Photo Friday: I was reading Bob's post today about desigining the retirement that's right for you. It may not look exactly like your parents' retirement. In my case, I have to say that's because my parents' retirement is a bit more adventurous than my own.
(To submit your picture of retirement, email me a photo with how you would like it credited.)
Why would someone give up 60 cents to save 5 cents? It doesn’t make any sense.
Stupid Tax Trick #1
Apparently the very real threat of the top federal income
tax rate returning to 39.6% from the current 35% has people herding toward
this example, a couple in Virginia is considering closing up their chiropractic
office late next year if they get too close to clearing $250k in profits. Kristina Collins asserts that tax policy is “providing a
disincentive to keep expanding a business she founded in 1998.”
I don’t get it. If
this couple expands their business past the dreaded $250k mark, they will have to
pay 4.6 cents more in tax next year than they would have had to pay this year, on each incremental dollar earned. So let’s say they could grow
their business to $300k. This couple would
rather walk away from the additional 30 grand they would clear, because that results in $2,500 less than they would have cleared if the rate were still 35%? This doesn’t make any sense.
Stupid Tax Trick #2
As a former tax professional, I understand the concept of
accelerating income into the current year if you think next year’s tax rates will be higher. The capital gains rate
of 15% is widely expected to go back to 20% in 2013. According to this New
York Times article, this acceleration technique “is one of several factors
cited in the recent plunge in the price of Apple shares.” Apple shares have dropped 26% since
mid-September. So how does it make sense
to take a 26% haircut on the value of your Apple holdings just so you can avoid
an additional 5% tax on that portion of your holdings that represents capital
gains? It doesn’t make any sense.
advisors caution against allowing short-term tax ramifications to impact
your long-term investment goals. Mag Black-Scott, of Beverly Hills Wealth
Management warns that “any time you make a decision purely for tax reasons, it
has a way of coming back and biting you.”
I know. I have been
bitten by stupid tax tricks myself.
Stupid Tax Trick #3
Back during the dot-com bubble, I owned a few high-flying
tech stocks. Much like these folks in
reverse, I figured why sell these stocks this year? I’ll just have to pay tax on the gains. I might as well sit back, watch them
appreciate, and then pay the taxes some day in the future. A fine plan, except that all
those stocks tanked. I would have
come out far ahead if I had sold the stock, paid the tax, and pocketed the
difference. It didn’t make any sense.
Stupid Tax Trick #4
We knew when I retired, that at some point we would have to
sell our vacation home to make the retirement plan work. In 2008, the value of that home had doubled
since the year we bought it. I came up with the
brilliant tax plan to convert that home to our principal residence, sell the
house, exclude the gain from tax and walk away with all that money. Tax free.
While shuttling between homes for two years to make that
plan work, a funny thing happened. That thing was 2008. The value of that home fell to
less than what we even paid for it. All
that jumping through hoops to exclude that gain from tax, and the gain
evaporated. Poof! We would have come out far ahead if we had
sold the house, paid the tax, and pocketed the difference. We could still sell the house today and pay no tax
on the gain—because there is no gain anymore!
That didn’t make any sense.
Stupid Tax Trick #5
Ok, to redirect the spotlight back away from my own
one more. “John Moorin, the founder
of a medical equipment company near Indianapolis, said he sold about $650,000
in dividend-paying stocks like McDonald’s and Coca-Cola a few days after the
election, worried about the potential increase in taxes.” He goes on to say, “I love these companies,
but I’m so scared that now all of the sudden I’m going to get taxed at such a
rate with them that they won’t be worth anything.” He loved those companies.
Where’s he going to park that $650k now? In stocks that he doesn't love that don’t pay dividends? So he trades in a bit of dividend income taxed at
his marginal rate, for zero dividend income taxed at his marginal rate? Or is he instead going to put that money in bonds? Guess what, that income is
already taxed at your marginal rate. Or
are you going to put it somewhere where you can’t make any money on it at all
just so you won’t have to pay tax on the money you make?
It doesn’t make any sense.
Take tax implications into consideration when comparing your
investment options, but don’t cut off your nose to spite your face. Take it from one who knows.
so looking forward to next year,” she said. “I just want to sleep and exercise and
travel for fun. And relax. It sounds so ordinary, but I haven’t done it for 20
years. I would like to see whether I can get untired. I work out and stuff, but
I don’t do it enough and I don’t do it hard enough because I can’t expend that
much energy on it.”
I have a feeling that this soon-to-be retiree will get
involved in some meaningful volunteer work, just like her husband did when he retired. Sure, she needs some time to just acclimate
to a slower-paced life. You can tell
she’s yearning for that, although I am not aware of a time in her life that she
ever lived a slow-paced life.
As I wrote about yesterday, a lot of the benefits
of retirement are very ordinary, sleep, exercise, travel, and fun. She is no different than the rest of us, just
looking to slow down a little.
Actually, I think she probably is different than the rest of us. I think that in a few years, she may decide
she’s re-charged and ready for the next thing.
Of course, she’s already 65 years old, but I
think she may decide she’s ready for something big, something really big. Sure, she’ll be 69 years old in 2016, but I wouldn’t
be surprised if she ran for president again.
My advice to Hillary Clinton: Take at least a year off. Enjoy, relax, see what it feels like to be
retired. Sure, maybe you'll want to
volunteer for a cause that you think is important, but don’t rush it. You deserve a little time off, to just be a
normal retiree. And if you just want to
stay retired, well that’s ok too. You’ve
A few years later when I re-entered the workforce on a part-time basis, I started to appreciate that trade-off a little more.
I realized that while I was indeed still laboring when I did housework, it sure
was a lot less stressful than the labor that someone else pays you to do.
That’s why yesterday when I spent the afternoon deep cleaning a bathroom that
hadn’t seen that kind of clean in years, I didn’t mind so much. Because
this time I appreciated how wonderful it is to have the extra time, even if
some of that extra time isn’t always spent on the most exciting of endeavors.
In fact, I spend a lot of my extra time in
ways that many people might not appreciate the appeal of.
I enjoy at least one more hour of sleep
each night than when I was working. And that’s not even counting the hour
most nights that I was up at 3am worrying about work. Besides that, most
days I take a little nap too. When I’m tired, I sleep. If I don’t
feel like getting up yet, I don’t.
I will share a tip for those that share my
priorities. I no longer do the hours-long cleaning or gardening sessions
that were usually saved for the days immediately preceding visitors. Now,
I spend an hour each day taking care of one house cleaning or gardening
item. It all adds up to a relatively clean house and manicured garden all
the time, minus the back aches.
There is really no excuse for the fact
that I hadn’t been to yoga at all during the two
years of my part-time job. Priorities again I guess. But part of
the reason is that this is basically a three-hour venture. With almost a
half an hour commute each way for the hour-and-a-half class, followed by a
shower, we’re talking about a three-hour chunk of my day.
All the other stuff
If you’re keeping up with the math so far,
I’ve just spent six hours of a full-time work day, and I haven’t even done
anything really revolutionary. For those that fantasized about having so
much more time in retirement, this may be a little depressing. Basically
only two hours left for all the other stuff: reading, volunteering,
seeing friends, taking classes, planning trips, and enjoying whatever hobbies
you thought you’d be enjoying in retirement.
It’s not a whole lot of extra time is
it? It hardly seems worth it. But here’s the thing. All of
your time now is missing something, something that makes it totally worth
it. The thing your time excludes now is hurrying. Sure you
might lose time to more sleep, more housework, more lollygagging over
breakfast. But that’s because you have time to lollygag. And best
of all, while you’re not hurrying, you’re also not thinking about work, not
during yoga, and not at 3am when you should be sleeping.
Photo Friday: I recently attended my 30-year high school reunion. These are the "kids" from my elementary school. Ok, I don't think any of the other kids are retired yet, so what does this have to do with retirement?
Well many of my classmates opted not to go to the reunion at all. I get it, time is valuable and they just didn't see the value in attending. Maybe there isn't any, I don't know. So then, why go? Well the way I see it, now that I'm retired I've got plenty of time, so instead of asking why go, I just figured why not go?
I enjoyed my first foray into live radio last night
with an appearance on Lance Roberts’ streettalklive
broadcast. (To listen to my segment,
click here: Download Streettalk Live 2). We chatted about retirement, and he shared his wisdom on important
issues like how much money one needs to retire, and how retirees should
allocate their nest eggs between stocks and bonds.
I’ve discussed the importance of determining
your own tolerance for risk in order to figure out how much of your
portfolio you should allocate to stocks.
And by risk tolerance, I am
referring to how much you feel like killing yourself when you see your nest egg
As I’ve mentioned before, I may have been a little too risk
tolerant when I initially set up my own retirement
portfolio. When the stock
market lost about half of its value in the first year of my retirement, I might
have felt a little more comfortable with a slightly more conservative
allocation. Live and learn. But what if you don’t want to learn the hard
way like I did?
You already know how to target
the size of your retirement nest egg.
Let’s say you are retiring at age 65 and are targeting
a 4% withdrawal rate. You’ll need a
nest egg equal to 25
times your annual expenses that aren't covered by other income sources
such as Social Security, rental income, or part-time work. But how do you allocate those assets among
stocks and bonds in a way that will allow you to sleep at night during a market
tumble, before you actually suffer through a market tumble? That’s where Lance has an interesting
at your projected expenses. Then figure
out how much money you will need just to cover your “Alpo diet,” meaning
the absolute minimum you need for basic expenses before you have to start
eating dog food. Maybe not such an
appetizing image, but you get the drift. Perhaps some of this is covered by your
Social Security or other income. But to
the extent that it is not, invest enough of your nest egg into the safe part of
your asset allocation to generate the income you'll need to meet your basic needs.
Then to keep up with inflation, you will want to allocate the rest of your nest egg to equities. This
part of your nest egg will cover the wants rather than the needs. That way, if the market runs into trouble,
you’ll be able to makes
some adjustments to your spending on discretionary items, while still ensuring
that you get to eat normal food for dinner.
I took a look at how this approach would translate to my own
allocation. Sixty percent of my budget
is for non-discretionary items, housing, insurance, utilities, groceries, health
insurance--things like that. A little
more extravagant than an Alpo diet, but that represents the basic cost of
operating our life as is right now. The
other 40 percent of our expenses are for discretionary expenses, things we could
cut in a pinch, but really wouldn’t want to.
That would translate to a 60% bond allocation and a 40%
stock allocation. Which is a little too
conservative for my taste, especially since I’ve got potentially 50 years to
cover. But consider the same breakdown
if I were 67 years old. That would be
when I am eligible for Social Security.
Social Security should cover about 20% of my expenses. (I will not earn the maximum Social Security
benefit since I did not work long enough to earn the full benefit.) In that circumstance I would only be aiming
to cover 80% of my expenses with my own nest egg. After applying a little math, that translates
to a 50/50 split between stocks and bonds. (Since the first 20% of my budget would be taken
care of by Social Security, only 40% of my expenses would remain to be covered for
basics and 40% for fun stuff.)
While this approach may not exactly hit the mark for me now, it
seems a pretty reasonable way to tackle the issue, perhaps with a little fine
tuning to really make it your own.