Retirement and DeFi

So much of FIRE blogoland is devoted to “passive income”. Often the passive income isn’t so passive. You write a blog and grow it into an “income stream” but you’re stuck writing and marketing the blog. You buy some duplexes and are stuck with the tedium of running a rental business. You sell Herbalife and loose all your friends because when they see you coming they head the other way. Maybe you buy preferred stocks or dividend stocks. Maybe you buy an annuity. In days gone by when you could lend some money and get paid some interest, you bought CD’s lived off the interest, or you started a rock band and made and sold CD’s

In retirement the goal is adequate income. It’s a different portfolio goal than what you did during the working years. During the working years your risks were covered by your work and your employer. During the retired years your risk is covered by SS and your portfolio. In my Grandfather’s day he was covered by SS, a pension, and interest from a CD ladder. When my grandmother died at 88 she had about 60K in assets left to her name. My Great Aunt (same generation as Granny) who died at 90 had maybe only 30K left beyond SS. In my now 91 year old Mom’s case she has IRA, annuity and SS income and a fairly robust portfolio. I recently had to move Mom into assisted living and her portfolio readily pays for that though she is slightly cash flow negative she has more than enough to live 2 more decades. Granny lived in their retirement house and would not have been able to hack assisted living, financially unassisted. Auntie and her husband FIRED in the 1960’s. The bought a resort property on Lake Michigan and rented cabins half the year and then lived in a trailer in FL half the year. At some point they sold the resort and moved full time to the trailer. No way could Auntie afford anything more than the trailer.

This is a picture of 3 retirements over 120 years of life. Granny was greatest generation pension based retiree at 65. Auntie was greatest generation entrepreneurial based FIRE retiree. Mom is silent generation investment based retire at 67. I’m boomer generation investment based retire at 66. Each of these have generational approaches to retirement which used the instruments of their time like fixed income v annuity v pension income to in at least 2 cases just barely realize the goal of not running out of money before running out of breath. Every family has this generationally historical approach to the dilemma of retirement using the tools available to the generation. Greatest generation had little access to stocks, some access to bonds and debt instruments and some access to real estate. Stocks were typically too expensive to own in small quantities, unlike today. The modern brokerage account has been around less than 20 years. I’m a boomer and extremely dependent on the financialization and government intervention of the investing environment. My children are Gen Z. To them investing will be the result of the creative destruction of decentralization and digitalization.

Each of my parents and grand parents failed to embrace the next generation’s style, preferring rather to embrace the relative “comfort” of their generations investing style, a style that petered out as each generation petered out. That’s the conclusion I reach. Investing styles are marketed. As a generation embraces it’s marketed style that style reaches a peak and then dies off as the generation dies off. If you want to beat the odds, you must embrace the style of the 3 younger generations ahead of you at some level elsewise your money may peter out before you peter out. It’s clear this means you need to develop some intimacy with crypto before your generations style, what ever generation that is, becomes anachronistic. This is especially true if you belong to the bogglehead version of reality. There is no place in boggle head lore for crypto. It is anything BUT a cheap diversified index fund. Boggle head lore is Gen X’s generational investing style. Nothing more, nothing less. It will see it’s zenith same as every other generation’s style and then will be left to decay in the scrap heap of time while the adherents skid to their eventual demise.

If you can, take some time to analyze the strategies of the previous generations in your family and their efficiency and effectiveness, and analyze in the context of the financial regimen of their generation. In 1980 Vanguard was dinky and had 1 or 2 funds. Fidelity was huge and sold loaded funds but sold the funds at a discount compared to companies like American Funds. Most of Fidelity funds were 3% load and American was 5.25%, they were all offered through some kind of local broker (salesman) who got his cut as well. The model was a bunch of small shops selling product instead of the internet based digital marketplace of today. Marketing gimmicks were employed like FDIC insurance. FDIC is great for a single bank failure. Do you think it really protects you against the FED’s moral hazard?

I’ve started playing around in some small measure with the products which will constitute what is being marketed to my kids. In no small measure they are throwback to Grandma’s generation. I’m staking Ethereum and it pays me interest in Ethereum. The amount I make in dollars is dependent on the Ethereum price. It is effectively a bond, but a intermediate term bond that pays 5% interest. It has volatility as well. At today’s Ethereum prices I make about $16/day. If Ethereum doubles I’ll make $32. $16/day pretty much pays my utility, cable and cell phone bill. If I owned USD coin, I could lend it at a fixed 4% rate. The terms cover the value of the principal, in other words my USD coin is backed up dollar for dollar. This works the way gold did back in the early 1900’s when you could exchange your dollars for gold at a fixed rate. USD coin exchanges 1:1, coins:dollars. What passbook account pays 4% interest? This means if I own 100K in USD coin as emergency fund money I can make 4K/yr or $11 per day, every day. Pretty much pays for our food. When my SS kicks in full force next year it will pay us $146/day tax free based on the tax bracket we will be in at that time. So let me see 146 + 11 + 16 = $173/day, every day ($1211/wk, 62,972/yr) . Eventually when my bride turns 66 and 10 months $146/day will become $171/day for a total of $198/day passive income assuming Ethereum doesn’t increase in price. My investment was about 5.5K on the Ethereum at about $100/coin in March of 2020 and if I owned it, $100K of the USD stable coin (I presently don’t own any) virtually tax free because SS is taxed at 85% leaving 15% of the SS money to passively cover taxes. If I bought the Ethereum at todays prices it would still be only about a $220K total investment. My SS is high because I spent so much of my 35 years paying into the trust at the highest amount, and I’m not claiming till I hit 70. I also understand how to maximize my wife’s benefit. Our SS has built in inflation adjustment. This money machine runs itself, no tenants, no blog posts, no orders to Herbalife and my friends generally don’t run the other way when they see me. Eventually the Ethereum stake will go away and I’ll have to figure something else out. By then the Gen Z-ers will be in their prime and the Gen-Apha will be breathing down their necks. I’ll likely be dead by then but my wife, she has a 30% chance of 30 more years and I’ll do my best to see she is funded come hell or high water.

This is a true granular view of how to think about passive retirement income. It starts with understanding the historical, and considers what is generationally marketed, trying to avoid the generational myopia that causes, and looks forward to the future. It’s hard to run a bunch of duplexes if you happen to stroke out or get Parkinson’s. It also limits greed. It’s less about trips to Europe and more about daily bread forever. The Gen-X 4% narrative is simplistic and requires perfect execution of the assumptions, because it’s a mean reversion strategy.

4 Replies to “Retirement and DeFi”

  1. Dear MD on FI/RE
    My first time reading, got the link via today’s All Star Money.
    Interesting analysis and very helpful in thinking about investing. Particularly appreciated the second to last paragraph as an analysis that I had not consider in the way you present it, both daily and annual income from each source. I will apply some of that thinking to my own income streams.
    Not being engaged with your concept of next gen investments until now (I have disdained my sons’ investment in crypo and don’t have any myself) I would appreciate some explanation about how USD Coin pays a return. I will try to sort it out with some research but you have me hanging there on that point, perhaps that is a topic for future discussion.
    And just a heads up, in your About the Site description you use the term Bogglehead three times, I believe the expression is Boglehead, derived from the work of John Bogle of Vanguard fame.

    1. Hi PM

      How did I wind up on All Star Money? I’m just a sleepy little blogger out here on the perimeter, but then Jim Morrison said “out here on the perimeter we is stoned immaculate”

      I use bogglehead as a tongue in cheek dig at how ridiculous it is to base your 30+ years of retirement on the “25x 4% rule”. The “boggleheads” are those who believe in that narrative as reality, based on pamphlets blogs and books and an entire financial services industry that has reprogrammed itself to fit this largely Gen-X narrative. I used to pay an individual broker, now I pay Fidelity directly. Either way I pay.

      USDC pays a return because it is borrowed by investors, the same as mortgage money is borrowed. In days of old Savings and Loan passbook accounts paid 4% interest so 4% looks outrageous to us because we live in such financially distorted times. The 10 year bond paid 8.55% in 1990, 6.03% in 2000, 3.22% in 2010, and 0.89% in 2020. Unfortunately we are slaves to regency bias and don’t realize over the past 30 years bond’s have paid 4.6% on the average. That 4% was the passbook holders portion of the profit on the loan. Banks today still make well over 4% of interest, for example Credit Cards charge 18%, but that no longer filters to the passbook holder. Banks lend on a partial reserve basis which means they have more lent than they have reserve on hand so the same 100K on reserve get lent over and over again creating multiple income streams on the same money. If the music stops there are NOT enough dollars to pay what is owed. We saw this in Greece in 2015 when even if you had 10M euros in the bank you were allowed to stand in line and withdraw only 50 euros a day. We almost saw this in 2008 in this country. USDC is full reserve meaning every $ is backed up by a $. To get a loan you have to have appropriate collateral and the payment is because that’s how the contract is written. They lend your 100K USDC likely make 7% and pay you 4%. The reason for FDIC insurance is because the system is a partial reserve system that is $1 is lent out multiple times so you need insurance against the eventual greed and fraud such a system fosters. This explanation is somewhat simplistic and a more in depth analysis would require a book, US banking and the Federal reserve system is very complicated. Here is a Motley Fool article on USDC. Motely fool has their own agenda but they include some of the FUD so you can realize there is some risk that needs to be studied. The national debt as of today is 28T, but we think we live in relatively riskless stability.

      I am looking at writing an article on how crypto staking may become a tax deferred means to wealth creation. There is a tax challenge in US district court in TN which may show crypto staking “rewards” are in fact creation of de novo crypto property and therefore not taxable until sale. This means I may make 5% on 100 ETH (5 ETH) and the 5 ETH make may not be taxed until I sell them, when they would be 100% taxable. In the mean time my 5 ETH are exposed to the full volatility of the crypto market. Lets say my ETH are created at $2K/coin but 5 years later when I sell they have grown to 10K/coin. My taxable event doesn’t happen till AFTER the appreciation and would be taxed as cap gains not income. Notice how Biden’s tax proposal is to turn lower taxed cap gains into higher taxed ordinary income.

      Thanks for stopping by.

  2. 4% can work but the starting dollar amount must be sufficiently high. Most people will have enough money or die before the money runs out if they start with about $1 million I think. Save more and it is a better probability of having enough.

    1. Hi DP,

      The problem of retirement is how to provide ready income to buy your hamburgers today, not on the average. Today the DOW lost 2.09% but my need for hamburgers did not diminish. Over the last 30 years bonds provided “on the average” 4.6% return but only 0.89% return in 2020, and my need for hamburgers did not diminish. So the main things used to “leverage the future”, stocks and bonds are failing. In a rising market, “most people will have enough money”, except inflation, except stagflation, except demographics, except the debt burden, except for all the people retire with 10K in the bank (requiring income redistribution). There aren’t enough rich to soak to get the job done. My point is retirement is all about risk management and to manage risk you first have to acknowledge risk. Shorter retirement (work longer) = more chance of success. Bigger nest egg = more chance of success. Less risky portfolio (leverage) = more chance of success. Today the Dow fell 2.09%, my portfolio fell 0.2% In the meantime I have a stake in Ethereum that paid for my hamburgers today, unaffected by stock or bond market swings.

      “Save more and it is a better probability of having enough.” 100% agree. Thanks for stopping by.

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