Parsing Cash Flow Part 3

So far we’ve seen a tail of 2 retirements . One with a small IRA and one with a big IRA. My feeling is the government will shave as much as they think they can get away with from your retirement. My feeling is also they will tend to leave the little guy who can barely fend for himself alone. There’s a bunch of those LG’s who have saved for retirement have something that will kick out an extra 20K/yr beside SS. The 12% bracket and cap gains law pretty well defines where the govt draws the line between middle and wealthy. Stay in the 12% your OK, 22% suddenly things start adding up. so my contention is to make myself look middle and stay in the 12% for a long time. The 22%’ers will fund those with less that average retirements through wealth transfer AKA soak the rich.

Spread-sheeting your projections year by year adds information. My 20 year projected retirement is slated to cost 2,672,711 dollars. In the small IRA scenario 1,129,845 will come from brokerage money apart from IRA. My total small IRA projected tax burden is projected to be 94,000. In the large 1.5M scenario I spend the same 2,672,711, all of it is covered by higher risk, I take nothing extra from the brokerage but nearly all the extra risk goes to pay extra taxes. My 1.5M tax bill is 338,016. So I need more risk to break even. The low risk portfolio winds up with a big ROTH on the side so part of the extra brokerage money goes to pay for the creation of a big IRA which grows unmolested. and can be used tax free as needed. It’s a legit way to move money from the brokerage as well as from the TIRA into the Roth at cheap tax consequence. (92k v 338K). I still have to pay some taxes on the Roth conversion but that tax bill is also reduced because the ordinary income comes out of the TIRA in smaller less costly but more frequent hunks. In addition since small IRA is lower risk market gyration has less effect and I can sell high when I need to sell by my choice not on a government mandated schedule.

This analysis represents what is called life cycle investing, where the details of the portfolio are quantitatively chosen for best outcome according to some criteria. The risk gets parsed along with the cash flow which to me is very desirable, and the slop in the system gets identified as well and is not lost opportunity.

Part of the driving force behind SECURE seems to be to force heirs to spend down the inheritance in something like 10 years so that’s when the government will pick the apple from your heirs but it won’t matter to you or your spouse since you both will be dead.

There is a rule of thumb that says the portfolio risk (SD) should equal the amount of money you can afford to loose in income any given year. If you’re pulling 100K and you are risked at 15% SD you need to be comfortable at 85K. 15% is an all stock AA . 10% SD means you have to be comfortable living on 90K in the bad times. If you own an efficient frontier portfolio you can simply pull the SD off the frontier line and get the AA associated with that risk.

Here is a 63/37 portfolio with roughly 10% SD, so to be comfortable to the 90% income level this is a measure of my risk tolerance. It ties risk tolerance to reality and not just some testosterone driven number plucked from air.

In my scheme 40% of my income comes from SS. My next asset is the 500K TIRA which provides a steady income of 17% for a total of 57%. I want that 17% to be as reliable as SS. The most reliable AA in terms of efficiency is the tangent portfolio. By definition it provides the most return at the least risk. So I want my TIRA in the tangent portfolio.

Being in the tangent means I can stand 4% variation in income and it’s as good as you can do. This means my 2 assets provide 57% income at very small and in fact optimized risk and low taxes. It means I have to come up with 43% of my income from another source, in my case my Brokerage account. In my case first year that would amount 47,000 which can come out at 0% cap gains tax because of the tax structure I manufactured. Each succeeding year I have to extract a little more to cover inflation and keep my income constant, but I have a long period essentially 2 decades to take brokerage money out tax free. If you had a 2M Brokerage to start 47K would be a 2.35% WR. If my AA is 50/50 my inflation adjusted withdrawal Monte Carlo’s to this

9999/10000 success and small SORR.

If I gin up 3 years of bad SOR first my predicted survival

9995/10000 success with a 50/50 AA and bad SOR.

In addition If I put a 1M Roth in 50/50 AA, and take out an additional/optional 25K/yr that Monte Carlo’s to

That multiplies my starting income from 110K/yr to 135K/yr with no tax consequence at only a 50/50 AA in a standard format 2 fund portfolio and plenty of leeway for years of self protection/expansion without upsetting the tax structure. It’s a very different approach to the usual bogglehead fare of 80/20AA max out your pretax. The government is ready for you to fill their coffers with your success.

The above plan allows me to live a pretty tax free self sustaining life. My real tax load comes from SS and my TIRA. I’m at about a 50/50 overall asset level which means the SD on the portfolio is 7.6%. I can pull out brokerage money tax free for a long time and I have a Roth to supplement my yearly income tax free. My overall WR is about 2.5% relieving a good deal of SOR stress.

Parsing Income Part 1

Parsing income Part 2

Parsing income Part 3

Parsing Income Part 4

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