Jonathan Clements's Blog, page 97

Waiting Is Risky

"YOU CAN PAY ME NOW—or you can pay me later." Years ago, that was the catch phrase, spoken by an auto mechanic working on a broken-down car, in ads for FRAM oil filters. The pitch: If you spend a modest sum on routine car maintenance, you’ll avoid far bigger bills down the road.

The same philosophy applies to retirement savings. There’s a constant tradeoff between now and later.

Faced with life’s challenges, we need to strike a balance. We need to balance our work with our home life. We need to balance risk with reward. We need to balance growth with income. And, yes, we need to balance saving with spending.

None of us knows how long we’ll live. It’s good to make plans and have goals. They act as the proverbial carrot, encouraging us to keep moving forward. But we also need to enjoy today.

Each one of us has our own ideas about what’s fun and what’s worth spending money on. We need to balance the things we must do with these things that we want to do. The musts provide us with the financial foundation that allows us to support ourselves and our family. The wants make our life worth living. We can pay now for our wants or we can pay later—assuming we live long enough to get the chance. The choice is up to us.

Many folks say they can’t wait to retire so they can do the things they’ve put off doing because of their careers, family commitments or lack of time. The benefit of this approach to retirement: It gives you something to look forward to. All your hard work will pay off when you’re sitting on that tropical beach sipping that umbrella drink. The downside: If your health deteriorates prior to retirement, you may never do all the exciting things you dreamed of.

I’m in the opposite situation. I’ve done all the things I wanted to do, and I did them while I was working. I visited all 50 states. I traveled the full length of Lincoln Highway, which was first conceived in 1912 and which runs from New York City to San Francisco. I traveled Route 66 from Santa Monica, California, to Chicago. I visited eight foreign countries and took four ocean cruises. I visited many national parks after buying a lifetime pass for $10 when I turned age 65. I took a motorcycle racing course at the Watkins Glen race course, took a go-kart racing course in California and drove a Ferrari around the Pocono race track in Pennsylvania. Such things may not be important to others, but they were important to me.

The upshot: I’m not facing some large expense for that vacation of a lifetime. I’m also not worrying about whether my knees or my health will hold up, so I can fulfill some big retirement dream.

On the other hand, I also don’t have anything major to look forward to. I’m not complaining. It’s better to have lived life as you chose than to have others decide for you, and it’s better to do at least some things you enjoy now, rather than leaving everything to be done at some uncertain future time. Still, I need to invent new goals and dreams. It’s a good challenge.

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Fear of Heights

THE S&P 500 INDEX just hit a new all-time high, topping 5,000 for the first time. Is it now too high? For investors concerned about market risk, this is an important question. But it isn’t an easy one to answer.

For starters, there’s no single definition of “too high.” Consider the price-to-earnings (P/E) ratio, the most common measure of market valuation. By this metric, the market does indeed look pricey. The P/E of the S&P 500 stands just a hair below 20 based on expected 12-month earnings—far above its 40-year average of 15.6. Should that concern us?

The reality: The economy today isn’t the same as it was 30 or 40 years ago, and that has implications for valuation ratios. Specifically, the companies that now dominate the market have very different financial profiles.

The five largest S&P 500 companies today are Apple, Microsoft, Amazon, Nvidia and Alphabet (parent of Google). Together, these five companies account for more than 20% of the S&P 500’s total value. From a financial perspective, what makes them notable is that, over the past 10 years, their profits have grown at an average 25% per year—a remarkable pace for companies of their size.

We can contrast these companies with the market leaders of the past. In 2001, the five largest companies in the S&P were General Electric, Microsoft, Pfizer, Citigroup and Wal-Mart. Aside from Microsoft, the market leaders consisted of an industrial company, a pharmaceutical manufacturer, a bank and a retailer. While they were all large companies, the profitability of these kinds of businesses doesn’t compare to that of the tech companies now driving the market. That’s why many argue that today’s higher valuations are justified.

Another reason to see today’s market as fairly valued: Traditional valuation ratios paint a distorted picture. According to an analysis by JP Morgan, as of Jan. 1, the average P/E of the 10 largest companies in the S&P was a lofty 27. By contrast, the average valuation of the other 490 companies was just 17—not far above the index’s long-term average. Through this lens, the market today isn’t more expensive than it’s been in the past. It’s just that the unusual group of companies that sit atop the market are much larger, more profitable and faster-growing than the rest, and that makes the market appear more expensive than it really is.

To be sure, some investors remain unconvinced. They argue that international markets offer far better value. Indeed, at year-end 2023, the U.S. stock market was among the world’s most expensive. That’s true—mathematically—but boosters of U.S. stocks are quick to point out why that’s the case: Nowhere else in the world is there a group of companies that matches the tech leaders in the U.S.

Yes, there’s Alibaba in China, Samsung in Korea, TSMC in Taiwan and others. But no international market has the sort of concentration of fast-growing technology companies that the U.S. has. That’s another reason the market here may not be as expensive as it seems.

So far, we’ve only looked at the market through the lens of the P/E ratio, but it isn’t the only yardstick. Yale University economist Robert Shiller is co-creator of an alternate barometer known as the Shiller P/E. During the 2021 rally, he made this statement: “The stock market is already quite expensive. But it is also true that stock prices are fairly reasonable right now.” Shiller explained the seeming inconsistency by arguing that there is more than one way to assess the market. Through one lens, it might appear expensive. But through another, it might appear reasonably priced.

For the past several years, in fact, Shiller has advocated a successor to his original P/E. He calls the new one the excess CAPE ratio. This new metric looks at stocks relative to bonds, rather than comparing stocks to their own historical average. The upshot: It’s another example of how market valuation is in the eye of the beholder.

Without the benefit of hindsight, of course, we can’t know whether the market today is actually too high. How can investors manage that uncertainty? I have three suggestions:

Ignore the market. Since we can’t be sure where it’s headed, investors’ best bet may be to simply ignore where the market stands at any given time. In a recent article, researcher Nick Maggiulli asked this question: Historically, if investors had put money into the market on days when it was at all-time highs, how would those investments have done relative to investments made on all other days? His conclusion: It depends.

Over one-year periods, investing at all-time highs yielded better results than investing on all other days, because the market exhibits momentum. But over five- and 10-year periods, returns were lower for investors who put money to work at all-time highs. That makes intuitive sense, but there’s an important caveat: Returns were still positive in all cases.

In other words, we’d all prefer to invest when the market’s cheap, but investors were still better off putting money into the market at all-time highs than not at all. The lesson: Investors who wait on the sidelines in the hope of earning better returns may miss out on receiving any returns.

Ignore commentators. I often recommend tuning out the advice of market experts. That’s because the investment world is full of commentators who became famous with one—but only one—successful prediction. These include Michael Burry, made famous by The Big Short, who in recent years has predicted a series of crashes that haven’t materialized.

Robert Shiller, who himself has an above-average track record as a forecaster, acknowledges how difficult it is. Referring to his own P/E measure, he wrote in 2014 that, “The ratio has been a very imprecise timing indicator.” The implication: Market measures are interesting, but we shouldn’t see them as anything more than that.

Diversify. While I’m not worried about the U.S. stock market, no one should ever be too confident. To appreciate that, look no further than Japan’s Nikkei 225 index. In December 1989, it closed at 38,957. Where is it today? At 36,897—still below where it stood more than 34 years ago. The performance has been horrendous.

While Japan has faced some unique challenges, including deflation and stagnant population growth, we can’t ignore this example. Fortunately, there’s a simple solution: diversifying your portfolio internationally. That way, if a problem does materialize in the U.S., you’ll have time to wait it out. Some investors recommend holding as much as 50% of your stock portfolio outside the U.S. I prefer something closer to 20%. But the important thing is to simply have some exposure.

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 (Twitter) @AdamMGrossman and check out his earlier articles.

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Fire Meets Ice

HAVE WE GOT IT ALL wrong? “It” is our relentless, lifelong focus on socking away great wads of money, so we don’t have to worry about earning another penny once we reach our 60s.

In fact, adherents of the FIRE—financial independence-retire early—movement aim to reach this blissful state far earlier, perhaps even in their 30s. This, of course, involves saving voraciously, with all the financial sacrifice that’s entailed. Even retiring in our 60s can seem like a Herculean task, generating much hand-wringing and financial stress. Is all this really necessary?

For those less enthralled with the traditional vision of retirement or its more extreme FIRE version, let me suggest an alternative. I’ve dubbed it ICE, short for “I’ll continue earning.”

This line of thought was inspired by a recent Ken Cutler article that raised two important questions about today’s notion of retirement. First, are we overly focused on amassing ungodly sums for retirement? Second, should we strive to remain useful throughout our life, rather than bowing out of the workforce in our 60s or earlier?

While I think our current concept of retirement could do with some tweaking, I wouldn’t want to discourage folks from saving aggressively for their later years. At the same time, I think it’s instructive to think about a different model of retirement, one where we continue to earn at least some income well into our 70s and perhaps beyond. Consider five implications:

From the get-go, we might pick a career less for its income and more for its joy—because we envisage doing it for as long as our mind and body allow. As the saying goes, if we can find a job we love, we’ll never work a day in our life.
All the anxiety over saving like crazy and investing prudently would be much diminished, because the financial stakes would be far lower. Sure, we’d still need to save for house down payments, college costs, financial emergencies and some period at the end of our life when we’re no longer able to do the work we love. But the total sum involved would be far smaller, and meeting all these goals would no longer seem like an all-but-impossible financial juggling act.
Similarly, all the fretting over finding the right retirement-income strategy would be greatly reduced. To state the obvious, retirement’s fundamental financial dilemma is we’re trying to pay for decades of living expenses without a paycheck coming in. With the ICE model, this problem is largely solved: Our “retirement” income might consist of Social Security, a paycheck and—if that paycheck is smaller because we’re working part-time—some modest amount of savings. The math is compelling: If we can earn $30,000 a year with part-time work, that’s like having a nest egg that’s $750,000 larger, assuming a 4% withdrawal rate.
Today’s pressing demographic problem—too few workers, and too many folks dependent on the goods and services that they provide—would be solved. That, in turn, would mean less reliance on imported goods and hence a smaller trade deficit, less inflationary pressure, fewer labor shortages and more taxes collected, including the payroll taxes needed to keep Social Security on a sound financial footing.
The whole issue of finding a purpose in retirement goes away. Our work remains our purpose. And thanks to the physical, social and intellectual stimulation that this work provides, we’d likely enjoy longer, healthier lives.

Among readers, I can imagine two big objections to all this. First, what if we really want that life of endless leisure? Or what if we want to spend our later years doing things that nobody’s likely to pay us to do, such as writing poetry or volunteering at our place of worship? Clearly, the ICE strategy doesn’t work.

Second, what if we simply can’t work, either because our mind or body won’t allow it? Wouldn’t we need a huge pile of savings for that? No doubt about it, this is a huge issue. But it’s an issue we already face, as evidenced by the many families that struggle today to provide and pay for long-term care.

As I see it, our current retirement ideal—that the good life means stopping all paid work in our 60s and perhaps earlier—rests on two questionable assumptions: that work is a distasteful task that we should escape as soon as we can, and that our goal should be to spend our later years avoiding anything so useful to society that it comes with a paycheck.

I realize that many, and perhaps most, folks have bought into these two assumptions. But wouldn’t it be great if we viewed work and retirement differently? Indeed, I suspect that, if they could do work that they love on a flexible schedule, a lot of retirees would jump at the chance to enjoy the income, camaraderie, and sense of identity and purpose that work can offer.

Convinced? Even as I advance these ideas, I must confess to cold feet. If my younger self hadn’t saved like crazy for retirement and I now faced the prospect of working for the rest of my life, would I feel happy with my choice—or trapped? Could any of us reliably predict in our 30s what our desires will be in our 60s?

Still, I think there’s an opportunity here for each of us individually and for us as a society. Businesses, faced with ongoing labor shortages, should be working to design jobs that would appeal to older Americans. Congress should be tweaking the tax code to make it more financially attractive for seniors to keep working, knowing the revenue that the government gives up would be more than offset by the additional taxes that these older Americans end up paying.

And we should all be thinking not just about saving enough for retirement, but also about what work we’d love to do in retirement and how we could get paid for doing it. If we can identify that perfect job, maybe our 60s and 70s would be a whole lot less financially stressful—and a whole lot more fulfilling.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X (Twitter) @ClementsMoney and on Facebook, and check out his earlier articles.

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Letting It Ride

I KISSED REBALANCING goodbye. In any case, I wasn’t consistent about rebalancing our retirement portfolio.

I’ve never attempted to maintain a specific stock-bond ratio. Whenever I did something akin to rebalancing, it was usually in response to some vague discomfort about the level of risk we were taking. Or it was based on a hunch about where the market would move in the near future—typically misguided.

This latter activity is also known as market timing. While periodic, methodical rebalancing is generally seen as virtuous by most financial experts I respect, trying to time the market is considered a no-no by just about all of them.

Somewhere along the line, I read that the best-performing financial accounts were those that had been forgotten. Turns out, the study used as the basis for that story might be apocryphal. Still, it seems clear that excessive trading and tinkering tend to be negative for returns. That’s certainly been my experience.

My current philosophy for my 401(k) and our two Roth IRA accounts—mine and my wife’s—is to just let them be. I don’t expect to be taking withdrawals for at least another decade, and hopefully even longer. In the case of the Roth IRAs, the most likely scenario is that they’ll pass intact to our children. Given the long horizon for these accounts, it makes sense to favor stocks. Why rebalance and perhaps undercut the growth potential?

Up until last year, I’d expected to be pulling money out of my old employer’s 401(k) plan, along with a rollover IRA that would be funded with my cash balance pension, to pay for retirement. In the years leading up to my recent retirement, I’d gradually made my overall portfolio a bit more conservative in an attempt to reduce the sequence-of-return risk that’s a big threat early in retirement.

But my plans changed. Increased interest rates in 2023 made selecting my pension’s monthly payment option more attractive. Rather than taking my pension as a lump sum, as I’d always planned, I traded in the entire cash payout for the annuity option. Although this decision drastically reduced my net worth, I no longer need to think about tapping our retirement accounts to live on.

Realizing I’d probably be taking the pension as an annuity, I reversed course last year and replenished our retirement accounts’ stock holdings a bit. Our combined retirement portfolio is now 57% in stocks. The Roth IRAs have a considerably higher stock allocation than the 401(k). I’m pretty satisfied with the mix of low-cost index funds we hold.

I suppose I could increase the stock holdings faster by transferring even more over from the bond funds, but I don’t plan to. I like being insulated from the emotional impact of short-term stock market drops, knowing that a decent portion of the portfolio won’t be affected. Absent a prolonged, severe disruption to the world economy, 10 or 15 years from now our portfolio’s stock weighting might be up to 75% and perhaps more. In that case, the portfolio should have grown enough that, even if the market experienced a temporary large downturn, there’d be no need for alarm.

Tinkering with our portfolio is a tempting retirement hobby. I have more free time and the spreadsheets are already built. Still, I’ve learned not to trust myself. In hindsight, my previous “clever” moves usually turned out not to be. Even though it might be fun to play around with the fund choices and allocations, I know the chances are good that I’d make things worse rather than better.

My current thinking is that, now I have our fund mix adjusted to my satisfaction, the portfolio can essentially run on autopilot for many years. I did manage to mostly leave my 401(k) account alone from 2017 to 2021, with favorable results: The balance ballooned 75%, powered by my S&P 500 index fund’s performance. Here’s hoping I have the discipline to continue doing nothing.

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. Check out Ken's earlier articles.

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Still Above Ground

I WAS WORRIED ABOUT what we’d be giving up when, a few years ago, we moved to a 55-plus community in Atlanta. We downsized from a large home to a small apartment, plus all our neighbors were considerably older. It was obvious we had to adjust and start enjoying our unfamiliar environment or we’d end up miserable.

My wife and I made a conscious decision to slow down, and make every effort to get to know other residents and their life stories. Within several weeks, we felt more comfortable living there.

One conversation during the first week transformed my thinking about retiree life. The man was much older, struggled with mobility and was constantly in pain. But he was always cheerful and would say “hello” whenever he saw me.

One morning, I ran into him in the corridor. I greeted him with, "Good morning. Have a great day.”

His reply, said with a smile: “Any day above ground is a great day.”

This simple statement had a profound impact on how I thought about life’s day-to-day struggles. A day could be bad for many reasons: a dead car battery, a traffic jam, a parking ticket, a client canceling a contract, office politics and more. But the important thing is, I’m still above ground, living and breathing, which isn’t always a given for a senior. I’m thankful for this fact, and it makes all other problems seem small, trivial and not worth worrying about.

We’re told to “count your blessings,” which helps us keep things in perspective when they don’t go well. This gratitude—especially the gratitude that we’re still above ground—can allow us to get some distance from life’s day-to-day hassles.

Such thoughts can also help with investing. Legendary investor Warren Buffett has said that it's wise for investors “to be fearful when others are greedy and to be greedy only when others are fearful.” Investment opportunities often arise when others are fearful and share prices are beaten down.

I think of the price I pay for a beaten-down stock as the “ground.” When the stock moves above the price I paid, I’m happy it’s “above ground.” If I buy a stock at $100 and it goes to $150, I’m certainly happy. What if it then drops to $125? I tend to be unhappy, and may be tempted to sell. But I try to avoid this temptation by telling myself I’m still “above ground” and I need to stay the course. It’s a way for me to get some distance from the stock market’s daily price gyrations.

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Passing the Baton

ONE OF THE MOST exciting events at a track meet is the relay race. Each runner has to run his or her leg, and then hand over the baton to the next runner. If the baton gets dropped, the team usually loses.

My wife and I occupy two roles in our financial life. I save the money and my wife spends it. This arrangement works well for my wife. When she complains about my frugal nature, I simply explain that this gives her more money to spend. She answers, “Carry on.”

As the saver in the family, I’m also the investor. I’ve set up pretty simple financial arrangements. We each have traditional and Roth IRAs. All other money is in joint accounts, accessible to my wife and me. If I die before my wife, it should be a smooth financial transition.

It’s not always so. My father-in-law was the main breadwinner. He’d bring home the paycheck, and my mother-in-law would pay the bills. At the beginning of their marriage, my mother-in-law failed to make mortgage payments on time. They lost their first house that way. It was a hard lesson. But after that, their finances were in good shape—until my mother-in-law died.

It turns out that my father-in-law didn’t know much about their finances. My mother-in-law had set up all of their bills on autopay, so he never thought about paying the bills.

Before she died, they’d reached the point where they could no longer live in their single-family home in a 55-plus community without help. They sold the house and moved to an assisted living facility. The facility didn’t have autopay, so my mother-in-law began paying those bills monthly. This change wasn’t grasped by my father-in-law. When he gets a bill, or what he thinks is a bill, he pays it without question.

Now, it seems, he’s running out of money. My wife, her brother and her sister will need to find a less expensive apartment for him. It likely won’t have the same services or quality of life that he’s currently enjoying.

Can my wife and I do better? I like to think so. The real wild card in our financial life is the potential cost of nursing home care. While I can’t know what our health costs will be as we grow older, I can make a guess based on family history.

My father died of a heart attack at age 56. No nursing home care. My mother needed hospital care but no nursing home care. She died at 93. My brother was badly injured in an altercation that resulted in two years of nursing home care. He died at 79.

Meanwhile, my wife’s mother had a history of poor health, but remained at home until her final three years. She died at 89. Her father has been hospitalized and needs assistance with his daily care, but at 94 he’s still alive and kicking. Her brother and sister are both alive, and haven’t needed nursing home care.

Reviewing our family history, I chose not to buy long-term-care insurance when I was 60, which I was told was the ideal time to purchase it. When you don’t have insurance coverage for a potential financial loss, you are—by definition—self-insured. You’ll have to pay the cost yourself if the need arises. This is our situation if we have long-term-care needs.

In most other ways, our finances are less uncertain. I’ve tried to simplify our accounts to help my wife after I’m gone. Our traditional and Roth IRAs are with the same mutual fund company. We even invest in the same mutual fund in our Roth IRAs, so she can simply merge the two accounts after my death.

I thought about buying Treasury bonds as part of our financial assets, but decided against it. The requirement to maintain an online account with TreasuryDirect seemed like too much of a complication.

I have regular discussions with my wife, so she’ll be informed and equipped to take over our finances, if necessary. It’s not that she can’t understand our finances. It’s just that she’s not as interested as I am. My concern is she may follow in her father’s footsteps, ignoring the subject until something breaks.

The KISS—or keep-it-simple-stupid—approach is almost always a winning way. I just hope our finances are simple enough for my wife to grab the baton without dropping it.

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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In My Room

"SO STEVE, WHAT BRINGS you to therapy?"

“I’ve been moody, sluggish and short-tempered lately. I think I’m depressed.”

“Any guesses what might be going on?”

“I do, but it’s so silly. My wife Alberta needs to make her first required minimum distribution in a few months. You know, when you reach that point in your 70s where they make you withdraw from your retirement accounts. I don’t think it’s about the tax liability. We’ve planned for that.”

“Then?”

“This is going to sound strange. But I manage the money, and I’m afraid I’m going to miss seeing her retirement funds grow.”

“Sounds like investing has been kind of a passion for you.”

“Uh-huh. The stock market is challenging for me in so many ways. I read about mutual funds and exchange-traded funds all the time, and have used my math ability and common sense to build up a nice nest egg for Alberta. I know I’ll still have some tinkering left to do, but the required withdrawal is a shot across the bow.”

“I’m getting the picture. Investing has given you a structure and a different kind of gratification than you get from seeing people in your psychology practice.”

“Yes, helping patients work out their lives is enormously satisfying, but I sit all day. I like a hit every now and then.”

“Is it fair to say you seek a lot of action to keep you from sinking into the blues?”

“Yes, definitely. That’s why the other doctor started me on Prozac a few years ago. He said my personality is keyed for depression and so I compensate with excitement.”

“Steve, from what you’ve told me, I’d agree. And maybe becoming a successful stock investor has been a source of pride and self-esteem. It’s a big thing in our society, especially for men.”

“Investing has been a big part of my identity. In my 40s and 50s, I became depressed and lost my job as a psych professor. Investing became my contribution to my family’s well-being. Friends still ask for advice all the time. Even so, I’m constantly comparing my successes to theirs.”

“Steve, you must have been raised in a very achievement-oriented family, which makes letting go of your money all the more terrifying. What you’re going through now isn’t a garden-variety depression. You’re in mourning.”

“Mourning? But no one close to me has died.”

“Grief doesn’t only happen with the death of a loved one. You’re losing a very good friend, an activity that has been a source of self-worth for many years.”

“I’ve never thought of my investing that way. I do feel a little lost. And truthfully, I’m scared.”

“Sure you are. Passage from a stage of life you’ve mastered to one that’s new—and that you’ve probably resisted planning for—is frightening. Steve, you’re in what we might call retirement affective disorder. You’re having trouble moving from the accumulation phase to the distribution phase, and from retirement planning to enactment.”

“Can you help me through the transition?”

“Steve, your prognosis is good if you’re willing to explore new ways of finding meaning in your life. Your path has been too narrow. Like many people, you’ve concentrated too much on what you do well, and haven’t experienced nearly enough of all life has to offer.”

“I’m open to most anything that might break up this fog I’m in.”

“As the fulfillment you get from investing winds down, you’ll need to replace it with activities that also have meaning for you. You’ve taught and you love investing. Maybe volunteering to coach teenagers in good money habits or assisting seniors in managing their financial affairs would help. And, of course, there are the rewards of travel—relaxation, learning and just plain fun.”

“Whoa, you can stop right there, doc. I hate vacations that involve a lot of travel. First of all, they’re absurdly expensive, not to mention a big hassle. You’ve got all the jostling at the airport and the discomforts of the plane. Alberta coaxed me into a trip to Europe a few years ago. After landing in Madrid, we were told our bags had turned up in Berlin.”

“So, you had an experience that only reinforced your worst-case scenario. But I wonder how it would be if the purpose of the travel held more meaning for you.”

“I’ve been having this recurring dream about a trip I would take. Some people wake up from a dream feeling anxious. But last night, I woke up all teary.”

“Can you remember any part of the dream?”

“Oh sure, the whole thing. I fly to New York—in economy, of course—and drive a rental car to the house I was brought up in on Long Island. I walk up to the front door and knock. When a woman opens it, I tell her my name and that I lived in the house 60 years ago. She smiles and invites me in. Then I point to the stairway and ask if I could see my old room. She says sure and gestures toward the stairs. When I get up to my room, I hear the Beach Boys playing one of my favorite songs. It goes, ‘There’s a world where I can go and tell my secrets to, in my room, in my room.’ And that’s when I wake up crying, just like I’m doing now.”

“Steve, your dream has to do with your fear of leaving a place that’s safe for one that’s frightening. Your unwinding of a rewarding sideline career is exaggerated by your memory of leaving home. You’re depressed because you feel trapped. But you’re not trapped. You’re just scared about what’s to come.”

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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Rookie Year

FANS OF PROFESSIONAL sports know the excitement and agony of watching each year’s fresh crop of rookies. These young players have to relearn a game they thought they knew.

The fact is, the strategies, tactics, intensity and winning habits of big league sports teams are tougher than those of college and minor league teams. That can leave rookies wondering what hit them when they move up to the big leagues.

That’s how I felt in December 2022, when I retired after decades of working and saving.

Season's start. For me, full-time work ended abruptly. Deciding not to seek another position came later, the result of a months-long wallow. I realized one day that I didn’t know what I was waiting for and I “don’t wanna be a richer man,” to quote David Bowie.

Time with family and friends had become precious. What’s more, I’d fallen in love with choosing how to spend my time. I couldn’t appreciate the joy and lightness this freedom brings until many months away from full-time work. Lower blood pressure has been a bonus.

Better defense. As a first step in our rookie retirement year, my wife and I reviewed expenses and cut some low-hanging fruit. Streaming services we modestly used? Gone. A remote storage unit for our seasonal things? Replaced with storage racks over our garage doors and a paring down of seasonal holiday treasures. These cuts and more felt so good that it’s now a January tradition.

Housing can be a big expense, but we finished off our mortgage years ago. When work ended, we had already decided to retire in place, staying in our home of 20-plus years in the Pacific Northwest. This area isn’t cheap, but it could be much worse. We’re still healthy, our kids aren’t far away, and we saw no reason to spend money on a move until later in life. By the spring, we’d finished a major year-long home renovation that was underway when my job was cut. From here, housing costs should offer few surprises.

New game. When I had a steady paycheck and was working long hours, I never took the time to create a detailed retirement-income plan. When my job went away, I felt we had likely saved enough to meet our goal for retirement income: 100% of my final net salary and bonus. That 100% excludes the retirement savings we used to sock away, but adds in higher health care costs.

Still, I hadn’t figured out how to turn those savings into steady early retirement income, while we waited to start Social Security. I felt stupid for skipping this step until retirement was suddenly upon us. Rookie mistake.

Over the next eight years, I have a chunky mix of investments outside our main portfolio that mature at different times: retirement stock grants vest quarterly until late 2026; annual deferred compensation investments pay out from 2026 through 2030; and an eight-year bond ladder covers 2024 to 2031. Series I savings bonds can be tapped for gaps, if needed.

Eventually, we’ll use some dividends and interest from our retirement portfolio, while it hopefully keeps growing. To cover the rough spots, and sleep well through tough times, I’m increasing our cash holdings from 18 to 30 months of expenses.

Like many HumbleDollar readers, I shifted our cash savings from our bank to a federal money market fund, so our cash would work harder while short-term rates are high. To simplify our cash flow, I finally set up a monthly automated transfer from our money market fund, so our checking account always holds two to three months of living expenses. It took this rookie six months before he felt comfortable enough with every aspect of our plan to automate that monthly transfer.

Don’t beat yourself. Without a steady paycheck coming in, our time horizon had changed overnight. I now wanted a bit more certainty, plus bigger financial margins to cover surprises, until we claim Social Security. That drove two more changes.

First, when yields on nominal and inflation-indexed five-to-10-year Treasury notes approached their recent highs in October, and with inflation heading down, I decided to shift part of our retirement bond portfolio from Treasury index funds to direct Treasury bond holdings. I also stretched our average bond duration, which had been short heading into 2022. Holding these new Treasurys to maturity gives us what Bill Bernstein calls “investing equanimity,” and does so with satisfying yields and low expenses. Our portfolio’s short-term Treasury holdings are still held in a Vanguard Group index fund.

Second, when my ex-employer’s stock price rose to new highs, I limited potential “losses” in future stock grant vests by buying put options for 2023 and 2024. Put options rise in value when a stock’s price drops below the contract’s strike price.

Playing the long game. Our final tactics were around longevity. In this first year of our retirement, I reviewed my assumptions for our portfolio’s expected return and dividend yield, as well as our planned withdrawal rates, which are set at 3% or less. I want a plan that’s conservative enough to carry us through the next 40 years, while still leaving some money for the kids.

To lower our early retirement risk, I trimmed our portfolio’s stock target to 67% and boosted Treasurys to 33%. With that allocation, and plenty of cash savings, I should be able to view market downturns as a buying opportunity. After we start Social Security benefits, I’ll let our stock allocation grow. Once I hit age 75, we’ll use a simple retirement-income system: We’ll supplement a modest income annuity and Social Security with required minimum distributions from my rollover IRA, plus dividends and interest from our taxable-account savings.

As I wrap up my rookie year, I can see why so many retirement veterans say “the first year is the hardest.” I’d love to hear how other readers are playing their retirement-income game.

David Powell spent nearly four decades as a software engineer and engineering general manager at Apple, Microsoft, NIH and Silicon Graphics until he retired in 2023. He can be reached on Threads at @AmpedToGo. Check out David’s earlier articles.

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Cooking Up a Kitchen

I'VE WRITTEN BEFORE about the financial benefits of learning to cook and then preparing meals at home, rather than frequently eating out. I still heartily endorse that notion. Still, our recent decision to remodel our kitchen can’t be defended as a wise financial choice.

In fact, the consensus is that almost all remodeling jobs result in an increase in home value that’s less than the remodeling project’s cost, and that includes kitchen renovations. Instead, our latest home project was an emotional and enjoyment expenditure, one that I owed to my wife, an expert cook and very patient woman. Our home was built in 1986 and we moved in a few years after that. The kitchen hadn’t had any major updates since then.

The biggest factor in a remodeling project’s success is the general contractor, so our first step was to find a good one. Ideally, you have a trusted friend or family member who says, “This is the guy. He just handled our project and he’s great.” But we didn’t know anybody who had a general contractor they’d recommend.

Nextdoor, Yelp, Google and so on can all be helpful in identifying potential contractors. The guy we ultimately chose had an extensive website. He later told me I was the first person who’d actually read the whole thing.

Still, what drove our decision was the contractor’s references. I spoke at length with three clients. Each was obviously intelligent, articulate and made no bones about being demanding. They all sang our guy’s praises. We were sold.

We’ve now finished the project, and we’re as happy with our contractor as his references were. With the benefit of hindsight, I can now list his attributes that were most important to me:

Organization. I got a sense of this from his website. It went into detail about his process, from the design phase through to completion. It was logical and made sense to me. Once hired, he followed the schedule and process outlined in our written contract. He adhered closely to the timeline he laid out, which is rare among the other remodeling projects I’ve heard about.

Responsiveness. I’m something of a fanatic about communication and responsiveness. Fortunately, this is something you can easily check before making a hiring decision. How quickly does a prospective contractor get back to you, and does he address the questions you’re asking or does he just respond with a general sales pitch? Our guy was great. He promptly answered emails and returned phone calls. He addressed what I was asking about. He didn’t become impatient or lose interest when I asked follow-up questions.
Honesty and integrity. This comes through in many ways. But one indicator is when something, however minor, goes wrong. There’s often a tendency to make excuses or blame others, such as suppliers and subcontractors. Our contractor took full responsibility for the few small mishaps we had, and then worked double time to fix them, in one instance by making a series of calls while out of town at a funeral.

Subcontractors. Our contractor had a small list of subs whose work was up to his standards and with whom he works on most jobs. The subs did great work, and the mutual respect between our contractor and them was obvious.
Attention to detail. Our guy was a perfectionist. He spotted and corrected small things we hadn’t even noticed and maybe never would have. This meant more time and effort from him, but reflects the pride he took in his work.

The hard part for anyone shopping for a contractor: How do you judge in advance whether a candidate has the attributes that are important to you? Without doubt, the best way is talking at length with references. Take the time to ask them to grade your prospect on every attribute that’s important to you. I promise you that, later on, you’ll be happy you did.

Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dog, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with five beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier articles.

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It’s a Secret

SOME FOLKS SEEM HAPPY to tell the world how much they earn, how much they have in the bank and what their portfolio is worth. Not me.

If I were to share my income and net worth, I’d expect some serious consequences, and not just from local thieves. In fact, I’m so cautious I have a plan not to tell anyone, except my wife Connie, if I win the lottery.

To be sure, overt sharing often isn’t necessary. The way we live can be revealing enough. Having two homes and spending much of the winter in Florida is a clear sign the Connie and I aren’t living solely on Social Security. Still, there are plenty of good reasons that I and others don’t reveal everything about our finances.

Getting judged. Will we be seen as rich and out of touch, or average and unsuccessful? Some folks may even fear being judged poor and deserving of pity.

Embarrassment. Could revealing details about our financial situation, including any debt, cause shame or guilt about lavish spending? Would learning about others cause us to question our earning power or life choices?

Power dynamics. Money can be seen as a source of power. Do we risk that by revealing more about our finances, which is a standard measure of success in our society?

Social norms. There are unspoken rules when talking about money. It might be considered rude or inappropriate to bring it up, even in casual conversation. “Nice to meet you. How much do you earn? Do you have a credit card balance? I don’t.” That’s going to be a short friendship.

Lack of knowledge. Many people don’t have a good understanding of personal finance and might feel insecure about that. Talking about money or investments could reveal their ignorance.

Comparison and competition. Talking about money can sometimes lead to rivalry, including among family members, which can be especially damaging. It might also create envy and resentment, and perhaps expectations of sharing.

Right or wrong, money is a key measure of success in our society. Sure, we can all list things that are more important. Still, what we earn, how much we spend and our net worth are yardsticks we all use. We even measure happiness using money. A recent survey found 59% of Americans think money buys happiness.

So, when it comes to our financial lives, mum’s the word.

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