Thank you for the clear and detailed response. I read John Lim's Paying for Aging (https://humbledollar.com/2022/03/paying-for-aging/) a few days after your article. The two together make a nice argument for QLACs for the objectives I'm researching for myself and spouse related to late-life safety nets. Also, we are focussed on our childrens' transition to adulthood. Under the assumption that they've got other investment strategies launched, I wonder about an annuity, or annuity ladder as you describe, for ~20 year olds. Or, is it too far out to have a hope of estimating inflation well enough?
I have really been having fun with your article for the past several days. I put everything from experiment 2 into a spreadsheet and added columns for our different expected income streams over time. I added expected expenses (in a smile pattern like you discussed) and I highlighted key milestones by age. Then, I looked at things like - what would it take to make all fixed expenses to be less than all guaranteed income. I have a few questions: 1) For the fixed annunity, is age 76 a general milestone age or just something specific to you? 2) Will the QLAC payments be taxed? 3) Any comments on non-qualified lacs?
Thank you so much for this detailed and practical discussion - The article and all of the comments are so helpful! Also, "My Experiments" by James McGlynn (Mar 5 2022) is a nice connect in with this article. I've been researching LTC insurance in some combination with life insurance but between this article and "My Experiments", you're making me feel that annuities would be even better. An LI/LTC approach would be be limited in utility to care or death coverage. The annuity approach would give a safety net for late-life income even if we don't need long-term care. What age would you target for purchase of annuities for someone approaching retirement? Or is there some other milestone besides "purchase age" that you would use as a trigger to purchase? What are your thoughts about annuities for someone in their 20s/30s deferred to age 80 or so?
I have a system that I really like. It took me a bit of trial and error to get here but I've been using this system for at least 15 yrs. My paychecks go into my checking account automatically. I have all of my bills set up to be paid on the same day I get paid regardless of due date. I split the bills' total amounts evenly across my paychecks. In this way the impact on my account is even across the month, I don't have to think about due dates, and I maintain a small credit balance by being a bit ahead of the bill. I log in once in a while to make sure things look as they should. Utility bills that fluctuate - I have on an equal payment plan so that I don't have to pay attention to bills being different from one month to another. I just pay the same amount every month. I don't let any biller draft my accounts. By having auto payments from my bank account, I'm in complete control and can change, move, or cancel a payment any time up to the point that it goes out. My bank pays most things electronically. But if a biller doesn't have that option, my bank cuts and mails a check on my behalf. I also have money automatically go to savings and investment accounts the same way. I don't get any paper statements - so no mail to open and shred or file.
I wonder why retirement/401K experts seem to emphasize so strongly with young people to use pre-tax dollars. Their calculations always show the pre-tax person investing more because they pay less in taxes up-front. They generically discuss expecting lower tax brackets in retirement. I’ve never seen anything discussing RMD in these scenarios. I think it might make more sense to contribute after-tax in your 20s/30s and switch to pre-tax when a little older and in a higher tax bracket. What do you think?
You ask a yes/no question Looks like most people are a "yes" and it's great to see their why. I say no and here's my why. The short of it is - lower debt is like having more insurance. It feels like most of the comments are about how personal debt fits into people’s investing strategies. Debt will let them earn more in investing. For me, I think it’s best to separate essential needs, like secure housing, from investing strategies. I take a very conservative position with feeling safe and secure. I take a very aggressive position with investing. I can’t put those two things together! In reality most people use debt to live beyond our means. We may say, “It was too good an interest rate to pass up.” If, as in most cases, we don’t actually invest the cash, it’s just talk. But if we do take the loan so that we can invest our cash, we have $X invested at risk of loss and we have $X in debt that must be repaid no matter what life or world circumstances arise. If things go bad, you could lose twice with this strategy! Low or no personal debt to me is in the same category as having insurance. You don’t make insurance decisions based on its investment value. Could you imagine saying, “If I don’t spend $Y on insurance, I could invest that money and it would be worth $Z in 20 years – how clever of me!” No. You carry insurance because it protects you from financial ruin in the case of a major peril. For major debt - You can’t guarantee that just because you can manage the debt now that you could in the face of some major personal or world circumstance. Plan B, you could sell the asset to rid yourself of the debt payment. Ok, but you can’t guarantee anybody would buy it. Or buy it quick enough to solve your emergency. Plus, it’s not unusual at all to be upside down on a loan. To me clever is: buy half the house you can afford. Pay it off quick. Invest the other half. This separates personal security from investing strategies and keeps you from having a bunch of money locked up in equity that could be working for you.
I really like the way you explained how and why you segmented earnings. Treating short-term as you did really creates so much opportunity for a big impact on savings/investing/major purchases without getting lulled into accidentally needing it. It reminds me of a family friend we had when I was a teenager. He worked an hourly job. He worked overtime for so long that at some point it wasn't extra money but money he had come to depend on. Regarding your short-term incentive comment "Meanwhile, we sometimes used my annual incentive pay for onetime major purchases, but mostly we saved the money." What do you recommend for tools for an emergency fund? The driver for the question is the quandary between keeping loss-risk low and availability high for an emergency fund vs inflation eating away at it if it's just parked in savings. For money beyond emergency, I assume when you say 'mostly saved the money', you mean invested not just parked. True?
Thanks for the nice article! My son is also interested in investing. It started with a Boy Scout personal finance merit badge when he was 12. He loaded a stock simulator on his phone and still uses it. He "bought" crypto back then and is a multimillionaire in the app now, at least last time he mentioned it. We started a custodial Roth IRA for him at 14. Contributions are limited to earned money. The long-term tax implications are great. This past year, we opened a minor brokerage account. This account doesn't have to be funded with earned money. So he can put birthday money, etc in this account. He completely manages this account. (I have a view screen in my account.) I wholely agree with you on both points - the growth of his money has been nice. Even more importantly, learning financial life lessons so young will be so valuable to their future!
Most of the advice I've seen on this issue is Roth conversions ahead of the age of RMD. Conversion ladders even. Ormode seems to disagree with this. Any additional thoughts/comments would be great.
Comments
Thank you for the clear and detailed response. I read John Lim's Paying for Aging (https://humbledollar.com/2022/03/paying-for-aging/) a few days after your article. The two together make a nice argument for QLACs for the objectives I'm researching for myself and spouse related to late-life safety nets. Also, we are focussed on our childrens' transition to adulthood. Under the assumption that they've got other investment strategies launched, I wonder about an annuity, or annuity ladder as you describe, for ~20 year olds. Or, is it too far out to have a hope of estimating inflation well enough?
Post: My Experiments
Link to comment from March 18, 2022
I have really been having fun with your article for the past several days. I put everything from experiment 2 into a spreadsheet and added columns for our different expected income streams over time. I added expected expenses (in a smile pattern like you discussed) and I highlighted key milestones by age. Then, I looked at things like - what would it take to make all fixed expenses to be less than all guaranteed income. I have a few questions: 1) For the fixed annunity, is age 76 a general milestone age or just something specific to you? 2) Will the QLAC payments be taxed? 3) Any comments on non-qualified lacs?
Post: My Experiments
Link to comment from March 13, 2022
Thank you so much for this detailed and practical discussion - The article and all of the comments are so helpful! Also, "My Experiments" by James McGlynn (Mar 5 2022) is a nice connect in with this article. I've been researching LTC insurance in some combination with life insurance but between this article and "My Experiments", you're making me feel that annuities would be even better. An LI/LTC approach would be be limited in utility to care or death coverage. The annuity approach would give a safety net for late-life income even if we don't need long-term care. What age would you target for purchase of annuities for someone approaching retirement? Or is there some other milestone besides "purchase age" that you would use as a trigger to purchase? What are your thoughts about annuities for someone in their 20s/30s deferred to age 80 or so?
Post: Paying for Aging
Link to comment from March 12, 2022
I have a system that I really like. It took me a bit of trial and error to get here but I've been using this system for at least 15 yrs. My paychecks go into my checking account automatically. I have all of my bills set up to be paid on the same day I get paid regardless of due date. I split the bills' total amounts evenly across my paychecks. In this way the impact on my account is even across the month, I don't have to think about due dates, and I maintain a small credit balance by being a bit ahead of the bill. I log in once in a while to make sure things look as they should. Utility bills that fluctuate - I have on an equal payment plan so that I don't have to pay attention to bills being different from one month to another. I just pay the same amount every month. I don't let any biller draft my accounts. By having auto payments from my bank account, I'm in complete control and can change, move, or cancel a payment any time up to the point that it goes out. My bank pays most things electronically. But if a biller doesn't have that option, my bank cuts and mails a check on my behalf. I also have money automatically go to savings and investment accounts the same way. I don't get any paper statements - so no mail to open and shred or file.
Post: Which financial tasks do you find most irksome?
Link to comment from January 25, 2022
I wonder why retirement/401K experts seem to emphasize so strongly with young people to use pre-tax dollars. Their calculations always show the pre-tax person investing more because they pay less in taxes up-front. They generically discuss expecting lower tax brackets in retirement. I’ve never seen anything discussing RMD in these scenarios. I think it might make more sense to contribute after-tax in your 20s/30s and switch to pre-tax when a little older and in a higher tax bracket. What do you think?
Post: Take It to the Limit?
Link to comment from January 24, 2022
I read a funny once - even in a zombie apocalypse, your creditors will expect a payment every month!
Post: Is it okay to retire with debt?
Link to comment from January 15, 2022
You ask a yes/no question Looks like most people are a "yes" and it's great to see their why. I say no and here's my why. The short of it is - lower debt is like having more insurance. It feels like most of the comments are about how personal debt fits into people’s investing strategies. Debt will let them earn more in investing. For me, I think it’s best to separate essential needs, like secure housing, from investing strategies. I take a very conservative position with feeling safe and secure. I take a very aggressive position with investing. I can’t put those two things together! In reality most people use debt to live beyond our means. We may say, “It was too good an interest rate to pass up.” If, as in most cases, we don’t actually invest the cash, it’s just talk. But if we do take the loan so that we can invest our cash, we have $X invested at risk of loss and we have $X in debt that must be repaid no matter what life or world circumstances arise. If things go bad, you could lose twice with this strategy! Low or no personal debt to me is in the same category as having insurance. You don’t make insurance decisions based on its investment value. Could you imagine saying, “If I don’t spend $Y on insurance, I could invest that money and it would be worth $Z in 20 years – how clever of me!” No. You carry insurance because it protects you from financial ruin in the case of a major peril. For major debt - You can’t guarantee that just because you can manage the debt now that you could in the face of some major personal or world circumstance. Plan B, you could sell the asset to rid yourself of the debt payment. Ok, but you can’t guarantee anybody would buy it. Or buy it quick enough to solve your emergency. Plus, it’s not unusual at all to be upside down on a loan. To me clever is: buy half the house you can afford. Pay it off quick. Invest the other half. This separates personal security from investing strategies and keeps you from having a bunch of money locked up in equity that could be working for you.
Post: Is it okay to retire with debt?
Link to comment from January 15, 2022
I really like the way you explained how and why you segmented earnings. Treating short-term as you did really creates so much opportunity for a big impact on savings/investing/major purchases without getting lulled into accidentally needing it. It reminds me of a family friend we had when I was a teenager. He worked an hourly job. He worked overtime for so long that at some point it wasn't extra money but money he had come to depend on. Regarding your short-term incentive comment "Meanwhile, we sometimes used my annual incentive pay for onetime major purchases, but mostly we saved the money." What do you recommend for tools for an emergency fund? The driver for the question is the quandary between keeping loss-risk low and availability high for an emergency fund vs inflation eating away at it if it's just parked in savings. For money beyond emergency, I assume when you say 'mostly saved the money', you mean invested not just parked. True?
Post: Chicken or the Egg?
Link to comment from January 14, 2022
Thanks for the nice article! My son is also interested in investing. It started with a Boy Scout personal finance merit badge when he was 12. He loaded a stock simulator on his phone and still uses it. He "bought" crypto back then and is a multimillionaire in the app now, at least last time he mentioned it. We started a custodial Roth IRA for him at 14. Contributions are limited to earned money. The long-term tax implications are great. This past year, we opened a minor brokerage account. This account doesn't have to be funded with earned money. So he can put birthday money, etc in this account. He completely manages this account. (I have a view screen in my account.) I wholely agree with you on both points - the growth of his money has been nice. Even more importantly, learning financial life lessons so young will be so valuable to their future!
Post: What $1,000 Can Buy
Link to comment from January 13, 2022
Most of the advice I've seen on this issue is Roth conversions ahead of the age of RMD. Conversion ladders even. Ormode seems to disagree with this. Any additional thoughts/comments would be great.
Post: Senior Class
Link to comment from January 13, 2022