What’s Your Strategy?

In the past decade we have had unusual market stability, artificially induced by the FED and the regime of stress testing of banks.  In my opinion we narrowly avoided a depression in 2008.  We are off the gold standard since largely since the great depression and that allows the government to print money.  Also the FED bought toxic debt and returned treasuries which allowed banks to not go out of business.  The problem is if the debt had been called in 2008, banks would have imploded.  By moving the toxic debt to the FED balance sheet, it was allowed to mature and as it matured it became at least somewhat profitable.  Like healing a wound add protein vitamin C, zinc, and time.  By forcing bond returns low people moved out the risk curve and bought stocks, a lot of stocks.  The forced stability of the FED on the market gave the illusion of safety.  The economy is strong enough for the FED to unwind it’s balance sheet.  Both bonds and stocks have have moved far off their historic mean trend lines.  With the termination of FED interference both stocks and bonds will tend toward the mean, and the name of that game is increased volatility.   Bonds are starting to yield enough return that their inherent safety plus a little dab of yield starts to look attractive in the face of turmoil.    Stocks are inherently risky.  You think something like SPY is pretty safe but did you know SPY tracks only a little over 300 stocks not 500 and it has a large cap tilt.  VTI is even worse.  It’s not 3000+ stocks but about 1500.

I always wondered what would happen in a crash.  If you own SPY and they are forced to sell, SPY would likely no longer track the S&P because the momentum of the selling pressure on the 300 SPY stocks would overshooting would overwhelm the tracking of the instrument.  So your 15% volatility might be greater and increased vol means bigger losses compared to the real S&P or total market index.  Who knows?  A LOT of people own SPY and VTI and a huge heard of sellers is an enormous pressure on price.

Controlling volatility is important in a portfolio, as important as return IMHO.  High return is your friend in expansion but low vol is your friend in a crash.  Lets say you own SPY.  It’s projected return is 9.23% and it’s risk is 14.8%.  Lets say you own a million bucks worth.  Let’s say the market drops in half and my concern about increased vol doesn’t happen.  So your 1M turns into 500K, a 50% loss.  This means to recover to zero you need to make 100% before you reach your pre-loss level.  When you reach your pre-loss level you start compounding again and making money.  Till then you’re merely recovering.  That recoup can take a long time.

Here is a chart of SPY you can see the local max was on 10/8/2007.  It closed at $155.85  That number was not seen again till 3/11/2013.  That means for almost 6 years your money was sitting there under water.  After 3/11 you started accumulating and compounding again.  It’s Halloween, you want even scarier?  

This is the same SPY dating back to 8/28/2000.  Notice it takes till 2007 to recover from 2000 and almost immediately another crash.  This means nearly 13 years of living under water.  If you’re going to make your million bucks with this sequence you’re going to have a tough time.

This is what you made over those 13 years with a SPY account, 2.246%/yr and that was from reinvested dividends.  Say you retired in Dec 1999, with the intention of living off the dividend.  Your net growth/yr over the first 13 years of your retirement is 0.343%/yr.  Freaky eh!  

Imagine you had some bonds say 60/40 SPY VBMFX.   Your return is 7.41% and your risk is 8.93%.  Lets say SPY drops in half.  since your not 14.8% risked but only 8.93% risked (60% of SPY’s risk) your S&P will go down only 30% (1/2 of 60%) instead of 50%.  Your 1M would only drop to 700K not 500k.  That means you only have to get 60% back not 100% as in the first example.   You would get your 60% back about 2 years sooner and start compounding again,  while portfolio #1 is still under water.  If you did that twice say in the 2000-2013 case that would be an extra 4 years of compounding portfolio #1 misses out on.  For sure once portfolio #1 starts to grow again  it will grow faster but the return rate on #1 is 9.23% while the return on #2 is 7.41%  only 1.8% more.  Eventually #1 will overtake unless there is a bad SOR as in the 2000-2013 sequence.  What happens if yet another crash?.  The sequence repeats.    

Let’s look at the 40/60 case.  40/60 has an expected return of 6.53% and a risk of 6.24% (only 42% of SPY’s risk).  Now when SPY goes down 50% 40/60 goes down only 21% (1/2 of 42%).  Your million becomes 790K.  Your recovery to compounding again only needs to go up 42% as opposed to 100%.  This portfolio has the shortest recovery time of all.  Your portfolio is still compounding at 6.53% only 2.7% less return than the riskier portfolio.

Just because you pulled some asset allocation out of thin air does not mean you are wedded to that forever.  It’s not all or none.  You don’t have to go completely flat, you merely have to reduce your risk for a while by using a less aggressive allocation.  You can turn down the volume a bit, you don’t have to shut things off. In addition you can use that 60% bond money when stocks are cheap to buy a passel and be “loaded for bull” on the way back up.  Investing is like playing poker.  The house is slated to win by 8% but by playing correctly you can reduce those odds to almost parity to -0.2%(aka change asset allocation in a down turn).  You can further change the odds by buying low so you can sell high and let compounding work its magic.   How to know when to hold em and when to fold em is problematic.  I use a financial adviser and quant analysis and I’m happy to pay for that.  That’s my strategy.  If the guy gives me an extra 5 years of compounding during accumulation… you do the math.

This article is  an outline of a concept, a different way of looking at a portfolio from a perspective of capital preservation.  It is not a plan.  I do have a specific plan for my situation, but it’s more involved than this article would pretend.  If our interested it gives you a starting vantage point to begin your study.  The bogglehead approach is to simply stand there and take it with the refrain “I’m young I can recover!!” Problem is the young get old and the time to recover vanishes into the mist of mistakes made.  Compounding takes time.  If it’s a good sequence it pays off.  But another way to look at compounding is mistakes take just as much time to compound into failure.

This also points out a problem with FIRE.  Compounding relies on time.  You can wet start your portfolio by over funding.  HUH? Over funding?  It means you save half for 10 years instead of say 15% for 20 years.  Nothing wrong with that right?  What about mistake compounding?  That mistake is merrily compounding but is overshadowed by your exuberant saving profile.  It will manifest in it’s allotted 30 year time frame because it may take a long time for a mistake to become significant,  (Example national debt.  We ignore it continues to grow).  Let’s say you overfund save a lot of money but make a mistake (say running a portolio at 90/10 AA) that mistake manifests in 30 years but you retire in 15 years.  It means 15 years into retirement an over exuberant asset allocation takes its toll.  

Big ERN wrote a series here and here , looking at oscillating your risk profile risk and what he uses as red flags to know when to pull the trigger.  A second point of reference.

Efficient Frontier

It’s no secret I’m a big fan of efficient investing.  Efficient investing means you pay for your return with no more risk than necessary.  If your in a cup game where a ball is hidden under a cup, you want the least number of cups in the game.  3 cups 1/3 odds.  8 cups 1/8 odds.  The bet (return) is the same so what is varying is risk.  Less cups means risk optimization and a greater chance of success.  I play a lotto game every week.  I don’t play power ball or mega million, I play lucky money.  Power ball has a 300M:1 chance, lucky money is 3M:1 so my 1 dollar ticket is equal to 100 bux worth of tickets on the other game.  Lucky Money caps at a 2M payout.  If the cap is reached the excess trickles down to lesser prizes so the $10 dollar payout with much better odds may grow to $15.  I don’t win a lot but I do win sometimes.  I win enough to buy myself a more expensive ticket on another game when that game hits 1.6 billion and the cost of playing for the 1.6 billion ticket is free because it’s from the free money out of winnings from the less risky bet.  Over the years I’ve hit $800-$1000 a couple times so at one buck a week the whole shootin’ match is free.  Playing for free is good risk management.   I could cash out and buy hamburgers, but I already have a source of hamburgers so I’ll risk a little free money.  You never know, plus it’s a hoot optimizing my risk.   Risk management is the driver for my play, not return.  

This is no different with portfolios.  IMHO that is all about risk management as well.  The beloved Harry Markowitz published a paper, the year I was born, on optimal portfolio selection which included risk, asset correlation, return, variance and co-variance.  The zero point or origin is called a risk free asset.  It is an asset where you can park your wealth and be virtually assured of your return.  The risk free asset is typically short term govenment paper called T-Bills.  Your risk and return on any other asset is therefore judged against the Risk free asset. 

Here is a pic of a Bogglehead 50/50 2 fund efficient frontier.  You see the curve sits on a plane.  Every point on the plane represents a risk (SD) on the horizontal axis and a reward (% return) on the vertical.  0.0, 0.0 is the risk free asset (T-Bill).  Every this else is related to this.  You see VBMFX which has a 4.79% return and a 3.4% risk compared to a T-Bill.  You see VTSMX which has a 9.9% return and a 15.19% risk.  Remember when you own stocks and bonds you own property.  What those numbers tell you is when the value of the bond property drops say 50% the value of the stock property drops 4.6 times more, mucho risk. (there is a correlation factor in there yet to be addressed I just want to let the risk nature of two assets to sink in.  To own bonds you can expect to get 4.79% back on your money.  To own stocks 9.9%.  Owning stocks gives you only 2 x the return that owning bonds yields, but at 4.6 times the risk.  You are paying for your return with a hell of a lot of risk.  Note these values are averaged values for each asset from 1997 to 2018.  The calculations are quadratic which means they are not linear but curved, and id you have a curve you can define a maximum point.  The maximum point on this curve is called the tangent portfolio.  It is the ratio of these assets that pays the most return for the least risk.  Those values are 16% VTSMX and 84% VBMFX and you can expect 5.55% return for only 3.58% risk.  Best bang for the buck.  The risk goes up a measly .18% (3.58-3.4) and the return goes up 0.76%.  How many boggleheads kvetch over saving 3 bp on the cost of a fund?  This is a whole 76 bp increased return!  

Notice the provided 50/50 portfolio.  It still lives on the efficient frontier.  You still pay an optimum amount of risk for your reward, it’s just that you choose to own a more risky portfolio in hopes of greater return.  The R/R of a 50/50 is 7.69 risk 7.32 return.  You pay 46% more risk for 31% more return.  The curve is curved because Bonds and Stocks have almost zero correlation so when the value of one is oscillating the value of the other is pretty much static.  The efficient frontier calculator likes non correlated assets because of this because it further reduces risk.  In fact some assets tend to grow in the face of a stock down turn.  Gold is such an asset.

Here is a picture of gold v S&P 500 during the 2008 down turn.  If you owned some gold and S&P, and you needed some money in 2009 what would you sell?  Buy low sell high of course, sell the gold!  This is why I own some gold.  It’s not investing it’s insurance,  it also points out the value of non-correlation.  

The bogglehead 3!:

Boggle heads love their 3 fund.  The rap is all about “diversity”  If you own more piled higher and deeper you are more diverse (right?) so let’s own US International, AND Bonds by golly.  Lets look at that on the frontier:

Remember every point on the plane represents a risk and a reward and the above is the R/R of 50% VTSMX, 30% VGSTX and 20% VBMFX, the vaunted 3 fund.  The return is 7.84% and the risk a whopping 12.27%!  Recall the 50/50 2 fund was 7.32 return and 7.69 risk.  All I can say is DUH owning a 3 fund is stupid stupid stupid.  You pay 63 cents more risk for 7 cents more return.  BUT BUT BUT how can that be Mr Natural?  

The R/R for VGTSX is 6.5% and 17.10, super risky, shitty return.  The correlation between VGSTX and VTSMX is 0.85 an high correlation means the 2 assets act nearly identically as far as response to a crash.  So you own a shitty asset compared to VTSMX (6.5% return v 9.9% return) but your risk is greater (17.1% v 15.19%)  Note these are averages.   Any one year a given class can out perform but on the average… (complete this sentence).  

So there you have it, lesson 1 in efficient frontier.  I may write a follow up about market diversity.

You can play with the calculator yourself 

Assess Yourself

I recently did a psychometric personality self assessment.  It’s created and published by noted Canadian psychologist Jordan B, Peterson and his university group.  I went to a Peterson lecture concert up in Jax last month with my wife and enjoyed the presentation.  I’m keenly interested in neuropsychology and functional imaging and how that affects lives and especially in the investing arena.  It’s 10 bux for the test so I decided to see what Jordan’s assessment has to tell me.

Peterson is a big brain and is also interested in neuropsychology and I find him quite credible and proliferative.  The study of personality over the years has evolved into what is called the “Big Five”.  These include:

  • Agreeableness: Compassion and Politeness
  • Conscientiousness: Industriousness and Orderliness
  • Extraversion: Enthusiasm and Assertiveness
  • Neuroticism: Withdrawal and Volatility
  • Openness to Experience: Openness and Intellect

Each of the big five are further refined into 2 more dimensions giving a greater granularity.   Each trait can be viewed non judgmentally as each trait conveys it’s own power and support structure upon society (family, work, friendships, Church etc.) and melds it’s utility into the matrix of life.  As you discover the traits you come to know better “How you are” not just who you are.  My interest especially is with an eye on investment.  What type is a risk taker, what type procrastinates.  What type has a high barrier to investing and what manner of investing suits whom.  Investing at some level is competition and understanding the game and it’s players is useful.  Eventually we will be investing against AI and a comparative analysis of how you think and how an AI thinks will be mandatory.    It also gives some insight into choice of mate and understanding how your traits might mesh with theirs.  Information is power and nothing ventured nothing gained (the test tells me that’s one of my off the scale traits).  The test is available at Understanding Myself.  You are compared to men and women of all ages and strata so if you imagine a 10 dimensional heat map of society you get some idea of where you fit in 10 space.  Peterson’s goal is to give the assessment and then conjoin this knowledge with a self authoring program where you can write your story, and in the act of writing your story you gain significant insight into yourself.  Enough insight that you can start to iteratively make changes for the good.  He has a lot of good ideas to help people empower themselves for successful lives instead of just living in the stew.

I’m open to releasing my results but I won’t because I’m not sure how a preview would affect reliability for someone else taking the test.  Especially for physicians who are very testing savvy.  Some innocence I’m sure improves validity.    You take it only once, as repeated testing adds noise and unreliability to the result.  You can probably take it again 4 or 5 years down the road as personality changes as we mature in our life’s roles.  It’s kind of the basis of for at 20 you’re a liberal because you have a heart and at 40 you’re conservative because you gained in wisdom.   The scores in each dimension is read out numerically and a narrative provided regarding what people along that dimension are like.  I will say many of my scores were extreme, but then I kind of do live on the perimeter, stoned immaculate.  It’s my feature.  I wasn’t sure what to expect but I felt it interesting and the insight useful.  So for the price of a couple flights of craft beer you can get your head shrunk, gain some insight and have a hoot all at once and not wake up with a headache, having to pee like a race horse.

The Mathew Principle

In the book of Mathew in the bible is a parable called the parable of the talents (Mat 25:14-30).  The parable simply stated:  To him who has more will be given, and to he who has not all will be lost.  

The principle is actually a study in risk management.  In blackjack the house is slated to win.  The reason is the player goes first.  If the house and the player go bust, the player loses because he busted first.  This gives the house an 8% advantage.  To he who has more will be given.  The player through judicious betting and application of the rules can reduce the 8% disadvantage to a 0.2% disadvantage, and by understand the history of what has gone before (a deck has only 52 cards so each subsequent hand has a different sequence of return and the smaller deck may be more favorable to the player than the house) a player can shift those .2% odds and be a winner.  Shifting the odds is risk management.  It is complex because one wrong move exacerbates risk as opposed to reducing risk.  Also the SOR needs to work in the players direction.  By never paying for your return with too much risk, you can move from loser odds to being a winner.

Bogelhead is not “the best” portfolio.  If you bought AMZN in 1997, you would be up 24000% compared to 140% for S&P.  Bogelhead is however adequate and it’s systematic, and in that systematization Bogelhead automatically manages risk.  If you own a Bogelhead 2 fund it lives on the efficient frontier and you pay for your return with the proper amount of risk.  If you own a Bogelhead 3 fund it does not live on the efficient frontier and you pay for your return with an excess of risk.   Bogelhead 2 is like the guy with 5 talents.  He risks perfectly, doubles his money and gains stature and gets the last guys talent.  Guy #1 is like a Bogelhead 2 portfolio started at birth.  His starting sum (5) could be provided by starting early with discipline and best risk management.    The guy #2 with 2 talents risks, but not correctly, he doubles his money but gets no extra because he only doubled to 4 not 10.  He is like a Bogelhead 3, risk taken but not optimized.  #2 could have benefited from adding a little AMZN to his mix.   #3 failed to risk.  He did not invest and was penalized.  

We glibly talk about how easy it is to invest and kind of look down our noses at those who don’t.  The presumption is those who don’t are just slovenly or clueless.  About 70 million of the population has an IQ under 85 or has something like schizophrenia.  These tend to compose the “homeless” and are never going to invest.   If you make 36,666 per year take home and have perfect discipline and 40 years of steady W2 can max out a Roth ($36666 * .15= $5500) and if nothing goes wrong, no job loss, no bad SORR, no hurricane Michael, no cancer diagnosis, you can pull 36,666 out of your portfolio for 30 years.  This guy is like the guy with 5 talents.  If you save only 30 years or use a poor risk strategy portfolio, you will have barely half (2 talents).  If you don’t save (1 talent) someone else will be called upon to feed you.  Probably only 40-45% of the people have the possibility do 40 years of Roth maxing out since the median single wage is 44K pretax.  You would have to be amazing on discipline and luck to get this to work.  So only 50% or so of the people have the where with all to engage apart from some employee participation.

Whip It Out, They’ll Cut It Off.

I ran across a study looking at how getting cancer affects finances.  It’s pretty sobering.  First let’s look at the chance of getting cancer.  The risk for acquiring cancer for all invasive sites is 39.66%  or 1 in 3.  The risk of dying from cancer is 22% 1 in 5.  So there is a big risk of getting it and a smaller but big risk of dying from it.  

Here is the result from the financial paper:


Across 9.5 million estimated new diagnoses of cancer from 2000–2012, individuals averaged 68.6±9.4 years with slight majorities being married (54.7%), not retired (51.1%), and Medicare beneficiaries (56.6%). At year+2, 42.4% depleted their entire life’s assets, with higher adjusted odds associated with worsening cancer, requirement of continued treatment, demographic and socioeconomic factors (ie, female, Medicaid, uninsured, retired, increasing age, income, and household size), and clinical characteristics (ie, current smoker, worse self-reported health, hypertension, diabetes, lung disease) (P<.05); average losses were $92,098. At year+4, financial insolvency extended to 38.2%, with several consistent socioeconomic, cancer-related, and clinical characteristics remaining significant predictors of complete asset depletion.

The link above takes you to the original paper.


There was a recent brouhaha over Suze Orman and her attitude on FIRE.  Presented above is a not unlikely scenario.  1/3 got cancer of those  2/5 DEPLETED their entire life assets. 

FIRE is like taking a mortgage on your future.  You and your future own the mortgage.  You pay the mortgage from W2 assets.  In addition you off load your risk of living on your employer.  It’s his job to see you and your family are covered.  His job to match your retirement.  His job to pay for your vacation.  His job to pay for your disability and unemployment insurance.  While you glibly split your W2 into savings and spending.  You feel pretty smug at your “investment prowess”, but your “prowess” amounts to buying some low cost mutual funds and letting the deadly accuracy of American enterprise make you “wealthy”.  You are like a flea on a dog.  You go where the dog takes you.  You can crawl from the tail to the head and think you are so smart, but it’s the dog stupid, it’s the dog not you that is making the progress.

You “retire” early because you notice something about pulling a “number” out of thin air.  Why all ya gotta do is save 25 times that “number” and you can live 30 years off the proceeds.  If you look at this article, you see three faces of retirement.  One with very low risk, one with medium risk and one with high risk.  These risks are expressed by varying degrees of leverage on your future.  As leverage goes up risk of failure goes up.   In 60 year olds case his future was unlevered.  In the 52 year old case moderately levered he needed to make up 15% over 38 years.  In the 38 year old case he was extremely levered.  He had to triple his money, while simultaneously living on his money.  You can create math that supports the RE scenario but you can’t eat math.  You can eat hamburgers.  60 year old is the one with the hamburgers.  52 year old may have hamburgers or maybe Ramen.  38 year old has smoke.  Suppose each scenario gets cancer, 1/3 chance.  Who’s portfolio survives?  The other thing that happens when you retire is you take back ALL of your risk, and just owning that risk is expensive.   Maybe Suze ain’t such a dope after all.

The Hidden Face of Leverage: How to go Broke in the 21st Century

I’m reading a book about middle class failure.  It’s called NOMADLAND Surviving America in the 21st Century.  I’ve searched for FI blog posts about FI failure but find none.  FI is all about travel and travel hacking and minimalism, simple ratios proclaiming assured retirement longevity.  It’s all about starting a blog or some other side gig like real estate.  You know some white collar kinda of “passive income” kind of deal to make you a cool hundred K/yr on the side while jetting to media events.  It’s all about being glamorous and being amazing.  In short it’s all about a narrative that doesn’t include failure.  It’s preached with the fervor of a health and wealth evangelist.  It turns out MMM may not be the first evangelist of minimalism, though he may be the most prominent in FIRE land.  Here is a site CheapRVLiving,   dating back to 1995 this guy spent his life living in a truck and blogging about it.  Pretty minimal.

As I read the book it was full of stories people middle to upper middle class, college teachers, college administrators, accountants, home owners, 401K owners, people with several hundred K in the bank and retirement accounts some pushing a million.  The people are now Workampers, itinerant post 65 year old’s who travel from “gig to gig” like Amazon fulfillment centers.  They walk 15 miles in 90 degree heat a day stooping and lifting to fill pallets with goods to ship to us Prime customers.  They pick sugar beets, and scoop ashes and clean toilets 4 times a day at California campsites and make ten bucks an hour, trying to survive.  10 bux an hour plus a place to park their truck.  Some campsites don’t have showers.  Those are half an hour away.   They get paid for 8 but are expected to do what it takes.  If that’s a 12 hour day so be it.  People lost their dough in 2008.  People got divorced and the savings were split.  Mortgages were due and jobless could no longer make the nut, people just walked away unable to pay.  (I’m 66 and retired).  They drive from place to place, no healthcare, a few bucks for gas, maybe a burrito from Taco Bell living in Vans and Trucks and RV’s.  Entirely different narrative than the FIRE narrative.  It turns out these employers like the seniors because they know how to get the job done.  They are wired to do the task at hand even if their bodies are busted and injured and fried.  They like the seniors because come hell or high water they show up.

It’s a fascinating contrast and so I ask myself what’s the difference?  How can high level executive types wind up shoveling shit in a camp ground instead of swilling stout with MMM at some event?  As I worked through it I think it’s leverage.  People live lives of leverage and they don’t even understand they are levered up.  I wrote an article: “A Graphical View of Retirement”,  and I was struck that the difference in the three scenarios was leverage.  The 60 year old basically had no leverage and could pay for his retirement straight up cash on the barrel head.  He would get some SS likely but he wouldn’t struggle.  He saved for 40 years to cover 30 years.  In the 52 year old’s case his future was slightly leveraged.  He worked only 32 years to cover 38 years.  He was basically bullet proof as well.  He only needed to make a net of 15% on his money over 38 years to compound his money to enough to cover his retirement.  SS would make up most if not all of his shortfall.  The FIRE guy had to cover 52 years, but he only worked 18.  In his retirement he needed his retirement nest egg to triple to die not poor.  Each of these guys has a different level of leverage on the future from 0 to a lot, and each will have a different probability of joining Workampers R Us.  In 2008 people who were slated with retirement aspirations 20 years in the future, were forced to crack the nest egg in the present with no W2 assist on the horizon.  Remember as you withdraw from the nest egg it’s ability to pay you contracts and chances of failure increase.  Their expected age 60 portfolio turns into the age 38 portfolio in a crash and is way underfunded.  People worry about poor return, but this hidden unrealized leverage is just as deadly.  FIRE types talk bravely and glibly about withstanding disaster and how FI gives you “options”, with no experience of failure.  Then comes Hurricane Mike.

It’s about as close as I’ve yet come to failure stories

More Pictures of Risk

There are all kind of popular formula as to retirement.  4% x 25, 3.3% x 30, 3% x 33, and so on.  These formula describe withdrawal rate and are based on longevity.  So what’s the risk?  WR in these formula is all about performance.  No one really expresses risk.

Here is a picture (monte carlo simulation) of a $1,000,000 portfolio, in a Bogelhead 3 portfolio, with a 40,000K/yr withdrawal projected 30 years, and no sequence of return bias and using historical inflation.


The program runs 10,000 simulations and survives 8,679 times.  If I shorten retirement to 20 years survival improves to 9575 times.  15 years takes us to 9915 survivals.  50 years is 7331 survivals.  

Here is with a 2 year bad SORR in the first 2 years, 4% over 30 years normal inflation.  This is how your portfolio would perform if you retired into a recession, or were laid off because of a recession and decided to retire.


You survive 5,914 times out of 10,000

Here is 50 years because you decided to retire early or couldn’t find a job.

You survive for 50 years only 2827 times.

You say BUT I WOULD CUT BACK TO SUPER SAFE 3%!  Here is 50 years at 3%

Better, you survive 6263 Times.  How about if this was a 30 year retirement instead of 50 still retiring into a recession?

Better still!  Your up to 8435 using “super safe” 3% and 2 bad years of initial SORR.  Did you ever read the refrain how FI gives you independence?  You call these last few independence?  Notice the down tick at the beginning of the graph.  This IS a graphical representation of SORR

How  about a Bogelhead 3 @ super safe 3% WR over 30 years with normal SORR? 

9535 certainly safer but super safe?

How about 50 years super safe 3% normal SORR?

8808 successes over 50 years!  That means you fail 1 out of 8 times.

What about 2%  Hell nobody retires on only 2%!

First over 30 years:

Now you’re talking!  9929 successes over 30 years at 2% WR!   What about 2% at 50 years?

9678, almost 97% survival for 50 years at 2% WR normal inflation, normal SORR.  This is why Bernstein says 2% over 30 years is basically bullet proof

These graphs were generated using the Monte Carlo simulator in Portfolio Visualizer.  Monte Carlo does a forward looking simulation of 10,000 probable futures and then statistically orders them in terms of likelihood.  You can decide, but the risk analysis is quantitative forward looking as opposed to “rule of thumb” or historical .  I base my retirement on Monte Carlo. 

No pressure in this post.  Retire at 40?  What the hell!

A Graphical View of Retirement

FIRE types use formula to determine retirement.  It goes “take your retirement amount multiply x 25 and withdraw 4%.  Or multiply x 33 and take 3%.  People think this is “safe” based on looking in the rear view mirror.  A 1998 study looked at 30 year aliquots of time from before 1900 to 30 years ago and judged nobody ran out of money so it must be safe.  The 30 years was expected to cover from say age 60 to 90.  This some how was generalized to save 25 or 33 take 4% or 3% and you’ll never run out of money so once you hit the “number” pull the trigger.  Some problems:  1. Past performance does not equal future result.  2. It doesn’t really make mathematical sense.  Retirement is based on both Risk and Reward, not just projected Reward.  Here is a graph of Human Capital:

The red line represents what your potential earnings capacity is from birth to about age 70.  After 70 consider yourself burned out.  

This graph represents a “Mr. normal retirement”  The orange line is saving and investment from ages 20 to 60, and the blue line is deflation from retirement at age 60 till death at 90.  He gave up a dab of red line earnings retiring at 60 but he accumulated over 40 years and so he has more than  enough to cover 30.  The area under the triangle represents the money you made during accumulation or the money you spend in retirement.  You generated 1.33 times more money in accumulation than you spent in retirement.  He will die with money in the bank and a cushion in case of bad times.  He could guarantee his 1x in TIPS and put .33 in riskier assets and likely leave his kids a nice chunk.  His risk of running out of money is extremely low.


This is Mr. FIRE.  He accumulates from 20 to 38, 18 years and then deflates for 52 years.  He’s hard charger with a great job and lives in his mother’s basement so he basically saves it all.  He gives up a huge chunk of earnings potential (ages 38 to 70, 32 years potential) and he needs to generate twice as much money during retirement as he generated in accumulation to satisfy 52 years.   To generate twice as much money he needs to be in fairly aggressive assets with high risk.  As risk goes up failure goes up.  He waves his hands a lot about side gigs and such but hand waving may or may not generate that extra needed to cover till death do us part.  This guy is essentially retiring in debt.   He is not covered.   He presumes it will work out.

This is Mr. middle of the road.  He retires in his 50’s, say 52 after working 32 years of saving his ass off plus working a second job and spends his 32 years of accumulation on 38 years of retirement.  His retirement money is invested in safe assets which return an extra 6 years of free retirement.   His failure risk is low.  Mr. middle of the road retires a tiny bit in debt but his potential compounding over 38 years should easily make up that difference.   No Walmart jobs starting at age 70 for this joker he has fishing on his agenda.  Remember we consider age 70 as burned out regarding Human Capital.

3 retirements, 3 pictures of risk.  Every picture tells a story don’t it.

Here is another picture of risk.  Wonder which portfolio is best suited to survive this?


My coloring book version soon to appear on Amazon!

Roth Conversion

I seem to be obsessed with Roth conversion.  I’ve analyzed it 68 ways to Sunday, and written articles on that.   My take away was to develop a scheme of the most efficient conversion.  What I discovered is to convert at best efficiency and you have a fair pile to convert you need to be living on cash and it works best if you are married.

Love and Conversion

The tax law is such that being single kills conversion.  A married couple filing jointly can convert much more at a lower rate


Here is a list of maxed out contributions for married and the tax on an equivalent contribution for a single.  Notice the tax bracket creep.  Being married helps to the tune tens of thousands or more.  ALWAYS CHECK THE SINGLE V MARRIED CALCULATION!  In this calculation the deductible is the sum of my over 65 and my wife’s under 65 rates.  If you die your wife will be taxed at single rates and have a single deductible which means her taxes will be far higher than while married for a similar income.  You have to plan your portfolio deflation accordingly because Uncle Sam will happily take her dough.  In addition after your death her SS will decrease so taxes go up and SS goes down meaning a bigger strain on portfolio deflation.  Filling only to the 12% level doesn’t convert enough money to dent the tax burden of bigger TIRA.  

The Time of the season

Till 2025 taxes are favorable, but the tax cuts are temporary!  If you can, make hay while the sun shines.  I spent months optimizing the most efficient conversion strategy.  It turns out best conversion is in the years just prior to RMD, or when you can live off cash and are no longer funding IRA’s.  If you planned for conversion, you can free up some cash to live on while using all of your tax bracket to convert.  The number of years and amount you need is based on IRA size.  If your going to convert the whole shootin’ match of say a 1.7M IRA your best conversion is 340K over 5 years.  Your tax bill will be $321,000.  Past the top of the 24% bracket things start getting drained by the tax man pretty quickly.  If you plan to live on 100K per year you will need 821000 in available cash to effect your conversion.  You would need 500K anyway to live on so the extra risk is only 321K or an extra 64K per year.  You plan for that during accumulation, and if you do it right part of that 321K will be from interest,

If you put 10K per year away for 20 years at 4% that’s 320K at the end of 20 years, 34% of which is interest.  But wait there’s more!   If you start at age 30 and put an extra 14K per year away for 20 years at 4% that will virtually pay for the entire 5 year Roth conversion including 100K/year living expense and 64K taxes/year starting at age 65.  14k/yr for 20 years @ 4% grows to 450K.   34% of that money is interest.  450K for an additional 15 years @ 4% with no added money is 820K meaning your Roth conversion would only cost 280K,  (20 x 14k) including 5 years of living expense.  If that isn’t magic, nothing is!  Essentially your 820K Roth conversion would be paid with 2/3 interest and 1/3 principal, and your non Roth conversion portfolio would continue for 5 more years of compounding untouched.  As long as you’re married filing jointly you can pull 100K/yr out of a taxable account with no cap gains tax.  In the mean time since you don’t need SS because you saved and have all this interest to spend, you can let SS ride to age 70 when you will get a bigger payout.  I hear people call SS gravy.  Not this daddyo, I call it red meat.  A larger SS means my therefore smaller WR becomes bullet proof.  

You can fund over longer or shorter periods but it’s hard to live on cash for say 10 years while doing funding.  Longer periods of funding tends to be in smaller amounts per year so you do save some taxes.  Part of the reason I retired was so I would have adequate time to do my Roth conversions efficiently.  Best choice ever!

Discovery is in the Details

My Original plan was to convert 100%.  I consider those taxes already belonging to Uncle Sam.  The problem with waiting is Uncle Sam controls the tax rate and RMD forces you to withdraw.  If you’re forced to withdraw A LOT and taxes go up you pay A LOT in taxes.  Taxes are low till 2025 so my inclination is to get them out of the way.

This is an image of how RMD works the red line is ROI with RMD.  The black line is ROI with Roth conversion.  RMD continually increases and therefore taxes continually increase causing the slope of the red line to fall off as time goes on.  The black line however shows what happens when you pay a chunk to start and then let the ROI recover.  Eventually black beats red.  It takes some time but if you live long enough it pays, and when it pays is significant.  If you don’t live long enough you die with less than if you didn’t do the conversion, but your wife will reap that black line benefit.  It starts paying just when you might need assisted living or some significant medical expense.  This is a kind of sustainable self insurance.  Yes you may need to forgo yet another trip around the world to pay for the conversion but when you need memory care that trip around the world will be long forgotten.  (it turns out the black and red lines are also a pictorial of what mildly bad SORR looks like).  The above pic dramatizes the differences between early SORR (black) and late SORR.  In my own portfolio I ran actual quantitative curves,  holding all other return risk stresses constant, the early SORR portfolio (black) outperformed the late SORR portfolio (red) by close to 1M over a 30 year horizon but it took something like 15 years for the lines to cross.  

As I was working through conversion it became obvious the highest risked assets needed to be converted first, and lower risked assets each succeeding year.  In other words convert the AMZN before you convert VBMFX.  VBMFX is the last to go.  I have virtually all of my bonds at Vanguard in IRAs except for some LTIPS in a  FIDO IRA.  As I was reading through the tax code I found out there is a 3.8% surtax attached to income above 250K jointly.  Homey don’t like surtax so I re-evaluated max conversion.  In addition there is an increase in monthly medicare expense.  Regular folks (170K jointly income) pay 134/mo.  170K to 214K folks pays 187.50/mo, I pay 348/mo because I made too much money in 2015 (267K to 320K range).  I can save over $1500 per year in medicare expense.  Over 5 years that’s 7500.  In addition by limiting my conversion to 250K,  I save the 3.8% surtax and quite a bit of taxes upfront from not converting at 340K/yr.  What I discovered is by converting 250K x 2 and then 214K x 3 I can convert about 1.1M of risky assets, take advantage of medicare savings the last few years before RMD and avoid a 3.8% surtax.  My total tax bill drops about 150K.  What I am left with is 600K of bonds in the IRA.  If bonds pay 3% my RMD is about 25K/yr on the average. The Roth will continue to compound during conversion so with 1.1M converted over 5years as described at 4% return I will have 1.6M in the Roth when I turn 70.  I have the rest in a taxable account with a big chunk of LT cap loss to pair against cap gains.

Our combined SS will be a little over 50K and my RMD about 25K,  My living expense averages 109K/yr so I only need tap my taxable account for 35K per year plus taxes.  Taxes look like they will be $4600 and once I get this rigmarole done medicare will drop back to 134/mo.  I will never have need to touch the Roth so it will just sit in the background peculating, and my 150K tax savings also sits in my taxable account gathering interest.

One other small detail.  I don’t recommend using “timing” but if the market happens to be down, it’s an excellent time to convert.  A smaller portfolio generates fewer taxes, and the conversion can recover in the Roth as easily  as if left in the TIRA.  Roth conversion can no longer be re-characterized so once you do it, it be done.

Angels (not devils) are in the details

This post demonstrates what happens on the other side of accumulation.  Your goal becomes all about efficiency and what I call parsimony, making the best value out of what you have.  You don’t want to let the air out of the portfolio balloon too soon and you certainly don’t want Uncle Sam letting it out for you!  This is my present Roth conversion strategy.  Convert the stocks, RMD the bonds, compound the tax savings from not converting the bonds, avoid extra taxes and Medicare penalties as much as possible.  Efficient conversion however depends on planning during accumulation.  If you can make it happen, that accrued interest can’t be beat. 

FWIW here is an article

Trying to figure it out

I just installed WordPress and it’s a completely different experience than my old blogging software.  More intricate, more powerful, less boilerplate.  The learning curve is moderately steep.  My old blogging software was simple.  As I work through the jot’s and tittles it occurs to me the experience is not unlike retirement.  Pre-retirement is simple.  Spend less than you make, put what’s left in some type of investment account, sit back and let the deadly brilliance of corporate America compound your money for you.  You control the investment amount, you control the timing.  The market controls the rest.  Retirement is like WordPress.  Lotta moving parts.  How long is retirement?  What about return?  What about risk?  Do you have enough?  What about taxes?  Medical cost?  The rent?  How much does all that cost?  Which brings us back to do you have enough?  

I’m past accumulation and into deflation (a word I prefer to distribution).  I  did my part, pulled the train, and now it’s time for discovery.   I read a lot about plans and projections, but not that much about the rubber meeting the road.  I read the pipe dreams of the W2 types pulling numbers out of thin air, but I don’t read all that much by actual retired folks living off their squirreled away acorns.  I read about side gig this and scheme me that  but not so much about what that pays.  I never read about failure, just projected success.  Failure is what happens when projected success doesn’t work out.  Study of failure is how you assure success.  You study failure and then don’t do that.  Success and not projected success is what pays the rent and buys the hamburgers.   I read an article analyzing a report this morning that looked at retiring middle class Americans .

 I’m one of them.  Hopefully I planned well.  I haven’t read the study because it’s not referenced but it gives me pause to read 75% of workers plan to work past retirement age.  If this the face of failure?

I’m a little jazzed at getting this thing to post and it looks pretty good!