MD on FI/RE

I got involved in an interesting discussion about Bar Bell investing. The idea comes from splitting risk in bond futures trading or commodities trading. I traded commodities back in the 70’s and in fact saved up enough money I could either go to medical school or buy a seat on the Chicago Jackson street mini-market, so I was more than a little into it. Commodities trading is a zero sum game and a game of leverage. You might but a contract that has a potential for $1 gain but you may pay only 20 cents or 5 cents for the chance. Contracts expire so you can’t just buy and hold, your only choice if you’re in the game is to trade or get the hell out, so you place bets, and you win some and loose some. If you win more than you loose at the end of the year you have a profit, loose more than win a loss. Loose too much you’re busted. So it’s all about wining and its all about controlling your losses such that you have money to play. Commodities trading is not investing. It is trading on a market with the idea of buying low and selling high and the very real possibility of buying high and being forced to sell low. If you loose, what you loose goes to whomever had the other side of the trade your “buy high sell low” pair is his “buy low sell high” pair. If you don’t like that much risk you can do something called spread trades and there are all kinds of spread type trades.

So in a poker game you may have the main game going on and bets on the side. Bets on the side have a different risk of paying off than the main game. By knowledge of the odds of the side bets and the odds of the main game you can improve your risk by making enough on the side to make up to some extent for the risk of the main game. FIRE types do this all the time in fact they plan this into their strategy. They work 10 years with the idea of having that 10 year “investment” generate 60 years worth of income. Sounds psychotic doesn’t it? So they hedge their bets with a side bet called a “side gig”. A little blog or something that generates some income to cover part of the risk of the nutzo 10 years work 60 year play narrative. FIRE types think they are investing but actually they are speculating same as a commodities trader or a poker player. Small businesses fail 20% in the first year 30% in the second year and fully 50% fail in the first 5 years. 30% fail AFTER 10 years. So that little blog is anything but a sure thing. It is the reason startups sell out. Start up, make some money, sell out before you fail. Speculation. So what about Bar Bells?

The Bar Bell portfolio comes from splitting risk in bond trading. You can buy low yeild high quality paper and are pretty much assured of making your coupon. You can buy high yield low quality paper that if it pays off, pays off big but there is a definite risk of default. This is called a spread. You spread your risk between a sure bet which pays you and a speculation which may or may not pay you, and this is why it’s called a Bar Bell. It’s a bi modal risk. Pictorially

Here is a balanced portfolio of known risk and known reward and it sits on the efficient frontier. It has an expected return, the peak at the center, and an expected risk the range of values above +- 3. What if you squish down the center?

You get a bimodal distribution with a risky end (pink) and a safe end (blue). This is a Bar Bell The argument is you split your risk between safe and risky and if risky dumps you still have safe but in reality you have just the same amount of area under the curve in Bell as Bi-Modal it’s just distributed differently. The net portfolio will still work out to some average risk and reward. What if you have a BIG blue and a LITTLE pink but pink has a chance to multiply dramatically or it can go away completely? Lets look at some charts

Here is a portfolio of SPY. You retire in Dec 1999 just before the 2000 .com crash and also experience 2008. You’re a Bogglehead and expect SPY to generate 8.82% return over the long term.

Spy between 2000 and 2018 under performs BY A LOT

You’re expecting 8.82%, your actually getting 4.58% or half of what you expected. SPY experienced 2 recessions in that 18 years and so the volatility ate your lunch and your nearly 2/3 done with retirement! How much “return is it going to take to get you back to your expected 8.82% over the next 12 years? If you started with 1M and compounded at 4.58 x 18 years you would have 2.4M Your expected at 30 years with 8.82% is 12.6M, so at 18 years you are 10.2M under expected and NEED to make 13% / year for the next 12 years to make up the difference. The expected is 8.82% Do you really think it’s going to work out? THIS IS SEQUENCE OF RETURN and this is a real present day example not just some speculation This is exactly what happened to a guy who retired in Dec 1999 with 100% SPY

Let’s Monte Carlo a SPY portfolio for 30 years 4% WR

over 1/10 times you 100% run out of money. You run out of money because of the RISK in SPY

Here is the kicker to 100% SPY

Your portfolio starts dying EARLY. By 15 years it’s already heading down and for some is out of money. Retire at 60 get to 75 Uber Driver here you come!

Lets say you buy only VBMFX which was has been around since 2000. It’s expected return is

almost 5% and in fact it did better than that. Over the past 18 years VBMFX has returned

5.75% since inception in 2000. Bonds have been in a 30 year bull market.

So if you had SPY and took out 4% you could expect 0.6% growth on your money, less than inflation in the past 18 years, where as if you had VBMFX you could expect 1.75% growth about equal to inflation. What happens if you Monte Carlo VBMFX?

You survive 98% of the time but notice purple is headed into the dirt.

What about the kicker, what about the kicker??

The kicker is you don’t start running out of money till after you’re probably dead with this SORR

SPY alone and VBMFX alone are Bi-Modal when you look at them together, and they are almost perfectly uncorrelated as we saw in the example. Stocks under performed Bonds over performed. What happens if you Model a 50/50?

The kicker?

You fail about 2.8% of the time but look at purple, it is barely headed into the dirt and will survive for many years to come. The idea is to then have a “less risky part of the portfolio and a risky part for a Bell so lets add 20% AMZN for a 20/30/50 AMZN/SPY/VBMFX portfolio

Holy Cow! a >99% survival!

The kicker?

All you needed to do was to know to buy AMZN in 2000

Substitute GE of AMZN for a 20/30/50 GE/SPY/VBMFX portfolio Uh oh 89% survival no better than SPY!

It can be even more complicated if you change SORR or Inflation assumptions.

So what does all this mean? By choosing at Bar Bell you are speculating just the same as a poker player with side bets. Some times you win some times you loose, good time Charlie has the blues! How do you apply risk management? 1. You over fund to start. If you start at 20% above your 100% of need it can be a home run or a strikeout. If you’re a 3%/33 type with a million bucks you need 1.2M to start. An extra 200K is roughly an extra 7 years of work. If you strike out, YOU’RE OUT. It means you weren’t cut out to be a speculator. You don’t know what you are doing. Do not put hamburger money in the pot. See #2.

2. NEVER send money from low risk to high risk. You may send money the other way, in fact that’s how you get rich in this kind of scheme, dollar cost average the risk. When things are up stuff some into the mattress When things are down you have your 100% of need so go to the beach. Another way to play this is to completely divorce the portfolios into 2 independent portfolios one for investing and one for speculation. WR is strictly NOT part of speculation. The flow sheet for this kind of risk management is

You are always siphoning profit or principal off into investment never the other way. Here is my story with this technique but not with these numbers. The ratios are correct. In 2005 I bought a penny stock for 10K. It grew to 50K and I pulled out my 10K and put that in BRK.B. This is called a free trade. The remaining 40K was free money. The investment bobbled around till 2015 when I sold that 40K to cash. When I sold it it was worth 50K. I put half in BRK.B and half into BTC. 25K into speculation and 25K into investing. I had made 500% profit, and my principal was tucked in BRK.B plus half my profit. BTC exploded and my 25K went up to 1.5M. On the way up I took out the 25K and put it into BRK.B (free trade) and left the free money alone. BTC crashed OH WOE IS ME? Hell no The money was free money. It could go to zero and I’d be out nothing. As it turns out it’s still up 1300% and I have all that loot in BRK.B to boot. If I went to zero Whoope shit I had a good ride and made some money which I stuffed into BRK.B. But the thing is BTC is not going to zero. BTC is creative destruction and creative destruction multiples. AMZN is creative destruction. Apple smart phone is creative destruction. NFLX is creative destruction. Remember the brick and mortar Block Buster? NOT creative destruction. In the mean time I’m going to the beach quite content to do nothing.

The point is if you had co-mingled the portfolios the risk of one would seep into and erode the value of your hamburger money. In retirement do not let greed eat your hamburger money. Do not be a Dumb Bell because you read a Bogglehead book and think you know something. Reading a Bogglehead book doesn’t mean you know Jack it means you know Taylor Larimore, who’s just an old coot with a system (sorry couldn’t resist). These traders make their living eating your lunch and they are damn good at it. This ain’t bean bag. If you can’t practice risk management, don’t play. If you don’t know what you’re doing, don’t play. Speculation is a zero sum game. Some’s gonna win some’s gonna loose.

There is a program called PGP “Pretty Good Privacy”. It’s a cryptography program for emails and such and does what it’s name implies. The algorithm is good enough to protect your stuff from prying eyes. It’s based on using a set of rules as well as the algorithm and if you follow the rules… It’s not super duper government un-crackable requiring super computers but Pretty Good. It was designed as an educational tool to teach peeps how to wrap one’s head around cryptography. There is an open source version and a commercial version undoubtedly the commercial version is better and suitable for enterprise security.

My last series of articles constitutes PGRP. Pretty Good Retirement Planning

Goalscape Introduces a planning tool that succinctly allows you to encapsulate goals in a pictorial format. The ratios are variable and you can grow granularity. There is a free version to use but its somewhat crippled because it allows only one job at a time and has only 30 conditions to display. The limitation can be overcome by simply pasting screen shots of your Goalscape creation into a personal blog.

Goalscape is a planning tool so use it to make a plan. In retirement you need a portfolio and a cash flow to substitute for your job. There are a multitude of ways to get there and a multitude of accounts you can fund from Bank to Roth to IRA/401K to Brokerage. Money also comes from SS. The accounts are treated differently in distribution and most of them are owned by you AND the government understand the treatment is important since there are consequences to going down one path or another.

RMD Calc and Uses

RMD Calc and Uses looks at methodology and strategy to help plan those consequences by using Schwab RMD calculator, Tax Plan Calculator and Excel. The tax code is progressive and the RMD % is progressive so through out your retirement the government is taking a larger and larger bite out of “your” (plural) money because IRA money is owned by both you ad the government. By knowing whats waiting at the end you may make different choices at the beginning RMD calc shows you how to think about that prospect.

Where We Stand

Where We Stand is an article that looks back on a projected future from death back to accumulation. Very often planning is done from the other perspective from accumulation going forward. By looking backward from a projected future you can start to predict what is more or less important and how to optimize years in advance. You can’t spend Tax Loss Harvest if you never Tax Loss Harvested and you won’t see the advantage of a Brokerage and TLH if all you ever did was max out your tax deferred accounts which are owned by you and the government and taxed as ordinary income. Brokerage has different tax treatment so it’s like tax diversification, suddenly each account has a different risk and a different cost associated with ownership and can be incorporated to serve a different purpose in your old age. Money is fungible meaning you can’t tell one buck from another but the efficiency of how that money is created is specific and the plan and details matter. You only get to keep what the government says you can keep, harsh truth. No biggie, you got tools and a plan! Go slay the dragon!

Personal Capital

Personal Capital is an article on using a web based portfolio aggregator, a tool that tracks your portfolio in it’s entirety. Vitally important to making efficient decisions. The ability to accurately track and analyze is absolutely invaluable. It as important as giving sight to the blind. Use it or loose it.

Mint

Mint is an article on using a cash flow aggregator aka budgeting tool plus Excel to give you customized information on where the money goes. It’s implementation is trivial to use and it’s depth of knowledge is immense. I didn’t use it when I was getting rich because it didn’t exist. Had I used it I likely would be richer.

How I Knew When to Retire

How I Knew When to Retire is an article about understanding “enough” on a personal level using SS.gov as a guide. Retirement is not boiler plate it’s personal. Retiring with “not enough” is a drag. Retiring with “too much” may mean you stayed too long. It may also mean your work pays you only in excess risk and stress, bad juju. The method along with the other articles gave me a personal way to understand my future in light of my past and be able to predict with virtual certainty the outcome even though I have yet to experience the outcome.

So there ya go! PGRP I could drone on about portfolio construction etc, but Personal Capital is adequate for that, in fact better than adequate it’s damn good.

Rock the Casbah

Rock the Casbah

Sharif don’t like it

Sometimes my opinions clash

1. a place where money is coined, especially under state authority.
2. a vast sum of money.
3. produce for the first time.
4. a peppermint candy.

Which one do you think of when you hear the word Mint? Mint is my go to budgeting tool. I’ve suffered budgeting for decades trying to discern the ins and outs of Microsoft Money and Quicken and Andrew Tobias’s Managing Your Money which I ran on an Intel X386 laptop under DOS with 1 mb of ram and a 4 bit grey scale on a 12 inch black and white panel. It was better than a napkin but infuriating to get any work done. I had a dozen accounts between me and my wife including business accounts and retirement accounts etc So pretty much I did it in a spread sheet in simple categories gross money, tax money, net money, investment money, living expense money, based on my accounts and called it a day. The granularity didn’t tell me what was going on just that something was going on, but the energy hump for any of these programs to actually provide accurate information was beyond the pale. So I used the slop in the system as my protection. Make a buck, save some for me, save some for taxes. use some to live on. don’t spend too much. don’t go into debt. I always made more than I spent so forward progress happened. Sound familiar?

Eventually I retired and the slop method worked, I had a nice pile of money, I guess you might call it directed slop, but it wasn’t tuned except in a gross way. I came across Mint and it was what was needed. It is what what all those other programs promised to be. I use Mint strictly to track my cash flow and acquire data which I transfer to Excel. I have 2 hub accounts a bank account and a credit card account. Both accounts do a nice job of automatically tracking category and are amenable to learning my customization without a lot of muss and fuss so it’s easy to tease out insurance line items and taxes and housing costs etc with some means to drill down and it’s easy to see what a transaction was an go to the account record for more complete information. The bank account is used to store money for living but not a huge amount. My money is in the brokerage which is linked electronically to the bank. The credit card is also linked to the bank so I can pay that bill one touch. The credit card pays cash back so I charge virtually everything which generates an excellent transaction and category record and gives me recourse if I didn’t like the outcome of a transaction. The cash back goes strait to the brokerage for investment. The bank pays the CC as well as automated accounts like power and internet. My wife has some other credit cards for her business she uses and I pay those as just another bill.

Mint has an export feature that allows export of a comma delimited spreadsheet and I open that file in Excel and cut and paste each month into my master Excel money management spreadsheet. The sheets are multiple and form a book organized by years. I just started 2019. Once the data is copied into Excel I go through the list and change the sign of every transaction labeled “credit” to negative and leave the debits alone. If there is a special deal I don’t want to track like something being paid for from an non tracked account I set that entry to zero and put that amount out to the side so it gets tacked but not counted in the totals.

Here is an example

Since I changed the signs on credits and debits I just go to the bottom of the Amount column and hit AutoSum and get a to the penny accounting. Down load, cut, paste, change signs, AutoSum, DONE! Mind blown! Since the data is in Excel I can do custom totals and averaging and track expensive months and cheap months. My budgeting is based around a generous monthly maximum compared to my need. I usually don’t reach the maximum but some month I may go over a bit like I pay home owners insurance once a year so that’s a big month. Under months compensate for over months and Excel is not bugging me about artificial spending goals and helpful hints to “improve” my situation.

When I first retired I was still tuning my spending knowledge and what retirement was really going to cost not just some projected number, so I checked often. As time went on the routine became predictable so now I check twice a month unless there is a specific question. If I wonder if something got paid I just turn on Excel and look. 2 seconds. So I use Personal Capital to aggregate my portfolio and Mint and Excel to aggregate my cash flow. Both of these are so easy to use. I recommend!!

Here I am hard charging at 25. I had a boat load of Human Capital, not much risk, a small portfolio, my first house. I was trading commodities at this point in my life, had a steady job as an engineer.

Here I am at 45. Out of med school, out of residency, out of the Navy, Fee for service private practice, Anesthesia main gig, Pain Management side gig 5 days a week. I was Reelin in the years and stowin away the time.

By now I’m working a same day center. My FFSPP turned into a group then our contract was cancelled so we went into competition with the hospital. Did that gig for 7 years plus pain on the side. No call, no weekends, still pretty stressful as the Human Capital was winding down. At 65 I realized what 70 would look like if I continued to work. Human Capital a sliver, Risk through the roof, a tiny bit of reward compared to a big portfolio. Risk and stress dominate this picture. I needed a New Goal!

What I did was go to SS.gov and looked at my life long Medicare earnings. Medicare earnings are not capped. I added them up and divided by the number of years I worked. That was my Human Capital gross and average for my work life. Out of that HC I had funded a retirement portfolio, bought a house, some cars, paid for college for my kids, food, travel, insurance, taxes. all the stuff of life. I looked at my bank account and portfolio and saw I had 1.5 times in the bank what the value of the Human Capital was I had expended over the course of my life. What I had in the bank would easily substitute for my Human Capital and give me and my wife security to the completion of our lives. A few more years or another million meant nothing compared to the growing risk and stress. I knew what my HC had paid for and I was completely satisfied with living at that level. That trip to SS.gov changed my life and was just the tool needed to correctly assess my risk and reward going forward. The rest was merely details, get some health care together, re-jigger some TIRA to Roth pre-RMD, Optimize taxes going forward, Optimize SS, reduce SOR risk by moving to 5 years of cash to live on while Roth converting, details. Nirvana is about moving from being a Human Doing to becoming a Human Being. The portfolio is correctly sized and funded so there is virtually no risk, My time is my own so there is no stress. Nirvana is a place of Zen:

Nirvana is a place of perfect peace and happiness, like heaven. In Hinduism and Buddhism, nirvana is the highest state that someone can attain, a state of enlightenment, meaning a person’s individual desires and suffering go away.

I’m Catholic not Buddhist so I have my guilt to deal with but this is where I’m at today.

Been down one time, Been down 2 times, Never going back again.

This is what it means to win.

This is what the SS.gov calculation provided me. A clear personal picture of where I stood in my life. Displayed in that table was a history of what I did and what I could expect. I knew how it felt to live my life and what that cost. I knew what it took to get where I was and for the first time I saw where I was going, Not some normative projection or a FV calculation or bla bla bla on a forum or article in Forbes. At that point I internalized what enough meant and I had more than enough. At that point return became irrelevant and I realized my life had become ALL RISK and it was time to make a decision. I did risk really well. I was good at risk, but I a needed New Goal. So I gave myself permission. The relative sizes of the triangles are important. My retirement and self insurance out sized what my life had cost. There is no leverage needed in a flush retirement save perhaps enough to cover inflation.

There is a TON of leverage in this retirement. The little purple triangle needs to generate ALL of the green triangle. So when someone is bragging about retiring at 30 what they are bragging about is their stupidity and failure at risk management. Do not be deceived by the shiny object.

I signed into Personal Capital and was greeted by a lecture on risk management This is one reason I like this site, the investment advice is actual investment advice not just back of the napkin. Why pay for your return with too much risk when in the long run the risk can and will eat your lunch and ruin your sleep????

I was going to go into a long over view but I’ll play this instead It gives the overview. Personal Capital is a suite of integrated tools.  Its main feature is it’s an account aggregation program. It will log into all of your accounts and create an aggregate snapshot of what you own, what you spend, what you save (or forgot to save), and it will help you spiff up your returns and help you to set your AA to place you smack dab on the Efficient Frontier at your chosen level of risk. It will optimize in a way that projects your mistake into the future and shows you the difference between “your way” and the optimized way. The optimized way wins.

It freaked me out at first allowing all of my accounts to be scanned by the aggragator but the payoff is worth it and nothing has been hacked. I really like the way it aids in portfolio planning. It uses the same kind of tools to do the analysis that I have been describing Efficient Frontier and Monte Carlo analysis. It optimizes taxes to some extent and has a hierarchy of account payout strategy It’s not perfect but very good and these strategies are what I’ve read about in professional investment journal articles . So the advice is professional and up to date in portfolio theory.

It tracks accumulation and reads out probability of success and allows testing of different scenarios. I still do things my way but I always check my results against the PC software. I use a proprietary aggregator which is more granular and can help me answer specific questions but for a free program PC is hard to beat and wholly adequate for anyone but a money Nerd like me. Employing an aggregator was the single most powerful investment decision I ever made. Between me and my wife at one point we had 14 accounts with 14 asset mixes based on assets available to the account and before the aggragator it was impossible to correctly track reality. This one does it automatically and has the prognostication and optimization tools built in and they are reliable. If you have the real probabilities laid out before you it’s easy to judge the risk and choose correctly. If you veer off course PC will help you correct soonest. Because the program is not emotional it helps relieve fear and fantasy and the epic tales of great Ulysses or Buffet from the mix. The only way to know is to sign up and create your portfolio. Here is the web site I am not affiliated in any way, just a fan! They make their money by selling advice. They will to to sell you advice but like Nancy Reagan said “just say no”. I don’t know anything about their investment advice service except it seems a little expensive. I did look up some reviews and they do help with tax planning and a good tax plan like tax loss harvesting can save you a lot more than management fees but again this is not a recommendation for or against the professional services.

We have been using modern tools to plan a retirement portfolio using an epoch strategy for accumulation and deflation. Here is an example of where you might want to end up at age 65

We have 1M in the Roth which we started saving for at age 24

We have 1M in Taxable Brokerage which we have been stuffing extra money into all along. We have managed to tax loss harvest an additional 200K over the years. This turns the taxable into a Roth like account until the TLH is used up. Useful for the TIRA to Roth conversion situation.

We have 600K in TIRA which becomes an annuity with RMD so it pays out a yearly income. 600K keeps us in the 12% low tax bracket for a long time. Included are 5 yr increasing payouts. At 6% the TIRA grows to 700K by age 85 so there is extra money here to increase payout along the way if needed

Our W2 job provided the ability to save for an HSA so we stashed a little and let it compound to use to pay our Medicare Insurance expense well into retirement. There are tax dodges associated with HSA but IMHO those can be cut or means tested at any time so a little dab will do ya IMHO

We chose to max out SS and dual spousal income pays out 50K+/yr I use 50K as a convenient example.

We have a bank account and credit. We store some in the bank enough for say a year which gets spent down during the year and we have credit for emergency cash. We pay all out bills with credit card, get cash back, pay it off monthly from bank account. We save some every month to buy a new/er car every 6 years. The money is stashed in CD’s and timed so between us a new/er car is purchased every 3 years alternating spouses. It was useful during my working life because it guaranteed a healthy car, less so in retired life. YMMV

College: this might be a typical plan, save some for tuition and save some for kid expenses outside of college but still in the kids name. It separates cash flow in retirement and if funded correctly can replace some insurance costs along the way since once established and funded they grow on their own till needed. IMHO college should neither be over funded nor underfunded but properly funded and that requires making some boundaries on likely disposition when accumulation commences. The best gift you can give your kid is a richly lived (not necessarily costly) debt free start. For me that didn’t include Harvard in the plan or money for grand kids.

Roth conversion is a special case that need to be analyzed. It has a big cost and a big benefit associated depending on your situation.

We haven’t covered funding TIRA and Taxable Brokerage and we haven’t covered how to fund living during the W2 stage of life. But by describing where we want to be at 65 and where that money will go after 65 and the built in safety nets we have a stronger understanding of how to jigger the numbers and what forces like progressive RMD compounded by progressive tax code can affect your decisions. The government is very happy to maximize their “take” in accounts where you have joint ownership like taxable accts and TIRA. But the code also allows you to make maneuvers to control that “take”. You can also “what if”, like what if two spouses becomes one single. What if you get divorced, what level college funding can you really afford etc. We have learned to use modern tools that take into account risk as well as reward and read out in a range of probable futures so you can set upper and lower limits on expectations and create your own SOR of safety to reduce the chance of failure to nearly zero. Wait there’s more! We will learn about Personal Capital as a very sophisticated account aggregation tool and longevity planner. We will learn how to budget and track expenses in Mint and use that along with Excel to track and predict. We will learn how I knew it was time to retire and the dangers of RE. It’s all doable but nothing like the monstrosity save 25x spend 4%.

I use the Schwab calculator for RMD calculations along with Tax Plan Calculator 

Between the two you can quickly make plan decisions. RMD is progressive. Starting at age 70 they take a little more every year up to age 93

If you start with 1M in the IRA at age 70 and are receiving 6% growth you are forced to remove the value of your TIRA x the RMD% from the IRA and that amount is taxed as ordinary income based on your filing status. So a $1M and 3.65% yields a $36,500 RMD on year 1. If your SS is 50K you are taxed at .85% of that or 42.5K. If you have no other income your income is 79K. If you are married filing jointly and both spouses are over 65 your tax bill will be $5,907 (in the 12% bracket) using standard deduction. If single you would owe $10,328 (in the 22% bracket) on that $79K income. Your gross income would be $86,500 excluding the SS tax break and the 7K difference just about pays your taxes. At 6% growth at age 75 and 2% inflation your 1M will be worth 1.126M even with the yearly 5 years of RMD withdrawal and the RMD at in this case is 49206 and SS has grown to 55,240 of which 46954 is taxable so your taxable income is 96160 and married tax is 7966 and single tax is 14104. Gross income is 104,446

In a table the first 15 years of 1M RMD 6% growth

So you can see taxes go up by the RMD% and the progressive tax bracket and by year 10 the single player is already at the 24% bracket. Who might the “single” be? Could be your widow if you kick at 79.

Here is gross income at 70 80 and 85 and the net after tax

Here is the 1M portfolio in Schwab and the distribution schedule

and you can download a printable chart and table to fill in a spread sheet

I set about once to write a tax calculator in EXCEL but it was more time than I wanted to spend to write it and test it. There are plenty of tax sheets out there but nothing that fit my specific need so I spent an afternoon and did it by hand

Here is a shot of Tax Plan Calc’s output

I generally test about 20 years in 5 year increments to test tax scenarios so the calculations aren’t ridiculous and you get a good idea of the trend

Here is a 600K TIRA RMD for 20 years at 6% and a 50K SS inflated at 2%/yr in 5 year snapshots. The top level of the married filing jointly 12% bracket is 104K taxable income. So a married filing jointly with a 600K TIRA @ 6% stays in the 12% bracket for 20 years if you live on just SS and RMD This is good to know. It means if you have 1.5M in the TIRA, Roth convert 900K before age 70 and you will minimize 20 years of taxes. If you have taxable money as well you can sell stocks at 0% cap gains tax up to a taxable income of 104K You be optimized baby! This is your late in retirement WR money, post age 70. I would call it the post age 70 WR epoch. What you live on pre age 70 needs to be developed separately.

Goal: convert 900K of 1.5M TIRA to a Roth leaving 600K in the TIRA cost 124K in taxes

I’ve been discussing using a Roth as an insurance vehicle over on XRAY’s site It’s a useful way to demonstrate planning using modern portfolio theory and taking risk as well as reward into account. I’m nothing if not a quant A quant is someone who uses computers to analyze investments. It is also a pole used to guide a large barge, from the Greek kontos “boat pole”. If I’m going to guide my barge I want a good chance at being successful and staying off the rocks.

The discussion devolved to how to fund extrinsic risk like medical disaster in retirement. In preparing for retirement you purchase a product called a portfolio which at some point takes over the job of providing you money. It is bounded. If you have 1M you can leverage it but leverage increases the likelihood of failure. What does leverage mean? You can take your 1M, put it in cash, take out $30K/yr at 2% inflation and you’re money will last 25 years. Whoa whoa 25x should be $40K!, but $40K 25 years in the future is only worth $30K @ 2% inflation

How do you combat the loss in value? Leverage my boy/girl leverage. If you make 2% on interest and take out $40K your money lasts 35 years

That % the inflation ate, is returned and then some. GREAT! I want to make 10% OVER INFLATION then (12% not a bit greedy)!!!

Yep 35M that’s the ticket! So what is it? 40K/yr for 35 years and 0 dollars in the bank or 40K for 35 years and 35M in the bank? That’s the power of leverage all things being equal. This never happens. If you have 35M in the bank at least 50K is coming out or 900K or what ever. If you start yanking more less in the bank. How much less? Lets yank 900K

Lawdy Mama I’m 335M in debt! With that kind of debt I think I’ll grow a beard and change my name to Uncle Sam! This is still the power of leverage when leverage goes against you.

To get back your million and live on 900K/year you only need make 90% on your money every year, EVERY YEAR. So a FV calculator is a blunt tool. It gives some quick information but not very deep information. Are you planning your life with such a tool?

Enter Monte Carlo. Monte Carlo calculators take into account the multitude of variables. Still incomplete but more complete. Lets use Monte Carlo to consider the problem of saving for extraordinary risk such as medical disaster in old age. One thing you could do is buy SPIA insurance. Let’s say you get Alzheimer’s at age 70 and you need 30K/yr for nursing home care. The average length of the disease till death is 12 years but can last even 20 years. So you buy SPIA at $500K and it pays you 30K/yr for life. SPIA doesn’t inflate and you don’t have much variability and you pay taxes on the income. You live 12 years, the insurance company wins. You live 20 years the insurance company looses, but does it really loose? Upshot the insurance company didn’t loose even at 20 years. You’re the looser remember those taxes?

Lets Monte Carlo this suckah

Here is $500K in a 50/50 fund at 30K/yr withdrawal inflation adjusted for 20 years. It succeeds 93.7% of the time for 20 years BUT it succeeds 99.96% of the time for 12 years at a very worst case scenario, the 10% SORR line. This means 90% of the time you do better than 93.7% with inflation adjusted tax free worst case scenario money. If the $500K is in a Roth the money comes out tax free. SPIA costs $500K this plan costs $500K. The SPIA plan pays out for a lifetime (say 20 years) 100%. The Roth pays out nearly 94% for 20 years (essentially a lifetime) but an increasing % portfolio survival if you die sooner in a nursing home aka virtually bullet proof.

Stop being the Tool by Using the Tools

Let’s say you are 24 and you put 5500 in a Roth for 10 years to age 34 ($55000 principal) at the end of 10 years you will have about 85K if you get 6.67% on your money in a 2 fund using the tangent portfolio at the best risk/reward ratio which is 18/82. This is epoch 1 of the accumulation. This best portfolio is determined by using the Efficient Frontier

You then just leave the 85K in the Roth and switch to a 50/50 ratio with no added or subtracted money till age 70 (35 years additional or 45 years total growth). This is epoch 2 of accumulation. It has a different risk that epoch 1. The risk in epoch 1 was 4.2% the risk in epoch 2 is 7.8% or half the market risk (15%). Epoch 1 is only 10 years but epoch 2 is 35 years so you have considerable time for the risks/returns to normalize to the mean during epoch 2. This is about as set and forget as you can get and quite safe. It is extremely safe because we plan around the worst case scenario.

At age 70 worst case (10% line) you will have $685K available for your catastrophe, to withdraw tax free. A 500K SPIA pays 30K/yr foreve with taxes, your Roth in the 10% scenario, can pay $35K/yr at age 70 with 98% success to age 90 (essentially forever). This is a 3 epoch calculation, in accumulation epoch 1 was super safe 4.2% risk. Epoch 2 grew under bad circumstances, 35 years along the 10% line, and the deflation epoch, epoch 3 was along the 10% line. DO NOT WALK UNDER LADDERS, you’re one unlucky dude. But you still have 35K/yr to spend in retirement.

These are worst case projections. There is a 90% chance you will do better. You don’t have to wait till your sick to get the tax free 35K but if/when the time comes that 35K is spoken for and it pays better than a SPIA. If you have a wife then save 11K/yr x 10 years do the same routine. At 70 you will get $70K/yr as a couple and if one gets sick it breaks back to 35K/35K. If you both get sick it’s 35K each and it cost you a 110K cash money outlay plus the taxes you paid each year to get money into the Roth for end of life protection.

This plan is for what it’s for, extraordinary circumstance and some extra money late in life. It’s NOT for RE money, it is not WR money. If you want WR money or RE money make a separate plan for that. Don’t mess with the Zohan! To make it work you need 45 years of growth in a super to moderately safe 50/50 investment, but it’s virtually bullet proof. The only thing you need to do is re-balance once a year after the principal is contributed and since it’s Roth money, re-balance and withdrawal are tax free. Personally I would fund this before I paid loan debt or maxed out anything else. Time is of the essence. That “good feeling” of paying off your mortgage or student loan is going to cost you a mint in lost growth opportunity. Screw your “feelings” and do what’s smart. Dave Ramsey is good for helping credit abusers. If you’re not a credit abuser he ain’t for you. His nonsense is eating your lunch.

So what happens if instead of pulling the 10% card for your whole life you pull the 50% card for epoch 2? Again at age 24 you save $5500 in the 20/80 account till 34 resulting $85K. Notice this is epoch 1 of the accumulation. Your risk is so low 85K is virtually assured in epoch 1. It’s mostly in bonds. Then you change the risk to 50/50 and ride 50% line for an additional 35 years. Instead of the 10% level $685K you have a $1.34M insurance policy in the Roth at age 70. In epoch 3 you can pull out $45K/yr for 20 years on the 10% line and still have 1.88M in the Roth available for disaster. The risk is moderate at 50% of the market risk.

Notice how I did an epoch switch between accumulation and pay out. I did a 50/50 accumulation epoch on the 50% line for 1.34M accumulation, and a portfolio deflation on the 10% line for additional safety in retirement. If you continue to ride the 50% line you can re-retire every 5 years safely boosting up your withdrawal a bit. Such delicious control on your future!

The point of the exercise is to look at how to use modern portfolio tools to create a plan, how to use that plan to target a specific need and how to safely fund that plan. It is not a plan driven by greed which begets excessive risk. It is not a Casino plan despite it’s name. It is a plan that optimizes probability of success at minimal cost by analyzing multiple variables. You can easily tweak the plan and you get both risk and reward displayed and then projected.

The charts displays both risk and reward. The projected amount is the reward and the range of percentiles takes into account projected risk. Far superior to a FV calculator.

You now know more than 95% of the Boggelhead Guru’s, and you understand the power of epochs, Monte Carlo and Efficient Frontier. This is part 2 of the “planning tools” series Part 1 was Goalscape.  A look at Personal Capital and Mint and Schwab RMD calc and SS will follow.

Using Goalscape to chronicle the plan on say a personal blog page.

The goal with a drill down from Goalscape You can chronicle a dozen scenarios on a private blog and rapidly switch back and forth.

Save half, invest in low cost index funds. You need 25x your income and can withdraw 4%/yr safely. It’s a plan. But life is more than a simple equation. If you’re married w children there is educational expense. If you stash money in IRA like accounts the government owns part, is taxed as ordinary income and the government forces you to spend the money in your old age. If you stash money in a Roth account you paid off your government debt early, but the account has its limits on investment amount so you have to save a long time to get any substantial amount. Taxable accounts are taxed with the purchase money and taxed yearly on the investment income and taxed again on its appreciation. Medical expense is a constant and there is an account for that. There are plenty of tricks and hacks and optimizations and “how you do it matters”. So what’s a mother to do?

I would define life in epochs. Each epoch has its purpose. Fore example you get married, that starts the “married epoch” and the need to fund a marriage. You have children, that starts an epoch of needing to fund children at least until they can fund themselves. You want to retire some day with more than a pittance of government subsidy that starts the retirement epoch. You start a business, that’s the business epoch. Epoch can and must run in parallel. Epochs have different sometimes well bounded time frames. For example college occurs over 4-6 years depending for each kid. It should be neither over funded nor underfunded. It should be neither over risked or under risked but properly risked, so the money is there when the time comes. Retirement has a different time frame since retirement lasts a lifetime, but the same kind of constraints apply. You need to properly fund it, properly risk it, and properly spend it. A business has it’s own epoch. You have to build it maintain it and eventually dispose of it. It has its costs and it may or may not fail. Healthcare and insurance cost has it’s own epochal consideration.

These epochs intertwine in a complex way. If you have a business or a wage you use that to fund your future. Once you’re finished working you use what you funded, the accounts associated with each epoch as the means to subsidize your future and your security. Save half, x25, 4% doesn’t do the complexity of the problem justice. It’s basically saying “something is better than nothing”. True enough but woefully incomplete in it’s analysis. You want a plan with a high probability of success. Enter the tools.

I found a website that allows goal planning called Goalscape It’s a tool to plan complex problems like financing life. It has a free version that allows up to 30 goals to be planned in hierarchies with variable percentages in the hierarchies and the screen has a drill down feature. So I whipped together a financial life life

This is kind of the 4% x 25 view of things. You spend most of your life working (31%), saving for college (6%) and saving for retirement (31%) , and a similar time (31% spending your portfolio. In this example the retirement portfolio accumulation and deflation are identical at 31%. Work and interest on investment fills both College which is 6% and. So 68% of your human capital is represented in work and saving, some for college and some for retirement. This is what “save half” means. You use 68% of your Human capital and expend 31% on living, 31% on purchasing a retirement portfolio and 6% on Juniors future. Jr goes to school and spends his 6%, you quit work and are left with 31% to survive in your dotage.

Now we are getting granular. We see “work” can mean W2, small business on the side and something you do to multiply your value called education. We see The Retirement Portfolio has multiple accounts and each account has it’s own feature/s disposition, tax treatment and percentage of funding. which must be elucidated for the plan to be effective. 4 x25 and stuff it all in a TIRA is nonsense when you actually think about this. We see the granularity of portfolio deflation start to emerge. It’s not that you spend 1/25th but actual needs are displayed and some idea of how much each need exists in a hierarchy of expend ability. You can skip splurges and jigger legacy so those categories become a sort of internal portfolio insurance if tings tend toward the sour. You can adjust the percentages because it helps you understand what and how long it takes to fund those percentages. This is the concept of UBER driver FIRE to regular FIRE to FAT FIRE displayed right before your eyes. College may also have components like scholarships and loans depending on income level at the time Jr goes to school. A buck saved from “college” is a buck toward retirement.

Even more granularity on what retirement means. You subdivide your needs and get a clear idea of what is bottom line and what is squishy. You’ve heard retirement is squishy? It mostly is not. It’s mostly concrete with a dab of squishy. It took 20 minutes to whip this up. It’s generic but a hell of a lot more informative regarding reality than 4 x25. It informs you what happens when you use a FV calculator to determine your future and the likelihood of success. It’s harder to delude yourself when you see 30 things need to be funded in retirement and each has it’s own inflation and risk etc.

Note: This is the free version and I used 27 categories. You can just plan, take screen shots (I use gadwin print screen capture tool, not the pro but the free one. Once you do the highest category you can make sub category hierarchies for example I would do a sub category on portfolio accounts to look at and optimize tax consequence vs funding and something about what I expect to do with the account in retirement. For example Roth in my portfolio is for insurance and legacy. As such it doesn’t need to be over funded or underfunded but correctly funded by Roth conversion. If it’s going to serve those purposes it need not be huge and it will grow unmolested to either be used in a disaster or to leave to the kids. If you fund it early it’s time to grow unmolested will magnify it’s value at the end. So if you fund a Roth for 6 years of residency and fellowship @ 6% return that’s $92K. You can get 6% in a 50/50 2 fund easy. In 40 years (say age 70) That $92K is now $1M and you are self insured going forward for long term care and medical disaster your cost for this self insurance? $66K.

Enough for now. I was playing with the Personal Capital program and between this tool and PC’s portfolio planner and some fooling around with the portfolio visualizer suite. I think you can give Buffet a run for his money when it comes to financial planning. You can certainly kick any Bogelheads ass every day of the week and twice on Sunday. I’ll write something on that soon.

I’m gonna tell a story ’bout a man named Jed poor mountaineer… wait wait wrong channel. What I’m going to tell is a little family history. My grandparents aunts and uncles are all dead so spilling a little family history won’t matter much. My grandfather was born about 1905 and he had a wife a few years younger. Gramps had a sister a few years older than him so she was born 1900. She married a guy probably 5-10 years older than her so he was born 1895 or 1890 or so and he was my uncle. My dad, also deceased was born in 1928. That locks you into a reality of pre depression life. In 1900 there were only 45 states as UT was added that year. WW1 was still 18 years away. Both my Gramps and Uncle were entrepreneurial types but expressed that in different ways. My uncle was technical, he built radio stations and wired telephones and “saved half” even in the great depression stuff needed doing and somehow he managed to get paid to do it. My aunt always worked. She was a telephone operator and they had no kids so the second income helped to create a nest egg. After the depression my uncle bought a failed “summer resort” on Mackinac Island in Michigan. It was a few cottages on the beach. The was no bridge joining the 2 parts of Michigan across Mackinac straits and things were all by Ferry. Now I-75 crosses the straits.

The cottage business was seasonal, rich people from Chicago and Detroit trying to beat the heat down by the beach in the summer, ice and snow in the winter so my Uncle bought a trailer down in Florida and they worked the resort in the summer and enjoyed the sun in the winter. Does this sound familiar? Eventually they qualified for SS and Medicare and sold the cottage business to retire to Fl. My uncle always drove the best Cadillac, it was his feature. My uncle lived into his 90’s and then my aunt into her 90’s. Despite my uncles facility with finance over the ensuing 30 years things got tight. In my aunt’s old age she would go order an early bird special and then complain about it and try to get it comp’d. It was embarrassing, then she died. The disposition of her things fell to my Dad. After all was said and done she had about $15K left to her name. Better than nothing but a real bounce the check for the under taker kind of story, and I understood why she always tried to get her early bird comp’d. They lived a FIRE kind of life. It worked! Barely. She still drove that Cadillac but parts were falling off at the end.

My Grandpa was a hard charger. He started with A&P around age 11 pushing carts from the lot into the store. He didn’t have the job he just pushed the carts and got noticed, and pretty soon he had the job. He wound up as the meat buyer for A&P down in the Chicago stock yards. The cattle and hogs would flow in from far and wide on the trains, and he would buy the herd that would feed the people. The guy could pick a $100 steak while it was still on the hoof. He would bring home a hunk of beef liver that would put sirloin to shame. Roast beef? Don’t get me started. He grew in that grocery business to become Vice Prez and in the end was building shopping centers and all kinds of stuff, but he wasn’t an owner he was an executive and he retired on a good pension and SS + Medicare to a 55+ community in FL about 25 miles from my Uncle. It was a nice new community and he immediately became president of the HOA or something for the community and he got on the building committee of the proposed new church down the road. In the beginning when there was nothing they would have Mass in his living room. Eventually a church and school were funded and built and he continued to live off his pension. I liked the location as my grandmother could go down the street turn right go to church, then go a little farther down the road to a shopping center get her hair done, maybe have lunch, go grocery shopping pull out on the cross street and turn right, go down a ways and turn right and wind up at home. If you ever drove in Ft Lauderdale traffic you’d understand the value of an old lady only needing to turn right to survive. My grandfather died from AIDS in the 80’s. He had a triple A done and as is often the case was transfused with tainted blood which hustlers sold for McDonald’s money. It was a time when AIDS was just being understood. That right turn routine became even more important as my grandma soldiered on. Eventually she broke a hip, went into the hospital, got her hip fixed, infarcted 2 days later and actually blew out the wall in her LV. I trained as a cardiac anesthesiologist and had seen a lot of badly scarred heart but never a blown hole in the muscle! It fell again to my Dad to take care of the disposition. Grandma who was just under 90 when she passed had about $50K left. Her finances initially were solid but as the originals in the retirement community died off the places were sold to families and being an older community, lower middle class families. Those families wanted services like swimming pools so the home owners fees sky rocketed and taxes skyrocketed and Gramps wasn’t president any more to ride herd. So a pensioner was in a bit of a pickle with a fixed income and rising expense.

That’s enough history but it does lay out the reality. Someone born around 1900 had a whole different reality than someone born in 1928 and someone born in 1952 (me) and someone born in 1997 (my daughter). My aunt and grandma made it, barely. A nursing home stay would have wiped them out. What’s the likelihood of a nursing home stay at age 89? You can get out your future value calculator all you like but it doesn’t reflect reality. That 20th century was a century where America had a great expansion and we all remember that. In the 21st century up to 2017 GDP is up on the average only 2.1% over 17 years. 17 years is more than half a projected retirement. It may not give you pause but it gives me pause. Pensions work until they don’t. Real Estate works until it doesn’t. Stocks work till they over inflate and then regress to the mean and the regression steals half your net worth.

You can learn a lot about retirement just by taking a few hours and journaling your family’s history and the economic circumstances in which that history occurred and then thinking through salvation strategies. Beats hell out of wasting your time watching the talking heads on CNN try to beat themselves to death with their lips and trying to out snark each other.