I'M A BIT EMBARRASSED to admit that, until I started toying with the idea of early retirement a few years ago, I was pretty ignorant about how Social Security worked. I didn’t even pay much attention to the FICA payroll taxes that were deducted from my paycheck. As I looked into it some more, the prospect of receiving lifelong monthly checks from the government came as a pleasant surprise. I started researching how much I might get. I learned that my retirement benefit depended primarily on two factors. First, the system would calculate a monthly benefit—called my primary insurance amount—based on my taxed Social Security earnings. The second factor would be when I decided to start benefits. I could claim Social Security as early as age 62, and take a permanent haircut on my benefits, or wait until as late as 70 to juice up my monthly payments. Based on my birth year, the system designated 67 as my normal retirement age. That’s when I would get 100% of my primary insurance amount—the benefit I’d earned by paying Social Security taxes. I was still unclear, though, exactly how my benefit would be calculated and whether early retirement might affect it. Should I plan to work longer to boost my monthly benefit? How much longer? Would my benefit grow substantially because of those extra years of toil? I’d already paid the maximum Social Security payroll taxes for 15 years, thanks to the steady paychecks from my software engineering job. In my naïve thinking, if 15 years of payroll taxes got my primary insurance amount to, say, $1,500 a month, then each additional working year would proportionately increase the monthly amount by another $100 or so. As with most things, the answer turned out to be more nuanced. To illustrate, imagine a hypothetical worker named Fred who was born in 1960 and started his career at age 22. Throughout his working years, he earned enough to contribute the maximum annual Social Security tax. The accompanying chart shows Fred’s monthly primary insurance amounts if he stopped working at different ages. Notice that Fred gets nothing if he stops working before turning 32. That’s because it takes 10 years, or 40 quarters, of payroll tax contributions to be eligible for Social Security benefits. Also note the diminishing effect of Fred’s contributions on his benefits during the second half of his career. His benefit’s growth decelerates in his early 40s, and almost stops after age 57, even though he works five more years. Why are Fred’s later contributions less valuable—or outright ineffective—compared to those earlier in his career? The devil is in the details of the timing and amounts of Fred’s Social Security contributions. Fred’s annual contributions are indexed, or adjusted, to factor in wage growth over his working life. These indexed earnings are then combined over 35 years to calculate Fred’s average indexed monthly earnings. Think of this as Fred’s Social Security earnings averaged over 420 months, or 35 years of work. What if Fred worked fewer than 35 years? His earnings would still be averaged over 35 years, but with zeroes for the idle years when no taxes were paid. And if Fred worked for, say, 40 years, his lowest-paid five years would be dropped from the equation. This explains why Fred’s benefit barely budges after 57. If he keeps working, he’d be replacing lower-earning years with higher-earning years—but he’s credited with 35 years of work in either case. The difference between the two rates of pay isn’t significant enough to bump up his benefit much, particularly after the lower-earning years have been indexed for wage inflation. [xyz-ihs snippet="Mobile-Subscribe"] Once Social Security computes Fred’s average indexed monthly earnings, it then plugs that number into a three bracket system to calculate his benefit payment. In the first bracket, each dollar of his credited monthly earnings adds 90 cents to his benefit, up to $1,115. The second bracket adds 32 cents for each dollar of credited earnings between $1,115 and $6,721. The third bracket adds 15 cents for each dollar of credited earnings over $6,721. The idea behind these brackets is to favor the folks who’d probably need the benefits the most due to their lower lifetime income. For example, if Fred had a much lower-paying job, his benefits would be lower—but it would represent a much higher percentage of his working years’ wages. In my case, starting my benefits at my full retirement age of 67 would provide me with 100% of the primary insurance amount to which I’m entitled. I’d receive a monthly payment for the rest of my life, which could be passed along to my wife if she survives me, plus it’s increased annually to keep up with the cost of living. As sweet as all this sounds, 67 is not the age when I plan to claim. Waiting for my maximum benefit at age 70 seems like the wiser choice. My benefit would increase by 8% each year I delay claiming, plus annual cost-of-living adjustments will be added on top of that. I won’t be working until I’m 70, though. Like Fred, working longer would increase my benefits only marginally—certainly not the $100-a-month boost that I’d imagined. Grinding beyond a few more years for the sake of a minimally higher Social Security payout doesn’t seem appetizing. Waiting a little longer to claim, though, does seem palatable given the big gain in benefits that would result. Want to know where you stand? You can get an estimate of your benefits from Social Security’s online calculator. Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles. [xyz-ihs snippet="Donate"]

AS A CHILD GROWING up in India, I was taught about the six seasons of Bengal: summer, monsoons, autumn, late autumn, winter and spring. From my recollection, some seasons felt distinct, while others were subtle and transitory. Still, each season had unique characteristics, making it different from the others. A HumbleDollar Voices question—if you could live your financial life again, what would you do differently?—reminded me of the six seasons. How so? Our financial life can also pass through as many as six seasons. I started my financial life with the idea that there were only two seasons: working years and retirement. If I’d recognized the six seasons beforehand and acted accordingly, I could’ve done much better with my most valuable asset—time. What are the six seasons of our financial life? 1. Summer: Financial learning. Bengali New Year starts with summer, arguably the most unpleasant season. Yet the hope of a new beginning overshadows the discomfort from heat and humidity. Similarly, we often start our adult financial life with an occasional stumble and fall. But the thrill of independence trumps any hardships. This is a period to make financial mistakes and learn from them. To explore and settle on a career path. To find a partner and plan a family. The shorter this season, the better. Those who manage to jumpstart their wealth building—saving for housing and retirement—have better odds of enjoying the seasons that follow. 2. Monsoons: Full-throttle saving. The rainy season in Bengal is disruptive. Growing up, I used to hate getting stranded at home because of heavy rain or waterlogging. Instead of playing outside or being with my friends, I had to study or do chores. On the bright side, the extra focus on studies lightened the academic pressure for the rest of the year. The second season in our financial life comes almost as abruptly. We focus mostly on career advancement and earning money, rather than recreation and personal enjoyment. Overwhelming financial responsibilities—for family and housing—force us to reduce waste and streamline spending. Our savings rate rises sharply. 3. Autumn: Slower accumulation. The autumn is highlighted by the festival of Durga Puja, the most enjoyable time of the year for most Bengalis. People slow down to soak up the celebratory mood. [xyz-ihs snippet="Mobile-Subscribe"] The third season in financial life feels the same way. A lifestyle of all work and no play seems unappealing. Our focus tilts away from the career rat race and toward family and other priorities. It isn’t uncommon to scale back career aspirations and make more time for children, or to give up a job altogether to care for an elderly family member. We still earn enough to save a bit toward future financial goals. But we also make a conscious choice to value life outside of work, even when it means less income. 4. Late Autumn: Financial security. Depending on how the prior seasons have turned out, there’s a good chance we can dial back work even further and earn just enough for ongoing living expenses. When can we do this? First, near-term financial needs, such as college education for the kids, must be funded by now. Second, enough must already be saved toward our future financial goals for compounding to take care of the rest. For instance, retirement accounts must have a reasonable balance and enough time to grow before they are tapped. To be clear, we’d still be financially dependent on our jobs during this season, even if we don’t especially like our work. Though we don’t care much about saving anymore, we still need a minimum income to pay the bills. Getting to this stage is when we begin to feel financially secure. How? We know that we have enough for the future, and thus we can choose to spend more time on personal and family interests. 5. Winter: Financial independence. My childhood friends and I used to look forward to the winter months. It was not only the time for school holidays, but also for the seasonal savors. Similarly, we all look forward to financial independence. We may not be wealthy, but we’ve met our financial obligations to others and ourselves. Debts are either paid off or accounted for. Our nest egg is larger and we no longer fear tapping it. We can now choose either to stop working or to work only for enjoyment and supplemental income. From now on, our time is ours. 6. Spring: Conventional retirement. The king of seasons is aptly called the golden age of financial life. Withdrawals from our nest egg may fall as we become eligible for Social Security, Medicare and any other retirement benefits. On the flip side, this final season involves some unique uncertainties. There’s longevity risk, unexpected health issues, and the possible loss of a partner and dependence on others. Still, it’s the season to reflect and be thankful for life’s diverse experiences. Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles. [xyz-ihs snippet="Donate"]

MY TAXES ROSE 50% in 2021. I've never paid so much before, not even during my peak earning years. I’m not upset about having to pay my fair share, but the extent of the increase puzzled me. After examining my tax return, I came away with a handful of insights. To be sure, I wasn't expecting a large refund. The reason: I suspected that a onetime employment windfall would cause me to owe money, so I withheld more taxes during the year. I wanted to avoid an underpayment penalty at all costs. While the workplace windfall and some employer stock vesting contributed to higher taxes, I made moves in my taxable brokerage account that increased the pain. I had rebalanced my portfolio in early 2020 to take advantage of the stock market swoon. The market recovered and soon my stock allocation exceeded my target portfolio percentage. I trimmed my stock holdings in 2021 to get them back to an acceptable size. Many of the stocks I sold last year had risen in value, so rebalancing increased my capital gains for the year. I’m not much bothered by that. Regular rebalancing is part of my investment process, and this was the expected result. Here’s where the unexpected happened: I invested the rebalancing proceeds in a short-term inflation-indexed Treasury ETF. I wasn’t planning on much income from this investment, thanks to the chronically low interest rate. But soaring inflation changed the dynamic, boosting the value of inflation-indexed Treasurys—and leading the fund to distribute a large sum that was taxed at the ordinary income rate. The most unexpected surprise came from capital gains distributions in my ETF portfolio. Vanguard International Dividend Appreciation ETF (symbol: VIGI), for example, distributed more than 6% of its net asset value in capital gains. Half of those gains were short term, so they were taxed at the ordinary income rate. It was an unfriendly reminder that the vaunted tax-efficiency of ETFs isn’t guaranteed. To prepare for the taxes we might face, we can keep a close eye on our portfolio. Our brokerage statements will list the dividends and interest we receive. Fund company websites will tell us what size distributions to expect. Sound like too much work? Alternatively, you might keep a little extra cash on hand—just in case you owe money when you file.

EARLIER THIS YEAR, I swapped the Vanguard Short-Term Bond Index Fund (symbol: VBIPX) in my 401(k) for an inflation-indexed Treasury ETF (VTIP). The trade worked out well: The replacement fund has since fared better, thanks to this year’s accelerating inflation. To buy the inflation-indexed ETF, I had to open a brokerage subaccount within my company’s retirement plan—a feature some 401(k)s offer, though these “brokerage windows” typically aren’t heavily promoted for fear employees will end up trading too much. Initially, I didn’t think I’d use the subaccount for anything else. But I’ve come to realize that the flexibility to choose from thousands of securities in a tax-deferred account could come in handy. For instance, in my regular taxable account, I had bought income-producing funds that own real estate investment trusts (REITs). I like the generous dividends, but not the tax bill, even after the 20% deduction. I wish I owned these in my 401(k) subaccount instead. That way, I could defer the taxes, instead of footing the bill during my high-earning years. Another problem I often face: headaches caused by tax-loss harvesting. In the past, I’d sell an investment to book a loss and use the proceeds to buy a similar, but not substantially identical, investment to preserve my market exposure. I’d then look to switch back to the original investment after the 30-day wash-sale period. But if the temporary investment had gone up in the intervening period, often I’d be reluctant to reverse course. The reason: The short-term capital gain from the sale would partly negate the harvested tax loss. Result? I’d be stuck with the temporary fund indefinitely. Now, I can simply buy the temporary fund in the tax-deferred subaccount instead of my taxable account. Even if the temporary fund climbs in value, I can sell it after 30 days—with no taxes owed—and then buy back the original investment in my taxable account.

LIKE MANY IMMIGRANTS living in the U.S., I regularly return to my hometown to visit family and friends. My trips to Kolkata are usually short and jam-packed, seeing not just contemporaries, but also the older generation, including aunts and uncles, my parents’ friends and my friends’ parents. My two recent visits—one last fall and the other this spring—were no exception, but I had mixed feelings this time. Most of the older generation are now in their 70s and early 80s, and two of them had passed away since my last pre-pandemic visit. I was happy to be able to catch up with the rest. But I was also saddened and surprised to find that, since my last visit, a few didn’t seem to be doing well emotionally, as if they’re struggling to find meaning in life. On the surface, health problems and mobility issues are to blame, but that alone doesn’t explain such a change within a few short years. With most of their family members or adult children living elsewhere, these folks have no one to lean on for day-to-day support. They resist getting professional in-home senior care services or moving to retirement communities. This mental block is cultural and emotional, not financial. Meanwhile, the rest of my older acquaintances seem to be having a great time in their golden years. They, too, face health and mobility issues, but these don’t appear to affect their positive outlook on life. The best example is my maternal aunt—my mother’s younger sister—whom I call Mashi. Despite dealing with several family tragedies within the past year, including losing her husband of 50 years after a long period of ill-health, Mashi remains upbeat and full of energy. If you were to guess her age based on appearance and activities, you’d probably be off by at least 10 years. What’s the secret to the higher life satisfaction of these older folks? I’m not sure about the others, but for Mashi, I can think of six factors: 1. Keeping busy with a purpose. I’ve never seen Mashi sitting idle and wondering what to do with her spare time. Words like sedentary and lazy don’t exist in her dictionary. Even at this age, she still feels responsible for the smooth running and upkeep of her household, which includes her younger son and his family, who live with her. Mashi’s younger son—my cousin—is a doctor, his wife also has a career, and they have a four-year-old son who started kindergarten last year. Both my cousin and his wife assist with the household’s upkeep as best they can, and there’s also domestic help for certain chores. Still, Mashi is deeply involved with the remaining day-to-day work. It’s almost as if the household would cease to function if she were away for even a short time. 2. Nurturing relationships. Mashi makes a big effort to stay connected with all of her family and close friends—the quality I admire most about her. Her daily routine includes spending a few hours with her grandson, chitchatting with neighbors, talking to her older son’s family—they live abroad—and catching up with my mother over the phone. She’s also regularly in touch with her late husband’s extended family and friends. She rarely misses social gatherings, be it a puja celebration with in-laws, birthdays or special events of friends and acquaintances. [xyz-ihs snippet="Mobile-Subscribe"]  3. Healthy eating. Mashi has resisted today’s lifestyle of junk food and frequent dining out. To be sure, she’s curious about food and doesn’t mind other cuisines for a change. But her staple meals involve homemade food with fresh vegetables, legumes and grains, plenty of fish and occasionally eggs or meat. She loves to make traditional Bengali dishes with seasonal vegetables. Whenever I visit her, I enjoy tasting what she’s making that day. 4. Regular physical exercise. No, Mashi doesn’t go to a health club, swimming pool or any fitness center. Instead, she gets her physical exercise simply by choosing to walk whenever she needs to go anywhere within a one-mile radius. She finds one excuse or another every day to get out of the house for a brisk walk. Often, the trip involves getting fresh vegetables and groceries from the neighborhood bazaars, picking up monthly provisions from convenience stores, buying a gift for an upcoming family event, or paying a visit to her in-laws who live close by. Even the pandemic lockdown didn’t change her walking habit. 5. Personal time. Despite a busy daily life, Mashi sets aside time to relax. Her favorite hobby is gardening. Living in a congested city, she doesn’t have the luxury of a backyard garden. Instead, she uses her home’s two terraces to grow a variety of plants in pots of various sizes. The small terrace on the second floor doesn’t get much sunlight, and the one on the fourth floor has no shade. She regularly moves pots between the terraces, prunes and weeds them, and treats the soil with tea leaves. According to her, looking after her plants is the most relaxing part of her day. 6. Financial security. Mashi doesn’t come across as wealthy, but she’s financially comfortable, thanks to a lifetime pension, retirement savings left by my late uncle and a decent-sized house. Both her sons are capable of offering financial support, but I doubt she’d ever need or ask for help. She can afford to spend beyond her regular expenses without worrying about outliving her money. Mashi is in her 70s, but—given that she’s hardly changed since her early 60s—I have a feeling that she’ll be the same in her 80s, too. Sanjib Saha is a software engineer by profession, but he's now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles. [xyz-ihs snippet="Donate"]

I GREW UP IN INDIA. There, it’s quite common to have outside help for household chores. Most middle-class families hire someone to help with washing, dishes and cleaning. Affluent households typically have a cook, driver and housekeeper. After coming to the U.S., I noticed that most households weren’t dependent on domestic help, thanks to appliances like a dishwasher, vacuum cleaner and washer-dryer. A few coworkers went as far as building their own cabinets and decks, painting their homes and changing the oil in the car. This do-it-yourself culture resonated with me for three reasons. First, I valued independence—the ability to do things at my own pace, rather than waiting on someone else. Second, the idea of working equally hard at work and at home gave me a kick. Third, it appealed to my sense of frugality. I wanted to be like my DIY coworkers. But it was wishful thinking on my part. I tried various home maintenance jobs that required no special tools or expertise. But I didn’t especially enjoy fixing toilets, repairing garage doors, blowing leaves or mowing lawns. These mundane tasks felt increasingly burdensome. Still, the idea of getting outside help was at odds with my values. I’d no longer be the independent, hardworking and frugal person I perceived myself to be. But in truth, I was being stupid and stingy. If I could afford it, why not pay someone to do these unexciting chores? Reluctantly, I availed myself of yardwork and housecleaning services, but I still resisted offloading anything else. That changed when I cut back the number of hours I worked. How did a smaller paycheck motivate me to spend more for domestic help? My reasoning was simple. With my part-time job, I was effectively paying back a prorated percentage of my fulltime salary to my employer, so I could have a few extra hours for myself. If my personal time was as valuable as that pay cut, it made no sense to spend it on uninteresting tasks that someone else could do for an even smaller price.