Avoiding Personal Retirement Calamity

Let's start with some more retirement doom from a few places. Barron's has all sorts of numbers in a new article about how stretched and stressed retirees are. Because of increased inflation or concerns that inflation might persist, 58% of retirees have some sense of insecurity about inflation shortening how long their assets last. There were 19% struggling, 5% were "living the nightmare" but there were also good numbers with people who are comfortable and living the dream.

Alicia Munnell is sounding the alarm over the increase of out of pocket medical expenses and to a lesser extent, Medicare inflation going up at a higher rate than the COLA adjustment for Social Security. That doesn't mean people are going backwards though. A 10% bump in Medicare might be $25/mo while a 3% COLA for Social Security might be $120 as a simplistic example. 

I am obviously going to take the Munnell article as a chance to make a bigger priority out of diet changes and exercising vigorously. The simplest path is to eat less sugar (carbs) and do some sort of resistance training with weight. If someone can get ten years into retirement without needing polypharmacy and constant doctor visits, how much less money are they spending? As my contemporaries and I all get older I see this play out in terms of who is having more issues come up and who is having fewer issues comes up. This may not be easy to implement but it is very simple; cut carbs and lift weights. 

Bill Bengen, the founder of the 4% rule for sustainable retirement withdrawals, sat for a podcast with Morningstar. I would guess that most people view the 4% rule as a set and forget sort of thing but based on the podcast and some other interviews he's done, set and forget is pretty much the opposite of what he is doing. He is constantly researching and refining. Lately, the safe number in his estimation has been more like 5.8%. The biggest threats as he sees them is the combination of high price inflation and lower stock returns. 

He places a lot of emphasis on the potential for higher inflation to really jam up a lot of retirement plans. Where we have used the phrase "something's gotta give" if someone does hit the amount of money saved that they think they need, something extreme might have to give if inflation really gets out of hand. I don't think he was making a prediction though, it seemed more like he has concern that inflation might go up quite a bit. That's a subtle nuance and I might not be wording it very well.

My take on the 4% rule has always been to try to simplify it, whatever you got, take 4% or more realistically, take 1% per quarter. The growth in the portfolio will address keeping up with inflation. Obviously, when markets go down, there is visibility that a retiree would have to take less. Bengen thinks that most people cannot be flexible enough in their spending to weather a 25% drop in their portfolio leading to a 25% drop in their income. He might be right, there's certainly truth in that but I don't know how universal it is. 

One way to mitigate this is to set aside cash in an attempt to manage sequence of return risk. Something like two year's worth of regular expenses would last through most bear markets. 

There's been a lot of content lately about the rise in bond yields and whether there is more trouble ahead. I certainly don't know if rates will go up but I do think the volatility is here to stay and as we've been talking for several years, bonds with duration have become source of unreliably volatility. 

All the above makes up a cocktail of reasons why I place so much importance on adding robustness to portfolios using tools that take different approaches to offsetting equity volatility without taking on the volatility of bonds. 

Most of what we build overlaps with each other, some combo of equity beta, managed futures, bond substitutes that have almost no volatility and a little bit of negative convexity. Here's another version;

The only one not in my ownership universe is SHRIX. I use  a different cat bond fund for clients but SHRIX is more useful here for having a longer track record. 

With just over six years to backtest, the portfolio was close to VBAIX most of the time but much of the improved CAGR comes from only being down 3% in 2022. 

For people who are truly desperate something called a home equity investment contract might be an answer. Basically, you sell some of the future price appreciation of your home to get cash now. The way it compounds though you might actually get zero or close to zero when you sell your house. Like I said, for people who are truly desperate. This is not HELOC to consolidate debt or remodel the kitchen. About the only application I can think of is using this to pay for something that was very medically expensive. Someone has $300,000-$400,000 and needs to spend $150,000 for something not covered? That might be desperate enough. You can't get kicked out of your house but the smaller portion of future gains that you sell today might become all of your appreciation in the future leaving you with almost zero. Save your life but be able to stay in your house? Yeah, maybe.

The world is getting more complicated but I think my message is very similar to what it has always been in terms of health, having a simple withdrawal strategy (the way Bengen constantly tinkers is not simple) and a robust investment strategy. Building other income streams in order to be less reliant on the portfolio is a logical (to me) extension to try to reduce the odds of personal, retirement calamity. 

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.

Coincidental Coincidences

This will be fun and starts off with a coincidental Tweet about something we looked at the other day, sizing equities correctly. 

Cullen then replies;

From there, this guy Brad appears to actually get mad at Cullen for essentially saying "don't forget about inflation." Click through, do you think it's a bit or is Brad actually mad?

Obviously, a lot would have to go wrong to exhaust $10 million in most circumstances but it is important to understand price inflation and why more attainable relatively large numbers might not be the golden ticket that they first appear to be.

However much you end up with will simply be a source of income. If sustaining that source is important then taking 4-5% will be about it. Having $2 million accumulated at retirement age is nothing to scoff at, most people will not have that much in today's dollars. The income available to mostly ensure sustainability is $80,000-$100,000 which again, that's pretty good but not killing it. 

Combining that $80,000-$100,000 with $50,000 in Social Security is pretty comfortable I think and will get the job done for plenty of people but it is not so much that something very expensive, I am thinking health related, couldn't derail that "comfort" quickly. 

The combination of a down market coinciding with something medical that is very expensive and maybe a roof or plumbing catastrophe and that $2 million is going to get much smaller. The market will come back after some period, I would certainly spend the money on a medical problem and I can't imagine there's any getting around a roof or plumbing catastrophe, but the ability to generate the same income could easily be diminished. I wouldn't count on $1.3 million sustainably paying out $100,000 every year.

It's that sort of combination is why we spend so much time on trying to find additional streams of income beyond an investment portfolio and Social Security. Whether anyone thinks of that as working with a negative connotation is up to them but I would say it doesn't have to be negative. 

I started talking about this ages ago and then recently my involvement with the Del E, Webb Foundation just sort of fell out of the sky. It was a volunteer position for what turned out to be almost five years and now as a board member pays a stipend that is not big but big enough to cover a decent chunk of what I expect our fixed monthly expenses to be a few years from now. It would be enough to relieve some of the burden we would otherwise place on our portfolio if I ever decide to retire from my day job. It's the sort of "work" that others in the group have done into their 80's. 

When we talk about these things, I usually include something about being willing to have a long runway to creating an income stream so I think it is a funny coincidence that happened with my Foundation involvement. 

The willingness to play the long game with planning is vitally important to figuring out a successful path through retirement and I don't just mean financially. 

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.

Low‑Volatility Carry Engine

Bob Elliott posted on Bluesky that "rate rises have been the most common prick that pops bubbles throughout history." There is certainly visibility for the FOMC to start hiking after that last bit of inflation data and based on what Fed Fund Futures are now pricing in for 2027. Who knows what will actually happen but there is a path to hikes.

To the second half of Bob's quote, is there now a bubble? Maybe, but that is more difficult to determine versus observing there are excesses and a few warning signs. The sector weightings of the S&P 500 is something we've been talking about lately and the current tech weighting or tech + communications which I think might be a better way to look at it is certainly excessive. The capex numbers being thrown around and the debt being issued to fund that capex also seems excessive. 

Maybe these signs of excess won't matter, maybe there will be no consequence but portfolios and retirement outcomes are not threatened by what can go right which is why it is so important to look for signs of obvious excess and make decisions about whether to address the threat. 

It's not practical to avoid 47% (tech + communications) of the S&P 500 in a portfolio that needs some equity market growth. I do think being underweight is feasible, I've been in the 20's in terms of percent with most of the exposure coming from a sector ETF, an individual stock and EMXC has evolved into having a lot of semiconductor beta.

Completely avoiding bond duration is much easier because the positive attributes have been pretty easy to replace. Replacing the positive attributes of tech stocks would be more difficult.

SPXT is the S&P 500 excluding the tech sector. So it includes some tech adjacent names like Amazon, Google, Netflix, Meta and Tesla but still compounds quite a bit lower than the full S&P 500. Maybe you could overcome the 400 basis points but I think that path is more difficult than simply underweighting. 

Against this backdrop, Owen Lamont had some interesting things to say about global equity diversification. The short version is that globalization of trade has made global equity diversification less effective but now because the trend toward globalization is reversing it should make global equity diversification more important. 

I'm not sure I agree with the premise that the value of global diversification has been diluted by globalization. That implies that correlations have gone up and that returns have been less differentiated which hasn't been the case assuming he is going back further than the start of this year.

But, foreign equity exposure is still very important and if any of the chatter about the Thucydides Trap has made your radar, anyone not having any foreign exposure should probably do some work there. I don't take Thucydides literally, at least I hope that is not the outcome, but it seems like the current administration's policies are designed to make us less globally relevant. That would be a big negative, creating visibility for another decade like the 2000's where select foreign outperformed domestic. Broad foreign outperformed by a little but some select pockets outperformed by a lot.

The threatened drags from there being a consequence to the excess in tech, globalization happening without the US and let's throw in visibility for higher interest rates raises the question about how to make portfolios a little more robust or all-weatherish. 

Like we've been talking about, the way that products have developed, there isn't a need to completely turn a portfolio inside out against these risks because they might never matter. Adding a little managed futures for anyone who doesn't have that exposure is probably a good idea. The negative themes we've isolated today are probably slower moving as opposed to the Tariff Crash which is more conducive for managed futures to do well. Long time readers know I am a believer in adding negative convexity like with BTAL. That's certainly not for everyone but adding negative convexity is an effective way to make portfolios defensive without selling anything or selling very little. 

And a fun item to close out. Obviously we spend a lot of time on what to do with the 40% that typically goes into bonds in a 60/40 portfolio. I was doing a little work on the concept with Copilot and it came up with two different descriptions for my approach of no duration, instead using alts as bond substitutes and keeping duration very short in more traditional income sectors. Copilot called the strategy a low‑volatility carry engine and a risk‑controlled carry portfolio.

Carry means several different things but in this context it refers to the yield earned. 

SHRIX invests in catastrophe bonds and I'd say is an extreme example of low volatility carry and YieldMax Netflix (NFLY) is a pretty extreme example of high volatility carry. I threw T-bills in just for a little context. The SHRIX lines (I use a different cat bond fund IRL) are what I am trying to get out of the 40, or whatever percentage, that would usually go into bonds. 

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.

Explaining Your Strategy To A Child

Michael Sonnenfeldt from Tiger 21 wrote a guest essay for Barron's about whether or not to establish a family office. The main point about needing a family office probably isn't germane to what we do here but he had some pretty good one liners that are worth sharing. 

1) Intelligent discipline beats brilliance. Process is repeatable. Genius isn’t.

We talk all the time about process. I would add the idea of simplicity to this point. I think anyone's investment process should be simple relative to their own experience and capacity. I don't think Cliff Asness thinks what AQR does is simple but none of us are Cliff Asness. I first learned about the idea of simplicity in this context from Peter Lynch in the 1980's. Paraphrasing, you should be able to explain your process to a child. 

2) Position sizing is the sharpest risk tool. 

Yes. This point is an essential building block for understanding how to manage risk. I'll reference a reader comment from 2006 who put 25% of his portfolio into Pozen, betting on a migraine treatment. There was bad FDA news and the stock fell by 61%. He put 1/4 of his money into a lottery ticket. It's hard to be critical of making the bet but the sizing was catastrophically bad. 

3) If you can’t explain your edge, index proudly. 

I don't take this literally. Indexing is of course valid but so too are plenty of other simple strategies. Ideally, a portfolio only needs to be tweaked occasionally versus a lot of churn. This is why so much of the content on CNBC as well as a lot of stock market websites should be avoided. They try to get you to trade more which is the wrong thing for so many people. I would rephrase number 3 to build a portfolio you can live (sleep) with that doesn't require constant trading. 

If I have an edge, I don't love that word, I think it is avoiding or being seriously underweight areas where the risk of something terrible happening is high. Hopefully that is repeatable in the future but I have had this luck in the past.

And because I think there is a connection, the CEO of the Harvard Management Company, the endowment, announced he is retiring. The link includes a little bit about the performance which has run at close to 8%. The comments, it's a WSJ article, piled on about how far behind the S&P 500 the endowment has been. 

The endowment doesn't benchmark to the S&P 500. Apparently, the HMC targets an 8% return to account for inflation and the amount of the school's budget it covers. It's fair game to wonder whether that is the appropriate target or not but that's what it is. 

One point we've made here before is that there are things to learn from how endowments allocate but I don't think they should be emulated. One reason is that we do not have access to the private equity and venture managers that Harvard does. The other is that we are not managing for an infinite time horizon the way a college endowment should be doing. 

The idea of targeting 8% or some other number is difficult to pull off but I think the idea drifts into making sure you have the correct allocation to stocks, making sure you don't have more than you need. For example, a 55 year old who wants to retire at 68, has $1.8 million now, thinks his number is $2.5 million and is still adding to his savings. 

The median total return for rolling 13 year periods going back 100 years is 10.7% annualized, 274% total. This guy could have just 35% or $630,000 in equities and most likely come out ahead of what he thinks his number should be. Remember he is also still putting money in every year. I could see where 35% might be uncomfortably low but I don't think this situation needs 60% in equities either. 

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.

Are You Ready If Rates Go Up?

Jonathan Hoenig Tweeted this out

Yields have been trending higher of course which historically has spelled trouble for stocks. Someone else on Bloomberg this morning (didn't catch who it was) said that 4.5% is not great, 5% would be trouble and pegged 4.80% as being where trouble starts. Maybe but I would take it as there potentially being some sort of adjustment period for stocks. There's no way to know how long any sort of adjustment period would last or how much stocks might drop if at all.

Any of this playing out means bond prices go down and we might be able to take today (Friday) as a microcosm for what this "adjustment period" might look like for plain vanilla 60/40.

AOR is an ETF proxy for plain vanilla 60/40.

Repeating for the 1000th time, just avoid duration. The four blanked out funds above are all huge ETFs, not obscure, that we write about all the time. They avoid duration risk and don't feel the pain of things like TLT when rates rise. 

Cullen Roche gave a quick post mortem on the collapse of the QVR Hedge Fund which focused on volatility. This specific point is relevant to today's conversation.

1) Tail risk hedging is really, really hard. There’s a reason the classic 60/40 stock/bond portfolio remains the most popular allocation in the world: the 40% in bonds is still the simplest, most reliable positively asymmetric long-term hedge most investors can implement. It’s not perfect, but it’s “good enough” for the vast majority of people who just want durable diversification without needing to be geniuses.

Cullen is far more comfortable with bonds with duration than I am. Something like 60/40 can be all the things Cullen says but my argument is that there is a better chance of being all those things by avoiding duration in the 40. And as noted above, there are many ways to replace the duration with less volatility, a little more yield and still diversifying the risks versus putting 40% in UTEN, TLT or the like. I would also add short term individual issues into the mix if you're comfortable. 

Unrelated, here's a doozy of an ETF filing.

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.

Beware Of Morningstar Mischaracterizations

A couple of quick things tonight. 

First is a model ETF portfolio that I was able to get a look at. I won't get into specific funds and weightings but the basic idea was a lot of factor funds and very ordinary fixed income exposure including the Fidelity version of the AGG and some others that will look pretty similar to AGG.

There's not a lot of differentiation except in 2022 when the model was down about 300 basis points less than VBAIX and this year it is about 500 basis points ahead. 

Back to the factors, the model has 17 holdings, eight of which are different factor funds. To the extent a market cap weighted fund takes in all the factors, when you add too many different factors together they sort of wash out and drift toward looking a lot like market cap weighting which presumably they are trying to avoid. For anyone wanting to go down the factor road, I think it can be done more effectively with far fewer funds. Eight different ones seems like being too clever by half.

And second, a new fund alert; the Absolute Flexible Fund (FLXIX). It is convertible arbitrage-ish in that it won't always hedge every position. It says it should have about half the "beta" of high yield. It has been around for almost four years, has very little in assets and is nominally expensive. It isn't a yield play, paying out 2,88% but a portion of that is capital gains. 

The comparison is to AGG, high yield with HYG and then a couple of convertible bond funds. Just eyeballing it, I'm not sure how AGG is less volatile but FLXIX exceeds the volatility expectation versus HYG.

The fund only gets two stars from Morningstar because it is in the convertible bond category but it is not a long only fund like the majority of the category. Morningstar has miscategorized the fund. The typical convertible bond fund has a lot of equity beta and whether FLXIX is a good fund or a crappy fund, it has pretty much no equity beta. 

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.

Tell Your Friends

The NY Times had an article about retirees that have had to go back to work because their retirement math wasn't working out for them. A few of the people profiled simply did not have an adequate understanding of how the dollars and cents of retiring work. It might have been a lack of planning, not sure, but they simply did not understand. 

Most of the stories started before AI was commonly used. Now that AI is ubiquitous, anyone can use it to build a very basic framework. I'm not saying it will get everything right at this point and maybe there are some biases to sift through but in terms of an elementary starting  point where before there was less help available, AI can be helpful. 

Using Copilot, I told it I was going to make up a scenario, then ask some questions and I asked to keep the answers short. Here's the conversation with Copilot.

Roger: I am a 57 year old male. My wife is 55. We both want to retire when I am 65. My wife is in good health and I take a statin and blood pressure medication. We have a combined $300,000 in our 401ks and $26,000 in an emergency fund. I make $68,000 and my wife makes $51,000. We spend $6500/mo but that includes a mortgage that will be paid off when I am 67. First question is how much more do we need to save to be able to afford retirement?

Copilot: About $1.1M–$1.3M total by age 65 (including your current $300k).

Very rough rule‑of‑thumb math:

Spending drops to ~$5,000/mo once mortgage ends.
With Social Security, you’d want ~$1.1M–$1.3M to retire comfortably at 65.

You’re about $800k–$1M short, which means saving roughly $35k–$45k/yr combined (including employer matches + growth) gets you close.

Roger: What would you estimate our combined social security benefits to be if we both take it when I turn 65?

Copilot: Very rough estimate: ~$48k–$52k/yr combined if you both claim when you are 65.

Breakdown:

You at 65: ~$32k–$35k/yr
Wife at 63: ~$16k–$17k/yr

Total: about $4,000–$4,300/month.

Roger: If social security will be $4000/mo and we spend $5000 after the mortgage is paid off, why do we need $1 million dollars saved?

Copilot: Because the $1,000 gap isn’t the real gap — the real gap is inflation + longevity + market risk.

Super short version:

Your $5,000/mo at 65 becomes $7,000/mo at 75 and $9,000/mo at 85 with normal inflation.
Social Security doesn’t fully keep up with your rising spending.
You need savings to cover the growing gap for 25–30 years, not just the first year.

So the $1M isn’t to cover the first $1,000/mo — it’s to cover decades of rising costs and protect you if markets underperform or you live into your 90s.

Roger: Is the $35,000-$45,000 you think we need to save for both of us combined?

Copilot: Yes — that’s combined, not each.

Very short version:

You need to grow from $300k → ~$1.1M–$1.3M by age 65.
That requires roughly $35k–$45k/yr total household saving + growth.

 Roger: At most, we can only save $25,000/yr where will that leave us when I am 65?

Copilot: Very short answer: about $650k–$750k total by age 65.

Here’s the quick math:

You save $25k/yr for 8 years → $200k contributions
Assuming ~6% growth → your current $300k grows to ~$480k
Your new contributions grow to ~$170k
Total at 65 ≈ $650k (low return) to $750k (normal return)

So you’d end up about half of the ideal $1.1M–$1.3M target. 

Roger: What should we do if we are that far short of what we need?

Copilot: Here’s the short, blunt version:

If you retire at 65 with $650k–$750k, you’re not doomed — but you can’t run the same plan as someone with $1.2M. You’d need to adjust one or more of these levers:

1) Work longer (even part‑time).

Working to 67–68 shrinks the gap dramatically: more savings, fewer years to fund, higher Social Security.

2) Spend less.

If you can get spending to $4,000–$4,500/mo after the mortgage ends, the plan becomes workable.

3) Use home equity later.

Downsizing or a reverse mortgage in your 70s can fill the late‑life gap.

4) Delay Social Security.

Waiting to 67–70 boosts benefits 14–24%+, reducing how much savings you need.

5) Keep investing aggressively enough.

A too‑conservative portfolio makes the shortfall worse.

In practice, most households in your situation combine #1 + #2, and that’s usually enough to make the math work safely.

Roger: What other questions should I ask?

Copilot: Here are the short, high‑impact questions that make a retirement plan go from fuzzy to clear — perfect for your blog post’s point that AI can walk people through a framework.

1) What will our spending really be after the mortgage ends?

Most people never separate “today’s spending” from “retirement spending.”

2) How much of that spending will Social Security cover?

This tells you the size of the income gap.

3) How much will our savings grow by retirement?

People underestimate compounding and overestimate returns.

4) How long do we need the money to last?

Longevity is the silent risk.

5) What happens if returns are below average?

A simple “bad decade” scenario changes everything.

6) What levers can we pull — work longer, spend less, delay SS, downsize?

Retirement math is flexible once you see the levers.

7) What’s our safe withdrawal rate given our situation?

Not everyone gets 4%; some get 3.5%, some get 5%.

8) Are we invested appropriately for growth before and after retirement?

Too conservative = running out of money; too aggressive = volatility panic.

9) What’s our plan for healthcare before Medicare?

This is the #1 surprise cost.

10) What’s our plan for late‑life expenses (long‑term care, home repairs, etc.)?

This is where many retirements break.

Ok so that was the entire exchange. If you're reading a blog as obscure as this one, then you may know most or all of what Copilot said but you know people who don't. This can be solvable for people who realize they need to put some effort in to figuring this out but maybe they need some encouragement (from us) to get started. 

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.