RETIREMENT IS LIFE’S most expensive purchase. During our working years, we deprive our present selves of immediate pleasure by refusing to spend money for nicer cars, a bigger house or a vacation to boast about. Instead, we squirrel away those saved dollars with an eye toward keeping the future us fed, clothed and living indoors.  At age 64, after decades of choosing to save and invest a large chunk of each paycheck, rather than spend it, I’ve bought a choice: Fully retire to fully embrace life after work, or carry on in a career that still adds purpose to my life. I’ve chosen to stay, but I’ve whittled down my work hours too far to handle all of my family’s spending needs. Thus, I’m faced with reaching into savings for the first time. More about that later. But first, where is our money, and why? Taking advantage. The bulk of our retirement savings is invested in tax-advantaged accounts. Until we reached our mid-30s, neither my wife nor I had invested a dime in the stock market. Since that time, however, we’ve stuffed dollars from every paycheck into our workplace savings accounts. Initially, these contributions went into traditional accounts, but we switched to the Roth option when it became available. We also topped-off Roth IRAs every year, and stashed a smaller amount in a taxable brokerage account. A little less than half of our total investments reside in future-tax-free Roth accounts. Most of the balance is tax-deferred, traditional money, which is subject to ordinary income tax rates the year it’s withdrawn. The distinction between how these two types of accounts are taxed influences where we position assets between those accounts. Accordingly, we’ve looked at two scenarios that may raise our future tax rates: One begins in a little more than a decade, when required minimum distributions (RMDs) from my traditional retirement accounts begin at age 75, followed by my wife’s RMDs a few years later, plus my Social Security, begun at age 70. The other is triggered when the first of us dies and the surviving spouse moves into the single filer tax bracket.  Because we still owe ordinary income tax on the savings in our traditional accounts, we’re making Roth conversions and taking the tax hit now, at a known rate. We’re also seeking to curb the growth of our traditional accounts by keeping all our bonds there. By contrast, our Roth accounts, on which we should never owe future tax, are invested 100% in the stocks we expect to grow over time. Picking winners. In the beginning, my wife and I entertained thoughts of alternatives to stocks, such as real estate. Soon, however, we decided that maximizing market participation was our wisest wealth-building tactic. As our knowledge of finance grew, we further refined our focus by choosing broad-based, low-cost index funds over other options, for good reason: They out-perform actively-managed funds. I don’t doubt the intelligence of active fund managers. On the contrary, I suspect they carry bigger brains than me, and know they command more resources to sniff-out future winning stocks. But they swim in a tank with fish just as big, and it's tough to get a fin up on the competition. The result: Each year, index funds finish strokes ahead of their active cousins. For the same reason, we’ve shied away from individual stocks. Have we lost out? I’d argue we profited. Simple diversity. Moving into retirement, my ideal portfolio is heavily influenced by decades of working closely with older patients in my physical therapy practice. I’ve followed a number of folks as they age from their vibrant, active 60s through the years of physical deterioration. Along the way, I’ve observed the cognitive decline that affects most of us as we age. I don’t count on escaping a similar fate.  Hence, rather than covering every corner of the stock market with a complicated collection of index funds, my wife and I have been shifting toward a two- or three-fund portfolio, to achieve the same result. We aim to hold shares in virtually every public company across the globe, housed in two funds, plus one bond fund. Our choice for U.S. stocks is Vanguard Total Stock Market Index Fund (symbol: VTSAX). For foreign stocks, we like Vanguard Total International Stock Index Fund (VTIAX).  Tending to just two stock funds cuts complexity, especially decisions like when to rebalance and how to go about it. Aside from the biases that affect most of us, there’s that issue of our aging brains, again. Why fret about realigning our investments when just keeping track of medical appointments has become a challenge? To further simplify our lives, at a bit more expense, we could let Vanguard Group, Inc. do all the work with their Vanguard Total World Stock Index Fund (VTWAX).. Picking our peril. Our nest egg is weighted a little heavily toward stocks, which means its sum will rise and fall with the market. That can be unnerving, but it’s the price we'll pay for the extra risk that gives us a shot at outpacing inflation.  Without the long-term growth provided by stocks, our buying power might not keep pace with our expected long lives. That strategy is fine when the market is riding high, but where do we go for spending money when stocks are in a slump? Selling depressed stocks in a pinch to raise cash is hazardous to our wealth. For that reason, the balance of our savings is in mostly short-term government bonds and cash, enough of a cushion to cover several years of expenses until the market regains its footing. To be sure, that money is mostly idle, but it's ready when needed. When I finally clock my last-day-forever in the clinic, we might buy an income annuity to replace earned income with insured money to add to my wife’s modest Social Security check, which she expects to start collecting in a little over a year.  This combination of regular monthly paychecks would provide a floor of income to keep the household going, and bolster our courage to boot, when the market hits the skids. Drawing it down. Meanwhile, we’ve yet to settle on a plan to siphon off savings to pay the bills not covered by my part-time income. At the moment, there’s little pressure to find the perfect formula. For starters, we’re not calculating the highest withdrawal rate our investments will bear to bankroll a spending spree. Also, part of our retirement preparation included holding steady to a frugal lifestyle and eliminating debt. Our low expenses give us breathing space to decide how to replenish our cash account. Why the dithering? It turns out nailing down a withdrawal plan is my toughest financial decision to date. But it’s not the math that has me stymied. Rather, it’s the emotion. Yes, I believe the research, and I’ve run analyses that assure me our money will probably outlive us.  Still, thinking of pushing start makes me queasy, so we’re sliding into the task. Instead of a rate, we’ve chosen the dollar amount that sustains our current lifestyle over the coming year. It falls short of the figure we expect to reach once we’ve limbered up our spending legs, but one allows us to work up to a rate that doesn’t outpace my level of comfort. Ed is a semi-retired physical therapist who lives and works in a small community near Atlanta. When he's not spending time with his church, family or friends, you may find him tending his garden and wondering if he will ever fully retire. Check out Ed’s earlier articles.  

THERE’S A CHANGE coming in the way many of us invest. But for background, it’s important first to look at a related—though seemingly mundane—investment concept known as tax-loss harvesting. To understand how tax-loss harvesting works, consider a simple example. Suppose you purchased a stock in your taxable account for $10, and it subsequently dropped to $8. That would be unfortunate, but there’d be a silver lining: You could sell the stock to capture the $2 loss for tax purposes and then reinvest the proceeds in another stock. Like most topics in personal finance, tax-loss harvesting is the subject of some debate. Detractors argue that the tax benefit is something of an illusion. Continuing with the above example, critics would point out that a tax-loss harvesting trade would cause the investor’s cost basis to drop, and that, in their view, would negate any benefit. Why? The new stock’s basis would be $8, whereas the original stock’s basis was $10. That’s important because it means that when the new stock is eventually sold, the taxable gain will be $2 greater than the gain would’ve been on the original stock. And that additional $2 of gain would perfectly offset the $2 loss that was captured earlier. It’s for this reason that some compare tax-loss harvesting to a shell game: They argue that it can shift a gain from one year to another, but never truly eliminate it. In a narrow sense, the critics have a point. But there are many cases in which harvesting losses can yield tangible benefits. Suppose you’re in retirement and taking regular withdrawals from your portfolio. In that situation, tax-loss harvesting could help you moderate the capital gains on those withdrawals. Continuing with the example above, if you took a $2 loss on one investment, you could pair that with a $2 gain on another investment. That would allow you to free up cash from your portfolio without any net tax liability. In that way, tax-loss harvesting can help retirees keep a lid on their tax bill when drawing down a taxable account. Even before retirement, tax-loss harvesting can be a benefit. That’s because even the most dedicated buy-and-hold investor will want to make changes to their investments from time to time, if only for rebalancing. And that’s another key benefit of tax-loss harvesting. It can help investors rebalance—and thus manage risk—more tax-efficiently. Those are the benefits of tax-loss harvesting. But you might notice a fly in the ointment. After the strong market we’ve enjoyed over the past decade, it might be hard to find holdings with any losses to harvest. Over the past 10 years, the S&P 500 has risen 250%. Even international stocks, which are seen as laggards, have gained nearly 70% over that period. That would appear to be an obstacle to tax-loss harvesting. In other words, it’s hard to harvest losses if there are no losses to harvest. For index fund investors, this is indeed a challenge. But now imagine that if, instead of owning a broad-market index like the S&P 500, you instead owned each of the 500 stocks individually. Then, as you looked across your portfolio, there would be both winners and losers. While Nvidia has gained 25,000% over the past 10 years, stocks like Walgreens, Warner Brothers and American Airlines have each dropped more than 50%. Forty stocks, in fact, have lost money over that period. Nearly 300 of the 500 stocks in the S&P index have gained less than the index’s overall average. If you owned these stocks individually, they’d offer opportunities to take withdrawals from a portfolio more efficiently than if you owned the index only in the form of a fund. Wouldn’t it be cumbersome, though, to own 500 stocks individually? That brings us to a strategy known as direct indexing. It’s a way to own the individual stocks in an index, and to conduct regular tax-loss harvesting, without needing to manage the portfolio yourself. Direct indexing has existed for decades. But in the past, because of the cost, it only made sense for the wealthiest investors. In recent years, however, brokerage commissions have largely been eliminated, and new competitors—including Vanguard Group—have helped bring down the cost. As a result, these services now cost as little as 0.15% or 0.2% a year. Yes, that’s more than a comparable index fund. But according to at least one study, the tax benefits can easily offset that cost. In addition to the tax benefit, direct indexing offers two other advantages. First, it offers the ability to customize a portfolio. Suppose there’s an industry that runs counter to your values—tobacco, for example. With a direct indexed portfolio, you could own all of the stocks in the S&P 500, with the exception of Altria and Philip Morris, leaving you with your own custom S&P 498. With direct indexing, you could also overweight selected industries. Another benefit of direct indexing: Suppose you have a large holding in a single stock—Apple, for example. Because of the risk, you might want to diversify. But if you bought an S&P 500 index fund—ordinarily a good way to diversify—that would pose a problem, because 7% of any dollars invested in the S&P 500 would be allocated to Apple, further increasing your exposure. But with direct indexing, you could construct a portfolio that included all of the stocks in the index except Apple. A further benefit: Over time, losses produced by the direct indexing strategy could be used to offset gains as you whittled back your Apple shares. Are there downsides to direct indexing? As noted earlier, there’s the cost. In addition, some people dislike the idea of holding hundreds of individual stocks; it seems messy. Another downside of direct indexing is that the tax benefits are front-loaded. Over time, as the market rises, there will be fewer losses available to harvest. Still, I believe direct indexing can continue to provide tax benefits far into the future. Even if, after a decade or two, most stocks in a portfolio have gains, there’ll always be some stocks that have gained more than others. Result: At any given time, if you were looking to take a withdrawal, there’d still be a tax benefit even if none of your holdings had losses. You could cherry pick from among your holdings to limit the gains on each sale. Moreover, to meet charitable goals, you could donate the most appreciated shares, such as Apple or Nvidia, thus sidestepping the gains. Another potential risk with direct indexing is that a portfolio can ossify over time. Without the benefit of new cash, the ability to make changes can become constrained by unrealized gains. And this can cause a direct indexed portfolio to slowly drift away from its benchmark. This is where mutual funds have an advantage. Because there are always investors coming and going, mutual funds have the benefit of being able to deploy new cash on a daily basis, and that gives them the ability to stay right in line with an index. For these reasons, I don’t recommend direct indexing as a substitute for index funds. But I do see it as a good complement. It is, I think, a strategy well worth considering. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

AN UNUSUAL STORY hit the news this week. GameStop, the struggling video game retailer, announced a bid to buy eBay. The offer was unexpected, but what surprised investors more was the economics of the proposed deal. eBay is many times larger than GameStop, making it difficult to understand how GameStop would be able to finance the acquisition. GameStop has offered $56 billion for eBay, comprised of cash and stock. For the cash portion, according to its May 3 press release, GameStop would use the $9 billion it has in the bank and borrow the remainder from TD Bank, which has committed up to $20 billion to the deal. But that, in a sense, is the easy part. The stock portion is what left investors with many more questions. That’s because GameStop’s total market value is in the neighborhood of just $11 billion, so it isn’t clear how it would be able to hand over $28 billion of shares. Its share price would somehow have to multiply for this to work. In an interview Monday on CNBC, GameStop’s chairman, Ryan Cohen, offered little clarity. When the reporter asked Cohen to explain his financing plan, the details were sparse. More than once, Cohen just repeated: “It’s half cash, half stock.” When the reporter challenged him to say more, Cohen stared back stone-faced. “I don’t understand your question…it’s half cash, half stock.” This went on for several minutes without much more clarity. Cohen’s parrying was amusing, and it’s an open question where this all ends up. In the meantime, this story is instructive for investors because it helps illustrate some of the stock market’s inner workings. For starters, it can help us understand the market’s seemingly split personality. At first glance, this story seems to highlight the more casino-like side of the stock market. After all, GameStop was the original “meme” stock, rising 30-fold in January 2021 when a YouTube personality promoted it to his followers. GameStop is now using its cult status as currency to support a deal that, according to conventional analysis, doesn’t add up. That said, it isn’t entirely irrational. Putting aside the financing, there is precedent for an online-only business merging with a traditional retailer. Amazon purchased Whole Foods, a grocer, in order to gain a retail footprint, and GameStop envisions something similar, where eBay customers could drop off goods at a physical location rather than hauling them to the post office. To be sure, eBay isn’t Amazon, and GameStop isn’t Whole Foods, but there is some logic to Cohen’s argument. How can we assess investors’ opinion of this deal? A pillar of Cohen’s pitch to investors is that he can make eBay much more profitable, such that it will essentially pay for itself. In an interview on Wednesday, he argued that under new management, eBay could operate much more efficiently. “There's 11,500 employees,” he said. “It doesn't make sense. I could run that business from my house. It doesn't need 11,500 employees.” The implication: Right now, it might not look like the math works for this deal, but if GameStop proceeds with the acquisition, its shares deserve to rise very considerably. Even if GameStop has to issue many new shares, in other words, each share would become much more valuable because of the addition of a newly more profitable eBay. Those additional profits, in Cohen’s view, would offset the dilution caused by the issuance of new shares. That’s the argument GameStop is making. What does Wall Street think? It turns out this question has a straightforward answer. GameStop has offered $125 per share of eBay. If investors were confident in this deal, then eBay’s shares would now be trading right around $125. That’s according to the principle of arbitrage, which says that there shouldn’t be a way to purchase a dollar for any less than a dollar. In other words, if eBay shareholders really stand to receive $125 a share, then it would be illogical for the shares to trade much below $125. But today, eBay shares are trading far below that, falling to as low as $105 on Wednesday. That tells us that investors have little confidence in the deal, most likely because of the difficult-to-explain financing. As Benjamin Graham famously wrote, in the short run, the stock market is a voting machine—a popularity contest—but in the long run, it’s a weighing machine. It’s rational. And though corners of the market often devolve into irrational and speculative excesses, that’s not always the case. More often than not, in my view, the market is better behaved than it’s commonly perceived to be, and I think that’s what we’re seeing here. eBay’s share price today tells us that investors are keeping their feet on the ground. In 1901, J.P. Morgan coordinated the acquisition of Carnegie Steel in a deal that, in its time, was the most audacious ever undertaken. Through massive leverage, it created the first company in the United States worth more than $1 billion. At the time, it was astounding. This tells us that unusual and unlikely things can happen. On the other hand, in 2001, the highly-leveraged merger of AOL and Time Warner was a disaster almost from the start.  Which way will the GameStop-eBay deal go? Right now, it’s anyone’s guess. And as with most things involving great amounts of financial engineering, my recommendation is to steer clear. But this case is instructive because it illustrates many of the principles that drive the market from day to day.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.