Should Ministers Opt-Out of Social Security?

I have been asked many times from pastors, missionaries, and those in ministry about whether they should opt-out of social security. As a follower of Christ and financial planner, I have spent a lot of time researching, pondering, and praying over this question.

I will go through the problem, two points of view, some projections, and my perspective.

The Problem

Social Security and Medicare provide eligible participants with the following:

  1. Retirement benefits

  2. Disability benefits (if you become disabled before age 65)

  3. A death benefit to your survivors

  4. Medical care (Medicare)

Within the first two years of ministry, pastors can opt-out of paying the 15.3% self-employment tax. This is composed of a 12.4% Social Security tax and 2.9% Medicare tax. Employers typically pay half of these taxes (7.65%), but ministers and self-employed individuals must pay both halves.

The decision can be overwhelming. In the first two years of ministry, you may withdraw from the program. After that, you’re stuck with your choice for life, at least for all your ministry income.

However, this is not just a financial decision, it’s a moral one as well. Here is the language from IRS Form 4361, which is what you submit to opt-out:

I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care.

The government made this provision exclusively for those who choose to withdraw on moral grounds, not financial ones. The language is the same as the conscientious objector provision in the military.

The Points of View

The decision is even more difficult when we get conflicting counsel. Well-respected Christian thought leaders differ in their opinions on what to do.

Dave Ramsey: Team Opt Out

Dave Ramsey has helped many people get out of debt and transform their household finances. Naturally, many people have sought his counsel on the matter. Here are a couple quotes from Dave’s site:

If I were in your shoes and still serving as a church pastor, I’d opt out in a nanosecond. That’s because sending money to the Social Security office is a bad way to manage your money for God.” (Here’s the link to the post)

There are certainly people within Christianity who think it's your moral obligation to give money to the government. I'm not one of them. (Link)

Dave recommends contributing your tax savings to a combination of retirement, life insurance, and long-term disability insurance. This is to make up for what Social Security would have provided.

Russell Moore: Team Stay In

Russell Moore, president of the Ethics and Religious Liberties Commission of the Southern Baptist Convention, provides an argument for remaining in Social Security. Many have sought his counsel on this subject as well. He wrote an article in 2010 expressing his views in depth. Here’s a quote from Moore:

Our Lord Jesus refuses to call his followers to withhold taxes from Caesar. “Render unto Caesar that which is Caesar’s,” Jesus announces (Matt. 22:21). This isn’t because Caesar is so monumentally important but because money is not. It isn’t worth subverting one’s witness or one’s God-ordained deference to authority.

The Projections

Although the decision to opt-out is supposed to be a moral one, it has huge financial implications as well. Let’s look at an example calculation for an individual making this decision.

For these calculations, we’ll use the following assumptions:

  • John, born in 1957

  • Works for 35 years (1989 – 2024)

  • Retires at 66 ½, his Social Security Full Retirement Age (FRA)

  • Average pay during working career = $50,000

Situation 1: Stay in Social Security

The projected Social Security benefit at age 66 ½ for John would be $2,311 per month. If you’re wondering how I calculated this, you can view the calculation process here. John’s spouse can also claim half of his Social Security benefit, or her own benefit, whichever is higher. So, if John had a non-working spouse, their total Social Security income would be $3,467 per month.

Situation 2: Opt Out of Social Security

What if John opts out of Social Security and invests the money he saves in taxes in a retirement account? I assumed that he made monthly investments into a retirement account with a 7% average annual return. The three scenarios below are if he invests all his tax savings (15.3%), most of his savings (10%), and some of his savings (7%). Keep in mind, you would not be able to invest all your tax savings since you would need to use some to pay for disability and life insurance to compensate for those lost Social Security benefits.

*The monthly income is based upon the principles of the  4% Safe Withdrawal Rule .

*The monthly income is based upon the principles of the 4% Safe Withdrawal Rule.


Let’s compare the various retirement incomes for the different strategies:

NOTE: These calculations are estimates and actual Social Security and investment values will vary.

Based upon the comparison, it’s clear that in some situations, you can financially benefit by opting out.

My Perspective

Despite the projections above, I recommend remaining in Social Security. Here are 4 reasons why:

1.) Theologically and Ethically

I wholeheartedly agree with Russell Moore in his article. I love Dave Ramsey and the impact he’s had on so many people, but I think he’s wrong on this.

Ramsey’s argument is based on the accumulation and preservation of personal wealth. God wants us to steward his resources well, but his primary purpose is not our wealth, but his glory. Ramsey did not use a single scripture in either of his resources on the subject on his site. His statement that Christians do not have a moral obligation to pay taxes is directly contradicted in scripture.

It’s clear Jesus commanded his followers to pay taxes (Romans 13:7, Matthew 17:24-27, Matthew 22:17-21). We are supposed to pay even if the government is corrupt. Russell Moore noted that the Roman government was composed of polytheist dictator-worshipers. The taxes would have been used for many things contrary to Christian belief. Roman taxes would have been used to support a ruler who claimed to be a deity, as well as for crucifixion stakes. Jesus commanded his followers to pay taxes nonetheless. Jesus called for the payment of taxes, not because the government is so good or important, but because our money is not. The day that Christians are known for non-payment of taxes rather than the Gospel of Jesus will be a sad day indeed.

If you think paying taxes is so wrong, would you be willing to preach that in your congregation? Would you be willing to go to jail for it if it were not given as a choice? Are the members of your congregation sinning by paying into Social Security while you are not? If the answer to these questions is no, then you are not a “conscientious objector,” as the IRS exclusion states, and filling out that form would be a lie.

We can debate whether Social Security will be around when we retire all day. Even if you think it will not be, you should still contribute. Jesus knew the Temple wouldn’t be around for long, and he still paid the temple tax (Luke 21:15). Heck, the U.S. government may not even be around when we retire, but that doesn’t mean we shouldn’t pay any taxes. Fear of the future does not excuse us from the obligations of the present.

2.) Lack of Discipline

Although the decision to opt-out is supposed to be a moral one, it has huge financial implications as well. Based upon math alone, you should opt-out, right? Not so fast.

The projections assume that nearly all your tax savings get invested for retirement. You may think you are disciplined, dedicated, and committed for the long-haul. The truth is, you're probably not.

William Thornton, a retired Southern Baptist pastor, wrote an article exploring this topic. In it, he provides a quote from a member of the Mission: Dignity program, which helps retired ministers and spouses (emphasis mine):

In 20 years of assisting retired ministers on low incomes, I have met quite a few who opted out of Social Security at a young age. In spite of good intentions, savings were never set aside and these ministers reached retirement without sufficient resources. Not one of our Mission: Dignity recipients has ever told me, in retrospect, that opting out of Social Security was a good idea.

Put yourself in my shoes (those of a financial planner). Could you recommend that someone leave Social Security behind?

Imagine that you are a rock-climbing instructor. You are teaching students how to climb a 100-foot rock face. A student comes up to you and asks if he can climb without any safety ropes. The student insists that they can scale the wall faster without the hindrance of ropes. You know the skill of the student, but also the difficulty and duration of the climb. Would you permit the student his request? Of course not!

What if they get half-way up the wall and realize that they needed the ropes after all? What if they fall? What if the student isn’t as skilled as you thought?

In the same way, I can't bring myself to recommend opting-out of Social Security.  

3.) Risk

With investing comes risk. When you opt-out of Social Security, you exchange a fixed benefit for a variable one. Taking on investment risk for 35-years is not for the faint of heart. There are several factors that could reduce your retirement benefit if you choose to opt-out:

  • Being too conservatively invested – In the words of Young Jeezy, “Scared money don’t make no money.” An overly conservative portfolio can be a detriment to your long-term return potential. I’ve met too many people with retirement portfolios in cash or money market accounts to trust the average investor.

  • Making poor investment decisions – Although the market has averaged about 10% over the long-term, the average investor comes in at around 5%. Why? Because people make dumb decisions. They sell in fear at market lows and buy in overconfidence at market highs. Most of my job is keeping people from making dumb decisions.

  • Not investing enough – 74% of retirement success is based upon one thing: your savings rate. 1 in 3 Americans has less than $5,000 saved for retirement. Everyone loves to talk about investment risk, but the biggest risk is not saving enough.

  • Not investing soon enough – Compounded interest is no joke. Someone who starts saving at a younger age will have a much easier time saving for retirement than someone who delays. Too many people do not take retirement saving seriously until it’s too late.

In short, when you opt out of Social Security you give up one risk, government instability, for many more.

4.) Potentially Marginal Benefit

In the example above, John and his spouse would have a $3,467 monthly benefit together. Compare this with the $3,827 per month they would generate if they had invested all their tax savings instead. Is it worth the $360 extra income per month for 35 years of added risk and discipline?


In summary, I do not think ministers of the Gospel should opt out of Social Security. The theological and moral arguments against it are sound, the risks are many, and the financial impact can be marginal.


IRS Form 4361 (The Opt-Out Form)

Russel Moore’s Advice

Dave Ramsey’s Advice

Publication 517 (Detailed Info From IRS)

How Medicare Works for Pastors Who Have Opted-Out of Social Security

GE and the Risk of Company Stock

Investing in your company’s stock is nothing out of the ordinary. Many people invest in their employer’s stock without much thought. Being heavily invested in a single stock is risky no matter if you work there or not. There are several reasons why we do this and some pitfalls we should avoid.

Percentage of Retirement Plan Assets Invested in Stock of Employer

Source: Fortune

Familiarity Bias

Familiarity bias is our tendency to choose the things that are familiar, or well-known to us. This bias can be harmless in some areas of life, such as choosing the same restaurant over and over again, taking the same way home from work every day, or dating an ex (okay, this may be dangerous).

This bias is not as innocuous when it comes to your investments. It is one of many behavioral flaws that can hinder your investment decisions. Prudence says that you should diversify your investments. Familiarity bias leads people to do the opposite. They find safety in holding companies that they know well. This familiarity and false sense of security blinds them to the benefits of diversification. They think, “why would I hold 400 companies I don’t know when I can hold onto a few that I do?”

Familiarity bias can be especially strong when you work at the company that you’re invested in. The temptation only compounds the longer you work there. From the inside, you may think the company will never fail. I don't care how well you resonate with the core values, how good the product is, or how competent the leadership is, no company is immune to failure.

A study conducted by the Kaufman Foundation and Inc. Magazine looked at the 5,000 fastest growing companies in the US over a 5 to 8 year period. What they found surprised them: About two-thirds of these companies had either gone out of business, diminished in size, or sold at a reduced value. This risk isn't limited to small companies. If history has taught us anything, it’s that no company is too big to fail. Did you know that the average life expectancy of a Fortune 500 company has fallen from 75 years to about 15?

Everyone Else Is Doing It

When investing, we don’t only fight internal pressures, like familiarity bias, we fight external pressures too. I have spoken with many of my clients that have stock options through their employers. Most have mentioned feeling pressure to be heavily invested in their company’s equity. They fear that if they don't, they will be overlooked for promotions and ostracized by leadership. While some of this is only perceived, a lot of it is very real. I have some clients that were flat out told that this was true.

This is peer pressure at its worst. Employees should not be punished for being more risk averse than others. An employer should have no bearing on what an employee's portfolio looks like.

I understand that employers want employees to have a vested interest, but is it worth staking their livelihoods on it?

Danger, Will Robinson

You don’t have to go straight to Enron comparisons to see the dangers of being heavily invested in a company’s stock. A company doesn't have to go belly up to ruin someone's retirement. Individual companies go through regular periods of significant volatility. Just ask Gary Zabroski. Gary worked for GE for over 40 years and is now looking for a new job when he thought he would be retiring. He, and others like him, have seen the GE stock price go from $29.80 on January 1, 2017 to $11.53 as of September 27, 2018 (that’s over a 60% drop).


A company stock plan can be a way to increase employee engagement and create a vested interest in the company’s success, but internal and external pressures can lead people to making very unwise investment choices. Most people should not have more than 5 or 10% of their portfolio invested in the stock of their employer. The company that made you could just as easily be the company that breaks you.



Further Reading

How About Now? - The Irrelevant Investor

What GE’s Board Could Have Done Differently - Harvard Business Review

Having Too Much Employer Stock in Your 401(k) Is Dangerous. Just Look at GE - Fortune

When Workers are Owners - The Economist


Rent or Buy? One Helpful Metric

The decision on whether to rent or buy a home is a difficult one. There are many factors at play, and not all are financial. When my wife and I bought our home, we had to think hard about our motives. Was it a good financial decision? Were we blinded by our emotions?

Emotions can lead you to make some of the worst financial decisions ever. That's why I love methodologies that set emotions aside and make you take an objective approach. The metric below is one of those strategiess that can help you make an informed decision.

Before I continue, let me deflate some of you right now. I meet with a lot of people who are not ready to buy a home (or second, third, or fourth home) but think they are. Don't even think about buying a home if:

  • You don’t have an emergency fund saved up. This should be at least 6 months of household expenses.
  • You don’t have money for a down payment. That's on top of your emergency fund folks. 20% is ideal, but there are certain scenarios where less than that is acceptable.
  • You can’t afford to take on more debt (See my article on How Much Debt is Too Much?)
  • You don’t plan on living there for at least 5 years.
  • Your income is unreliable. It’s one thing to get kicked out of a rental if you can’t pay, it’s another to have your house foreclosed on.
  • Your primary motivation is one of the following:

“A home is a good investment.” It’s not.

“All my friends are doing it.” Your friends’ situations are different from your own. Plus, you could have dumb friends.

“We need one to start our family.” Your baby won’t know whether you own your place or if you’re leasing it. I promise.

Price-to-Rent Ratio

What Is It?

Assuming none of the above apply to you, a great tool to use in your decision is the price-to-rent (P/R) ratio. This ratio is often used in economics to look at trends in the housing market. It can also be useful on a personal level to determine how expensive it is to buy versus rent in your area. It’s a simple three-step calculation. All the data you need can be found on Zillow Data.

  1. Look up the median home sale price for a given area.
  2. Look up the median rental cost for the same area. For the purposes of this calculation, you’ll need an annual number, so multiply that monthly cost by 12.
  3. Calculate:

How to Use It

So, how do you interpret this number? A high ratio suggests that the cost of ownership will likely be higher than the cost to rent, meaning that it would be better to rent than to buy. The converse is true for a low P/R ratio. A good rule of thumb for interpreting the resulting ratio is:

  • If the ratio is under 13 – it’s typically much better to buy than to rent
  • If the ratio is between 13 and 16 – the decision could go either way
  • If the ratio is above 16 – it’s typically better to rent than to buy

The numbers above can be a helpful guideline, but the situation may differ depending on the area in which you look.

Right before the housing bubble burst in 2008, the average price-to-rent ratio was 24.5! This means that the vast majority of people should have been renting, but most were buying. In hindsight, this was one of many indicators that should have been a warning sign.


Here’s an example calculation for the areas around where I live (using the March 31, 2018 numbers from Zillow):


This would tell you that LaGrange would be a good place to look for buying opportunities. Conversely, Prospect is an area that renting would likely be better than buying. For Eastern Louisville and Crestwood, the decision would be a bit of a toss-up.

The price-to-rent ratio is also a great tool to use when contemplating a move to a new city. The Get Rich Slowly blog has a great overview of these ratios among different US cities. When you move to a new city, you have the disadvantage of not knowing the area well. The P/R ratio gives you a leg up in your search. You can see which areas are overpriced, as well as areas with good buying opportunities. Here is the graphic from his blog on the ratios for many US cities:

Source:  Get Rich Slowly

Regardless of whether you're staying in the same area or contemplating a move to a new one, the price-to-rent ratio is a helpful tool to use. The decision to buy or rent is a difficult and complex decision and it helps to have as many tools as possible at your disposal. The price-to-rent ratio is one tool of many that you can use to aid your decision.

Preparing For A Market Decline

I am not one to predict a stock market crash.

If market history has taught us anything, it's that even so-called “experts” are notoriously poor at predictions. I don’t know when the market will go down, but I know it will at some point.

History of Corrections and Bull Markets

Industries love their jargon, and finance is no exception. There are 3 common terms that refer to declining markets: a correction, a bear market, and a crash.

A correction is a market decline of 10% or more. A bear market is a market decline of at least 20%. A crash is a general term that refers to a sharp market decline, usually over a short period of time.

Capital Research and Management examined all the corrections and bear markets since 1900. They studied market declines and how often, on average, they occur. Their findings are as follows:

  • 5% declines happened about 3 times a year
  • 10% declines happened about once per year
  • 15% declines happened about once every 2 years
  • 20% declines happened about once every 3.5 years
Source:  Wealthfront

Source: Wealthfront

It can be hard to believe that these types of declines are so common. It is easy to forget when we're in the middle of a market that has been increasing since 2009.

We know that declines have happened and will happen in the future, we just don't know when.

So, how can you prepare?

What Can You Do?

1. Don't Predict

Predictions are tricky things. No one has a magic formula to determine the future movement of the markets. Economists and investment managers alike have pitiful records trying to foresee downturns. Economist Paul Samuelson once said, “The stock market has called nine of the last five recessions.”

If the pros can’t do it, you shouldn’t either.

2. Expect It

As you can see above, stock market declines are a regular part of investing. So, it should not come as a surprise when the market inevitably drops (again… and again).

3. Stay the Course

People love to gloat about how they got out of the market at the right time. But you hardly ever hear them brag about how they got back in at the right time. You can't just be right once, you have to be right twice- on the way out and on the way in. Both are equally unlikely.

Markets fall, but they have always recovered. Trying to time the market will almost always fail. People (professionals too) who try end up getting out too late, and back in after most of the recovery. They hurt themselves on both ends, rather than staying the course.

A recent DALBAR study found that investors who consistently exit the markets when they drop cost themselves, on average, 4% a year!

4. Check Your Allocation

Your best protection from a market downturn is a well-diversified and allocated portfolio.

A well-diversified portfolio consists of many types of holdings, companies, and industries. Just because you have a lot of holdings, doesn't mean that you're diversified. Sometimes a single fund can be more diversified than 10. 

A well-allocated portfolio is one that reflects your risk tolerance, time horizon, and goals. The closer you are to pulling money from your investments, the more conservative they should be.

These two things won't protect you from losing money in the market, but they will help you mitigate that risk.

The last thing you want is to have a short time horizon and poor diversification and allocation when the market drops.

5. Rebalance

One of the most important things that you can do is to rebalance your investments regularly. In a well-diversified portfolio, different asset classes produce different returns. This means that your allocation changes over time. Periodically, you need to bring your investments back to their original allocations. This process ensures that you are not taking on more risk than you should be. It also forces you to sell things that are high in the portfolio and buy things that are low- a core discipline of investing.

There has been a lot of debate and study over how often you should rebalance. I’ll spare you the extensive research and let you in on the consensus:

The average investor should monitor their portfolio at least annually and rebalance any positions that exceed 5% more or less than the original allocation.


My Reaction to the Kentucky Pension Crisis

On Monday night, my wife and I watched Kentucky governor Matt Bevin conduct a Q&A on the state's pension crisis. I know what you're thinking, "what a perfect date night!" Before you judge, my wife is a Kentucky public school teacher and I'm a financial planner, so our interests were both piqued. 

Before I get into my thoughts, a quick background on the pension crisis:

Pension Crisis Background

Who does this impact?

There are eight different pension plans in question, covering about 500,000 people in total (Courier Journal):

  • Kentucky Employees Retirement Systems (KERS)- This consists of two plans:
    • Hazardous
    • Non Hazardous
  • County Employees Retirement Systems (CERS)- This also consists of:
    • Hazardous
    • Non-Hazardous
  • State Police Retirement System (SPRS)- This system and the two above are administered under Kentucky Retirement Systems (KRS).
  • Teachers Retirement System (TRS)
  • Kentucky Judicial Form Retirement System (KJFRS)- This system covers:
    • Judges
    • Legislators

How bad is it?

Standard & Poor's, the world's leading credit rating agency, ranked KY as the worst funded pension system in the United States.  The current pension debt is at $33 billion, but could be as high as $64 billion according to the Bevin administration. Kentucky's pension plans will run out of money if nothing is done to help fix the ailing system. Some are even projected to fail by 2022 (via PFM Consulting Group).

How did it get this bad?

There are three primary reasons for the current state of KY's pensions:

  1. The plans have not been adequately funded. This didn't happen overnight. Over the course of the past two decades, state legislators have failed to sufficiently fund the pension systems.
  2. Poor investment decisions and assumptions. The government actuaries overestimated the future return on their investments. As I look over the list of investments in the plan (you can see a list of them here), I see that many of them are very expensive. Some of the managers on the investments are charging 2 to 2.5% with added "performance" fees on top! With the emergence of low-cost mutual funds and ETFs, there is no reason to be in such expensive funds.
  3. An aging population base. KY retirees are living longer and there are less new hires to replace them than expected. This is leading to fewer people paying into the system to support older retirees. We're seeing a similar problem with Social Security.

Where Do We Go From Here?

The government has three main courses of action: (1) Cut spending, (2) Increase taxes, or (3) Adjust benefits. Most of the backlash has come from the last one.

The government contracted Public Financial Management (PFM) Consulting Group to recommend potential solutions for adjusting benefits. They came up with the following suggestions(see the full report here). I'll give the recommendation from PFM, followed by my thoughts on each- for what they're worth:

  1. Changes to Actuarial Assumptions
    • First, they recommend a more aggressive payment structure. Up till now, we have made payments that allow the debt balance to continue to grow. Think of it like paying only the minimum due on your credit card- you're good for this month, but your debt balance grows.
    • Second, they recommend adopting more realistic investment return assumptions going forward.
    • Both of these are no-brainers and should have been implemented a long time ago. PFM projected the 2019 impact of these two changes alone at over $1.8 billion.
  2. Benefit Changes
    • PFM recommends that all non-hazardous service (including teachers, judges, and legislators) pension systems use a 401(k) plan instead of a pension. Hazardous service plans (including State Police) would keep their pensions.
    • New non-hazardous service hires would go straight into a new 401(k) plan. This would also make teachers in the 401(k) plan eligible for Social Security benefits.
    • Current plan participants would have their current pension frozen and offered a buyout option. Teachers, however, would continue their pension plan if they are already enrolled.
    • They recommend increasing the retirement age for all pension participants not yet retired. This would be 60 for hazardous members and 65 for non-hazardous. They also recommend suspending Cost of Living Adjustments (COLAs) for retirees until the plan is 90% funded.
    • These benefit changes are the most controversial of their recommendations. The addition of the 401(k) is "on par" with the current times as pension plans have been on a steady decline over the past 25 years. The increase of the normal retirement age will be quite unpopular. No one likes to be told that they have to work longer, but the current ages are unsustainable. With people living longer and longer, some current early-retirees spend more time in retirement than they did working! No system would be able to sustain that indefinitely. These major overhauls should be a last resort, but some may be inevitable.
  3. Funding Changes
    • They recommend that the required plan contributions be based on a given formula. This amount should also be reflected in the state budget. This is to ensure that future contributions are not up to subjective changes.
    • They also mention shifting some costs to local school boards, such as Social Security.
    • I agree with the top two, but it's hard to know where I stand on the third one without knowing the true impact on local school boards.
  4. Investment Practices and Approach
    • PFM recommends consolidation of the KRS and the TRS plan assets (everyone except the legislators and judges). They used the Indiana Public Retirement System as an example. With this consolidation, PFM claims they could save up to $5 million per year. They could save on investment costs, staffing overhead, and have greater coordination among plans.
    • On paper, this makes sense. Not sure why they excluded the legislators and judges here though. This is a very general recommendation and would be a giant change with many minute details to account for. But, if they could make it happen without undue burden, it could be a good thing.


In summary, we have a big problem in Kentucky. The current path we are on is not sustainable and changes have to be made. Participants, legislators, and employers must communicate to come to a satisfactory resolution.

To participants- Educate yourselves! Pour over the reports (linked below). Come up with your own informed opinions and let your legislators know how you feel!



PFM Pension Crisis Recommendations

ALL PFM Consulting Reports

Latest News and Updates

How to Combat Lifestyle Inflation

In a previous post, I introduced a concept called lifestyle inflation. Lifestyle inflation is the process of increasing spending as your income goes up.

This process is problematic because it keeps you from making progress toward your goals. If you upgrade your lifestyle every time your income goes up, you will end up with many nice things, but will be far from the goals most important to you.

So, how can you arm yourself against this destructive tendency? Here are five methods:

5 Ways to Combat Lifestyle Inflation

1. Know Your Priorities

The siren song of lifestyle inflation is that more/better stuff = happiness. Does money buy happiness? 

The answer is yes, but only to an extent.

Economist Angus Deaton and psychologist Daniel Kahneman tried to solve this question. Over 450,000 people were surveyed on their well-being (happiness). The survey included questions such as, "How satisfied are you with your life as a whole these days?" Next, they compared these answers with the respondents' incomes to determine if any correlation existed.

Kahneman and Deaton found that a rise in income did indeed bring along with it a rise in well-being, but only up to a household income of $75,000. Happiness essentially flat-lined above that point. This indicated that income above that point no longer brought an increase in happiness.

I think that $75,000 is an arbitrary number, especially across different regions of the country and the world. The key point to take from the study is this:

Your peak happiness lies at the point where the needs of yourself and your loved ones are comfortably met.

Anything more is a welcome addition, but does not contribute one iota to your well-being.

2. Know Your Baseline

There isn't a clearer analogy for lifestyle inflation than the cell phone. Look at the cell phone you have now and compare it with the first one you ever owned. Each year brings new innovations and ideas to the mobile phone market that makes older models obsolete. This gradual change has made us all expect certain features as "standard." If you don't believe me, try going out and finding a phone without internet access nowadays.

Lifestyle inflation does the same thing in our lives. Things that used to be luxuries are now essentials.


There is a psychological term that helps describe the above process, it's called hedonic adaptation. Hedonic adaptation begins with the acquisition of new things and experiences. When we first acquire something new, we experience initial excitement and happiness. But, as time progresses, these new things become more normal and your happiness reverts to your original baseline.

You need to know how much is enough in your life and be able to recognize the rest as excess. The better you can make these distinctions, the sooner you will be able to reach the goals that matter to you.

3. Stop Comparing

This one digs down to the root of the why behind lifestyle inflation. When you compare yourself to others, you will always be able to find someone who has something that you want. Comparison and jealousy are toxic to a happy life. Comparison leads us to buy things we don't need and be in a hurry to afford a life that isn't ours.

Comparison is the thief of joy.
— Theodore Roosevelt

4. Automate Savings

What's your first impulse when you get that coveted raise?

For most, they picture that item or trip that has always been on the fringe of their reach. They get that nicer car, take that trip to Disney, upgrade their home, or just plain splurge. They may even justify it in their minds, saying "I deserve this." or "I can afford this now." 

Now, there's nothing wrong with all those things, but they often get in the way of more important priorities.

Each raise should be automatically saved until you can figure out how to best use it. You may choose to keep it in savings, finally allowing you to have that emergency fund. You may choose to pay off that high-interest rate debt you have. You may use it to increase your retirement savings, or a myriad of other goals. 

In the financial footrace to reach your goals, you get there a lot faster if you're running. When you thoughtlessly spend each rise in income, you ensure that you'll always be walking, nay, limping, towards your goals. 

5. Gratitude

Do you want a cure for your discontentment?

The answer is thankfulness. Your jealousy and covetousness fade away when you spend time being thankful for what you have. When you fix your vision on what you don't have, you perpetually rob yourself of joy, as there will always be more to be had.

I guarantee you'll find it easier to save that pay raise when you're consistently grateful for the things, people, and circumstances in your life. 

I'll conclude with a quote from one of the most inspirational people of all time, Dietrich Bonhoeffer:

“It is only with gratitude that life becomes rich” 

Lifestyle Inflation: A Tale of Two Joes

What Is It?

Lifestyle inflation is the process of increasing spending as income goes up.

The first experience most people have with lifestyle inflation is in the transition from college into their first job. In college, someone will live with several other people to bring the cost of renting down. They will opt for the generic brands of cereals and foods over name brands to keep their grocery bill down (or eat Ramen noodles for every meal). They will share rides back and forth to keep gas costs low. 

Then they get that first job. They make a meager income, but compared to their college years, it's a fortune. Suddenly living with other people seems unacceptable. Generic foods have lost their luster, and Ramen has become the food of peasants. Their old car begins to look dingy and run down. 

It is easy to see this concept play out in this stage of a person's life, but it doesn't stop there. Lifestyle inflation lasts a lifetime.

A Tale of Two Joes

To help illustrate lifestyle inflation, let me introduce two people, Average Joe (AJ) and Extraordinary Joe (EJ). They are identical in their lifetime income, but vary in how they spend it. Check out Average Joe in the fancy graph below:


AJ's income goes up at a nice and steady pace throughout his lifetime. Each raise brings an upgraded lifestyle into view. No matter how much income he brings in, it never gets easier to make ends meet. Notice how AJ's "Needs" are in quotation marks. That's because AJ does not have an idea of what he truly needs.

Let's check out Extraordinary Joe (EJ):


EJ has the same exact income and raises throughout his lifetime as AJ. However, EJ takes each raise he gets and automatically saves it until he can figure out how to best use it. Sometimes he uses it to pay off debt. Sometimes he makes more retirement contributions. And sometimes he spends it. Notice that his needs increase throughout his lifetime, but they are not directly correlated with his income, like AJ's was. 

The Take-Away

The vast majority of people are like Average Joe (hence the name). Each raise is accompanied by a corresponding increase in lifestyle. As more income floods in, so do more things, or the same things upgraded. They can never seem to save as much as they need to and financial independence is always a mirage on the horizon. People living like AJ are slaves to ever-increasing want. 

On the other hand, an increase in lifestyle is not always a bad thing. Isn't that everyone's goal in making more income? To produce the type of lifestyle they want? Of course it is. The key point is that, when unchecked, a person's spending will always keep pace with their income. People need to be mindful of what their needs, goals, and priorities are. Everything else is excess.



Investopedia- Lifestyle Inflation

What To Do With an Inherited IRA

What is it?

An Inherited IRA, also called a Beneficiary IRA, is simply a retirement account that has been passed along from a deceased individual to another person.

What can you do with it?

In regard to contributions, you cannot make any additional contributions to the account. In regard to withdrawals, you have several options. If you are the spouse of the decedent, you can just assume the IRA as your own, but if you are a non-spouse beneficiary, you have several options.

You Have 4 Options:

  1. Open an Inherited IRA: This is often called a Stretch IRA. With this option, you can keep it in a retirement account and continue to defer paying taxes on the account for your lifetime. You will, however, be subject to annual Required Minimum Distributions (RMDs). The required distribution amount will be a factor of your life expectancy. You can calculate this required distribution here.
  2. 5-Year Option: With this option, you can elect to receive the entirety of the account over a 5-year period. During this 5-year window, you can withdraw the funds however you like, without penalty, as long as the account is empty by the end of the period. Each distribution is considered taxable income.
  3. Lump-Sum Option: You can elect to receive the entirety of the account at once. The whole distribution will be counted as taxable income in the year you receive it. With this option you may end up with a sizable tax bill, plus you will be forgoing the benefit of tax-deferred investing.
  4. Disclaim It: You actually have the right to refuse to accept an inheritance. When you do this, your portion of the inheritance will be distributed among the other primary or contingent beneficiaries. You will have zero say over what happens to the funds with this route. You generally have 9 months from the original owner's date of death to make this decision. It is important to consult with your attorney if you decide to go this route to ensure that you are meeting all legal requirements.

Which Option is Best?

There are many factors to consider when making your decision and some options may make sense in some situations, but not in others. Generally speaking, for a young individual, keeping the money in an IRA can be a powerful benefit over the long-term. Keep in mind this hypothetical example from Charles Schwab:

When six-year-old Tara inherited a $30,000 IRA from her grandfather, her parents decided to open an Inherited IRA with the money. By doing so, and by limiting Tara’s annual withdrawals (RMDs) to the minimum amount required, they ensured that the majority of her legacy had the potential to grow tax-deferred for decades. If the account earns 8% annually and Tara withdraws the required minimum amount over her 82-year life expectancy for 76 years, her grandfather’s initial $30,000 legacy could turn into a cumulative inheritance of $2.1 million.

How Should You Invest It?

When making any investment, you always have to keep in mind your time horizon and your tolerance for risk. Your time horizon lets you know how much risk you can afford to take on (your risk capacity), and your risk tolerance is completely unique to you. 

There is a caveat with inherited accounts that change things a little bit: the RMDs. Depending on your age, the annual required distributions can start getting quite large. When you're young they're relatively small in relation to the value of the account, but as you approach your own retirement, they grow. The reason this is an important factor to consider is because with other tax-deferred retirement accounts, you don't have to worry about taking money out until you retire or age 70½, but with an inherited account, you don't have a choice. 

You should structure your investments in a way that allows you to account for you annual distributions.


Inherited retirement accounts can be a tricky mix of tax, estate and investment planning and your decision should not be taken lightly. Before you act, you should carefully consider your options and make an informed decision.



How Reliant Is Each State on Foreign Trade?

Foreign trade is a major topic of discussion in today's political climate. Regardless of where you stand on the topic, you can't deny that it is something that has to be approached with careful consideration.

Just how much does foreign trade have an impact here in the U.S.? It's one thing to look at the the nation as a whole, but sometimes looking at a state-level view of trade can lend interesting insights as to what areas of the country rely most heavily on international imports and exports.

The two graphs below show two things: 1.) Just how large, in a global sense, each state's GDP is, 2.) How much each state depends on foreign trade.

This first graphic shows each U.S. state renamed for countries with similar GDP's.

Courtesy of: Visual Capitalist

This illustration really puts the economic power of the U.S. into perspective. Large states such as Texas and California produce similar economic outputs as countries such as Canada and France, and even smaller states produce economic outputs with global significance.

The second illustration below shows each state's GDP, as well as what percentage of their GDP is from foreign trade. This graphic is a fascinating view into which states rely heavily on foreign trade, and those that do not. Where does your state fall?

    Courtesy of: How Much

    The Five States Most Reliant on Foreign Trade, by % of GDP

    1. Michigan – 38%
    2. Louisiana – 35.1%
    3. South Carolina – 34.8%
    4. Tennessee – 34.7%
    5. Kentucky – 34.3%

    The Five Sates Least Reliant on Foreign Trade, by % of GDP

    1. South Dakota – 5.3%
    2. Wyoming – 5.8%
    3. New Mexico – 6.5%
    4. Colorado – 6.8%
    5. Hawaii – 7.0%

    It can be observed that states with larger population hubs and those with headquarters of large, international corporations rely more so on international trade, while those with smaller population bases rely on it to a much lesser extent. Any changes to foreign trade policy could have a huge impact on the U.S. economy, either positive, or negative. How does the information above impact your views on this tricky political issue?

    Ten Principles of Personal Finance

    The following list is adapted from the ten principles of personal finance by Arthur J. Keown in his book, Personal Finance, Turning Money Into Wealth.

    1. Knowledge is Power

    Finding advice is not hard. Finding good advice can be. The world is full of articles, videos, books, self-proclaimed gurus, financial advisers, consultants, representatives, etc. all trying to give you advice on what to do with your money. Every single one of these resources has the potential to be filled with bias, misleading or false information, or just flat out bad advice. So how can you protect yourself from all of this? It all starts with knowledge.

    It's unreasonable to expect yourself to be an expert on every area of personal finance, but that doesn't mean that you shouldn't make an effort to be informed. Learning the basics of personal finance will help you to make better decisions and:

    • Identify information that applies to you and to ignore information that doesn't. Sometimes the information and advice aren't bad, they just don't apply to you specifically.
    • Allow you to partner with professionals in planning for your future, rather than leaving it up to them to do it for you. 
    • Give you an understanding of the urgency and importance of planning for your future.
    • Protect you from incompetent and/or biased financial professionals and information. When you arm yourself with knowledge, you can better identify people and information that may not have your best interest at heart.

    2. Nothing Happens Without a Plan

    People are creatures of defaults. We tend to take the easy path until we are motivated enough, either by fear or desire, to change. For many of us, our default lifestyle would be quite passive, lacking the discipline to exercise and eat healthily. It is only when we have cringed enough looking in the mirror, been motivated by someone else, or seen the poor effects of an unhealthy lifestyle on ourselves or someone we know, that we are motivated to change.

    The same logic can be applied to financial planning. No one wakes up one morning and says to themselves, "You know what I want to do today? Delve into the ball of insecurity that is my financial situation and try to make that into an actionable plan for my future goals." Nope. No one. Why? Because it's not our default! Our default is to ignore it because that's easier. We put it out of mind until we experience enough incentive to get us moving, whether positive or negative. Don't let idleness be your default. 

    3. The Time Value of Money

    When idleness is your default for long enough you start to miss out on this next important principle, the time value of money.

    Time is always working for or against your money. Its is working for you in your investments and against you in your debts. Believe it or not, even that dollar wedged under your mattress is slowly losing value. Don't believe me? Look at the Consumer Price Index over the past 70 years. Everything just keeps getting more expensive, while your mighty mattress dollar gets less and less valuable.

    However, time isn't always a drag, it can be exciting as well. For example, if you invested $200 per month for 40 years, growing at a compounded rate of 10% each year, you would have over $1.25 million dollars at the end of that period. You would have only invested $96,000 over that 40 years, the rest of that $1.25 million dollars is compounded interest plus a whole lot of time. 

    Sounds great, right? So why doesn't everyone do that? This leads to our next principle, risk vs. return.

    4. Risk vs. Return

    There aren't many areas in which the phrase, "nothing ventured, nothing gained" is more applicable than in finance. There is a general relationship between the amount of risk taken and the amount of return on your investment that you will expect. No one in their right mind would take on more risk if there were not more to be gained. 

    What do we mean when we say risk? There are many types of investment risk. Below are the two main types of investment risk:

    • Business Risk- This can also be referred to as company, industry-specific, or unsystematic risk. It is merely the risk that a specific company, or even the company's industry as a whole, will do poorly or fail. This is one type of risk that can be reduced through diversification.
    • Market Risk- This is also referred to as systematic risk. It is the risk that is inherent to the market and all the securities in it as a whole. This is one type of risk that cannot be mitigated by diversification. No matter how diversified you are, you cannot completely eliminate the risk associated with investing.

    There are many other types of risk to consider, such as credit, inflation, liquidity, social, currency, legislative, etc. In short, with investing comes risk, and every person is different in regard to their tolerance of risk.

    5. Taxes Matter

    You can't just evaluate an investment purely in terms of expected return; you have to keep taxes in mind. A rule of thumb is that, sooner or later, Uncle Sam always gets paid. You should always be mindful of the effect taxes will have on your investment, both now and in the future. It may very well change how or what you invest in.

    6. Life Happens - The Importance of Liquidity

    If financial planning guarantees a single thing, it's that you will be wrong. Even the most meticulously created financial plan will be based upon assumptions that will change given enough time. Does this mean that you shouldn't even try to plan for the future? Of course not! However, you should not plan for your long and intermediate-term goals at the expense of your short-term stability.

    Enter the emergency fund. You should always have some of your money available at a moment's notice, a term we refer to as liquidity. A general rule of thumb is that you should have 3 to 6 months in liquid funds available to meet emergencies or unexpected needs, such as a job loss, medical need, car troubles, home repair, etc.

    7. The Power of Budgeting

    "A penny saved is a penny got" (yes, this is the actual quote from Ben Franklin).

    This one is simple. Know what you make, and know what you spend. Can you name a Fortune 500 company that isn't aware of their cash inflows and outflows? Set goals for yourself and cultivate the discipline to systematically work towards them. 

    8. Protect Yourself and Others

    Insurance. The thing no one is excited to buy, but everyone has. The worst time to worry about your insurance coverage is after a tragedy has occurred. Do yourself and loved ones a favor and evaluate your health, life, disability, property & casualty, and long-term care insurance needs and put a plan in place sooner rather than later. Especially do your homework before someone comes knocking on your door to try to sell you some. Insurance is one of the most necessary aspects of your financial picture, but it is also one of the most abused. This goes back to principle #1: Arm yourself with knowledge and make an educated decision.

    9. You Are Your Worst Enemy

    I just finished a book called, "The Little Book of Behavioral Investing: How not to Be your Own Worst Enemy" by James Monier. If you're interested in exploring this concept more fully, I highly recommend it. The premise of the book is simple: overcoming human instinct and emotion is key to becoming a better investor. The biggest risk to your future financial success is not inflation, pushy salesmen, poor 401(k) investing options, nor taxes. Your biggest risk is yourself. 

    According to a study done by Dalbar, from 1983 to 2013, the market, as measured by the S&P 500 averaged 11.11% per year, but the average individual investor earned only 3.69%. 

    Don't fall victim to overconfidence, fear, media noise, so-called "gurus," emotional decisions, nor the goals of other people.

    10. Just Do It!

    The most difficult step in the entire planning process is implementation. The actual act of getting started and maintaining the course is the biggest obstacle for most. As a perfectionist at heart, I can struggle with this principle in many areas of my life. If I feel that everything is not perfect before I begin, I tend to not even attempt the endeavor. I once spent an entire day trying to formulate the "perfect workout routine," all the while sitting on my couch. Planning is a vital step, but don't get stuck there forever. Eventually, the rubber has to meet the road.



    Keown, A. J. (2010). Personal finance: turning money into wealth. Boston: Pearson.

    40 Stock Market Terms Every Beginner Should Know

    While I don't think that every investor needs to know all of these terms in order to be successful, the following terms are a great foundation to start with. The graphic below, courtesy of Visual Capitalist, is a really neat visual of some key investing terminology.

    Courtesy of: Visual Capitalist