IF THERE’S ONE NUMBER that drives your financial life, it’s your fixed living costs. We’re talking here about regular expenses that are pretty much unavoidable, such as mortgage or rent, car payments, property taxes, utilities, insurance premiums and groceries.
Why are fixed living costs so important? There are five reasons. First, the lower your fixed living costs, the easier you’ll find it to save. Many folks who struggle to save are, I suspect, boxed in by hefty home and car payments.
Second, low fixed costs mean you need less income to retire in comfort. One way to slash those fixed costs is to get your mortgage paid off before you quit the workforce, and perhaps also trade down to a smaller place.
Third, if hold down your fixed costs, you can probably get by with a smaller emergency fund. After all, if you lose your job, you’ll need less from savings every month to keep the household running.
Fourth, lower fixed monthly costs mean less financial stress. You won’t be constantly worrying about how to pay the bills.
Finally, lower fixed costs can translate into greater happiness. The spending that brings us the most pleasure tends to be discretionary spending—things like eating out and going on vacation. If you have lower fixed costs, you’ll have more money left over for the fun stuff.
IT’S THE NEVER-ENDING DEBATE: When should retirees claim Social Security? This piece, I hope, will at least serve to clarify the basic math involved.
Let’s dispense with a few preliminaries. If you have young children, it may be worth claiming at age 62, so your kids can receive family benefits. Meanwhile, if you’re married and you were the main breadwinner, it’s probably worth delaying benefits to age 70 to get the larger monthly check. This is true even if you are in poor health. The reason: Your benefit may live on as a survivor benefit for your spouse.
But today, we’re keeping it simple. Let’s assume you are single and your full Social Security retirement age is 66. You’re trying to decide between a monthly benefit of $750 starting at 62, $1,000 at 66 or $1,320 at 70. Your plan is take the money and invest it in high-quality bonds, and you want to know what the breakeven age is. In other words, if you take benefits later, at what age would the monthly checks you’ve collected be worth more than taking benefits at 62?
It’s time for a few more preliminaries. Social Security benefits rise each year with inflation, so you need to figure that into the calculation. To make things easy, I like to think in terms of real (after-inflation) returns. For instance, if 10-year Treasury notes are yielding 2% and inflation is 2%, your real return is 0%.
What if you plan to invest in stocks, not bonds? The potential return is higher—but so, too, is the risk. As I mentioned in a recent blog, it simply isn’t fair to compare a relatively sure bet (the government keeps paying Social Security) to something so uncertain (lest anyone has forgotten, stocks lost roughly half their value twice in the past 15 years). Instead, if there’s an investment alternative to Social Security, it should be high-quality bonds.
Let’s consider three scenarios in which high-quality bonds deliver after-inflation returns of 0%, 1% and 2% a year. Based on those three real returns, how long would you have to live to make delaying benefits worthwhile?
If you delay from age 62 to 66 and you’re investing in bonds that deliver a 0% real return, you’ll be ahead shortly after you turn age 78. Meanwhile, at a 1% real return, delaying benefits to 66 will put you ahead if you live to age 80, while a 2% real return will put you ahead by age 81. What if you delay benefits from age 62 to 70? You’re ahead at age 81 assuming a 0% real return, 82 assuming a 1% real return and 83 assuming a 2% real return.
So how long can retirees expect to live? According to the Social Security Administration, the median life expectancy for a 65-year-old man is age 84, while a woman can expect to live until 87.
RESEARCH ON MONEY AND HAPPINESS has had a profound impact on my thinking. It isn’t that the insights are so startling. With a little reflection, you quickly realize the validity of the research findings—that friends and family are crucial to happiness, that we quickly adapt to material improvements in our lives, that commuting is a wretched activity, that it’s better to spend money on experiences rather than things, that engaging in work we’re passionate about can be among our happiest times.
But, at least for me, the various academic studies have helped bring all of this into focus. It’s prompted me to arrange my life so I don’t have to commute, arrange my days so I spend them doing work I love, and arrange special times with my children, stepchildren and other family members. I had the latter in mind when writing my most recent column, which is devoted to getting the most out of our vacation dollars. We save now so we can spend later—and great experiences are, I would argue, among the best uses of our hard-earned dollars.
AMONG EXPERTS ON SOCIAL SECURITY, there’s a broad consensus that most folks should delay Social Security to get a larger monthly check—and yet roughly half of retirees claim benefits at 62, the earliest possible age.
Many of these retirees, I suspect, take benefits right away because they need the money or they haven’t given the issue much thought. What about those who have wrestled with the topic and still insist that claiming at 62 is the right strategy? If the emails I receive are any indication, including the ones in response to my latest column, people believe there are three reasons to take benefits right away.
First, they think the politicians will slash Social Security benefits, so they should get whatever money they can now. Second, they believe they can earn a higher return by taking benefits early and investing the money. Third, they figure their spending will be higher early in retirement, when they’re more active, so it makes sense to claim benefits right away.
My response? First, Social Security benefits may indeed be cut—but it’s hard to imagine any politician hoping to get reelected would cut benefits for existing retirees. Instead, any cuts would likely apply only to those 10 or 15 years from retirement age.
Second, you might come out ahead by claiming your Social Security benefit early and investing in stocks. But given the different level of risk involved, that’s like comparing apples and oranges. A more appropriate comparison is between Social Security and high-quality bonds. Based on that comparison, you’d be better off spending down your bonds and delaying Social Security, assuming you live to an average life expectancy.
What about the argument that you spend more early in retirement? Even if that’s true, that is hardly a reason to claim Social Security early. If you need more spending money, you could always draw more heavily on your savings.
BESTSELLING AUTHOR Thomas J. Stanley died in a car accident over the weekend at age 71. His death has received scant publicity—which is surprising, given the popularity of his books and his impact on the way we think about money.
With co-author William Danko, Stanley wrote the 1996 blockbuster, “The Millionaire Next Door.” Who are the rich? It isn’t the folks with the flashy cars and designer clothes. Those aren’t signs of wealth. Rather, they’re signs of lavish spending, and the people involved are poorer for it.
Instead, the typical American millionaire is the couple who live in a modest home, drive their cars until the bumpers drop off and buy their clothes at J.C. Penney. Thanks to their frugality, they're voracious savers--and that, more anything, has helped them to amass seven figures. This was Stanley’s powerful insight—which was not only a great rebuke to conspicuous consumption, but also a roadmap for everyday Americans who want to accumulate significant wealth.
IF THERE’S MONEY TO BE MADE, Wall Street is relentless. What if it’s time-consuming, with no extra payoff? Don’t expect a whole lot of help.
That brings me to the obvious starting point for every financial decision: What’s the goal? Many financial advisors are happy if you just tick the appropriate boxes: retirement, college, house down payment, insurance, whatever.
But to make the right financial decisions—and create the motivation to save diligently—you need to dig deeper, fleshing out exactly what you want to achieve and why. That’s the subject of my latest column. The column followed what’s become the standard publication schedule for my articles: It was carried in Saturday’s Wall Street Journal, and also posted to WSJ.com, a subscription website. But today—Monday—it was made available through MarketWatch.com, a free site.
BONDS SHOULD BE BORING—and that’s how I usually manage my portfolio. My taste typically runs to low-cost short-term corporate-bond funds, supplemented with occasional purchases of certificates of deposit.
But there’s one major exception: I have roughly 3% of my overall portfolio in a low-cost emerging-market debt fund. This is not a low-risk investment. According to Morningstar, emerging-market bond funds lost an average 18% in 2008, before bouncing back 32% in 2009. Clearly, owning emerging-market debt is more akin to investing in stocks.
So why did I buy? The fund doesn’t fit neatly into my portfolio’s design and I doubt it’ll add much diversification. Still, here’s my (self) justification: The fund has a yield of almost 5% and—unlike, say, a high-yield junk-bond fund—I’m not so fearful of defaults. Indeed, I suspect the credit rating of emerging-market debt will be upgraded over time, as emerging-market economies continue to mature. Meanwhile, over the next 10 years, the 5% yield may rival the total return from blue-chip U.S. stocks, especially given today’s lofty stock-market valuations, plus I’m getting the return in relatively assured yield, rather counting on share-price gains. My hope: The fund will give me close to stock-market returns with somewhat lower risk.
“HOW TO THINK ABOUT MONEY.” That’s the tentative title for a new book I’m working on. It probably won’t see the light of day until early next year, after I get the 2016 edition of the Money Guide out the door.
What’s the new book about? My goal is to pull together five strands that define my financial philosophy. First, the connection between money and happiness is surprisingly tenuous. That means we need to think carefully about how we spend and what goals we pursue. Second, our long life expectancy should change the way we handle money, including preparing for midlife career changes, and worrying less about dying young and more about how we’ll cope if we live an astonishingly long time.
Third, we regularly make mental mistakes and seem hardwired for financial failure. Result: Getting and staying on track financially takes great discipline, much self-awareness—and a little trickery. Fourth, we ought to take a broad view of our finances, one that encompasses our human capital, debts, investments and more, and which involves thoughtfully trading off one goal against another. Finally, the surest way to win the financial game is to focus less on scoring big gains and more on limiting losses, whether it’s the corrosive impact of investment costs and taxes or the devastation caused by panic selling during a market decline.
MOST OF US WILL ENJOY wonderfully long lives. For those born in 2000, the average life expectancy at birth was age 80 for men and 84 for women. That’s a vast improvement since 1900, when life expectancy was age 52 for men and 58 for women. The bad news: While men can now expect to live 28 years longer and women 26 years longer, the bulk of the improvement—20 years—came in the first half of the 20th century. Indeed, the Social Security Administration projects that, for men born in 2100, life expectancy will be just seven years longer than it was in 2000, while women’s life expectancy will be just six years longer. Medical advances could change that, of course, but it seems the biggest improvements in life expectancy are now behind us. Maybe our great-great-grandchildren won't be regularly living to 100.
But there’s also good news: The longer we live, the longer we can expect to live. When today’s 65-year-olds were born in 1950, the life expectancy was age 72 for men and age 78 for women. But those figures include all the unfortunate individuals who never made it to age 65. Among those still alive today at age 65, the life expectancy is 84 for men and 87 for women. Moreover, these are just medians. Half of all folks will live longer. Among today’s 65-year-olds, roughly 25 percent will live to at least age 90 and 10 percent to at least age 95. With that long life comes two key issues. First, we need to figure out what will keep us happily employed for four decades and perhaps longer. One career may not be enough. Second, we need to pay for a retirement of uncertain length, but which might last 20 or 30 years.
ESTATE PLANNING IS EASY for most folks—but many don’t bother. Surveys regularly find that half of all adults don’t have a will. Yet a will, the right beneficiaries listed on retirement accounts and life insurance, and correct titling on property (such as the house you own jointly with your spouse with right of survivorship) are all most of us need.
Sure, there are other niceties, like drawing up durable powers of attorney for financial and health-care matters, getting a revocable living trust to avoid probate, and writing a letter of last instruction. But in terms of making sure your stuff ends up with the right people, everything should be in order if you have a will, the right beneficiary designations and correct titling on jointly owned property. And getting a will is neither expensive nor difficult. You can create one online for less than the cost of dinner out. Once you’ve drawn up a will, you’ll need to get it notarized. I went to the local UPS Store. It cost a whopping $2.
Tomorrow is the 805th weekly edition of The Wall Street Journal Sunday, a publication carried in 67 newspapers with a combined circulation of 6.2 million—and, I’m sad to report, also the last. I wrote columns for 423 of those editions, including both the inaugural publication, which appeared Sept. 12, 1999, and tomorrow’s final paper.
You can get an early look at my last column on MarketWatch.com. In that column, I discuss five notions that—I believe—are indispensable to a happier financial life.
While Wall Street Journal Sunday is disappearing, I’m not. Starting next Saturday, I’ll be writing a column for the regular Wall Street Journal. Still, I am sorry to see Wall Street Journal Sunday die. It was a publication packed with great financial information—and had an audience I loved writing for.
STAT OF THE DAY: In 2012, 27% of Americans said they were satisfied with their financial situation, versus 32.2% in 1972, according to the General Social Survey. That 27% was the third lowest reading ever for the survey, which has typically been conducted every two years, though sometimes more often. Meanwhile, over that same 40-year stretch, inflation-adjusted per-capita disposable income grew 108%.
INVESTORS SHOULD VIEW THEMSELVES not as pursuers of performance, but as managers of risk. The fact is, nobody has a clue what will happen next in the financial markets, so we shouldn't waste time fretting over something we can't control. Instead, we should focus on the stuff we can influence--how much we save, our portfolio's tax bill, our investment costs and how much risk we take.
I tackle the topic of risk in this weekend's column. Investors seem increasingly obsessed with performance, but risk remains my big worry: The benchmark 10-year Treasury is yielding no more than the core inflation rate, while the S&P 500's cyclically adjusted price-earnings ratio is above 26, versus a 50-year average of 19.6.
MY NEW BOOK was mentioned in two recent articles. In the Chicago Tribune, Carolyn Bigda discusses the Money Guide’s suggestion that folks look back at 2014, recall what spending brought them the most pleasure, and then use that to guide their spending in 2015. My hunch: Most people will find they got the most happiness not from new possessions, but from money spent on experiences—things like vacations, dinners out and going to concerts.
Meanwhile, in the Sarasota Herald-Tribune, Elliot Raphaelson gave the Jonathan Clements Money Guide a thorough review. The book, he says, is “informative, concise, up-to-date and easy-to-understand.”
In designing the Money Guide, I was heavily focused on the e-book edition. I divvied up the financial world into short, 250-to-350 word sections, which I figured would be more appealing to those reading the Money Guide on a tablet, phone or e-book reader. I embedded a slew of hyperlinks, not only to related sections within the book, but also to useful websites and online calculators. I inserted a detailed, interactive table of contents at the back of the book, which works similar to an index. Result? To my surprise, the paperback has easily outsold the e-book.
MANY FOLKS CAN’T WAIT to retire. I hope to avoid it—at least in the traditional sense. I can’t imagine having endless days with no clear purpose, other than to “relax” and “have fun.” I much prefer devoting at least part of every day to work, whether it’s banging out my next column or writing my next book.
If you’re retired, this daily sense of purpose doesn’t have to generate income, but it’s sure helpful if it does. As I point out in this week’s column, if retirees can find part-time work that simply covers the bills, and lets them delay Social Security benefits and avoid drawing down their portfolio, it can make a huge financial difference. An added bonus: It can give retirees a reason to get out of bed in the morning—something, I believe, that we all need.