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Keeping It

Adam M. Grossman

WALL STREET JOURNAL personal finance columnist Jason Zweig recently made this observation: Getting rich isn’t the hard part, he said. “Staying rich is the hard part.”

On the surface, staying rich might seem easy. After all, you simply need to build a balanced portfolio and then withdraw from it at a reasonable rate. Sure, there are stories about lottery winners and professional athletes going broke. But you might assume that phenomenon—having a hard time staying rich—is limited to such extreme cases.

In my experience, however, it’s a challenge for everyone. That, I think, is because the skills and strategies required to retain wealth are different from those required to build it. What to do? Here are some of the approaches that I’ve seen work well.

Portfolio (Part I). When it comes to building a portfolio, most people think first about risk. That makes sense. But it’s important to recognize that there’s such a thing as being too conservative. You might, for example, feel that the ultimate “safe” portfolio would be one invested entirely in U.S. Treasury bonds. While that would certainly offer safety in one respect, it would also be enormously risky—because of the exposure to inflation. Consider that, in just the past 20 years, the dollar has lost about a third of its purchasing power—even though inflation has been historically low. Counterintuitive as it may seem, a key ingredient in maintaining wealth is taking sufficient risk.

Portfolio (Part II). Back in the fall of 2008, when the financial crisis hit, Harvard University found itself in a difficult position. With a large part of its endowment tied up in hedge funds and illiquid private equity investments, the university faced a cash crunch. It had to lay off hundreds of employees. To raise cash in a hurry, the school began selling investments at fire-sale prices. It was a disaster. None of us should make that same mistake. Even if it feels inefficient, keep plenty of cash and bonds, so you can weather a rainy day.

Budgeting. Mention the word “budgeting” and a lot of people recoil. But if your goal is to preserve wealth, especially after you stop working, I favor a form of budgeting. The approach I recommend is to set annual allocations for each of three major spending categories: general household expenses, charitable giving, and gifts to family.

For your household expenses, set up automated transfers from your investment account to your checking account. That’ll ensure that you stay on budget or, at least, highlight when you go over. For charitable giving, I often recommend donor-advised funds for their tax benefits. But they provide another benefit, which is that they make it easy to track contributions and donations on a year-to-date basis. What about gifts to family? Try to complete the gifts once a year—and all at once. In combination, these three strategies should help you stay on budget without the pain of a traditional budget.

Spending. The expression “penny wise, pound foolish” sounds elementary. But in recent decades, certain categories of expenses have dramatically exceeded others. Foremost among them: college tuition, which has risen at an egregious rate. As I’ve noted before, tuition represents the single biggest obstacle to many families’ financial security. Fortunately, it’s not mandatory to pay $80,000 a year. There’s now more data with which to make informed college choices. If you can contain big expenses like this, that might pack more punch than a lifetime of penny-pinching on everything else.

Creative solutions. Economists like to talk about the $20 bill theorem. It says that you never find money simply lying on the ground because somebody else would have already picked it up. By the same token, it may not seem worth the effort to look for ways to substantially cut your budget or increase your income. But both exist.

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Consider my friend—let’s call him Jim—who has two children a year apart in age. Recognizing the way the college aid formula works, Jim convinced his older child to take a gap year after high school. The result: Both children went through college during the same four years, yielding Jim tens of thousands of dollars of additional aid.

Taxes (Part I). In retirement, taxes represent a double-edged sword. On the one hand, retirees have much more control over their tax rate. On the other hand, it requires a fair amount of diligence on an annual basis to exercise that control. What to do? Work with your accountant or advisor—or both—to develop a tax-smart “decumulation” plan for your annual withdrawals from savings.

Taxes (Part II). If you’re still working and have charitable intentions, a useful tax strategy is to front-load a donor-advised fund. Suppose your annual giving totals $5,000 a year. You could continue to give at that rate into retirement, but the value of the tax deduction will likely fall—and it may even be eliminated. An alternative: If you’re well-heeled, you might consider making one big contribution—say, $50,000 or $100,000—to a donor-advised fund in your last year on the job. That way, you’d get a huge deduction at a high tax rate. You could then dole out that sum in $5,000 annual increments during your retirement.

Insurance. Most of us understand the importance of life and disability insurance, but it’s good to review these periodically. During the first half of your career, you might need to bump up coverage levels periodically. In the second half, your accumulated savings might allow you to decrease coverage. Another insurance recommendation: Secure plenty of umbrella coverage.

Plan B (and C). In making a financial plan, I always find it useful to ask what levers would be available if things don’t go according to plan. Could you downsize or sell a second home? Liquidate a life insurance policy? Request more college financial aid from the bursar’s office? Secure a reverse mortgage? None of these is pleasant to think about. But I’ve found it’s easier to sleep at night if you know what financial levers are at your disposal.

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 Twitter @AdamMGrossman and check out his earlier articles.

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Catherine
Catherine
9 months ago

Thank you, Adam, for another thought provoking column.

I’ve got two HS grads in their first semester at 4-year colleges, despite the valuable and sensible recommendation here and elsewhere to save a mountain of money by sending them first to a nearby community college, the nearest of which is walking distance from home. In the next 60 days I’ll pay for their second semesters, since neither has done badly so far, nor has either taken a full-time job that could displace/delay college for now.
Why? I don’t think it’s because I’m foolish or sentimental. Nor am I any less rational than all other semi-rational human beings. I’m not prone to sunk cost errors, either.
For me, as the adage goes, “Time is money.” With the exception of the University of California, our state’s 2- and 4-year colleges don’t graduate the majority of students in the expected time. In a pre-pandemic report, the Public Policy Institute of California noted that, “Only 13 percent of community college freshmen receive an associate degree after two years, 31 percent do so within three years…. only about 48 percent of students aiming to receive an associate degree or certificate, transfer to a four-year school, or complete at least 60 transferable units do so within six years.”
That’s a three-in-ten chance of completing a 2-year degree in 3 years, increasing to a 50-50 chance of completing a 2-year degree in 6 years. I don’t like those odds at all.
I saw many many examples of students who’d experienced this when I was a professor, reviewing applications for grad programs. Applicants who’d spent 10 years to earn a 4-year degree.
The years between 18 and 30 are among the most productive and healthy and vital times of a person’s life. Only if there is *no other way* would I wish upon any young adult a ten-year path to a 4-year degree.
That is, contrary to David Powell’s comment here, I myself would only recommend sending a student to community college if he or she was in fact “…wicked smart and has clearly demonstrated fully independent self-discipline around work and studies.” That student has an excellent chance for timely success at community college.
There is a separate, important and related question for an typical parent of a typical 18-year-old who is ordinarily smart and who has yet to demonstrate independent self-discipline around work and studies. What ought a parent to support? Pushing them out of the nest so they might sink or swim at work or at school, independently? Letting them live at home for free indefinitely, while taking the slow road to a 2-year degree? I think the conundrum of inadequate readiness for adult responsibilities feeds into the desires of parents to send kids to college right away, to help them to grow up a bit. Similarly, for young adults to take on college debt as a funding support while they learn to make money and pay their own way in life. Very possibly, going to college isn’t the right mechanism to achieve these life skills goals.

Jim Wood
Jim Wood
8 months ago
Reply to  Catherine

It is possible to test out of the first 51 hours of college if your child is motivated. There is no reason to retake English and math and history that they already took in high school. This is a consideration for some students and can save bundles of money. I knew this as a business professor and encouraged my son. He was actually able to test out of 51 hours of a 4-year college degree.

DrLefty
DrLefty
8 months ago
Reply to  Catherine

One of my daughters was in no way ready to leave home and go to college at 18. She was not a confident or motivated student and she barely graduated high school. She went to community college for three years before finally transferring to a four-year school…and then dropped out with a year to go for her degree. She’s 27 now and still doesn’t have her degree (to our chagrin), but she is gainfully employed. I don’t know if she’ll ever go back and finish. College isn’t for everybody, and I say that as a university professor. That said, I’m glad her community college tuition was hundreds of dollars per semester rather than tens of thousands.

An
An
9 months ago
Reply to  Catherine

How much are the community college graduation rates and time to graduate are skewed from part-time students working full time jobs?

Jack Hannam
Jack Hannam
9 months ago
Reply to  Catherine

You have provided a lot of food for thought. As if it isn’t challenging enough for students and their families to pay for a college education through some combination of part-time work, savings, family gifts, and navigating the complex rules concerning scholarships, grants, and loans. But more fundamentally, to help the student decide whether to pursue a college degree is the best choice, or to instead consider other routes to a career such as technical training, apprenticeship in a skilled trade, or military service.

David Powell
David Powell
9 months ago

Thanks for this, Adam!

Here’s another idea re college costs: don’t right away send your high school grad to a four-year college or an expensive trade school, unless your child is wicked smart and has clearly demonstrated fully independent self-discipline around work and studies. Instead, for the first two years of undergrad, keep your kids at home and let them knock out the general education requirements in a local community college. Living expenses are a big part of college costs, community college tuition per credit-hour is far cheaper than a four-year school, and the first two years of required curriculum toward any bachelor’s degree will transfer to the university where they finish their undergrad degree (that’s the name which appears on their diploma). Let them make and learn from their own very cheap community college mistakes, ones which won’t raise your blood pressure so much.

And if your son or daughter has been tested and diagnosed with ADHD, the executive function part of their brain, involved in planning and anticipating consequences from choices, will finish developing several years later than their peers. Rushing them into a four-year school is likely to yield wasted time and money.

DrLefty
DrLefty
8 months ago
Reply to  David Powell

Exactly!

Jack Hannam
Jack Hannam
9 months ago

Excellent and well written summary, Adam!

For Portfolio I: Risk of permanent loss of purchasing power, whether due to inflation, taxes, fraud, poor investment performance, bad luck, or unwise investor behavior, is real. We cannot eliminate risk, but can mitigate it. When terms like “safe” and “risky” are used to characterize various asset types, I consider that for any asset, the risk to me in owning it is a combination of its “intrinsic risk” and my individual investing behavior. A share of stock in an individual company has not only an intrinsic value, but also an intrinsic risk, which is the probability of that company underperforming, or worse, going bankrupt. We can mitigate that risk by diversifying, owning stocks in many different companies via a mutual fund based on a broad stock index. As for investor “behavior risk”, we should avoid “buying high and selling low”. To do this, we dollar cost average while buying. We may rebalance from time to time when appropriate. And when retired and withdrawing funds each year, we avoid selling low when the market is down by maintaining a multi-year liquid cash cushion. This addresses the dilemma faced by some as described in Portfolio II.

Constant reminders from the financial press that cash today earns virtually nothing while losing purchasing value due to inflation, bond prices are at a multi-decade high with correspondingly low yields, and stock market valuations are at historic highs, can be distracting to say the least. It can make one wonder whether he ought to “do something”. I would say “don’t just do something, stand there”. We have all hopefully followed, and continue to follow prudent strategies to accumulate portfolios and later to withdraw from them, no matter what the markets do. I choose to not introduce a new level of behavioral risk by changing my portfolio composition now in response to the drumbeat of pessimistic news. My diversified portfolio will hopefully shrink only slowly over time when taking annual withdrawals and inflation into account, surviving longer than my wife and I. The negative investment returns earned by my ten year cash cushion and its resultant opportunity cost to my overall portfolio performance, is a price I am willing to pay to comfortably manage my overall risk, and enable me to ignore the distractions and to sleep well at night.

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