Debunking the Narrative

I woke up at 4:30 this morning. The advantage of being retired is I can get up at 4:30 and if I get tired at 9:30, I just go back to bed for a while catch a few more hours and start the day again. This happens to me a lot. I sometimes wonder if man has this bifurcated sleep schedule built in, since ancient prayer traditions include a “night prayer”, which was something to do during early post midnight awakening, but long before sunrise. Pretty much you make babies or pray to God if you don’t have lights and internet.

I ran across this video this morning which is a critique of Ray Dalio’s predictions of the macro economy based on the financial engineering of the past 30 years. I have come to similar conclusions, which is why I’ve been bailing on the portfolios that tout passive investing into a financially engineered “reality”, what I call The Narrative. I read a lot of financial hocus pocus out there in FIREland, hocus pocus far more convoluted than the 4 x 25 narrative. Now it’s all about becoming a real estate tycoon. Real estate tycoonery is all tied up with levered cash flow. It’s a little like the Federal government. Why yes 23 trillion debt is just peachy until the economy crashy with an actual mean reversion kind of crash. You are basing your risk on a narrative of the past. A narrative when there was a free market. A narrative when companies borrowed money to increase productivity, not just buy back stocks in a maneuver to raise stock price.

This video describes Dallio’s perspective as well as this Vlogger’s perspective and largely my perspective. Depending on your perspective it might provide needed counter point to your narrative.

This guys presentation style drives me nuts. It’s very much like he’s selling timeshare. But what he’s selling I think is good to think about and it’s only 26 minutes long.

A friend of mine from High School is a professional photographer and graphic artist. He created the photo below. Imagine the scene of the displays against the pitch black of night. The displays would have immense majesty and would encompass your entire attention. Then consider the displays at dusk the day before Christmas Eve. It’s the trees and the sky who claim the true majesty, the trees and the sky that show the real majesty of God, not a bunch of lights on sticks

8 Replies to “Debunking the Narrative”

  1. MDonfire,

    In your 11/25/18 post you wrote you were limiting your conversions to $250k MAGI to avoid the 3,8% surtax .
    The Roth conversion income itself is not subject to the 3.8% tax because it is not treated as investment income. But it can increase MAGI to the point where the 3.8% tax can apply to investment income like the LTCG or interest and dividend income.
    Is that how you see it ? You lowered your conversion amount to avoid the 3.8% due on LTCG/div taxes, not the conversion amount, correct ?

    1. I lowered for 2 reasons

      First I was going to completely Roth convert. I had a fixed time frame of 4.5 years to convert. My age 65 year I only did a partial small conversion because I had 1/2 year of income that year and it was before the tax cuts went into effect, so I initiated the accounts and added some money up to the top of the nearest tax bracket that year. I also started Medicare the last half of that year. The next Year as I was planning I realized I could annuitize part of the TIRA over the course of it’s disbursement. I needed a place to stash bonds, which don’t throw off much interest, so I would have excellent control over the actual yearly payout from the TIRA . I did a comprehensive analysis of the tax law and found as long as you are in the 12% or below your tax rate is very low and if you had a small TIRA RMD in mostly bonds, it would throw off a couple thousand a month based on the RMD and add only a small amount of extra to SS which is tax advantaged as well. So my ordinary income at age 70 starts at about 60K/yr from SS + RMD and my ordinary income stays in the MFJ 12% bracket for nearly 20 years increasing a little each year due to inflation adjustments and the increasing RMD%. Being in the 12% with an IRA has 2 advantages. You pay 0% LTCG on brokerage money, and you can use the TIRA as a tax free source of money if you or the wife gets legitimately sick. So a small TIRA in bonds or mostly bonds, and SS are going to be my main sources of income after Roth conversion supplemented first by brokerage money, and if that runs out supplemented by Roth money or by an increased TIRA payout depending on my age and the tax regimen. I ran this scenario ten ways from Sunday and at least for my retirement which has no side gigs and is well funded with a small WR and a low leverage this was the safest solution to get first me and then my wife to the promised land solvently. Another advantage of partial Roth conversion is the conversion costs a lot less money. The taxes on the top of the 24% including all excess medicare fees and surcharges is nearly 70K/yr if all of your income is going to conversion which is the most efficient way to do it. If you have side gigs and all that your conversion efficiency plummets. If you convert 250K of ordinary income your tax bill is more like 45K/yr a 25K/yr savings. If you don’t spend 25K/yr and do that for 5 years you have a 141K/5yr saving. If you them project the growth of that 141K over 20 years it will grow to 452K total over 20 years. So at age 90 you will have an additional 452K in the account relatively speaking from the savings in taxes DCA’s and invested over 25 total years. In the mean time you are growing a big wad of Roth money tax free. So by paying some taxes early (Roth conversion taxes) and some taxes late on a slow growing asset (small TIRA) you hit a sweet spot where you pay all the taxes you owe, but not too much tax because of the progressive nature of the tax code. The progressive nature of the tax code is written to take advantage of the power of compounding in your account. If you own a 3M TIRA and add SS income you start out in the 24% bracket and soon advance to the 32% bracket where as if you have a 500K TIRA and SS as described you stay in the 12% for 20 years.

      This is the main driver of my plan, how much I pay in taxes total over 20 years. A couple percent extra over a 5 year conversion period is trivial. It kind of becomes you would choose investment A over investment B because a is 2 basis points less than B for the 5 years of investment. That being said your point is exactly right. If the MAGI exceeds 250K you get to pay more in taxes, as well as a lot more in Medicare part B and part C premiums. It all depends on the size of the TIRA. It’s difficult to Roth convert a huge TIRA efficiently and all of these little cliffs in the tax code need to be taken into account, but never let the tail wag the dog. Never let an extra couple percent for 5 years, hold you back from realizing many times that over 20 years. In my case my TIRA was small enough and my living expense and thus MAGI could be made small enough to avoid the extra surcharge. Not everyone can dodge that bullet, but at least this gives a guide on how to think about it.

  2. Thank you for your very detailed response. I am filling the 24% bracket with conversions in order to get my TIRA down to between 250k and 500k prior to Social Security and Medicare. My non IRA account is invested such that divs and cap gains are not an issue during this time (still offsetting losses from years back), so I am not concerned with the 3,8% surtax from exceeding $250k. I just wanted to make sure my understanding of the surcharge was correct – that the 3,8% would only be on cap gains and divs, not regular income/conversions.
    Thanks again,

  3. Thanks for sharing.
    I agree there is too much uniformity in the narrative of blog echo-chamber.
    Unfortunately, I think many of these predictions about taxes and inflations will become true.

    1. WD, however you can plan to survive if you choose to. I understand .22 bullets will be more valuable than gold when NYC becomes New Amsterdam 2.0. You’ll be able to trade a bullet for a slice.

  4. MDonfire,
    I just realized you posted comments on that article. The “money to buy hamburgers” tipped me off it was you.

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