Beginning of the End?

I just read a story about Citrus Greening A disease destined to take down the Citrus industry. A bacteria out of China that is spread by an Asian citrus psyllid, harmless to humans yet deadly to citrus. Economically it attacks the 7 billion dollar Cali citrus industry. Locusts are devouring Africa and the bugs just reached China and other Asian lands.

Of course the big question is Covid-19. Covid-19 appears to have a R0 of around 6 similar to small pox and presently no human immunity. It is highly infective being droplet spread and seems to survive on surfaces for quite a while. It has a split course, 80% show mild symptoms but are highly infective and 20% become severe. It can reinfect meaning you can catch it once and catch it again. It’s mode of death is ARDS and cytokine storm, the storm causing heart failure being especially prevalent in second infections. It tends to kill older and sicker people, like people with diabetes etc. Masks don’t do anything. If you touch a surface and rub your eye you’re infected.

There are 100K ICU beds in the USA likely 85% full at any given time. The idea we are somehow going to escape is laughable. The idea that life will not be severely disrupted is denial of reality.

Japan is about to be hit and overwhelmed, and the rest of Asia will follow suite. Medicine is designed to treat disease on a local basis not arrest epidemics. Arresting an epidemic requires en mass participation of the herd, and a vaccine, and enough time for the herd to become immune. We have none of those tools. A vaccine is 18 months away.

If Covid-19 moves to Africa the famine from the locusts will assure a weakened population. If it gets into South America rest assured it’s coming directly to North America through 2000 miles of porous border. If it gets into Canada we have 3000 miles of porous border to the north. If you hang your hat on WHO or Tony Fauci you’re a fool.

It seems to me the only solution is to become self sufficient for a time when the explosion hits and self quarantine until the herd can attain some level of immunity. That means NOT SHOPPING once the virus explodes but shopping before the virus explodes and hunkering down while nature takes its course.

I’ve lived through 2 dozen hurricanes and the way it works is there is plenty till there is nothing. Hurricanes are a local event and supply comes back from other places in the country in a week or a month. This won’t be like that. Supply won’t come back and if it does it may well be infected. One apartment building has been thought to have spread through water pipes.

My course is to buy enough MRE to cover 3 months and to buy a chest freezer and fill it with meat and hope the power doesn’t go down. Meat is the most caloric and complete food we have. All healing is made from meat. If my predictions do not come to pass I’ll just eat the food PRN and sell the freezer.

I’d be interested in hearing holes in my analysis since our “trusted leaders” seem to be engaged in bullshitting us about the danger.

The market if this comes to pass will die. Supply chains will fold and employment will crater. Given the triple bubble economy, no amount of FED is going to solve this. I’m thinking about buying puts likely leaps as a hedge but still unsure. Puts are the suggestion of one of the market information service products I own. It’s a macabre and perverse way to think but is there another way to approach reality?

We are fed heaping gobs of narrative about investing and everything else. What narratives are we being fed regarding the virus? You can bet Tony Facui has a bunker so he can lead “relief efforts”.

If 80% have a mild course and 20% have a rocky course and 1/3 of those die that’s 21 million dead in the USA alone.

More Gloom and Doom

I subscribe to Real Vision. I like to watch the shows while I’m on the treadmill. Usually 30 to 60 minutes, just perfect. Today’s update is the start of a 2 week macro look at retirement. Today’s vision is free, so I wanted to offer it to my readers. Understand all of your brokerages and the brokerages are hedged. All of the members of the C suite are hedged. They all have slabs of gold in their vaults and cribs in Spain or Uruguay to escape to. I wouldn’t count on those surviving but none the less that’s the plan. You and me OTOH are just fat dumb and happy waiting for the slaughter. I’ve considered selling my house while there is still a bid, but I’m in at such a low price it probably wouldn’t pay. My step up in basis for a new place will eat my lunch.

Real Vision on Retirement

Pretty Happy

Yesterday was a humdinger as the S&P was down 58.14 or -1.77%. I tend to use the S&P as my benchmark as it’s a broad US index with many multinational companies. My portfolio was down almost exactly half of that 1.77%. This is what I’ve been aiming for, a portfolio that is half as reactive as a pure passive equity play. This means if 4M in equities goes to 2M in a crash my 4M will drop to 3M. In doing a efficient frontier analysis

My portfolio risk of 9.9% is virtually 1/2 of a pure equity risk of 19.76%. My projected return is 7.6%, which is 76% of the projected 9.99% of the 100% equity portfolio. I get 75 cents of every dollar to the upside, but I risk only 50 cents of every dollar to the down side. Given my 20 year longevity regarding the sustainability of my portfolio, I think my odds are good, especially since my portfolio is tax optimized. My odds will further be enhanced in 2 years when I pull the trigger on Social Security. If the market dies sooner I can pull the SS trigger if need be, since pulling the trigger at 68 is not hugely different than pulling the trigger at 70, so it would quench my need to deplete my portfolio in a bad SORR scenario. If I pull that trigger it will cut my portfolio WR in half. Each month I get closer and closer to 70, so each month my relative value of SS increases. It’s a nice place to be in.

The majority of my Roth conversion has taken place. If the market dumps it will cut the value of my remaining assets to convert, and therefore I will be able to convert more (cheaper) assets for the same tax dollar. The tax money to pay for conversion is already in the bank. I sold high, paid the taxes, and didn’t look back. If the market doesn’t dump I will simply convert a smaller amount over a longer time ( to age 72 vs age 70) and lower my tax bill that way.

I recently sold some QQQ and bought some BRK.B to reduce my risk exposure while increasing my return. BRK.B has a 11.3% return and a 17% risk while QQQ has a 8% return and a 24% risk. Better return, lower risk = no brainer. The 2 also have only a .16 correlation. Compared to the 1.77% loss in the S&P, BRK.B lost only 1.5%.

Who says you can’t time the market! My conversions are parsing out exactly according to plan.

Real Estate

The latest tycoonery in the FIRE movement is real estate. Everybody wants to lock up their capital in a illiquid asset for 30 years, mumble some mumbo jumbo about tax breaks and how people will need a place to live, you know sing a narrative. They speak of tales of the brave and charmed Ulysses on the real estate trail slaying monsters right and left and see themselves buckling into that swash.

My latest passion is to discover inflection points. An inflection point is when the second derivative of a growth curve in a local region of the curve changes sign. The second derivative is denoted by d^2x/dt^2 and is best known to our experience as a change in sign in acceleration. Step on the gas and the second goes positive, let off the gas and it goes negative. If you’re a long only investor that means you pour in the dough when when things are accelerating and sell when deceleration commences. If your a buy and holder it means your accelerometer is busted and you can’t tell the difference between acceleration and deceleration.

Markets run in broad macro cycles. If you look at interest rates the cycle lasts about 30 years. Stocks cycle much more frequently maybe 5 – 10 times in a 30 year period depending on how you define a cycle. FIRE investors are mostly stock types used to rapid cycle boom bust cycles. Bond holders obtain diversity by mixing short cycle duration and long cycle duration and that’s how they control risk and return. Both stocks and bonds are quite liquid. Very different investing styles to be sure, but if you know what you’re doing bond trading can hit as large a home run as stock trading. Last year I bought EDV which is a long duration zero coupon ETF, and saw a 26% year over year increase in that aspect of my portfolio. VTI has only a 21% YoY increase. Both bonds and stocks are priced for perfection. Bonds are limited by 0% interest and stocks are limited by deviation from the mean, and stocks have soared not by increases in productivity but through financial engineering because of the huge amount of money at virtually zero cost that has been pumped into the system by the FED. A dollar is pumped in, it eventually gets sucked up as corporate debt which is used to buy back stock shares which causes equity prices to soar without a concomitant increase in corporate productivity, so stocks and bonds are expensive both in terms of increased price and increased risk.

I’ve looked at getting into real estate wondering if that’s a silver lining. I’ve been in a couple real estate deals that definitely left a dyspepsic taste in my mouth. That’s called a berf aka a baby barf, but who knows? I think real estate like its cousin asset classes are priced for perfection as well. Free money and foreign money has raised the price likely to an unsustainable level. People don’t think of real estate as a particularly risky asset because it, like long bonds and unlike stocks has a long period to its cycling.

I think there are a lot of head winds as well. Boomers were quite happy to sink their fortunes into 2M houses under the delusion the prices effectively always rise. Part of that is based on free money and part based on a lack of history. If you live in a time when housing virtually sky rocketed because of demand and an economy of one time improvement in productivity the local experience looks much different than the historical reality. In 1970’s woman’s lib, a feature of the baby boom generation became a thing. In 1960 the average house could be purchased by a single average wage earner. By 1980 2 handed bread winners had multiplied to 4 hands and the first thing mama wanted with her new found work wealth was a bigger house, and prices soared. This was the time of the baby boomer so a glut of boomers aka a glut of demand entered the system. The demand was so great and the improved productivity so great house loans were able to sustain 19% interest rates. Today millennial’s can’t sustain that price increase. They are not productive enough. Not a knock on them, there just isn’t a double in the number of hands in the household from 4 to 8, and the demand will soon be replaced by a glut in supply as boomers try to cash in and no buyers appear, despite nearly free money. Real estate is a market and same as any market price is set by supply and demand. You may have 2M in your joint but if the market says 1M, 1M it is. Real estate investors also are at risk. Yes people need housing but not at any price. If you buy a building for 2M and the economy dumps, your 1500/mo apartment may drop to 500/mo because your renters have no jobs, and your 2M investment may be worth 1M, and good luck on selling that mess. Buffet owns a ton of cash, not a ton of real estate. Sam Zell is buying trailer parks not condo’s. My impression is the second derivative is negative.

Worth a watch

Front Running the Recession

S&P is down 40 today after being down 30 on Friday. Is it impeachment? Is it Coronavirus? I think it may be the start of the next recession independent of the headlines. I’m trading with a system that predicts this Friday’s GDP to be 0.06% growth instead of the consensus predicted 2.00% That a 194 bp miss and barely positive. Earnings are being reported and with 30% of the reports reported earnings are negative. Job growth has peaked. The yield curve went negative last summer. Buffet is sitting on the biggest cash horde of his lifetime because EVERYTHING Equities and Bonds are way too expensive and if Buffet knows anything it’s buy low. It ain’t low so he ain’t buying. I read a report that said family offices are now holding more cash than ever. The market is cruising at 120% of the long term mean, implying a 60% drop to revert to the long term mean

I’ve been slowly rearranging my portfolio to be less concentrated in equities. BTC is up $2000 (23%) in a month. EDV (zero coup long term bonds) are up 7% ytd. Gold is up 3.3%.

My birthday is Jan 31. Is my birthday present going to be a 2% economy or a .06% economy? I decided to further hedge. I sold some equities like QQQ, and MTUM and bought more BRK.B. Buffet will buy low when stocks are low, so I’ll let him work his magic and I’ll sit back and reap part of his profit. I also bailed on some of my commodities trades while they were still black. The market is down 1.34% for the day, my trading account is up + 0.5% for the day. Homey likes going up when everything else is going down.

I may be wrong. Time will tell. T -3 days and counting. Falling less on a relative rate of change basis is the same as making more in the long run. An equity swap is not the same as market timing. The correlation between QQQ and BRK.B is 0.16% So swapping BRK.B for QQQ is like buying into a non correlated asset class.

I made the changes with the advice of my AUM adviser Phil DeMuth. His years of experience holds down my volatility.


There is a book by Benoit B. Mandelbrot called the Misbehavior of Markets describing his discovery and application of fractal geometry to markets.

I’m not going to attempt in a blog post to describe fractal geometry but I will try to describe it’s relevance when it comes to how to think about markets.

Here is how we are trained to project retirement.

We have a 1M nest egg, we suck 40K/yr and the leverage on the nest egg provides the income. This is a simple linear equation and is represented by the black line in the above graph. The linear equation is Y=MX+B where Y = 40K, M= 4% and X= 1M. In this equilibrium you can suck 40K forever.

If you try to suck 60K

The line goes from linear to curve linear aka exponential and you wind up 2M in debt.

Here we increase leverage to 6%

and voila’ we are back to linear but we are now 50% more risky (4% went to 6%). This is the real dilemma of retirement. It’s the relationship between Y and X aka M that determines success.

Here the leverage is constant but the duration is reduced to 29 years. We see it’s the duration that somehow determines success as well. In addition we saw the increase in budget from 40k to 60 has a dramatic effect. So let’s rewrite the equation to Y = M(a)X + B where M is no longer a constant but a variable, a variable of budget, duration, and % change in leverage. Each of these “changes” can be described in terms of rates. 40K to 60K is a 50% rate of change. 4% to 6% is a 50% rate of change. 50 years to 29 years is a 58% rate of change, Each of the parts of (a) have subsidiary rates of change that effects the main variable. Rate of change math is called differential equations and multi-factorial rate of change math is called partial differential equations. The mapping of partial differential equations results in differential surfaces which is a geometric representation of the math.

If you own passive low cost index funds you necessarily are limited and entirely dependent on the economy by definition since index funds by definition return at best market return. If duration goes long and leverage goes long those multiply and cause the expectation to go from linear to curve linear. So it’s the non linear that interferes with the nice clean projection. Mandelbrot enters the picture

This is a picture of smoke (hot gas) above a candle. Notice how for a while the smoke is so well behaved it proceeds up in an entirely Gaussian fashion. If you look REALLY closely you can almost see the Gaussian distribution in the stream of the candle. It’s darker in the center and brighter towards the side. The geometry is entirely predictable. The flow is laminar which means the flow is defined by a Gaussian distribution of an infinite number of parallel plates next to and sliding over each other. The thing that keeps the smoke behaving Gaussian is something called the viscous force. A force which is being dissipated the farther up the laminar column you go. Note just before the chaos you see the smoke start to get wavy, and then you see a little eye form in the center of the smoke this is called cavitation and is the onset of the final extinction of the viscous force that has kept things nice and orderly. You can also see a change in the Gaussian distribution. The color changes and becomes more uniformly dark and the bright edges get very thin. This is where black swans turn while. This is where the tails of the Gaussian distribution get fat and the unexpected begins to happen. The crossing from order to disorder is something called the Reynold’s boundary defined by the Reynold’s number. Beyond the Reynolds boundary is chaos. The viscous force is gone. The smoke above the Reynolds boundary is also predictable using Fractal geometry and so by applying the proper math chaos becomes predictable. The geometry of the chaos is based on a power function (an exponential aka something like X^2 or X^3) as opposed to the nice predictable Gaussian function. What it predicts may however not be desirable, if your life is designed around a Gaussian reality. What is happening along the entire course of the smoke is the smoke is loosing energy, first it’s loosing energy in a way controlled by the viscous force (the Gaussian way) and later by the wild and expansive eddy’s of rotation added to forward motion (the power function way). Note also how the cavitation taken in isolation looks like a hurricane, rotation with a well formed eye. Gives a little perspective on what you are looking at.

This is how markets behave. They behave in an orderly fashion right up till the forces enforcing order dissipate and chaos ensues. Once in chaos it won’t stop until the energy is dissipated (reversion to the mean). The more leverage you have the greater the chaos released when chaos ensues, and that’s the retirement dilemma. How to limit the damage of chaos when chaos finally ensues. You can have a shorter duration (retire on time instead of early, notice the impact of the 29y vs 50 yr retirement. You can have a lower leverage but remember leverage includes things like inflation. You can have a smaller WR. You can have a larger nest egg, You can have diversity across non correlated assets. You can reduce risk dynamically when it hits the fan. You can have a fuse portfolio such that you have something to sell high when your other assets are low. You can own things that tend to grow in the face of a crash like gold and you can allocate that dynamically as the risk of a market crash increases thereby getting off the track before the train hits. If you know how you can go short and become a billionaire instead of a mere mortal, but going short is exercising a power function against a power function so it’s like trying to snuff a nuclear bomb with a nuclear bomb. If you know how to do it you win. If you don’t you are assured to loose.

The main thing is to understand the dynamic nonlinear second order nature of risk. If you look at the graphs above only one line fits a linear reality and that one line has an associated risk. ALL THE OTHER LINES ARE NON LINEAR AND GENERATE AN ERROR COMPARED TO THE LINEAR ASSUMPTION, and errors cost you money.

Pretty often the train blows its whistle before it runs you over and the whistle is reason to get off the tracks. Sometimes whistles are false sometimes true. Buy and hold investing simply and arrogantly throws away the information whistles provide. One thing to understand is once the smoke leaves the candle you can’t put it back in the candle. You have until the smoke leaves to place your bets. Rest assured if you live by the bogglehead mantra you ARE placing a bet.

Debunking the Narrative

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

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

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

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

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

Roth to the Rescue!

We know the SECURE act decimated stretch IRA’s, so what’s a mother to do? In thinking about this problem once again the solution is to play growth against taxes. An IRA generates ordinary income tax as money is removed, and it is governed by RMD. So a typical RMD on a 2M IRA looks like this

At age 80 the 2M has grown to 2.4M and the RMD is $126K. If you’re pulling 50K from SS your taxable income is 176K. If you’re MFJ, 176K is in the 24% bracket. At 90 you’re RMD looks like this

193K plus SS growth at 2% inflation means you make 61K in SS or 254K total and your tax bill is 43K/yr. Your IRA is still worth 2.15M You and your spouse die at 91. So the 2.15M is transferred to your kids, who then have 10 years to clean that IRA out. Tis means your heir has to remove 290K/yr from the IRA to get the job done

Lets say your kid makes 200K/yr. That means for 10 years he/she will be making close to 500K/yr and paying 117K/yr in taxes almost triple the 43K you were paying. Bummer! Right?

This is where Roth conversion comes into play. If you can get the 2M in the IRA down to 500K the taxes are much more manageable. A 500K portfolio would play out like this.

With the same 50K SS your taxable would be 81K and your MFJ taxes would be 6,147 based on the standard deduction. Your portfolio would be worth nearly 600K. At age 90

If SS at 90 is still 61K your taxable income is 109K barely into 22% (you leave 12% at 104K MFJ standard deduction) and your taxes would be 10,000. The portfolio is worth 535K at age 90. You and the Mrs both die at 91. This means your heir needs to disperse about 73K/yr over 10 years to clean out the account

Same 200K/yr makes his/her income 273K/yr and the tax burden only 48K a substantial savings over the previous 117K.

When the Roth is inherited there are no taxes to be paid and the Roth has the same 10 years to be cleaned out. Lets say you pulled just enough WR from the Roth to keep the 1.5M steady during your 20 years of RMD so 1.5M gets transferred. 10 years later that Roth would be worth 2.7M to your heirs tax free

That’s how you transfer wealth to your kids under the present SECURE tax regimen without annuities or Donor funds. The advantage is you get to use your money for you as cash flow during your life and your kids get a windfall when you pass. I estimate a tax free 4% WR on 1.5M will generate 60K/yr in income over the course of 20 years at 6% growth plus you will be taking the RMD on the IRA and SS. You pay minimized taxes during your life, since with Roth conversion all the taxes get paid sooner instead of later. Later costs more in taxes because of the progressiveness of the tax code and RMD percentages. You do pay all the taxes you owe, but you get to adjust those to your benefit not the governments benefit. If you want to convert even more you can take more out of the IRA over and above the RMD amount but just keep the total taxable income under 104K/yr. The excess money above the RMD amount pulled from the IRA can be put in the Roth to gather interest or you can just live on that extra money and have a smaller WR on the Roth.

The trick to this is efficient Roth conversion BEFORE RMD, and the trick to that is planning well in advance of actual retirement. Much of this blog has been devoted to understanding Roth conversion.

Secure Act Blues

On 1/1/2020 there is a new law in town. The stretch method of wealth transfer will be kaput. The government has devised a new schedule that will assure them a lions share of your wealth upon your death. They will do it by nailing your children to the cross.

There are typically 4 asset classes that transfer IRA, Roth, Brokerage, Real Estate. in 2019 you could dissolve the assets in the IRA and the Roth as an heir over a very long time, even into your next generation i.e. the grand kids. You could leave the kids an IRA say IRA 1, but you could also name grand kids as beneficiaries in a separate IRA called IRA 2 which could grow unmolested for decades. Kids get money, pay ordinary income tax, but had control over how much income is removed so they had some control over taxes. No more. Starting next year Roth and TIRA needs to be emptied within 10 years of inheritance. If you have a combined 2M IRA and it grows at 5% your kid has to pull out $260K/yr as ordinary income. Depending on his income this could easily put him in the top tax bracket for 10 years, accelerating his tax bill and allowing the government a larger slice of your money than they otherwise have enjoyed.

This maneuver isolates the politicians. By the time you’re dead and your kids take over the money, the law is seasoned and “no one” is to blame. As a voting block the kids don’t even know they’ve been fleeced, and the grand kids don’t have the first clue. What’s a mother to do?

I’ve been playing with using the power of compounding, mixed with the power of lower tax rates to come up with an inter-generational solution using the gift tax. Each parent can gift 15K/yr per kid tax free, so if you have 2 parents and 3 kids you can gift up to 90K/yr. If you have 3 kids and 3 grand kids that becomes 180K/yr. What you want to do is set up a schedule of disbursement that eats into the principal of the IRA over the projected course of your life span. So if you start with 2M at 5% interest and have 20 years to live you need to pull out 160K/yr to empty the account in 20 years. 100K /yr keeps the account steady state at 2M. This gives you good control over disbursement. If you want to keep some money in those accounts till you die simply take out an amount somewhere in the middle. Lets say you pull out 130K/yr at the end of 20 years you would have $1M left in the accounts and would have transferred $4.3M in net value to your kids if they just put that money away and let it dollar cost average and compound for 20 years. This uses the tax law and compounding as a means of transferring a ton of wealth. In addition There will still be 1M in the accounts which will be disbursed over 10 years @ 130K/yr. By varying the disbursement vs the residual you can figure what disbursement is optimal for a given progressive tax code.

Your eyes may pop out at this and ask how can this be true? The answer is your money compounds no matter who owns it. If you start with 2M at 5% and never remove a dime after 20 years you will have 5.3M, the same 5.3 M you wound up with except you transferred 4.3M of that at a low tax rate and then had the additional 1M still in your account at the time of death. More money stays in your family less money goes to Uncle Sam. The particulars matter however. You can’t do this rule of thumb. You have to mathematically optimize and minimize taxes across 2 or more generations. Certainly a gamble but a gamble with a highly likely outcome since no one else is going to do the work involved in the optimization. The governments rules are designed to slaughter most of the people and it’s hard to write a law that covers 100% if there is some wiggle room and there is wiggle room.

A second strategy would be to take money in excess of RMD from the accounts and stick that in a brokerage. You would have to pay ordinary income taxes but if you optimized into a Roth you can pull Roth money into a brokerage tax free. Upon death the brokerage receives a step up in basis to the heir, and a brokerage has no expiration and a different taxation regimen. In addition, as the heir you may be able to tax loss harvest the brokerage over a long time, turning at least part of that account into a Roth like asset or a partial Roth like asset. You also have control over how much you take out depending on other income sources further optimizing your tax bill.

It’s complicated but it’s a puzzle that can be solved, and is worth being solved. I don’t have the details worked out yet, just the general framework, but my preliminary massage of the data shows this should work quite nicely.

Secure Act Update

The Secure Act was attached to the continuing resolution to keep the government funded and therefore will be signed into law and take effect 1/1/2020

For me this changes my Roth conversion schedule. Originally I was converting about $250K/yr. This year I converted $214K to keep my Medicare costs under better control. Medicare is an ongoing nightmare of arcane rules. My $250K MFJ conversions doubled my Medicare cost. For 2020 my Medicare cost will drop to 1.28 x the basic cost or $185/mo. Next year with the Secure act in effect I should be able to drop that back to a basic rate of $144/mo since my conversions are going to be less. I will also save on taxes. My regularly scheduled conversion bill was about $41K/yr on my AGI but will drop to about $17K/yr. This allo ws me to convert the same total amount in smaller aliquots over a longer period of time which improves the cash flow in any given year. The savings over 5 years pays for 1 free year of retirement and my net projected Roth account will be 1.5M over the 5 year to age 72 conversion vs just under 1M in the account using the larger 2 year to age 70 conversion.

Secure hoses up wealth transfer. All those articles you’ve recently read about creating “generational wealth” are now crap. You won’t be funding your grand-kids but the national debt. It is what it is, so take advantage where of the code as it will exist in 2020 instead of kvetching. You never step in the same river twice and we are stepping into a new river.

I funded my conversions for the next 4 years by selling stocks high this year and not waiting for the necessity to sell in a down market. Locking in 90 – 100% of the gains gives me a 100% war chest to use while converting as opposed to playing the odds of making an extra 5% by not selling, in the face of a possible 50% loss. Life is about the analysis of probabilities and then ordering the probabilities from most likely to least likely. Since they are probabilities there is no guarantee, but given my druthers I’d rather own the most likely scenario rather than the long shot.

The Secure Act will likely force wealth transfer to funnel through insurance products. Elsewise you could start funding your progeny over the course of your life. Instead of RMD take out RMD + 10% and slip the kiddo the 10%. You could slip the 10%/yr into BRK.B in a taxable account and it would have no tax consequence for owning it, but step up in basis when you croak. Better than paying some damn insurance company.