Retirement Financing So Far

It’s December and I decided to do a post on what it’s like to live on a nest egg.  My situation is I’m fully retired no side gigs age 67 (next month).  I should have enough money to pay for my retirement and my wife’s to age 100 with no interest beyond inflation on my investments.  I do budget, but I budget in reverse.  I budgeted a yearly amount that is 20% more than I live on, so in case I need more money there is an automatic built in excess cushion in my budget.  If I don’t spend up to that excess it just counts as a bias against any SORR risk I might incur.  In other words if I budget 10k/mo and i spend about 8k/mo so my SWR (and SORR risk) varies downward from safe to safer not vis versa.   So I’m always running “to budget” and not “over budget”.   It means I never have to sweat it when my wife or kids “need” something.  My answer is essentially always yes.

I started winding down my risk profile 3 years ago to a lower risk.  It is recommended in early retirement up through 5 years into retirement (10 total years peri-retirement)  that risk be cut to a 50/50 allocation.  I’m a little over that around 56/44 but close enough.   In the past 3 years I added 5% return/yr to my portfolio, 4.3%/yr in the past 2 years, and -5.8% in the past year.   Part of my risk “wind down” was to take some post tax brokerage stock and turn it into cash (risk free asset in the short term) to live on while I Roth convert at maximum efficiency, so my actual risk based portfolio is closed to SORR since I’m not withdrawing from it right now but withdrawing from the cash pile.  I actually sold at the market high but that was parsimonious and not by design except I decided it was a good time.   

This means I don’t need to sell anything or do anything to my portfolio to live for the next 4-5 years.  I have enough cash to pay my bills and taxes and live my life.  A recession can come or go it won’t matter to my cash flow.   As I spend down my cash my AA will once again automatically rise, until RMD when I will take SS and RMD a small remaining bond based TIRA of about 600K which will keep my income in the 12% tax bracket for a long time.  So I accomplish SORR protection in early retirement and portfolio preservation by risk reduction in early retirement.  When I RMD and take SS, I will then feel free to bring my portfolio risk back up because I will be 5 years in, age 71 and tax streamlined from the Roth conversion.  I will convert a little over 1M to the Roth at a net tax bill of 15 cents on the dollar.  The Roth will grow as a retirement self insurance account for my wife and myself in case of extraordinary expense like cancer care or assisted living or for a legacy for my kids.   My analysis was 5 years of cash is probably excessive but if there is a recession it will prove fortuitous since I sold at market peak.  Having never retired before I wanted my bases covered and had only my estimates of what to expect.   

Thus far this plan has unfolded perfectly.  Certainly a 6% drop this year is unwelcome since I’m as greedy as the next guy, but not at all critical to my or my wife’s well being.  This week I further de-risked my portfolio jettisoning some alternatives and real estate and turning that into  bonds and low beta to reduce my AA  a little closer to 50/50.  Those assets were not performing and especially real estate carries a higher risk than the US market so provides a kind of negative diversity in a down market.   If the market keeps going down, I will start to sell global and emerging markets since they likewise carry more relative risk than the US market.  So my risk management strategy is to sell high risk and turn it into low risk, but stay invested.  I also bought some gold miners with some of that money since gold and gold miners tend to be zero to negatively correlated to stocks in a crash.  Gold equivalents are cheap to buy now, so I buy low, to sell high when the market is in the tank.   I’m still fully invested but my portfolio has somewhat less risk this week than last week and I’m more defended against the bad, which I find desirable in these conditions.  I don’t need a home run, base hits will do just fine.  What I especially don’t need is to strike out.   I’m learning that risk management is the key to portfolio longevity in retirement.  I see some posts about “standing tall” and “taking your beating like a man”  when it comes to portfolio management.   Selling out is stupid but de-risking at least to me makes sense since I’m not replacing my lost dough and poor risk decisions with hard work anymore.  I’m done with work.  I’m retired.

  • Have a retirement plan.  Deflation is nothing like accumulation.
  • Understand your risk and how to vary the risk and the benefit/consequence of that
  • Understand the cash flow as time goes on.  SS RMD and when they kick in etc makes a big difference in the plan
  • Have a budget and spend under budget
  • Have a big enough pile to start
  • Plan for your life till death and then for your wife till her death it makes a difference
  • Understand your taxes including the difference between married jointly and single, the government is coming for them.  
  • There are no easy magic formulas or narrative for actual retirement.  You get to be the author.
  • Retirement self insurance is quite useful since you both are going to die of “something”, and that “something” may prove expensive or even 2x expensive.  Dying is a known unknown but planning, even moderate planning gives some control.
  • Living real life is not living a narrative.  Happiness and peace depends upon living in reality.

8 Replies to “Retirement Financing So Far”

  1. This is the aspect of retirement planning that hardly ever gets talked about because most of the bloggers are on the path to retirement but not on the other side.

    Decumulation phase I think is far harder than the accumulation phase as you can weather mistakes with the latter due to a high income. Decumulation mistakes can set you up awfully as other revenue is likely limited as we age.

    Great luck with the selling at a market high. You pretty much have a great plan ahead and hope more people copy it.

    1. Tnx for the kind remarks. Hopefully this will inform some people, though my FI is not FIRE. There is more risk in FIRE but similar principles apply. I got out based on my actual need to implement my Roth plan not so much a need to time the market. If the market had been down I would have chosen a different schedule of disbursement, probably 2 and 2 instead of 5 at once but the market was up a lot so no point in getting too cute and baffling myself with BS If you have 90% the extra 10%. 9%, or 8%, is a diminishing return. The same is true with taking some risk off the table switching from a 7.64/9.27 “60/40” portfolio to a 6.66/6.39 “40/60” portfolio for a couple years makes virtually no difference in the average over-funded end game. But cutting your risk 32% for a few years can make a difference in survival at the margin. The bet is if the market goes up and you take some risk off you loose a little gain, basically you get 88% of the gain you would have gotten if you didn’t make change, but by changing your risk goes down 32% so if the market does crap you go down less and come out of the pocket sooner. In the mean time you can cost average some of that bond money you stashed back into the stocks (changing the risk back to 60/40) for an even better return on the way back up. You can mess yourself up by trading too much but you can study all the past recession and get some idea of time-frame. My next trade to take cash out of my portfolio won’t be for 5 years so that’s not trading too much IMHO. I won’t take another “5 years” out all at once but 2-3 year aliquots seems rational. If you look at 3 years in my above scenario I was up 5%/yr, 2 years 4.3%/yr, and 1 year -6%

  2. Yes accumulation is a cake walk. Just fill’er up. But once you round your 50’, it is wise to start the wind down.

    I have always planned 20 years ahead. Much like yourself.

    I recently renewed my family trust and made an estate freeze in my medical corporation.

    I find that I am using many different avenues now. One of the largest expenses will be taxes thus I am making sure to take care of some of it now.

    I enjoy reading your detailed breakdowns since I think about many of the same things.

    1. Simple! Ya right! Taxes is #1 for me now then insurance. After Roth conversion taxes will be quite low and it will be insurance as the biggest line item. 20 years of pre plan and 30 years of post plan corrected execution is about right 🙂 After 50 years of discipline you can kick back on the beach with your remaining 2 weeks of life. Good to see u.

  3. You’re putting yourself in good shape to weather any storm. It will be interesting to see what the Feds do with interest rates today and how the markets will react. Not that the day-to-day matters; you’re in it for the long haul.

    “It means I never have to sweat it when my wife or kids “need” something. My answer is essentially always yes.”

    With young kids, my answer is usually “no,” but their needs are generally temporary wants. As they get older and know what they truly need, I’ll be more likely to say “yes,” but one must be cautious with what Drs. Stanley and Danko refer to as Economic Outpatient Care. At some point, the youngins need to learn to fend for themselves.

    Cheers!
    -PoF

    1. Hey PoF Good to see ya!

      The Fed will ruin the economy like they always do.

      My kids are 20 and 22 have started their own businesses which do actually make money. One is still in school and the other is applying to grad school. With that kind of industry and entrepreneurialism I can afford to reward requests liberally because the request usually expands their experience like a semester abroad or a tour of Italy. These are optional but I think valuable touchstones for them. They both are incredibly frugal but creative in their frugality. They are Chinese immigrants and a little bit exotic, so for example daughter #2 can buy $2 worth of clothes from the second hand store, a bottle of blue hair dye and turn herself into someone who belongs on a magazine cover. I expect her destination will be marketing. A few bucks tossed toward that destination will pay off for her. The other kid is a musician, piano organ and choir and does fill in on the side at churches who need coverage (like a locums of music), has a photography biz under contract to do restaurant photo shoots for a magazine and she does weddings at $2K a pop as well and is presently a Montessori school teacher while waiting to get picked up for grad school. My whole tact with them was to drive their creativity and ambition and let it take them where it would, while providing the necessary financial backing using UGTM money I stashed when they were age 2. So their needs don’t much affect my cash flow at all it was pre-planned and largely funded by 20 years of interest not by Daddy.

      I just read your retirement plan and it’s so much like mine even to the accounts funding. Like you my wife and I are 7 years apart. One thing I found on SS is if your wife takes early (age 62), you can claim spousal and use that dual income which is taxed at 85% while you reach 70. At 70 you claim SS and she continues at her level. At my death she will claim survivor. Over all in our case after decades it winds up paying out more and provides some additional protection to the 2034 benefit cut. I use the HSA to pay for medicare A & B. Like you I didn’t have access for very long for funding but it’s enough to get 2 people about 16 years into retirement with tax free money for medicare expense, so I save on taxes.

      I wrote on portfolio insurance which is my Roth. I don’t even count the Roth as part of my WR calculation. It is there as a separate account to provide self insurance in case of a bad diagnosis for either me or my wife or both. We’re both going to die and likely at least one will need extraordinary cash flow so that’s covered.

  4. I’ve enjoyed the numerous posts regarding your retirement journey. The detail provided is very useful especially the quantitative aspect. Prepaying your taxes to boost your Roth account and increase your financial flexibility (legacy vs. unexpected expense) is something I’ve always believed was beneficial but you’ve shown this with actual numbers. Focusing on minimizing risk rather than seeking maximum gain also seems like a wise path in retirement. I’ve also started examining my portfolio with the Efficient Frontier and there is definitely room to make it safer so I appreciate the tutorial.

    1. Rewarding comment GF tnx. The tools are there to use and they represent a pretty state of the art technique for a sophisticated analysis. My approach is probably a little out on the perimeter, but as I work through this and discover a tid bit, I wanted a way to publish that bit in case someone else finds it useful. There is enough of the post retirement granularity to help people still in accumulation make decisions far enough out to make a difference, like putting enough aside to Roth convert close to RMD.

      There is a whole RE part of the journey say the age 45 to 65 crowd I don’t address because it’s not my story and is well addressed by other bloggers. Risk analysis led me to research the neuroscience of risk and reward and it turns out to be largely subcortically driven with very powerful circuitry. Lotta white tracts shooting up out of the mid brain into the cortex and not so many shooting back down from the cortex back to the mid brain so in the battle for control the mid brain wins. Risk aversion is about 4 times more dominant that reward in terms of the likelihood of a behavior but both risk and reward are strongly subcortically driven. Also reward tends to shut down risk aversion which leads to riskier behavior. Knowing that helps in understanding decision making which is often irrational aka subcortical, and it gives you pause before doing something stupid.

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