The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney

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My Favorite Personal Finance Writer of All Time -
Jonathan Clements
Jim Lange, CPA/Attorney
Guest: Jonathan Clements
Episode 92

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TOPICS COVERED:

  1. Introduction of Guest – Jonathan Clements
  2. Understand What You Want From Your Money
  3. We Shouldn’t Neglect Today
  4. Money Is Emotional
  5. Focus On Things You Can Control
  6. The Virtue Of Simplicity
  7. Fund Retirement Before College Education
  8. Buy Experiences Rather Than Things
  9. Inflation Is Worse Than Market Volatility

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.


1. Introduction of Guest Jonathan Clements

David Bear:  Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks.  I’m David Bear, here in the KQV sudio with Jim Lange, CPA/Attorney and author of two best-selling books: “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.”  Today, we welcome Jonathan Clements back to the show.  The top personal finance writer for The Wall Street Journal for eighteen years, he and Jim collaborated on some thirty columns.  Jonathan’s also the author of the best-selling book, “The Little Book of Main Street Money: Twenty-One Simple Truths that Help Real People Make Real Money.”  Stay tuned for an interesting and informative hour, and listeners, since our show is live, Jim and Jonathan are available to answer your questions.  To join the conversation, call the KQV studios at (412) 333-9385.  And with that, I’ll say hello, Jim, and welcome, Jonathan.

Jim Lange:  Welcome, Jonathan. 

Jonathan Clements:  Hey, Jim!  How are you?  It’s great to be with you!

Jim:  It’s always a pleasure to talk with you.  As you know, but I’ll tell our listeners, that you are my favorite personal finance writer, and I actually think that your columns in The Wall Street Journal are masterpieces, and I guess it’s not fair to say that “The Little Book of Main Street Money” is a compilation of your articles, but let’s say it has some of your best thinking, and I just love this book.  I have recommended it many times to many clients.  I actually have what we call a non-returning library where I have some of my favorite financial books, and I offer it to clients and prospects, and your book is prominently displayed in that case.  So, it’s always a pleasure to have you and, frankly, to freely promote your book, which I think would be a terrific thing for people to get, again, that’s “The Little Book of Main Street Money.”  You were gracious enough to come on the radio show before, and I think you gave people some great information, and you talked about seven different key beliefs that are also in your book, and I thought, maybe, what I could do is kind of go through them one-by-one, tell you what they are, and then maybe have you expand on the thought a little bit, because I think that they are very wise, and they have certainly stood up, and as I was reviewing the book, you know, it’s certainly very, very current and applicable right now.  And the other thing that I thought was interesting is usually, when you think of financial guys (and I’ll admit that I’m included in this category), that you expect some technical discussion about Roth IRAs or yields on dividends or things like that, but one of the things I thought it was terrific about your book, and actually, about your columns, is that you’re a little bit of a, let’s call it, financial philosopher, and you have some beliefs that I think go a little bit beyond what you could calculate with a computer or a slide rule, and one of them is ‘Money is a means to an end.  It isn’t an end in itself.  If we don’t know what our goals are, we might not settle on the right strategy.’  Could you expand on what you mean by ‘Money is a means to an end?’

2. Understand What You Want From Your Money

Jonathan:  I’m happy to do so, Jim.  I mean, what we save and invest, we shouldn’t save and invest in a vacuum.  We shouldn’t just, you know, go out and buy this life insurance policy or get that estate-planning document.  All we really need to do is to sit down and think about our financial affairs in the context of our entire lives.  Take saving and investing for, you know, sure, it’s nice, you know, to get up in the morning and fire up the computer and call up our brokerage account or our mutual fund account and see how much we have, but the goal isn’t to have the biggest balance possible.  The goal is to save and invest that money so that we can achieve our goals, and indeed, if we can really visualize what we want to achieve with our finances, we want to put the kids through college, we want to…we have a picture or vision for what our retirement is going to look like, if we can really visualize that goal, then not only can we get the appropriate savings and investment strategies, but also, we’re going to be much more committed to it.  So, before you really do anything with your finances, what you need to do is sit down and think about what’s really important to you?  What are the goals that you want to pursue?  You know, what are the financial worries that you want to protect against?  Once you start to flesh that out and really understand what you want to achieve with your money, then you can build the right sort of financial portfolio. 

Jim:  Well, one of the things that I have found in my practice, and I have quite a few retirees and some seniors who have done a pretty good job of accumulating money, typically in a retirement plan or a 401(k) or an IRA of some type, and they’ve spent a career accumulating money, not spending very much, and actually, today was a perfect example: a guy in his early eighties had $2,000,000 of investible assets, and he had Social Security of about $30,000, and I asked him how much he was spending, and he told me that he spent somewhere around $40,000 a year.  So here, the guy has $2,000,000, and he literally can’t spend more.  I mean, it’s just not in his DNA or constitution, and we had a little discussion about his kids and his grandkids and setting up education, 529 plans, etc., but do you think that your idea of money is a means to an end, it isn’t an end in itself, not only applies to people in the accumulation portion of their career, but also the distribution phase?

Jonathan:  No, I think you’re absolutely right.  You know, when I sit down and have dinner or drinks with financial experts like you, Jim, occasionally the conversation rolls around to “What percentage of the population do you think truly has their finances under control?”  And the number that a lot of financial professionals will use is 15% to 20%.  There is 15% to 20% of the population who really has their finances under control, and the other 80% are somewhere between middling to totally out of control.  But when you get that 15% or 20%, those people who really are super good at delaying gratification and saving for retirement…now, other goals, when it comes to that distribution phase, when it comes to starting to live off their savings, they have a real problem.  They are so good at delaying gratification and saving money that they can’t pull the switch and start to spend.  And so, what you find is that people who do indeed have multi-million dollar portfolios, and despite the many years of sacrifice that they’ve put in in order to accumulate that money, they really can’t bring themselves to enjoy it. 

Jim:  Yeah, and that’s a problem for me as a planner, because I tell them I’m happy if you decide to start spending more money, you know, take some cruises, and we’ll talk about your experiences and wealth, but, you know, whether it’s go on cruises or sponsor a family vacation or go out to dinner more, or whatever it might be, but a lot of these folks just can’t do it.  Then, the second thought is okay, well, if you literally can’t spend money on yourselves, maybe you should be thinking about giving some money to your kids and helping your grandkids with their education, and helping your favorite charity or favorite church or whatever it might be, and a lot of them…if you were to actually, they might not think of it like this, but if I was to categorize some of their plans, it would be well, my plan is to work very hard, build up a retirement plan, and now that I have it, I’m not going to spend very much, I’m not going to really help my kids out that much, maybe a little bit here and there while I’m alive.  I’m not going to spend.  I’m going to accumulate and accumulate, and then, eventually, I’m going to die, pay a lot of taxes, and then the kids get money in their fifties and sixties.  And that’s not the best plan.

Jonathan:  And it’s not the best plan, and it really also bring up a related and, I think, really important point:  we spend four decades preparing financially for retirement, but we don’t spend nearly enough time thinking about what we’re going to do once we do leave the workforce.  People have this notion of retirement as some sort of endless vacation, but if you go into retirement with that vision, retirement is going to be all about relaxing, you’ll probably be bored out of your brain within two months.  What we really find satisfying, what makes for a happy life, is being engaged in activities that we think are challenging, that we think are important, that we’re passionate about, that gives us a sense of purpose. You shouldn’t be thinking about oh, you know, how many days a week I’m going to play golf, or who I’m going to play bridge with, or stuff like that.  What you should think about is what is it that I really enjoy doing that I don’t necessarily have…can’t do now because I have to earn a paycheck, but if I could do anything I want and I didn’t need a paycheck, if there’s something I’m really passionate about that I want to pursue, and that might be anything from going back to college, to getting involved in your favorite charity, coaching a children’s sport team, things like that that are challenging, that do seem important, those are the sort of things that people should be thinking about doing in retirement, and not playing golf and playing bridge and sitting around on the couch and relaxing and watching TV. 

Jim:  Now, by the way, I like both golf and bridge, but that’s okay!  I do a little bit of each.  Now, with bridge, the thing is you can play on the internet, so I never have, like, a half a day that I could go to a duplicate bridge tournament, but I’ll have twenty minutes and I go on the internet, and then play bridge on the internet. 

Jonathan:  Well, one of the things that both you and I are fond of doing is bicycling, and I also have an older brother who is a keen bicyclist, and he is about to sell his business, and he’s going to have a substantial amount of free time, and he’s firmly committed to bicycling more, and in fact, I keep telling my brother, “Hey Nick! Yeah, that’s great.  You know, you can bicycle for an hour a day.  You can bicycle for two hours a day, but you’re got to figure out what are you going to do with the other fourteen or fifteen hours, because you can’t bicycle the entire day.  That is not enough for a satisfying retirement.

Jim:  Oh, I thought you were going to tell me that he was going to do one of these cross-country trips, or even around-the-world trip.

Jonathan:  Well, he actually is talking about a cross-country trip, but that’s a different conversation, Jim!

Jim:  All right, and by the way, I should mention, and it’s not really a financial book, but I actually…and I didn’t get through it, but I did start it, your novel, which was, let’s say, a little bit different, about bicycle and love and what is the name of it again, please?

Jonathan:  The book is called “48 and Counting,” and the subtitle is “A Story of Money, Love and Bicycling,” and what it is is it’s a novel that brings together the three things that I know the most about, which is 1) money, 2) bicycling, and 3) failed relationships. 

Jim:  Well, I know you’re saying that tongue-in-cheek, and if your wife is like mine, she’s not listening anyway.  So…she doesn’t!  I could say anything and she doesn’t listen!  So, anyway, that actually leads us into the second area, which is you said ‘We shouldn’t neglect today.’  What do you mean by that?  ‘We shouldn’t neglect today.’

3. We Shouldn’t Neglect Today

Jonathan:  Managing money is often about pursuing these goals that are many years, or even many decades, into the future, like saving for retirement, saving for our toddler’s college education, but it’s really hard to focus exclusively on those longer-term goals because if you do that, you’re going to fall off the wagon.  You’re going to have months when you don’t save as much as you should, and maybe more important, you’re going to have months when the market’s are really rough and you’re going to be panicked.  So, what you want to do, even if you focus on those longer-term goals, is also pay attention to what it takes for you to feel financially secure today, so that when we have a year like 2008, and the S&P 500 is down 37%-38%, you’re not freaking out, and you still feel okay about your investments and you’re going to stick with them even at the worst time. 

Jim:  Well, that actually…it’s a little bit out of order from what I was planning to talk about, but that, I thought, was one of your really interesting thoughts of the book, where you said that the asset allocation percentage, and I assume what you’re talking about here is percent bonds and percent stock and even, you know, subdivisions within stocks and bonds, you know, for example, a small cap value and a small cap growth, and a mid-cap value and a mid-cap growth, etc. etc.  But that the asset allocation percentages that you choose for your portfolio are less important than your willingness to stick with them, whatever they are.  I thought that that was really wise, and if you could expand on that thought a little bit, because it does relate to what happens in a downturn when, unfortunately, many people didn’t follow that advice.  They were, perhaps, too aggressive early, and then, after the downturn, they became too conservative, and then they missed the rebound.

Jonathan:  What, in the past dozen years have taught us (if they’ve taught us anything) is that investors tend to chase performance.  I mean, we saw that in the late 1990s and early 2000 as people piled into growth stocks, generally, and tech stocks in particular, and then we saw it again through the early 2000s up to the market peak in 2006 when people piled into the real estate market.  I mean, when it comes to investing, people behave in totally the opposite way from the way they shop.  When Macy’s holds a sale after Christmas, everybody rushes and buys.  When the stock market holds a sale, everybody panics and wants to sell.  So, what you need to do is to settle on a mix of investments: stocks, bonds, cash investments, maybe hard assets like, you know, real estate securities, and then you should have a mix, but you’re willing to stick with come what may?  And if you don’t have that mix, then I would encourage you to adjust because the markets are going to do a crazy thing, and the worst thing that you could possibly do is sell sound investments simply because they’ve dropped 20% in value.


4. Money Is Emotional

Jim:  Well, that I think, leads into another one of your seven key beliefs, which is ‘Money is emotional.’  What do you mean by ‘Money is emotional?’  And how do emotions really have an impact on our investment decisions, and if they do, is that a good thing or a bad thing, and if it’s a bad thing, how can we overcome them?

Joanathan:  Saving investing is really remarkably simple.  I mean, if you want to grow obscenely rich, all you have to do is save diligently, diversify broadly, and stick with that portfolio for three or four decades.  It’s as simple as that!  It’s not that complicated!  And yet, we all regularly mess up.  And why do we mess up?  Because of our emotional reaction to the market’s ups and downs.  We also, unfortunately, don’t save as much as we should, and partly because we’re constantly tempted to spend.  People say, “I’m going to save 10% or 15% of my income this month,” but they get to the end of the month and there’s nothing left to save because they kept walking past shop windows and seeing things they wanted to buy.  We are constantly pulled away from sensible, long-term saving investing plans by our emotions, and this is the reason the financial advice business exists.  It’s not because the typical financial advisor is any great genius.  The financial advice business exists because financial advisors are able to help clients stick with investments when they’re tempted to sell at the worst possible time, or buy at the worst possible time.

Jim:  Yeah, there was actually an interesting article in your old paper today, the Wall Street Journal, that talked about people not really being able to stick to their New Year’s resolutions, and they talked about one of the ways to have a more successful chance of sticking to your New Year’s resolutions, and in this area, specifically, saving money, is to just have a chunk of it withheld so you literally never see it.  So, it automatically goes from your paycheck to some type of savings vehicle.  And that was one of the ways to get around it, so you don’t miss it, like it’s not even there. 

Jonathan:  Yeah, but one of the most powerful forces we’ve discovered is inertia.  So, once you get somebody to agree to something, they don’t tend to go back and re-examine it.  So if when you join a company, if the company can persuade you to enroll in the 401(k) plan and contribute a certain amount each year, you’ll probably stick with it.  But if they fail to do so, then you’ll probably never sign up, or by the time you sign up, you’ll have missed years of investment gains, years of matching contributions from the 401(k) plan from the employer. 

Jim:  Yeah, and I think they actually changed the presumption.  I think before, you had to proactively sign up, and I think now, you almost have to opt out of the system because…which, by the way, I thought was a great thing because if you don’t think, like you said, out of inertia, you’ll be in the system.  You’ll be contributing money, your employer will hopefully be contributing some money, and then you have some money that is automatically going into a retirement plan to a retirement plan that will help you in the long run.

Jonathan:  No, you’re absolutely right.  I mean, because they know that inertia’s a powerful force, and because they know how questions are framed will influence what you decide, what a lot of companies have done is 1) have automatic enrollment where you’re automatically put into the 401(k) plan unless you opt out, 2) they have automatic increases, so the amount you contribute to the plan rises each year unless you opt out, and 3) they create default investment options that tend to be broadly diversified stock and bond portfolios so that you’ll end up in something that’s a reasonably sensible portfolio for you, again, unless you opt out. 

Jim:  And it’s great until you get fired.  But actually, David is going to interrupt…

David:  I’m waving, I’m waving.  Let’s take this quick break now, and when we return, we can continue the conversation, and listeners, if you have a question or comment, call KQV studios at (412) 333-9385.

BREAK ONE


5. Focus On Things You Can Control

David:  And welcome back to The Lange Money Hour.  I’m David Bear, here with Jim Lange and Jonathan Clements.

Jim:  Jonathan, we were talking about a couple of the great strategies that you lay out in your book “The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money,” which I am going to highly recommend that our listeners go to Amazon and purchase.  And one of your seven key beliefs that I thought was very good, and again, here you are mixing, let’s say, personal wisdom with financial expertise, is ‘We should focus on things we can control.’  Probably, not a lot of us necessarily do that. 

Jonathan:  Think about the various components of financial success: there’s how much you save, there’s what the financial markets return, there’s how much you pay to get those financial returns, and there’s how much you lose along the way to taxes.  We have great control over how much we save.  We have a lot of control over how much we pay in taxes.  We have a lot of control over what we pay in investment expenses, and we have absolutely no control over what the financial markets are going to do.  So what do people spend their time doing?  They spend their time fretting endlessly about the market’s short-term performance and try to guess what it’s going to be, whereas they could’ve substantially improved their finances by them taking all of that energy, and instead focusing on those other three things: how much they save, how much they pay in taxes, and how much they incur in investment costs.  It’s that simple. 

Jim:  Well, I wish more people would take that to heart because I think so many…I mean, you know, when I’m hanging out with friends and everybody’s saying, “Well, you know, I don’t know about Apple,” and they go on and on about all these things that, again, they don’t have any control over, but nobody says, “Hey, it’s really important to save money on taxes, so therefore, I’m going to invest in something that is more tax-efficient, or I’m really going to be looking at a Roth IRA conversion strategy, or things like that.”  That’s not what tends to happen at the water cooler, and even in conversations.  So, I think that that advice is very important.  The other, or at least, one other key belief that you have is ‘The virtue of simplicity.’ 


6. The Virtue Of Simplicity

Jonathan:  And we’ve all seen this.  I mean, particularly these days, and there’s like sort of a fascination with complicated investments.  People think that it’s so cool and so sophisticated to have an investment in a hedge fund, or in some sort of private equity, or they buy one of these mutual funds that pursue some complicated strategy.  But they don’t really understand the strategy.  They’re only doing it because it’s something that they can talk about at those cocktail parties Jim attends.  And they would be much better served by sticking with simple products.  If you stick with simple mutual funds, you pursue simple strategies.  A couple of things are going to happen: 1) you’re more likely to stick with it because you actually understand what you’re doing and you’re less likely to panic if there are a couple of rough days in the market, and 2) you’re likely to incur substantially lower investment costs, and those lower investment costs will, everything else being equal, translate into better long-run returns, because you’re simply not losing so much, the Wall Street middle man. 

Jim:  Well, I agree with that, and that, by the way, is the direction of our practice, which involves, let’s say, a combination of our advice and low-cost index funds, again, with an understandable basis.  You have some other, what I would say, are somewhat unconventional thoughts, and I’ll tell you one thought that you presented that I have presented to parents, and they don’t like it at all.  So, first, I’m going to tell you I’ve got some open hostility about this one, and frankly, many of them violate it, but maybe if they heard it from you directly, it might convince them that, perhaps, it really is the right thing to do.  You tell people to fund retirement before you fund your kid’s college education, and I have a lot of clients whose parents paid for their college education.  They are way under funded at retirement, and they are devoting substantial resources, either into private school for their kids when their kids are in grade school, and/or substantial resources for college, which is much more expensive, even after taking into inflation than when their parents went to school.  Can you talk a little bit about funding retirement before funding kid’s college educations?

7. Fund Retirement Before College Education

Jonathan:  A lot of people make a fundamental mistake, which is that they deal with their financial goals consecutively rather than concurrently.  And what I mean by that is they get into their thirties and they buy the house.  They get into their forties and they pay for the kid’s education, and finally, they get to their fifties and they suddenly realize, “Yikes!  I haven’t done much about saving for retirement!”  And at that point, there simply isn’t enough time.  To amass enough for a comfortable retirement, you really need to start saving by your late twenties or your early thirties because it just takes that many years of regular savings investment compounding to amass enough money.  Moreover, think about it: you can take out a mortgage to buy a house.  You can take out a loan to buy a car.  Your kids can take out loans to go to college.  When it comes to retirement, you’re going to have to pay cold, hard cash, and it takes thirty or forty years of saving and investing to have enough cold, hard cash.  An additional reason why you should focus on saving enough for retirement before you start focusing on these other goals is all of the benefits accrue through retirement investors.  And what I mean by that is, take the classic 401(k) plan.  People who fund that 401(k) plan get the tax-deferred growth.  They get the initial tax deduction, plus then they get some sort of matching contribution from their employer.  Nothing else is going to give you that combination of benefits.  So, if you aren’t putting retirement first, in all likelihood, you’re giving up the chance to get free money from your employer and a slew of great tax benefits. 

Jim:  Well, I think that’s some very good advice.  It did bring up a point that you and I actually did a column about.  I don’t know if you remember this, but one of the things that you said, and I think that this is true of a lot of Pittsburghers, we’re a little bit of a working town, and I have a lot of clients, for example, who never made a ton of money, but they were prudent.  They put money in their retirement plan.  They paid the mortgage.  They paid for their kid’s college education.  They paid for their kid’s braces, and now they have a certain amount of money, and you had said for people like that (and their house is usually paid up by the time they get to me), you said in calculating how much money they can afford to spend, that they can actually take into consideration at least a portion of the equity of their home.  And that’s a little bit unconventional, and again, by the way, that’s another one that people don’t want to hear.  On the other hand, if I remember right, the column that you had suggested that people could consider 60% of the equity of their home as a number to apply the safe withdrawal rate to.  Could you expand on the concept of using money or using the value of your home, even if you don’t plan tomorrow to do a reverse mortgage or borrow against it, why we can spend more money if we have a paid-up home?

Jonathan:  Well, I guess there are two advantages to having a paid-up home by the time you reach retirement.  I mean, one is once the mortgage is gone, you get to live rent-free, and that’s a major expense that’s out of the way, and we’ve seen a substantial increase in the number of people who head into retirement carrying a mortgage, and I think that’s a huge mistake.  But then second, once you reach retirement, if you have a paid-up home, at some point, you may well trade down to a smaller place.  And at that point, that’s going to free up home equity, which you can then add to your retirement nest egg, and that’ll give you additional spending money.  So, yeah, I think when you look at your house, you should certainly think of it as a potential resource for retirement.  Maybe not all of it, but certainly some portion of it. 

Jim:  Yeah.   By the way, my thinking has shifted a little bit.  I used to really think that reverse mortgages were very, very high fee items to be avoided at all costs, and we actually did a column on this.  We were talking about taking out home equity loans, or a home equity line of credit in lieu of a reverse mortgage.  But I think that that might have changed a little bit over the years.  I don’t know if you have any opinion on that, whether the availability of a reverse mortgage can, in effect, free us to spend a little bit more, knowing that, in the future, if we need it, we can tap into the equity of our house. 

Jonathan:  I think we still need to go some way before the reverse mortgage is the sort of product that will have mass appeal.  I mean, these still are fairly expensive products, but I think we’re going to get there simply because this is going to be a key component of the typical baby boomer’s retirement.  But let me just go off on a little bit of a tangent here, Jim, because this is an idea that I’ve been sort of toying with.  I mean, we do know that there is a substantial portion of the U.S. population, none of whom listen to your radio show, by the way…

Jim:  Unfortunately!

Jonathan:  …there’s a special portion of the U.S. population that is in terrible shape when it comes to saving for retirement.  And so, this is my strategy, and tell me what you think, if you think it’s crazy.  But this is my proposal to anybody who’s in bad shape for retirement.  My rule is this: you should not allow yourself to leave the workforce until you 1) pay off all your debts, and 2) you have enough in savings so that you can postpone claiming Social Security until age seventy.  So, in other words, if you haven’t got enough money to get all your debts paid off and to cover your costs from now until age seventy, at which point you can get full Social Security benefits plus the delayed credits for waiting until age seventy, then you shouldn’t leave the workforce.  Because, if nothing else, delaying Social Security until age seventy, that’s going to give you 32 percentage points more than the benefit at full retirement age, and 70% more than you’re going to get at age 62, and you’ll be given a stream of income that is 1) at least partially tax-free, 2) linked to inflation, 3) government guaranteed, 4) you’re going to get it for the rest of your life, and 5) if you’re the family’s main breadwinner and you die first, your spouse is going to get a survivor benefit.  So, delaying Social Security to the latest possible age, that should be the strategy that people who are in bad shape for retirement should pursue. 

Jim:  Well, funny that you mention that, because we’re actually going to do a radio show on Social Security, and Social Security was one of the areas that I always considered my Achilles heel.  It was my weakness because I knew there were ways to game the system, and I didn’t really quite get it.  Anyway, we invested in a program called Horse’s Mouth.  It’s four financial advisors, and it has software that helps calculate when you should take Social Security and then makes recommendations, and we actually invested the time to learn how to use it, and I would agree with you that in the vast majority of cases, it really does make sense to delay Social Security, and your idea of don’t retire until you can afford to delay Social Security until age seventy, while I’ve never heard it put that way, I think that’s great advice. 

Jonathan:  And I would strenuously argue the flipside, which is if the only way that you could retire early is by claiming Social Security immediately, then you’ve got a problem.

Jim:  Well, I think that that makes a lot of sense, and I always like when clients come to me before they retire and say, “Do I have enough to retire?”  Instead of what one, and this is a true case, the guy came to me and he said, “Jim, I’ve trusted you my whole adult financial life, or at least in the last twenty years, and I just retired, and now I want to talk to you about what to do.”  And I looked at the numbers, and I immediately thought, “Well, see if you can get your job back because you retired too early.”  And that was true, by the way, and he couldn’t get his job back.  So, I think that makes sense.  The only one other thing, and David’s waving his arms again, that I do want to say, is if there are some, let’s say, tricks with Social Security that you don’t want to necessarily just delay it, there’s something called apply and suspend, which is a really cool technique where you can apply for it, and then your spouse can collect on your benefits.  But anyway, so I just don’t want to say it’s always a good thing to delay without thinking.

David:  Well, with that, let’s take one break.

BREAK TWO

8. Buy Experiences Rather Than Things

David:  Welcome back to The Lange Money Hour with Jim Lange and Jonathan Clements.

Jim:  We are talking with Jonathan about some real gems, many of which are in his book, called “The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money,” which by the way, I unreservedly recommend for people.  It just has a lot of wisdom, a lot of great information, and it’s also relatively short.  It’s a little less that 200 pages.  It has some great things.  Jonathan, one of the thoughts that you had in the book that kind of surprised me, but I thought it was great, was ‘Buy experiences rather than things.’  What do you mean by ‘Buy experiences rather than things?’

Jonathan:  Well, consider two examples: first example, you go out and you buy a new car, and initially, you’re thrilled!  You drive it around town, you show it off to the neighbors, you phone up your brother-in-law and you boast about it.  And then, three months later, you get the first scratch.  And then, two years later, you have your first fender bender.  And then, two years after that, the car breaks down.  And suddenly, this thing that had been a source of such pride and such joy is sitting in your driveway taunting you.  Suppose you went to Paris with the family?  Sure, the trip is soon over and the money’s gone, but you’ll always have Paris!  You’ll have these fond memories, and if anything, those memories will grow fonder over time.  Unlike the car, the trip to Paris doesn’t sit in the driveway taunting you.  And there’s actually a fair amount of research that shows that if you spend your money on experiences rather than things, you will get more pleasure out of the dollars that you spend. 

Jim:  Well, I actually think that’s a great idea, and I’ll even take it one step further, because I have a lot of clients that are reluctant to spend money, even though I know they could afford it, and they tell me they have everything they want and what else should they spend money on?  And one of the things I tell them is what about sponsoring a family vacation where you pay for everything, whether it’s a cruise, or a kind of a resort-type vacation or you rent a beach house, and you fly in all the kids and all the grandkids at your own expense, because that’s what my father-in-law does, and all the cousins know each other, and yes, he’s spending a little bit of money, and I guess the whole family’s going to inherit a little bit less because he did that, but I think we are so much richer as a family. Frankly, what he’s doing is he is buying experiences, not only for himself, but for his family, rather than things.  So, I think that’s great advice.  The other thing that you point out, which again, is kind of surprising coming from a financial person, is that commuting is terrible for your happiness. 

Jonathan:  Commuting is indeed terrible for your happiness.  There was a wonderful study done a few years ago of 909 working women in Texas, and what they did was they tracked these working women throughout the day, and they got them to report how happy or unhappy they were at particular points in time, and then they matched it up with whatever they were doing.  So, the number one time during the day when these women were most happy was when they were engaged in what the researchers euphemistically referred to as ‘intimate relations.’  But I know you don’t have that sort of radio show.  We’re not going to go there, Jim, but the number two thing, in terms of happiness, was when they were hanging out with friends.  That was the second happiest time during the course of the day.  Meanwhile, at the bottom of the list, the three worst times during the day were 1) when they were at work, 2) when they were commuting to work, and 3) when they were commuting home from work.  And the reason commuting is such a source of unhappiness is because we hate uncertainty.  And when you commute, you just never know how bad it’s going to be.  You don’t know how bad the traffic’s going to be, you don’t know whether the trains are going to be running late, you don’t know when the bus is going to turn up, and that uncertainty breeds unhappiness.  If you were to do anything to make yourself happy, one of the things you should seriously consider doing is moving so that you are closer to your work. 

David:  Well, I have to break in here because I heartily agree with this theory.  I used to commute into New York City from New Jersey and it was an hour each way, each day, and one day, when it was taking longer than an hour, it occurred to me that it was one-twelfth of my day, and that if I did that job until I retired, I’d wind up spending 5 ½ years of my life going back and forth to work, and it just seemed to be the fact that murderers who serve shorter sentences in nicer places. 

Jim:  Now, of course, what you could do is you could do what one of my clients does for long trips, and that is they download the archives of the radio shows including this one…well, this one won’t be available for a few weeks, but let’s say your last one.  And I think we have about eighty shows up there…

David:  Getting up there, yeah.

Jim:  ...but they download the shows and they listen to the shows during their commuting time, which is both educational and enjoyable.

David:  Well, you can always make it better, but it’s not as good as doing the same thing at home in the kitchen. 

Jim:  Well, that’s probably true.  All right, so, we’re starting to get into the home stretch here, and we have a couple more…

David:  About five minutes, yeah.

9. Inflation Is Worse Than Market Volatility

Jim:  ...all right, and we have a couple more important issues.  In fact, I would say this one might be as important as maybe anything we’ve talked about, and that is inflation, Jonathan, that you say is worse than market volatility.  So, here, you’re talking about 2008 when we had a 37% drop in the market, and you’re saying inflation is worse than that?!?

Jonathan:  Well, let’s do the math, Jim.  You go down to your local bank today in Pittsburgh, and what sort of yield would you get on a savings account?

Jim:  Let’s say, somewhere between 1% and 2%, if you’re lucky.

Jonathan:  Ah, yeah, if you’re really lucky! 

David:  You’re lucky they say between nothing and one.

Jim:  Okay, all right…

Jonathan:  Yeah, I think probably a lot of savings account yields are running 0.1%, 0.2%.  Meanwhile, over the past twelve months, inflation is right around 2%.  So, if you put your money into that savings account and you leave it there, once inflation has taken its toll, and of course, you’re also going to be paying taxes as well, you are guaranteed to lose money.  You will have less spending power at the end of the year than you had at the beginning.  It’s as simple as that.  Indeed, even if you go out and you buy a ten-year treasury note these days, you are probably going to end up losing money to inflation and taxes.  So, if you want your money to grow over time, you’re going to have to take more risk, and that might mean going into higher quality corporate bonds.  It might mean going into the stock market.  Yeah, that’s going to mean volatility, but that’s the price you pay to earn returns that can potentially beat back those two demons of inflation and taxes. 

Jim:  So, inflation really is worse than market volatility, then, because it’s just a continual force that continues to gnaw at the value of our portfolios.

Jonathan:  I mean, nobody wakes up one morning and goes, “Yikes!  Inflation is running at 2%,” but if you retire on a fixed income and inflation’s running at 2%, after twenty years, you’ll feel it. 

Jim:  Yeah, and actually, that’s an interesting issue for some of my clients who have fixed pensions, and again, these defined benefit plans are becoming more and more rare, but there are still a lot of people who still have them, whether they work for maybe a government agency, or even just a private company that had a pension plan.  But many of these pension plans have a certain amount payment per month that is not adjusted for inflation and is the same amount, and it’s tricky for us to calculate how much money they can spend, because let’s say somebody gets $30,000 or $40,000 a year in a pension, we really can’t count on that being the same purchasing power, say, 10 or 20 years from now.

Jonathan:  And so, probably what you want to do to try and insure that you have money for later on in retirement when the value of that pension is going to be less, is to invest moderately aggressively early in retirement and leave that money aside, don’t spend it, in the hopes that you have sufficient to start to subsidize what you’re receiving from the pension after the pension’s spending power has been reduced by inflation. 

Jim:  Yeah, and frankly, to me, somebody with a pension should also adjust their asset allocation.  So, for example, a teacher who has a pension plan and can count on a certain income for the rest of their lives should actually be investing a little bit more aggressively in the stock market because their pension is kind of like their bond fund. 

Jonathan:  And that’s absolutely right, and that’s the same reason why a young person who has a job with a steady paycheck should also be investing rather aggressively, because the paycheck is like a bond, and to diversify that big bond, the value of your human capital, you want to be investing relatively heavily in the stock market when you’re younger, and then as you approach retirement in the end of your human capital, the loss of those paychecks, that’s when you adjust your portfolios so that you have greater fixed-income holdings. 

Jim:  Well, Jonathan, it has been a pleasure talking with you today.  You are so full of wisdom, much of which can be obtained in your book, “The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money,” by Jonathan Clements.  Thank you so much for being on the show.

Jonathan:  Thank you very much, Jim.

David:  And thanks for listening to this edition of The Lange Money Hour, Where Smart Money Talks.  Thanks to Jonathan Clements.  He can be reached directly at his website, www.JonathanClements.com.  Thanks also to our program coordinator, Amanda Cassidy-Schweinsberg, and Dan Weinberg, our in-studio producer.  As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning, here on KQV, and you can always access the archive of past shows, including Jim’s recent chat with Vanguard Group founder, John Bogle, there on the Lange Financial Group website, www.paytaxeslater.com, along with written transcripts.  Finally, mark your calendars for the next edition of The Lange Money Hour on Wednesday, February 6th, when Jim’s guest will be Hollywood divorce lawyer Howard Klein, an expert in how a parting of the ways can impact a retirement and estate plan. 

END

 

James Lange, CPA/Attorney

Jim is a nationally-recognized tax, retirement and estate planning attorney with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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