Bogglehead Time

I give the Bogelheads a hard time. I was on CD’s site and realized in all fairness l should give the Bogel aficionados their due. What they do right is get people to right size their lives. For example for the average guy there is no reason if your employed to live in long term debt except for a mortgage and there is no reason to own a mortgage that is not right sized to your income. There is no reason to own too much car, and there is no reason to not save and invest. There is no reason to not try for a better job since a better job is an income multiplier.

The Bogelheads also get the portfolio basically right. Cheap index funds properly risked in a rising market are a sure winner. Return relies on the economy not stock picking or magic. It’s the jokers in the C suites of the companies that make you wealthy, such a deal. All you have to do is come along for the ride. I poke a lot of fun at the BH3 because I want to teach folks about modern portfolio theory and doing comparative analysis is a good way to do that.

With the advent of Personal Capital graduating to a modern portfolio theory portfolio is plug and play simple. You can upgrade your portfolio to one consistent with MPT and Personal Capital will tell you exactly how to pick your assets and AA to be on the Efficient frontier. It will then add up your cost of owning those funds and Monte Carlo the result to give you some insight into the future and if you are saving enough.

Funds now are dirt cheap to own and transaction costs are dirt cheap as well, the tools of optimization are free, life is good. So what’s the downside of Bogel’s crew? It’s unclear what FI really is. I listened to a “what’s up now” podcast and the panel was interviewing the audience asking if they were FI. Everybody in the room thought they were FI including people with just a few K in the bank. Because they had read a book or read some blogs they assumed they were on their way and could claim the title. Then there is the RE at 30 crowd. They are just gambling or they have a job (like a blog) or a wife who has a good job aka they are freeloading to a greater or lessor extent. Certainly a 1 income household is legit but it takes a long time to reach true FI on one income. In the recent Playing with Fire movie this became evident. The couple were living on their parents couch for a year while grandma baby sat. The wife “tele worked” all day to bring in some dough and the dude hung out tying to figure out a gig. I don’t see free loading as FI or as a means to a 3M nest egg, nor is it a real narrative of success. Free loading by definition is financial dependence.

I find it interesting the narrative seems to have moved from FIRE to FI and people still have a W2 or have manged to start some kind of business. I hear more and more about being FI and less and less about FIRE which means normal wisdom and risk aversion are modulating the narrative. Virtually nobody is retired in earnest they are just FI. I’m not the retirement police so people can do what ever they want, but it causes the narrative to skew wildly away from reality, and I think that does a disservice to those who are being sold the narrative. My hope is the narrative will continue to evolve into something essential and sustainable since we now have amazingly powerful tools, to use to accomplish the true goal of true FI.

So we have now the analytical tools of accumulation, and some ability to attempt to peer into the future using either a historical analysis technique or a Monte Carlo technique. We also have some models of spend down very different from the BH boilerplate of 4% x 25. Kitces for example just wrote a piece of flexibility in spend down. Big ERN includes Sharpes ratio in his spend down viability calculations attempting to better quantify risk and improve his aim at the retirement target. Others are developing odds based models (expectancy theory) to try and determine what is the smartest choice based on probability of success vs probability of some failure or less likely outcome, a very Bayesian approach to spend down. If you look at a normal distribution in spend down, expectancy theory attempts to choose the choices most likely to place you in the better half of the distribution. If you wind up in the better half your chances of being in the worst half tend to zero eventually. My own work at looking at actual year by year spending to arrive at a total cost of retirement and a means to accurately estimate through budget a rational “number” based on your actual life style and not some wanna be lifestyle.

That is the future. Those books have yet to be written, and when they are both FI and FIRE will come into clearer focus. The financial tools and programs for understanding this also exist. Being rich and then not becoming poor is a different thing than day dreaming about being rich. Eventually the hucksters and snake oil sellers who make their fortunes off the masses will die away. People are smart. It’s the reason nobody accepts the 4 x 25 rule as legit. There is simply too much at stake.

How to BEAT The Market!!

I read a recent article on the PoF Facebook site about some stock picker who crushes it at least according to him. I beat the market by living on the “efficient frontier”. Here is an example:

This is 1M invested in a BH3 Vanguard fund portfolio with a WR of 4% over 30 years and normal SORR and historic inflation. The graph uses a log scale on the y axis since it makes running out of money look more dramatic and the graph is inflation adjusted. On the 10% line you are doomed at 23 years and have only 1/4 of your starting portfolio at the 25% line. You are essentially even at 50%. This is a 50/50 scenario half the people do well half do poorly some so poorly they run out of money.

This is a 80/20 US stocks US Bonds Vanguard portfolio made up of the same US funds used in the BH3. The foreign fund is eliminated and that amount is added to US stocks. The 80/20 lives on the efficient frontier. All other parameters the same as above only the asset mix has changed to move the portfolio to a less risky risk return position on the EF plane.

Notice the success rate of the portfolio is 93% in the 80/20 as opposed to 82% in the BH3. Notice ALL lines still have money at 30 years. The 25% in the BH3 had 1/4 of the start amount. In the 80/20 nearly 1/4 is still in the 10% line’s portfolio. And the 50/50 split where “half do worse half do better” is now the 25% line, so in the 80/20 scenario 3 out of 4 do better. Notice the 90% end value of 5.1M in he BH3 and 8.3M in the 80/20. If the BH3 is supposed to represent “the well diversified market”, the 80/20 clearly beats the market and not by a little. On the 50% line you have doubled your money and considerably improved your longevity simply by choosing the the more efficient portfolio. Specifically at the 50% rate of return line the 80/20 effectively has an additional 2.2% of return compounded over 30 years

That’s called beating the market! In my last post I talked about choosing what is essential. Clearly choosing an efficient portfolio is essential. Just as clear by eliminating the Foreign fund, the FOMO turns to the JOMO. The fear of missing out becomes the joy of missing out. This is essentialism and parsimony in practice.

Less But Better

I’ve always been fascinated with the concept of parsimony. Parsimony is often confused with cheapness, but its not about cheapness. Minimalism is often conflated with doing without aka don’t buy anything for a year. Not my gig. I’m more interested in buying the right thing, the thing that is a long term solution to a need. The right solution is the parsimonious solution.

In high school I drove a 66 Ford Mustang. I didn’t have the V8, I had the V6. I didn’t have the 4 speed shifter, I had a 3 speed. My straight 6 engine was indestructible. My straight 6 didn’t fill the engine compartment like its V8 sibling. I could almost climb in next to my engine to work on it, making it easy to work on, a key consideration for a kid who had to do his own repair work. I could tune it up for just a few bucks. The torque of the 3 speed would not allow 30 ft of rubber to be laid so the tires lasted longer. The car was lighter, so easier on brakes and got better mileage. Parts (like mufflers) were cheaper. It was still a ton of fun to bomb around in and I had it up to about 115 more than once so it went plenty fast. It cost less to purchase used. It was just the right thing for a 16 yo punk kid with a part time job working at a gas station. Not too much, not brown Betty the station wagon–Parsimony.

When we moved to my present town after I exited the Navy, my wife wanted a treadmill. I bought one for maybe $700. It was consumer grade. It had a component in the motor speed control which would overheat and eventually lead to malfunction. I gave it away. I bought a commercial grade gym quality machine for just under $5000 in 1992. That machine never broke down and we used it every day even 27 years later. It’s been about 2/3 the way across the planet in terms of miles covered my cost is about $185/yr. Later I added a $120 factory second weight vest which allows for excellent control over the metabolic load. I bought one for my wife as well as weight vests are good for protecting against osteoporosis.

The next year My wife wanted a weight machine. Having learned my lesson regarding buying cheap crap, I bought a small machine that had multiple stations (about 22 exercises) and could be set up to move from station to station with only a weight stack adjustment consisting of 1 pin. It was easy to maintain a metabolic load while lifting across every muscle group. We both use it all the time. It’s not quite as good as free weights but it does quite well and nobody need spot you. It was the kind of machine you would find in a motel gym, low end commercial and it fit the space I had perfectly. It cost me about $4500 or $173/yr. Those machines plus some other minor ex equipment live in my home gym. It was easy to stumble out there any time day or night before work or after on my schedule. I never had to go anywhere and was not tethered to some other gym’s schedule. It removed the energy hump excuse. Even more so now that I’m retired. 10 grand for exercise equipment = parsimony? 27 years of availability with no gym fees or hassle = parsimony. I have another half dozen examples where buying the right thing, not the cheapest or most expensive has paid off over the long haul.

There is a concept called essentialism. It comes from an educational philosophy where what is taught is a function of the teacher not the student and the curriculum is the classics of History English Language Math Sciences Humanities Logic and Philosophy as a core and a few electives. The core was considered essential to creating a well informed and capable adult. I trained my children using this concept. The concept moved out to business. Southwest airlines for example made specific choices to eliminate the noise in service compared to other airlines. No food, no first class, point to point, not all cities covered, first come first served, just the essentials. Southwest made a killing providing just the essentials. Less but Better.

I went to med school in Chicago. There are like 8 med schools in Chicago most with teaching hospitals attached and plenty of duplicated services. My hospital was run by Jesuits, steeped in the essentials. It was part of the reason I chose to go there. It was a classical style education none of organ systems group think approach. Each student needed to experience neuro-anatomy both gross and microscopic, it was not a group experience.

The Jesuits understood in the 80’s the money was in cardio and cancer so they specialized in those. We had every other service like NICU, Peds ICU a big burn unit, Neuro Medical OB Trauma unit etc but in Chicago there were specialty hospitals like Children’s Memorial and Prentice for OB/Gyn and we were set up to rotate through those institutions and see the zebras. Those folks rotated to my place for hearts and cancer. Our hospital had its own affiliated nuclear accelerator at the VA across the street. This is an example of essentialism, doing more with less, and doing that less better. I rotated through all the specialty centers several times and got my chops and pimps from the experts and a much more varied education.

I think this concept could and should be attached to FI. So much of FI is a hodgepodge of conflicting concepts, incomplete and chaotic knowledge. Often it over promises and under delivers. There is an article describing the concept on the Forbes site. The author speaks of Greg McKeown who as written on the topic and is a guru in the field. I have his book and can recommend. Instead of going in 48 different directions each fairly ineffective go in one direction balls to the wall ignoring the noise. Learn the JOMO joy of missing out and the benefits it promises.

Delta tried to beat Southwest at it’s own game by creating a competing “lite” version. It flunked. It flunked because of economy of scale. Delta wanted to be all things to all travelers and so couldn’t be the best to any. Does this apply to your portfolio? Are you so busy attending to crowd funding or silly side gigs which require a ton of risk and work for not commensurate return (FOMO) that you miss the supercharged thrust of sticking to the essentials?

Gym Time! CYA

Financial Planning

I remember in first year med school I was studying the extrinsic and intrinsic pathways of clotting. The pathways first year are taught as part of cascade reactions in the biochemistry course. I decided to learn a little more so I checked out a 2500 page 20 pound text book on Hematology from the reference desk at the library. The book was so dense it took me half an hour just to find the cascades. Once I did I found there was a lot more to know. It was that experience that taught me the level of knowledge I was up against.

Medical school was about learning 10 things, and you were tested on those 10 things. The “neurosurgeons to be” learned their 10 things perfectly. Some others learned less completely, we all learned enough, but here in my hands was a book that contained nearly all there was to know about Hematology at the time of its publication. My 10 things weren’t even in the index. You learn more than 10 things as you progress and more than thousands of thing as you pass through residency to become attending, It starts with 10 but hardly ends there.

I’ve been thinking about CD’s retort that I’m the Socratic Gadfly of FIRE. It is true, but why is it true? Why don’t I just accept the MMM boiler plate? Why do I think that FIRE movie is propaganda? Why when I read misuse of the Pareto principal does it raise my ire? Why do I care? The essential reason I care is people are basing their futures on what is written. They are basing their futures on learning 10 things. In medicine you learn 10 things, then move onto the clinics and those 10 things are fleshed out into the blood sweat and tears of sick people. If you pay attention the 10 things become more than the cliff notes.

I had a pt once the first day of 4th year on the cancer service at the VA, who came in with extremis. It was the day I learned some people come to the hospital to die. It was also the day I met my wife in a bar as I considered what had happened. The patient came incoherent. I spent a couple hours trying to get an IV in him. I would get into a vein, but no flash. I could advance the catheter but no return and eventually the catheter would “blow”. I would pull out the cath and then it would bleed profusely. I thought WTF? and deduced the PT was in DIC. This was the expression of the cascades in reality. During the course he threw a clot or a wad of cancer from a leg vein to saddle in the pulmonary artery and died. The guy was riddled with metastatic CA and the 4th year resident showed up and cancelled the code. In reality there was nothing to do but that didn’t quench my feeling of inadequacy that I somehow let this guy down. The 4th year knew more than 10 things, way more.

It’s this kind of thing I see in the FIRE movement. I see a lot of people who know their 10 things, but knowing 10 things is woeful. There is a whole 2500 pages to know. I see people spouting those 10 things as if that’s all there is. It’s like a blind man exploring an alligator, not big deal till you find the mouth.

There is a kind of scholastic philosophy called essentialism. It is basically classical education, where you learn rhetoric, English, languages, math history, sciences, philosophy, religion. In studying that body of thought a societal cohesion is formed, and a kind of brotherhood of belonging in a way tat fixes you in space. It’s the education I gave to my children. It’s not just 10 things but it’s the 10 essential things that underpin the truth of shared human experience.

FIRE doesn’t have that. It has no truth. It has millions of opinions expressed for millions of reasons, promoting millions of narratives and agendas. It promotes a mechanism of using index funds to risk money in some simplistic formula, but in the end nobody believes that. It could have truth if it was broken down to the essentials, but as long as it’s every man for himself it does not constitute a body of knowledge. It’s a collection of half truths showcased as the truth, and then marketed as the truth. People are hanging their futures on marketed half truths, while the marketeers clean up. I find that disturbing.

There is a fallacy called the planning fallacy which basically states any plan takes longer to complete than planned. Plans are projection and projections don’t lead necessarily to reality. I break FIR down to 2 parts accumulation and retirement, very different beasts requiring very different plans. Refer to the planning fallacy when considering each

Attaining FI is certainly possible but RE doesn’t necessarily follow. Knowledge of 10 things is not enough knowledge to retire. FI may not actually be FI once you take risk into account. MMM became super frugal, made 1M and retired at 30 on 27K/yr aka WR = 2.7% a far cry from 4%. That plan at 60/40 AA has a good 98.68 chance of lasting 60 years, but what about health care inflation? You move to the alpo diet and hope you don’t wreck and fracture a hip on that bike in the Colorado snow. I guess we missed essential “thing” 11 and 12, yet they are glaringly obvious. It’s 98.68 with the caveat: if nothing goes wrong. What could possibly go wrong?

I guess part of my skepticism comes from not knowing about FIRE narratives in accumulation and reaching retirement financially independent by separate means. First time I heard about FIRE was a year after I quit, so FIRE didn’t bring me to the dance. I didn’t know the 10 things, so I had to manufacture essential things to get here. The MMM narrative is not my narrative and I find it remarkably shallow and self serving, so I don’t buy the soap, sometimes I wish I could.

My goal is not to rain on the FIRE parade but to think about that cliff outside in the cold distance.

No reason to get excited
The thief he kindly spoke
There are many here among us
Who feel that life is but a joke
But you and I, we’ve been through that
And this is not our fate
So let us not talk falsely now
The hour is getting late

Outside in the distance
A wildcat did growl
Two riders were approaching
The wind began to howl

Pareto Principal Malarkey

I read a blog post today abut the topic of how much you need to save. It was a Pareto principal analysis, 20% of the dope gets you 80% of the results. The analysis was a typical FIRE blog analysis which starts at year one (say 30) and ends at year retirement (say 45) and uses the hokey 25 x, or an even safer 30 x. It was 100K/yr and it was decided 2.5M or a safer 3M was enough to get the job done.

Here is the analysis of 3M @ 3% inflation and 5% return a 45 year retirement

A 45 year retirement will cost 9.27M. In this analysis the portfolio fails in year 44 (age 90). The analysis does not include SS with SS it would likely not fail. Let’s see:

This is a guesstimate of SS taken at age 70 and inflation adjusted to age 90, SS=1.1M So you’d wind up with about 700K in the bank at 90.

This is what is wrong with Pareto. This analysis took 10 minutes with explicitly defined assumptions and results. If you Pareto it you end up broke if you work through it you are far clearer in your understanding.

Would you be temped to quit @ age 45 with 2.5M in the bank? Remember this does not account for end of life issues, increasing taxes (note the last year you are in the 32% bracket) or SORR. 2.5M is dicey

Even with SS the portfolio fails in year 35 (age 80). 100,000K x 25 = 2.5M to start. This is why I think it is necessary to plan not from the year of retirement but from the year of presumed death. You can also see the effect of working more years on portfolio longevity and the effect of everything like SS.

Here is a 35 year retirement 2.5M @ 5% and 3% inflation, beginning at age 55 and ending at 90. Notice how the portfolio still fails at age 88 but the longer SS leaves you with 900K in the bank

Would you quit @ 55 with 2.5M in the bank? I’ll leave the consideration up to you but clearly making 25x last 35 years much less 45 years without the safety of SS is nuts. I must admit Pareto got you 80% there BUT 80% WASN’T A GOOD ENOUGH ANALYSIS.

Stochastic Portfolios

In my guest article at ERN, Karsten compared some of my data to his WR spreadsheet. The numbers are very different from my FIREcalc comparison to Monte Carlo in a good way. I think the Sharpe’s adjustment helps. I thought about what Sharpe’s really is and I concluded it’s a risk modifier. If your portfolio has some long term risk, the Sharpe’s modifies that risk because it’s magnified for the period of time when Sharpe’s is high and relaxed when Sharpe’s is low. It’s a very clever cheap and dirty modification that I think improves WR predictability. Cheap and dirty because Sharpe’s is free for the using.

In thinking about this I decided there is a well known physical equivalent. In the general chemistry analysis of solutions, every solution has it’s own equilibrium constant the caveat is “for weak solutions”. To get a more complete picture of solutions there is an alternative P-Chem analysis that involves multipliers. This means P-Chem analysis of solutions turns from a kind of linear analysis A + B = AB to a non linear second order process xA + yB = zAB and the coefficients are determined in various ways. The xyz are called activity constants and are variable depending on certain defined properties for a given solution.

What this means physically is chemicals don’t act with 1:1 correspondence but in concentrated solutions act as clumps of molecules and the molecules clump because of the way molecules act locally in solution. The stochastic looks at macro solution behavior, but the activity looks at deviation of solution behavior from the predicted stochastic. The idea is to develop a model that actually predicts how a solution will behave.

I think Karsten’s modification is like this, and it uses the “clumping” of excessive local risk in times of high Sharpe’s and relaxing of local risk in times of low Sharpe’s as a way to tease out non linear behavior in the risk model based on particular periods of time. I think it’s a cool idea to view the economy as a stochastic model (a marco model, like FIREcalc does) and then further modify the model to gain insight into local economic behavior.

Playing With FIRE

I went to see this movie on Wednesday with my wife. It was in Tampa 2 1/2 hours distant. I had a second ulterior motive. Tampa is now home to a recently opened Hot Dog chain from Chicago. Obviously someone retired from the Chicago chain to Tampa and built a couple stores as a side gig. It’s named Portillo’s and my wife LOVES Portillo’s Italian Beef sammy’s, on a croissant, with sweet roasted pepper, French Fries and Root Beer. We used to go when I was a resident in Chi but her experience predates our meeting so it’s a long part of her history. t was so fun to spring that on her on the way over and then watch her light up at the experience. That alone was worth the trip. I like me some Portillo’s too.

The movie was a disappointment and pretty disturbing. It was pitched at “retire by 30” and was a cross between Tony Robbins, Crossfit culture, Amway and a time share sales pitch.

The story was about a couple and their absolutely adorable baby living in a San Diego beach community in a 1.4M crib with Beemers, a $2000/mo food budget bla bla bla. One of the shots is the guy in his speed boat fishing in some San Diego bay with a gorgeous sunset caught on drone footage. The guy makes video and the wife telecommutes and they haul like $150K/yr, already something doesn’t compute. The guy catches wiff of FIRE on TV and gets a hard on. He badgers his wife into ripping up their life and they leave SoCal to go stay on their parents couches “to save money” first the wife’s parents then the husbands parents. The husband is from IA so they are living in rural IA fishing in creeks and such “saving money”. Still fishing no boat. (should have bought a rural IA crib for 25K and saved some real money)

The wife is paying the bills with her telecommuter job working 8 hours a day. Her goal is to spend time with her baby but that becomes Grandma’s job. Hubby is supposed to have some kind of “remote job” never spelled out so pretty much he’s a dead beat with big ideas, while his wife pulls the train and the parents foot the rent and babysit.

Eventually he starts flying around visiting (and filming) FIRE types and flying to conferences and goes to FIRE camp where they sit around the campfire and squawk about being retired by 30, and the FIRE types are quite happy to pitch him. All the luminaries are there, but wait there’s more! He goes to see MMM and get’s video of him riding his bike “to save money”. ALL of these FIRE types are running huge media empires to supplement the 4 x 25. He has a lot of drone video of Vicki Robbins palatial estate on a Washington State island with the caption “retired by 26”. It’s such BS. It’s like saying Dave Ramsey is “retired”.

Eventually they wear out their welcome at the ‘rents place and fly to HI with the kid for a vaca sleeping on their friend’s couch. There’s a typhoon or something and the place floods and they have a “bad time”. Man what a gyp! They go house hunting and wind up in Bend Oregon, a well known destination for Cali ex pats, and buy a new crib. Downsizing to these people is buying a half a million crib in Bend and trading the Beemer for a perfectly functional Honda. The guy buys a bike and a trailer so he can ride 2 blocks to the piggly wiggly to shop and “save money” and returns to his mortgaged half mil crib and they make a months worth of breakfast burritos and freeze them “to save money”. Oh the Pathos!

They meet JL Collins who advises put every dollar you can into VSTAX AND NEVER SELL so we get to see them stuffing 3K into a brokerage account and they keep flashing their “emergency fund” balance of $12K and keep flashing how much they are saving and how many years to retirement. The wife is pretty miffed at this nonsense having given up her previous life but eventually comes around to the “frugal life” WINNING! All of it is geared around retire by 30 and even making the movie is an obvious sop to this guy trying to create a payday out of cliche’ (nice alliteration ehh?) It’s all boiler plate. Millennial Revolution hawks their party line (her book was released only the day before I saw the movie, (I’m sure her rags to riches story is ripe for movie picking) MMM hawks his line, JD Roth his line, Mad Fientist, Vicki Robbins (retired at 26 and now lives in a multi million crib in Island WA) hawks her line, and so on and so on and scooby dooby dooby.

The audience was full of kids trying to find out how to retire by 30 so they too can live in Bend Oregon with a half a mil crib and 2 paid cars and a bike. AMWAY!!! AMWAY!!! AMWAY!!! I’m all for people living their dreams and building their futures with their own two hands and creating their own narratives. God knows I did it, but because I did it and I get what’s really involved and I think it does the community harm hawking this nonsense. I wonder how these jokers are going to fund their kid’s college? What about health care? So much risk so little insight. Just once I’d like to read the tales of people who flunked FIRE. Suzy Orman tried to convey some of that in he Pound interview from letters she’d received about failure, but she was shouted down. You’re not allowed to fail and if you do, YOU DID SOMETHING WRONG! Not sure how something like getting cancer is doing something wrong. Not sure how 3K in a brokerage 12K in emergency and a half a million mortgage constitutes FIRE.

Another thing that bothers me is who pays the bills? America and FIRE is predicated on productivity. If America isn’t productive your bank account won’t last 10 years. You are not a tycoon, you are a flea living on the economy’s ass and you go where it goes. If productivity tanks it’s game over. We are the most productive people in history. Were do the taxes come from to pay for the roads and schools and military? The reason we are the reserve currency is because of our military who protects that store of value and the military is dependent on our productivity. The whole pitch was about “I got mine!!!” You only got yours till the government confiscates it. You can watch the Sound of Music for more details.

All in all it was a good time. We had a good time hanging with each other, a too fun meal, a nice trip over and a nice trip home and some interesting discussion dissecting the movie. My wife is not a FIRE type at all this was her first official foray into the topic but she’s naturally parsimonious and she knows BS when she hears it. I tweak the finance she tweaks the budget. I think this over selling and zealotry is why virtually no one pays attention to the FIRE rap. The flaws are too obvious

Compare Historical vs Monte Carlo

Karsten picked up my article and published it over at ERN. I was fun collaborating with him, he’s a very smart cookie. In my recent analysis I thought about comparing FIREcalc, the kind of gold standard for historical based retirement calculators, and Monte Carlo. By comparing you can gain some insight into future variability in your retirement plan from 2 vastly different mathematical points of view. The Trinity study looks at historical return, in 30 year aliquots of time from 1925 to 1995. You can see already the Trinity stud is 25 years out of date. Between 1995 and today we have gone through 2 major recessions. The government is leveraged out the yin yang and they would love to loot your retirement funds to feed that beast.

The Trinity type approach uses a 50/50 portfolio as does Bengen’s earlier 1994 study and a 30 year time frame in the historical analysis. The authors give this caveat:

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.


FIREcalc is a calculator based on the Trinity methodology. It looks at aliquots of history, the length of the aliquot is set in the calculator as is yearly spending and starting portfolio value. It analyzes data from 1871 with latest data update earlier this year. The question it asks is what would have happened over history if I had the listed portfolio, and how many times historically would I have run out of money. It therefore only looks at the past in a deterministic way and presumes the past will somehow mimic the future

From FIREcalc home page:

How can FIRECalc predict future returns from past performance?

It can’t. And it doesn’t try….

Except for this kind of severe limitation FIREcalc is a very powerful planner. You can adjust all kinds of parameters like inflation and portfolio AA and even a granular portfolio mix like small caps and EM etc. It allows addition of SS income on a given date for both spouses, different spending models. A lot of time went into designing this piece of software. One problem I have is understanding how a portfolio of stocks and bonds starting in 1871 (6 years after the Civil War) provides some rational information about my portfolio ending in 2050. The program is widely used as proof of performance and many FIRE retirements are based on it’s presumptions and calculations. I don’t have a dog in that fight, people can do what ever they like and since I haven’t reached 2050 I don’t know if my presumptions will hold true. So I use FIREcalc for what it’s worth and use Monte Carlo for what it’s worth, and try to divine the tea leaves,

FIREcalc is deterministic not truly probabilistic. It looks at history and ask the question of failure in the past. Monte Carlo is entirely probabilistic but uses some historical parameters to determine the model, things like an averaged historical inflation, how assets performed both in risk and reward over some period, things like that so the model is not entirely divorced from history, but what the model predicts is a distribution of “probable futures” from most likely to least likely on both the down side and the upside. It tells you there is some chance of running out of money (10% line and below) and there is some chance of getting lotto like returns (90% line and above) and then there is the most likely result that lives on the 50% line, so Monte Carlo in some sense forward looking in terms of likelihood but NOT deterministic. Taken together the two calculators give some range of perspective.

I used a 50/50 AA, a 30 year retirement and a 50 year retirement. I used US Stocks and US Bonds in the MonteCarlo and used the asset mix native to FIREcalc except I adjusted the AA to 50/50 equity/fixed. I used 1M and 40K/year withdrawal and whatever the calculator calls historical inflation. Monte Carlo allows SOR stress testing but FIREcalc does not since it only looks at history.

30 years of 4% WR on FIREcalc with historic inflation

FIRECalc looked at the 119 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

“Here is how your portfolio would have fared in each of the 119 cycles. The lowest and highest portfolio balance at the end of your retirement was $-223,952 to $4,145,063, with an average at the end of $1,146,780. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.”

The first failure seems around year 25.

The Monte Carlo predicts 97.98 success and

Year 16 start to fail. Interesting data..

A 50 year retirement:

“FIRECalc looked at the 99 possible 50 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 99 cycles. The lowest and highest portfolio balance at the end of your retirement was $-1,641,644 to $7,055,125, with an average at the end of $1,022,915. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 40 cycles failed, for a success rate of 59.6%.”

Monte Carlo 50/50 AA at 50 years:

59% success vs 91% predicted difference between the 2 calculations. Amazing!

80% AA at 50 years

“FIRECalc looked at the 99 possible 50 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 99 cycles. The lowest and highest portfolio balance at the end of your retirement was $-2,339,116 to $20,646,899, with an average at the end of $4,071,620. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 20 cycles failed, for a success rate of 79.8%.”

Monte Carlo at 80/20 and 50 years

80% vs 88% success rate. Note how increasing the AA to 80/20 made longevity worse for MC and better for FIREcalc on a 50 year retirement. This may be why FIREcalc-ers tend toward high AA, because the calculator predicts a better outcome and why Monte Caro-ists tend toward more stodgy allocations. The two calculators predict different futures that’s for sure! Personally I think much deviation is accounted for in the method of projection. All FIRE is based on projection and projection is deviant. It does not actually predict what it portends to predict. It’s like shooting a bullet at a distant target using Kentucky wind-age in a truly accurate gun, a tad to the left you miss the target by a mile but to the left. A tad to the right the opposite occurs. Both shots miss the target, but both misses give you information about where the target actually is. There is nothing says you can’t improve your aim. In fact that is what you do. Come a downturn you may well reduce your WR and change the calculus. You may use a mechanical re-balancing technique as risk management and come a downturn you may re-balance and super charge your post recession returns. The models tend to be static, life is dynamic . Another issue is these models project withdrawal and most people are unfamiliar with withdrawal but are used to accumulation. When you start withdrawal your risk profile is very different than when accumulating.

Secure Act in More Depth

My financial adviser is retirement expert Phil DeMuth PhD author of about 12 books on finance and a contributor to Forbes. Every quarter he dutifully pens a letter keeping the troops under his tutelage informed of developments. I wrote a piece on the secure act last month, but this letter’s content is far more extensive. Be afraid, be very afraid

The SECURE Act: Implications for your Retirement

Accounts and Estate Planning: Sometimes a piece of legislation is so terrible that both parties immediately fall in love with it, and this is the case with the Secure Act. It passed the House with an overwhelming majority and is widely expected to pass the Senate soon. The Secure Act covers all the main retirement vehicles: Traditional IRAs, Roth IRAs, SEP IRAs, Simple IRAs, 401(k)s, 403(b), and 457 plans. The legislation is so important that I want to discuss it in detail. I hope it does not pass, but if it does, you will want to be thinking about how it affects you and how to respond.

Background: The main sponsor of the Secure Act is the insurance industry. They are lobbying hard and have our representatives on speed dial. Why? The Secure Act mandates that an annuity payout be offered as an option in all retirement plans. Insurance companies sold $230,000,000,000 worth of annuities in 2018, and their goal is to sell even more.

Annuitizing your retirement plan assets is a bad idea unless:

 You need all the cash for living expenses (you have no bequest motives)

 You can find an annuity that indexed to CPI-E, the inflation rate facing senior citizens that includes their increasingly expensive medical care

 It is indexed to our rising standard of living

 It has the lowest possible default risk

 It is low-cost

Unfortunately, such an annuity doesn’t exist. Congress eyes your retirement accounts as a giant piggy bank. The mandatory offer of an annuity is a slippery slope that could lead to the mandatory annuitization of all retirement accounts in the future. This would shoehorn the distributions into higher tax brackets, raise revenues, and eliminate the “problem” of the inherited IRA. Best of all, politicians would get to accomplish this without “raising taxes.” But that is a problem for another day.

The issue before us is that the Secure Act would be an estate planning catastrophe for people with large IRAs. It takes the sensible planning done up until now and stands it on its head. What is the problem? The Secure Act eliminates the stretch IRA. The stretch IRA let you leave your retirement accounts to your children or grandchildren or other heirs, who then parcel out the required minimum distributions (RMDs)over their actuarial lifetimes. The payout might be small for a child but would grow over the decades until the inherited IRA would comfortably provide for the child’s retirement. A parent could die with the knowledge that, whatever vicissitudes their children might experience in life, they would have freedom from want in old age. What a wonderful legacy. Congress wants to kill it. In exchange, they plan to let you postpone taking your first required minimum distribution for a year and a half – until age 72.

How it would work: The Secure Act forces non-spouse beneficiaries to pull out all the money from your IRA over ten years. (The original Senate plan was even worse: 5 years). A surviving spouse can pull the money out over his or her actuarial lifetime (or yours, if preferable). A child can pull it out over his or her actuarial lifetime up to age 21 but then must takeout the remainder over ten years. Only beneficiaries who are disabled or fewer than ten years younger than the account owner are exempt from this ten-year pullout rule. If you skip a generation and leave the IRA to your 5-year-old granddaughter, she must take the money out over ten years. Under the Kiddie Tax, it would be taxed at her parent’s rates. Only your children (not your grandchildren) can use the actuarial payouts up to age 21. Before, the best approach was to leave your IRA to your kids or grand-kids and stretch the payout over decades. Now the longest stretch might be with your surviving spouse – who likely will be paying taxes in the higher “filing single” tax bracket.

The bracket jump a surviving spouse experiences can easily go from 12% to 25% or from 24% to 35%, especially as the mandatory payout ratios automatically increase with age. For example, the RMD for a seventy-year-old is 3.7% of the retirement account balance, but for a ninety-year-old, this rises to 8.8%. In most cases, the IRA will eventually pass to adult children. If a million-dollar IRA ends up in the hands of an attorney/daughter, she will have to add $100,000 of annual income on top of her six-figure salary for a decade. As much as half might be swallowed by taxes. The effect is to make more of your IRA subject to higher taxes sooner, as distributions are forced out in bigger chunks that are subject to higher tax rates under our progressive tax code. This is not what the government promised us when we were making all those contributions, but there it is.

By the way, the Secure Act is also a college planning catastrophe for middle-class parents. The temporary but jumbo, highly taxed mandatory distributions from inherited IRAs will make these families spuriously appear high-income on the Free Application for Federal Student Aid, ruining their prospects for need-based financial aid. The ten-year mandatory IRA payout will look like a Christmas goose to colleges. The result is the opposite of what the grandparents intended. The Secure Act lowers the value of retirement plans – perhaps not for the half of the population who pay no Federal income tax – but very possibly for you. Our estate planning options for them have become much more unwieldy.

Using a Trust In the past, many estate attorneys would cut and paste the boilerplate from Natalie Choate’s IRA book to establish trusts that could stretch the IRA distributions, rather than having the IRAs pass directly to human beneficiaries. One appropriate use for a trust might be if you had beneficiaries who were young and you didn’t want, say, your 8-year-old grandson to get unfettered access to a million dollar IRA when he turned 18. What happens under the Secure Act? Since there are no longer any “Required Minimum Distributions,” the trust receives nothing for the first nine years. Then year ten, by law, the IRA must pay out everything. Now the kid turns 18, and suddenly he gets $1,000,000. With a decade of additional compound growth, it might be $2,000,000. All delivered in one year, so most of it is taxed at the highest Federal and state brackets. The money that remains is his to spend. Once again, we have the exact situation the grandparents set up the trust to prevent.

Recommendations: Broadly, there are two kinds of trusts that people use here. One is a conduit trust, where the trust passes through all the income to its beneficiaries every year. The other is a discretionary trust, where the trustee decides what gets paid out to each beneficiary every year. In the example above, we saw the conduit trust makes Johnny a millionaire at age 18. If this were a discretionary trust, the trustee could withhold the distribution. But trust tax rates start at 37% on only $12,500 worth of income, and state taxes are on top of that. We can postpone giving the money to Johnny, but the taxes would be severe. If you want to use a conduit trust, take the money out in equal installments over ten years and try to distribute it over as many beneficiaries as possible (kids, grand-kids) so that no one’s taxes are raised unduly. Most kids up to age 24 will be taxed at their parent’s rates due to the Kiddie Tax. If you are going to use a discretionary trust, convert your traditional IRA to a Roth first. That way the distribution to the trust might be postponed for another ten years while it grows untaxed, and then the tax-free distribution can stay in the trust until the trustee parcels it out. The only further taxes would be on the earnings within the trust until it was distributed to its beneficiaries. These can be mitigated by the use of zero dividend stocks like Berkshire Hathaway. But – if you are considering this Roth IRA approach, then the question arises whether you would be better off taking the money earmarked to pay the taxes on the Roth conversion and using it to buy a universal life insurance policy inside an Irrevocable Life Insurance Trust (ILIT) for the beneficiaries instead. That money is out of your estate no matter what happens to the current $11.4 million estate tax exemption and the proceeds from this ILIT would go tax-free to your heirs, distributed on terms that you set. You can model it both ways – Roth vs. ILIT – to see which seems most economically advantageous.

Using a Charitable Remainder Unit Trust Families with large IRAs and some measure of charitable intent could make a Charitable Remainder Unit Trust (CRUT) the beneficiary of a traditional IRA. This maneuver reconstructs the stretch provisions of the inherited IRA that the Secure Act abolishes. The CRUT needs to file a tax return every year but offers you the flexibility to set it up and invest it yourself. There is no reason why the final charity couldn’t be your family’s donor-advised fund if you so choose (although not your private family foundation). The CRUT sells the IRA assets but does not pay taxes. Your estate receives the amount that will eventually go to charity – 10% at a minimum – as a tax deduction. Meanwhile, the beneficiaries receive, say, 10% of the account balance per year for twenty years. They pay taxes on that as ordinary income. If the CRUT is invested successfully, beneficiaries could even burn through the initial contribution and eventually receive distributions taxed as capital gains. As one attorney told me who is doing this with his own estate, there are plenty of ways to screw it up. There are rules to be carefully followed. Talk it through in advance with your custodian and trustee to make sure everything is in good order – especially the beneficiary forms – so the IRA flows seamlessly to the new CRUT. It will probably work best where the IRA and the CRUT have the same custodian. If you don’t want all this trouble, big charities are happy to let you use the CRUTs they manage if you are willing to leave the remainder to them.

Action Item: A rule of thumb is that you use a trust when you don’t trust. If your beneficiaries can be people (responsible adults who unlikely to be sued) that is always easiest and cheapest since you avoid the expenses of drafting trusts, using trustees, and filing trust tax returns every year while paying trust tax rates. We can change beneficiaries easily by submitting a piece of paper to Fidelity. If your retirement accounts currently name a trust as the beneficiary, you should contact your attorney if/when the Secure Act passes to determine whether the trust as written still achieves your objectives. One red flag would be any mention of “required minimum distributions” or other actuarial-based withdrawals from the IRA in the trust documents. Your trust would have to work with the new ten-year withdrawal rule.

Superb analysis IMHO!

Will Passive Investing Cause an Avalanche?

I read an article about passive investing over taking 60% of the market, and an additional 20% being traded by robots. Nobody knows what this means. It’s a brand new phenomenon. The market index funds are up 39B while the active funds are bleeding to death down 90B.

Index funds are not index funds. They are index tracking funds. Total Stock Market does not hold all the stocks in the market. Last time I looked it held 180 stocks which are weight adjusted to track the market. I’m not sure what it holds today. Passive investing is built on the idea you buy and hold, and sell a little dab once in a while to buy hamburgers, or live off the dividends or some combo of that. Passive funds are owned by relatively inexperienced investors who bought in a time of sustained growth out of proportion to the norm. Market averages are thought to be 90% higher than the trends predict, so people are used to the good life. It is absolutely unclear what would happen if the market crashed. Would people violate “Buy and Hold”?

In addition the funds are not the index but a small fraction of the index, adjusted. When the sell orders come funds are selling those few stocks in the tracking fund, not the index which will accelerate the volatility in those particular shares and distort the funds price compared to the actual index likely a distortion to the downside. If suddenly your VTI is trading below par what you gonna do? The market will regress to the mean at some point, we can only hope the regression is orderly and covered by rational sustained growth and not all at once.

The robots follow trends and are algorithms tuned to maximize profit. As trend followers they will go long OR short. It’s buy low sell high OR Sell high buy low, that’s how they make money and they are agnostic to which pair of profit makers to employ. So in the up trend they are your ally tending to add to up momentum, but in the down your enemy if your a buy and hold type since their position becomes anti-momentum to your position. Shorting the market increases volatility and 20% is a pretty big short compared to 60% buy and hold. In addition the regular speculative traders will tend to follow the trend aka don’t fight the tape, so suddenly 40% of the market is aligned against you, where as 40% prior was aligned with you.

I read several Bogel books and articles and he was worried about this when indexing was only 20% of the market. If someone as smart and plugged in as Jack was worried who am I to blow that off?

What to do, what to do? First off consider your risk profile. A 80/20 has lot more to loose in this kind of crash than a 50/50. Don’t presume “it will come back” as that is unclear to me. The market is already something like 90% over valued. If 60% get burned it’s very unclear 60% will return, and I think many will cut and run at any price adding to the volatility.

Own stuff less likely to sell. I own DFA funds through an adviser. You can only own those through an adviser, and a good adviser can stand in the way of your panic. The best antidote for volatility is owning the VIX unfortunately nobody can afford the VIX but professionals, long term because of the carry charges and the ETF are not a good stand in. The don’t really track the VIX very well. Own some GLD. GLD’s volatility tends to be in the opposite direction from stocks in a crash so the net is a reduction in volatility. Own some cash equivalent like a tangent portfolio. The tangent is mostly bonds so it’s volatility in a crash is very low and it gives you something to spend while waiting for the dust to settle. It’s like a security blanket.

One thing to remember is owning stocks is owning property. They are NOT cash. The more property you own the richer you are, so it’s a good time to buy some property when it’s on sale if you can stomach it. It’s also time to tax loss harvest, a different way to make hay while the sun shines. To tax loss harvest you need brokerage stocks so a brokerage account would be a good thing to own. May take a while to pay off but it’s always done so in the past.

That 60% passive index + 20% robots freaks me out.