Make Sure You Have The Correct Numbers In Your Planning

Investopedia via Yahoo Finance took a look at how much money people need to have saved for a comfortable retirement with your home paid off versus not, being single or married and depending on what state you are in. 

A mortgage-free couple needs between $700,000 and $1.18 million, $870,000 as median number, depending on the state with Arkansas and North Dakota at the low end and New York and New Jersey at the high end. Actually the only still has a mortgage retirement number they included was the $1.46 million estimate from Northwest Mutual that everyone wrote about a couple of months ago when it came out. 

Most of the article was as useless as that last paragraph but there were a couple interesting tidbits. One was that in 1980, only 13% of homeowners 65 and older had a mortgage versus 36% as of 2024. And I thought this graphic was useful.

We've articulated what the table displays many times as has probably every site that explores retirement math. The single/couple columns, ok but whatever your marital situation what are your complete expenses? What are monthly expenses, what are your annual/semi annual expenses like property tax and certain types of insurance? Do you track so granularly to factor in oil changes (not a bad idea but we don't) or maybe haircuts (my $20/mo at Great Clips seems a little unnecessary)? Do you pad in an amount for larger, unexpected items like a veterinary bill or something like tires? Whatever your process, just make sure it's thorough. 

We just looked at Social Security. The SSA wants us to know our numbers. Then decide if you think it is prudent to assume a reduction in your payout and to be thorough, reduce it by what you expect to pay for Medicare Part B.

That process is what is captured in the table. If there is a gap, can you cover it somehow from some sort of planned earned income, rental income or from an investment portfolio? 

At some point in our 50's it probably becomes reasonable to start to frame out what a gap might look like unless someone is hell bent to retire at 50 then they need visibility at a very young age and need to do some math (AI can do this for you) on what their Social Security will look like if they don't get 35 years of earned income in before they stop working. 

The annual Social Security report everyone gets notes that the dollar amount assumes a full career duration, if someone stops at 50 then that won't qualify for full benefits. The 35 highest earnings years will include quite a few zeros or if someone actually has earned income starting at 15, a few very low earning years. I wouldn't try to discourage anyone from retiring early if that is what they want but as per the above table, a reduced SS payout due to a shorter working career means needing more saved. Planning, based on the wrong numbers could be catastrophic. 

As a matter of personal philosophy, I don't want to rely on just two things, SS and my IRA account. The first two ideas I think most people would come up with for additional income streams is some sort of post retirement gig like monetizing a volunteer endeavor or turning a hobby into an income stream and the other one is rental income. All the better if you can come up with others that work for you. 

I actually think of a bridging strategy as being a separate income stream. We've written about this quite a bit lately. This could just be a taxable account that built up over the years or maybe there is some sort of event that funds an account for bridging like maybe the sale of an investment property or some sort of options vesting from an employer. 

The way we have framed this out in recent posts, this is a different strategy than the 60/40 or 70/30 that might be in the typical IRA account. If leaving this sort of windfall (house sale or options vesting or just years of accumulation) in cash would last for eight years, could a higher yielding bridging strategy stretch that for ten years until maybe when RMDs start? That's the equation. Leaving an IRA alone for ten years can reasonably see the IRA invested 60/40 come close to doubling.

It's a little sloppy but I tried to color code rolling ten year periods for most of this century. The ten years numbers show solid growth. The worst time to invest in this century would have been at the start of 2000 and even then, the cumulative growth for ten years would have been 34%.

I understand that this much work won't appeal to everyone but like many aspects of life, the more we put into retirement planning, the more we will get out of it. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Create Your Own Solution

The Washington Post says that "Republicans say it is time to raise taxes" to try to fix Social Security. By raise taxes, the primary implication is increasing or eliminating the cap, the level of income where people stopping having to pay FICA each year. The article goes on to mention considerations for means testing and various other sorts of ideas like raising ages for eligibility and anything else you've seen mentioned. 

Quite a few years ago, I blogged a few times that I thought people born before a certain year, I guessed 1975, would not have to confront benefit cuts in the context of what is now an expected 22% cut in 2032. That assessment appears to be incorrect. If Congress never tackles/solves the issue then I think we'd all be facing that 22% cut (the exact percentage and year has been a little bit of a moving target). 

What role will/does Social Security play in your financial picture? There's some mental accounting in the different ways people think about that answer. For some clients and plenty of commenters at places like WSJ and Barron's, it is more of an afterthought.

If things go as planned for my wife and me for when we take it (70 and she would be 64) and if it is reduced by 22%, in today's dollars it would be $5213/mo which exceeds our fixed expenses. The mental accounting for us is that the $5213 would be the first dollars we spend. If we still have rental income at that point then that income would contribute to our month to month living. Our accumulated savings would be for fixing things, buying the occasional big thing (my Tundra is 20 years old and will need to be replaced at some point), traveling and any other one-off unbudgetable expenses that come up.

I also brought up the idea of means testing a long time ago which as I mentioned is in the article. Who knows what that would look like, my comments on that were if means testing happens, it would come down to much lower levels of income and wealth than we might think or at least we should prepare for that. 

Our unreduced amount at 70/64 would be $6604 in today's dollars. We are not loaded but we are plenty comfortable. As a very aggressive means testing scenario that came down to our level of income/wealth, what would happen if $6604 was instead $3302? Yeah, that's aggressive but what if it shakes out that way? It's easy to quantify and then assess. Actually managing something like that might be more difficult of course but the dollar and cents assessment, just open a spreadsheet. $3304 would still be a meaningful contributor to our month to month expenses but we would need to rely on our savings more, not a catastrophe.

If the country is as unprepared for retirement as the media portrays, then solutions need to be found, people need to find their own solutions. The Wall Street Journal wrote that Boomers Are Moving Into Retirement Communities Alongside Their Parents. Some of the profiles in the article are people moving into the same community but some others are actually living with a parent as roommates, splitting expenses. From the standpoint of a financially challenged retirement, splitting expense with a family manner is a solution even if it's not Plan A for too many people. Five or ten years of spending less (half?) seems financially productive. 

Another solution that we haven't talked about in a while is tiny houses.

You can see the one above costs $72,000 and the one below is $36,000. 

They are more like much nicer manufactured homes than what most people think of for manufactured housing. You can go find modular_houses on Instragram to see the more, they are very nice and also a huge upgrade to what most tiny houses looked like ten years ago. The typical scenario for these is usually leasing a spot in a community or putting one of these on your own parcel. If you know otherwise, please leave a comment and I don't know about permitting one of these onto parcels, that's probably different across jurisdictions. 

Again, this may not be Plan A for too many people but in the context of serious financial challenges for retirement, a clean, new house that is paid for where everything inside works because it is new is a pretty good outcome.

All of this is about preparing in case whatever you have in mind for your retirement, your Plan A, does not work out as expected. Expecting fair outcomes (from the government) is bound to end up in disappointment. We are all here now, living our lives while the problem continues to go unfixed. Maybe they will fix it, logic says that one way or another they will but what if they don't or what if you are ground zero for everything that is unfair about what they come up? 

Ditto our busted healthcare system.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

(Traditional) Bonds Still Stink Part XXXVII

Meb's point about individual bonds is one we've made many times. Yes, you get your money back at maturity but think about someone who bought a 15 year Citibank bond in 2020 yielding 2% or so. They have nine more years taking in a yield that is way below prevailing market rates. That 2% has been way below market rates for four and half years already. They are carrying the position way below their price so if they sell they locking in a big loss. 

One of the comments nesting under there somewhere, someone said they were 60% alts and 40% cash with no other details. There are enough different kinds of alts now that someone could diversify idiosyncratic risk and avoid loading up on the same provider but backtesting probably wouldn't help, a lot of the funds are too new. Your AI of choice could probably help you poke holes in various ideas to avoid certain types of mistakes like unintentionally loading up on credit risk. 

If put together correctly, a 60/40 alts/cash mix could probably deliver a solid real return but I would not expect that to return anything close to equities and the differentiation versus more traditional 60/40 like with VBAIX will be difficult to endure every so often. A lost decade for equities would be a different story provided there isn't too much unintended equity beta in there, again AI can help with that.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

More Awesomer?

Jared Dillian has a new book out called The Awesome Portfolio. Here's a podcast with Matt Zeigler to learn more. 

In our parlance, the Awesome Portfolio is quadrant inspired with five equally weighted sleeves. Dillian said he was not aware of the Permanent Portfolio when he came up with the idea but described his portfolio as a slight modification resulting in a huge improvement. It's similar to the cockroach portfolio from Jason Buck but it's cheaper.

• Equities
• Bonds
• Real Estate
• Gold 
• Cash

For most part, it's Vanguard ETF; VTI, BND, VNQ, GLD.

The underlying premise is focus on managing volatility. No stress and sleeping well are priorities. A Gemini search says that Jared backtested it to 1971 and in that time the portfolio has returned about 9% annualized versus 10% for the S&P 500 with half the volatility and smaller drawdowns. 

Using testfol.io, there's no way to recreate the results going back to 1971 because there isn't a proxy for real estate (REITs) that goes back that far. But when you see 1971 what do you think of in terms of capital markets and the like? The US went off the gold standard that year and over the course of the next decade +/-, gold went from $35 to about $800. 

I asked Gemini if that created an unrepeatable, favorable skew? Gemini noted that there was a long slow decline in gold after that massive rally but that the impact of the gain in the 70's had more influence than the subsequent long decline. Gemini found something from Bogleheads that figured the Awesome Portfolio's CAGR was closer to 6.5% if you strip out the massive run in gold from the 1970's. 

Using ETFs, we can backtest back to late 2004 and in that run, it compounded at 7.37% versus 10.97% for SPY and since the idea seems quadrant inspired, the Permanent Portfolio Mutual Fund (PRPFX) compounded at 8.14%. The Awesome Portfolio was less volatile than SPY or PRPFX but not half as volatile.

I don't think REITs are a very reliable diversifier. Managed futures do a much better job, when we take out VNQ and add managed futures instead, we get about the same result as the Awesome Portfolio with much less volatility, much smaller drawdowns, half the beta and no huge, unrepeatable skew from gold.

Using managed futures instead of VNQ resulted consistently smaller drawdowns than in the Awesome Portfolio.

The only way I know to go back that far on testfol.io with managed futures is simulated DBMF. For anyone actually interested in putting 20% into managed futures, I'd suggest splitting that up across several funds. It's not as simple as just five funds total but we've seen enough performance dispersion across managed futures funds that such a huge allocation to one fund could create the sort of stress Dillian is trying to avoid. 

With the updated version that splits the managed futures between simulated DBMF, AQMIX and ABYIX and removes BND in favor of FLOT to take out duration, it still looks competitive with the shorter time period. Dillian said that "the one vulnerability of the Awesome Portfolio is rapid rising rates." He noted that bonds, stocks and gold would probably get "killed." He said real estate would be ok but VNQ was down 26% in 2022. I've been saying for 20 years that REITs are not good protection against declines.  

The much smaller drawdowns also hold up in this second study.

I used FLOT as I said but there are now many more choices to split the FLOT slice and add a few more basis points of yield to the portfolio. 

Can this continue into the future? There's no way to know but if this is quadrant inspired then the expectation is that properly diversified, managed futures has been better than VNQ for mitigating downside volatility. There should always be at least one thing working in the Permanent Portfolio, that's the big idea, and I would suspect at least two things could always be working in the More Awesomer Portfolio. A caveat is that I don't think there's anyway this concept keeps up with equities other than if we have another lost decade that skews the results for a while.

A quick follow up, it looks like the FirstTrust BuyWrite Income ETF (FTHI) also pays out about 93-94% ROC as we've been looking over the last few days. Also that fund is quite a bit older than most of the other ETFs in the space, it goes back to 2014 and has $2.5 billion in it. In it's early years it distributed about 5% but for the last few years more like 10% as interest rates as moved moved up. Side note, if you are going to dabble in derivative income funds I would strongly encourage learning the role that interest rates play in options pricing. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

NAV Incinerator

Amy Arnott from Morningstar took a hatchet to the YieldMax Ultra Option Income Strategy ETF (ULTY). If you click through to the fund's website, this is waiting for you;

The fund blends stocks of varying volatility profiles and then sells call spreads to generate a whopper of an "income." A derivative income fund that yields 20% should not be expected to keep up with its distributions so at 60%;

The other day, I talked about crazy high yielders incinerating NAV, 60% would do it. When we dig into depletion/bridging strategy theory, part of what we are trying to assess is whether some sort of higher yielding portfolio would last longer than just leaving the money in a savings account and spending as needed. 

As a simplified example, someone has $120,000 and wants to spend $2000/mo for 60 months until they start taking Social Security at their preferred age of 67, all the while letting the IRA account grow. They could leave it in cash and then start Social Security in the 61st month after the $120,000 is depleted. 

If five years ago, this person put the $120,000 into 50% cat bonds and 50% T-bills willing to be at zero in the account after 60 months, they are a little better than that, they still have nine months of their desired withdrawal amount which gives them optionality to delay Social Security a few months or do something else with the remaining $19,000. Is that worth it? I think so but to each his own.

If instead of SHRIX/T-bills, the $120,000 was split between SHRIX and covered call fund SPXX, they would have had the optionality to extend two years beyond the original five period where they were willing to have the smaller account zero out and start Social Security.

In the context of a bridge strategy, these two examples aren't very aggressive and there is a basis to believe the above could work. Not so with ULTY.

If someone owns ULTY and reinvesting the distributions, why would anyone endure that kind of volatility for a total return of 2%, it doesn't make sense. If they are taking the distributions, the starting dollar value from when the fund first started has gone from $10,000 to $4635 at the start of 2025. So in 2024 they got $5365 in "income," then in the second year they got close to 60% again from the greatly reduced value, $2704 of income in 2025. So far in 2026, the "income" taken in is $562 and the current value of the position is $1357. The fund has already had one reverse split and it has a lot of assets so the fund can probably endure. While a small slice, 5% or less, could fit into an aggressive high "income" bridge strategy, we've looked at several examples lately where this can be done without an NAV incinerator. 

Another ROC-centric fund popped up on my radar, the Goldman Sachs S&P 500 Premium Income ETF (GPIX). It's just shy of three years old but it looks like about 90% of its distributions have been ROC. So far it is performed noticeably better than Neos S&P 500 High Yield Income (SPYI). With the upcoming merger, I'm not sure what will happen with these two but they are both huge, $5 billion for GPIX and $11 billion for SPYI.

Whether GPIX is a good fund, bad or meh, it is not an NAV incinerator. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

ROC Palooza

Just a quick post to close out our conversation of distributions that return capital (ROC). At the end of yesterday's post I said that if there wasn't already, there soon would be a way to build a portfolio that pays almost entirely ROC and that diffuses issuer risk for the few circumstances where a lot of ROC is preferable. 

Derivative income funds are not insanely complex other than autocallable funds if you count those but there are some moving parts and while the odds of a malfunction seem extremely low, it's not the same thing as buying SPY or VOO. Looking closer, there are enough funds to diffuse issuer risk.

We've talked about ROCY, it is slightly less volatile than the other broad based domestic ETFs listed. XDTE is borderline crazy high "yielding" at 20% and its distributions have been 100% ROC. BIGY is a YieldMax product that sells call spreads against the 50 largest US stocks and it's distributions almost always more than 95% ROC but there have been several exceptions. NIHI is from Neos and gives some foreign exposure, Neos does a good job paying ROC. We've mentioned MDST a few times, it has been paying 100% ROC thus far. CAIE is an autocallable ETF that pays ROC. We mentioned ACSP as being a more volatile autocallable that says it will also pay ROC. MPIM is another new autocallable fund that says it intends to pay ROC, we'll see. KGLD yields 14%, references gold and been running 86% of its distributions as ROC. BOXX and BALT are fixed income proxies that don't pay anything which is good in this context. 

It's kind of a complete portfolio....kind of, domestic equities, foreign equities, some natural resource exposure and fixed income (substitutes). To be clear about ROCY, XDTE and BIGY, those funds diversify issuer risk there's really no meaningful diversification looking through to the holdings. The large cap domestic equity sleeve of this portfolio is 45%. If we just wanted that 45% in simple market cap weighted then one fund would do. This is an aggressive strategy so we are diversifying the issuer risk. It would probably be ok to put all 45% in ROCY but that seems unnecessary in case there something crazy that comes along, crazier than the craziest black swan. 

The backtest is useless in terms of assessing growth rates, it's only six months. I think there could be some information in the volatility numbers though.

The ROC Palooza portfolio also has a slightly lower standard deviation.

I asked Claude if it was reasonable to expect that the volatility characteristics could endure and it said mostly yes but it was worried about volatility shocks. I pushed back, asking about the Volmageddon event of early 2018. It told me to get the info from testfol.io, there it is below. They did a little better. Claude thought the fast decline at the end of 2018 could also be thought of as a volatility shock and the funds derivative income funds did a little better. 

It's not the end of the world if ROC Palooza looks like VBAIX on a total return basis. KGLD could go up a little if stocks go down I suppose but to the extent gold tends to go up when stocks struggle, maybe KGLD could avoid going down. We'd need to add BTAL or managed futures if we wanted more reliable negative convexity in the portfolio. 

This is an aggressive idea as I have been saying but it could be plausible and although there aren't a lot of fund choices yet we did cover a lot of bases in today's first iteration. Someone really wanting to add more defense could swap BTAL in for either BOXX or BALT.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Highway To The IRMAA Zone

IRMAA recently came up in passing in a conversation. This has been coming up a little more recently. IRMAA stands for Income Related Monthly Adjustment Amount. 

The context is Medicare. If you make above those dollar amounts you can pay more for Medicare. If a couple is between $218,000 and $2740,000 the surcharge is $81.20 above and beyond the $202.90.

Someone of Medicare age, still enjoying their work and earning enough to trigger IRMAA probably wouldn't stop working for that sole reason but the idea of trying to manage income to avoid IRMAA if possible is worth studying for anyone who might be affected. The IRMAA income calculation is different than earned income for income tax purposes. Interest from municipal bonds counts toward IRMAA. Gemini says Roth IRA distributions do not count toward IRMAA but Roth Conversions can move the needle. Withdrawals from HSAs for qualified medical expenses do not count but HSA withdrawals for non-qualified medical expenses do count. 

It's tricky. I am not a tax expert by any means, my understanding could be best thought of as usually knowing the right question to ask someone who is an expert. 

This is an area where ROC, return of capital strategies can help. The portion of fund distributions deemed as ROC is excluded from the IRMAA calculation. If a person/couple's circumstance is such where eliminating IRMAA-able (a play on the word taxable) income from a taxable account would keep someone out of the IRMAA zone, there are a few ways to do that. 

The simplest and least volatile way would be to leave cash in the default "money market" option at Schwab or Fidelity. In taxable accounts, not IRAs, the default cash option pays effectively no interest, just a handful of basis point. I'm not sure how that is ok but these are non-competitive, non-market rates. You have to buy a money market like SWVXX at Schwab or SPAXX at Fidelity to get a competitive yield. Of course this strategy will have no chance of keeping up with purchasing power. In ten years, $100,000 might grow to $101,050.

Putting it all in box spread ETFs provides a similar effect to owning T-bills in terms of gross return. A box spread is an option combo that neutralizes out equity market risk to the point of a very steady T-bill sort of return.

BOXX has no distributions to speak of, the price just accretes. Someone in the 24% tax bracket who bought BIL has had an after tax CAGR of 3.45%. Buying BOXX and not selling has owed no tax. BOXX did have to pay $0.29 in 2024 but the NAV was over $100, effectively no distributions but technically the one. There are at least three other box spread ETFs; CBOX, XCSH and LBOX but BOXX is the first one and is huge with $14 billion. BOXX is a client holding.

The drawback is not being able to sell in the IRMAA context because sales are subject to capital gains taxes and cap gains count toward IRMAA. So there's some growth in the money but no utility if staying out of the IRMAA zone if the problem trying to be solved. 

This is where products that return capital in their distributions can help. ROC frequently takes a bad rap but there are uses and advantages and tax deferred income is one of them. The basic building block of understanding is that ROCs reduce cost basis. If the ROCs actually take cost basis down to zero, then after that, distributions are taxed as long term capital gains. Gemini thinks that YieldMax TSLA went to zero cost basis in early 2024 for original holders who never sold. If correct they've been paying long term gains on the ROC portion of their distributions ever since. It's probably worth running the numbers for selling once the cost basis gets to zero. There may be nuance to that beyond my understanding so ask a CPA or the like. 

We recently looked at JP Morgan Equity Premium ETF (ROCY), not to be confused with JEPI, that seems to have all of its distributions paid as ROC. The fund is only six months old. So far so good with ROCY but still, it's just six months. SPYI from NEOS has been pretty good about paying 95% of its distributions as ROC.

Some autocallable funds pay ROC too but some do not. CAIE does as well as the brand new ProShares ACSP.

ACSP seeks to pay 18-19%, versus 14% for CAIE, and the volatility seems sky high for ACSP. 

In the context of the $450,000 bridging strategy we've looked at a few times lately where a smaller, probably taxable account is willing to deplete to get the investor to the next milestone like Social Security or RMDs, it is possible to have much of the income be tax deferred. 

In six months, ROCY has paid about 4% which implies 8% annualized. SPYI has a much longer track record and yields 12% (95% of which has historically been ROC), CAIE pays about 14% of which 85% or so has been ROC. We've looked at the Westwood Enhanced Midstream Income ETF (MDST) pays out 9-10% and the fund's website notes 100% ROC from its previous distributions. Some of the lower yielding funds from the crazy high yielding firms have funds that return a lot of capital for distributions to sift through. BIGY from YieldMAX targets a 12% payout but there has been variability in the percent of distributions that has been ROC.

Loading up on SPYI (or ROCY), CAIE and BOXX is not something I would consider but if there isn't a way yet to cobble together a portfolio that diffuses issuer risk, there soon will be. A scenario where $40,000-$50,000 of tax deferred income keeps someone out of the IRMAA zone is fascinating. Check with your tax advisor (repeated for emphasis). 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.