Bay Area: Last Stop?

(Image from first for women)

I bought Steve Martin's album A Wild and Crazy Guy in 1978 and found this bit to be hilarious:

You.. can be a millionaire.. and never pay taxes! You can be a millionaire.. and never pay taxes! You say.. “Steve.. how can I be a millionaire.. and never pay taxes?”

First.. get a million dollars.

Now.. you say, “Steve.. what do I say to the tax man when he comes to my door and says, ‘You.. have never paid taxes’?” Two simple words. Two simple words in the English language: “I forgot!”

The transcript does not do justice to his delivery, which was replete with pregnant pauses, shrugged shoulders, and goofy expressions. Plus, the two-part answer to "how can I be a millionaire and pay no taxes?" that began with "first get a million dollars" struck me as funny, and if you don't agree, dear reader, well, we laugh at different things.

I thought of Steve Martin's routine when I came across an article in the Chronicle about why many of us choose to live out our final years here: How to financially prepare to spend the rest of your life in the Bay Area . Certainly the drawbacks of staying in the Bay Area--or California in general--have been well publicized:

there’s plenty of talk about the bad. You don’t have to look far on the internet to find people blasting California for its high taxes, housing costs and homelessness. California has the top marginal state individual income tax rate at 13.3%, according to the Tax Foundation.

"But that’s not the whole story."

[Estate planning, trust and probate law attorney James] Cunningham broke down the hidden benefits in a post on his firm’s website titled “Why Retiring in California May Actually Be a Smart Idea.” For instance, though marginal rates are high, you’ll pay a lot less on your presumably diminished retirement income compared to some states with flat tax rates. California is one of the states that doesn’t tax Social Security benefits, and doesn’t tax capital gains when a spouse dies. And you’ll dearly miss that Prop. 13 property tax cap if you move somewhere like Texas.

Bay Area retired acquaintances have told me that the primary factor that caused them to stay or leave was the state of their finances. Those who have a paid-up house and enough savings and retirement income to live on (daunting prerequisites, like "first get a million dollars") consider other factors, such as where their children and friends live, the quality of medical care, and, last but far from least, the temperate weather all year long.

If I had to bet, the Bay Area is our last stop, but circumstances can easily change.

Summer, winter, or fall the Foster City weather is nearly the same.

Out of Rhythm

Lester Beach, South Lake Tahoe (Chron)

Moderate weather is forecast for this Labor Day:

Tranquil weather is expected in the Bay Area for the holiday weekend as west-southwest winds keep marine air flowing from the ocean to the land, preventing temperatures from climbing too high. Sunday will be the windiest day of the extended weekend, with gusts up to 30 mph.

Along the coast, the ebb and flow to the marine layer will keep temperatures in San Francisco in the 60s to low 70s with morning and evening clouds from Friday through Monday. Oakland should reach the mid-70s each day, while San Jose will steadily be in the low to mid-80s.

It looks like a good weekend to get away.

During my working years I looked forward to holiday weekends. Dates were circled months in advance, and travel was scheduled to minimize the use of paid vacation. Holiday weekends took a lot of work, but the payoff was often great.

Now that I'm retired I don't much care for long weekends. Shopping centers, restaurants, and supermarkets are crowded on what would normally be a weekday, and the local bank and post office are closed. I rarely go on long car trips, especially not when most other people are on the road like the upcoming Labor Day weekend.

I do regret being out of rhythm with the rest of America.

Needing a Lot of Gold to Live in the Golden State

Retirement here is excellent
if you have enough money.

Bankrate says that California is the fourth-worst state in which to retire:

The analysis ranked states based on five categories: affordability, overall well-being, the cost and quality of health care, weather and crime. Affordability accounted for the largest share of a state’s ranking at 40%, while crime was the smallest, at 5%.

With this methodology, California ranked 47 out of the 50 states, largely due to its high cost of living. The state ranked 50th on the affordability scale, which took several data points into account, including cost of living, state and local sales taxes, property taxes and average cost of homeowners insurance, according to Bankrate.

The major reason that California ranks 47th is that it is the least affordable State, and affordability determines 40% of the score.

If one has a paid-up house and an adequate nest egg, California would rank much higher. Living on the Peninsula, we have access to excellent medical care within 30 miles (Stanford, Sutter Health, UCSF), the weather is mild all year, and crime and homelessness are controlled much better than in San Francisco and San Jose. Unless conditions worsen dramatically, these retirees will be staying put.

Every Bar is Lowered

My portfolio in blue, S&P 500 in gray

My retirement portfolio is up 11% year-to-date, which is well behind the 14% recorded by the S&P 500. Nevertheless, I'm happy with a six-month increase of 11%.

It's a good thing that I'm not a professional money manager that has to explain why he didn't buy more Nvidia to keep up with the S&P:

Nvidia’s ascent is a big reason the S&P 500 has climbed 14% this year—nearly as much as in last year’s standout first half—even as a series of hot inflation readings damped investors’ hopes that the Federal Reserve would soon begin to cut interest rates...

So far, Nvidia has contributed 30% of the S&P 500’s total return, including dividends, this year through Wednesday, according to S&P Dow Jones Indices.

If the market doesn't go up or down in the second half, I'll still be content with 11%. When one is retired, every bar is lowered.

Loud Budgeting

I missed this new term in personal finance: loud budgeting.

Lukas Battle (Instagram)

Loud budgeting began as a joke, said Lukas Battle, the 26-year-old comedian who coined the term in a December TikTok video after a night of overspending.

When Battle’s friends then messaged him asking to go out to an expensive Italian restaurant in Manhattan’s East Village neighborhood, he proposed they all cook dinner at someone’s house and have a game night instead. It was a riff on “quiet luxury,” the trend of favoring well-made, expensive, but understated fashions.

Battle’s video took off, generating over one million views and more than a thousand comments. Hundreds of people have shared their own examples of how loud budgeting helped them save money.

“People want a break or some sort of relief from this constant need to be spending and buying,” said Battle, who lives in New York.

Loud budgeting has helped some combat the peer pressure to spend.

Madeleine Burke (WSJ)

Madeleine Burke, 26, said her best friend visits the nail salon every two weeks for a manicure and pedicure. The last time Burke went with her, she paid $45 for a pedicure and instantly regretted the decision.

“I cannot believe I paid for that and I could’ve done it at home,” said Burke, who lives in New Orleans. The next time she was asked, she felt more comfortable declining. She credits loud budgeting with helping change how she approaches spending.

Burke said her friends now host more potlucks at each other’s homes and go secondhand shopping together.

Your humble blogger admits that during his career he yielded to social pressure by going on expensive outings that he didn't want and couldn't afford--or, to be more accurate, could pay for if he defunded activities that had a higher priority (e.g., retirement savings, replacing a 15-year-old car).

If proclaiming publicly that you don't have the dough gets your non-wealthy status out in the open, that's a welcome improvement over "my spouse and I have other plans" or "we can't find a babysitter." Any friends you may lose aren't really your long-term friends anyway.

Retirement: How Much is Enough?

WSJ illustration

Seventeen (17) years ago I did a quick-and-dirty estimate of the nest egg required for us to have a "sleep-well" retirement. The answer: $2 million.

We can spend a lot more time fine tuning the calculation to include taxes, Social Security, lumpy expenditures such as medical care, cruises, and cars, and whether the savings are in tax-deferred or taxable accounts, but the extra precision won’t change the final number much. Am I there yet? Let's put it this way, I've got to keep working for a while---there are a few more years of mortgage and college payments--but I'm sleeping well, too.

In the intervening years we've been lucky. The performance of the stock market has kept our savings above $2 million, and we have paid off the mortgage. On the other hand, inflation has rocketed past the 3% used in my old calculations, and doesn't appear to be dampening anytime soon. The upshot: retiring in the SF Bay Area now requires more than $2 million to have sleep-well golden years (remember this is my personal opinion!), but that amount seems more than enough in other parts of the country.

A recent survey places the subjective target at $1.46 million.

It would take $1.46 million to retire comfortably, according to a recent survey of 4,588 adults released Tuesday by financial-services company Northwestern Mutual. That is up from $1.27 million a year ago. And over $1 million more than the average survey participant’s nest egg.

The rising magic number reveals more about retirement anxiety than retirement planning, said Teresa Ghilarducci, an economist at the New School for Social Research in New York City.

Money isn't the only way to buy retirement happiness, of course. Having trusted friends and family members--preferably younger--helps, as does living in a safe community with ample medical services. If through planning, skill, and luck you have all that, you're living the true American dream.

Peering Through the Fog

Different priorities now: a banker, lawyer, CPA, and financier
walked into a bar and compared notes on health, not money.

Lately I've been accepting more invitations to go to reunions, whether they're related to family, work, school, or eleemosynary institutions.

Although lethargy is growing with age, a stronger counterweight is the desire to avoid regret. Seize the opportunity to meet up with old friends because one never knows when it will be the last time.

And so it was that I fought the rush-hour traffic through San Francisco and peered through the fog on the Golden Gate Bridge for a dinner with former work colleagues in Sausalito.

The four of us quickly caught up, then turned our attention to gossiping about former acquaintances, which is another reason to attend these gatherings. Generally it's better to talk about others than to be talked about.

After two hours--three hours after sunset--our energy flagged (two bottles of chardonnay also helped). We resolved to meet up again after the New Year. I wasn't 100% sure it will happen, but it's nice to look forward to.

No Cruises on the Horizon

During the 1970's we went on our first and only cruise, a trip along the "Mexican Riviera." Starting in Acapulco, the ship made its way north, stopping at port cities until it reached Los Angeles.

I immediately grasped cruising's appeal. Travelers didn't have to pack their suitcases every night to make next morning's bus or train; the floating hotel would move to the next destination while they were sleeping. At one's leisure one could disembark and see the city, or stay onboard if so inclined. Ocean cruises were something we would want to do when we retired.

During the 1990's there were outbreaks of legionnaires' disease on cruise ships. Diseases spread quickly in close quarters.

Now that we're retired we're leafing through the brochures. However, health and safety risks still appear to be as significant as they were three decades ago. Headline:

The Viking Neptune outbreak originated in Iceland

Stomach Virus Spreads Through Cruise Ships at Fastest Pace in Years

So far this year, there have been 13 outbreaks of norovirus on cruise ships, according to reports from the U.S. Centers for Disease Control and Prevention. That marks the largest number of norovirus incidents on these vessels in a single year since 2012—and the year is only halfway over.

The most recent outbreak occurred on a North Atlantic Viking Cruises sailing that docked in New Jersey on June 20. More than 100 passengers fell ill, according to the CDC, accounting for 13% of all vacationers on the ship. Crew members also contracted the gastrointestinal illness.

We'll still travel by ship when it's clearly the best option--for example, Alaska--but for right now there are no cruises on the horizon.

The Men's Shed

Dale Nugent and Jim Tuten at the Ruston, LA Shed

Three decades ago John Gray wrote Men Are from Mars, Women Are from Venus. It described the different methods by which men and women communicate, their different perspectives of the world, and, importantly, how men and women could communicate more effectively with each other. It sold 15 million copies.

The book has been criticized as making over-broad generalizations, but it still resonates with the millions of Americans who subscribe to traditional views of the sexes.

The Men's Shed movement, while open to women, has filled a need for men who like to work in groups to construct something tangible.

The Hopkins [Minnesota] shed is one of 27 Men’s Sheds in the U.S., where men, and sometimes women, gather to build park benches, desks, and bird feeders, or learn to cook and sew. At David’s Memorial Men’s Shed in Girard, Pa., a 5,000-square-foot pole barn, members work on cars or learn to weld. Shedders, as they are called in Ruston, La., construct bunk beds for shelters in a former warehouse. Elsewhere, shedders repair bikes for police youth leagues and clean parks....

The Men’s Shed movement started in Australia in the 1990s, to combat loneliness among retired men, and has grown to more than 2,500 sheds in a dozen countries, each with projects based on local interests. Estonia has two sheds, whose members help each other with chores, such as stacking logs and transporting stones.

A mere half-century ago every community had non-sectarian organizations where men could gather together outside of work and home, for example, the Freemasons and Elks and Rotary Clubs. (All now are open to women, or have affiliated groups for women, but they're still predominantly male.) These groups have a general philanthropic bent, but they have not been able to arrest the decline in membership.

Men's Sheds seem to have struck the right chord with guys who want to work with their hands, strive toward a concrete, limited goal, and be around other guys doing the same. More like this, please.

Reaching My Price Point

Oahu home prices have dropped closer to my price point (sarcasm):

The median sale price of previously owned single-family homes on Oahu has fallen below the $1 million mark that was first eclipsed in August 2021 and consistently met or exceeded until January.

January’s median price was $970,000, down 8% from $1,050,000 in the same month in 2022, according to Honolulu Board of Realtors data released Monday.

Everything's relative. The prices in my Bay Area neighborhood are north of $1.5 million, so if we sell our house and pay the income taxes (and in our case there still will be some after the $500,000 Section 121 exclusion), we'll have enough to pay cash for a home on Oahu.

If we want to downsize, as well as add to the nest egg, we could buy a condo:

The number of condo sales in January sank 50% to 275 from 552 in the same month a year earlier. A string of falling year-over-year sale volume began in June with a 14% decline that grew in size over the second half of 2022 to around 40% in November and December.

Condos sold for a median $495,000 in January. That was down 3% from $510,000 a year earlier. The record was $534,000 in June.

Malasadas and plate lunches can be expensive.

It's Not Too Late

(Wikihow illustration)

Retirement is a time for reflection... and regrets. Chief among them is the failure to stay in touch with friends from long ago. The most stark examples are the friends who have passed away, where obviously no renewal of a relationship is possible.

The fears that hold us back from reconnecting are largely in our imagination. [bold added]

People also exaggerate the risks of reaching out to old friends, including awkwardness and rejection, and underestimate the pleasures, according to research by Nicholas Epley, director of the Center for Decision Research at the University of Chicago Booth School of Business.

“Failure to recognize how interested others are in engaging with us keeps us overly avoidant in ways that harm our well-being,” he said.

"Make a new friend" is a goal that's too vague and more difficult to achieve.

"Connect with an old friend" is more concrete and likely to bring you happiness.

A Smart Move

(Illustration from estateexec.com)

Most middle-class Americans have a simple estate profile.

Assets may include a house, retirement accounts, stocks, cash, and personal effects. Beneficiaries of the estate are typically family and charities.

Even with such straightforwardness, there is still a smart move to make on income and estate taxes. Where possible, charitable bequests should be made from 401Ks and IRAs, while assets that have gone up in value ("appreciated assets") should go to the heirs.

This is because IRA and 401K distributions (unless they're from Roth plans) will be taxable to the heirs, while on the sale of the house or stocks they will only have to pay income taxes on the appreciation after the death of their thoughtful relative. (The charities don't pay taxes in either case.)

There are also the advantages of efficiency and flexibility.

there are two big benefits to making gifts at death using traditional IRA assets.

The first advantage is tax efficiency. Donors of traditional IRA assets at death can win an income-tax trifecta—no tax on contributions going in, no tax on annual growth, and no tax on assets at death...

The second advantage of leaving traditional IRA assets to charities is flexibility. Wills are often drawn up years before someone dies, and circumstances change. As a result, the donor may want to name different charities or donation amounts.

Making these changes is often easier with traditional IRAs than a will.

Let's say that you have a $100,000 IRA and that you wanted to leave $20,000 to your alma mater. You could create a new IRA, name its beneficiary as Old Blue College, and fund it with $20,000 from your existing IRA, leaving the remaining $80,000 for existing IRA's beneficiary. And you could do that without hiring a lawyer to rewrite your will.

You spent a lifetime earning, saving, and building an estate. Spend a few hours seing that thousands of dollars from that estate go to who you prefer, not the government.

Retirement: How Much is Enough?

A $2 MM net worth is in the top 10% of
the 65-69 age cohort (myroadtofire)

Back in 2005 my friend Phil and I had a conversation about how much we would need to retire comfortably. The assumptions were:

1) we wouldn't have a defined-benefit pension plan;
2) we would be collecting Social Security and participating in Medicare.
3) our house mortgages would be paid off;
4) our assets would be the total of everything in our taxable savings, stock brokerage, 401(k) and IRA accounts;
5) the tax attributes of various assets would be ignored;

We agreed that we would need more than $1 million, but $2 million would be the goal if we still had a few years of mortgage payments.

Without doing actuarial analysis or investment projections, a nest egg of $2 million would allow us to withdraw $100,000 for 20 years, and that would be plenty enough to support a middle-to-upper-middle-class lifestyle.

17 years later, $2 million in investable assets may still be the right number.

The WSJ profiles four (4) retirees who have net worths (including their homes) of $2 million - $4 million. They all spend at least $93,000 per year, and none have cut back substantially because of economic conditions. Some, however, eye the volatile stock market with trepidation.

How much is enough? Some of the people in the article--and your humble blogger--don't know the exact number, but we know that $2 million doesn't get us there.

The Days Are Long But the Years Are Short

Before entering retirement the priority had to be on finances, that is, making sure that income covered expenses, not only immediately but for the long-term.

Physical changes due to aging have needed to be addressed, too, and more consideration and planning had to be given to diet, exercise, and sleep. Of course, these "burdens" are nothing compared to life while working.

What I didn't think about was how I would respond to removal of the necessity to keep a daily calendar, with its prioritized task list and careful scheduling of due dates.

To the extent I thought about it at all, it seemed that I would be even more productive and efficient, tending to long-deferred home and learning projects. Taking to heart the accounting concept of depreciation, "remaining useful life" of, say, 20 more years instead of 50 years that it was just yesterday, I would surely be more productive now that I'm working for myself instead of others.

But that's not how it's turning out to be. In a corollary to Parkinson's law, retirement activities have expanded to fill the time available for completion. Visits to the gym used to take an hour. Now two- and three-hour walks burn the same number of calories as one-hour workouts, yet I do the former because I find them more enjoyable.

Managing time has become less important though paradoxically the time remaining is shorter.

One of the major joys of retirement has been the luxury of spending more time on those things I look forward to doing, with no deadlines to rein me in, no obligations that require me to make those hard choices about how to spend each day. What continues to surprise me is how many of those activities turn out to be exactly the ones I have been advised to cut back...

While grinding away on an exercise bike or in a gym is always an option, hourlong walks up and down the hills in my neighborhood is my favorite go-to exertion. They stimulate new ways of looking at a particular challenge, including something as simple as coming up with the words to help reconnect with a long-lost friend...

Meal preparation is another area ripe for shortcuts...I could assemble a dinner with almost no prep work to be ready at whatever hour I punch in. It’s easy, but it defeats one of the most enjoyable aspects of cooking—preparing meals with implements that might have been used hundreds of years ago whose sturdiness and texture I can feel as I begin dicing, grating and mixing.

I know these idyllic days won't last. There will come a point when a health scare will force me to dust off the daily planning calendar with its hard deadlines and concomitant stress. Meanwhile, I shall live as if these days will go on forever.

Because we don't know when we will die,
we get to think of life as an inexhaustible well.
Yet everything happens only
a certain number of times,
and a very small number really.
How many more times will you remember a certain afternoon of your childhood,
some afternoon that's so deeply a part of your being that you can't even conceive
of your life without it.
Perhaps four or five times more, perhaps not even that.
How many more times will you watch the full moon rise?
Perhaps twenty. And yet it all seems limitless.

--Paul Bowles, The Sheltering Sky

&copy 2022 Stephen Yuen

A Wealthy State of Mind

One way for a San Franciscan to become wealthy: leave.

San Francisco residents say they need $5.1 million (including the net value of their home) to feel wealthy: [bold added]

Respondents to the 2022 Modern Wealth Survey said it will take an average net worth of $5.1 million to be considered wealthy in San Francisco in 2022, compared to $3.8 million in 2021 — that’s an increase of 34% in one year, and more than double the national average. In 2020, respondents said it took $4.5 million to feel wealthy in San Francisco. The nationwide average also increased from 2021 to 2022, but by only 15%.

To be “financially comfortable,” a San Francisco resident would need a net worth of $1.7 million, versus $1.3 million in 2021 and $1.5 million in 2020. Nationwide, respondents said it takes $774,000 to be financially comfortable.

Being financially wealthy is subjective. For us it wasn't a specific number. We got there a few years ago when income exceeded expenses and appeared that it would for the foreseeable future, even allowing for emergencies. It helped a lot that we have a middle-class lifestyle and that the house was paid off in 2016.

A good chunk of our assets is in the stock market, which has fallen by 21% in the first half of 2022, the worst drop since 1970. We're being squeezed on the other end, as inflation over 8% has caused expenses to rise alarmingly.

I'm beginning to feel nervous....and not so wealthy.

Coping with Inflation

(WSJ illustration)

The WSJ publishes 15 Ways Consumers Can Deal With—and Even Benefit From—Rising Inflation. Below are my comments in italics:

What’s your inflation rate?

In the CPI-U [consumer-price index for all urban consumers], motor fuel represents approximately 5% of assumed total household spending and is up 44% from April 2021 to April 2022. Used cars and trucks represent approximately 4% of the total and are up 22.7% over the same period. So if you can hold off on buying a new car, for instance, you can feel less of a sting from those big increases.

My personal inflation rate is lower than the average because the largest expenditures (mortgage and car payments) are fixed. Variable components have a discretionary element, e.g., chicken can be substituted for beef, and we can dine out two days a week instead of three. So we're lucky--we certainly feel the inflation, but the non-inflatable part of our budget is high, and we are willing to substitute lower-priced items in most cases.

Be aware of shrinkflation

Product companies will slowly “shrink” the contents of the packages and goods you buy while charging you the same price. This means a price hike for you. The package of strawberries now has five fewer strawberries. The bag of chips has more air and less chips than usual. The roll of toilet paper went from 264 sheets to 244 sheets...

One way to deal with shrinkflation is to try to stick with generic store brands because those tend to be the last to shrink...It also helps to only buy fruits and vegetables that are in season.

Perhaps there's brainwashing involved, but about half the time I don't find generics to be as good or effective as branded products, so that suggestion doesn't work for me.

Instead, my problem is kind of the opposite but is an opportunity to save money: don't buy more than you're going to use before it spoils. I buy too-large packages of perishable items, for example, two loaves of bread for $7.50 instead of one for $5, then have to throw out the second because of mold. Switching to smaller-size packages raises the per-item cost, of course, but the overall expense is lower.

Delay Social Security

Every year that Social Security benefits are delayed past full retirement age, the amount of the eventual benefit increases by 8%.

Thus, an individual with a full-retirement-age benefit at 67 years of $1,000 a month could increase their benefit to as much as $1,240 by delaying to age 70—an increase of as much as 24%. And the annual CPI increase is based on this higher amount.

My health is good but not great, and there's a good chance I will make it to 90. However, there are many personal friends, relatives, and acquaintances my age for whom stuff happened, so I claimed full benefits at 66 rather than defer until 70. Deferral is a good plan if you're in good health and are financially comfortable.

Buy the car you’re leasing

New-vehicle prices rose 13.6% since March 2021, while prices for used cars/trucks were up a whopping 34.7%. If you have a vehicle lease expiring soon, you possess a valuable way to avoid those higher prices.

That’s because your vehicle’s lease-end price was set when your lease began, prior to the current inflation...

Even if you really want to get rid of it, buy it anyway. It’s now a (lightly) used vehicle whose market value has jumped about 35% in the past year. So sell it yourself, and pocket the profit on the difference before buying something else. If you simply return it to the dealer, they will do the same thing and, of course, share none of the profit with you.

We bought out our leased car three months ago. It was the right thing to do, kind of like going to the dentist.

Seek a higher return on happiness

Take a moment and think about what you’re spending money on and why. And then stop spending money on the unnecessary things that don’t bring you joy. After all, if you stop spending money on something, by definition, you are no longer impacted by inflation in that area...

take just a week (a month is even better) and commit to deliberately reflecting on every single expenditure made during that period—from the auto-payment on that streaming service to filling up your gas tank—transformational things can happen...thinking about that one expenditure allows you to rethink where you are going—literally and figuratively.

COVID-19 caused a lot of people to reflect on their lives before inflation struck. What one needs vs. what one wants is an age-old question, but it's still relevant. I want the latest iPhone but the almost-four-year-old iPhone XS Max satisfies all my needs (except for status and techno-lust), so resist temptation!

Ask for a raise

The salary increases one normally gets are likely to be below the rate of inflation, so it is important to ask for higher raises...Given the state of the labor market—this time in favor of workers—summon up courage and go ask for the raise. You need it.

I only expressed unhappiness to management about my pay a couple of times in my career. Each time I was fully prepared with comps, a list of extra things I did, and even a worst-case scenario if the discussion went south and I had to leave the company. Even if the worst-case scenario is improbable, it's good to go through in your mind (see "happiness" above) and enter negotiations with the confidence that walking away from a job isn't so bad.

Time your expected purchases

Consumers are often advised to have cash and other liquidity available for unexpected expenses, such as house or car repairs or even medical bills. But there is another use for that cash on hand: making expected purchases on sale and ahead of time. While this only works for nonperishables, there is real value to be reaped by buying goods when the price is right and in quantities that make sense.

...households tend to hold inventories of consumer goods worth about $1,100 on average. By shopping strategically and optimally managing their inventories, households can potentially earn returns well above 20% on their “household working capital.” The key is not to stockpile too much at full cost and buy only when the price is right.

Stockpile supplies when prices are low. Clothing, however, carries the risk that tastes change: you may not like the swimsuit you bought on sale last winter.

Don’t add explicit inflation protection

While there’s nothing wrong with maintaining a long-term allocation to Treasury inflation-protected securities (TIPS) for diversification, tactically adding them as a hedge may not have the intended effect. TIPS performance is driven by unexpected changes in inflation expectations. So while inflation is high today, the likelihood of inflation expectations surprising to the upside going forward seems low now that the Federal Reserve is actively tightening monetary policy.

Gold, meanwhile, has been an awful inflation hedge since gold futures began trading in 1975, in part because they tend to rise in anticipation of inflation (rightly or wrongly) rather than with inflation.

Even with the recent period of higher inflation, average inflation is less than 3% over the past five-year and 10-year periods. So rather than adding an explicit inflation hedge, you are better off reviewing the underlying assumptions of your financial plan to focus your attention on items that are within your control.

Plus, most investors already own the best asset to combat inflation: stocks. A big reason stocks beat inflation over time is that corporate earnings and dividends tend to grow faster than inflation.

I followed my own advice from one year ago, and it holds up: If we are going to reprise the 1970's, shift some investments into real estate, gold, art, or more stable foreign currencies that can keep up with dollar inflation. (I would recommend cryptocurrencies, but I don't understand them well enough.) Get out of bonds and low-growth dividend paying stocks. If you have variable-rate loans, convert them to long-term fixed-rate debt.

Control your lifestyle creep

spending inertia is very common and, oftentimes, there are some expenses that can be cut out with minimal impact. A good place to start this budgeting process is to simply pull all of one’s bank account, credit-card and debit-card statements and look for any recurring expenses for subscriptions or services that may no longer be needed.

COVID's silver lining: we bundled our shopping expeditions, doctor's visits, etc. to minimize car trips before gas spiked, cut back on recreational travel, and cooked more often. We're spending less in total than we did before COVID but I draw the line on subscriptions; we're keeping them all.

Account for shadow inflation

Do you remember when your restaurants gave you free bread and butter? When soda refills were free? Or when your hotel room was automatically cleaned, and you could count on fresh turned-down sheets before bedtime? With the cost of goods rising rapidly, along with the current labor shortage, many of the services we have grown accustomed to are no longer included without an extra fee...

Since it is likely right now that the cost of goods and services will continue to rise, build a buffer into your budget for spending on meals and other services that are affected by this cost increase.

The message seems to be that freebies are a vanishing species, hence inflation is worse than we thought, and we should "build a buffer." Very helpful! (sarc)

Buy inflation-indexed stocks

Investors should purchase stocks from established companies—such as supermarkets—whose revenues are indexed to the inflation rate. Inflation is a basket, and the best thing correlated with the change in the price of the basket is exactly the basket. Food is sold in supermarkets and, therefore, the inflation rate of food is highly correlated with the revenues of those companies. Because those companies have small margins, their earnings also are correlated with the inflation rate. Hence, buying a claim on the revenues or the earnings has to be correlated with the inflation rate.

My own preference is for real estate stocks or the hard asset itself. Though risky, real estate returns, especially with leverage, exceed inflation.

Update your résumé

I encourage individuals to update their résumés. Given the tight job market, there’s an opportunity for many employees to find new positions that will pay them more—and a higher salary is obviously a benefit in an inflationary environment. But workers may be able to find a job that is more personally satisfying as well.

The retirement nest egg is big enough so that I don't have to go back to work...yet. If inflation continues for a couple more years, then the résumé will have to be dusted off.

Watch for falling prices

One strategy for dealing with inflation is accelerating certain purchases. This might seem counterintuitive given the impact of inflation on the economy. However, in certain scenarios it is possible to selectively capitalize on the current environment. Many consumers will need to cut spending on discretionary items, so a lack of demand may cause the prices of various nonessential goods to decrease. This can present a unique buying opportunity.

If you planned to pursue new hobbies in retirement, for instance, and are fortunate enough to have ample cash flow, it’s possible to make the most of this inflationary environment by accelerating the purchase of select recreational items as their prices fall. The key is to identify where you have some financial flexibility and make the most of what is otherwise a very challenging situation.

Prices fall with products that no one else wants (duh!). Time to fill your space with hardcover books and CD's.

Invest in alternative energy

Investors may want to consider alternative-energy stocks as an inflation hedge...But the war in Ukraine has further underscored the importance of sourcing alternative energy...While traditional energy may outperform over the near-term, the drive toward clean energy seems unlikely to reverse and may present a better long-term opportunity for socially responsible investors and the planet.

Even if you don't buy alternative energy stocks, get out of fossil fuel companies like Chevron and Exxon-Mobil. Their shares have doubled in the past year, so take the profits. The long-term prognosis is bad.

Better insulate your home

One of the best investments for a return on your dollar is to better insulate your home. This is particularly important given the current higher costs of fuel. Often, you can get a free energy assessment from your power company, with a to-do list for lowering your energy costs.

The upgrade will eventually pay for itself—sometimes in as little as three to five years—and you will have lower heating and cooling bills that will outlast this inflationary period. If it takes five years in saved electrical and fuel bills to recoup the expense, you likely just got a lifetime 20% return on your insulation investment. And as the costs of fuel and electricity go up, so does your percentage saved.

Insulating the house has been recommended for decades, and we haven't done it because we're highly allergic to the dust that project will create. Besides, it's cheaper to wear a sweater during the winter and go to the air-conditioned mall, library, or theater during the summer.

A few final words of advice, applicable to non-inflationary times, too:

1) Temper your lifestyle to be less than your income (easy to say, but pride and pleasure are powerful obstacles);

2) Pay off your credit card balances every month;

3) Do all you can to make your marriage work.

Taxes: Old Fashioned is the Way to Go

Despite trying to go paperless, the IRS is
buried in paperwork. (WSJ image)

More than ever, I'm glad I've retired from the tax-return business. I help a few friends and relatives, but that's it. To render proper service to a paying client I would have to spend many hours on the phone with the overwhelmed IRS trying to ascertain the status of returns filed a year ago or longer. [bold added]

Tax Day 2022 is nearly here. But just when many Americans most need answers, communicating with the Internal Revenue Service can be harder than ever.

Need to send the IRS a letter? The extra workload from the pandemic has left the agency with a paper backlog of more than 20 million tax returns, amended returns and correspondence. On March 17, Commissioner Chuck Rettig told members of Congress that even though the IRS is using extraordinary measures, the backlog won’t be cleared before year-end. The agency, he said, is tackling the pileup on a first-in, first-out basis.

Calling the IRS is nearly impossible as well, unless you have a specific number for an audit or notice. For the fiscal year ended Sept. 30, 2021, only about one in 10 calls to the agency’s customer-service line reached a representative after call volume nearly tripled during the year, according to National Taxpayer Advocate Erin Collins. The lines are still clogged.

A third barrier to communication involves taxpayers’ access to key records. The IRS’s legacy system for retrieving such information had such rigorous sign-up requirements to prevent fraud that it rejected more than half of applicants.

No tracking for returns filed with States,
who are much more reliable than the IRS.

Mom signed her paper tax returns two weeks ago, and I mailed them at the post office last Saturday, with tracking and return receipt added. No Luddite I, but there's zero trust in the IRS to process the return timely and accurately. Moreover,if there's money owed, I pay with a check in order to have evidence of the remittance.

Filing our own 2020 return through the U.S. mail was the right move, because, as noted in January, the post office tracker proved that the return was delivered by April 15, 2021, while the IRS claimed it hadn't received it as of January, 2022.

Electronic payments and electronic filings are near instantaneous, but when it comes to proving that one fulfilled one's responsibilities, old fashioned paper is the way to go.

Procrastination Ends Now! OK, Maybe Tomorrow

Re working from home: we've heard accounts from people who extol WFH virtues--they're no longer wasting hours commuting--but a significant number, maybe a majority, are less productive: [bold added]

The pandemic has brought us to peak procrastination. Turns out your office—in addition to being in plain sight of your boss—came with environmental cues that reminded you that you had to, you know, work. Without the hum of the industrial printer and the sight of colleagues marching off to the conference room, we all tend toward aimlessness....

Our [home] workspace was thrown together haphazardly in March and never rectified. Kids, pets and neighbors distract us. Our homes are filled with things we like to do. More than a third of telecommuters in a survey of 10,332 adults by Pew Research Center in October said it’s been difficult for them to feel motivated to do their work.

(Image from procrastination.com)

At the office people watch each other (not) working and are compelled by their boss and social pressure to limit their time goofing off. It's like group exercise, where potential embarrassment makes the recalcitrant continue past the point where they would have quit on their own.

Your humble blogger, who left the office environment over 10 years ago, has had to battle tempting distractions ever since. I'm far less efficient than I imagined I would be. If I don't feel like pulling weeds, clearing the office clutter, or repainting that scratched door, so what? I can't fire myself.

Three years ago I dispensed with the dreaded to-do list since almost all of the tasks assigned to "today" were being rolled forward to tomorrow.

In January I brought the to-do list back. An open calendar was wonderful to experience, but like sheltering-in-place, the real danger is I'll get used to it.

Wealth Survey

On a day like this I feel wealthy, and it's not from owning one of those houses.

Eighteen years ago my work colleague, Phil, and I were musing about retirement over a beer. The question before the panel: what should our financial situation be to have a comfortable retirement? The initial bid was $1 million + a paid-up house + Social Security and Medicare coverage.

Then we thought about the traveling we would like to do, the 3-years-old-or-less cars we would like to have in our driveway, and the need for long-term care, and the bank-account objective was raised to $2 million, which is easy to do when the sun is shining and you're on your third beer. The conversation was only half-serious--after all, we weren't yet on Medicare--so we had to keep working anyway.

In the intervening years Phil retired, sold his Bay Area house, and moved to Palm Springs. Whether he hit the goals we set on that distant afternoon, I don't know, but I hope he's happy. Happiness, and its relationship to wealth, is a subject more for philosophers, psychologists, and priests than accountants, but we hone in on wealth because financial measurements are objective and easier to obtain.

In the Bay Area one needs to have $3.8 million to be "wealthy". [bold added]

Respondents to the 2021 Modern Wealth Survey from Charles Schwab said it takes an average net worth of $3.8 million to be wealthy in the Bay Area, down $700,000 from $4.5 million in 2020. If you’re just aiming for “financial happiness,” that carries a price tag of $1.8 million in 2021 compared to $2.1 million in 2020.

A mere $1.3 million is enough to make you “financially comfortable” in 2021, versus $1.5 million in 2020, according to the survey responses.

Speaking from personal experience, I can tell you that "financial happiness" was not achieved at $1.8 million (the Schwab survey amount includes one's house).

While having enough money to make ends meet is necessary, it's not a sufficent condition for happiness. For that you have to look elsewhere, maybe in Palm Springs.

COVID-19 Projections: Another Reason to Leave the Bay Area

Firehouse in Old Town reopens today

Sacramento is heading in the right direction, while the Bay Area remains locked down. [bold added]

The Greater Sacramento region’s available ICU capacity is currently under 10%, but the state’s data models project it will hit 19% in the coming weeks. Officials announced Tuesday that the region would move back into the purple reopening tier — the tightest of the four, but less restrictive than the ICU-based lockdown.

The state bases its evaluations on regions, rather than by individual county, because hospital systems rely on one another for patient transport and other support, said Dr. Nancy Williams, health officer for El Dorado County.

The area — which is part of the Greater Sacramento region along with Alpine, Amador, Butte, Colusa, Nevada, Placer, Plumas, Sacramento, Sierra, Sutter, Yolo and Yuba counties — will now be allowed to reopen outdoor dining and some small businesses and services such as hair salons, museums and movie theaters. Hotels can reopen to recreational travelers.

Firehouse filet (2016) 

We know at least a dozen Bay Area residents who have re-located to the Greater Sacramento area because of its much lower house prices, lower cost of living in non-real estate categories, and up-to-date amenities.

The region's medical facilities are excellent, and SF and Peninsula specialists are less than two hours away. Concerning the better coronavirus outlook, the reason could be lower population density. It's certainly not money, because the counties in the Central Valley are doing better than we who live in wealthier zip codes.

As noted in our visit to towns near Sacramento three years ago, they're on our short list of places to retire.