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.
- 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!