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.

Living in a Bayesian Land

Thomas Bayes was born in 1701 and dies in 1760.  He developed a statistical theory called Bayes Theorem.

I have read Bayes Theorem is the most tattooed theorem in the world.  Bayes was a Presbyterian minister and Presbyterianism is nothing if not about determination.  Yet Bayes approach is about probability.  Every other statistician of his day was about calculating the odds.  If you have a box of 20 black and while balls what’s the chance of pulling a black ball?   Bayes OTOH asked the question how to you come to know a better level of belief called the Posterior belief. 


If you have an old belief (prior) and no new evidence you have an old belief (same odds).  If you have new evidence that is reliable evidence then the belief changes and a new belief occurs (posterior odds).  The change in belief therefore is contingent on the reliability of new information.  Therefore you need a prior and you need evidence and the result is not deterministic but statistical.   

Let’s say you’re a FIRE type.  You bought MMM’s BS about “simple math”.  Let’s look a little deeper at “simple math” based on probability of success.  Boggleheads LOVE their 3 fund portfolio there are all kind of stanza written: low cost, you can’t beat passive index, FA’s suck, DIVERSIFY DIVERSIFY DIVERSIFY!    Then you pick a “number” out of thin air and apply simple math say 4% x25.  Lets say the “number” is 1M for easy calculation and conceptualization.   You choose a bogglehead 3 portfolio based on the “internet”.  You wouldn’t know a BH3 if it came up and bit you on the ass but that’s what Joe the Plumber uses and after all Joe is a plumber and knows how to braze copper pipe in a way that doesn’t leak, he MUST be a wizard!  Here are the survival chances of 1M, with 4% WR standard inflation and SORR for 30 years on a BH3:

Note as early as 15 years this portfolio starts to flunk.  You have a 86.87% chance of survival.  It means you’re broke 1/8 times.  It means 1M is not enough for a 4% WR and you need more or a side gig to reduce the WR, aka you need a job in retirement.  Let’s go from a BH3 to  a 50/50 VTSMX:VBMFX portfolio.  Note this portfolio has the same 50% VTSMX AA as the BH3 but reduces risk by substituting risky, highly correlated VGTSX allocation for a greater % of the non correlated VBMFX.  This 50/50 portfolio reduces the risk of the overall portfolio compared to BH3 and lives on the efficient frontier.

Same 1M, same 40K/yr withdrawal, same SORR and inflation, less risky allocation 98.46% success!   You’ll be dead well before this portfolio flunks.  There isn’t a hint of trouble till year 27.   This portfolio is based on the efficient frontier and Bayesian statistical analysis not Joe the Plumber’s dirty thumb nail analysis and MMM’s simple mindedness.   This portfolio is “enough”, survives nearly 99/100 times, and needs no side gig to pay for the added risk of stupid assumptions.  This is the power of quantitative analysis instead of the unproven narrative of internet fever dreams blasted at full volume into the FIRE echo chamber.     Hmmm… maybe Bayes was about probable determinism.   

As I think about this, this example is a systematic way to look at Suze O’s freakout and the recalcitrant FIRE response by reciting the “narrative” like it’s the Apostles’ Creed.  It turns out both formulations of the problem were wrong,  FIRE’s simple minded brain dead narrative and Suze O’s imprecise hand waving risk analysis.  You don’t need  10M and your money won’t survive by paying for your leverage with with too much risk. 

Bless you Thomas Bayes 

The Old Chain Saw

I wrote a post on Dobermanns of the Dow  looking at a particular screen of the universe of DJIA stocks.  The screen uses Return on Equity and Free Cash Flow and some winnowing criteria to knock out 20 of the stocks and leave you with the “best”.   It’s a value play in that the screen is designed to buy low and sell high, but ROE and FCF allow for using quality and not just cheapness as the criteria.  Being a risk adjusted kind of guy I added some bonds for non correlation and put the picks on the efficient frontier.  The result was this:

 A list of 7 DJIA  stocks and a Bond in AA ratios that place it on the Efficient Frontier.  I decided to see what old Mr Monte Carlo had to say about this portfolio, so I stuck the stocks and the bond in the blender and pressed high:


9978 times out of 10,000 the portfolio succeeded over 30 years.  The WR was 4% at normal historic inflation and no SORR stress

I stressed with the first 3 years being the worst 3 years of return.  This would be like retiring in Dec 2007 kind of scenario still with 4% withdrawal and historic inflation

The portfolio survives 9851 times out of 10,000 for 30 years at 4% WR with terrible SORR. 

Here is 5 years SORR worst case stress:

We still survive 9 out of 10 times (9245/10,000) at 4% WR.  Let’s try 3.3% WR, same first 5 first years worst case SORR:


Back over 99% survival (9940/10,000).  What if we go to 50 years of payout?

3.3 WR @ 5 yrs worst initial SORR allows 50 years of benefit success 9 times out of 10.  Pretty amazing!  What if we go back to normal SORR, 50 year payout normal inflation and 3.3% WR?

Back to 9970/10,000 successes, all from 7 stocks and a bond.   Would I buy this?   This doesn’t analyze the Dobermann’s results.  It analyzes 1 year of the screen, the past year 2018 which has been nothing to write home about, in fact it’s underwater.  I need more info but it looks interesting.

The Dope on Burnout and The Race of Life

You read a lot on burnout in Physician land.  There was an administrator at my old hospital who had an MBA and went to med school in the Caribbean and got her MD.  She didn’t do an internship or a residency and she held no license but she still was used as an in road into the physician community by the hospital.  One time there was needed some kind of physician to sign off on some kind of workup in the hospital and I heard her telling her boss the CEO “we’ll just get some physician in the hospital to do it like the Anesthesiologists”, like we were just sitting around on couches waiting to be called to do a H&P on someone.  This kind of points out the typical MBA’s perspective as physicians we be grunts.  It’s a well known fact most physicians will sell their souls for a free ham sandwich from the drug guy.  The MBA’s are jerks but nothing if not masters of manipulation “I’ll give you a quarter to hop on one foot 10x” and so systems develop that are about coercion and doing more with less.  Enter the bell curve.


A physicians life is all about this curve.  Notice its shape 34% is a big area 13.5% less than half of 34 (40%) of that 2.5% less than 1/10 of 34 and about 1/5 of 13.5.  Notice the X axis intervals these are equal.  This means for the effort it takes to go from 0 to 1 you get a 34% return.  From 1 to 2 a 13.5% return a 200% increase in effort from 0 for 40% more return.  2 to 3 a 300% increase in effort from zero for a mere 10% extra return.  It takes a lot of horsepower to get to 300%.  This is called diminishing returns.  To get into med school you had to walk down the curve and as you descended your effort went up.  Then you got into residency and it went up more.  Then you became attending and it went up even more.  You started getting paid for your effort pretty well but still running at 300% takes it’s toll.  The MBA’s would like you to run at 350% so they incentivize you with ham sandwiches and of course you’re a codependent people helping dope and agree to eat the ham.  You think the extra effort is linear but in fact it’s Gaussian it is in no way linear.  Each of us has his/her natural/mental/physical limit.  Each of our families have that as well. 

The solution of course is to walk back up the curve, tell the MBA to go pound sand, he’s just a sniveling drunk anyway, and move back toward 200%.  How many of our colleagues follow this exact path into perdition and how many retrace back to health, because running at 350% clearly is a distorted way to live. 

Another interesting thing happens.  If you watch your P’s n Q’s you can save a little along the way and a little turns into enough.  At enough your 200% effort might start to look like risk.  At some point you’re going to pull the brass ring, so now the question becomes how much risk is too much risk?  At some point you realize every day you practice you are adding only a little dab onto your pile (diminishing returns) and that brass ring is looming somewhere out in your future.  Pretty soon you decide to hell with it all, enough is enough, time to do something else.  You’ve been living a 1 SD lifestyle while making a 2-3 SD wage.  You become used to the security a 3 SD wage provides and freak at the idea of living a 1 SD life on 0 wage, substituting your pile for your wage.  This again becomes a bell curve problem.  One thing to realize you’ve already been living a 1 SD life, so the question really is how much is enough?

Enter the Bell again!


But in this case the numbers start going negative from zero and it becomes a race to understand if portfolio deflation is going to over take all they days of your life.  It’s a weird race, the way you win is to die.   It too is a Gaussian problem not a linear problem, yet linear solutions are often proposed 4 x25 is essentially a linear solution with a small fudge factor (compounding) built it and a big risk factor (SORR, over deflation and longevity) built in.   

Look familiar?   For men we are quite likely to die by 99, we’ve been dropping like flies for years.   For women however maybe 15% on this chart are still kicking at 99 waiting to die, clearly not a linear problem.  Somewhere in this mishmash is parsimony the best result for the least risk.  Since planning for yourself necessarily implies planning for your wife, plan accordingly.  Marriage, it’s a double bell whammy! DING A LING  At least this fleshes out both problems of burnout and retirement deflation risk in terms more akin to reality.  Knowing your enemy is critical to success. (A quote frem Sun Tzu or Napoleon or Julius Caesar or one of them jokers.)

Lemme see if I just max out my pre-retirement accounts and invest in low cost index funds…….  I CAN QUIT MY JOB AT 30, RIDE MY BIKE, BE JED CLAMPETT AND HANG OUT BY THE CEMENT POND!!!  whee doggie  It’s shockingly simple, shockingly I tell ya!

The Old Saw

The old saw is you can’t beat the market!!!   But in fact people do it every day.  I bought BTC @ $275 3 years ago and am up 1250%.  The old saw is invest in low cost index funds….  Studies have shown low cost index funds beat actively managed funds bla bla bla.  True enough but actively managed funds do not constitute the universe.  What if you don’t invest in “funds” but invest in stocks?  The old saw says: diversity, diversity I tell ya!  It’s your savior!  

Looks to me like diversity isn’t cutting it.  The arrows are pointing into the ground.  Notice the YTD return is -0.79%.  I was reading an article on the Dobermann’s of the Dow  which is a screen of the old Dog’s of the Dow.  The dogs theory was a value play on the Dow stock universe.  When picking you don’t screen 3800 stocks you screen 30.  The 30 are the best run companies in the world.  The 30 are adequately diversified and cover all sectors well.  The 30 have killer management.  The 30 if they flunk get kicked off the team and sent to the hinter land to be replaced by creative destruction. The 30 are analyzed 10 ways to Sunday so there isn’t much in the way of catastrophic surprises.  It took GE nearly 20 years to get the boot after Jeff Immelt choked it to death for most of those years.    All of this implies much risk management is done for you.  

The The Dogs screened share price and yield on the 30 stocks once a year andyou bought the 10 lowest priced highest yielding stocks.  I did a calculation once and found over 40% of the Dogs return was based on dividend, only 60% on capital appreciation.  It’s a value play because you are buying stocks cheap, buy low sell high.  Sometimes cheap stock means out of favor sometimes trouble is brewing and the Dogs screen doesn’t sniff that out.  

The Dobermann’s OTOH are screened for Free Cash Flow, as in a river of revenue, and Return on Equity which is a measure of productivity and quality.  This gets to some extent to not what is the cheapest stock but what is the best bang for the buck stock of the 30.  The choices are winnowed by screening and elimination until 10 remain.  You buy those 10 every year, replacing those not still on the list from last years purchase.  Not very expensive to own either @ 5 bucks a trade if you turn over all 10 stocks once a year it’s $100 even on a $5M portfolio.  So how’s it work out?

 510% better than the index over 20 years.  It paid off 17 of those 20 years.  Not Bad!

I put the issues into the EF calculator at equal percentages 

17.56 expected return @ 16.18 risk   A lot more return and a little more risk compared to S&P 500!  I then decided to look at adding a bond fund.  Right now I’m in VBIRX so I added that in a 50 bond/50 stocks  AA 

It tamed things down considerably.  This would be a good portfolio to weather early retirement.  It has reasonable return and pretty low risk and is cheap to implement and re-balance.  This portfolio is not on the efficient frontier so I let the calculator do it’s work and create a portfolio on the EF

With the same 50/50 bond stock mix, the return is now almost 9% and the risk is virtually the same.  The calculator picked only 7 stocks and the bond not 10 and a bond and it adjusted the % of each stock in the portfolio to park me on the EF.  

The S&P YTD is down -1.35%

When I did a weighted analysis of the 7 stock 1 bond EF portfolio, it’s YTD return is +4.54%, compared to the venerable S&P 500’s “well diversified” -1.35%.    I’m thinking strongly about pulling the trigger on this for a couple hundred K next year and see how it does.  It’s 50% in bonds which are safe, and 50% in super well managed stocks which though volatile are also safe.  HD MRK and VZ are not going out of business.  I have some Roth money just begging for this since I can trade to my delight and incur no penalties.  The low risk is what attracts me most given the market turbulence and if Bond yields go up good deal, I’m in short term paper and will see the benefit of that.  I can’t see much downside.  

Here are asset statistics and correlation statistics

Note the good degree of non correlation between these companies

THIS IS NOT INVESTMENT ADVICE just my latest musings

Liar Liar Pants on FIRE

I notice an underlying theme within the FIRE community about work.  What is work, what is retirement?  Do you ever stop working?  Work is required!  Not working is not optional!  Is a side gig work?  Is a side gig retired?  I got real estate!  I got a prune farm!  At least the guy with the prune farm is regular.  It seems the 40 somethings are most flummoxed by this retirement idea.  It seems they know they are squandering their productivity and feel guilty about it while steadfastly trying to maintain the delusion.  There are all kinds of virtue signaling like “I work (drink coffee) in an animal shelter half day a week” therefore I’m still somehow productive.  I quit my highly productive job as an engineer and now I spend my day sending prose into the ether while my wife still slaves away for the man.  It’s how we have health care man, plus she likes it!  No what she likes is having healthcare while you sit on your ass pumping prose to nowhere.  And it’s always some internet straw man that is harassing them about their lack of productivity.

It turns out serotonin is probably not related to depression but related to social status.  Serotonin is biochemically what makes you engage in the pecking order and keeps you engaged.  It happens when you reinvigorate serotonin by taking a SRI like Prozac the re-engagement in the pecking contest looks like the lifting of depression.  Lowered serotonin makes you withdraw from the pecking contest and you just kind of accept your fate somewhere on the social ladder.  Some people accept their pecking fates at 20, settle and just attend to living their lives.  This is the hard charging  40 somethings dilemma.  They want the status of being a pecker but they don’t want the hassle and they don’t like settling and they don’t like the guilt of being the dope in the jammies sending all that really important prose to nowhere regarding the blood sweat and drama of their investment hobby. 

I read no less than 3 posts this weekend admonishing sitting on your ass doing nothing complete with YOU SHOULDs!  and dumb assed comment like “life doesn’t just end because you’re retired”, all of it directed toward their guilt their life has ended and they are no longer relevant to the world of real productive work, the work that pays the bills, move investment portfolios forward, saves lives, wins valuable prizes.  Substitutes like blogging, virtue signaling volunteer nonsense going back to school bla bla bla does not improve the GDP.   I think there’s a part also related to the fact FIRE is at some level a con job and the one being conned is the FIRE bug himself.  

Here is a typical age 60 retirement the area under the red line is expenditure of human capital to age 70.  After 70 you’re pretty well burned out.  Age 60 throws away a little of his human capital, the orange part under the red line.  He amassed a fortune over his 40 years of work (purple) and will spend 30 years spending his fortune (orange)  He saved so well he could afford to retire a little early and throw away some human capital because he had more than enough.  The purple area is > than the orange area so his life is not leveraged.  He doesn’t care about working anymore.  He has the cash and doesn’t need the status or the cost of that status.  He has no guilt, and goes fishing 4 days a week, golf on three. 

Age 50 is in pretty good shape but he’s playing the odds.  His need (green) is bigger than his pile (purple) so he’s going to need growth to survive.  He threw away a pretty big chunk of human capital (green area under red line) but bought into the 4 x25 investment club narrative.  If he doesn’t crap out he will probably make it.  Bad  SORR maybe not.   At 50 he feels guilty at loosing his status so he writes a blog and keeps repeating the narrative to convince himself everything will be OK.  He also buys into a new social order and reinvigorates serotonin since he can now play in a new pecking order.  Being in a pecking order feels good so is investing hobby takes on greater import.

Age 40 has a high paying hard charging job so he makes a lot of dough early.  He throws away a huge chunk of human capital, so much so he has to twist and turn in the wake of that waste.  He is also very leveraged he has a little accumulation triangle (purple) and a big deflation triangle which needs to be filled with money.  He is very leveraged but he denies the importance of that.  Like prayer beads he repeats 4 x 25 4 x 25 4 x 25 but inside he knows the risk is pretty excessive.  He hasn’t figured out all the vagaries of tax consequence and asset allocation and keeps quacking “diversity, I got diversity  tell ya!” like that’s going to save him.  This guy is so uncomfortable about his plan he is always into gigs to try and reduce the leverage. It’s kind of stupid since if this hard charger had worked another few years he’d be much closer to his age 50 counterpart but he wanted the prestige of being “retired” at 40.  It’s hard to eat prestige when you’re 60 and no one cares when you retired. 


 Age 30 this guys delusional whether he rides his bike or not.  No point in analyzing crazy.

 So it’s not about work work work. It’s about understanding how you feel about your net worth and social situation and coming to terms with the situation you’ve placed yourself. I’m done with work and  don’t need work to realize some serotonin driven pecker drive. I’m old enough society expects me to be retired and I’m wealthy enough to be leverage free.  I retired at 58 and again after 65 and have purchased myself maximum freedom to explore or not.  Not working and no money concern is a blast.  It’s the end game of a plan.  Telling me I “need to work” to find fulfillment just points out to me your level of insecurity and lack of insight.  Homey already worked, he done with that nonsense.  Be honest with yourself and you won’t feel compelled to tell me what I need to do.  What you are really saying is what YOU NEED TO DO.

The Budget

I wasn’t sure how retirement was going to work.  It was all based on guesstimate, projection, a wish and a prayer.  I pretty well knew what I was spending a month while employed about $13,500/mo and that went to 2 kids in college, funding retirement. the cost of being employed, my wife’s side business and charitable giving.   Retirement brought a lot of changes.  One kid graduated and launched, the other continues in college, we went through a hurricane and sustained some damage from that, I stopped funding retirement and reduced some charitable giving, and settled into a lower cost life style.   After doing some reading I found people do well with 75-80% of their pre-retirement income so I built around $10,000/mo.  I could easily “afford” my old number based on all of the calculators so I had some leeway up if necessary.  

There were a couple initial expensive months.  Months where insurance on 4 cars came due, tuition for my daughters last semester had to be paid, a car for her launching had to be purchased, an escrow for her to get an apartment where she was working needed to be funded, property taxes and home owners insurance,  I had to replace 2 air handlers and compressors in my A/C system etc.  Much of it I had pre-planned and funded prior to jettisoning the W2.  My daughter also spent a semester abroad and my wife and daughter toured 5 cities in Italy last Christmas.  Making a plan for the pre-pay was critical.   Pre-pay takes some heat off of early SORR risk.

 A few months into retirement after all the dust settled, Christmas was over and college was paid for I ran an experiment to see what belt tightening felt like.  You always read “we’ll just tighten out belt if the bad times come!”  So what the hell does that mean?  I was living on less than the $10K I had allotted somewhere around $8K/mo or 20% less than the 25% less I settled on as my “Budgeted amount of $10K.  We took it down to about $6400/mo.   At this level I needed to start planning payments like car insurance and the travel budget was curtailed.  But neither I nor my wife felt particularly constrained we just had to be mindful.  This was an important data point for me.  At this point my biggest line item was insurances and insurance was a number that could not be contracted, same with taxes.  Food had some flexibility as did driving, so I could tell there was a lower limit where “belt tightening” became not only uncomfortable but debilitating.  

After a few months of that we loosened up again but never to $10K/mo on the average.  Over the past 16 months the average has been a little under $8K/mo even with fairly generous kid related expenses.  By operating in the 8K/mo zone If we want to splurge we simply save up the $2K/mo differential between $8K and $10K till we have enough otherwise we just bank that differential.  Initially I was very anal about watching the cash flow because I didn’t know what to expect.  After a year and a half I do know what to expect and anal-ness has given way to automaticity in that the budget largely runs itself without much need for input.  Big expenses now are related to Roth conversion and taxes will dominate the line items for the next several years but all of that is already accounted for.  In addition I’m living off cash during conversion so stock market swings are not part of my day to day thinking.  After Roth conversion SS commences and I will leave some money in the TIRA as opposed to total conversion to the Roth.  This reduces the tax bill while still dramatically streamlining taxes going forward.

It turns out the tax code seems to be written around a RMD on an approximately $600K portfolio.  If you have $600K in bonds @ 3% the first RMD is $21K rising to $28K in the 10th year and $31K in the 20th year.  If SS generates 42K taxable the first year and grows at 2% inflation it will generate $63k taxable 20 years in the future so the age 90 taxable income is about 94K still in the 12% bracket married filing jointly, and cap gains on money you extract from a taxable account is zero up to $104K and only 15% on dollars over 104K.  If you have some tax loss harvested you can write off the TLH against the 15% for zero tax,  highly efficient.  If you have a $3M TIRA @ 6% it will RMD $109K the first year, $189K the 10th year and 290K the 20th year.  Mixed with SS in year #1 your taxable income becomes $151K the first year well into 22%, $241K the 10th year well into 24% and just below where the Medicare surtax kicks in.  At this level they charge you triple for medicare parts A & B as well.  20 years in you are paying taxes on $350K into the 32% bracket plus the surtax.  Your tax bill is almost $70K/yr.  If you die at the same SS level your wife would pay 95K/yr in taxes on $350K of RMD.  So you can see taxes are quite progressive and the rich definitely get soaked.  Those are some of the moving parts.  You can combat much of this bracket creep by Roth converting for a few years prior to RMDto get the TIRA down to about $600K and putting that $600K at least in part as the bond portion of your portfolio.  

With this kind of well funded and tax streamlined plan SORR is reduced.  By living on cash during Roth conversion the portfolio is pretty closed to SORR and by controlling taxes as well.  Roth conversion does constitute some SORR on it’s own but that risk is overcome later in retirement due totax savings.  In addition living on cash reduces the AA which is a good thing to combat SORR early in retirement.   As cash gets spent down for living and taxes your AA glides back up in aggression automatically also desirable.  I figure you already owe those taxes so getting uncle sam out of what little hair you have ASAP is a good thing. I never budgeted formally while saving but I was a diligent saver and investor.   Now that I’m retired and deflating my portfolio I find some pretty well defined budget knowledge invaluable.  It doesn’t run my show but it gives me a quantitative picture of cash flow.

Casey Jones you better watch your speed.

Hit to Hit Back to Back!

Bringing it down with the solid soul sound!  Gasem does a podcast.  

I’m a regular poster on Doc G’s website  Doc G has been kind to me and allows me to comment, often extensively, and I comment within what I consider my license.   Doc G is a successfully entrepreneurial character something I respect and something I consider uniquely American though not exclusively American.  Here regardless of status you can experiment with inputs, time, energy, money, intelligence, drive, risk, and build from that success.  Much of FIRE is about formula a kind of cook book set and forget approach to investing.  It’s unclear to me if FIRE investing actually works or if it’s mostly hype and projection and hobby.  A projection starts out small and by the time it hits the screen it’s big.  A projection starts out with crisp fine detail but by the time its big it’s definition is fuzzy.  Neither projection nor it’s screen image is real because it’s just a projection.  FIRE’s formula purports projection and expects the projection to be considered as in fact reality.   So it’s a kind of denial, but still there is information contained in the projection so it is a useful fiction.  

Doc G’s approach is to unpack different aspects of his take on the projection compared against his success (which in fact is real and not projection, and he is nothing if not successful).   So it gives the reader a contrast from which to judge based in some reality.  It’s not so much a cook book as a report on what the recipe produced in his case and tweaks he may have done to the recipe, so his site offers something between experience and dogma, while some sites just preach dogma.  Dogma is not truth, the result of following and tweaking dogma is truth.

My bent is to further try and tweak the truth through my experience in achieving a fully functioning retirement which was largely not contrived by bogglehead dogma but by a different path.  The dialectic between my experience and his experience therefore hopefully further elucidates the truth and improves the fidelity of the projection so the reader comes away with a bit more clarity from which to make his own judgement and the experience is provided for free, and out of a commitment to forward progress. 

Doc G and Paul Thompson started an ambitious endeavor called “What’s up Next” published on the Doc G website in order to explore aspects of FIRE life and FIRE media.  The last published cast was on children and retired or semi retired parents and how to approach money with your kids.    He invited me and Vagabond MD and Susan from FI ideas.  We are prolific “commentators” and his interest was to explore the world and motivation of commenting.  It was fast past and quite professionally done.  I’m more of a writer than a speaker so it took me somewhere else in this journey.  It was good to put face to intellect as I read these commentators quite often but have little else for referents.  The podcast functions differently than a blog, it’s more like a discussion at a bar or a dinner table, equals engaged in dialogue.  Doc and Paul put a lot into the production and I was quite satisfied with the experience.  Keep an eye pealed for What’s up Next!

Retirement Blueprint or a Tale of Two Portfolios

The usual saw is save 25x spend 4% and Bob’s your Uncle.  Nothing of course is said about spending because spending is left to daydreaming.  Lounging on the beach, traveling the world hacking credit cards, starting a little bizzy on the side to make pin money, why I can feel the Tahitian breeze and taste the Chipotle Tequila Colada as I write the words.   

Then you think about your parents and aunts and uncles and grand parents and great grand parents and realize they are either dead or in some stage of dying, not all at once but eventually they start dropping like flies.  Guess what’s going to happen to you kemosabe and it’s going to happen to your wife too. It’s inevitable, just like taxes and it ain’t necessarily cheap.  I wrote a post on it here.

 Your chance of getting cancer for example is 1/3 and once got, your chance of dying is 1/5.  That means 4/5 live, but whats the quality of life and cost of palliative care if any?  Your chance of being wiped out financially is 42% and the average expenditure per year is $92K and your odds are the same as your wife’s odds meaning the odds multiply.  You could of course draw the royal flush and both become terminal together which would wipe you out twice as quickly.   So the Trinity plan was $40K per year with enough leverage to extend your 25x out to 30x  or maybe a little more in case the dreaded early SORR come up and bites you on the patootie.  You of course are the master of the universe, save half and retire early.  You’re leverage balloons since instead of making a mere 5 extra times, you now need to make 25 extra times to cover your extra 25 year extension added onto your original retirement.  Why do you think early retirees have all their dough in stocks?  Because it’s the only way to make the excessive leverage needed to reach nirvana.  They talk a good game about very long averages bla bla bla.   No one has the real skinny on a 50 year retirement.

But wait you say I have real estate to which I say good deal.  But wait you    say I’m a media mogul my blog clears 12K per year to which I say I’m digging that.  But the deal is where does the  $92K per year cancer money come from?  Being sick is expensive and you can’t substitute aspirin for chemo and rads and surgery.   Where especially does it come from when what you have is already levered out the wazoo?   Who’s paying for your ol’ lady when you used up all the cash?  And oh yea the government wants those taxes you deferred NOW.  They have a boon dogle to fund or some paper pushers  age 50 retirement.

You embarked on the retirement with a plan priced to perfection, and you threw away 25 good earning years in pursuit of leisure.  One method to come up with $92K is to save for the eventuality in fact likelihood of this scenario.  You do that by completing your retirement portfolio and then embark on creating an insurance portfolio, 2 separate portfolio products.  The retirement portfolio product pays for retirement.  If you want Tahiti, stash enough in the retirement product to pay for Tahiti.  The insurance product is there to pay for the $92K haircut independently from the retirement product.  Both products consist of principal and interest.  You can fund them serially or in parallel to taste.  I won’t go into detail.  When the FIRE community got pissed off at ol’ Suze O, this scenario is what she was taking about.  Either FIRE or Suze is in denial and I’m not talking about rivers.  As for me I have an insurance portfolio carved out of my net worth.  It cost me about an extra $1.2M reached by age 70 to satisfy my conception of security.  It consists of both principal and interest.  It’s wrapped in Roth wrappings and will continue to grow side by side with my retirement portfolio.  It will remain unmolested until one of us pulls the brass ring when it will kick into gear.  If It grows excessively (praise God) I can drain a little for a retirement rainy day, like the retirement account running out of money.   At that point it’s all purpose insurance.  I’m not paying an insurance company for my insurance, I’m paying myself.  Pound sand Buffet!