Who Owns Your Money You or the Government or Harvard?

I wrote a response to a forum I infrequently visit about Roth conversion. The math types all were going through their analysis on why it doesn’t really make a difference bla bla bla, but they entirely missed the point of what money is about. You work hard, turn your human capital into value and stash some of that value into an account or two or three. That value doesn’t belong to you. It belongs to you AND the government. How that value is treated is a function of the account type in which you stash that value. If you put it in a post tax account it’s probable ongoing source of income for the government. You pay taxes on the ordinary income to start, stash what’s left and if it generates more value you are taxed again on the new value either as dividend or capital gain. If you loose the government doesn’t charge you for your pain and they give you a credit to charge against future profit. You can stash your value in a TIRA, an account that postpones your payment to the government, but make no mistake part of that value belongs to the government and it’s coming out at the most expensive tax rate, “ordinary income” Pound of flesh time. Ordinary income is progressive. The more you make the higher the “tax rate” not just the higher “the tax”. The effect is a “multiplier” not just a linear “adder” Double the income does not mean double the taxes it means 2.5x or 3x the taxes or more if you start adding surcharges and taxing cliffs. The third place you can stash your value is a Roth. With a Roth you square with the government once and then they leave you alone. You can withdraw without a progressive tax burden of either TIRA or post tax accounts. You can stash value in things like real estate or art or gold but similar tax burdens apply as post tax accounts.

The government has another trick. At age 70 BY LAW they start collecting their money from your TIRA on their schedule and you don’t have any say in it. The calendar rolls over and a predetermined increasing % of your TIRA must be extracted. The % extraction is progressive i.e. a multiplier. In addition as the distribution increases the tax increases as a multiplier because the tax code is progressive, so it’s multiplier times multiplier and you don’t have a thing to say about it. The government is nice and they don’t start this extraction till 70 so you’ll probably expire before your money expires but none the less the government is coming for their money at their leisure not yours. IRA like accounts are marketed such that you can stash value and avoid a high tax rate you may pay on the value immediately in order to subject yourself to the double multiplier effect later and the bet is your tax rate will be lower in your old age so the net result is you MAY pay less but then again you MAY not. It’s a bet! The control variable is the size of the amount of value in the TIRA.

The tax deferment is a middle class perk used to incentive retirement saving. As you make more the incentive disappears, in other words if you’re rich you get soaked today instead of in your old age. At some point the government realized this was a pretty good way to fleece the middle class so they set up a million “tax deferred” vehicles each with it’s peculiar tax treatment and extraction methodology and spending rules. Save for college? No problem 529b, can only be used to transfer wealth from you to something “accredited” Oh happy day if you’re a university. Jr gets drunk for 4 years on your nickel and Harvard’s tuition goes up at slightly above the rate of market return because that’s how much is in your 529b and they want the whole shooting match and you think what a fine deal. Your money grew for 20 years tax deferred just so Harvard could gobble it up, but you didn’t save enough and wound up with a student loan anyway and Jr graduates with a piece of paper and a hangover and a payment schedule, and you feel bad like somehow you failed. NEWS FLASH it was rigged against you. 529b’s are Harvard’s friend not your friend. The point being these tax deferred accounts are not necessarily your friends, yet how many times have your read “max out your tax deferred accounts it’s a no brainer”? You have to think through the liabilities and who benefits in the end.

Value is good for one thing: keeping you comfortable and alive, from your point of view. From the governments point of view your value is good for funding itself under penalty of law, and given the debt the sooner the better! So lets say you followed conventional wisdom and maxed out your retirement accounts. You did well and have a big wad in tax deferred money. You can max out something just shy of 80K/yr in tax deferred accounts. In 25 years you will own 3M+ of tax deferred money! At a 4% WR that’s $10K/mo baby plus SS to boot! Hubba Hubba! So you retire at 62 and take 80% of SS (say 25K) plus your $10K. Your accounts make 6%. 10K/mo is slightly above RMD on $3M. Your tax bill is $17,600 on your netted out TIRA + SS income of $141K/yr or 12.5 cents on the dollar You hit age 70 and the RMD for 8 years into retirement is 164K plus your SS net so your income is 185K and your tax $27,299 or 14.8 cents on the dollar.   At age 75 your haul is 240K and your tax $40,419 or 17 cents on the dollar.

At 76 you get cancer and you beat it! But it takes 4 years at and extra $100K/yr expense. Your RMD at age 80 is 284K plus you had to take out an extra 100K so your tax that year on $384K is $78,500 or 20 cents on the dollar. Now your wife gets cancer and in 5 years she beats it at 100K/yr so at age 85 your pulling 482K out of the TIRA with a tax of $111,800 for 24 cents on the dollar. 

Back when you were 65 you could have pealed off a million or two at a lower tax rate doing a Roth conversion. 250K/yr conversion (1M) would have cost you 17 cents on the dollar and then your done. Your TIRA would RMD at a far lower rate. 120K at age 70 with a 10 cents on the dollar tax  at 75 $165K with 14 cents on the dollar at 80 $210K income with 15.7 cents on the dollar tax and at 85 $261K income at 17.4 cents tax You and your wife still get cancer and you still beat it but you pay the extra from the Roth tax free and enjoy lower taxes on your TIRA distribution as well.

That’s the real advantage of Roth conversion is you are prepaying for disaster coverage and tax free growth as opposed to tax deferred growth at a relatively low rate. In addition if you die your wife is left with paying single rates on her taxes so in her 86th year the 2M + 1M Roth payout would cost her on a 261 K RMD income 23 cents on the dollar On a 3M TIRA the RMD would be 397K and 28 cents on the dollar  

So the calculation is colored by how the money is used and how rapidly it is needed. TIRA retirement is about doling out small aliquots of money and letting the “interest” pick up the slack. If bad things happen and you’re TIRA you are locked in with no flexibility. The government is coming for their money.

Welcome 2019

My wife’s in the other room watching the parade. Girls in grass skirts waving plumes. $300K worth of hydraulics on trailers with billions of festive pumpkin and poppy seeds glued to their surface trying to navigate razor sharp right turns. It’s hard to turn a battleship on a dime. Think of all that wasted DNA. Some game show host narrating. It’s a tradition. We used to watch the Christmas parade till it became unwatchable. We some times watched the ball drop till this year one of the NBC co-hosts decided to tell us all about her menstrual habits and they forgot to show the ball drop. The Pasadena spectacle was OK. Harmony of Union caught FIRE, no, no literally caught FIRE and Chaka Kahn belted out a medley of her hit, so it looks like Pasadena is going in the dumper as well. Disney is too close to Pasadena to not assume control of 3 hours of TV time to promote itself. Welcome to 2019!!

I spent New Years Eve thinking about the past year and my life since I retired. I finished off the 2018 spreadsheet chronicling my spending and spent a little time projecting our longevity. I’m in the danger zone, that zone of early retirement where SORR can rear it’s head and take you out in your dotage. I dutifully calculated WR in 2017, WR in 2018 and what I expect WR to be in 5 years. Retirement is a financial kaleidoscope as different patterns of risk and reward emerge out of the mist according to the “economy” and “tax law”. It’s not what they promised when they told you “4% x25, ya that’s the ticket!” It’s a little more complicated, but all in all a very enjoyable trip. I’m going to talk about ACTUAL RETIREMENT, not some Bogglehead BS full of smoke and mirrors and silly side gigs.

Budget: Have one

The first thing to come to grips with is the meaning of freedom. Freedom is limiting. You might think it’s liberating, it’s that too. Freedom is constrained by something called a budget, PERIOD. When you assume your own risk of living and the possibility of failure silly equations loose their luster. My biggest line items were TAXES, Insurance of all types, food, utilities. Not much of that is negotiable. In W2 times you may forgo a budget since you make so much money it feels decadent to ignore your expenses. Works for me, but when the W2 is history you got what you got. If you have no clue you will die clueless so get a clue, a budget gives you a clue.

I’m not obsessive about my budget. I made enough during W2 days so my budget could be generous, and so it is. Just because it’s generous however does not mean it needs spending, it just means it’s available for spending. Your best sword against SORR is a low WR from the portfolio. The lower the WR the higher the probability of success. Low WR to start gives you a lot of flexibility. I didn’t know what to expect so I picked a number $10K/mo. This number was below what I had been making during W2 but that W2 number was funding many other things beside the day to day. Big salaries mean big taxes and Kids means big expenses. Back of the napkin isn’t really good enough when you have available the ease of something like Mint.com. I track 1 credit card in Mint and 1 bank account and use that to pay ALL of my bills. The categories take care of themselves. The other credit cards are payed from the bank account like a bill and things like electric and health insurance are automatically deducted. The main credit card pays me $1K/yr for the privileged of tracking my expenses with their cash back deal. Given the ease of tracking, not budgeting is pure hubris IMHO.

I was obsessive about tracking in 2017 since I didn’t know what to expect. By 2018 I had a much clearer picture so my obsession went away. The method also revealed expensive months and cheap months so you can decide any given month where to place your spending. Dec was particularly expensive as I sent $50K to the my buddy the IRS, for the Roth conversion I did in Nov. I also did an experiment to see how low I could go. This means we purposely cut back to subsistence to see what that felt like. It felt OK and was worth the experience to understand the affective nature of the income range of our lives. One thing I DON’T want is for my wife to feel pinched in our lifestyle. We have more than enough and a visceral understanding of that makes a difference. It keeps you from making risky mistakes. This is why the freedom of retirement is limiting. You have to redefine the boundaries. That becomes a different question if you don’t retire with enough. Enough is measured in cash nor narrative or presumption. Budget sets the bottom line.

Accounts for the journey from an already retired perspective

I’m Roth converting a big wad of TIRA using a cash stash to fund the process. I’ve obsessively written about this. It turns out to be rather complicated to optimize. What you need is enough cash to cover a period of time to do the conversion which maximizes conversion at least taxes. Once you pay the government what you owe them they leave you alone. Desirable! The time to start Roth conversion is the first year you invest. Stick what you can in a Roth and stick even more in a taxable brokerage account. Tax loss harvest the brokerage account so you can sell appreciated stocks tax free when the “time” comes. The “time” is about 5 years before the government forces you to RMD.

1, The taxable account plus appreciation, plus tax loss harvest is the FIRST of several retirement accounts you need to develop.

You don’t need to put all of your money here by any means but it needs a yearly sizable contribution. It is the money you will live on when you first retire. The longer it’s invested the more of your early retirement will be due to appreciation and not principal. Setting it up first is intentional. It means you are committed to your future and once it’s set up and funded, it’s set up and funded. Over time if you effectively TLH it will be tax free money not unlike a Roth because the tax loss can be written off against the capital gain. This makes it cheap to own in the scheme of things. Cap gain taxes are not particularly progressive in nature especially for the people in the first 2 tax brackets where they are zero. But even for higher brackets they are lower than income taxes.

2. Fund the Roth accounts.  

Once the taxes are paid the government leaves you alone. Even in TIRA accounts if you already paid taxes on some of that money, future taxes are absolved on the already paid part. There s a formula to calculate the tax break, and this money is not subject to future SS and medicare tax since you already paid your Medicare and SS when you deposited. You pay that once and then you are done. This money once accounted for by the tax man grows TAX FREE. This is the LAST money you will spend since the longer it goes the more it grows. Funding this early means it grows a really long time. I’m using my Roth to self insure for future disaster like a cancer diagnosis or assisted living. There are normal periods of risk in retirement like day to day expenses and there are abnormal periods of risk which have a high cost. If you fund a Roth and stick in the back of the cabinet it will be there in your old age. If you don’t use it your kids will thank you.

Finally fund your TIRA accounts

Ya I know “bogglehead heresy”. Every dope know you fund your pretax first! After retirement TAXES they come with a vengeance. The government gave you a TAX deferred possibility, not a tax free possibility with a TIRA, and they are coming for their dough. Part of that money in your TIRA accounts doesn’t belong to you so you are not nearly as wealthy as the bottom line implies. Pay me now or I will force you to pay me later is the governments motto and they force you with RMD. Most people don’t RMD 3 million bucks. The average joker RMD’s $600K and the tax code is set up for that guy. Between SS and a $600K TIRA you live a nice middle class life in retirement. $600K RMD’s $22K the first year, about $2K per month and between that and say $30K of SS you live on $55K of income with a tax bill of $2127, an effective tax rate of 3.86%. If you RMD a $3M TIRA your first year is $109K and with SS puts you into the 22% bracket at a tax bill of $15,397 an effective rate of 11.5% So the trick is to grow your assets tax deferred and then have a plan to get yourself into a low bracket when “the time comes”. From a post retired point of view it is critical to understand these moving parts and their sequencing. I did my first Roth conversion in 2018 and will convert 1M from the TIRA to the Roth over the next 4 years at a cost of about 11 cents on the dollar. I will leave some money in the TIRA to RMD but the amount left in the TIRA will put me in line with the normal retiree’s income and tax bill, and will keep me in the 12% bracket for a long time, meaning my cap gains for taking money out of my taxable portfolio will be zero. My taxable will continue to act like a Roth and throw off tax free money for a long time. In addition I have excess TLH so once I move to the 22% bracket the taxable money will still be tax free. Meanwhile the Roth stands poised to take up the slack just in case. Once I die my wife is well covered.

WHY ISN’T MMM telling you this shockingly simple truth? What about BOGGLEHEADS?

Taking all of this into account requires a shockingly longer work life than those jokers advertise because you have to manage your own risk, and you can’t really sell books and speeches selling “normal retirement”. Hell anybody can do “normal” no magic bullet in that! Just stick some money in low cost mutual funds…

So how did I do?

Budget:  Last year (2017) I came in under budget by a few thousand. Early retirement turned out to be a bit expensive as I had some AC’s and house repair to be done. We also had a hurricane which ate up some dough the month after I retired. This year (2018) I came in $20K under budget despite the expense of launching my daughter in her post college life and the tax expense of Roth conversion. My WR was 2.7% for the year including the one offs. I’m not yet taking SS nor is my wife so this early part of my retirement is entirely portfolio dependent but that was in the plan, and it is being executed perfectly despite market conditions. The “money” I’m living on was obtained when the market was at its peak and at a zero dollar tax bill so the taxable + TLH really worked out for me. I have 4 to 5 years of “money” left in the pile to use without SORR consequence while Roth converting. My future for the next 5 years is market independent and therefore I have no market risk on my life for the next 5 years. After that my WR will drop to 1.4% as SS kicks in and my remaining TIRA annuitizes and begins to RMD.

The view from the portfolio

I’m not one who cottons onto the idea I have to take it like a man. I worked a long time and the advantage of retiring truly plush with resources at a more normal age is you don’t need to make 7% survive your 30 years or 10% to survive 60. A percent above inflation will do. 2% and I’m good for 100 years so there’s no reason to take the risk, since I don’t NEED to. I don’t have the hassle of side gigs and the waiting to fail if it ever gets off the ground in the first place. Who needs em!? I don’t. I’m not living on narrative and a projection, I’m living on cash. When you RE you forgo this luxury because your future is leveraged. Retirement is NOT squishy. The only squishy part is how leveraged you are. More leverage, more chance of failure. More leverage, a worse response to SORR. Leverage is why people fear a downturn. I de-risked my portfolio some this year as my risk is now about 48% of the 100% stock risk. My return is down as well but only by 25% compared to the 100% stock portfolio so seems like a pretty good trade off. You loose a little on the return, but you are still 100% invested, but you gain in that your portfolio goes down only half as much.

The view from retirement is risk management trumps return IMHO.

  1. Multiple accounts with different tax treatments so you have a means to adjust your tax bill

2. Retirement epochs, periods where you can granularly describe what is supposed to happen, and what is happening and how that effects future epochs with an eye toward optimization.

3. Enough time to prosper.

4. Study. The knowledge and insight I’ve gained is amazing, both pre and post retirement.

2019 may be a good year or may be a bad year. Personally I think we are doing OK but the politics are out of control and the politics can do you in. In 1978 Carter signed a bill divorcing S&L interest from prime and the S&L crisis ensued. A few got rich and we all suffered. In the 2000’s Barney Frank pushed sub prime lending to the max and we had 2008. A few got rich and we all suffered. I guess time will tell.

Bottom line retirement is a total gas! Completely different smoke than the work a day world, I recommend!

The View

I’m a fan of the Stoic Philosophers. Stoicism dates back to 300 BC and had 3 ages. Stoic Doctrine covered these notions:

Stoic Principles

  • Nature – Nature is rational.
  • Law of Reason – The universe is governed by the law of reason. …
  • Virtue – A life led according to rational nature is virtuous.
  • Wisdom – Wisdom is the the root virtue. …
  • Apathea – Since passion is irrational, life should be waged as a battle against it.

Stoics varied in station from the slave Epictetus to the Emperor Marcus Aurelius and the American experiment owes much to this philosophy. Heraclitus of Ephesus was pre-Socratic and his view was to explore the riddles and paradoxes of humanity the huge unconsciousness of life in it’s relation to the universe. His writings come to us only as fragments so you don’t have majestic volumes to contemplate but you have to make do turning snippets into whole cloth. Heraclitus can perhaps be summed up in one phrase, “the only constant is change”. In some respect he felt change was the cord that connected the future to the past. His famous saying is:
“No man ever steps in the same river twice” which is the basis of the philosophy of “becoming” where as Parmenides stood in contrast with “what is – is”, the basis of the philosophy of being. In these philosophies lives the tension of FI and the FIRE movement. Heraclitus is where I get the notion of “all time travel is forward moving”. If you step in a river, step out and then step back in, in the second step you’re in a different reality than with the first.

Retirement is nothing if not stepping into a different river. It’s a completely different reality than work life. There is all kind of discussion regarding RE and FI, much of it rationalization and marketing, about retirement. One comment is “retirement is squishy” implying retirement doesn’t have a “real” definition but is amorphous and subjective. That’s a pretend reality. The idea is you rebel “against the man” who’s got you enslaved under his boot. Somehow this “man” is your oppressor. He oppresses you by giving you a salary, benefits like paid vacation, health care, a stable environment in which to thrive. He takes on much of the risk you would otherwise suffer. If sales suck for the month YOU STILL GET A PAYCHECK. If the economy is in the dumper YOU STILL HAVE HEALTHCARE. That “man” is a real SOB that’s for sure! Why he expects you to actually “work” for those benefits or at least show up. He needs you to make some money so he can give you a paycheck and manage your risk for you. You want Freedom, you want Independence! No “man” gonna tell you what to do! Why Why I’ll save half and put it in low cost index funds till I get 25 times and then and then RETIRE EARLY! I’ll show that SOB! The drama, the pathos, the sanctimony, it’s all so pedestrian. If you retire at 30, you have 60 years of risk and expense left to cover on your own. Pathos don’t pay the bills.

I recently listened to a Podcast that was hawking RE. Nobody on the podcast was retired. Everybody was still working in some fashion. One had been through the ringer in her life and understood the real danger that looms out there. Under-employed, her husband got a diagnosis and she became “it”. She went into Wonder Woman mode and booted herself into financial security while her husband recovered, plus the kids got raised. It’s an amazing story. She stepped into a different river, but she has been scarred in the process. In her success she saw the bottom approach as she plunged toward the sudden impact. Pull up, pull up, and she did, but as a result she’s not in a big hurry to relinquish her security for “freedom” and “independence” because she lived the risk those words imply. Another just retired at 55. He was a well regarded corporate guy who grew weary of being a road warrior. He had a gig fall in his lap where he is a board member for a corporation and writes a blog, so he no longer fight’s the battle but still is employed. At 55, his portfolio longevity risk is 35 years, a damn sight better than 60 years and he’s spitting distance from SS and Medicare. I read on his site actually 55 is somebody’s boundary between retired and retired early. Either way he’s still working. Another writes a high profile financial blog that makes a lot of money. He sells courses and news letters and podcasts, he owns real estate has a stock portfolio, is a physician and group owner. He’s a natural marketeer. A real every day in every way Tony Robbins type. No problem with that except this guy is as far from retired as Pluto is from Sol. He the one with the notion of retirement is squishy. I guess you have to redefine retirement and make it “squishy” to deal with the cognitive dissonance of the paradox. Another is a real estate guru and is selling his knowledge of real estate investing while owning real estate as his business. His gig is “independence”. He perceives himself as independent. Maybe true but independent is not retired, it merely means you have taken back the risk you gave up when the “man” was “oppressing” you. You’re still working. The last is a physician who has made his life into precisely what he wanted it to be. He came to realize being tied to his phone managing hundreds of severely ill patients 24/7 was not how he wanted to live, so he cut back, started a blog and became a speaker and a podcaster. It’s an expression of freedom, it’s an expression of entrepreneurialism, it’s not retirement. It’s just stepping into a different river.

So what’s the point? People look at FIRE like the participants have 2 heads and 4 mouths. On the one hand they are “retired” on the other hand they clearly are working. On the one hand they are betting their future security on something flimsy like a blog or consulting or what ever. They come up with a “rap” that looks nothing like their reality and try to sell it as “reality”. It comes off phony and it comes off like multi-level marketing. People hear that story and understand it perfectly and say “no thanks, I’m not interested, I don’t do Amway” and the FIRE types just can’t understand the lack of appeal for adopting some “wacky theology” and then betting your life on it. I’m like Heraclitus sitting out here on the perimeter looking in to the unconsciousness of it all. I’m not judging any of it, just contemplating it. Contemplating how there are so many opinions on the state of “being” retired and how to get “to be” retired, while no one actually IS retired. I’ll probably do a post on what actually “being” retired is like from a financial perspective. A post about living in the bulls eye not just aiming at the bulls eye. I stepped into the different river and understanding where “here” is not where “there” was predominates. Can’t wait for 2019 to unfold. I’m a year and a half down the river and I want to know what 2 and a half is going to be like.

SOR

When I wrote yesterday’s post I realized there is a fundamental flaw in the FIRE model. Yesterdays post had to do with changing the AA and moving the portfolio onto the efficient frontier, and it’s effect on portfolio success. By eliminating a class of stocks (global) and putting that money into bonds we saw an amazing change in the risk of the two portfolios, defined as % success. Why did this happen? How can selling stocks and buying bonds improve things so dramatically in terms of success?

You read the FIRE literature and all you read is the “magic of compounding”. Compounding has a specific mechanism. You take some “interest” add it to some principal, wait a year take some slightly larger “interest” add that to last years portfolio and the thing grows!

Here is $1000 over 10 years @ 7% interest. It nearly doubles to $2000 and every time you plunk $1000 into a 7% money machine for 10 years it will grow to $1976.15. There is a specific investment called a zero coupon bond that works exactly like this. If you buy a $1000 10 year 7% zero coup in 10 years you will get $1967.15 for your trouble. A bond is a contract that pays out in money and a low risk of failure. This is the magic of compounding! A mortgage works like this. You borrow $200K on a 15 year mortgage for a house and at the end of 15 years you have a piece of property you paid $360,000 for, (excluding tax write off etc.) The property may be worth more or less or equal to $360K, but that is independent of the loan. If you’re the mortgage lender you’re the recipient of the magic of compounding!   A bond’s value can be directly calculated at any time and is fixed. There is a market in bonds, but if you just hold to maturity it is what it is. You’re bond at maturity becomes promised cash. Income on bonds are taxed as ordinary income unless the bond is a special deal like a Muni bond. The bond aspect of your portfolio uses the magic of compounding to inflate it’s value.

A stock is a piece of property. It’s like the house. You pays some money and gets some property and you owns he property. You don’t own money. What sets the value of your property is the market, so the value floats up and down on the market, but that value is not money unless you sell it. If the asset appreciates it’s called capital gain and if depreciates capital loss so it’s taxed in a completely different way indicating it is not using the magic of compounding to inflate it’s value. It’s using the market to set it’s price. Like the value of your house, you hope a stock goes up in value but there is no contract assuring that like with a bond. Stocks offer return based on profits. Basically you take a raw material or service add some value and sell it at a higher price, but that profitability rides on the waves of the economy. Generally economy good, profit good, economy bad, profit bad, but also stock price is based on management’s ability to execute and creative destruction, inflation, the cost of money, the cost of labor, the cost of logistics, aka the cost of commerce. So stocks are risky. There are a lot of variables and variables vary.

When you own a portfolio and you are not adding or extracting you basically own a fixed amount of property. This is an important concept. Regardless of the “value” of a share which is set by the market, if you own 1000 shares you own 1000 shares, same as if you own a house you own a house. This is why in a down market if you don’t sell there is a chance to recovery because the property stays constant. This is why I see little difference in Real Estate and stock investing. Real Estate throws off cash flow, stocks throw off dividends. Real estate can be leveraged so can stocks. Real estate can be depreciated stocks can be tax loss harvested. Real estate can be used as collateral for a loan so can stocks in several forms for example covered calls. The value of real estate is market and economy driven, same with stocks. Some difference like liquidity and carrying charges and efficiency and correlation but more alike than different from my perspective. There are some tax breaks in the law for real estate but without the breaks profits would/will get taxed as capital gains.

When you open a portfolio and start deflating it, now value is being drained from the portfolio. It is no longer a bobber floating on the economic waves but starts to loose value. If the economy is good the value is high and you can slice off a little and sell high. If the economy sucks you sell low, but sell you must because you need some hamburgers to eat. High or low the portfolio has converted some of its property into money. You may say dividends! dividends! When the portfolio was closed those dividends were being reinvested into more property, when open that value is coming out and dividends are still floating on the economy. They may last a while but eventually will falter in a down economy. This is not the magic of compounding. Let’s look at a couple graphs:

The magic of compounding!

The risk of the market



You go SEE SEE the market goes up!! Except when it doesn’t You had to buy hamburgers in the years surrounding 1995 and 2003 and 2009 so sell low. Sell low = bad SOR. What’s the mean?

Not much magic here. Good old fashioned commerce with it’s concomitant risk and FED manipulation and money printing but no magic of compounding. The magic of this chart is you and your neighbor getting up every day and being productive. That’s the magic in stocks. American productivity and capitalism. So that’s why the 80/20 portfolio failed so much more than the 50/50 portfolio. It’s all been “magic” since 2009 but that trend line is calling for it’s pound of revision. In a balanced risk adjusted 50/50 portfolio half the assets are exposed to the compounding magic, in a 80/20 only 20% is exposed to the compounding magic. If you’re 80/20 you best be about protecting policies that encourage the magic of capitalism and productivity.

A Tale of Two Retirements

I occasionally read some other retirement forums than the few blogs I frequent. These are people often actually retired not just dreaming of retirement, people in my boat. Of course there are the experts, and the established pecking order spewing out the boilerplate, a couple retired CPA’s who like to pull rank etc but mostly retired Joe’s just trying to get by. I like to lurk and don’t post much because it threatens the CPA’s and I have better things to do than participate in pissing contests with beam counters. I did that my whole career when negotiating contracts. One of forums, given the recent market events, was about asset allocation in the face of loss. Interesting to see the rationalizations. A lot of brave soldiers standing up for 80% or 90% stock allocations, some complaining about not being able to sleep at night. Many visiting DeNial which is also a river in Egypt. Pretty much: Don’t do anything! Just stand there! and nobody giving permission to get out of the way of the buzz saw.

I was playing with the Monte Carlo calculator in portfolio visualizer and discovered an interesting thing. You can virtually guarantee portfolio success by proper portfolio risking and the calculator gives you a quantitative way to evaluate your decisions. It also frees you from the prejudice of “low cost mutual funds bla bla bla” and then shooting your wad into a BH3 fund because everybody else is doing that. So here we go!

Retirement 1 the BH3 retirement:

Here is how I set up the calculator

This is a 4% WR 30 yr standard format (inflation SORR etc all default) portfolio. I use actual tickers instead of asset classes. I chose the BH3 from the drop down

and proceeded with the calculation. Here is the result:

87% of the BH3 portfolios can expect to survive 30 years. Notice the 10% line 100% of the people who pull the 10% SORR card can expect to be broke in year 27. There’s a 90% chance you won’t pull the 10% or lower SORR so the question is: “Are ya feeling lucky punk?” Here is the failure distribution:

As early as year 9, portfolios following the 10% SORR or below BH3 portfolios start to fail. The BH3 is a 80/20 portfolio with 30% of the 80 in high risk global assets. It does not live on the efficient frontier which means you pay for your return with too much risk. This above graph shows the result of paying to much risk for your return.

Let’s change up the AA a little. Same conditions, same funds, except I jettison the Global fund and replace that 30% with bonds, a classic 50/50 2 fund.

Retirement 2, the 50/50 Efficient Frontier retirement:

The envelope please:

Notice just by jettisoning the global risk, which moves the portfolio ONTO the efficient frontier and adjusting the amount of risk you pay for return survival of 10% and below jumps to 98.43%, everybody on the 10% lines has 1.15M to leave to their kids. Here is the failure chart:

It’s not till year 19 the first hint of a failure rears it’s head. These two portfolios started with the same 1M and used the same 40K/yr WR over the course of 30 years. The only difference was properly risking the portfolio. The idea that you chose some level of “risk” for your portfolio out of thin air is stupid. The idea that you have to stand there and “take it like a man” in a downturn is stupid and this tool gives you a way to quantitatively consider your investments and not be a prisoner of some narrative.

Get ready to have your mind blown!! What would happen if you bough VTSMX BRK.B and VBMFX in a 50/50 efficient frontier portfolio? OMG Mabel he’s breaking ALL THE RULES!!!  No global index fund, quantitatively risk balanced asset allocation, no guessing, an individual stock!!!   Can you believe it Mabel, he owns  an individual stock!!

Bonus blow your mind retirement:

Your survival is better at 98.96% and you die with an extra $225K in the bank at 30 years, or you might need that money for end of life care. Stick that in your “low cost index fund pipe” and smoke it.

Not saying anyone should do this. Full disclosure I do own BRK.B.

Tax Loss Harvest

My portfolio consists of 5 account classes:

  • Taxable (post tax)
  • TIRA/401K (pre-tax)
  • Roth IRA (No tax)
  • Tax Loss Harvest (tax loss)
  • Social Security (taxable annuity)

Each of these fit into and support my retirement cash flow differently. In the taxable account I hold stocks funds and ETF’s which are distributed according various investing styles:

  • US equities
  • Foreign
  • Emerging markets
  • Alternatives
  • Low Beta

Things that throw off dividends and interest that would increase my tax load like bonds real estate and gold are in the TIRA accounts as well as tax inefficient equities.

I’m loading up the Roth with things from my TIRA and I’m transferring the things with highest volatility (risk) first. In a down year high volatility means greatest loss in value so the transfer cost (ordinary income taxes) is minimized and I can transfer the the most property for the least cost. Homey likes that. The least volatile assets don’t change value that much so no rush to move them. In fact since bonds don’t change much and throw off interest, I decided to not move them at all, let them RMD and use that as a retirement annuity income. I’ve written about all of this before. My accounts are invested according to Fama French efficient markets theory which uses the 3 factor long term tilts to try and tease out some extra return. 2 factors are missing in the classic Fama French model Momentum and Low Beta, so I add some momentum and low beta ETF’s and funds to round out the diversity party.

My adviser was reviewing my portfolio and noticed the momentum assets were underwater (as to be expected in a down turn) One ETF is the best in that class and another fund was performing less than optimally so we decided to combine the two. Since the assets are underwater their sale would allow tax loss harvesting. TLH is a way to essentially pre-pay your future capital gain taxes, by applying capital loss to the tax bill. It works a little like depreciation on a property or a business where you can lock in a loss to offset a future capital gain. It’s a very powerful tool. The rule is: the money you get to keep is whatever is left after the tax man pillages the funds so TLH is like hiding some money under the bed. In my case I’ve harvested enough losses by selling in down markets, to offset hundreds of thousands in gains in my taxable accounts. It effectively turns my taxable account into a Roth up to the limit of the harvested loss, and those saved taxes are no joke. You can buy actual hamburgers with those savings. But wait there’s more!

I used the TLH to combine taxable assets with no tax consequence and a future tax savings. Since both funds were down and had losses to harvest I wanted to maximize my take and acquire the loss from both funds, BUT I then wanted to re-purchase the better fund with all of the proceeds from the sale and the IRS doesn’t allow that. If you want to buy the same asset you have to wait 31 days, and suffer any market consequence while you’re sitting on the side line. The other alternative is to invest in some other asset that is substantially different than the first which you can do immediately and stay fully invested. I know… first world problems but then I live in the first world.

So what we did was sell about 100K of the momentum funds, into the rally, and I collected 20K in LTH and put that in the TLH bank to use at a future date. This is why I consider TLH a separate asset class. It is essentially negatively correlated to equities in terms of value. As equities go down my future tax relief goes up. I don’t like equities going down but may as well grab the value if it presents. So my 100K is sitting in cash and a reminder in the calendar to remind us to reinvest in the better ETF at the end of January, I own that ETF in my Roth and TIRA as well so I’m exposed anyway if the market explodes, but not quite as much as I will be in 31 days. I may even have a chance to buy in at a lower cost if the market continues to fade. So that’s the bet. It works like selling a covered put where I bet the market is likely going down or at least not advancing for 31 days. My risk premium is the locked in 20K TLH and my risk is I have to buy back the ETF at a higher price than I sold it for. Since I sold into a 1000 point rally that improves the chances of the trade working out to the positive. Ya ya I know you can’t beat the market, some joker wrote a study, so just buy low cost index funds…

I play a lottery called Lucky Money every week. It’s payout is limited to 2M but it’s odds are 125x better than Power Ball and a ticket is only $1 not $2. So I get 125x better odds for half the money. The elegance of the concept tickles me enough to get me to cough up the buck. I’ve probably revealed too much.

What Worked in 2018

It’s Christmas Eve and The Dow is down over 4000 points, NAS is in a bear, S&P is flirting with 2300. You can look at this like gloom and doom if you like but I hardly think it’s gloom and doom. Because of political leadership joblessness is 3.7% and applications for work are at a 49 year low. The economy looks like GDP will be over 3%


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Tax cuts were passed and taxes simplified and tax revenues despite the cuts or maybe because of the tax cuts are screaming after hitting an all time high in Oct. Welfare and food stamps and government transfer of wealth was down. What worked in 2018 was having a job. What worked in 2018 was the system of American capitalism. Just look at the FIRE blogosphere how many new blogs and podcasts came online and how many get rich books were published and courses and coaches went into business. So many experts so little knowledge, such magnificent marketing but still the freedom to express ones self in commerce was respected and rewarded. What worked in 2018 was the political system. Kavanaugh despite a media and political S-Show was confirmed according to the rules and the rules were therefore validated whether you like or hate the outcome. Presumption of innocence was validated. What worked in 2018 were elections Dems took over the house, dividing government according to the system and the peoples’ will, the same as peoples’ will was worked in 2016. Preserve the political system at all cost.

Would I wish the Dow remained 4000 points higher? Maybe, maybe not. My fear would be less but my reality probably more precarious and deluded. After the 2008 S-Show and slice and dice incredibly levered credit of the Bush the economy was WAY out of whack. Everybody blamed the banks but everybody was at fault, because everybody (except us debt free savers) participated. You can’t have 3 new cars and a boat parked outside of your faux McMansion with it’s second and third mortgage on a cabbies salary and say it’s the banks fault for providing you the heroine. Hank Paulson and Robert Reubin deserve our respect IMHO. Had it not been for them and the fact we can print money and are the world reserve currency, we’d be in deep depression. That trick of moving all that bad paper to the FED balance sheet to give it time to mature was genius. The banks were put in idle living off 2% short term Treasury money while the bad debt matured. It has matured to the point over the decade that it can now be sold by the FED back into the market. The skittishness comes from “no one knows” what price it will bring, but one thing’s sure the market will determine that. The training wheels are off. You can’t heal if you don’t express the pus. Also banks have been returned to their own resources and are no longer in idle. The people and the banks over the ensuing decade have repaired their balance sheets and there is some rationality back in the system so now it’s time for the market distortions to be relieved and for commerce to happen. This means there is now a market in bonds hence the rise in interest rates. The 30 year hyper bull market in bonds which was 90% above it’s mean is over and it will trend back to the mean. Stocks likewise are way above the mean and must revert. The CAPE is proof enough of the perversion. Interest is way low and will revert to it’s mean as bonds and stocks pull back toward the mean. You will actually will make a little for your act of saving money. The process of relieving this distortion sucks but is necessary IMHO. Even to the most ardent FIRE guy it matters. Eventually that FIRE guy will be retired and if things are running 150% over the mean that cool million will be bubble gum money. Starting at something closer to the mean is more sustainable over 40 years. Short term pain long term gain. Would I wish this happened 5 years later? I’m living off cash for the next 5 years so I’m well risked for this scenario and if it’s going to happen, as it must happen, might as well be now. Is it scary? I don’t have the one thing that worked this year, a job, so yes it’s a bit scary. Guess I could always start a blog… OH WAIT I did start a blog… Also in 5 years I’ll be closer to death so I will need less to survive till death. How’s that for Christmas Cheer?

One problem I do worry about is the loss of IP. My wife bought a new Christmas tree this year. It’s a Chinese POS. Poorly engineered knock off of an American design. My Church has the “same design” in their tree done correctly and has been in use for probably 2 decades. The POS tree is going back in January. The US has had an advantage over the past 300 years and that advantage is abundance. Abundant land, abundant water, abundant navigation. the fact the rivers all flow from N to S and then to flow into each other. Things like winning the war of 1812, the Louisiana purchase, the purchase of Alaska, the movement into the West and those territories becoming states. Things like the development of mechanical farming and the blast furnace which allowed rivers of steel aka Railroads to link the East and the West and the North and the South so goods not only could be produced cheaply but the logistics of nation wide delivery became present. Roads and a good education. A common moral reality. All of that and more is what has made us prosperous. The long term GDP runs about 3.22% over decades. Allowing it to be stolen by China or debased by open boarders will only result in our destruction and GDP in the 2’s or less. Nobody’s FIREing on a 2% GDP. You may not even normal retire on a 2% GDP. If you wonder think Venezuela.  If we loose our currency as the reserve currency we will be in trouble as well. Be very clear where’s the butter is on your bread and preserve it’s up-ness. Take nothing for granted.

Like WC Field’s epitaph: All in all I’d rather be here than in Philadelphia. Down here there is no state income tax and I haven’t run my furnace yet this year. Merry Christmas ya’all.

The Year “Diversity” Didn’t Save You

The ditty goes: “in well diversified cheap index funds”. The ditty goes: “when some things are down others are up”

Here is a pictorial of the S&P 500’s year in review. Red is Bear, Orange is negative but not bear, Gray is even, Light green is +, Green is ++, and Gold is golden +++

This is a picture of diversity, the picture of the ditty. I follow this metric of the relative balance between bull and bear stocks in the S&P as an indicator of economic health For the whole year 20% was in a bear market and 20% underwater. 20% dormant 20% up and 20% flying. About 40 stocks of the top 20% accounted for 1/3 of the growth and the FANG (FB, AMZN, NFLX, GOOG AAPL MSFT) was responsible for 13% of the S&P’s price. Let that sink in, because that is the true nature of equity risk. My chart actually over dramatizes the reality but that drama points out the risk. It’s not a bear yet. We’re down 7.5% not 27.5% but the point is the point. Ditty’s don’t save you. But you say “I have a side gig” to which I say good deal, what happens to a side gig in a bear?

I quack a lot about non correlated diversity so here is a picture of non correlated diversity this year.

reference

Natural Gas worked, Wheat worked, VIX worked well, some of the short ETF’s that leverage triple an index in a negative direction worked, but those instruments require expertise to trade. There is nothing cheap or buy and hold about owning them and a wrong move will clean your clock. I’ve traded the VIX through ETF’s I do not recommend.

The world seems ready to roll over. S&P was down 7.46. Nikkei down 11.87, DAX down 18.12, I would say your Foreign assets in your 3 fund didn’t save you. (VGTSX down 18.8% compared to 7.5% for S&P). Real Estate? VNQ is down 10.35% compared to 7.5% for the S&P. Bonds are down, the 30 year down 5.35% and even shorter term government debt typically a safe haven lost money. The 5 year note is down 1.97% as the FED unwinds it’s balance sheet. Cash lost by the rate of inflation. Even TIPS were down. The 3 month The 3 monthT-Bill was up a penny for the year, BONANZA. The 3 month T-Bill is the risk free asset against which the efficient frontier is calculated.

This year demonstrates the risk of a leveraged retirement in a leveraged world in a very real way, and the more equity exposure the more real the demonstration. The farther off the efficient frontier the more real the demonstration. Governments and corporations are swimming in debt and leveraged not all that different from the housing crisis of yore. Peter is being robbed to pay Paul and debt derivatives are being sliced and diced, same as it ever was, same as it ever was. The only way out is through the gauntlet. Santa Claus is not coming. The curves are regressing to the mean. Statistics are pesky things. We’ve been living a charmed 2 SD life buoyed by easy money and easy expectations and government manipulation for 10 years. China is eating our lunch by stealing IP. IP accounts for creative destruction and creative destruction = exponential jumps in productivity and growth in national value. I can’t over emphasize that enough. It’s been the US’s motor for 300 years. If the motor leaves or is snatched away our goose is cooked. “Worst December since 1931” should give every one pause. So far it seems an orderly regression. I think it’s the best we can hope for. Someday “the means” will be obtained, hopefully not by a dramatic overshoot. There is a lot to be learned here.

The robots respond to mathematical representations of the above picture and set about to optimize, maximize gain and minimize loss. We live in a three dimensional world and typically optimize on one dimension, reward, or the fancier of us in 2 dimensions, risk and reward. The robots live in as many dimensions as they like or need for optimization and they scale in and scale out in other words the dimensions aren’t necessarily linear, hence trading the triple short fund in a way that’s not just randomly shooting bullets. They trade and they learn from the trade and hone their skill set. If you think you’re not exposed to that process by being buy and holder, think again. Every “return” consists of an investment component and a speculative component. The VIX is often called the “Fear” index. It is not. It is the chaos index. It makes it’s money from chaos. Wrap your little buy and hold mind around that. You own chaos, it’s called variance and it’s not fixed. The bottom line is as long as your next door neighbor is getting up and going to work every day we will be fine. It won’t be fun, but we will be fine. Your existence as a retired rests on his going to work and adding value to what ever process he performs. While you get cocky about retiring at 30 understand how you depend on him. He deserves your respect. If he quits going to work lay in some Valium because a hard rain gonna fall.

Is Risk Aversion The Seat of Wisdom

I was listening to a podcast by Sam Harris PhD who is an author and controversial type but did his PhD in neuroscience. Although my major in grad school was Biophysics my research in grad school was in Neuroscience in a sort of adjunct bifurcated degree program between Engineering Physics and Neuroscience. I was studying a phenomenon of slow DC wave forms in the brain. AC wave forms (EEG) are common and are in cps (cycles per second) or Hz. These DC wave forms were on the order of seconds per cycle and had independent ipsilateral and contralateral components. The waveform was sensitive to injury, so you could damage the cortex for example in one hemisphere and there would be released a cascade of damage signals over time and the signals were hemisphere independent. My goal was to use this to model strokes since the waveform changes and cascade tracked what seemed to be the same pattern as an evolving stroke, the old “we won’t know how bad it is for a few days”. The “few days of stroke evolution” seemed to be the integral of many discrete smaller stroke-ettes across the hemisphere or sometimes across both hemispheres. The model therefore might be used to create therapeutics that limit stroke-ettes and therefore the severity of the integrated stroke event. This was before CT scan was invented and way before MRI, but it’s advantage was it showed a physiological process not an anatomical process. The research required rat lab access and neurosurgery. I knew how to do it but I couldn’t get funded so I took my EE degree and went out and got a job as an engineer. The book learning part of the degree was rigorous in neuroanatomy and what was known about neurotransmitter distribution at various nucleus and the experience always left me with a deep interest in neuroscience.

I started recently to explore the underlying neuroscience of risk/reward behavior. I also have a degree in psychology and was interested in social psychology which uses game theory (risk/reward) in some experimental models so I knew something about that literature also. In the mid 2000’s the fMRI was developed and you could watch subjects brains light up while presenting them with various “problems” and see what loci seemed to be active in the processing. Risk aversion seems to be in the anterior insula, cyngulate gyrus, posterior medial cortex and ventral striatum among others. The anterior insula sits over the hippocampus which seems responsible for memory management. So it might seem these structures form what I call the seat of wisdom, a place where risk aversion and memory meet at a relatively subcortical level. “DON’T TOUCH THE HOT STOVE!” It only takes once to become wise and there isn’t much rational thought involved. What about reward? That’s widely scattered but a significant center is the Nucleus Accumbens in the basal ganglia. NA’s neuro transmitters are dopamine and serotonin, so when you get reward you get a shot of dopamine and +- serotonin. We all know about the dopamine hit. It turns out serotonin is strongly tied up with hierarchy and pecking order and its “anti-depression” effect may not be anti-depression but to reinvigorate a dormant competition response to try and ascend a social order, which could look like recovery from depression. One other feature is serotonin seems to turn down or off risk aversion.

Psychologists ran experiments where subjects participated in risk/reward games and measured response with fMRI and measured the activity in these nuclei and by using different outcomes could measure risky behavior and risk aversion in gambling situations. Sam Harris’s PhD was on religious belief and he used fMRI to measure believers vs non believers and the same risk aversion nuclei lit up when I looked at his data. Interesting co-incidence? Seat of Wisdom? Rules to live by or not live by? One big point of all of this is these are subcortical structures beyond the reach of pure rational thought. If you look at the white matter there are a lot of paths out of the mid brain up into the cortex and a much smaller amount of tracts from cortex into mid brain, so who is running who?

An example of altered risk aversion is when someone gets drunk. People think drunk people can’t think. but they think just fine. Their reaction times may be off but they can think. What happens with drunk people is they just don’t care. NA gets stimulated and risk aversion gets shut down because of serotonin stimulation into the seat of wisdom. FIRE obsession might be akin to this. You start to save and see your acct accrue interest and it stimulates NA, and it feels good. You like it. In addition the seat of wisdom gets shut down so you move into risky assets. You read somewhere about 4×25 and it’s kind of like a religious belief. You get a good run and since serotonin opens you to hierarchy advancement and shuts off risk aversion you start feeling like the master of the universe and your 50/50 AA goes to 90/10! Now you’re cookin! “I think I’ll start a blog man!” and that further reinforces the neurochemistry and religious belief, but somewhere down in there the seat of wisdom is trying to breakthrough and turn risk aversion back on so you think well maybe not 4% but surely 3.5% or I’ll start a side gig, side gigs pay good and almost never fail! So you do and that’s enough to shut up the seat of wisdom. You chose a buy and hold portfolio (Buffet’s favorite) of cheap index funds and it turns out 2 cheap bond /stock funds live on the efficient frontier so the risk management takes care of itself. The 3 fund isn’t efficient but most of the time it makes money too and you keep plowing money into the portfolio and it seems to grow or in fact grows. Then one day you hit your number you pulled out of thin air and retire on 3.5% because the religion says that’s safe safe compared to those jokers taking 4.5%. You’re still risked at 90% because you’re “comfortable” with that. The problem is as your portfolio grows the safety provided by contribution dramatically diminishes. At retirement that safety is gone once you open the portfolio to withdrawal and SORR and you’re still risked at 90%.

Notice how little of this scenario is based on rational thought and how much is based on sub cortical systems. If anything rationalization is substituted for rational thought.


A little ditty ’bout Jack & Diane
Two American kids growing up in the heart land
Jack he’s gonna be a football star
Diane debutante in the back seat of Jacky’s car
Oh, let it rock, let it roll
Let the bible belt come and save my soul.

Wonder if that plan worked out? Wonder if Jack became a football star and what’s happinin’ with Diane?

Retirement Financing So Far

It’s December and I decided to do a post on what it’s like to live on a nest egg.  My situation is I’m fully retired no side gigs age 67 (next month).  I should have enough money to pay for my retirement and my wife’s to age 100 with no interest beyond inflation on my investments.  I do budget, but I budget in reverse.  I budgeted a yearly amount that is 20% more than I live on, so in case I need more money there is an automatic built in excess cushion in my budget.  If I don’t spend up to that excess it just counts as a bias against any SORR risk I might incur.  In other words if I budget 10k/mo and i spend about 8k/mo so my SWR (and SORR risk) varies downward from safe to safer not vis versa.   So I’m always running “to budget” and not “over budget”.   It means I never have to sweat it when my wife or kids “need” something.  My answer is essentially always yes.

I started winding down my risk profile 3 years ago to a lower risk.  It is recommended in early retirement up through 5 years into retirement (10 total years peri-retirement)  that risk be cut to a 50/50 allocation.  I’m a little over that around 56/44 but close enough.   In the past 3 years I added 5% return/yr to my portfolio, 4.3%/yr in the past 2 years, and -5.8% in the past year.   Part of my risk “wind down” was to take some post tax brokerage stock and turn it into cash (risk free asset in the short term) to live on while I Roth convert at maximum efficiency, so my actual risk based portfolio is closed to SORR since I’m not withdrawing from it right now but withdrawing from the cash pile.  I actually sold at the market high but that was parsimonious and not by design except I decided it was a good time.   

This means I don’t need to sell anything or do anything to my portfolio to live for the next 4-5 years.  I have enough cash to pay my bills and taxes and live my life.  A recession can come or go it won’t matter to my cash flow.   As I spend down my cash my AA will once again automatically rise, until RMD when I will take SS and RMD a small remaining bond based TIRA of about 600K which will keep my income in the 12% tax bracket for a long time.  So I accomplish SORR protection in early retirement and portfolio preservation by risk reduction in early retirement.  When I RMD and take SS, I will then feel free to bring my portfolio risk back up because I will be 5 years in, age 71 and tax streamlined from the Roth conversion.  I will convert a little over 1M to the Roth at a net tax bill of 15 cents on the dollar.  The Roth will grow as a retirement self insurance account for my wife and myself in case of extraordinary expense like cancer care or assisted living or for a legacy for my kids.   My analysis was 5 years of cash is probably excessive but if there is a recession it will prove fortuitous since I sold at market peak.  Having never retired before I wanted my bases covered and had only my estimates of what to expect.   

Thus far this plan has unfolded perfectly.  Certainly a 6% drop this year is unwelcome since I’m as greedy as the next guy, but not at all critical to my or my wife’s well being.  This week I further de-risked my portfolio jettisoning some alternatives and real estate and turning that into  bonds and low beta to reduce my AA  a little closer to 50/50.  Those assets were not performing and especially real estate carries a higher risk than the US market so provides a kind of negative diversity in a down market.   If the market keeps going down, I will start to sell global and emerging markets since they likewise carry more relative risk than the US market.  So my risk management strategy is to sell high risk and turn it into low risk, but stay invested.  I also bought some gold miners with some of that money since gold and gold miners tend to be zero to negatively correlated to stocks in a crash.  Gold equivalents are cheap to buy now, so I buy low, to sell high when the market is in the tank.   I’m still fully invested but my portfolio has somewhat less risk this week than last week and I’m more defended against the bad, which I find desirable in these conditions.  I don’t need a home run, base hits will do just fine.  What I especially don’t need is to strike out.   I’m learning that risk management is the key to portfolio longevity in retirement.  I see some posts about “standing tall” and “taking your beating like a man”  when it comes to portfolio management.   Selling out is stupid but de-risking at least to me makes sense since I’m not replacing my lost dough and poor risk decisions with hard work anymore.  I’m done with work.  I’m retired.

  • Have a retirement plan.  Deflation is nothing like accumulation.
  • Understand your risk and how to vary the risk and the benefit/consequence of that
  • Understand the cash flow as time goes on.  SS RMD and when they kick in etc makes a big difference in the plan
  • Have a budget and spend under budget
  • Have a big enough pile to start
  • Plan for your life till death and then for your wife till her death it makes a difference
  • Understand your taxes including the difference between married jointly and single, the government is coming for them.  
  • There are no easy magic formulas or narrative for actual retirement.  You get to be the author.
  • Retirement self insurance is quite useful since you both are going to die of “something”, and that “something” may prove expensive or even 2x expensive.  Dying is a known unknown but planning, even moderate planning gives some control.
  • Living real life is not living a narrative.  Happiness and peace depends upon living in reality.