In the 80’s I was working in a pediatric ICU and we got a kid who was creamed. There is an expressway in Chicago called the Eisenhower named after the 34th president. It heads out of the city past the ghetto to the western and northwestern burbs. It’s 10 lanes of 80+ mph Mario Andretti mayhem, testosterone, and precision driving, at once exhilarating and frightening, kind of like sky diving. The kid had apparently been playing real life Frogger on the highway with his buddies. Yea, let’s legalize dope! We need more stupidity! The tragedy is something that has stuck with me all of these decades. Certain experiences change you.
Retirement is like playing Frogger. You may make it to your your little frog bungalow or… In a recent podcast on Doc G’s site some folks with medical issues were talking about retirement in the face of chronic illness. I have written on this, but what to do? what to do? How do you get to the frog hacienda intact? My solution is to self insure. My Roth is my self insurance. It serves several purposes. One is as a tax free, not tax deferred growth vehicle. It does not annuitize like a TIRA. If you have enough money to fund it properly you can risk the assets within it in a different way than you may risk the rest of your portfolio. You may carry a 10% risk on the money you intend to live on in retirement. You can calculate the risk by using the efficient frontier calculator or by setting up a personal capital account they will calculate it for you. Let’s call this money SWR money. You can set up separate money in a different account risked differently and to serve a different purpose than SWR. You can set up a self insurance account. My Roth is my self insurance account. Once funded it will sit unmolested and compound. I will not count it as part of my SWR v. net worth percentage. I will own it but account for it as a different line item. It will exist as insurance, to be used in case of disaster. It can be risked for example at 6% (the risk of a 50/50 asset mix) with an expected 6% growth. Such a low risk has a very high chance of being intact no matter when needed, and not so much subject to market whims. Since I’m not pulling money from it, it’s basically immune to SORR. The rate of return fluctuates but no withdrawals leaves things intact like a nice feather bed of security.
The article I read on financial ruin due to cancer says the average loss to wipe you out was 92k/YR. Whoa Nelly! The solution is to systematically build a shield and let compounding do the heavy lifting. You’re going to die from something and your spouse is going to die from something. Hopefully and normally that something will happen further on up the road. So you have to plan for the cost of that something occurrence. This article suggests 92K/yr is a good place to start. FIRE types are nothing if not masters of Future Value calculations, so do the math. If you stick $300K in a 50/50 account at 45, by 65 it will grow to $962K with no added money (over 61% of this is interest). Where you get the $300K is from planning for it and making it happen, or win the lotto or something. You’re the master of the universe so master already. If you have $962K in insurance money at 65 you can pull out 92K/yr from a 50/50 fund for almost 17 years. (31% of that distribution is additional interest). Pretty good huh? That 92K is independent of your SWR money. So if your a 1M 4 x 25 frugal as hell bike riding FIREbrand you still need 300K in the account by age 45 to make this work. OOOH it’s hard! Living in a medicaid nursing home on disability drooling in your lap with everybody screaming all day and night long is harder I assure you. Yes it means you’re going to have to work longer and forgo a few years of drinking on the beach, BFD.
As time goes on the value will grow and protect more than catastrophic health issues. At some point it becomes big enough to protect against portfolio failure as well, since you underestimated your need you will have a life boat, a ready source of hamburgers, just when you need it. If not, your kids will have a nice nest egg. This is about as small as I would go especially if married with kids. You’re going to die from something and that’s going to cost dough, and your wife is going to die from something and that’s going to cost dough, or your kid may get sick, so you need a lot of compounding potential to get everyone to frog heaven. The insurance stands side by side with SWR and gives you big time flexibility.
4 Replies to “Frogger”
I like the conceptual framework of different pots with different risk profiles, including the extra pot for self-insurance that doesn’t get tapped unless catastrophe strikes.
I still consider the portfolio as a whole, Roth included, because until I reach my fat FI cushion (or right-size the house after the nest goes empty) I can’t yet consider one account extraneous to the sunset plans.
Your framework gives me hope that when that line gets crossed, I get to mentally separate one bucket of gold from the others.
You don’t have to do separate accounts now, or a different risk profile now during accumulation, just sometime peri RMD. What you need now is a plan. I calculated it wasn’t fortuitous to Roth convert till 65 for me, but I did calculate for separate aspects of the portfolio happening at some point. Why that is important is post retirement there are different tax consequence to different “pots”. It also informs you to the “real” portfolio need including insurance and risk premium (taxes health care etc) your portfolio will have to support. Just pulling a number out of the air and using a rationale like “the average family lives on 60K” is inadequate planning. The average family is not the average Cali family for example, and moving to Venezuela or Columbia may not be appetizing when the time comes. So likely your actual nest egg might have to be 20% larger than your thin air number. There are a number of articles on over saving as well and different models on spending. One intriguing model is: Ty Bernicke’s Reality Retirement Planning, where you spend a lot up front and a decreasing percentage as you get old. The problem is if you get cancer that percentage doubles, not decreases so having the insurance gives you some leeway to play with spending models or recover from SORR without going back to work. If you get that “insurance money” in the plan soonest (not necessarily in an account soonest) it becomes mostly funded by interest. If you wait till 55 if will mostly be funded by cash so there is an aspect of free money involved. The main point is regardless of your budget you probably need something approaching 1M at 65 to cover some number of years for both you and your wife since you’re both going to die of something I gaarontee. If you get to 80 and have 2.4M you may be able to tap a dab of “insurance money” to supplement the consequence of aggressive early retirement spending (like the 3rd trip around the world) or be like Cap’n Suze O and buy an island and then giving everyone hell for taking too much risk. One thing about owning an island is there are damn few people interested in buying it from you if you need to sell. (speaking of risk)
Like I said the “insurance policy” gives you options, and having a different risk profile is also a kind of “risk” diversity. If I had an extra 1M at 65 in a properly risked account not subject to SORR, I wouldn’t think twice about planning a 4 x25 “normal” retirement regardless if my retirement portfolio size was 1M or 5M or using some variation of Bernicke etc. tnx fer stoppin by
Super informative post Gasem.
There must be unifying force over doc blogs this week. I had a post mentioning frogs as well as Millennial doc had one of her own with frogs (and I feel I am leaving out another mention of frogs in a post) and now we have the ultimate frog based arcade game, frogger (a personal favorite of mine in my youth). ?