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!

On a Postcard?

I went into Locums practice in 1991 after I got out of the Navy.  I’d always been an electronics geek and had built a few computers.  In those days it was Z8o chips and then Commodore, and hacks on the motherboard to make the peripherals work.  It was a command line interface where you used arcane commands like: COPY D0,”FILE 1″ TO D1,”FILE 2″ to copy a file from disk drive 0 to disk drive 1.   Primitive, slow but computing none the less.  When we went on the road I realized we needed something better.  I needed to log my finances, pay my taxes, create a savings plan.  So Gates and  CO had purchased a “DOS” product from some guy and set about porting that O/S over to the new IBM PC x86 architecture.  I bought a cheap laptop (probably $2000 in those days) out of Computer Shopper likely of Japanese origin .  It was a 386 SX16 with 2mb of memory and a 10mb hard drive and a 12″ black and white panel.  I put DOS on it and bought a program called MS works which had a word processor and a spreadsheet and a way to navigate the file system without COPY D0,”FILE 1″ TO D1,”FILE 2″.  I also bough a disk based tax software called Andrew Tobias TaxCut from MECA software.  They also had Managing your Money which was a generic business and aggregating package, a cross between a database and a spreadsheet, all DOS based.  TaxCut had a couple dozen IRS forms included and you could log the data into a database which carried forward to next years version.  In 1991 TaxCut on a floppy was $90, next year you paid another 90$ to get the latest updates and tax tables, nice subscription kind of business model.  The two programs allowed me to easily track expenses, writeoffs, income, net worth which I could use that data which was reliable, and I could  to then write my own “what if”  spreadsheets using that data in MS Word’s spreadsheet program. 

TaxCut eventually was sold to Kiplinger’s and later was acquired and expanded upon by HR Block as their premier software product.  Every year I dutifully bought a copy and used it to do my taxes.  It dramatically increased my productivity and had error sensing built in with checking against mistakes that could cause IRS to scratch their chins.  The program also knows stuff I don’t know and else wise gave me clues where to look for that knowledge.  This year I downloaded my 2018 addition to check my Roth conversions.  I had to do a little hack on the inputs and do some calculations by hand to make those hack adjustments.  When I went to the 8606 form that calculates the % of my IRA money that is taxable and the part that’s already been taxed, I had a nice surprise.  I had more already taxed money by about twice than I thought I did.  My program remembered and counted some SEP’s I had not counted.  The result is I can either pay less taxes or convert a greater amount for the same taxes.  Oh woe is me!  I’m likely just going to stick with my previous plan and pay less taxes because my goal is to not convert my bonds.  By not converting my bonds to Roth and leaving them to RMD my AA will slowly become more aggressive over time as I age which I consider desirable, and it reduces the probability of ever accessing the Roth unless disaster strikes.  I can also use RMD to buy hamburgers, and homey likes his burgers.

I do have a clear understanding of what my this year tax picture will be, how much to prepay and how to avoid any penalties even though I’m a 1099-R virgin.  The 1099-R has literally 2 dozen+ scenarios and 2 dozen+ modifiers from which to choose and the choice determines how the program acts.  Choose wrong and things go GIGO (garbage in garbage out).  When all the forms like the 1099-R come through I can erase the hacks and do it live with Bone Fide data.  I’m going to pay a little extra since I’m going to do the second tranche of Roth conversion in Jan and I will use the excess  therefore have some of my taxes paid early, a good thing to have done if the IRS comes knocking.  My estimate over the course of conversion and TIRA RMD is the post tax contribution portion will save me about $50K in taxes until the basis steps up at my death.  Thank you TaxCut!!  If I would have switched as I was tempted to do many times likely I never would have caught my mistake.  Best $90 I ever spent.

Roth Blueprint

I spent quite a bit of time developing a Roth conversion plan.  Conversion to effectively modify the bottom line has several moving parts to be optimized.  Each aspect in turn has it’s own set of optimizations.  


When to conv#ert

 How much to convert

Tax consequence (single and married)


Long term payback (break even)

Medicare cliffs

Difference between assets left in a TIRA (bonds v stocks)

Eventual use of Roth in a portfolio + SS (spending model)


Self Insurance

Tax treatment diversity

Sequential portfolio diversity (non-Roth v Roth) clean out risk first.

Planning money to live on while Roth converting

Tax loss harvesting

post tax 8606 IRA money

1 When to convert

The problem of when to convert is related to the W2 income.  When you are earning any conversion will be added to your ordinary income.  If you make for example an AGI of  $189K (top of 22%, married filing jointly, under age 65, standard deduction of $24K) it  will cost $28,179 in taxes.   If you Roth convert 100K the AGI will increase to $289K (well into 24%) and your taxes will be another $24,000 or $52,179.  Every additional dollar above $189K gets 24 cents whacked out of it.  In the end you spend $24K to get $100K into the Roth.  If OTOH you are living off of cash there is no income tax from a W2 source.  So you can convert $289K and your tax whack is still $52,179, BUT when it’s done you have $289K sitting in the Roth.  You can convert 2.89 times as much money for the same tax dollar.  Tax law certainly is “progressive”.  Let’s say you want to convert $1M.  If you do 4 conversions while W2-ing it you will have made a W-2 of $756K (189×4) over 4 years,  400K net converted and a $208,176 tax bill of which 96K was due to your Roth conversion.  Not so efficient.  Convert while living on cash and in the same 4 years you will have 1,156,000 net in the Roth and the same $208,176 tax bill.  If you converted $250K x 4 years to get your 1M your tax bill would be $386,513 well into 35%.  Clearly if you want to minimize taxes, live off cash while doing it.  

My analysis of when, is when you are retired and able to live off cash with no other income and you need to be able to live off cash for 4 years plus have the tax money available during conversion, which means pre-plan how to fund the conversion.  For the above 4 year example I would go to cash at age 66, 4 years before RMD and commence to converting, to end your conversion at 70.  Once you RMD the RMD money is ordinary income and just like a W2 can dramatically raise the cost of conversion but it’s even worse since you won’t have a W2 income to compensate so your portfolio is rapidly deflating.  Where you get “living on cash money” will be covered further on down the line.

2 How much to convert

Every dollar you efficiently convert is a dollar that will never be taxed again.   If you leave money in a TIRA especially money in equities it will continue to grow and that money once RMD’d will generate a tax bill.  If you have 500K in an equity rich TIRA with an 8% return you start at 18K distribution at age 70 and by age 80 you’re distributing 38K.  Your SS is 42K + 38K for 80K taxable and a tax bill of 6K well within the 12% bracket limit.

What if you have a 2M TIRA? 

Once again you start out slow at about 73K and by age 80 it’s $153K.  You left the 12% tax bracket long ago and you are approaching 24% bracket only 10 years into RMD!   If SS is say $50K/yr your taxable SS is $42.5K (SS is taxed at .85%) so your net is $195,500, into the 24% bracket.  Tax on $195K is  $29K.  And the tax picture only gets worse from there.  So cleaning out the TIRA is a tax saving maneuver.  #1 the tax is less so the strain on the portfolio is less and #2 you have to get tax money from some where to pay.  The W2 is no longer buffering the assault.  If the market is down, you get to sell your shares low to pay the tax man.  Bad for SORR.  If you had the same situation with a 500K account SS of $42.5K + $38K is an income of 80.5K and a tax bill of $6087  Much easier to come up with! 

Let’s say you die at 80 leaving the estate to your spouse.  She will loose you’re SS and keep her own, or she will claim survivor benefits.  I estimate survivor will pay her maybe 36K/yr or 30K taxable.  At 81 the RMD will remain the same or be recalculated depending on the inheritor’s life expectancy, so let’s say it stays on the same schedule.  The next payout would be $164K, add 30K SS for 194K   The (age 81) tax bill will jump to  $39K from 29K from jsut into the 24% bracket to the 32% bracket.  Your ol lady is getting hosed!  She makes less on SS and pays a lot more in taxes because you died.  Cleaning out the TIRA into a Roth does the following:  The age 81 RMD is 41K plus the same 30K from SS for 71K  for a tax bill of $8.5K just into 22%.  So your death in this scenario keeps her 2 tax brackets below the other scenario.  Uncle Sam already has his money so he leaves her relatively alone.  It only gets worse with a bigger TIRA.  By cleaning out the TIRA as much as possible and as efficiently as possible this scenario is avoided.  

The other problem with not converting enough is growth in the TIRA post RMD.  Let’s say you have 2M and pull out 500K into a Roth leaving 1.5M 

At age 80 your RMD is 115K and SS is 42.5K for $157K and a tax bill of about $21K intermediate between a 6K bill from a 500K TIRA RMD and a 29K bill from a 2M TIRA.  Cleaning out 500K helps but because the tax is progressive the power of conversion is eroded.  

How about the whole shooting match!  You convert all 2M at the tip top of the 24% bracket!  The tip top is 340K when you include standard deductions, so 2M would be almost 6 years of conversion.  The taxes on 340K is 64K for a 6 year conversion cost of 375K.  With no RMD your tax bill on 42K SS is about $1700

so to recap 

TIRA @ RMD2M1.5M1M0.5M0MSS taxable
age 80 RMD1531157738042
tax in K going forward29211361.7
yrs conversion 05556
total tax paid at conversion 034152273384
living on cash 4 to 6 yr
conversion to keep 
bracket below 24%
Spouse tax hit 362615101.730

The race is between dying and higher tax brackets.  The less you convert the higher the future tax bill, BUT the more you convert the higher the conversion tax bill so it’s pay me now or pay me later.  You owe the money and it will be taxed at an ever accelerating rate and once you die your spouse is hosed unless you planned for that.  Once RMD hits you’re locked in so what you gonna do?  Call Gasem!  One thing I did not cover are medicare cliffs. 

Cliff 1 at 250K (married) a 3.8% surcharge is placed on your income so converting at 340K is even more expensive making a 250K ceiling more attractive

Cliff 2 If you make more they charge you more for medicare 

This does not include a supplemental (typically about 150/mo) and it is per person  so when you convert 340K and you’re both 65  you pay about 11K per year

What you want is to stay in the 12% bracket for as long as possible and then in the 22% as long as possible.  The code is progressive so being middle class is your friend.  Soak the rich is alive and well!   I was noodling with the RMD calc and if you put only low yielding assets (bonds) in the TIRA the RMD goes down The age 80 RMD @ 3% return on a 2M TIRA is 95K v 153K in a 8%  TIRA, and the RMD accelerates more slowly.  For 0.5M the RMD at 80 is only 23K  Here is a table:

TIRA @ RMD2M1.5M1M0.5M0M
age 80 RMD 3%967047230
RMD + SS138112896542
top of 12% tax bracket 104
top of 22% tax bracket189

I estimate at a 1M IRA you will be well into the 90’s before you leave 22% and at 0.5M in bonds in the TIRA at RMD it will be a couple decades till you leave 12%  The outlook improves for your widow as well.

Tax savings if you don’t convert:

tax savings between 100% to 0% 3843502321110
on RMD conversion

If you don’t convert you save those taxes and they can keep compounding BUT the tax code is progressive so more and more will be taxed.  The rate of taxation goes up while the rate of return is pretty constant so the tax saving will erode quickly.

3 Account mix

I suggest 4 types Roth, TIRA, and post tax, and a Tax loss harvest account.  Your portfolio will develop over decades and there will be occasions to tax loss harvest.  Tax loss can be mixed with cap gain for a 0% tax bill.  Also as long as you stay in the 12% bracket the cap gain tax is zero and you only pay cap gain on the amount over the 12% limit.  If you have tax loss it can be applied to the over amount so a little dab of TLH can save you money if you bother to acquire it.   My FA has all of my tax lot info in his software so it makes harvesting effortless, and lucrative.

I used my post tax account mixed with TLH to pay for my Roth conversion.  I converted about 600K of post tax stock mixed with TLH for a zero dollar tax bill.  I saved about 100K in taxes.  The 600K pays for living expense and conversion taxes.  It offers another advantage in that it lowers my overall AA during conversion and in my early retirement which offers me some SORR protection.  This is recommended.    Most people are in accumulation mode but upon retirement you enter deflation mode and need to be ready to spend some money once the W2 disappears.   As the cash gets spent the AA will rise again but I’ll be farther into retirement so SORR becomes less important.  SS is deferred till age 70 so I have no income.  My chosen conversion is 250K per year x 4yrs which avoids most of the cliffs, and will convert net 1M and  a gross 1.4M @ 4% when compounded at conversion end.  My TIRA will be about 600K all in bonds and at 3%  will RMD 22k the first year and 28K at 80.  My net tax saving will be about 130K which will stay in the post tax account compounding.  I am moving the riskiest assets first, then down the line till only bonds remain.  My disbursement model at RMD is SS + RMD plus I will sell some post tax stock as needed.  Since I only get taxed on RMD and 85% of SS, my taxes will be low for a long time.  Between my TLH and <12% income I will have no cap gains as I disburse post tax money.  I won’t touch the Roth and let that grow as insurance in case of medical disaster or as a wealth transfer vehicle.  Everybody gonna die from something and some of those causes are very expensive so having money stashed beyond living expense money is a comfort, and not only you but your wife will incur expense.  By owning 4 account types I have excellent control over my tax picture going forward.   A  lot of my “conversion money” is from interest accrued in my post tax account over the decades

4 Account imbalances 

You read a lot of boiler plate “fill up the pretax accounts” it may not be the best advice.  Those accounts are tax deferred not tax free and their size determines the tax consequences which are progressive and tilted toward soak the rich.  I’m sure there is controversy on this but I think equal tax deferred and post tax up to maybe 4M and then over in the post tax above that.  A 5M tax deferred is not a trivial liability in the grand scheme IMHO. YMMV but that’s my take. 

5 8606 Money

My IRA and my wife’s IRA were funded post tax.  I kept all the 8606 sheets.  It turns out once taxed that money changes the tax basis for the life of the TIRA.  Every year a proportional smaller amount will be taxed than what the RMD requires so if you RMD 25K and you have a 80% basis adjustment you will pay tax on only 20K.  My adjusted basis allowed me and my wife to transfer 265K into the Roth with only 245K taxable.  I’ll top that up once I have a better picture of for the taxable portion of my ordinary income from my post tax account.    All of these little tid bits add up.  265K compounds faster than 250K. 

5 Modeling 

This was all modeled in Excel in modules so  could understand the implications of each on the other and get some idea of multivariate optimization.  My portfolio and conversion strategy was further modeled in some commercial software designed to advise optimized Roth conversion strategies.  My actual modules matched the commercial strategy very well in terms of prediction.  My final optimization was different than theirs because they suggested 100% Roth conversion.  Over a very long time I agree with their strategy but it takes a while for the conversion to turn cash flow positive, for the tax progressive savings to over come the initial cost of conversion.  The initial cost can be initially viewed as a negative SORR.  A slightly less aggressive conversion has less SORR character.  The cash flow positive point is about the same.  My wife is younger than me by 7 years and is genetically predisposed to live a long life, with no real history of cancer, typically age to 90+.  My side is dead by 80 from CAD and metabolic syndrome, so some attention to that is built in.  My modeling is more extensive than 10 years age 80, but models 5 year aliquots of time with and with out married filing jointly and takes into account progressive tax codes.  I also optimized SS but won’t go into that here. 

6 Budgeting and cash flow management

I believe in budgeting as a means to judge progress but I’m not a slave to it.  I can afford my pre-retirement income, including a risk premium for health care etc aka the bennies I lost with the W2  I’ll call that Max budget.  I retired on 80% of my “max budget” as this was described as comfortable to most retirees.   After the dust settled I decided to experiment with belt tightening since you read about that as a solution to bad times and I wanted to understand what that actually felt like, not as just some bromide.  I could go down 80% of the 80% or 64% of what I can afford.  So I oscillate between 64% and 80%.  Some months are cheap months, some expensive.  If we want something like a trip to EU (been twice since pulling the trigger) I save up the differential between cheap and Max months and when I have the differential we fly.  My wife is good with that technique.  All in all I came in 11% under my 80% max budget last year.  This year looks about the same, a little more expensive but likely inflation related.  Inflation is something to consider as it will eat up the slop in the calculation, but I ain’t skaired.  

This is pretty much what I did and am doing.  I’ve invested for several decades and investment vehicles exist now that did not then so you do what you do in the environment in which you find yourself, and the environment into which you are retiring.  If you got a ten year nest egg and a 50 year horizon, that life has a very different risk profile from mine.  That life is quite leveraged, my life is not.  I can survive quite comfortably at 0% interest for decades, but it gives some insight into my thought process. It is not advice just my experience.  It’s complicated and based on probabilities and probabilities are not certain.

Calculators I used 

Tax plan calculator

Schwab RMD Calc

FV Calc


I’ve completed my first conversion this year and will convert my second early next year probably Jan and then be done till 2020.  I owe the IRS 42K by my estimate and 44K by the HR block Free filer which doesn’t take into account some writeoffs I will claim.  The official HR block software won’t be live till Dec so I will get a more precise estimate then, and will owe essentially the same tax again next year, so it’s working predictably and according to plan.  I came across a tax penalty rule that says for high earners (>150K) you need to prepay 110% of last years tax to avoid the penalty so I take that to mean if my tax is 42K this year I must pay 46.2K next year to avoid the penalty.  Of course I would then apply the extra 4.2K to next years taxes, talk about soak the rich!  They’re screwing you 2 years out on money you haven’t made yet!  All the more reason to get them out of your hair.  I also checked the credit card option to see if I could claim cash back points and with the “convenience fee” it worked out to be a wash between CC and a check.

I’m now officially sick of researching Roth conversion, but quite satisfied in the result.

Playing with FIREcalc and FVcalc

FIREcalc is not my favorite.  It tells you what happened not what will happen, but it does give you some information.  There is a portfolio disbursement method called the Bernicke’s Reality Retirement Plan based on a scheme by Ty Bernicke built into FIREcalc.  The scheme is to start with a high payout and gradually reduce the payout by 2% or 3% per year to a constant payout in the future.

This is a payout scenario.  The retiree is 50.  The retirement amount is 3M and SS kicks in at 65.  He takes 160K for 5 years (55) then decreases the take so at 76 he is making about 75K per year till he dies.  Here is the scatter chart

It get’s pretty close to zero but never flames out for a 100% success looking in the rear view mirror.  BUT who wants a >50% paycut when they are 76?  You party like it’s 1999 and then ??? eat beans?  You get cancer at 77???  Your old lady starts alzin???  

Here is 1M @ 6% over 20 years 

It grows to 3.2M in a relatively safe 50/50 2 stock account if you don’t tap it.  Let’s tap it!  At 65 Bernicke is paying maybe 115K and living is getting kind of tight.  You;ve seen an income drop of 30%.   So 15 years into retirement we’ll tap the million for an extra 40K per year for another 15 years taking you out to age 80.

The million pays you 600K and you still have 1.4M in the bank at age 80.  Your take has tailed off from 160K/yr to 75K + 40K or 115K/yr and you’re now 30 years into retirement.  You had a blast when you were ER and later after cruising the world for a decade travel has lost it’s luster and you don’t drive much so your car replacement need is diminished etc etc.  If you get cancer the $1.4m can pay you the average 92K per year excess medical needs for 30 years and still not run out of money or you and mama can split 30 years of care.  This is 1.4M @6% for 30 years at 92K/yr  disbursement.

While you’re living large off the Bernicke acct 1M is accumulating and basically gives you a second retirement income when Bernicke starts to pinch.   

FIREcalc does not give absolutes on the future and this article does not look at tax consequence or SORR.  Instead it looks at a time shifted kind of diversity with different distribution schedules and different compounding and different SORR for each portfolio Bernicke and 1M.  For my example you need 4M total at age 50, fat fire for sure, but maybe only 20 years into a typical medical practice it might be doable without need for side gigs post retirement.  You can FIREcalc the 1M portfolio separately and get a different worse probably more likely result. but still surviving 85% of the time over 15 years.     Like  said this is play but intriguing.   It was too confusing to try and present those scenario’s  

Here is a spread sheet of retirement spending.  At 57 spending starts to ramp down until age 66 where the Bernicke retirement has lost 20% (headed to 39% loss) at a $127K payout.  At 67 portfolio 2 has grown to an estimated 1.5M (range .9M to 6M) and starts to throw off $40K/yr constant.  The tail off starts again but this time winds it’s way down to $138K  where it normalizes.  Over the 50 year course Port 1 pays out 5.9M and Port 2 pays out 1.3M on a $4M investment.  This isn’t a detailed analysis accounting for taxes and SORR etc but a quick FV calculation says Port 2 will have several M at age 99 and FIREcalc says a 1M to 9M range in port 2 at age 99.   My numbers differ from FIREcalc’s numbers because FIREcalc does look at historical SORR.   These are my calculated numbers not from FIREcalc.

acctport 1port 2net


I woke up this morning thinking about diversity, as in non-correlated diversity.  There is correlated diversity and a vehicle like the S&P 500 is all about correlated diversity.  The stock mix reduces single stock risk down to market risk, but once market risk is achieved there is not much to be gained in Piling more and more issues higher and Deeper (PhD).  20 stocks across 10 sectors is 95% diverse.  Adding 980 more stocks only makes you 99% diverse.  A nod is as good as a wink to a dead horse.   I study the S&P 500 and all year long it’s been troubled.  20% of the stocks were in a bear market, 20% more were under water, meaning 200 of 500 stocks were doing bad the entire year despite the “RAH RAH best economy in history”.  Only 40 stocks were responsible for the majority of the gains and especially the FANG plus a couple, at any time.  The index has broken down and those 40 are no longer performing and some of the high FANG flyers are now in a bear.  How is this diversity when you are relying on 40 stocks to give you gain?  The problem is these stocks are highly but not perfectly correlated and so stocks have a general direction when going up and a very tight path when headed into the dirt, like a hand.  On the way up stocks look like an open hand each finger pointing in a different direction slightly diversified and slightly reducing risk.  On the way down the hand becomes a fist plowing into the ground.  The algorithms sell first and ask questions later.  Because of the high correlation the in the bad times algorithms erase the “illusion of diversity”.  

Here is a picture of GLD (gold line) v S&P500 (blue line) since 2013.  The correlation between GLD and S&P 500 is 0.04, and the picture shows that gold is flat while S&P is exploding.  This is non-correlated diversity, the kind of diversity that saves you.  


 This is a longer term picture of S&P v GLD including the 2008 debacle.  Looking at GLD from 2005 when the S&P went in the toilet and dropped 50% GLD exploded in value, the typical flight to quality.  Again you see the benefit of non-correlation.  Stocks went down and then stayed flat for a long time while GLD went way up.   

Stocks are property, GLD is property, just as Real Estate is property and Bonds are property.  These assets are not money, they however can be converted into money using a market mechanism.  The property is worth whatever someone is willing to give you for it at the instant you want or need to sell it.  The way you make money is buy the property  low sell the property high.  The way you loose money is buy property high sell the stuff low.  Suppose you retired in 2005 and are living off your assets.  What asset would you sell in 2008?  You bought GLD low sometime previous 2005 and you bought S&P high sometime previous to 2008.  Buy low Sell high, you would sell some GLD (sell high) and keep the stocks or even add to the stocks (buy low).  You sell some GLD and have money for  hamburgers!!  Selling the stocks low would blow up your compounding plan in the long run.  If all you own is stocks you’re hosed.

 Let’s add some Bonds (BND the teal line)  In a 3 asset portfolio BND and S&P has a .05 correlation.  GLD and BND has a .44 correlation so BND pretty much does its own thing as the chart shows.  BND remains flat while S&P is crashing and  GLD is soaring.  In the case of a stock crash, BND might be a good source of hamburgers, or maybe a lil’ GLD AND a lil’ BND.  You see you now have 2 choices that won’t cream your retirement plan by being forced to sell stocks low.   Your GLD doesn’t have to last you forever only long enough to get through the bad time.  You can always buy some more from William Devane when the price comes down later.  It gives a ready source of value and gets you a year closer to death with your growth motor (stocks) intact.

You say yea but I’m a Real Estate guy!!! So let’s add some REIT

Purple (VNQ) doesn’t impress.  It doesn’t grow well but dives into the ground just fine, even more so than stocks and in the same time frame!  The correlation between stocks and VNQ is .72  You say I’m a Globalist!  I have Global to save my butt!  It’s diversity I tell ya!  Let’s add VHGEX which is .96 correlated with S&P.

Salmon (VHGEX) looks pretty much like dark blue to me from a diversity perspective.   If you gotta sell something you’ll be selling salmon low same as dark blue in a crash.  This is the story of non-correlated diversity.  

I was thinking about dividends.  In a crash dividends at least for a while tend not to change even though the asset value plummets, so dividends may be a source of diversity but I’m not sure how to model that.  Many people brag about living on dividends as if that’s safe.  Not so sure it’s safe but the diversity may pay you.  

Here is a calculator that looks at S&P 500 since Dec 1999.  I chose Dec 1999 since it would represent 18 years into a retirement spanning 2 downturns and is familiar since most of us lived it.  The average return on the S&P in this 18 yr period is 3.8%  (NOT 10%).  The reinvested growth is 5.8%  The dividend is 2%.  When you spend the dividend it is not really different than selling stocks, you just “sell” before you even “buy” (re-invest)  The fact the dividend might be considered diversified hurts and helps you.  You have a relatively stable stream at least for a while in a crash, but not re-investing means you don’t use that money to “buy low” in a crash.

Here is the inflation adjusted dope:

Inflation adjusted the S&P 500 sans dividends over the past 18 years has only grown 1.6% per year and only 3.5% with dividends reinvested.  Dividends therefore were 1.9% inflation adjusted.  To me this says dividends pay because of their non-correlation not because they are “safe”.   Next time some bogglehead putz tells you it’s stupid to own GLD tell em to go pound sand!


In the 80’s I was working in a pediatric ICU and we got a kid who was creamed.  There is an expressway in Chicago called the Eisenhower named after the 34th president.  It heads out of the city past the ghetto to the western and northwestern burbs.  It’s 10 lanes of 80+ mph Mario Andretti mayhem, testosterone, and precision driving, at once exhilarating and frightening, kind of like sky diving.  The kid had apparently been playing real life Frogger on the highway with his buddies.  Yea, let’s legalize dope!   We need more stupidity!  The tragedy is something that has stuck with me all of these decades.  Certain experiences change you.

Retirement is like playing Frogger.  You may make it to your  your little frog bungalow or…  In a recent podcast on Doc G’s site some folks with medical issues were talking about retirement in the face of chronic illness.  I have written on this,  but what to do? what to do?  How do you get to the frog hacienda intact?  My solution is to self insure.  My Roth is my self insurance.  It serves several purposes.  One is as a tax free, not tax deferred growth vehicle.  It does not annuitize like a TIRA.  If you have enough money to fund it properly you can risk the assets within it in a different way than you may risk the rest of your portfolio.  You may carry a 10% risk on the money you intend to live on in retirement.  You can calculate the risk by using the efficient frontier calculator or by setting up a personal capital account they will calculate it for you.  Let’s call this money SWR money.  You can set up separate money in a different account risked differently and to serve a different purpose than SWR.  You can set up a self insurance account.  My Roth is my self insurance account.  Once funded it will sit unmolested and compound.  I will not count it as part of my SWR v. net worth percentage.  I will own it but account for it as a different line item.  It will exist as insurance, to be used in case of disaster.  It can be risked for example at 6% (the risk of a 50/50 asset mix) with an expected 6% growth.  Such a low risk has a very high chance of being intact no matter when needed, and not so much subject to market whims.  Since I’m not pulling money from it, it’s basically immune to SORR.  The rate of return fluctuates but no withdrawals leaves things intact like a nice feather bed of security.  

The article I read on financial ruin due to cancer says the average loss to wipe you out was 92k/YR.  Whoa Nelly!  The solution is to systematically build a shield and let compounding do the heavy lifting.  You’re going to die from something and your spouse is going to die from something.  Hopefully and normally that something will happen further on up the road.  So you have to plan for the cost of that something occurrence.  This article suggests 92K/yr is a good place to start.  FIRE types are nothing if not masters of Future Value calculations, so do the math.  If you stick $300K in a 50/50 account at 45, by 65 it will grow to $962K with no added money (over 61% of this is interest).  Where you get the $300K is from planning for it and making it happen, or win the lotto or something.  You’re the master of the universe so master already.  If you have $962K in insurance money at 65 you can pull out 92K/yr from a 50/50 fund for almost 17 years.  (31% of that distribution is additional interest).  Pretty good huh?  That 92K is independent of your SWR money.  So if your a 1M 4 x 25 frugal as hell bike riding FIREbrand you still need 300K in the account by age 45 to make this work.  OOOH it’s hard!  Living in a medicaid nursing home on disability drooling in your lap with everybody screaming all day and night long is harder I assure you.  Yes it means you’re going to have to work longer and forgo a few years of drinking on the beach, BFD.  

As time goes on the value will grow and protect more than catastrophic health issues.   At some point it becomes big enough to protect against portfolio failure as well, since you underestimated your need you will have a life boat, a ready source of hamburgers, just when you need it.  If not, your kids will have a nice nest egg.  This is about as small as I would go especially if married with kids.  You’re going to die from something and that’s going to cost dough, and your wife is going to die from something and that’s going to cost dough, or your kid may get sick, so you need a lot of compounding potential to get everyone to frog heaven.   The insurance stands side by side with SWR and gives you big time flexibility.   

Financial Advice

I see all the time people crowing about DIY finances.  Just buy low cost index funds they cry!  Financial advice?  What a rip off!,  Why I can buy VTSAX for 4  bp…  And that is true.  It is cheap, but is it wise?  Why studies have shown you can’t beat the market…  But those studies are generally compared against actively traded funds a worst case comparison.  What about passive factor based funds?  Why those AUM guys just want to pump and dump for 1% of your money…  It’s hard to find a 1% AUM Financial Adviser most are 0.5% and under.  The ones that use 1%, use 1% to weed out clients with small assets.  Crowdfunding, by gosh I believe in crowdfunding gonna make a mint… Plenty of articles out there decrying crowdfund risk.  Taxes ya I know all about taxes… Do you really?  

I read article after article saying the “average retail investor” under performs the S&P by greater than 4%.   Another one I read says 3% performance for the DIY crowd over the last decade is average.  So if you can get a FA to help you get an additional 500bp return is it worth paying him 10% of that?  

In my investing life there have been dramatic changes.  I started trading commodities in 1975, the same year Vanguard was invented.  Vanguard was loathed, hated and ridiculed in investing land.  Back then you bought actively  managed funds with front end loads typically 5.5%.  Fidelity was cheap at 3%.  You bought actively managed funds because everybody knew Peter Lynch of Fidelity Magellan was a maven, and he was!  He consistently returned an average yearly 29% return, twice the S&P 500! (according to the advertising)  You needed twice the S&P to make up for the 3% loads and fee structure!    In 1975 there was no internet PC’s to speak of (I had some computers I built and programmed but primitive primitive.  My memory storage medium was a stereo cassette tape deck and my monitor was an old TV.)  You made trades over the phone and got market data from the news paper.  If you bought and sold a stock it cost $400 for a round trip.  IRA’s were initiated in 1975 and had a $1500 contribution limit.  Brokerages and brokers got rich not their clients.  This is where the prejudice of the “rip off FA” started.  I was a two for you, one, two, three for me kind of deal.  It felt like a rip off but at 29% a year it was better than a passbook acct which might pay prime at best.   Magellan by my calc has returned 5.5% over 38 years and lost it’s way after the dot com bust.   Understanding a bit about the history of the financial services industry is important because financial services are all about sales and hype.  Even Vanguard is hype else wise they would just have a bond fund and a stock fund, so no matter what you’re buying hype.  Money magazine was hype, Kipplingers was hype it all was hype.   

In ’92 I was listening to Alan Greenspan on CNBC in the surgical lounge and someone asked him “what would you invest in?” and he said I would invest in the whole market.  I never heard that before and it was entirely different than what I had been taught by the hype.  He obviously was a student of Harry Markowitz and understood diversity.   ’92 was the age of Compaq MSFT, Dell and Cisco.  One of the Internists bought Cisco and turned it into 10M in about 5 years.  He later got  Alzheimer’s and it didn’t do him much good.  The Greenspan comment started me on a journey to understand this different kind of “own everything” investing.   Own everything investing was Vanguards claim to fame and legitimacy, that and the .com bust.  After that people started looking for rationality.   People won Bigley in .com gambling, investing in smoke and lost even more Bigley.   I was day trading in those days but I also had a diversified investment account side by side with my speculative trading account.  I made money trading but it was a heck of a lot of work and a lot of stress.  After GE peaked at $60 in 2000 and was $20 in 2003, I understood my exuberance was irrational and I decided to give uncle Alan’s approach a try and plowed 1M into SPY in April of 2003.  I liquidated all of my losers and collected the LT cap loss and this 1M was my remaining cash.  It wasn’t all of my portfolio, but it was a chance to buy low.  It was the beginning of Gulf war 2 and the market was in the toilet and I asked myself should I vote for or against the US.  I was in the Navy during Gulf war 1 and decided FOR.  Right decision. 

Along about this time I decided I wanted some professional help, no not mental health but investing.  I was in B&N and a book by Phil DeMuth and Ben Stein caught my eye so I bought it.  It was all about the efficient frontier and how to invest effectively.  I read a few other books by these jokers.  One day I called up Phil and we talked and I sent him 1M to start with the promise to send more if I liked what he did for me.   Shortly there after 2008 happened, but it allowed me to compare efficiently risked money with my SPY kind of money and watch the rates of recovery.  Phil’s style won.  The other advantage is being involved with a manager made me invest correctly all the time and on time.  I still had cash not invested but it was cash I intended to not have invested not the result of indecision or poor choices.  I also  had access to investment grade funds as opposed to retail funds which were based on Fama-French tilts.  In those days FF tilts paid a premium at very low cost.  Over 100+bp/yr compared to an extra 10 bp differential between Vanguard and the tilted funds.  I’ll take an extra 1+% any day.  That difference has since been arbitraged away IMHO but it was nice while it lasted.  Phil also streamlined my taxes and tax loss harvested for me.  By retirement I had about 600K of tax loss harvest (TLH) accumulated.  TLH is like free money.  Phil’s software kept track of tax lots and their basis so I was always trading at max efficiency when I did trade or make a AA change.  When we would strategize a change I would get a complete analysis of what it was going to cost and it was easy to do cost benefit analysis.  When it came time to Roth convert I used 120K of the 600K TLH to scare up some cash to live on and to pay Roth conversion taxes.  That money came out of my post tax account tax free.  I also use that TLH money against cap gains on my post tax money come tax time.  Knocks hell out of my tax bill.  Phil also sent me journal  articles on topics like SORR and AA peri-retirement so my understanding of risk was much enhanced and it prompted me to do my own research.  We’ve concocted a good solid Roth conversion plan, highly efficient.  I’ve done most the work, he is my error check and I have access to his software to “what if” scenarios and he always adds a little twist to the analysis I didn’t think of.  I take the little twist and run with it and optimize it.  I’ve written my own spreadsheets but it’s nice to know professional grade software shows close agreement on my conclusions and have a professional looking over your shoulder.  My post retirement is set up to maximally optimize my tax picture.  My tax savings are in the hundreds of thousands over decades.

My Roth conversion provides exactly the portfolio safety I desire.  My portfolio is sub-divided into cash, LT cap loss, ST cap loss (small amount), Post tax brokerage, TIRA, Roth IRA and my Home.  My portfolio is quite a bit larger that my 30 year need so I can convert the Roth money into something of a self insurance account.  As I age and my wife ages eventually we will incur medical expense estimated at 300K per person from age 65 to death.  There are may things Medicare does not cover like assisted living or 24/7 memory care.  The Roth will be filled and then not touched as insurance against catastrophe.  1M in 10 years will be 1.8M, in 20 years will be 3.2M (my age 85) and 6.4M by my wife’s age 90 (she’s a lot younger), so plenty of money against catastrophe, or if we both drive into a bridge at a high rate of speed my kids will be ecstatic.  Either way the Roth has a job to do and it’s to protect our security, not to fund our cash flow.  I will get my daily hamburgers from other assets like SS some TIRA RMD, and post tax brokerage money mixed with TLH.   My situation is a bit complex and my wife has interest in the plan and can follow the arguments but does not eat and sleep it like me.  Phil acts as protection in the case of my demise.  The plan is the plan and will be executed and she can turn to Phil for guidance.  One kid is out of college and on her own and the other is 2 years away from fini so that whole Curly shuffle is winding down.  

I pay nothing like 1% for this security, I won’t say how much except it’s way less.  It’s money well spent.  I’ve made far more in streamlined returns in the last 10 years than 20 years of professional financial advice will cost me.  You may think DIY is wise but if you loose in the end because of ignorance, arrogance, simple mindedness, bad risk analysis or abject stupidity based on internet boilerplate it will cost you far more.  Investing is not about a dopamine induced fog but clarity of purpose and risk management.   The other thing is implementing a plan like this takes time and it takes staging in the accumulation phase in what I call epochs. 

Epochs occur over years to decades.  If you fund your retirement’s self insurance 40 years out, most of that will be in place as interest by the time you retire.  You could call that the retirement insurance epoch.  You already fund a 529 and rely on the interest to carry that through, you could call that the college expense epoch.  Just think of it like that.  Do not be mesmerized by the necessity of pre-tax money the restrictions are often more costly than the benefit. 

Color me contrarian.  

More on Roth Granularity

So I physically started Roth conversion this week.  I have enough information to know the majority of my post tax distributions for the year, not exactly but close.  Should only be about 8K unqualified.  The unqualified is taxed as ordinary income and qualified as cap gain.  I will pay taxes on unqualified and write off my cap gains against my LT cap loss for zero tax on that aspect of my tax life.  So I have about 8K ordinary income to worry about off the top.

My first conversion is my wife’s IRA’s in entirety.  It’s about 140K.  She has 24K in post tax basis mixed in that money, so by working through the calculations in form 8606 her taxable income is reduced to about 115K, for a 140K conversion.  Therefore I’m up to about 123K (115 + 8) in taxable income for 2018.  The reason I closed her out first was because of the write off on her account.  It gets the maximum amount of money into her Roth to commence compounding.  My net tax saving for this move is 5K.  This will close out her remaining experience in Roth conversion as all of her money will be tax free in a Roth.

My next conversion will be my own and I will convert something like 125K and I may go a bit higher as my tax picture becomes clearer.   I chose $250K as a max conversion instead of the top of the 24% because it avoids the 3.8% medicare surtax on amounts above $250K and avoids higher medicare monthly premiums, and generates 22K less in taxes (88K over 4 years saved), while over 4 years I will converting about 2/3 of our TIRA.  The other 1/3 I will leave in bonds and go ahead and RMD that amount at 70 and use that money to buy hamburgers.  My conversion factor on 125K is 97.9% taxable because of my post tax money in there So on a 125K conversion only 122,375 will be part of my AGI.

My taxable AGI therefore will be 115K + 122K +8K or 245K with a 5 K safety factor since you can’t re-characterize Roth conversion anymore.  My net conversion will be 140K + 125K or 265K into the Roth and I will reinvest the 8K back into my taxable account.  My tax bill for that conversion will be $41307 for a 265K conversion for an effective 15.6% tax rate.  I’ll send the IRS the 2018 money and we will be cool.  Had I converted 341K my effective tax rate would be over 19%.  My move in January 2019 will be to convert another 245K AGI.  With the conversion factor of 97.9%  I will be able to convert $250K actual money from the Roth for a 2 year conversion of $515K, over half of my estimated conversion amount.   My tax bill on that $245K is also $41,307 and I will send the IRS the money in January and we will be cool for FY 2019.  So by start 2020 @ 4% my 515K investment should be worth almost 536K.  I’ll do it again (250K, 245K taxable) in FY 2020 and be up to 814K in the Roth at 4%.  Finally in FY 2021 I’ll add the last ($250K, 245K taxable) bringing our Roth’s to 1.1M with a tax bill of 165,228 or a 15% tax bite.  I’ll leave the rest of the TIRA to grow ever time as I withdraw and should have about 600K left in TIRA @3% return over 4 years.  $600K will RMD $22K the first year and will grow to $28K the 10th year and $32K by the 20th year.  The TIRA at my age 90 will still have $340K available in funds just in case.   Every withdrawal from the TIRA going forward will use that 97.9% conversion in calculating the AGI, so $22K RMD is only $21.5K in AGI.  Every $500 helps.  I will supplement my income by selling taxable stocks and using my LT cap loss.  As SS grows and RMD grows my “need” to access money from the post tax account to make budget diminishes, or I can slice off a little more from the post tax money roast and buy the ol’ lady a new car.   The Roth remains untouched.  It will transfer wealth to my kids or be available as insurance in case of medical disaster.  At 5% it’s estimated worth will be 3M at my age 90.  

So by doing the conversion in this way, my future will cost me $165K up front in taxes.  If I converted to 340K/yr (top of 24%) it would be about  256K in upfront taxes on the future.  I will leave the $90K or so I save in taxes invested to grow @ say 5% and the interest off that easily pays for the unpaid taxes on the RMD.  Since the RMD is small the taxes are small.  This is an important point to understand.  I maximize my tax free growth by converting my wife’s IRA first.  I’ve been analyzing what assets of mine to convert and momentum is going first.  Next will be foreign and emerging.  Next US and finally alternatives commodities and REIT.  I will re-balance my AA across accounts.  Since I’m living off a wad of cash my AA presently is about 55/45%.  A desirable percent in early retirement adding some SORR protection.  As I spend that cash down and pay my taxes my AA will naturally rise to maybe 65%.  At that point SS kicks in and the TIRA RMD’s and I’ll be 5 years closer to death and my necessary SWR from taxable drops a lot, so I can afford a little more risk (actually a lot more risk but what’s the point of owning too much risk if you already won the game?)  

People write accumulation investment plans.  This is my deflation plan.  It tells me my need based on my assets.  It directly informed my accumulation phase plan.  It actually shows I worked too long but I didn’t hate my work life at all.  One day I realized every day I went to work all I was earning is more risk since I already made all the money.  My accumulation was determined by going to SSA.gov and adding up my lifelong earnings using medicare wages.  From that I could easily calculate a reasonable average cost of living as an estimate.  I paid medicare wages for 49 years and was always employed in some fashion.  From those medicare wages, I paid for 2 adoptions, 2 college educations for my kids, bought 2 houses sold one, bought a dozen cars, started a family.  I never had debt except the mortgage which was tax advantaged.  I also funded a portfolio over 43 years.  My portfolio was almost twice my medicare wages and probably 2/3 of it was accrued interest.  This means my portfolio could support about 2 retirements.  The earlier you retire and with less, your portfolio’s survival at some point becomes leveraged to a rate of return.  The earlier you retire and on lesser money your leverage increases.  Thinking of your future in terms of leverage I think is useful when it comes to planning because leverage is what drives you crazy, and your brain is hard wired to be risk averse.  It’s also what causes you to fail.   It’s hard to live in peace with too much leverage hanging over your head.  I never used a 4 x 25 kind of calculation to determine the future probability.  Instead I beat the hell out of it with a Math hammer which is my nature.  Took over a year to figure this out and optimize it to where I am happy with it.  Hopefully some insight can be gained as you make a plan germane to your situation.  Deflation has a lot of moving parts, and no W2 protection, but adequately funded retirement with no side gigs and all that hassle is glorious.  I took a 2 hour nap in the sun in my sun room today and even though unconscious I enjoyed every minute of the sensation of warm sunshine on me.  The I got up, took a leak and wrote this screed.   I recommend! 

What’s your deflation plan? 



I woke up this morning thinking about activity.  Activity is the thermodynamic concept of non standard behavior in a chemical solution.  As solutions become concentrated the A + B =AB relationship become x*A + y*B = z*AB  where xyz are a kind of fudge factor which describes real behavior instead pristine theoretical behavior in chemical solutions.  The variability is due to how charge, solubility and entropy changes local environments for molecules instead of just viewing their behavior in a dilute solution.  The local matters in the real world.  

Blood is an aggregate of hemoglobin contained in corpuscles and a kind of dirty proteinacious water called plasma.  The hemoglobin is highly soluble to O2.  You can stuff a whole lot of O2 into hemoglobin especially hemoglobin contained in corpuscles, but not so much in plasma or free hemoglobin in solution.  Your cells crave ATP and the ONLY way to efficiently make ATP is to deliver enough O2 to the cell mitochondria.  Not enough O2 = RIP.  So life itself depends on this method of hemoglobin aggregation.  Dis-aggregate the hemoglobin, and even though the amount remains the same the effective O2 delivery is so poor you will die. 

I was reviewing the nature of VTI.  VTI is a total stock market tracking ETF.  People own VTI as a proxy for owning all the stocks in the US market.  It is commonly published there is some comfort that “all the stocks” are “more diversified” and therefore “safer”.  Actually the majority of diversity is achieved in as little as 20 stocks.  1000 stocks only provides 5% more diversity.   VTI as a tracking vehicle has as its portfolio 1560 stocks.  The total us market has a bit over 3800 stocks, so VTI is only 41% of “total stock market”. 

Ya Ya blablabla so what?  Well the point of activity was to account for the non standard behavior of solution with high concentration.  Index funds make up 29% of the market.  That’s called an aggregate and I would call that a high concentration.  The behavior IMHO is not random but actually quite concentrated, and the measuring tool is just an estimate.  The “tracking fund” just estimates the actual total market.  In normal times it estimates beyond good enough.  But what about abnormal times?   The point of owning index funds is the so called safety of diversity.  If you sell VTI and Vanguard doesn’t have cash on hand it will have to sell 1560 stocks to raise the cash to pay you.  This causes a distortion in the tracking.  There is now downward momentum on those 1560 stocks in excess of normal market swing.  Remember you actually own VTI not the total market, so the value of your portfolio is the actual price of VTI not the price of the total market.  Now what if half of the 29% who owns the “index stocks” sell.  What happens to balance of the the index?  What happens to the value of your portfolio?  My impression is xyz kicks in and all of the “formula” which rely on say “8% long term market gain” goes out the window as momentum forces dynamic distortion onto the system, and the distortion will be worst in those 1560 stocks you own since those are the ones being most sold at fire sale prices.  The robots don’t care.  You give them a sell order, they sell sell sell, damn the torpedoes.

The point, the point?  Jack Bogel worries about this.  I’ve read it over and over in his writings but I don’t see it anywhere in the usual Bogglehead boilerplate.  Is your “diversity” really diverse or merely an illusion because your diversity is actually a part of an aggregate and therefore captured in that aggregate and not free to oscillate independently?  This is why some real bond mix like 60/40 IMHO saves you, because bonds are truly independent with a correlation of 0, and not captured as part of an aggregate.   Lemme see all ya gotta do is 4 x 25 in low cost index funds…