Sometimes Retirement Planning Is Mundane

Yahoo Finance reports that while the average Social Security payout is $25,000/yr, "more than 4 in 10 workers aged 55 and older expect Social Security to be their primary source of retirement income." Is that a surprising number? Four out of ten? I don't know what I think about that number. 

There were at least two comments that said with no mortgage, $25,000 should be plenty for a single person to live on. Doable? Maybe, depending on where you live but plenty....

I tried to list out our expenses for living in Tucson, projecting forward to when the house is paid off. 

Tucson is not cheap but it is not very expensive either. Because we are there only part time I had to grab some averages for things like the water bill. For just one person, the number drops to $3329.50 (cutting Medicare, car insurance and the cellphone bill in half). What do you think about $1200 for groceries? I didn't cut that one in half, is $600 for one person high or low. I didn't take out the solar lease because without it, the electric bill would be well north of $200.

I realize there are things that might be missing from how other people spend money. We spend nothing on medical care (knock on wood) other than an annual physical. Who knows how long our luck will hold out but at this point there's no way to reliably predict what our spending will require on this front. Gemini thinks that the average annual healthcare expense for a 65 year old is $2691/yr excluding insurance so maybe add another $224/mo in today's dollars. 

There's no money leftover for fun other than streaming, but streaming is probably the first (only?) place to cut expenses from that list. Is never watching anything realistic? Prime is almost free plus one more like maybe Netflix or Hulu without live TV might shave $75-80 off the monthly expenses. Please comment if you can figure how to get to $25,000/yr in today's dollars being plenty but that doesn't seem plausible. 

There's also no money left over for bigger, unexpected expenses like something with the car or house. 

The point is the process not whatever numbers I came up with and again, I am sure I am leaving things out. 

We've had this conversation before. What are your fixed expenses likely to be? What about more lifestyle expenses like traveling (even if infrequent) or hobbies? Looking at bank account statements and or credit card statements can help dial this in. 

Our real number is probably closer to $4500 in today's dollars but doesn't include traveling, other types of fun or big emergencies.

As I say frequently, the Social Security Administration wants everyone to know their numbers. Going with our Plan A for SS (I take it at 70 and my wife at 64), our SS would be $6684/mo, reduced by 23% in case Congress actually lets benefit get cut leaves us at $5146/mo in today's dollars. That looks good unless some sort of medical thing comes along that is continuously expensive out of pocket or there is some sort of scenario that forces our hand to take SS earlier than we plan. 

SS will cover some portion of your fixed expenses, maybe even some of your discretionary spending or maybe covering your occasional emergencies or other big spends. What portion will it cover of those three categories? How much does your portfolio need to reliably come up with to cover everything? 

I think the math is simple. Living a $7000 lifestyle and expecting $4500 from SS (whether you discount it or not) obviously means finding $2500. Got $2 million saved, you're in good shape. Got $500,000, you'd be at a 6% spend rate which would probably survive but is not ideal. 

Depending on how comfortable someone is with their own numbers, SS vs expenses and what they have in the bank, determines whether something has to give like working longer, spending less, taking up some sort of post-retirement side hustle or something else. 

As mundane as that was, something a little more interesting was post by Jordan Grumet. He is in the decumulation phase and not a fan of buckets like segregating a year or two's worth of expenses in cash to manage sequence of return risk. He is implementing what he calls The Never Rebalance Glide Path starting with a 70/30 allocation. When stocks are up for the quarter which is most of the time, he will take his income need from equities and when equities are down he will pull from the fixed income side of the portfolio. 

A couple of comments pointed out that his premise is built upon assumptions of how bonds did for close to 40 years going into 2022 and that 2022 invalidates his idea because both stocks and bonds went down. It's sort of a Karl Popper argument that it only takes one negative occurrence to disprove something. 

Grumet's goal is to make the decumulation process easier. You can decide for yourself whether you like the idea or whether you think it makes anything simpler but Grumet never talked about what bonds he owns. The critical comments make a good point but if you swap out bonds and think in terms of equity offsets whether that's absolute return, gold, managed futures or anything else, then that seems like a better way to think of his idea in case you are not a fan of bonds with duration. 

One last item relating to a different type of bucket, exhausting a bucket or account. One form of this that several clients have done over the years that I thought I would share here is selling a house and investing some of the proceeds while spending down the rest of proceeds. One client just did this, they sold a vacation home and pretty much split the proceeds 50/50 between investing in markets and spending down the other half of the proceeds allowing their investment accounts to grow without withdrawals for a while, probably three years in this example. 

I can see this sort of thing appealing to me. We own a rental cabin that we'll sell at some point. Using the proceeds as a bridge, as we've referred to it before, to the some financial milestone like starting RMDs ties in with my preferences. 

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. 

Wait 10 Years While The Money Triples

Bloomberg has a long read up about what AQR is doing in tax aware long short. It's interesting but the there was one line that ties in with some of what we do here. "Wait 10 years while the money triples." Bloomberg attributed the line to a presentation that AQR gives in promoting the strategy. We'll get back to that in a minute.

Torsten Slok wrote that the 60/40 Portfolio is no longer working. That's not a new thought but he added a little nuance citing that the concentration in equities is or will be a contributing factor to that outcome. The concentration is of course in tech and tech adjacent stocks which depending on how you count is about 50% of the index. 

Have you heard about the large wave of debt issuance from hyperscalers and the like? Early on Monday I was looking at bonds for a new account and Fidelity's inventory was heavy in tech sector bonds. Gemini thinks that the LQD ETF is now 13.2% in tech company bonds with 7.7% of the fund in hyperscalers alone. Five years ago, LQD was 7-9% tech and 2-3% in hyperscalers. The term hyperscaler existed five years ago but was not used commonly. 

The second paragraph of this potentially threatens the equity portion of 60/40 and while we've long talked about interest rate risk threatening the fixed income portion, the tech sector build up in funds like LQD is another one. 

If any of that is plausible to you, what are you going to do? The context of these sorts of comments tend to be in terms of lost decades. The most recent one of those was the 2000's and while markets had a bumpy round trip to nowhere, there were ways to grow portfolios. The way that fund sophistication has evolved, there are now many more alternative ways to grow portfolios than 20 years ago in case "lost decade" actually happens. 

There are several ways to go. One is just staying old school stocks and bonds in a 60/40 allocation or some other split, going all alternatives that can do decently independent of whatever is happening in markets like catastrophe bonds or combining the two or in our case, dialing up the alt exposure some while maintaining some basic exposures too. 

Everyone might come to agree we're going to have a lost decade but what if that is wrong. If it is wrong, and to be clear I have no idea what will happen, then equities will be the thing that consistently does the best and having no exposure would turn out to be a terrible mistake. 

Even if it is a lost decade there will still be plenty of pockets that do just fine or maybe a little better than just fine.

Here's a stretch were foreign had close to "normal" returns in a lost decade for domestic.

Materials did noticeably better than market cap weighted in the 2000's even if not really a normal sort of return.

Compounding at 4.77% is obviously a whole lot better than negative 0.91%. We talk frequently about the Merger Fund which I've owned for clients for ages, in the above period it compounded at 4.66% which is not too exciting during the good times but is pretty strong for a negative period for equities. Gold compounded better than 14% in the 2000's and simulated DBMF for managed futures annualized at 8.44%.

The list of things that can do better in a lost decade is much longer than it used to, repeated for emphasis. Yes, more choice is better of course but a longer list means not having to load up on just one or two things. What if we do have a lost decade for stocks but gold does even worse than stocks in the scenario? It could happen and having 25% in gold if it did would be very regretful.

When anyone talks about all-weather, this is what they are talking about. A portfolio that is able to adapt to whatever comes along. We have a lot of fun, I have fun anyway, building portfolios that might appear to be robust but really are not. They are templates for robustness, yes but 25% in cat bonds or 30% in managed futures is loading up on risk. 

There is something intellectually satisfying thinking you could defeat all macro obstacles with just three funds but you can't. Maybe the combo of momentum, managed futures and cat bonds will never face the consequences of loading up that way but you'd still be taking a lot of risk. A 5-8% weighting (a little bigger than I usually go) not working when it should is much more of a nuisance than a calamity. 

Back to waiting 10 years for your money to triple. At a compounding rate of about 11.5% your money would triple. Maybe that can happen or maybe it will take 15 years at 7.6% which doesn't seem so bad or maybe it will compound just under six percent and take 20 years to triple. But it will happen, the tripling in ten years comment is about just letting the portfolio/strategy work. Another Munger quote was that the first rule of compounding is to never interrupt it unnecessarily. 

Putting 40% into one fund (other than the broadest index fund) and the rest into two or three alternatives is compounding interruption waiting to happen. 

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. 

The Perfect Stack

A good follow up to yesterday's post about portable alpha is a research report from ReturnStacked that tries to find the optimal stack (layering of alternatives on top of equities and fixed income using leverage). ReturnStacked certainly gets credit for creating awareness of portable alpha and capital efficiency and their content is always interesting. 

That image is a good TLDR from the paper. 

The weightings appear to be risk parity-influenced. Finominal's risk weighting optimizer comes up with slightly different numbers but it's not that far off. This can be modeled out on testfol.io and playing around with it some, gives interesting results. 

The equity component is just SPY, I used IEF (simulated) for bonds, GLD (simulated) for gold, DBMF (simulated) for managed futures and the merger fund. I chose those simply to get the longest backtests, testfol.io can simulate certain things to go back pretty far. 

For Portfolio 2 I pretty much cut all the weightings in half other than equities which I reduced by 1/3. The reason to try it with no bonds in Portfolio 3 is because the time period they studied, 1999-2025, benefitted considerably from the bond sleeve up until 2021 in a manner that I don't believe can be repeated. 

The returns are adjusted for inflation, those are real returns not nominal. I adjusted them for inflation to continue the thread about CPI plus 5%. Getting CPI plus 4+% with 1/2-2/3 the volatility and downside of plain vanilla 60/40 without too much effort is impressive. 

For one other comparison, I think the Permanent Portfolio Mutual Fund (PRPFX) is worth mentioning. For the period we studied for this post, PRPFX had a real compounded return of 5.88% with volatility running at 10.07% and a Sharpe Ratio of 0.68. 

Obviously, the ReturnStacked guys believe in leverage but it is a complexity that I would prefer not to take on. I realize they say they are not misusing leverage, I'm sure that's right, but that doesn't mean that something unforeseeable can't happen that causes the leverage to malfunction. 

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. 

Less Portable, More Alpha?

Barron's cited research from Edward McQuarrie (we looked at something else from McQuarrie in June) that tried to make the case for bonds instead of stocks. 

No. 

If you want to make a case for including bonds, ok, that's different. I would disagree but including some bonds to offset the ups and downs of 100% equities might turn out to the be the right thing. But that was not the context.  

We frequently focus on how to get the volatility muting effects that people want from bonds without taking on the risk and volatility that is now inherent in bonds with duration. As I started to frame this post out in my head I saw a reference to portable alpha somewhere. 

The most common application of portable alpha is combining beta exposures like an index fund for equities and AGG-like or treasury bond exposure for fixed income and then adding some sort of alpha (outperformance) source in such a way that usually involves leverage. Maybe a program doing this would use S&P 500 futures for equities and the leverage component, maybe actual bonds and then some sort of intended alpha source that after a lesson learned from the Financial Crisis should be uncorrelated to equities like a hedge fund or managed futures. 

Portfolio 1 is an example of success with leveraging up. It gets leverage from SSO which is 2x the S&P 500. IEF is 7-10 year treasuries and the other three are different types of alts that should maintain a low or negative correlation to equities. In real life, putting 30% in SSO and leaving it in there would be a tremendous act of faith. 

The PIMCO Stocks PLUS Long Duration (PSLDX) goes down this road with 100% exposure to both stocks and long bonds. WisdomTree Efficient Core (NTSX) came along in 2018, it's 90% stocks, 60% bonds so a 67% allocation to it equals 100% into VBAIX which leaves 33% for alpha sources/diversifiers. 

Updating the first example to include a version with PSLDX and NTSX;

All three outperformed plain vanilla 60/40 in Portfolio 4 with the PSLDX version having the best growth rate and good volatility result. The version with NTSX has lowest Sharpe Ratio of the three portable alpha portfolios but a CAGR 131 basis points ahead of plain vanilla is pretty good. 

The alts help the three versions outperform a little during adverse market events but there doesn't appear to be a ton of reliable crisis alpha.

In previous blog posts, we've looked at building these sorts of portfolio but without including bonds with duration. For the last few years bonds have of course struggled but that struggle under the hood hasn't necessarily been a problem for the backtests. At least one of the alts (managed futures in 2022 or gold last year for example) helped bail out the struggling bonds during various negative market events. 

Then I found this paper from Man Financial (I'm guessing we looked at it a couple of years ago when it was published too). Here's their take on building an institutional portable alpha portfolio.

Below, I am using AQMIX and QSPIX as proxies simply because they have long track records. Man talked about possibly doubling returns with 100/100 equities/managed futures but I couldn't recreate that. The results are interesting though. 

Moving closer to something plausible. Portfolios 3 and 4 should say 50% SSO not SPY.

All three have 50% in SSO which is the equivalent to 100% in the S&P 500 subject to any tracking issues so the portfolios are 100/50 and all three outperformed with less volatility. They all did much better in 2022 than just the S&P 500 but in the other drawdowns, the fast ones in late 2018, 2020, 2025 and 2026 they didn't help much.

The final iteration is 80/20 and I threw in 60/40 with VBAIX

They lag SPY with quite a bit less volatility. They outperform VBAIX with a little more volatility but their drawdowns have been shorter than VBIAX' which is an interesting tidbit. Is it worth it? The Sharpe Ratio and the volatility numbers suggest it probably it but ultimately that would be up to the end user. 

The bigger point is about how very sophisticated strategies can be adapted to retail sized accounts through regular brokerage accounts and the extent to which alts can help dial in volatility and add defensiveness to diversified portfolios.  

Tying back into portable alpha, I am not a fan of leveraging up to build a portfolio but I think the process we explored takes some influence from portable alpha which I am comfortable with. 

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. 

There's a Munger Quote For That

Some quick hits today.

By now you've probably heard about the hedge fund called Situational Awareness run by Leopold Aschenbrenner. He made an absolute fortune leveraging up to bet on all the AI-adjacent stocks that were leading markets higher before they started to rollover in June. The leverage that made him a genius on the way up destroyed the fund on the way down. 

The Old Rope Research blog was apparently a believer in Leo and then wrote this mea culpa. In there, he called Aschenbrenner Lumpy Leo, referring to lumpy returns and attributed a quote to Charlie Munger about "preferring a smooth 10% return to a lumpy 15%." That is a great and concise way to sum up what we are trying to do here. 

This chart from Bespoke Investment Group is insane to me. 

I may not have mentioned it before but I am not a fan of bond duration. 

Recently, I learned quite a bit about outsourced chief investment officers (OCIO) in my work with the Del E. Webb Foundation. Basically, OCIO is a fancy term for the type of specialized investment manager that is equipped to provide service to foundations and endowments. It may seem like I'm making fun of the term but not the work they do. 

I will have more about this later this summer but in talking to one firm, there was one quip that really made an impression. In wanting to stress the importance of the relationship and services provided, they said anyone can manage the money. 

A quick detour, "relationship and services" is very important, there are complexities that differ from a person just trying to save for and then navigate through their retirement. 

But we can still dissect the portfolios. Typically, there's a lot allocated to equities, 65% was a common number. That 65% would include maybe 10-15% in private equity. Firms will often manage public equity with active managers with maybe a small sleeve allocated to index funds. A common allocation to alternatives as diversifiers other than private equity would also be in the 10-15% range. Based on my small sample size, these firms don't seem too interested in doing much with actively managing fixed income which if correct more universally, surprises me. 

I pulled some information about returns and volatility of OCIO managed accounts from Grok for three years ending 03/31/2026.

There's nothing special about the endowment and foundations numbers. There's nothing wrong with them either but they don't refute the claim that anyone can manage the money.

Portfolio 1 attempts a very generic replication. ACWI at 65% involves two decisions; the weighting which is consistent with what many OCIOs do and including foreign with ACWI as opposed to domestic only. APHPX and QMHIX are intended to be the the alts sleeve mixing something that is hedge fund-ish and managed futures. The income sleeve has a little more thought to it. SRDAX is an income fund but it goes off the beaten path and FLOT requires deciding to avoid duration. 

I couldn't really tease out better OCIO data even trying multiple AIs but if a person working at an OCIO shop says anyone can manage the money and we can get similar returns to what OCIOs can achieve then this supports the idea that investors can get "institutional" outcomes with brokerage accessible funds. That's huge and did not exist 20 years ago. 

The result is a little better than what Grok found but isn't all that interesting actually. It tracks very closely to the more generic Portfolio 2 but with noticeably better compounding and slightly less volatility. Both are valid but not special. Inflation ran at 3.04% so both were better than CPI plus 5% which is good of course but that is a short window we're looking at and stocks did fantastically well over that stretch.

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. 

CPI Plus 2.72%?

There's been a lot of attention lately to real yields on TIPS approaching 3%. These yields that Copilot found are probably stale by a few days but current enough for this post. 

We've talked more about the concept of real yields/return a few times lately. Generically, a real yield of 2% is considered a benchmark or sort of minimum standard. Real yields have been heading in the right direction from the perspective of investors for the last few years based on the UTEN ETF, which is not a TIPS product, but haven't been attractive.

This relates to recent posts where we've talked about foundations often seeking CPI plus 5% for an entire portfolio, the context of this is CPI plus almost 3% for a sleeve of the portfolio. The ten year and further out TIPS are still duration. If interest rates go meaningfully higher without a big step up in headline inflation then the prices of TIPS bought at 5.11% nominal/2.72% real will still go down a lot in price. If rates move higher along with noticeably higher price inflation, then the par value will be reset but it's sort of sequence thing for how much prices might drop as par increases teeter totter with interest rate sensitivities. 

Before going any further, if this sort of real yield appeals to you enough to allocate to TIPS, buy individual TIPS not ETFs or mutual funds. 

TIPS aren't my favorite. We can build a portfolio with a higher real yield that is far less volatile. I built this study;

I included TIP but there's not much information there, the duration is just under seven years. The real yield from the first table for a 20 year TIPS is 2.72%. The volatility of a 20 year TIPS should be similar to a 20 year regular bond and you can see the volatility of TLH which tracks 10-20 years. 

The specifics of the portfolio I built aren't important but a couple of details, 50% of it is FLOT which not a high yielding fund. It currently shows 4.53% on Yahoo Finance. The other half is split between 7 funds which each have 6-8% weightings to dilute the risk a bit. There is some volatility in the yield numbers flowing from the portfolio. 

In the context of CPI plus 5%, despite our result with the above income portfolio that has no equity exposure, you'd need a growth component (equities) to have a reasonable chance for CPI plus 5% for a longer period. 

Maybe you don't need that but if you do, even 20% equities should nudge up the plus X% number.

Adding 20% to equities and reducing the income positions proportionately had a total return for the period study of 11.27% and while that sounds good to me, it compounded 500 basis points less than a simple 60/40 portfolio. 

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. 

A Doozy Of A Day

This is a doozy of a quote from Torsten Slok via Bloomberg.

Here's how treasuries did on Wednesday. 

You can see most of the selling further out the curve happened as Kevin Warsh gave his press conference which was also a doozy. The respective drops in the seven year and five year is obviously less problematic.

Is the market doing the FOMC's job? Warsh sort of said that in the presser

The next batch are semiconductors, then broad tech, the S&P 500 and SPXT is the S&P 500 excluding the tech sector. From their respective highs in June, SOXX is down 27%, XLK is down almost 15%, SPY is down 3.8% and SPXT is down less than one percent from its high which was this month, not in June.

If this event turns out to be serious or memorable (or both), I think today gave a good look of what it will look like. Excess in the AI and AI adjacent space and unreliable volatility in the bond market will be front and center. We've been talking some about the excess in parts of the tech sector and talking constantly about the unreliable volatility of bonds a lot. 

We've had similar conversations in previous big events, I'm not sure what you do if you were overweight tech a month ago with no negative convexity on board. Maybe today is the bottom? At some point, industries like semiconductors, themes like the CHAT ETF or stocks like Oracle will find a bottom, time will bail those holders out eventually, there's just no way to know what they will have to endure or for how long. I mentioned ORCL because the decline has been stunning, I would be shocked if it went out of business at the end of this but to be clear, I am not a buyer at any price. 

I think anyone who was underweight tech coming into June, no tech is not realistic, and has been avoiding fixed income duration will fair better through this, if it turns out to be serious, but I would not count on skating through with no decline. My hope would be to avoid the worst of it. My experience has been that avoiding the worst of these events is repeatable. 

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.