaningful projects or just being part of a team, these experiences validate your skills and experience. It's about feeling valued and knowing you're making a difference.

5. Keep the doctors at bay. Believe it or not, working can be good for your health. Studies suggest that those who continue working tend to enjoy better mental and physical health. The combination of mental stimulation, social interaction and a sense of purpose creates a powerful health cocktail.

6. Flexibility is the new black. Retirement doesn't have to be all or nothing. Many retirees find joy in flexible work arrangements like part-time jobs, consulting or freelance gigs. This flexibility allows you to balance work with leisure, family time and hobbies. With the right job, you get to design your golden years exactly how you want them.

7. The joy of lifelong learning. Ever wanted to try a completely different career or learn a new skill? Now's your chance. Retirement can be the perfect time to explore new interests or passions in a low-pressure environment. Who says you can't be an intern at age 60 or start a new venture at 70?

Bottom line: It's your adventure. Retirement is a journey, not a destination. By incorporating work into your retirement plan, you're not just adding years to your life—you're adding life to your years. It's about finding the right balance that makes you jump out of bed each morning, excited for the day ahead. So, what will your retirement adventure look like?

Dan Haylett is a financial planner and head of growth at TFP Financial Planning, a U.K. firm that specializes in modern-day retirement planning. Dan’s “pull back the duvet every morning” purpose is helping clients spend their time and money on what’s truly important to them. A version of the above article first appeared on Dan’s website, where you can also learn about his Humans vs. Retirement podcast. Follow him on X (Twitter) @DanHaylett. Dan's previous article was The Changes Ahead.

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Risks Retirees Face

WE’VE ALL HEARD THE maxim that “without risk, there’s no reward.” Over the years, we’ve all taken countless risks—big and small, financial and otherwise—to get to where we are today.

Every activity has a risk associated with it, and that includes retirement. It’s best to be aware of these risks and, when prudent, take steps to limit them. Here are nine risks that retirees face.

1. Health. Even if we’re fortunate to enjoy a long, active retirement, our health may not be great in our later years. Alternatively, even if our own health holds up, our spouse may have medical issues.

On top of that, we’ll likely face escalating health costs as we age. I’ve watched a friend move from independent living to assisted living to a nursing home to memory care. Each move was progressively more expensive. Good planning is needed to manage such life-changing events.

2. Longevity. I met a retiree at a party who said, “My mother passed away at 70 and my father at 72. The chance of me reaching my 90s is virtually nil. My plan is to spend more and enjoy life while it lasts.”

A wise move? No matter what our family health history, it’s risky to assume we won’t enjoy a long life. And even if we don’t live to a ripe old age, our spouse may.

3. Market downturns. While the stock market has returned an average 10% a year over long stretches, a major drawdown of 20% or more could happen at any time. When we were young, we had many years to recoup such losses. But once we’re retired and drawing on our portfolio for spending money, our time horizon is often considerably shorter. A balanced portfolio of stocks and bonds can help reduce this risk.

4. Spending. We can’t control how the financial markets perform, but we can control our own spending—and avoid the excesses that can put our retirement at risk. My advice: Prior to buying anything, consider whether it's a need or want.

5. Family. Our retirement plan could be derailed by a host of family issues, whether it’s divorce, the need to support adult children, paying for children’s or grandchildren’s college costs, the death of a spouse and estate-planning mistakes.

6. Inflation. Most employer pensions aren’t indexed to inflation. Our pension might seem ample when we first retire. But a decade later, the buying power will be much reduced. As with many risks listed here, ample savings are likely our best defense.

7. Scams. Thieves are using increasingly sophisticated techniques to target seniors. We’ve all heard horror stories of investors losing huge sums to trickery and to get-rich-quick schemes. You no doubt recall the saying, “If something sounds too good to be true, it probably is.” Those words are worth bearing in mind.

8. Known unknowns. Think about threats such as flooding, fire, hurricanes, long-term-care costs, accidents and lawsuits. We know these are all possibilities, but we don’t know when or if they’ll come to pass. Still, we can prepare.

9. Unknown unknowns. Consider the recent pandemic. The world was unprepared and billions of lives were turned upside down. We can’t make specific preparations for threats we’re unaware of, but we can make sure our financial life can withstand large, unforeseen shocks.

I’ve spent time thinking through the above risks, and I believe it’s helped me to make more rational financial choices. Maybe we should all take our cues from the quote that’s sometimes wrongly attributed to Mark Twain: “I am an old man and have known a great many troubles, but most of them never happened.”

Sundar Mohan Rao retired recently after a four-decade career as a research and development engineer. He lives in Tampa in a 55-plus community. Mohan's interests include investing, digital painting, reading, writing and gardening. Check out his earlier articles.

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Fearing Nothing

WHEN I WAS IN MY 20s, I didn’t think much about money. My spending wasn’t lavish. I didn’t go to high-end restaurants or wear expensive clothes.

Still, if I wanted a book or a compact disc, I bought it. I wasted money on fast food instead of cooking at home. I blew money on electronics like a fancy CD player and bought a bigger, more expensive television than I needed. For somebody who considered himself reasonably bright, I was stupid with money.

The low point of my financial life came shortly after I got divorced in the mid-1980s. I was age 28. Despite having a good job working for a newspaper, I was in debt and responsible for significant child support payments. I lived in an apartment I couldn’t afford and spent money I didn’t have, running up larger and larger credit card debt. I hit financial rock bottom when I applied for a Sears credit card with a $500 credit limit—and got turned down.

I remember sitting with pen and paper many nights, adding and subtracting numbers, trying to figure out how I kept getting deeper and deeper into the hole every month. Unfortunately for my bottom line, my interests lay in getting better at my job and reading good books, not in cutting expenses, clipping coupons and giving serious thought before making what were often silly purchases.

Maybe I was trying to even the score. I grew up poor. We didn’t go hungry and we were loved, but money was scarce. We lived on a farm several miles from anything like a grocery store or movie theater.

For a few years, my two younger siblings and I received an allowance of 35 cents a week. I have no idea how that sum was determined, but I do know a quarter and a dime in the late 1960s bought a comic book, a candy bar and a coke for each of us when we went into town. Those two coins each week were important.

Memories of having no money can leave a lasting mark. Like me, some HumbleDollar readers have likely experienced periods of their life when they were afraid to check their mailbox, knowing there were likely bills in envelopes that screamed FINAL NOTICE.

And then there was the angst of writing a check for an important bill a day before getting paid, and having to calculate the odds of the check getting cashed before my paycheck got deposited. Getting hit with a $35 overdraft fee back then was like getting punched in the stomach.

Thanks to my good fortune of meeting a smart, practical woman, I eventually stopped spending more than I made, aggressively paid down debt and got smarter about my finances. Wising up was not immediate. I was stubborn. Fortunately, my future wife didn’t consider me a lost cause—and didn’t send me on my way.

Perhaps my humbling money experiences are why I’ve always been drawn to books about how to be smarter about money, or how to arrange your life if you don’t have any, or what you should do if you come into a huge financial windfall. Books such as Barbara Ehrenreich’s Nickel and Dimed: On (Not) Getting By in America and Scott Smith’s thriller A Simple Plan are fascinating reads.

My wife and I worked hard, and saved throughout our marriage. And yet do any of us ever stop thinking about money, even if we’re comfortably retired? A side effect of having once been broke is the fear, however irrational, of it happening again. In my mind’s eye, there’s always the possibility of another Sears moment, one that’s quietly and patiently waiting, just out of sight.

Tony Wilson spent most of his career working as a journalist and then newsroom technology trainer at news organizations in Kentucky, Kansas City, New York City, London and Geneva. He finished his career as the translations planner at printer manufacturer Lexmark. Tony’s previous article was Happy to Follow.

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It’s What We Do Next

BOXING CHAMPION Mike Tyson famously said, “Everybody has plans until they get hit for the first time.”

I’ve only been punched in the face once in my life. It occurred in sixth grade. I was alone in the boys' bathroom when a bully came in. He said something to me and didn’t like my response, so he attempted to kick me.

I saw this happening out of the corner of my eye and I lifted his leg up, which threw him off balance and he fell. He immediately got up and punched me in the cheek. I didn’t fall over. I just stood there, not sure what to do since I’d never been punched before. After thinking for perhaps five seconds, I turned, walked out of the bathroom and went back to my class.

By now, my cheek was red. My teacher saw this and asked what had happened. I told him I’d been punched, and said, “I didn’t want to make matters worse, so I didn’t respond.” He smiled and said, “I hope you get him after school.” I didn’t.

Sixth grade was my last year at the school, which I’d been attending since kindergarten. The next year, I’d be moving to the seventh grade at the junior high school.

When I attended elementary school, it was amid the post-war baby boom. Fathers had fought in World War II. Those who came home were ready to start careers, get married and have kids—lots of kids. This meant lots of school children all the same age. Every grade I attended had three classes of kids. It became apparent to me that one class was for the brilliant kids, one for the smart kids and one for the other kids. In elementary school, I was in the other kids' class.

In junior high school, this caste system meant you’d be slotted into the college-bound group, the trade school group or the grocery-store-kind-of-career group. My family had all gone to college, though no one graduated. Where I was slotted would decide my destiny. Would I go to college or get a job at the Acme grocery store? To my surprise, at junior high, I was slotted into the college-bound group.

In New York State, they have two types of diplomas, a high school diploma and the Regents Diploma. To get the Regents Diploma, you needed to pass every Regents exam, which were standardized exams created by the state’s Board of Regents and administered in every school district in the state. Our teachers didn’t know what would be on the exam, but you could get supplemental information from independent companies that had samples of past exams. Passing these exams was a challenge.

The first exam was ninth grade algebra. This wasn’t easy for me. In fact, my parents received a letter from the school stating that it didn’t appear I would pass. This was particularly upsetting to my father. But I assured him I’d pass the Regents exam because, if you did, you’d automatically pass the course and be allowed to move on to the 10th grade math course.

I studied, took the exam and crossed my fingers. It took weeks for the results to be announced. I passed. Unfortunately, my father died that summer, before the results were announced, so he never knew I passed. I went on to pass all the math, science and English exams needed to earn both the Regents Diploma and a high school diploma.

College was the next logical step. My SAT scores weren’t the best, so I wasn’t a candidate for scholarships, nor likely to be accepted by many state or private colleges. My brother suggested that I attend the local community college, believing it was better to get the first two years under my belt while living at home.

Before accepting students, the local community college looked at whether applicants had passed standardized exams to gauge if they could handle the course load. The college did this because not all students came directly from high school. Some had GED certificates, some were just out of the Army—the Vietnam war was in full swing—and some had graduated high school many years earlier.

When I took the standardized exams, the results indicated I needed “remedial help” to have a successful college experience. Despite having earned my Regents Diploma, I had to take remedial English and trigonometry. I passed both, as well as all my other classes.

Now, my eye was on transferring my community college credits to a four-year college to earn my bachelor’s degree. Before I took that step, I needed to be sure I earned an associate’s degree, in case I was unsuccessful in obtaining my bachelor’s. That way, I’d at least have an AA degree, or associates in arts, if I had to look for a job.

Before the end of my final semester at the college, I was called into the guidance counselor’s office. He advised me that the remedial English class I was forced to take didn’t count as credit toward my AA diploma. That meant I’d leave without my AA degree. I’m not usually good at thinking on my feet, but this time was different. I said, “I earned a B in every English course I took here. What makes you think I wouldn’t pass the next English course I’d take?” He thought for a minute and said, “You’re right. We’ll give you credit for completing the English requirement.”

We sometimes get punched in the face, figuratively speaking. It’s what we do next that determines our success or failure. That’s true in our careers, in investing and while we’re at college—and even when we’re in the elementary school bathroom.

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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Targeting Taxes

RETIREMENT CAN—ironically—take work. It requires us to restructure how we think about both our time and our finances. That rethinking extends to tax planning, which tends to move to center stage once we quit the workforce. Already retired or approaching retirement? There are several tax strategies worth considering.

But before we review specific strategies, it’s worth pondering a more fundamental change wrought by retirement. During our working years, the usual goal is to minimize our tax bill each year. But in retirement, the objective is different: It’s to minimize our total lifetime tax bill.

Let’s say you have two accounts, a traditional IRA and a Roth IRA. Withdrawals from the traditional IRA will be taxable, while Roth withdrawals will be tax-free. If you simply wanted to minimize your tax bill in a given year, you could draw all of your living expenses from your Roth. But if you did that every year, eventually your Roth would be depleted, and then you’d have to turn to your traditional IRA for all future withdrawals.

Result? Because withdrawals in later years would lean so heavily on your traditional IRA, that could force you into higher income-tax brackets, causing your retirement’s aggregate tax bill to be higher than if you’d more evenly weighted withdrawals over the years. Because of this dynamic, a priority for retirees is to pick a target tax bracket—one that, they believe, will more or less remain the same throughout retirement. How should you go about choosing a bracket? I see it as a three-step process.

First, you’ll want to estimate your potential maximum tax rate in retirement. That will most likely be in your mid- or late 70s, after you’ve started both Social Security and required minimum distributions (RMDs). Next, you’ll want to estimate your minimum tax rate. That’s typically in the years immediately after retirement, before those other income sources kick in.

Finally, to choose an ideal target for the entirety of your retirement, you’ll want to pick a rate somewhere between the estimated minimum and maximum. Got that? Now, let’s turn to specific strategies.

Roth contributions. The first strategy is one you can implement even before you retire. Suppose you normally contribute to a tax-deductible 401(k) or 403(b). That usually makes sense during your working years, when your tax rate is at a high point. But for some people, this playbook has a wrinkle.

If your plan is to move gradually into retirement, perhaps working a reduced schedule for some time, your tax rate might also drop. If it drops enough, it may make sense to shift your retirement contributions to your employer’s Roth 401(k) or Roth 403(b). Yes, you’ll forgo the immediate tax deduction. But if your tax rate is lower, the benefit you’ll be giving up will be smaller, and it’ll allow you to build up valuable Roth money.

Medicare surcharges. Once you’ve entered retirement and you’re on Medicare, you may be frustrated by the income-related surcharges added to your premiums. Because these surcharges are calculated on a two-year lagged basis, they can be quite high in your first years of retirement. Fortunately, the government has an appeals process. Look for Form SSA-44. You’ll notice that it offers eight possible reasons to request an adjustment, one of which is “work stoppage”—in other words, retirement.

Roth conversions. In your first full year of retirement, you might consider a Roth conversion. In the past, I’ve described the mechanics and the many benefits of conversions. The goal: Undertake Roth conversions to smooth out each year’s income, so you remain in your target tax bracket.

Portfolio structure. The objective of Roth conversions is to reduce future RMDs. That, in turn, can help keep a lid on your future tax rate. Portfolio structure can also help to limit future RMDs. To do this, you’ll want to house your fastest-growing assets—typically stocks—in your Roth IRA, thereby taking advantage of the tax-free growth. Meanwhile, you’ll want to locate your slowest-growing assets—typically bonds—in your traditional, tax-deferred accounts. The result: Your tax-deferred account will grow much more slowly, thus limiting future RMDs.

Roth IRAs are most attractive for holding stocks, but you can also house stocks in your taxable account. Yes, this means you’ll incur capital gains taxes when you sell your stocks down the road. But capital gains rates are often lower than the ordinary income rates that apply to withdrawals from traditional retirement accounts. Moreover, at death, appreciated assets benefit from a step-up in cost basis, thus nixing the embedded capital gains tax bill.

Charitable giving. Suppose you’re further along in retirement and contending with RMDs that exceed your annual expenses, causing your tax rate to creep up. After age 70½, you could turn to a strategy known as qualified charitable distributions (QCDs). Consider a retiree whose RMD is $100,000 but who only needs $80,000 for expenses. This is where QCDs can be a godsend. If this retiree were to give $20,000 directly from his traditional IRA to a charity, it would count toward his RMD but wouldn’t add to his taxable income.

Monitoring the mix. If you’re still many years from retirement, are there any steps you can take now? Two strategies are worth considering. First, keep an eye on your mix of retirement accounts. Sometimes, high-income taxpayers become too enthusiastic over tax-deferral strategies, such as employing cash balance plans that end up deferring six-figure sums each year.

While these plans can make sense, they can also have an unintended consequence. If the tax-deferred balances grow too large, the resulting RMDs can push a retiree into a very high tax bracket later in life. This is unusual, but I’ve seen it happen, so it’s worth doing some projections to see where your retirement balances might end up once you’re in your 70s. You could then adjust your contributions, if need be.

Direct indexing. Another suggestion for those in their working years: In the past, I’ve discussed the concept of direct indexing. Instead of owning an S&P 500 index fund, for example, a direct indexing service would purchase all 500 stocks individually. While this might sound unwieldy—and the cost is certainly higher—it can deliver a benefit over time. When you reach retirement and want to take withdrawals, you’ll have much more control over the gains you realize each year. You’d also have the option of donating the most highly appreciated stocks to charity.

Because direct indexing has pros and cons, you shouldn’t view this as an all-or-nothing decision. You might establish a separate account with just a portion of your assets dedicated to the strategy.

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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He Asked, I Answered

I'VE BEEN CHALLENGED—by Mr. Clements, no less. Jonathan didn’t actually say it, but his challenge was to defend my unorthodox views on investing and retirement, and the actions I’ve taken as a result.

Some of my decisions will seem illogical to others. Some don’t maximize investment returns. Some are very conservative, others not so much.

I don’t like math. I don’t like details. I haven’t used a spreadsheet in 30 years. I focus on the big picture and long-term goals. I want to feel financially secure and that I’ve achieved something. I try to cover every financial “what if” possible. Lately, I’ve been getting close to achieving my next net worth goal.

For Connie and me, our combined Social Security and my pension are our key sources of retirement income, not our investments, and that affects the investment decisions I make. Here are the five questions that Jonathan asked—and how I answered:

JC: You've written that you have 17% of your portfolio in one stock—your old employer's shares—and that you continue to reinvest your dividends. Was it wise to put so much in one company's shares, especially your employer's stock? And is it wise to continually increase your stake by reinvesting your dividends?

RQ: Conventional wisdom says it isn’t wise. I won’t argue with that, nor would I recommend my strategy to others. But I didn’t buy the great majority of those shares. They were given to me as compensation—stock options, restricted stock and stock bonuses. When the chance arose, I could have taken cash rather than shares, but I liked the idea of receiving dividends and still do. The company has a 117-year record of paying dividends. I suspect I also have a bit of misplaced loyalty.

JC: You've mentioned taking Social Security at your full retirement age of 66, and you've suggested in your comments that readers do the same. But if folks want to get the most out of Social Security, while also ensuring a healthy survivor benefit for their spouse, the standard advice is to wait until age 70. Are you sure you made the right decision?

RQ: I’m confident we made the right decision. I don’t recall suggesting readers do the same, but if I did, I take it back. I certainly recommend that, if possible, folks don’t start Social Security before their full retirement age. I also think it’s irrelevant whether you get the most out of Social Security in terms of total lifetime benefits. People should take their benefit when they need the money the most.

As far as survivor benefits go, if I predecease Connie, she’ll receive 50% of my base pension, 75% of my non-qualified pension, my Social Security, life insurance equal to at least two years of expenses, and income from our portfolio’s interest and dividends. Connie’s financial security is a top priority for me.

JC: When you took Social Security at age 66, you put the proceeds in municipal bonds—and yet you’ve said in the comments section that buying munis wasn't the best financial decision given your tax bracket. Moreover, the return from the munis would have been less than the gain you could have enjoyed by delaying Social Security. At this juncture, shouldn't you at least reverse course, sell the munis and invest the proceeds elsewhere?

RQ: My comment that you reference was comparing the return on Treasurys and munis. In that regard, I may have lost a percentage point or so of return each year by opting for munis. Today, those munis generate more than $1,000 a month in tax-free income, which I continue to reinvest, plus the three muni funds I bought now have significant value. Had we delayed Social Security, our income today would be higher, but we wouldn’t have the lump sum that we’ve amassed with the munis.

JC: You've promoted index funds, and yet your IRA includes actively managed funds with relatively high expenses. Why do you hang on to these funds, when you could switch to index funds without triggering capital-gains taxes?

RQ: Good question, Jonathan. Just lazy, I suspect. I got into those funds when I moved all investments to Fidelity Investments, and we were trying to replicate holdings from my 401(k) and an IRA. The good news is, the active funds are a small percentage of the total account. I may take your advice on this one. I still say index funds are the way to go, and they constitute the bulk of our investments.

JC: You've repeatedly advocated that retirees aim for 100% income replacement, and yet many retired readers say they live comfortably on far less. Are you right to keep pushing 100% income replacement?

RQ: My conservative side is showing. Yes, I still think replacing 100% of base pay—as opposed to total income, which might include a year-end bonus—is desirable. I’m sure retirees can get by with less if they reduce spending, relocate and so on. But why set that as a goal? Why retire with the requirement to change lifestyle? If Social Security is included, reaching 100% of pretax income is doable for most people—though perhaps not if you retire before age 62, which I see as a greater risk.

I also believe saving regularly is still necessary once you’re retired. When you factor in discretionary spending and unpredictable events, your spending probably won’t decline significantly—if at all—when you retire. Mine sure hasn’t.

Then factor in inflation. My pension is based on average earnings over the five years ending July 2008—my final five years of full-time work. Since then, we’ve had 16 years of inflation, so my pension now has 30% less purchasing power. Where would I be if I started retirement with income equal to just 70% of my pre-retirement base salary?

Could I have made better financial decisions? I have no doubt. Could I have accumulated more than I have with better decisions? Very likely.

The way I look at it, I graduated high school in 1961 and got a job paying just above minimum wage. Between then and now, my wife and I put four children through college, purchased a vacation home, built a secure retirement, and amassed financial assets that put us in the top 10% of our age group, with the prospect of leaving behind a healthy legacy for our children.

What more could anyone ask?

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

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