Toward a Unified Perspective on Retirement

I’ve been spending some time looking at retirement sites written by people who dream about retiring. There are many ways to get there some more effective than others. Investment vehicles and techniques have changed over time. The Motley Fools are a media organization started by a couple brothers and not that much different from financial blogs today

Back in the 90’s the funds they touted were not index funds. Portfolios were sets of managed funds often that addressed specific sectors like tech based or hot fund managers who were thought to be the golden children of investing. By the time you paid the fees and the loads and transaction costs it was damn hard to make any money. But you could make money publishing “articles” touting fund runners magic powers. It was a common theme in those days and was often driven by advertising. The Fools are all about the media and media sales. They are also into systems like versions of Dogs of the Dow all of this is about “beating the market”.

As a professional stock picker you can beat the market but you have to be a lot closer to the information than some source like the Fools can provide. If you’re not a professional speculator, it’s very unlikely you can beat the market because your competition is deadly. smart and exquisitely informed. The point being buying Fools books and systems is unlikely to make you rich, it just makes them rich.

The boggleehad approach has some advantages. It forces you to right size your life in a way that discourages debt and living in or close to the edge of debt. As a high wage earner living toward the mean gives you the ability to reliably invest excess money every month. The investment vehicle of the bogglehead approach are index funds. The system is designed to pay off over a long time as long as the market over decades continues to go up. Companies in America are well managed and we have good rule of law, a stable currency and some control over inflation so the likelihood of going up more than going down is good, so the likelihood of index funds paying off is good. Your investing return is not dependent on you, it is dependent on the people in the C suites of the corporations making the correct decisions. You are basically along for the ride.

Your return will be AT BEST the market return and If you don’t do it right AT WORST you won’t do very well or may loose money. So what do you need to do? First create a plan based on index funds, the simplest being a US total bond fund and a US total stock fund. The 2 fund approach puts your portfolio on the line of the most efficient portfolios, returning the most return for the least risk. Adding more funds unless done correctly tends to have lower returns for greater risk both undesirable.

The next thing to do is put all the money you want to invest in those funds and add to those every month or even week as you acquire more cash to invest. Do not mess around trying to market time. You don’t make a thing until the money is invested so sneaking up on it merely means you’re making less because you’re not invested. You need to choose an asset allocation, how much of every dollar to put in the bond fund and how much to put in stocks. The more stocks you own the more risk you own, and the more risk you own the worse you do in a downturn. I’ve read papers that say 70/30 or 75/25 over time are most efficient. Higher than that you own too much risk, lower you give up some return. During accumulation I ran my portfolio at 75/25. In retirement I own less risk so I’m about 57/43 including cash.

The next thing is re-balancing. Stocks tend to outperform bonds so the ratio will become unbalanced so once in a while if stocks get heavy sell some and buy some bonds with the proceeds on the way up. It’s a means of selling high and stashing some of that value in bonds. This manages your risk because 75/25 has lower risk than say 80/20 or 85/15. When the crash comes you re-balance the other way you pull some money out of bonds and buy stocks cheap so you are constantly cycling sell high and buy low, mechanically controlled by the asset allocation, which takes human guess work out of the equation. The human brain is not wired to make smart decisions in a crisis unless trained.

The last thing is NEVER SELL. When the crash comes NEVER SELL, just re-balance. When you buy stocks and bonds you are buying property. The more property you own the richer you are, so the whole point is to keep buying property. The value of your property is variable and set by a market. If the market crashes you own the same amount of property it’s just temporarily worth less. Relative to other property owners if you have a lot of property whether the market is low or high the one who owns the most property is always the wealthiest. If you sell low you are giving your property away, stupid move. If the market is down your purchasing power will go farther so buy more property for the same dollars and get even richer. Buy low Sell High is the mantra.

Over decades the price of your property will appreciate and the property you bought first will appreciate the most so buy soon and often. If you are 30 and you die at 90 your property has 60 years to grow, and with a bogglehead approach it’s those 60 years that pay the rent since the best you can expect is market return. With this approach YOU CAN”T BEAT THE MARKET so don’t even try. You’ll only goof it up, with hair brained schemes so sit back tend to the knitting of property purchase and enjoy the ride. I’m a fan of investing in 3 types of accounts Brokerage. Roth and IRA like accounts all the numbered accounts) and maybe HSA if its available but don’t overdo the HSA. (I think a big HSA is a likely target for means testing)

The reason to own 3 accounts is when you go to spend down in retirement the government has some tax surprises in store for you and owning 3 account types improves your ability to tax plan in retirement because the 3 types are treated differently when it comes to taxes. I’m not a fan of retirement formulas like 4×25 or 3 x 33. There is no reason not to sit down and plan a yearly retirement budget with some granularity. You are surrounded by old people, patients and relatives so use their experiences to inform you about likelihoods. You need to plan for expenses but also disaster and end of life and if you’re married 2 disasters and 2 ends of life. Disaster would include things like a CA diagnosis Alzheimer 24/7 memory care for 15 years, stroke, high inflation, bad sequence of return on investments and the increased tax burden of the surviving spouse when one spouse dies. None of that is considered by the typical bogglehead, but rest assure that train is coming down your track and when you’re 80 it’s too late to do anything about it. It’s only 50 lines on a spreadsheet to plan 50 years. I have my retirement planned and 25 years will cost 2.7M inflation adjusted in basic living expense. I have quite a bit more than that available for living expense and a spare million tucked away in a Roth which doesn’t get touched as a disaster fund that grows unmolested. Million bucks growing at 7% buys a lot of inflation protection, bad SOR or end of life care (given the inflation rate of healthcare and the likelihood of the government turning medicine into the one size fits all of the VA). I don’t need any side gigs or excessive leverage because my plan covers all the bases. Since I have a plan beyond something like 4 x 25 I have something specific to track and can readily make adjustments based on the economy.

My point is the part that is often missed is the follow through, the spend down part. It just gets assigned a number pretty much out of thin air. You can fart around trying to beat the market, I bought BTC at $275, it paid off pretty good, it’s property so I never sold it, but that’s pure speculation not investing. It’s not the kind of thing you need to retire on. The Motley Fools are in fact jokers when it comes to building a sustainable money machine.

10 Replies to “Toward a Unified Perspective on Retirement”

  1. Fantastic post Gasem.

    Everything you have stated I have tried to take to heart and shape my own retirement decisions.

    This post should and will have a broad appeal as it is quite easy to read and people won’t get lost in the numbers.

    I have long gone with the be the market instead of trying to beat the market. Typical market gains should ensure a pretty good return over the long haul, no need in trying to be greedy.

    1. Hi XRAY As long as the government doesn’t sell us out we will be fine. We are still the premier economy in terms of market efficiency and creative destruction. That relies on rule of law being maintained. Open borders is a direct threat to rule of law. Selling out to China is a direct threat to efficiency and creative destruction,so the conclusion is not guaranteed. The control of that is still within our grasp if we don’t give it away for playing politics

  2. Appreciate the insights that you have earned over time. Yet I still feel drawn to speculate on individual stocks, bitcoin, startups, and other ventures. I keep it to a small % of my portfolio and try not to let myself get too irrational.

    1. Hi ED, I’m not the investment police, like I said there are many ways to make money and I don’t have a dog in the hunt how anybody does it. If you bought BRK.B in 1997, it’s up 576% vs the S&P which is up 262%. In the 90’s I was day trading stock options, in the 70’s I was trading Orange Juice and Corn futures. All of that kind of trading requires deadly accuracy and pristine risk management which is a lot of work. I don’t do it now because it’s a lot of work and excessively risky and being retired I’m unloading risk not buying more. As I write this S&P is down 81 points, but my risk management is in place. That’s the main thing for me now, managing the risk. I did plenty of goofing around in my investing career.

  3. Hey Gasem,

    It is always a treat to read about a good plan. Plus you are “live” with it all which is a double treat for me.

    I am appreciative to see a current physician retiree’s plan. Yes, we all reach where we need to get by various methods. But for those of us who love planning, it is always interesting to see what others do.

    And yeah, there is a lot of wishing and dreaming going on for many others unfortunately. But they are young and can afford to get it mildly wrong.

    But a true retiree can not afford this luxury.

    Unfortunately those who pontificate about it the most are not actually retired with traditional methods. They supplement with “other” income which can be hard to replicate.

    Therein lies the crux of being a poster child for early retirement. The more they serve as a poster child, the less the realities will be born by them. Their newfound notoriety will shield them from it.

    Funny how reality works eh?

    1. Hi MB I’ve read some interesting stats. I the life span of a Fortune 500 company staying on the Fortune 500 is 10 years as of 2015. In 1930 it was 70 year. I read 96% of businesses go out of business in 10 years, meaning only 4% survive. It’s going to be interesting to see how all of these “retire early” tycoons manage, when their blogs are making $200/mo and their 90/10 portfolio is down 60%. When it hits the fan you better believe the song and dance will loose its luster. Just because you can get $1500/mo to rent your apartments today doesn’t mean you can when unemployment is 15%. When that happens a lot of people are moving into their cars as happened in 2008. There are whole websites devoted to living in your car techniques.

      I read another frightful statistic that personal bankruptcies are on the rise as well as personal debt. I read an article a couple years ago or maybe a book that said personal debt is the best indicator of bad times. In 2008 personal debt was maximum. The media wanted to blame it on duped consumers who were sold shady loans by unscrupulous lenders, but that was a load. Anyone with a brain knows you can’t “own” 2 new cars, a boat, and a McMansion on a cabbie’s salary. There is only one way to “own” those and that’s with debt, a lot of debt. No job, no problem just stick the keys in the mailbox and walk away. If personal debt is going up again bad juju is going to follow.

      If bad juju happens and you’re RE, you better be sucking 2% off your dough instead of 4% and don’t expect the blog to be buying your Wheaties. All of those advertisers will be going belly up, or at least 96% of them will be biting the dust. I don’t wish anyone bad but when times are good it’s easy to make money. In my opinion we narrowly missed actual depression in 2008. If the banks had been allowed to fail we would be in depression today. The FED balance still holds 4T dollars of 2008 debt. It’s a lot more house of cardsy than it appears. When I look at folks like “Our Next Life” or “Millennial Revolution” I see a lot of bravado but not much insight. Damn hard to sell retire early books in a crash even if you are a daydream believer and a home coming queen.

  4. I like your advice to Never Sell and own 3 accounts. As I approach 60 and plan for retirement, one thing I have become aware of is that SS is rarely discussed in most FIRE blogs. This is understandable in that many, including myself have lacked confidence that it would be there when we reach full retirement age. But as I get closer, I am becoming more confident that I will receive some benefit from the program. While I am not necessarily a fan of the 4% rule, I think it’s a reasonable marker to assess progress towards the goal. I personally feel more comfortable at a lower WR preferably below 3%, but that’s just me agreeing with your bad SORR modeling that showed a not insignificant chance of crashing and burning. SS gives me an extra buffer since I wasn’t planning on it in the first place. Basically money found between the seat cushions of the sofa, wasn’t expecting it but nice to have. FIRE types are probably right to exclude it from the analysis as they may not have enough high income quarters to get to the 2nd bendpoint. Using zeros can really kill the benefit.

    My parents could basically live on SS plus a little extra. My dad always complained that his RMD was too much as they had enough taxable savings for their needs. He recently passed away so now I’m helping my mom with the investments since he was a DIYer. I was pleasantly shocked by a few of things. Besides being much larger than I anticipated, the AA was 90/10 equities/cash, no bonds. On the surface that seems reckless, but SS essentially functioned as the inflation-adjusting fixed income portion. He believed in having 3 accounts but I was surprised to find the taxable/pre-tax/Roth was 30/20/50. Somehow he managed to get the bulk of the pre-tax into Roth, I assume by conversions since he was in the lowest bracket during retirement. The cash was split such that he had 3 RMDs worth in the tIRA and the rest in taxable, none in the Roth. Enough cash and well placed to handle an emergency or a bad SOR. He also believed in your Never Sell advice as most of the equity portion was in a handful of NL mostly growth MFs. I won’t be using this plan for myself, but I do think it was well executed and right-sized to my parent’s needs and circumstances.

    1. I bet your Dad was an engineer. Success is a pretty big target, and if you managed the risk and the sequence it’s hard to miss as long as the economy behaves. I look at SS as first, not last. I don’t look at it as couch money. It’s presence reduces your WR making your portfolio far more bullet proof. The law is already written and the payment will be reduced according to law in 2034 in my opinion. When I retire “officially” (as far as the government is concerned) at 70 in 2022 I will have 12 years of today’s rates in the bank and be 82 years old when the cut happens. I will then have another 10 years of reduced benefits till 92. It’s unlikely I reach 92 and only 1 male in my family made it into the 80’s. My wife, who is younger OTOH has many relatives who lived into their 90’s. A woman who makes 60 has a 30% chance of making 90 and a 2% chance of making 100. Upon my death, she will have 7 years to reach my death age but still should have a ton of money available to reach her own death age without curtailing her lifestyle, so that’s how to plan this out.

      If you look at SS as prime, plus a small RMD’d TIRA with a fairly low interest as second, that keeps you in a low tax bracket for as much as 20 years into retirement. So if you pull the trigger at 70, 20 years takes you to 90 and in my case takes my wife to 83. If SS gets cut at my age 82 I can just take a little more than RMD out of the TIRA and a little more out of the taxable without damaging the tax structure to keep me in the 12%, and a lower SS will keep my wife in the 12% longer. The advantage of the 12% is zero cap gains. Upon my death my wife will take her survivor benefits which is about my equal to my FRA benefit or a little more. so she will see a cut but also a saving on her lifestyle since I’ll be dead, but she will also lose a tax deduction, so being pretty far down in the 12% is important to try and keep taxes under control. She likely will go into the 22% but not deep into the 22%. I’m hoping to retain as much TLH as possible to cover her cap gains when she gets to the 22%, and I’m hoping to use the 0 cap gains rate of the 12% as long as possible while I am alive.

      My income is first supplemented from my taxable up to the top allowable at zero cap gains. I look at that % as my WR. So if my TIRA income + SS is say 60K and I can supplement up to 100K my withdrawal from my taxable is 40K tax free. My taxes therefore are just my ordinary income from SS + RMD. If I have for example 2M in taxable 40K is a WR of 2% a pretty bullet proof WR and likely to sustain excellent growth over the first 20 years of retirement so at the mean taking out an inflation adjusted 40K/yr in a 60/40 US stock/US bond portfolio would yield a taxable of 4.7M at 20 years. At the 10% bad SOR level taking out 40K/yr would yield 2.4M at 20 years in the taxable so with that low WR you will have more taxable than when you started pretty much guaranteed. The WR at the 10% bad SOR level where you start loosing principal is a withdrawal of 55K inflation adjusted. So if in 15 years if they cut SS, I can pull out an extra 12K or so from the taxable (inflation adjusted) and pull a little extra out of the TIRA above RMD and still remain bullet proof. One thing to note is SS is taxed at 85% so the amount you save in taxes, just about pays the taxes. For example say SS is 50K the taxable is 42.5 and that extra 7.5K goes a long way in paying your ordinary income tax bill so SS pays for itself plus a little. If your income is 70K SS + RMD MFJ both 65 in FL your tax bill is $4827 easily paid by SS’s 15% tax break, PLUS no cap gains. This is why SS is not couch money, it’s an incredible deal! It pays you some dough, pays your tax bill and gives you a smaller WR! Bet you never read that in some damn bogglehead post. Instead they are all worried whether they pay 5bp or 3 bp.

      You will note I have not mentioned the Roth. That grows unmolested and is not part of the WR calculation. When I die or if we get bad inflation or in a medical disaster that gets tapped. It gives my wife money to pay the extra taxes if necessary adjusting to the lowest tax burden on the income. In her case if the TLH is still there she can just use the TLH to pay the extra taxes till that runs out and let the Roth continue to grow unmolested. So 5 accounts are best. SS, small TIRA, taxable, Roth, and TLH. It gives you plenty of flexibility to optimize.

      In your case I would plan SS around the 25% cut plus what ever your wife will contribute. It will be a bit bigger hit to your income, but that’s the point of planning with granularity and doing a spreadsheet projection. It allows you to game out the actual optimized strategy. Retirement is complicated and don’t let any bogglehead tell you it’s not.

  5. Enjoyed your theory, as well as GasFIRE’s sharing about his father’s asset allocation strategy.

    We have shifted toward building up the pre-tax account to target a decade’s worth of living plus taxes on the Roth conversions in anticipation of pulling off a similar plan, assuming pending legislation does not kick the legs out from under us.

    1. Hi CD Since I wrote this piece I’ve been looking at some macro data and have become bearish on the future long term. Don’t get out too soon. The piece is still a good plan the problem is we may need quite a bit more money than to cover the decades than we anticipate

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