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Inflation Hedge

ArticleAdam M. Grossman | Aug 29, 2026

THE OPEN KITCHEN restaurant has been a fixture in Charlotte, North Carolina for 75 years. The restaurant has an old-time feel, with memorabilia, including menus from years gone by, lining its walls. Those old menus provided David Enna, a financial journalist, with a laboratory for examining the effects of inflation. What did Enna find? The oldest menu on display is from 1963. To state the obvious, today’s prices make those from the 1960s look quaint. Back then, spaghetti and meatballs cost just $1.10. Today, it’s $15.50. But, as Enna points out, that was more than 60 years ago, so increases are to be expected. Over the past 60 years, the Consumer Price Index (CPI) has averaged 3.8% per year. That isn’t unreasonable, especially since that average includes the 1970s, when inflation sometimes topped 10%. What’s of more concern, though, is what consumers have experienced more recently. Since 2020, prices across the economy have risen 29%. And though those increases have slowed, the Fed is still struggling to ratchet inflation back to its preferred 2% level. This has given investors renewed interest in strategies to defend against inflation. At first glance, this doesn’t seem like it should be such a difficult problem. The U.S. Treasury offers an investment specifically designed for this purpose: Treasury Inflation-Protected Securities (TIPS). These are bonds that are guaranteed by the federal government to increase in value with inflation. And though I hesitate to use the words “bond” and “exciting” in the same sentence, today many investors are finding the return on TIPS compelling. The 30-year TIPS is now paying close to 3% on top of inflation. If inflation averages 2.5%, for example, over the next 30 years, this bond will end up returning a total of 5.5% per year, and with minimal risk. That sounds good in theory, but do these bonds make sense for your portfolio? It’s worth taking a closer look. The first thing to note is that this seemingly attractive 3% yield only applies to 30-year TIPS. Yields on shorter-term bonds are lower. So unless your investment horizon happens to be exactly 30 years, these bonds may be of limited practical value. Putting aside the yield question, though, a more fundamental challenge with individual TIPS—and individual bonds in general—is that they’re a cumbersome way to build a portfolio. Even if you didn’t mind the process of buying bonds one by one, which can be tedious, there’s the fact that it’s hard for most people to be able to forecast their cash flow needs each year into the future. That’s a problem because choosing maturity dates is the foundation on which bond portfolios are built. Ideally, if you can align the maturity dates of the bonds in your portfolio with your future cash needs, then you can hold bonds to maturity, which is when the issuer would promise to pay you back in full. But that redemption value is guaranteed only at maturity. Buy a 20-year bond and sell it after just 10 years, and there are no guarantees. A bondholder could easily lose money selling an individual bond before maturity. Given these challenges, would a TIPS fund be a better choice? To be sure, bond funds are much simpler to purchase and to manage, but they typically offer even less protection from losses than individual bonds. Most recently, shareholders in TIPS funds were disappointed by how they performed in 2022, when inflation spiked to 9%. Investors expected that to be the year when TIPS rewarded investors, but instead, diversified TIPS funds such as the Vanguard Inflation-Protected Securities Fund (ticker: VAIPX) lost nearly 12%. Why did funds like this fare so poorly when inflation was running so high? The problem is that, at the end of the day, TIPS are still bonds. And though they receive a bump in value when inflation rises, a countervailing force is that they lose value when interest rates rise. In 2022, the Federal Reserve raised interest rates aggressively to fight inflation. The negative impact from those rate increases far outweighed the benefit TIPS received from inflation being higher. That puts investors in a difficult position. If TIPS provide inflation protection in theory, but both individual TIPS and TIPS funds carry limitations, what other options are there? The good news is that not all TIPS funds are the same. Some hold only short-term bonds, and they have historically held up much better than more broadly diversified TIPS funds because short-term bonds are more resilient when interest rates rise. Over the past five years, a fund like Vanguard’s Short-Term Inflation-Protected Securities ETF (ticker: VTIP) has outperformed a comparable fund (ticker: VGSH) holding standard short-term Treasury bonds every year, as well as this year to-date. It’s important to note, though, that this is relative performance. In 2022, when the entire bond market was under pressure, even short-term TIPS funds like VTIP did still lose money. They just lost less than funds holding conventional bonds. The bottom line: We should never become too wedded to any one strategy. No investment can promise reliable and complete protection against inflation in every market scenario. That said, I do still recommend TIPS and would specifically recommend a short-term fund like VTIP. But I also suggest taking a diversified approach to inflation protection. Here are other steps to consider. If you’re in your 60s and considering when to claim Social Security, that decision offers a powerful lever. Because Social Security benefits increase with inflation and also increase with each year you delay claiming, it’s maybe the most effective way to build additional inflation protection into your plan. What else can you do? Fortunately, you may already own one of the most effective—and underappreciated—inflation-fighting instruments: stocks. While rising prices in recent years have been frustrating for consumers, the result has been that companies have been able to maintain their profit margins. That, in turn, has helped to support their stock prices through this period of inflation. To be sure, some companies have more of an ability to raise prices than others, but overall, stocks are, in my view, a good way to keep pace with inflation. The one thing I wouldn’t do is to buy gold. Despite its reputation, various studies have confirmed that gold really isn’t a reliable inflation hedge. In a paper titled “The Golden Dilemma,” researchers wrote: “Over practical investment horizons, gold is an unreliable inflation hedge,” though they acknowledge that it may be more reliable over longer timeframes—“if the investment horizon is measured in centuries.” 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.

Traditional or Roth

ArticleRichard Connor | Aug 29, 2026

THE CHOICE BETWEEN a traditional retirement account or a Roth is a frequent topic on HumbleDollar. The choice is generally framed as a choice between paying taxes up front (a Roth), or deferring taxes until withdrawal (traditional). I thought it would be interesting to evaluate a real-life example of how this choice might work out. In December of 2016 my wife and I had an opportunity to each open a Roth IRA. My wife took a partial sabbatical that year, and that, combined with maxing out our 401k accounts, gave us a chance to each open a $4,500 Roth IRA. The maximum allowable contribution that year was $6,500 for those 50 and over. Up until then we had assumed that our marginal tax bracket would likely be lower in retirement, and focused on contributing to our employer’s traditional 401k plans. Despite that, we decided to move forward with opening a Roth IRA. I thought it would give us some tax diversity, and the opportunity to do Roth conversions when, and if, it made sense in the future. In December of 2016 we opened Roth IRAs at Vanguard and invested the $4,500 in their S&P 500 Index Fund. Those initial funds have been invested for almost 10 years. Over that decade we have added some additional funds, and have done a few conversions. I recently did a quick analysis to see how my Roth experience would have compared to investing in a traditional IRA. In 2016, our marginal tax bracket was 28%. To contribute the $4,500 required $6,250 of pre-tax income. Due to some financial engineering over the last year, including selling our second home in late 2025, I expect our 2026 marginal tax bracket to stay within the 12% bracket. I’ve been looking at this closely because I’m considering doing a Roth conversion later this year. The table below shows the comparison between the Roth performance, and what a traditional IRA would have produced. The annual rate of return was determined using Nick Maggiulli’s S&P 500 Historical Return Calculator. Roth vs Traditional

The table shows that the Traditional IRA would have been the better choice, producing about $3,500 more in available funds, or about 22% more. This demonstrates that the primary driver in choosing between a Roth and a traditional qualified account is a consideration of the tax rates at the time of contribution and at the time of distribution. There have been a number of changes to the tax code in the last decade that have contributed to the result, but I certainly didn’t predict any of them. If you guess wrong, you pay the price in a higher tax bill. In the example above, the extra $1,750 invested in the traditional account produced an additional $6,143.31 in earnings. The lower tax rate at the distribution of the traditional IRA results in the $3,500 in extra funds. Even though the Roth IRA had tax free earnings growth, the initial larger tax rate overcame that advantage, when compared to the traditional IRA. Because of my pension and my wife’s social security benefit, 85% of her social security benefit is taxable income, so that is not a consideration in our tax calculation. I used Dinkytown’s 1040 Calculator to run a series of estimates of our 2026 tax return to assess if we want to execute a Roth Conversion this year. We are still 4 years from taking RMDs, and I will start my Social Security in a year when I turn 70. My current thinking is a conversion of about $40,000 will keep us in the 12% bracket. There would also be a small NJ state tax impact. My simple analysis reinforces what I’ve been taught. Roth contributions make the most sense when you think your current tax bracket is lower than when you expect to withdrawal the funds. There are secondary considerations, like no tax diversification, no RMDs, and uncertainty about future tax rates. If you intend to pass the funds to heirs, it might make sense to perform Roth conversions today at the 22% tax bracket if you intend to pass these accounts to heirs who may be in their peak earnings years. Not sure? I believe I recall several HumbleDollar contributors write something about splitting the difference? 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.

The Intentional Spendthrift

Mark Crothers | Aug 21, 2026

"A few years back, we visited the Greek island of Crete in July. We took a local bus (no air conditioning) to the Minoan ruins at Knossos, and it was so intensely hot walking around the site that people were passing out from heat exhaustion. With that in mind, I fully endorse your plan to visit Greece earlier in the summer."

- Mark Crothers

Americans and their credit cards

R Quinn | Aug 24, 2026

"David, did you check the source data for the AI’s figures? My first thought is that it's mixing up nominal and real wage increases. A 28.2% real growth figure already has inflation subtracted out. That means wages actually outpaced inflation by 28.2% over those four decades, rather than lagging behind it."

- Mark Crothers

How Did You Find Paid Work After Retiring from Your Primary Career?

Jeffrey Chan | Jul 31, 2026

"Good for you."

- Patrick Brennan

Bad Maths, Good Fire.

Mark Crothers | Aug 28, 2026

"Dunn, working on that felled tree I mentioned was really satisfying. Though I have to say, splitting the rounds with an axe is one hell of an upper body workout!"

- Mark Crothers

The Wrong-Sided Man

Dennis Friedman | May 8, 2025

"I too walk early in the morning and now I carry a small can of pepper spray. It might be a vicious dog, wrong-way man as you describe, or a wayward hobo looking for an easy roll."

- art winslow

This would be a great posting on a web site with the name “HaughtyDollar.”

R Quinn | Aug 28, 2026

"t"

- Mick

You Heel!

Michael Flack | Aug 24, 2026

"Counterpoint- I purchased a brand new pair of Bostonian oxfords, maroon in color for about $20, about 25 years ago. I liked them so much I bought a black pair, but they were only reduced to $35. The black ones were go to shoes for my work environment for a couple decades. I spent ~$150 combined to replace the leather soles and rubber heels multiple times. I wondered if it was a prudent decision to keep spending so much more than the original cost. Then I shopped for equal quality and comfort in new shoes, and I found they were around $250 and could not be re-soled due to the rubber soles. I therefore succeeded in exercising my frugal muscle and got the maximum value out of a relatively paltry investment. And I supported small local businesses, making a modest living for their family. I call that a win-win. I've trashed the black shoes as I felt they were no longer worth repairing, or needed for work. I'll be wearing the maroon ones (original heel/sole) later this year in my son's wedding."

- John Verlautz

A Place At The Table

Andrew Clements | Aug 26, 2026

"Thank you, William. I’m glad you enjoyed it. The Philippines has taught me quite a bit, and often it’s the small, everyday experiences that have left the biggest impression on me."

- Andrew Clements

Blood Money

Michael Flack | Mar 28, 2026

"I agree with you about KO but XOM is involved in climate deception since it knew about global warming risks 60 years ago and ranks as one of the top global greenhouse gas polluters."

- Nick Politakis

Feeling TIPSy?

ArticleSanjib Saha | Aug 22, 2026

NOT TOO LONG ago, Treasury Inflation Protected Security (TIPS) was a relatively obscure investment for safe long-term fixed-income investments. For the first twenty years of the new century, consumer prices were mostly stable or rising at a too-slow-to-notice rate. Why bother with anything related to inflation? Sadly, persistently low inflation made us complacent on the biggest long-term risk of bond investments -- the insidious unexpected inflation that robs us of the purchasing power of our “safe” investments. Yes, let’s not forget that the biggest risk of bond or bond-like investments is unexpected inflation. Any bond or CD with a maturity beyond a few years must either offer a sufficiently high interest rate to compensate for sudden bouts of inflation, or have its principal adjusted for the inflation actually realized. The former is nearly impossible to find without sacrificing safety. The latter is what TIPS is for. To be clear, the market and investors always expect some level of inflation. Therefore, a bond’s effective interest rate - measured by its YTM (Yield to Maturity) - must be high enough to not only compensate for “expected” inflation and the uncertainties around it but also provide a meaningful increase in the purchasing power of the original principal. A concrete example might help. Consider a 10-year US Treasury nominal bond with a face value of $1,000, selling at $1,000 and paying 5% annual interest. The interest rate reflects the expectations about inflation and other factors over the next 10 years. The rate would be lower if market expected lower inflation, and higher if market expected the opposite. The omnipresence of inflation means we’re likely to lose some purchasing power when we get our $1,000 in 10 years. It won’t buy what $1,000 buys today. By how much? That’s the thousand dollars question (pun intended). There isn’t a readily available number that explains why that 10-year Treasury Bond yields 5% instead of 3% or 7%. Investors essentially take a leap of faith that annual inflation stays low enough over the 10-year period for the interim interests to compensate for the purchasing power loss, plus some changes. Most of us are perfectly comfortable assuming that inflation won’t be as high as 5% for 10 years. But are we fooling ourselves? I suggest using an inflation calculator to see for ourselves. Spoiler alert: Late 1960s through early 1980s can be an eye-opening period. How’d we feel if the next 10 years turn out to be something similar? Think about how you might feel when you safekeep your money in a so-called secure investment, give up higher returns available from risky investments, and then encounter an inflationary regime. Your minimum expectation was that your purchasing power would remain intact and perhaps improve a little by the time your bond matures. Instead, unforeseen inflation erodes your purchasing power and compromises the financial goal the fund was supposed to cover. Your “safe” investment fails you completely. You realize that it wasn’t safe at all. If unexpected inflation is so devastating, why are we so lax about it? I can think of two reasons. First, our minds haven’t adapted to the reality that, unlike to a “real” asset like a bag of rice or a gallon of gasoline, money in its current form is inherently self-eroding. It slowly loses its worth over time. A hundred dollars sitting around will still be a hundred dollars next year, but it won’t buy the same amount. We don’t intuitively perceive the continuous loss of purchasing power. Even when we do internalize it with some effort, we get used to the “pace” of the loss. In other words, we view inflation as steady and unexpected inflation as highly unlikely. Alas, all it takes is a single prolonged inflationary period to change that perception. By then, however, the damage to existing fixed income investments may already be done. Frankly, I’d be very wary of keeping my long-term “safe” money -- fund that I need to preserve beyond a three-year horizon - in any form that isn’t protected against unexpected inflation. For bond investments, the most meaningful option would be TIPS. Why? Because, in addition to being secured by the full faith and credit of the US Government just like any other Treasury securities, TIPS provides three important assurances upfront. First, it provides protection against unexpected inflation, which is a realized inflation that differs from what we expected when purchasing it. If the actual inflation averages 12% instead of the expected 2%, the principal is automatically adjusted to reflect the actual inflation. No guesswork or unexpected risk involved. Second, it provides a “real interest rate” upfront that tells us how much the purchasing power of the investment will increase over time, regardless of what the actual inflation turns out to be. Buying a 10-year TIPS with real 2% annual interest means the investment’s purchasing power will grow 2% per year over the holding period, before considering taxes and other factors. The third aspect is more nuanced. It involves the possibility of inflation being lower than expected, or even negative inflation (aka deflation). Let me elaborate. If a regular nominal 10-year Treasury Bond offers 5% annual yield and an equivalent TIPS offers a real annual interest rate of 2.75%, the market-implied inflation, the breakeven inflation rate, is roughly 2.25% (5% minus 2.75%). Actual inflation, of course, will be known only after 10 years when the bond matures. Suppose the actual inflation turns out to be only 1.25%. The nominal Bond investor would end up with more purchasing power than the TIPS investor because the TIPS principle would be adjusted by only the actual 1.25% inflation rate. The primary objective of the TIPS investor would still have been met: preserving and improving purchasing power by about 2.75% annually. But there would be a “missed opportunity”. The nominal Treasury investor would end up with even greater purchasing power. Does it mean that a TIPS investor can face an unlimited opportunity cost if inflation turns out to be negative? What happens if the actual inflation is, hypothetically speaking, negative 5%, in a severely deflationary period? Does the TIPS investor get back proportionately reduced principal at maturity? Thanks to the third assurance of TIPS, the answer is NO. TIPS guarantees that the principal returned at maturity will never fall below the original face value. During periods of deflation, the inflation-adjusted principal can fall below its face value and the interim interest payments will decline accordingly. But at maturity, the principal is floored at the original principal amount. Therefore, the breakeven inflation rate, the difference between the yield of a nominal Treasury bond and the real yield of an equivalent TIPS, represents the maximum annual yield advantage that the nominal bond can have over TIPS in an unexpectedly low inflation regime. To summarize, a TIPS investor gets unlimited protection against unexpectedly high inflation, while accepting a limited opportunity cost should the actual inflation be low or even negative. The magnitude of that trade-off is reflected in the breakeven inflation rate at the time of the TIPS purchase. An aside: given the destructive impact of deflation on economy and society, policy makers are generally more concerned about preventing prolonged deflation than about preventing modest inflation. Therefore, prolonged deflation is usually considered less likely. Still, we cannot ignore deflation risk altogether and should be prepared for the possibility that TIPS can underperform a nominal bond if inflation runs low. Therefore, the decision to favor TIPS over an equivalent nominal Bond hinges in part on the current breakeven inflation rate. If it’s low enough, favoring TIPS can be an easy decision. Getting unlimited protection against unexpectedly high inflation is worth accepting the relatively small opportunity cost if inflation comes below the breakeven rate. There is, however, a cautionary note about buying TIPS bonds in the secondary market, especially older issues. Consider a 30-year TIPS bond issued 20 years ago and a 10-year TIPS issued within last 6 months. Both might appear to be valid choices if they mature within a few months of each other and offer similar yields. But beneath the surface, one may be more favorable than the other. The older TIPS will likely have a much higher inflation-adjusted principal because it accumulated 20 years of inflation adjustments. But the protection against unexpected deflation applies only to the bond’s original face value, which is typically $1,000. In a prolonged deflationary period, the older bond has much more room for its inflation-adjusted principal to decline before reaching the $1,000 floor. The newer issue, whose adjusted principal is much closer to the $1,000 face value, has less exposure to this risk. Therefore, all else being equal, I’d favor a TIPS with a low inflation-adjusted factor when buying in the secondary market. All things considered, my vote goes to TIPS for long-term “safe” investments, provided the break-even inflation is reasonably low. For secondary market purchases, however, a high inflation-adjustment factor would give me pause. Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib’s earlier articles.

Inflation Hedge

ArticleAdam M. Grossman | Aug 29, 2026

Traditional or Roth

ArticleRichard Connor | Aug 29, 2026

The Intentional Spendthrift

Mark Crothers | Aug 21, 2026

- Mark Crothers

Americans and their credit cards

R Quinn | Aug 24, 2026

- Mark Crothers

How Did You Find Paid Work After Retiring from Your Primary Career?

Jeffrey Chan | Jul 31, 2026

"Good for you."

- Patrick Brennan

Bad Maths, Good Fire.

Mark Crothers | Aug 28, 2026

"Dunn, working on that felled tree I mentioned was really satisfying. Though I have to say, splitting the rounds with an axe is one hell of an upper body workout!"

- Mark Crothers

The Wrong-Sided Man

Dennis Friedman | May 8, 2025

"I too walk early in the morning and now I carry a small can of pepper spray. It might be a vicious dog, wrong-way man as you describe, or a wayward hobo looking for an easy roll."

- art winslow

This would be a great posting on a web site with the name “HaughtyDollar.”

R Quinn | Aug 28, 2026

"t"

- Mick

You Heel!

Michael Flack | Aug 24, 2026

- John Verlautz

Manifesto

Aug 30, 2026

NO. 24: OUR ONLY earthly immortality will be the memories of others. We should make sure those memories are good—by spending our wealth on special times with friends and family.

Truths

Aug 30, 2026

NO. 86: CARRYING a mortgage into retirement can cost a heap of taxes. To cover the monthly payment, you might sell winning investments in your taxable account or tap retirement accounts, thus boosting your taxable income. That, in turn, could trigger higher Medicare premiums and taxes on your Social Security benefit. Result: You suffer a double tax hit.

act

Aug 29, 2026

HIRE OTHERS TO do chores you dislike. For each of us, time—not money—is the ultimate limited resource. Research has found that those who use their money to buy time—by, say, hiring others to clean or do yardwork for them—report greater happiness. Why? These folks feel less time stressed, while also freeing up extra hours for activities they love.

Truths

Aug 28, 2026

NO. 97: IT’S HARD to say “no” to our adult children if they get into financial trouble—which is why we should try to raise money-savvy kids. But how? Set a good example. Talk regularly about your own finances. Tell your kids about your lean early adult years. Involve them in family financial decisions. Encourage them to save up for larger purchases.

Money Guide

Manifesto

Aug 30, 2026

NO. 24: OUR ONLY earthly immortality will be the memories of others. We should make sure those memories are good—by spending our wealth on special times with friends and family.

Spotlight: Behavior

Regular HD writers, readers and commentators are just not normal- in a good way

R Quinn | Jul 30, 2025

Over the several years I have been writing and commenting on HD it has been made clear that the HD community includes many sophisticated investors and planners. People who use budgets, track expenses, do their best to investigate and then make financial decisions based on information they develop. They use various type of software programs and, of course, their own spreadsheets. They analyze risk and investment expenses. They like details. They think about the future. And,

Hidden Conflicts

Jesse Cramer | Aug 15, 2026

WALMART SELLS FOOD. They sell car tires. Board games too. You can stop at any Walmart in the world and buy the same plethora of consumer goods. One roof, dozens of product areas, thousands of individual items.
This “cross-vertical” strategy has many perks to consumers like us. But it’s not without flaws. From brand dilution to in-store clutter, down to a lack of item expertise when you ask questions of employees – there are issues with “selling everything to everyone.”

Care to join me on my yacht cruising the Mediterranean? Do you envy the super wealthy? RDQ

R Quinn | Mar 17, 2025

There was a time when I probably did- that was many years ago when sailing around the Mediterranean in my luxury yacht was a fantasy. Once, decades ago, I actually explored the cost of renting such a yacht. Back then it was $200,000 a week, plus tips for the crew and the cost of the food you selected. I was afraid I couldn’t afford the tips- but I could bring eight friends to impress.
These days I don’t envy of the billionaires,

Investment Wisdom

Adam M. Grossman | Jun 27, 2026

THE INVESTMENT WORLD is full of storytellers. And while these folks might be entertaining, they generally aren’t very helpful. There’s one category of stories, however, that I do think is useful: They’re what I might call investment fables. They’re apocryphal stories that likely aren’t real. But they’re helpful nonetheless because each carries a useful lesson. Here are some of the more popular ones.
Consumer choice. In 1999, Richard Mille and a partner launched a company to make wristwatches.

Here is my favorite word. What is your favorite word? Perhaps frugal, Roth, spreadsheet, planning, Monte Carlo, dividends?

R Quinn | Jul 9, 2025

My favorite word is “aware.”
I believe that missed opportunities, stress, poor decisions of all types, just many of the things we complain about result from not being aware of what is happening around us.
Being aware means having knowledge or perception of something. It involves noticing, recognizing, or being conscious of what’s happening either around you or within you.
In essence, being aware is about being connected to what is happening, both internally and externally,

Let’s Be Adults

Jonathan Clements | Apr 22, 2025

I have no desire to oversee a website where folks work out their anger issues by posting snarky political comments. But lately, that anger has been on full display, and we all know why. Love him or hate him, Donald Trump clearly elicits strong emotions.
But here’s the thing: Those strong emotions may be justified—but they’re hard to justify on financial grounds, just as they were hard to justify during the Biden presidency. Consider:

The unemployment rate was 4.1% when Biden left office,

How Will You Know When It’s Time?

Rick Connor | Apr 13, 2025

A number of events over the past few months have me thinking about aging, mortality, legacy, frailty, and – of course – financial planning. These events included attending funerals, preparing tax returns (ours and dozens of others), visiting old friends and distant family, minor traffic accidents, winter doldrums, and the recent discussions on HumbleDollar on the unique estate planning needs of childless retirees. Recent market volatility may have played a small role. My wife and I have a lot of real-world experience caring for aging and infirm parents, both physically and financially. Those experiences have seared in my mind the importance of a well-planned, well-documented, and well-communicated estate plan. Jonathan’s articles over the past year have been a great example of this. A recent experience has me thinking about a very tricky and personal question in retirement. I have a good friend, a former colleague and mentor, who is in his late 70s, single, and childless. He lives in his home of 30 plus years, with a first-floor master bedroom, and relatively easy entry. He has his estate in very good order, has a deposit on a CCRC near family, and has communicated this with his family. He hopes he will have the ability to make the choice to move when the time comes. It’s one thing to have a good estate plan in place. But if we haven’t communicated that plan, or are unwilling to execute it, it’s of little use. I can’t count the number of stories I’ve heard of aging parents that are unwilling to explain their finances with their children, much less hand over control. Will we be willing to give up the literal keys to our independence – our cars? Has anyone thought about, or put criteria into place, to help make good decisions about…

When I Get Stupid

Richard Connor | Nov 7, 2022

COPING WITH FINANCIAL complexity as we age can lead to major problems—and denial isn’t the solution. What to do? One HumbleDollar commenter, in response to a recent article, recommended a book, What to Do When I Get Stupid, by economist Lewis Mandell. The book has two main themes. First, we should try to create a guaranteed stream of income, preferably one that’s linked to inflation, to cover our core retirement expenses. This could be a combination of Social Security, pension income, inflation-indexed Treasurys, annuities and possibly a reverse mortgage. Second, we should make our finances as “stupid-proof” as possible to prevent disastrous investing or spending mistakes that could derail our retirement. Mandell presents evidence that, on average, our capability to make financial decisions involving credit peaks at age 53. Our decision-making ability with investments peaks later, at age 70. It seems that, as we age, we gain experience, knowledge and wisdom. But this is somewhat offset by a decrease in our fluid intelligence, which is the ability to think abstractly and deal with complex information. Fluid intelligence decreases with age, just as vision and hearing do. The rate of decline is specific to the individual but tends to steepen after 70. We would all do well to consider the possibility of cognitive decline. Mandell gives several specific recommendations for handling these concerns. In addition to the two already covered, here are four suggestions that stood out for me: Insulate your core expenses from inflation. Having a home that’s both paid off and set up for aging in place shields you from housing inflation. It may also prevent the need for an expensive retirement community or nursing home. If you have limited income and assets outside of the equity in your home, consider a reverse mortgage. Have your estate documents in…

Treasure Hunting

Richard Connor | Jun 5, 2020

MANY OF US HAVE found ourselves with free time on our hands. I’ve read that folks are filling their days with shopping, baking, exercising and binge-watching TV. May I suggest another activity, one that may prove profitable? Over the past few years, I’ve found significant amounts of money in unlikely places. These treasures often come not just with monetary benefits, but also great memories. Here are four places to look: 1. Forgotten savings bonds. I’m old enough to remember when paper savings bonds were a common gift for birthdays and holidays. Many companies also had savings bond buying programs, encouraging employees to invest and pitching it as an act of patriotism. If you signed up, the money to be invested was taken out of your paycheck. Paper bonds were then mailed to you and you’d dutifully tuck them away for the future. I’ve been organizing my financial documents lately and I came across an envelope with a bunch of Series I savings bonds. I entered the required information in the Treasury Direct savings bond calculator and, much to my surprise, found they were worth nearly $10,000. I’ll bet many folks have old savings bonds hidden in the back of desk drawers. 2. Lost assets. Each state has unclaimed property that it holds, waiting for the owners to come forward. I haven’t checked every state, but I can attest to Pennsylvania’s efficiency. I recently found almost $1,000 in my father’s name. There were funds from an insurance company’s demutualization, an old savings account and the return of a security deposit from the Philadelphia Gas Co. Most of these were from the 1950s and 1960s. My father died in 1999, so the funds were divided between my two brothers and me. A decade or so ago, we also found almost $17,000 in my…

Fair Enough

Richard Connor | Apr 10, 2022

IT’S OFTEN SAID THAT beauty is in the eye of the beholder. The same could be said of fairness in taxation. A recent article by Kelly Phillips Erb addresses this contentious topic. Erb, who tweets as @TaxGirl, is the team lead for insights and commentary at Bloomberg Tax and Accounting. Her article was titled, “Did you pay your ‘fair share’ of federal income tax this year?” The piece discusses the history and current state of U.S. income taxes. When the federal income tax was introduced in 1913, tax returns only had to be filed by those with a net income in excess of $3,000. That’s about $86,000 in today’s dollars. That first year, the tax hit just 1% of the population. During the Second World War, the government needed to raise revenue, so the personal exemption was effectively reduced to the point where nearly 70% of the population paid income taxes. More recently, 2017's tax law brought significant change. Personal exemptions were eliminated and the standard deduction was increased to today’s higher level. The standard deduction now effectively sets the threshold for who has to pay income taxes. Erb includes an interesting quote from a Tax Policy Center study on the impact of 2017’s tax law: “The large percentage of people who don’t owe federal income tax is a feature, not a bug, of the revenue code. By design, the federal income tax always has excluded a significant fraction of households through a combination of personal exemptions, the standard deduction, zero bracket amounts, and more recently, tax credits.” The percentage of taxpayers paying no federal income tax is typically in the low- to mid-40s. The Tax Policy Center study, written in 2018, indicated that the 2017 tax law would increase the percentage of taxpayers who pay no income tax by…

The Right Tools

Richard Connor | Oct 6, 2021

WE RECENTLY UPGRADED our home with smart locks, which open with a keypad code or cellphone command. After a bunch of research, we settled on Yale Assure Locks, which I’d also seen on an episode of This Old House. I’ve installed many locksets in the past, so I didn’t expect any problems. Once they arrived, I gathered my tools, opened the packages and read the instructions. It seemed pretty straightforward. I set to work on the deadbolt, first removing the old one. The next step is to insert the new bolt mechanism in the side of the door. The hole needed to be one inch in diameter. Unfortunately, the existing hole was 1/8 inch too small. I was pretty sure I had a one-inch drill bit, but couldn’t find it. I tried using a smaller bit, working around the inside of the circle, trying to gouge out the material. After almost an hour, I was about halfway there. I realized I might have to repeat this tedious process three more times. We have two doors, with a deadbolt and a handle on each. I grabbed my car keys and drove to the hardware store for a one-inch drill bit. As I expected, there were a half-dozen choices. After consulting with the store’s owner, I bought a nice boring bit. Back home, it took about a minute to drill a perfect one-inch hole. The rest of the installation took about 10 minutes. The moral of this story is obvious: Always try to use the right tool. A good neighborhood hardware store is invaluable. It isn’t just the tools, it’s also the years of wisdom that the owner offers for free. We need the same expertise in our financial life, but we don’t always get it. That got me thinking about the…

Beginning Badly

Richard Connor | Sep 15, 2022

SEQUENCE-OF-RETURN risk has long been a major concern among retirees—and it’s a real danger right now for those who just quit the workforce or soon will. Also known simply as sequence risk, it refers to the chance that the market declines sharply, forcing retirees to sell investments at depressed prices to generate income. Wade Pfau, a leading retirement researcher, published a paper highlighting the danger involved. As he makes clear, a few years of market losses coupled with portfolio withdrawals can decimate savings, increasing the risk that a retiree will run out of money. You might view sequence-of-return risk as the opposite of dollar-cost averaging. Instead of buying more shares when stock prices are down, you’re selling additional shares at lower prices to generate the same amount of income. This year, unfortunately, provides a good example of how market forces can affect retirees’ savings—and their plans. Consider a retired couple with a $1 million portfolio who need $50,000 a year from savings to cover their expenses. If they withdraw $50,000 at the beginning of the year, their balance is reduced to $950,000. If the stock market returned 10% that year, their balance at the end of the year would be $1,045,000. If this continued year after year, the retired couple would be in great shape. By the end of the fifth year, their balance would be $1,274,370. But what if the market declined 10% in the year when they made their initial withdrawal? At the end of that first year, just as the couple was about to withdraw another $50,000, their balance would be $855,000. What if this continued? At the end of five years, their balance would be slashed by nearly 60%, to $406,211. Folks who retired during the 2008-09 Great Recession encountered this risk head-on. I had a colleague…

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