Parsing Cash Flow in Retirement

I’ve written a lot on efficient Roth conversion and getting to the magic RMD age presently age 70 but hopefully soon to be 72 with the SECURE act. Bogglehead technique is to make 25x or 33x your need, leave it in a fairly high risked investment vehicle typically a IRA and dole out 3% or 4% /yr to provide income. It’s a method that will likely work, but the ride may be harrowing because of sequence risk, market timing etc. The problem with “MAX OUT YOUR PRETAX” is those accounts are tax deferred not tax free and the tax code is progressive. You eventually have to pay and how much you pay is income dependent. The Bogglehead bet is growth eventually outperform (if growth is 5% and you’re sucking 3% to live on you still have 2% in the kitty). On the average it should work.

Retirement in my universe is retirement as in age 65 collect SS, have Medicare as an insurance basis and living off the proceeds of my nest egg. Your choice of blog income or books or courses and marketing your clever expertise doesn’t interest me. My focus therefore is how to live the best passive investment life I can with good control of risk. My retirement income therefore comes from cash flow provided by several passive streams from several accounts that have different tax treatments. Rather than conflate FIRE with FI retired age 65, I’m going to discuss FI age 65.

One account is cash. I keep my cash in a high yield no frills savings account. My cash is what let’s me Roth convert efficiently. I have plenty of “money” to live on while generating my income exclusively from Roth conversion. My cash pile was generated by selling post tax brokerage stock near the market high in 2016 and mixing that with tax loss harvest obtained over the decades . My cash pile therefore was generated pretty much tax free. The entire efficiency of the Roth conversion exercise relies on having a cash pile.

A second account is my post tax brokerage. At age 50 or so I realized “MAXING OUT MY PRETAX” meant I was ceding control of my tax burden to the government. At age 70 your burden becomes fixed and it’s payment is on the government’s terms. I never qualified for the TIRA middle class funding gimmicks anyway since I made way to much money. IRA money comes out as ordinary income and is subject to the progressivity of income tax. RMD forces the issue. You will take a predefined amount of income every year and you will pay the appropriate tax on that. I started therefore aggressive saving in post tax brokerage instead which has a different tax treatment upon disbursement. It’s taxed as LTCG not ordinary income and there is no RMD forcing sale. Mixed with some tax loss harvest the money comes out tax free not unlike a Roth.

A third account is the Roth. I fund the Roth through Roth conversion of TIRA money. The Roth has specific tax treatment in that the money comes out tax free including cap gains upon disbursement. The tricky part is determining how much Roth you are going to fund and over what period. All in one conversion is most expensive from a tax perspective with smaller conversions much more efficient, so you have variables of conversion amount that sets your cost of conversion as well as number of conversions. If you have a big honkin MAX OUT YOUR PRETAX kind of TIRA you’re going to have a big honkin tax bill to pay. By fooling with payments a most efficient conversion can be obtained where the effect of progressivity of the tax code is minimized. The downside of a big number of conversions is you need cash to live on while doing the conversion and you may not like having a million bucks sitting in cash even if there is good rational to be in cash. Being in cash also limits market fears since once sold you don’t have to worry about selling into bad market conditions. Your portfolio is exposed to growth but not SORR since during that period the portfolio is closed and cash is providing income. It turns out there are bumps in conversion as there are various things in the tax code where you move from being middle class to being wealthy from a tax treatment perspective. Dodging the bumps allows you to convert more money more cheaply. An example is the medicare 3.8% surtax. If you convert to the top of the 24% bracket (341K/yr) you pay it if you stay under a 250K/yr conversion you don’t

The last of course is the TIRA itself. It turns out the government really does soak the rich. The government does not soak the middle class despite all the talking points. It’s better for the government to engineer around a standard kind of retirement where people can more or less take care of themselves with some SS and some TIRA income. The top of the 12% bracket (104K including standard deduction MFJ) ordinary income is the breaking point. Below that income and cap gains are treated with pretty low taxes plus 0% cap gains, Above 104K you go to 22% marginal and 15% cap gain.

The question then becomes what is a “middle class” retirement since that retirement is fairly advantaged. I did some research and found a TIRA of 500K – 600K is a typical retirement amount over SS. By analyzing various RMD schedules some insight developed.

This is 500K TIRA @ 6% return from the Schwab calculator. Notice how the curve grows and notice the RMD amount grows as well. There is the concept of top of the bracket where your income will kick you into the next bracket sooner. If growth is slower your position in the bracket changes only slowly since ordinary income is the combination of SS + RMD. SS is COLA adjusted and tends to grow and as you can see 6% RMD also tends to grow and the combined growth will kick you out of the bracket sooner.

This is a 500K RMD @ 3% growth. Notice the reduction in volatility and the steady slow growth. A 3% TIRA allows you to get TIRA money in a quite predictable way with low volatility and very predictable taxes and keeps you in the bracket for a long time. It also protects against SORR and even at age 99 there is money available in case you need a few thousand extra. The 3% TIRA therefore acts like a bond and provides bond like stability and bond like predictable tax consequence to your retirement income.

You have the ability therefore to clean out the TIRA into a Roth all except 500K which you leave as portfolio non correlated balance, non correlated since bonds are the likely asset choice for this asset.

Here a retirement income schedule I concocted using a SS of 44,800 inflation adjusted a 2%, plus the actual RMD of 500K @ 3% growth. Expense is the yearly expense I want inflation adjusted. WR is the amount I will need to withdraw from brokerage to make up the difference between “expense” and SS + RMD with litle consequence on the tax bill and you can see a nice gently increasing tax as well. The WR comes from my brokerage account. In addition the Roth stands alone. It’s value starts with whatever I cleaned out of the TIRA before RMD and is allowed to grow pretty much unmolested. I my case my goal is about 1M in Roth at the end of conversion in 10 years it will have about 1.8M and is available to self insure our lives in case of disaster. The spend down will go: spend down the TIRA as outlined, spend down the brokerage as outlined, don’t spend the Roth unless needed.

The risks are dispersed by tax treatment as well. The TIRA has low risk. The brokerage has what ever risk/asset mix you like and the Roth also can have its own risk and asset mix. You can work backward to understand the cost. Initial cost to me was 600K of stock converted to cash, about 200K of tax paid on the 1M conversion and the taxes displayed ongoing. If you had a 2M brokerage left after generating the cash pile and a 1.5M TIRA at 72 you would have 1M in Roth 500K in TIRA, 2M brokerage and a WR around 2.5%. Presumably at that low of a WR brokerage will continue to grow as well. Each aspect needs strategic consideration. If I just “maxed out my preretirement” my tax bill would be huge and what is left smaller. Point being what you do in accumulation matters and having enough time implement the pan matters. Spend down is very different than accumulation. Quitting too early matters, quitting too late matters. Limiting the scope of what is “retirement” and what is financial independence matters A far cry from 4×25

Parsing Income Part 1

Parsing income Part 2

Parsing income Part 3

Parsing Income Part 4

Me Cardiac Surgery and Amazon Prime

This is not so much one of my technical articles but how amazing logistics has become. My home has its baths/showers and bedrooms upstairs. My downstairs bath is a sink and a toilet. I’m still hobbling around using a walker primarily for balance and safety.

It’s not too hard to convert a usual bedroom into something workable for convalescence but it’s another matter when all the infrastructure is 14 steps toward heaven. I’m probably 2 weeks out from reclaiming that aspect of my life. My wife who is an OT did a masterful job converting our school room which is built to educate our kids into a convalescent bedroom. I have queen size bed complete with remote control raising and lowering of the back and feet. I’ve always been a side sleeper which is a no no under sternal precautions but because of the degrees of body adjustment available in this bed frame I can safely simulate 80% of the comfort side lying affords. That translates fitful sleep into sound sleep. One day before discharge this room did not exist. Her design skills pulled convalescent reality into my time and space just in the nick of time.

I’m under considerable metabolic stress. I can tell by how my brain and muscles are working. Nothing I do is effortless but being in my home allows me to optimize my efforts. For example I gained 35 lbs of edema in the hospital. I got on the table at 205 and came off at 242. 242 is like falling into a gravity well. Getting up to go pee is like having a 35 lb pack or 5 gallons of milk added to the effort. I’m on some diuretics which of course involves a lot of peeing roughly Q 2 hour day and night. It’s the cost of doing business. My warm comfortable bed allows my stress and norepinephrine levels to go down and my body therefore to release edema further relieving stress and improving my mobility. Yesterday I weighed 212. Reduction in stress = rest. it’s also a measurable component of progress. I track noreipnephrine indirectly by trending BP and HR, and 35 years of anesthesia experience. I managed to become dis-coordinated in my back because of the chair I had at the hospital, but at home I am able do what exercise I need to do to re-coordinate. When you walk in a hospital room and see someone slumped over this is what has happened to them.

My downstairs is well designed for exercise, and exercise is what is needed. Life is nothing if not about forward progress. Exercise is measurable and the response to exercise (tiredness) as measurable. I have a nice gym replete with treadmill a weight machine, free weights, weight vests, step benches. Like my bed my tread mill is stress relief central. I can get on it and walk for 15 mins twice a day and that’s beneficial. It’s not pretend exercise but real exercise, nothing like I did last month before all this went down but I’ll take what I can get. My recovery regimen includes OT PT home Nursing and the approval of my surgeon so I’m not flying blind.

The last thing is I reclaimed my diet. My diet is ketogenic and carnivore I eat no sources of glucose or fructose. My liver makes what I need for a normal blood glucose from glycerol from fat metabolism and serine and glycine. My A1C is 5.3 so clearly this way of eating is enough. The hospital carbohydrate based food changed my gut biome back to something of the standard american diet and I had a ton of diarrhea etc so reclaiming my diet has allowed my gut to revert to a kinder gentler existence.

So what’s Amazon got to do with it? You have a need and Amazon provides overnight. Some gloves Amazon, some chux Amazon. My wife wanted my room to have a hospital table Amazon. Some extra sheets, Amazon. Everything fell into my house from the Amazon sky at not inflated prices delivery assured.

The other thing you need is money. If you want what you need to properly propel your recovery and not what the government allows you’re going to have to pay for it. The night before my operation I transferred 20K out of deep storage into ready availability. I had planned for this. This will probably cost every bit of that 20K in convalescent money maybe more. Money is my advantage and along with my sweet wife running the show allows me to precisely tailor this situation. That is the real crux and something to be understood. You can have all the schemes etc you want to fund your retirement. But when it hits the fan and it will hit the fan money is real power and schemes are pipe dreams.

I promise I won’t convert this blog to my convalescent diary but useful stuff to know and think about.

Roth Conversion 2019 Style

I’ve been dutifully converting according to my pre-disclosed schedule and have just shy of 500K converted. My goal was to convert 1M by age 70 (3 years from now) and an unchanged schedule would result in 600K of Roth by the end of 2019. I already have the taxes paid on my present conversion from last year carryover and some additional money sent to the treasury.

It turns out a bill is wending its way through congress raising the RMD age to 72 from 70. This gives me the option to convert at the same schedule for 2 more years at a higher net conversion (probably around 1.2M net). OR I can convert to the same 1M by age 72, paying less taxes along the way. The tax savings on the slower conversion is not trivial about 97K over 5 years or 20K/yr not huge but not chump change either. The 5 years will be covered under the current tax law, so there will be no danger of reversion to 2018 law before it’s all said and done.

None of my arguments regarding how much to convert changes. At 72 I still want 1M in Roth and abut 600K in Pretax which I will RMD at 72. The Pretax will contain my bonds offering slow growth and steady returns, keeping me in a lower tax bracket longer. We will still do the SS doe see doe, where my wife will claim SS at 62 and I will claim spousal until I become 70 when I will claim my maxed out SS, she will continue with her SS. Upon my death she will acquire my survivor benefit maximizing our SS payout over our life times. All of it works the same except by extending the period of conversion I manipulate myself into a lower tax bracket for the next 5 years of conversion, which is how the extra 100K is generated. That’s money I will no longer pay in conversion taxes and will stay in the bank. This tweaking around the edges, but tweaking none the less should result in a free extra year of retirement thanks to this change in the tax code. I will still use small aliquots of post tax money to round out my yearly spending with a net cap gain of zero.

Thought I’d let everybody know what’s coming down the pike. Full (no side gig) retirement with the ability control these situations is the best thing that ever happened to me. It didn’t happen out of the blue or according to a MMM formula. The plan took a couple years create, understand and optimize all the moving parts, and to bring to fruition. If I was still “making money” as in some kind of W2 like income none of this would work.

How Did The Ball Fall?

First day back in my real life. POD 17. Living in the hospital for 2 weeks was a shit show. Zero rest. The food was ridiculous. Way too many carbs in the diet, it’s no wonder everyone is diabetic. I went into the OR at 200 lbs and came out post op at 242 so pretty bad third spacing but 242 was 222 to day so that will resolve also. I’m pretty weak and my albumin dropped to 2.1, but 3.5 today. I did get some renal exacerbation creatinine to 1.8

Here was my best scenario. I wound up with long length of stay, some renal dysfunction but the rest all worked out. No stroke, no infection and my Echo is perfectly normal. A few decisions bounced left but mostly the balls bounced right in favor of a good outcome.

I don’t recommend the experience but the analysis kind of shows properly applied statistics is a rational way to move the needle on the outcome.

More Galton Goofiness

Look familiar? The decision tree above yields the distribution below. The distribution is a population of results but the destination of any individual ball is particular. If success is ending up on the right it is the result of enough rightward decisions and the sequence of rightward decisions to get you there. In the above there are 12 decisions applied to each ball before it reaches the mouth of its final bin. If the first 6 decisions are leftward it becomes increasingly unlikely you will wind up on the right. If the first 6 decisions are rightward it becomes increasingly unlikely you will end up left aka fail. This is the essential definition of sequence of return and the essential display of conditional or Bayesian probability. In your retirement spend down getting through the first half rightward has a big effect on eventual success.

Here is the Galton board taking a nap. In this case success is winding up on top.

This is a Monte Carlo of a 60 year 4% withdrawal on a 60/40 portfolio. It is basically a statistical creation of the Galton board placed on its side. Instead of the whole board being represented only the success is represented at the top of the graph, the “right” cohort of balls. After failure there isn’t much point in gilding the lily about how bad the failure is so instead the bottom graph represents how soon failure occurs. In the above 7869/10000 simulations succeeded, meaning about 25% of these retirements failed by the 60th year. I’ve come to believe this is the proper way to view retirement, not some rearward looking analysis. The rearward analysis says nothing about the future it only rehashes the past. I stopped by FIREcalc yesterday and ran my numbers, and I think the projections are optimistic. I was reading a forum discussing how closely FIREcalc can predict and what percent failure is a reasonable percentage of failure, in other words using FIREcalc as the mechanism to understand what is enough. That’s the real rub. Enough is based on what you will actually need from the start of portfolio deflation (retirement) until the end and that number, the most important number, is a single data point the projected WR based only on what would have worked in the past dating back to 1870 or something. Lincoln was shot in 1865 and I’m not sure 1870 data is relevant to the analysis.

The above analysis tells you likelihood of failure and when that is likely to occur. The probabilities are conditional. Here are the probabilities based on the first 3 years of return being the worst

Pretty stark only 2173 out of 10,000 simulations succeed. Here is the super safe 3% WR success rate on a 60 year portfolio with the worst SOR first.

Better, only about half fail instead of 78% but hardly super safe. In the Galton board example it took about half the choices (6/12) before the likelihood of failure to dramatically start to recede and the likelihood of success to overwhelm. 30 years is a long time to live on pins and needles. It’s actually not quite as gloomy as that but what’s the point of blogging if you can’t create a bit of dramatic tension. It’s during those initial 30 years however you have the best chance of affecting where your ball will reside at the end, that’s when the conditional probability is most active on the outcome. It definitely colors the perception of how much is enough.

The above discussion shows the risk involved in leveraging your future. The 4% portfolio is more leveraged than the 3% portfolio Here is 2%

9234/10,000 succeed after 60 years using a 2% leverage. Probably why Bernstein uses 2% as super safe. I get a lot of pushback on this stuff but knowledge of how to adjust the odds is power.

Authoring Part Deux

To author effectively you need tools. A couple tools I think are useful. One is AoF’s spreadsheet course over on Udemy. This course will teach you how to make an effective financial analysis tool using XL or another spreadsheet. I highly recommend. A spreadsheet allows actually granularity to be applied to the future and your projected need as opposed to the MMM 4th grade math approach. Granularity is how you move the ball rightward on the Galton Board. Granularity implies the application of a Bayesian understanding to reality.

The second tool is Jordan Peterson’s self authoring tool It’s not a financial tool per se but a means to create and add and record granularity to your narrative, and make a record of the thought process. Memory is a vital component of creating the future. If you can’t remember what you were thinking or doing accurately you can’t adjust the probabilities. Sometimes it becomes evident the scheme needs whole sale revision and future directed journaling is quite useful. It is a means to grow your tree of life and it can not be done wrong. Here is a 2 second example

“my time is my own so this course is to find how to spend my time. I want enough to live without the need to work or worry about finance. I want enough to be able to provide for catastrophic situations. I want enough to see my kids get a BA or BS degree the prestige of the school is not relevant, getting educated is relevant”

By writing down short statements needs and wants get specifically elucidated and a plan can be developed around each and later modified because you will be able to actually remember what you were thinking. The Peterson tool is specifically designed to create future narratives which can have a high probability of success since they are directed and not just sitting down with Notepad and creating pages of gobbledygook. If you want to pound in a stake you need a hammer. To pound in a BIG stake, BIG hammer

The journal provides the narrative and nthe spreadsheet provides the quantitative means to understand funding the narrative. Big Hammer

Authoring Your Life

Next week I’m heading for bypass surgery so I may be back or not. I may wind up dead or I may wind up stroked drooling in my lap going weedle weedle weedle. It’s a matter of odds. , so what are my odds?

My genetics are CAD. The genetics in my case is based on metabolic syndrome which is a constellation of disease process including obesity HTN, T2DM. lipid abnormalities and possibly neuro degenerative disease. Each of these “sub diseases” in my opinion is a phenotypic expression of the main disease, metabolic syndrome. The sine qua non of metabolic syndrome is insulin resistance and insulin resistance is pretty much strictly diet based. The culprit is carbohydrate, all of it. Insulin is a master anabolic hormone and it will take precedence in hormone competition. Excess blood glucose causes insulin to be secreted and the goal of insulin is to store this excess energy and the end organ is to store the excess glucose as fat in the fat cell. Constantly bombarding the tissue with glucose, constantly bombards the tissue with insulin, which constantly bombards the tissue with an anabolic stimulation. The normal is to cycle. The cyclic hormone is glucagon which is catabolic. In the absence of hyperinsulinemia, glucagon undoes what insulin does. Glucagon promotes turning stored fat into free fatty acids available for energy and it promotes the conversion of glycerol into glucose through neogenesis in the liver. You can eat only protein, some fat and no carbs and you will have a normal blood glucose and adequate stores of glycogen based on the liver’s ability to make glucose from glucerol and amino acids. The body knows what to do. It does not involve a lot of hocus pocus or vegan schmegan or vitamin schmitiman it involves turning off the constant anabolic insult of tissue by hyperinsulinemia which is directly caused by carbohydrate consumption. The most extreme form of this diet is Zero Carb in which you live on meat some fat and water and let the enzyme system of the body normalize and heal.

I’ve had CAD for decades based on this poorly understood metabolic syndrome scenario and I’ve treated the sub diseases accordingly under supervision. I have managed to avoid actual muscle damage through a cardiac stent and exercise. but my genetics for the vascular inflammatory response to hyperinulinemia and my coronary anatomy is my problem. The heart has 2 main arteries right and left. My heart has a vestigial right artery. not diseased just barely there. My left is patent and the only artery feeding my heart. The left immediately subdivides to 2 arteries the circumflex and the LAD and those are diseased. The circ has a stent and the LAD was too small to stent. That is my anatomy PERIOD. You have no control over your anatomy, that is the hand you are dealt. My course after the stent was to slow the progression but stenting doesn’t change your genetics nor your anatomy. I exercise 4 hours per week and can raise my heart rate to 180 for a sustained period (bordering on anaerobic metabolism) and can recover to a normal heart rate in less than 2 minutes and my blood pressure response to extreme exercise is non hypertensive which means my vasculature responds to correctly to the metabolic load of exercise. It wasn’t always so. In previous years, though I exercised, the exercise was suboptimal and my heart responded in a decompensated fashion as opposed to it’s present proper response. I got to proper response through proper training. Since I retired I didn’t have a 60 hour a week job to get in the way. By changing my diet to zero carb, I lost weight and I lost inflammation and I lost hypertension and diabetes which are the killer combo of the CAD HTN DM Obesity quartet of metabolic syndrome. My arterial disease and anatomy remain.

During my cath I had them shoot my carotids and my c’arotids are clean. No disease. I also had the leg arteries doplared and no PVD. I don’t smoke which means my cilia work correctly and my lungs are not scarred. I do not have pulmonary HTN based on cath data and my CVP normally runs zero to +1 which means no component of failure. I got to this state through effective training not half assed suggestions from the Mayo clinic. I didn’t know if I would be able to be bypassed, my cardiologist felt I was not a surgical candidate and would be doomed to stents, a substandard solution given my anatomy. Given my rate of decline I figured I had 2-3 years left before the disease moved from salvageable to failure. I consulted with a surgeon had he said he could do a LIMA to the LAD and a vein graft to the circ, a 10-15 prognosis improvement. Because I spent a year preparing for surgery, getting all my ducks in a row even though not a surgical candidate according to my cardiologist. My acute prognosis post op is

This would have been my scores a year ago before I went into effective training

The point of this article is you have the power to author your life, but only if you do so effectively. Doing something is not enough, doing what is necessary is what is required.

If I had followed conventional treatment, I would still be living the slide 2 risk profile. I was fortunate to hit upon a combination of protocols that changed the odds, and it’s all about changing the odds. Hitting that combination was not random. It took all the experience of my 67 years. There is a properly productive way to play and an ineffective way that is actually pseudo random. If you are doing ineffective stuff you are basically doing random stuff. The process is Bayesian in that an action then effects the probability of all subsequent probabilities. This idea is best described by a Galton Board.

The video describes a normal distribution of events, and is based on the random 50/50 odds of a ball tracking it’s way to its final bin. Bayesian statistics suggests that although the populations behavior is normative the fate of any individual ball is not random. If you wantto end up on the “right” side of the board you have to bounce as much as possible rightward, and your rightness therefore can be affected by making choices with rightward probabilities and risks.

Bayes theorem is described in this video on the Kahn site. By going into training I affected my odds moving them considerably rightward, and by a combination of correct weighting of choices the odds improved even more. Conceptually this in my opinion is the best way to approach retirement as well as life. It’s about growing and pruning trees and affecting the probabilities which can be calculated. The above calculator is a medical example. Monte Carlo in the financial realm is another example.

In the past couple months I’ve become somewhat disillusioned with FIRE. It’s all taken on the sheen of bullshit. I see all kinds of cute schemes which are likely ineffective and random in the main. For example people invest in low cost index funds. Investing in low cost index funds guarantees you won’t do better than market return and in fact that is the point of this way of investing, yet people persist in trying to guild the lily and outsmart the market with this scheme or tat scheme, this hustle or that hustle and no way of determining the effectiveness of the hustle. A t some point it becomes about marketing and not knowledge. A t some point it becomes Amway aka multievel marketing, and I think the point has been reached. The FIRE Blogoland is not any less susceptible to Galton board statistics than anything else since its human endeavor raised to the level of religion. I see much in the middle and no one trying to Bayesian their way to the right, rather opting for clicks over ideas. Too bad really, all those wasted words selling soap instead of ideas.

Next three months are gonna be a bitch for me, and not sure what my FIRE apatite will be post op. Depends on whether my squash will still work at speed or I get pump brain, time will tell. In the mean time keep effectively biasing your decisions rightward so you wind up on the right side of the mean. That is how to author your life, by creating truly effective rightward narratives and avoid the click bait.

More On the Concept of Yield Shield and 4 x 25

I’ve been thoroughly enjoying Big ERN’s series on yield shield 29, 30, and 31. In a very even handed way Karsten pretty much demolishes the illusion of SOR “safety” associated with yield based retirements. I think the illusion comes from the way FIRE is sold by the bogglehead crew and others like Mustache. The shockingly simple math is the math of a passbook savings account, not a equity investment account, and given the passbook savings rate even that is far from safe. 1M @ 4% with a 4% WR works fine till the first 4% goes to 3 % or inflation goes to 3.5%.

I was reading another article by a young physician who has 1/2M in the bank and “decided” 3.3M would give him a FI retirement, but now it’s up to 5M. If you actually inflation adjust to just nominal inflation, $150K/yr added to 500K takes 19 yrs to get to 5M. Imagine at high inflation how long it would take. At 3.5% inflation for the same rate of return it now would take 22 years to make that 5M nut and every year after you pulled the trigger your effective WR and “safety” would be less. I’m just playing with shockingly simple 4th grade math here, not calculus or differential equations. Look at these numbers. A cut in the rate of return from 4% to 3%, with a 4% WR wipes you out in 47 years. An increase in inflation from 2% to 3.5% blows you up! These small changes represent SOR. They are what constitute SOR. SOR giveth and SOR taketh away. The yield shield does not take into account SOR because the calculation is based on a constant as in it’s not a variable but life is not based on a constant. SOR by it’s very definition is a variable. It’s a sequence not a constant. Where is the sequence variable in 4 * 25? In 3 * 33? Yet people blindly plan their lives around these variable-less formula and behave as if there is some assurance of success and get all pissed off at Suze O when she dare challenge the illusion.

Lets take the illusion of success and turn it on it’s head using a simple FV calc No fancy Monte Carlo statistics but iterative 4th grade math.

This is a 1M 4% WR 30 year retirement @ 6% return. 2.25% inflation and a 12% tax load. In 30 years your 1M at 6% would generate 2.748M. Taxes, inflation and WR would eat 2.000M. Your have 1.030M of buying power left

Here is the scoop if you make 4% on your 1M instead of 6%. After taxes inflation and WR your 1M has 398K of buying power left.

Here is the scenario at 2% return all else the same. 64K of buying power left. Better hurry up and die! You will notice what we did literally was vary the sequence of return. We turned the constant into a variable, with a pretty dramatic result! THIS is what Suze O knows! She intuitively understands there is a variable in there somewhere to worry about. Ignoring the variable is the face of retirement failure. This retirement is levered to at least 2% rate of return to satisfy the assumptions.

Lets say you get a diagnosis where instead of 40K WR you need 52K WR. For example the drug Repatha costs about $1000/mo

You ran out of money a long time ago. Your Repatha bill killed your portfolio off at 23 years. “Varying” the WR is part of SOR.

Here is a 60 year Mustache retirement. Mustache retired at 30 with shockingly simple math so this calculation takes him to 90.

At 6% Mustache still has 1.8M left in the bank at age 90.

At 4% return he better hurry up and die! Sucka is flat out of dough. 2 variables changed in this scenario SOR and longevity and this portfolio is leveraged to a 4% rate of return for success. This is the problem when you create scenarios like the Yield Shield. If your money is coming from yield your are ignoring growth and growth is your protection against inflation. It’s also the the problem with formula like 4 x 25 where you just pull numbers out of thin air and call it good enough. If Mustache gets a bad diagnosis at 55 or 60, with the above 4% plan the guy is screwed.

Skinning Cats and Fleshing Out Disaster Funding.

I have a well documented plan for post retirement risk management, which includes varied accounts, pre-tax, taxable brokerage, and Roth. My plan is to annuitze the pre-tax accounts through RMD after whittling down their present size through Roth conversion to something that won’t force me into higher tax brackets too quickly. It’s a perverse race between taxes and death. My Roth is primarily disaster money, in case of emergency break glass. The Roth is the most valuable money I own since I own it tax free, while the other two are still taxable, as ordinary income in the case of the pre-tax, and as capital gains in the case of the brokerage.

My pre-tax RMD has included a tax discount because a certain percentage of it was funded with post tax money and the government only taxes you once on pre-tax money. As I was working through my taxes it occurred to me there may be a different format for disaster spending, by spending down the pre-tax money first.

This is a picture of a $600K RMD amortized on the government’s schedule over 45 years @ 3% return. The green is the yearly disbursement and blue the remaining portfolio. It occurred to me after the 7.5% “standard write-off deduction” is met, in the case of a medical emergency you could basically extract extra money from the account tax free, never paying taxes once you meet the threshold. This means a 600K @ 3% pretax (mostly bonds) could provide about 8 years of of catastrophic care @ 85K/yr essentially tax free or at a very low rate. That extra 8 years of growth would be tacked onto the Roth and Brokerage. A 1M Roth would be worth 1.5M if it were risked in a portfolio returning 6% for 8 years with no withdrawal.

Let’s say you make 40K/yr on SS of which 85% or 34K is taxable lets say you generate a $50K bill fighting your cancer diagnosis. The 7.5% threshold is $2,550 so you should be able to pull $47K out of your pre-tax account, tax free to pay your medical bills, and leave the Roth to grow and pay your living expense later if you survive. Your married filing jointly tax bill would be less than $1K/yr on $90K of spendable money You can pull 50K/yr from a 3% 600K portfolio for 15 years before the stream runs dry. In the meantime the Roth grows to 2.3M. How do you spell relief? I spell it “well thought plan”.

A nice strategy to have up your sleeve if the time comes.

Yield Shield Schmield

There is a raging little argument going on over at Millennial Revolution. It’s over living off yield vs living off growth. Wanderer loves his “yield shield” and “cash cushion” and Big ERN is a growther through and through and claims living off yield is a mirage. I’m with ERN on the yield argument but I think there is merit to a tweaked cash cushion approach as well. My cushion tweak is to use an efficient frontier tangent portfolio instead of cash, so it grows in growth years efficiently but does it’s job in down years of protecting the portfolio against early SORR. My tweak also is once the tangent is out of money do not refill it just move to start living off the higher risk portfolio.

Here is 30 years of S&P 500 returns starting in 1988, 5.1% plus 2.245% yield for a net reinvested inflation adjusted 7.35% annualized return!

Here is 20 years of S&P starting in 1998 1.7% growth, 1.9% yield for a total of 3.626/yr total return.

here is a 2008 to 2018 look see, 9.366 growth and 2.281% yield for a whopping 10 year reinvested growth of 11.647% Reinvested yield is a supercharger! $1,000,000 at 11.647 becomes OVER $3,000,000 in 10 years. $1,000,000 at 9.366 becomes $2,440,000 in 10 years plus
281K of compounded dividend interest for a net 2,721,000. If you lived off the yield you would have on the average 28K/yr to live on. If you lived off the growth 3M-2.4M = 600K over 10 years = 60K/yr. Both portfolios after 10 years would be 2.4M

In the 20 year case 1M would grow to 2.04M over 20 years @ 3.636. If you lived off the yield you would live on 23,000/yr and the end portfolio value would be 1.18M. If the reinvest guy winds up with a 1.18M portfolio after spending some WR he could could live on 43K/yr. Both portfolio’s after 20 years are worth 1.18M . If the reinvest guy lived on 23K/yr he would have a portfolio worth 1.38M , 200 grand more than the yield living dude.

It is what it is. Reinvesting the yield is like a dollar cost averaging a yearly cash infusion. The good thing about yield is it tends to be non correlated with S&P growth, so you DCA pretty much the same amount each year whether the S&P is high or low, so some years you buy low, some high but you’re always buying and allowing that dividend money to be exposed to growth. On really good years your growth on the dividend way out performs your WR so only some % of the dividend is extracted and the rest just continues to grow, and grow and grow. In the down year you would prefer not to sell so have some low risk tangent frontier portfolio around to sell instead. I once was enamored with dividend stock scenarios till I did the math. You can goose yourself into using “high dividend stocks” but those can be dangerous and tend to be in concentrated sectors. GE paid a good yield till it didn’t. In the meantime it lost nearly ALL of it’s value. A yield shield doesn’t shield anything of the company goes into negative growth.

I’m with Big ERN except I include the ability to use tangent funds on years the market is down (YTD less than zero) to live on, and still reinvest the dividends when the stock price is low. Do that for a few down years especially in the first half of retirement an u gone b a winner!