A Different Way to Plan Retirement

Karsten at ERN suggested I write a post for his site so I’m giving it a test drive here. If he picks it up I’ll probably delete it since it’s old hat to my readers. If he likes it I’m hoping we can somehow cut and paste it

David Graham wrote a great post on this site regarding the 4% rule. What is the 4% rule really? You save 25x your yearly need and put it at some risk in a portfolio and then try to extract 30 years of value from the portfolio by extracting 4%/yr. 25x is the principal. You have to inflation adjust the withdrawal, and then you risk the principal at some interest rate above inflation. Let’s say you have 1M, you pull out 4% above inflation (and SORR doesn’t eat your lunch) you will still have 1M 25 years later. You can re-retire for another 25 years on that 1M and still pull out 4%. So if inflation is 2% you need to make 6% on your money to run this money machine. 6% is the leverage on your future, That’s the “math” behind the 4% projection.

What’s the problem you say? The problem is volatility. The problem is the market can not guarantee 6% and 2% inflation. Return is all over the map as is inflation. One year you may make 12%, the next year loose 20%. One year inflation maybe 2% and 5 years later 13% (1979). If your lucky it’ll work out you tell yourself, probably will work out, I read it on the internet! So what’s the probability?

This graph is generated by a Monte Carlo engine at Portfolio Visualizer a free to use financial tool kit. The analyzer works like this. It creates a model from a given portfolio (in this case 50% US total stocks and 50% US total bonds) and then runs it through 10,000 sequences from -3 to +3 Standard deviation where 0 is the mean. It mixes in inflation and a standard sequence of return risk, and spits out a Gaussian plot of the 10,000 probable futures from most likely to least likely. The most likely is the mean and is the 50% line the least likely graphed probability is the 10% line and the 90% line. The are successes below 10% but at some point there are failures. the 10% line represents 30 years of overall poor returns, but when all is said and done you still have 561K in the bank at 30 years with poor returns. Another calculator in the suite the efficient frontier calculator calculates the nominal rates of risk (as SD) and return for the 50/50 portfolio described above with data going back to 1987.

with a 50/50 you can expect on the average 8.56% return, 2.56% above your 6% limit. These are quantitatively calculated statistical values not just guesstimates, useful and more granular knowledge than guesstimates.

In the above example over 30 years of normative sequence out of 10,000 simulations 9838 succeeded to make 30 years the rest failed before 30 years. When did the failures start?

by year 18, 3 people had failed, year 17 nobody failed. Quite a bit of information on a simple 2 fund 50/50 portfolio. Useful information in planning your future, since this is a future looking calculator.

What happens at 80/20 AA?

9504/10,000 succeed the rest fail

The first failure is year 11 out of a 30 year retirement.

The 10% guy at 80/20 only has 396K left in his account compared to 561K for the 10% 50/50 guy. Quite a bit more information

What about bad SORR? You can adjust the SORR by putting the bad SOR in the first years of the model. So if youretired in 1972 you had about 3 years of bad SOR plus very high inflation, It happens. Here is a nominal 3 year bad SOR scenario with a 80/20 AA

Only 6722/10,100 survive the rest fail

The first failures are at year 9 and the 10% line is out of money at year 16 AND the 25% line is out of money at year 23. This is with a 30 year retirement. What about 50 years of 80/20 AA 3 bad years of SOR first?

Only 3508 survive and 10% 25% AND 50% are out of money before 50 years

The first failure is year 8

So that’s what you’re messing with with a leveraged future. Remember this is the nominal 4% x25 retirement plan everybody quotes. Sober you right up doesn’t it?

Rick Ferri Podcast

I was over on my friend CD’s site and that suckah likes to stir the pot. The topic is interesting enough to warrant a post, but it’s ground I’ve trodden before. Never the less I may have a little better conceptual model than squawking about mean square variance and variable risk. By the way I’m in no way knocking Rick Ferri. I was an investor in the dark ages and in the land of the blind he had one eye. The podcast is here and I recommend!

My conception is a portfolio lives on a plane and has a shape on that plane. It has a center, and the assets fan out from the center in lines like the spokes of a wheel. The shape and area of portfolio on the plane represents portfolio’s total risk, and the spokes individual asset risk and asset correlation.

A square is a more inefficient plane from a risk perspective compared to a circle

The circle represents the efficient frontier. It is the plane where the assets and their correlations come together and form the least risk. The surface area is a measure of portfolio risk, so clearly the circular portfolio holds less risk than the square. Here is the square which holds the assets:

This is not to scale, just a picture of assets as spokes and their relative correlations with each other. The spokes represent individual asset risk and the length of the spoke is adjusted by the assets volatility and it’s percentage in the makeup of the AA. EM is very risky compared to US, 22.73% SD vs 16.67% SD, but if you own only a dab it tends to tone down the risk in the portfolio on a weight adjusted basis. Note bonds form a near perfect right axis with stocks. The correlation between bonds and stock is nearly zero, meaning as stocks gyrate their values wildly due to their risk, bonds don’t budge and are virtually impervious to that gyration. Here is a snapshot of correlations to US stocks

In the diagram the angle between spokes is equal to the correlation. Gold is NOT to scale but gold has a property in a crash I want to talk about later.

The most efficient portfolio is a circle. It is the portfolio of least surface area and therefore least risk. If the radius = 1 the area of a square is 4 and the area of a circle is 3.14, a 27% reduction in area corresponding to a 27% reduction in risk. Again I don’t want to emphasize absolute values but just to give a visual of how to think about portfolio risk. In accumulation the key attribute of a portfolio is return, risk be damned. In accumulation the risk is managed by the W2. You just work more or longer. The calculus changes in retirement once the portfolio is open to withdrawal and SOR and risk becomes paramount, and minimizing risk is a good strategy for portfolio longevity. You want to make the surface area (risk profile) of your portfolio small and circular if you can.

Look at the square and it’s contained assets. Notice how US, Global, and EM all go in pretty much the same direction. Their contribution to surface area is out sized in the vertical dimension. They add a lot to the height not much to the breadth. Bonds add to the breadth. This is why IMHO it’s important to own bonds. They are built in risk management. Bonds further act as a storehouse of value, like a bank, but bonds don’t grow much either. So they add stability but not much return. Re-balancing means you use a little of stocks growth to sock away some value in the bank. You sell a little of the stocks when they are high and stuff that value in the bonds (bank) for later when things aren’t so groovy. It’s a natural thing for a indexer to do, economize and save and invest don’t speculate, reduce the risk, that’s the indexer’s motto. The whole reason to own an index is because of the diversity it provides and diversity to a point improves risk. Diversity is way over done however. Diversity in a given asset class like stocks is asymptotic meaning after a certain point is reached there is barely anymore advantage to be had, and piling higher and deeper PhD just buys you complexity and portfolio drag. A large cap fund becomes diverse with as little as 30 stocks spread across 10 sectors. The DJIA is diverse.

Look at EM US and Global. Are they diverse? NO. They all go in the same direction. They add a little to spreading out the perimeter on the way up. On the way down they all collapse together, and the ones with the greatest risk collapse far more than the ones with smaller risk. So on the way up a dab of diversity, on the way down nightmare. I analyzed EM’s performance in the 2008 crash and if US stocks dipped 50% EM went down 70-75%. If you go down 50% it takes 100% to get even. If you go down 75%, 150% to get even. The thing that gets you even is growth. The relative growth of US stocks is 10.89% the relative growth of EM is 8.66%. How long do you think its going to take for something down 150% to recover at 8.66% growth compared to 100% at 10.89% growth? YEARS is the correct answer yet everybody insists EM needs to be in the portfolio. Quantitatively a stupid idea IMHO.

People criticize factor investing because it may take decades for small cap value to pay off, but blindly put EM in their portfolios which may take centuries to pay off based on some half assed explanation of increased diversity. If the arrows point in the same direction it ain’t diverse. Bonds diversity is called non correlated diversity because it’s correlation is zero. Gold is like that too, non correlated, as is cash (lets say 3 month T-bills = cash). Those are your store houses of wealth, the bank against SOR-Risk if you will. Stocks are the engines of growth. That’s how a portfolio works.

Gold is a special case IMHO. Gold doesn’t return anything it just stores value. It is a commodity not an investment per se’. So why own it?

Behavior of GLD in 2008 crash

Notice how GLD soared while stocks crashed and recall correlations. This is a strong negative correlation in the face of a crash. Soaring gold gives you something to “sell high” when everything else is going to hell and all the stock arrows are pointing into the ground. You want some hamburgers? Sell some GLD when the S&P is in the toilet. It’s a hedge against SORR. What about GLD today?

It’s time to buy a little GLD (buy low) to get ready to hedge. This is still a strong negative correlation but more approaching zero correlation. Gold gets quiet when stocks go up and becomes quite volatile when they go down. So you can trade some GLD volatility for that stock volatility and reduce the over all volatility. That’s why I own some GLD. Not for return but as a volatility hedge.

So what about re-balancing? If you put some money in the bond (bank) on the way up, you have some money to spend when the crash comes. If you own GLD or maybe a cash equivalent (more later) you have something to buy hamburgers with, so take some money out of the bond bank and buy stocks LOW. The rule is buy low sell high, or sell high buy low. People say “you can’t time the market” but they’d be wrong. If you look at growth after a recession it tends to explode to the upside and buying low is exactly the “right time” to buy. The feature of this kind of risk management is it’s automatic, no human intervention required except to do the mechanics of re-balancing year in and year out. Look at the 2009 chart above the right time to buy was Jan 2009 and if you re-balanced in Jan 2009 you hit a home run. That’s called market timing, it’s mechanical and that part is critical. It takes the dumb assed human who’s constantly trying to maximize profit out of the loop. Dumb assed humans can’t time the market but a mechanical system can capture at least some extra growth.

What about cash equivalents? I consider a tangent portfolio a cash equivalent. What is a tangent portfolio?

The tangent portfolio is the roundest portfolio. It is a portfolio of stocks and bonds that has the most return for the least risk and the least risk is the roundest area. If you look at this portfolio it’s expected return is 6% but it’s risk only 3%. It’s mostly bonds with a dab of stock so if bonds are horizontal it’s just enough stock to turn the bond line into a circle from a risk perspective. If you own 12% stock and the market drops in half you now own 6% stock barely a budge on the net portfolio value. It drops 6%. If you’ve been re-balancing on the way up you’ve stored extra value in the bonds anyway, so a few years in you could loose 6% and still be money ahead. If you wan’t to store some equivalent to cash for a rainy day this is a pretty good way to do it. Lets say you store 2 years of WR (say 200K) in a tangent for 5 years and the crash comes.

lets say you can tighten your belt to 85K/yr.

You have about 3.5 years of money to live on without touching the main portfolio. This is a strong hedge against SORR since you leave the main portfolio alone while using the tangent to buy hamburgers. I did an analysis and burning this fuse portfolio needs only happen once to change the trajectory of SORR in a bad crash to something sustainable. You don’t need to keep refilling this bucket if you have it full to start. It just changes the probability of success to the good in a very Bayesian way. The cost? 2 more years of work. A little GLD and a little Tangent = a lot of horse power when it comes to combating SORR. If you never use it good deal. Just die richer or blow it on a Bentley at 85. Again GLD (non correlated) and a tangent (relatively non correlated since its mostly bonds) reduce the risk.

The last portfolio risk rounder is the Roth. Getting some dough in a Roth is insurance because your retirement is NOT going to happen as you think it is and you can be woefully underfunded.

A mere 200K in a Roth 20 years later is 650K and that buys a lot of end of life care. Remember if you’re married you have to fund 2 end of life plans. You don’t get to suck up all the dough and leave your wife hanging. In your death she will have higher taxes and a reduction in SS income and if you don’t plan for that it will bite her in her ass, no thanks to you Mr bogglehead tycoon. 650K is a nice back up portfolio and virtually eliminates SORR from your life and her life. Notice that 69% of the backup portfolio is accrued interest aka free money when it sits in a Roth.

You further reduce risk by proper tax planning but that’s another post. CD’s post was on complexity and kind of addressed the complexity in a single portfolio. Portfolios can be analyzed simply on the efficient frontier plane to reduce complexity.

Here is a 5 fund portfolio of 3 kinds of stock funds, bonds and GLD

It expects a 7.5% return at 12% risk

Here is a portfolio with the same return but half the risk

You tell me which one you want to own in retirement. This is not complex. The efficient frontier calculator is effectively a square rounder. You feed it some assets and it will tell you the assets and allocations of the best circle. You may feed it 10 assets in may only choose 3 to give you the best circle. The tangent is the best circle. It will then create a line of “better circles” for various risk/reward pairs, and you just pick off what you like. It will also analyze your particular asset allocations you fed it and give you the overall risk and reward of that portfolio.

What is complex, is planning for the unknown SORR and the the hedges described above do that with minimum muss and fuss, but you don’t get to retire at 29. The complexity also comes from trying to win against an arcane tax code designed to separate you from your wealth. You only get to spend what they don’t take,

Price Transparency in Medicine

Oh Baby Oh Baby Trump just stuck a shiv in the MBA top heavy medical industry by ordering price transparency in Medicine especially the drug biz. It’s the day the universe changed.

I went to Med school in 1981, it was a heady time of 17% interest rates on student loans. When I was accepted my med school cost 6800/yr and I sold my house and had saved enough to cover 4 years. By the time I walked through the doors 6 mos later it was 8600. The next year was 12,000 and the 3rd year… I ran out of money and I wasn’t going into debt at 17% interest, which started accruing immediately. So I marched down to the NAS Glenview, in Chicago raised my right hand, swore to defend the constitution and the peeps and it was anchors aweigh for this pilgrim. It was actually a great deal they pay 2 years, I pay back 2 years after I complete my residency. They get a fully trained anesthesiologist for LT’s pay which was 36K/yr.

When I got to med school it was the time of the first HMO. My buddy and I looked at each other and said “OH NO! It’s going to be the $39.95 gall bag operation”, because it was dead clear he MBA’s meant to pierce the profit in private practice medicine and hoover it up for themselves and it’s been down hill ever since.

When I started the physician commanded 12 cents of the medical buck and soon enough it was 6 cents then 3 cents. Where did the dough go? Strait into MBA’s pockets. MBA’s and middle men. You can’t run a competitive business unless you know the cost and if you break your wrist what gets paid is who knows? It’s what ever the contract says you get paid plus the slippage of denials.

Transparency is going to change that as he says BIGGLY. A wrist can’t get set without a Doc but it sure as hell can get set without a MBA sucking off the profit or a screw company charging 10K a screw. United health, CVS, all them jokers are heading down. Should be an interesting ride.

Roth Estimator

I’ve written a lot about Roth conversion especially partial Roth conversion. I’m in the middle of Roth conversion which is why its on my mind. I was playing with a simple FV calc to look at conversion over time. This is a non-spreadsheet method of analysis that is pretty good.

My previous analysis says that something like a 500K TIRA is OK to own when RMD happens. It’s payout is small enough to keep you in the 12% bracket for a long time. So lets’ say you’re age 65, the SECURE act passes, have a 1.5M TIRA and 7 year to convert it (post SECURE act RMD won’t start till age 72). You want to clean out the TIRA such that 500K is left in the IRA after 7 years of conversion. Do you just divide 1M by 7? That would be the crudest estimate but wouldn’t get the job done. The TIRA will continue to grow over the course of the 7 years (presumably) so you will have to transfer more than 1/7 per year (142,000/yr). Lets look at a FV calculation

This calculation says at 4% return (return above inflation) you would want to convert 185K/yr not 142K /yr. Taxes on 185K would be $36,538 and $ 25,106 on 142K MFJ standard deduction one spouse over 65. So now you know how much to transfer and what it’s going to cost. What’s the end value of the Roth?

So at the end of conversion you would have 1.461M in the Roth (nearly as much as you had in the TIRA, and 512K left in the TIRA for a nearly 2M total. Your taxes would be 7 x 36,538 or $255,766 or a cost of conversion of .13 cents on the dollar, a pretty good deal IMHO. Well below 22% or 24% marginal costs.

I pay my taxes not from the Roth conversion but from cash I free up from my brokerage account mixed with long term cap loss, so my taxes money comes out tax free. A good reason to consider learning how to tax loss harvest.

The results may not be perfect since they represent averages but a rational estimate of both conversion amount and cost. As you convert you can adjust the rate of conversion if the market happens o hit a home run or has a crash. My goal is to wind up with 500K in the TIRA and more than 1M in the Roth prior to RMD. Simple quick no muss no fuss, no Monte Carlo.

This analysis presumes you are living on cash for the conversion period for max conversion efficiency, but even if you’re living on side gig income or dividends this is how to do the analysis, you would just have higher taxes if not living on cash, but you would be paying taxes anyway.

A word on how assets come out of the TIRA. My goal is to store my blonds in my TIRA. Your best placement of bonds is in a pretax or Roth account. My asset transfer is to get the highest return asset out first and into the Roth. Second highest next. The idea is to get the growth into the Roth to avoid paying more taxes on the appreciation. Moving growth first may change the calculus slightly but it’s a trivial matter to adjust every year now that you have a method to judge. Simply place the assets on the efficient frontier plane and read off which one pays the most. Alternatively you can move the riskiest first but depends on your goal. My goal is to have the bonds in the IRA and enough stock to own a “tangent portfolio” which is the AA which pays the most return for the least risk. If you owned BND and VTI the AA of the tangent would be 12% VTI and 88% BND. You may want higher growth but higher growth brings more taxes and moving out of 12% bracket sooner since this account RMD’s, so I’ll get my growth in the Roth which grows tax free. You get the tangent portfolio from the efficient frontier curve of the assets

The really good news is $185K/yr avoids all the tax cliffs and surcharges built into the tax code. If you convert to the top of the 24% you go off the cliff and pay more taxes than need be, but that’s a subject for another discussion.

My brokerage (FIDO) allows transfer of assets whole or pratial between Roth and TIRA so I don’t even need to convert to money, just transfer and pay the taxes.

Here Comes the Crypto

I own BTC. I bought it not as an investment but as a currency. Back in 2015 Greece froze up. There wasn’t a dollar to be had. No checks worked. Credit cards were frozen. If your money was in “the bank” you could go stand in line for 5 hours to be allowed to withdraw $50. I read a story about a guy who was vacationing in the Greek Islands. When he was ready to go home he couldn’t buy plane ticket. He was a rich guy with plenty of means, but his means were all tied up in banks and the banks all had the windows closed. He owned BTC. He used BTC to buy some Ouzo, some Gyros and a plane ticket home. I had just sold some penny stock at a good profit and used the proceeds to by my kids a car. What was left I split between BRK.B and BTC. I became intrigued at the idea of bank-less currency and true point to point transaction guaranteed by the block chain technology. Also I was intrigued by the fact BTC had an upper limit. It was infinitely divisible but there were only 21 million BTC that would ever exist. The limit guaranteed a bubble like the tulip bubble would not happen. Tulips are trashy flowers, easy to grow. BTC is VERY hard to mine, I know I tried my hand at it, and it becomes asymptotically harder with every BTC mined, so the BTC universe is capped at 21M. I bought my BTC at $275 a coin and went off and took a nap. A year or 18 mos later it became a speculation and doubled and doubled etc till it was worth $19,000 a coin, YIKES! I looked at the BTC charts and the volatility was +- 40% or an 80% spread. At $19000 if I lost 80% I’d still be way ahead about 1300% so I sold my initial stake and let the rest ride. This is called creating a free trade since all you own after the trade is profit as the principal was removed. I put the principal into BRK.B This was totally speculative money, I won’t even call it an investment, but by selling the principal my risk was zero. Worst that could happen is I’d loose my unrealized gains and not have to pay the taxes. As of today I’m 8800% ahead since I took the principal off the table. Wild ride.

What I like about BTC is there is no banking and governmental involvement. You can be a purse maker on a mountain top in Peru, get on the satellite phone and sell 50,000 purses to Nordstrom or Neiman, do the deal and have the BTC in your account by lunch. All you need now is logistics to get 50K purses to NYC. Logistics? Sounds like a job for Bezos! This opens the world to commerce. A form of this already exists in China where your account is linked to your cellphone and you can buy Bahn Mi with a tap of a button or a QR code. This is creative destruction at its finest! BTC was further legitimized as a currency when the options market was established so you could effective short BTC and hedge the risk and better control the volatility. My prediction was BTC would stabilize at 9000/coin and today its 8800.

Facebook backed by Visa and Mastercard is creating it’s own Crypto. Be very clear what is happening. Facebook has 2 billion users and God knows how many hold Visa and Mastercard. Elon Musk is launching a satellite network that will blanket the planet in wifi. I’ve participated in this kind of technology through my ham radio interest, it’s called LEO low earth orbit. The satellite plant is just down the road from me, and the launch pad is 13 miles southeast from my sun room. Amazon and Space-X are involved and its called project Kuiper. I can sit and watch the launch from my couch and hear the roar of the rockets as they leave then hear the roar as the boosters return 6 minutes later for reuse. This is happening folks world wide non governmental dominated commerce. The results are staggering. Imagine a currency where the USA is NOT the reserve currency. In the block chain value transfer is automatic and requires no middle man. If your not the reserve currency you can’t just print money.

That oughtta spice up your weekend

Cardiac Surgery Recovery Update

I’m on POD 47 so a little over 6 weeks. Immediately post op in the ICU My BP crashed and the Curly shuffle ensued. The surgeon walked in at 5 AM and asked me “how ya doing” I told him I need blood, and a few minutes later it hit the fan. They worked on me for 5 hours and finally the guy gave me blood and I stabilized. When he saw me later he said “I wish I had listened to you in the first place”. I find that hilarious. It’s a subtle anesthesiologist/surgeon kind of thing. And after standing toe to toe with these guys for 35 years it’s rare I’m wrong. I’m not knocking this guys skills, I consider him a minor god, but I was already doing anesthesia the same year he was going to his Prom

The ensuing Curly shuffle bought me an extra 35 lbs of edema. If you don’t think it’s a bitch getting out of bed or a chair post sternotomy with an extra 35 lbs strapped to you think again. My albumin dropped to 2 indicating I was under significant metabolic stress. The food was horrible mostly carbs, and healing is made out of protein so like Lynard Skynard: “I did what I could do” and 6 weeks out my albumin is over 4 with resolution of the metabolic component. at 16 days I was actually catabolic and loosing weight beyond the edema but at home I was finally able to get complete control of my diet and level off. I felt like a dive bomber diving into the ground and pulling up at the last minute, but the plane held together and pull up I did.

I managed to get an infection in the saphaneous canal where they harvest the vein. The C&S was unknown at that point. but likely staph so I started on Augmentin . It blew up over night literally. I was measuring the circumference of my leg and it grew an inch in a day. I DID NOT want to go back in the hospital. It would have been a week admission, so I called up my surgeon buddy who brought me to his office on a Sunday and Incised and Drained the saphenous canal. Got about 40 cc out, got a culture. I proceeded to drain more over the next 2 weeks. The bug was Proteus Mirabilis a gram neg rod so it had potential for very bad juju. I got on the right antibiotic and things have deffervesced nicely, but the infection made me quite ill. I’m also on a anti arrhythmic amiodarone for afib and I swear that stuff is rat poison. A-fib is common post op and the amio converted me but I’ve been in perfect sinus for a month so the pathway swelling has likely subsided so I’m starting a taper on the amio. Tapering is proof God loves me, I would hate to be on that stuff permanently. I’d probably opt for a pace maker instead.

6 weeks is the magic number for driving. The sternum can take 24 months to completely heal, and I can tell my manubrium is not well healed especially on the right (common) so I still have to watch my P’s and Q’s about things like lifting heavy weights, but “I’ll do what I can do”. My surgery included a LIMA to the LAD, so the right internal mammary is still in situ and should aid in healing.

I went to see my surgeon today and he discharged me 2 weeks early because of the progress I’ve made. I’ve been reviewing recovery times and this is going to be a 6 month deal at least. I’ve been doing twice a day workouts to total 40 minutes various activity prescribed by PT and have seen good progress. Yesterday I did 30 min. continuous aerobic exercise at a HR of 150 and had normalized my post workout BP in 3 minutes. Long way to go till I’m back in shape, this incident knocked it out of me, but it will come, totally worth it since I have a 55% EF and a normal echo. On the way home I took my wife out for lunch at a rib joint. We had a great time. The market is up and life goes on!

“Worldwide Retirees Slated to Run Out of Money!!!!!”

saw a Bloomberg story on retirees outliving their money, a quote:

” From the U.S. to Europe, Australia and Japan, retirement account balances aren’t increasing fast enough to cover rising life expectancy, the World Economic Forum warns in a report published Thursday. The result could be workers outliving their savings by as much as a decade or more. “

In the FI movement we make our plans and tend to our knitting better than most I think, but the statistics are not as dire as advertised once you work through the assumptions:

For US males the average post age 65 retirement is 18 years and for women 20.6 years, the average savings for men’s retirement covers only 46% of what is necessary, and for women there is a 47% hole to be filled. The assumption is withdrawal rate is 70% of accumulation wages and does not take SS into account

This means according to this article if you start at 500,000K, made 87K/yr and withdrew 70% (61K) your money would last 10 years. When I inflation adjusted the withdrawal and grew the funds at 4% above inflation my longevity was closer to 8 years not 18. I calculate a 18 year retirement would cost 1.4M. 900K is missing to live 18 years @ 61K/yr inflation adjusted

What about SS? I’m going to guess the average worker who paid into SS for 40 years will get about 25K/yr. It’s likely his income was not 87K for 40 yrs but some smaller number for some decades, so 25K is a FRA thin air estimate, but it will illustrate the argument.

If you add inflation adjusted SS income as described, it would account for an additional 571K of the missing 900K, leaving you 329K short. The short amount you would have to make up with portfolio leverage and Asset Allocation. I Monte Carlo’d a 50/50 stock bond portfolio and for a 20 year withdrawal (the closest to 18 the program would allow) Adding 500K plus SS, 50/50 asset allocation portfolio worked out 99.76% of the time

you’d still have a 3/4 million safety net left in the account in the 10% case.

I don’t know about other countries and their Social augmentations, but in the USA an age 65 SS and half a million in retirement money will get you way down the road. The longer you go into retirement past age 85 the more failures occur, but even at age 95, 95% of the portfolio’s still survive. If you save at least 1/2 million dollars your chances of running out of money for an age 65 retirement are small.

I found this report very misleading to say the least.

A Tail of Two Risks

I’m going to create 2 portfolios, one high risk and one low risk, and run them through the meat grinder called Monte Carlo. I’m using a simple 2 fund portfolio of US Stocks and Total US Bonds, such that both portfolios reside on the efficient frontier. One is an asset allocation of 40/60, a bond heavy allocation the other 70/30 a stock heavy allocation. There are plenty of people that run 70/30 or even worse.

I’m starting with 4M in each portfolio, and I’m taking the first 1M off the top and stuffing that in a Roth IRA in each instance. The Roth serves the purpose of a backup portfolio, which I don’t count in the day to day WR of the other 3M. In other words the Roth stays closed to withdrawal unless needed. A portfolio closed to withdrawal does not suffer SORR. It’s end value will simply be it’s start value plus interest, inflation adjusted. A portfolio open to WR is liable to SORR and inflation. This study will look at a 25 year ride (actually 10,000 25 year rides) and create a distribution of what the future might look like for each portfolio.

These are the efficient frontier data for each portfolio. You can read the risk and return and Sharpe ratio for each.

When I plug the 70/30 portfolio /into Monte Carlo I choose 3M and 110,000 as portfolio size and fixed withdrawal rate inflation adjusted. I choose historic inflation. 3M and 110,000 is a WR of 3.7% in either portfolio. Monte Carlo has a cool feature in that it dissects the internals of various statistics and each portfilio has a very different ride through its 10,000 simulations.

You can read off things like Max Drawdown, the percentage of drawdown the portfolio suffered according to centile, quite informative! in 10% of the cases the portfolio suffered a 95.71% drawdown and an ending balance of only $128,636 left in the bank after 25 years. It tells you safe withdrawal rate and perpetual withdrawal rate for 25 years, an important statistic The WR is tied to the term of withdrawal, so you don’t get to pull fuzzy numbers out of the air and try to apply them to other scenarios like assuming if 4% never fails over 30 years it won’t fail over 50 years. If you want to treat the portfolio as a perpetual source of money you have to reduce the WR from 3.7 to 2.94 or $88,500/yr.

Look at the difference between 10% and 25%! Inflation adjusted end value for the 25% cohort is 1.7M while its 65K for the 10% cohort. Here is the graph

In the 70/30 case at the 10% centile if you start with 3M you’ll end with just under 2M and your chances of success are 9887/10000 for 25 years.

Plugging in 40/60 all else the same

In the 40/60 case max drawdown is -40% (not 95%) but the end balance is 1.4M not 65K much safer. Both portfolios give you 25 years of 110,000 buying power inflation adjusted, but the 40/60 is a kinder gentler ride. The success is 9998/10000 only 2 failures. The graph

the inflation adjusted end balance of the 40/60 is 2.27M or 320K more than the 70/30. The reason of course is the drawdown. It takes a LONG time to recover a 95% drawdown. If it’s 95% down it’s 190% back up. Perpetual withdrawal in the 40/60 is a little bit better at 3.02% or $90,900/yr

So there ya go, a quantitative way to determine your post retirement risk profile through number crunching. Remember you also have that Roth over to the side which has been growing unencumbered by SORR. About the only thing that can derail you is if we actually switch to a bullet based economy where money is no good. No need for side gigs

So What About Cash?

In setting up for the next traunch of Roth conversion I converted some stock to cash to round out my living expense into my 73rd year. If SECURE passes 73 will be my RMD year. I store my cash in a high yield savings accounts paying 2.45%, so my interest is entirely predictable and government secured. My money market account only pays 1.75% so to me this seems a better deal. Cash at 2.45% is pretty safe. It grows and its growth beats inflation and I don’t have to put up with the variations in valuation of a bond fund like VBMFX. It’s basically as stable as a 3 month T-Bill but pays a lot more interest

Here is a 3 year chart of VBMFX and it has grown 2.13% where as my savings account is paying 2.45%. I also own bonds but I think this provides some diversity

I dont know how to model a savings account on the efficient frontier so I modeled VTI vs BIL which is the 3 month T bill etf and VTI and VBMFX fidelity total bond

You can see the VBMFX has an expected return of 3.83 with a SD of 3.32 vs the T Bill which has an expected return of 0.43 and a SD of 0.31. With a return of 2.45 I would expect the blue line to move up and more closely resemble the red line. My yield would be 2.45% but my SD probably less than .31% since the investment is fixed and government secured like a T bill.

Given bonds keep falling, meaning more volatility. I’ve concluded this is a pretty good investment. Essentially zero risk with a return only 36% less than the bond fund and it is perfectly liquid. It fits my need. I think cash is often ignored as an asset class because it’s paid so little compared to inflation but now that it pays more than inflation it seems both safe and efficient for risk free money, and I think provides some diversity which lowers overall risk in the portfolio. In the olden days before everybody moved out on the risk curve is was quite common for retiree’s to hold laddered CD’s as an income vehicle.

How to Create a Budget Spreadsheet

I down load my expenses from Mint in a CSV file and at the end of every month I cut and paste the months transactions into a spreadsheet from the CSV file. To down load the CSV look for this link at the bottom of the transaction page after everything has updated.

The CSV file looks something like this

This is a partial readout from May. Had a lot of Amazon activity this May because of supplies following my surgery

My spread sheet looks like this

It is simply month after month of the year out to Dec using the same format as the CVS file so I cant cut and paste each month’s data into its place in the spread sheet

I set it up so each year next to a month is linked to the $c$1 value which is the year. So “Spending Feb” has as it’s year as $c$1 Spending Mar has $c$1 etc. In other words wherever I want the year to show up I type =$C$1 in the cell (the = is important. The entire spreadsheet changes to whatever value I put in cell C1. By doing this I can create a new year simply by cutting and pasting

Here is spending year 2021. All I have to do is cut and paste and put the right number in C1 and the whole year changes. I have out to year 2022 created and each year has its own sheet

to populate a given month with data I cut and paste that data Here is a partial of the month from May

I just cut and paste from “date” on down to the bottom of the month. I have to do a slight data massage. Notice how most everything is a debit but there is one credit. On credits I change the sign of the value

Next I merely Autosum the column

and voila the partial sum of May 2019 spending. I can update the month as often as I like till the next month starts. It’s just cut paste change credits to a negative autosum, takes only a couple minutes to have an accurate readout of the month’s spending. I some times transfer money between accounts using command account which is my checkbook. Those transactions I simply set the transfer “value” to 0 in the data column and write the transfer amount out to the side under “notes” to track that transaction. I keep track of tax payments like this also since I consider taxes a transfer and not a monthly expense and it makes it easy to track. taxes paid for the year. My credit card gets paid off on the first of every month and results in a debit and credit of equal value being generated so I simply set credit to negative and that along with debit results in a 0 transaction but any given month I can easily spot my credit card bill and when it was paid.

A bit complicated to set up but EASY to use. I also can track yearly expenses and ask “what if” questions of the data. Since each month is accurate each year is accurate and a “whole year” is merely the sum of each month. Once I have a year’s data it’s trivial to understand how expenses are varying year to year and you can create your own personal inflation index if you like.

Here is a shot of multiple years I have created but not yet populated. I retired is 2017 so the first “year” is actually 17 mos long

I keep my spreadsheet auto-saved in the cloud so if my computer blows up my data doesn’t and I can access my data across computers on my network. Just before completing this post, my power glitched but I was auto-saved so I lost nothing. My wife pays her credit cards using command so I get a readout of her credit card expenses but I DO NOT track her specific spending. If you want to track multiple credit cards just set that up in Mint

Funny thing I thought May 2019 would stand out as an expensive month and it did, but I checked May 2018 and it was nearly as expensive since my kid graduated college in May 2018 which required a lot of plane trips and motel expense and celebration. Looking over May 2018 was a nice walk down memory lane