Are You Obsessed?

Via Abnormal Returns, Elizabeth George says to stop obsessing about your safe withdrawal rate. The starting point is the 4% rule derived by Bill Bengen in 1994 based on a 50/50 allocation of stocks and bonds going back to the 1920's. 

Bengen has since dialed up the number to 4.7% but if you read or watch any interviews with him, he is constantly refining the number. Morningstar comes out with a revised number of its own every year which I have been pretty consistent in making fun of. Changing it every year in the manner they do doesn't help anyone. 

The precise, original implementation is to start at a 4.15% withdrawal rate and then adjust it upward by the rate of inflation. If someone's safe withdrawal dollar amount is $37,000 and then CPI was 3.4%, the following year the new number would be $38,258. I've also made fun of that part of it as being unrealistic. Many years ago, I started saying, "whatever you got, 4%, more precisely, 1% every quarter." 

That certainly is simpler but that was very early into my time as an RIA. I still believe in the simplicity although chances are 5% is ok too but even though the math checks out, it's not what too many people do at least based on my sample size of clients. It's more like, "I need $3500/mo" and that will be it for a while then after a few years, "I need to up it to $4000/mo." 

I've said before, like every advisor, I have a couple of clients who take what should be way too much to be sustainable but the stock market has bailed them out. Every so often, of course a client will need money for something bigger and I either just send it or if it is a problematic amount in terms of the longevity of their money I will say something like, "ok we're obviously going to do what you tell us but this threatens how long the money will last." One time a client responded, "I know but it's for son and I have to do it." 

One thing that several clients do as sort of coincidence is they take monthly withdrawals from their IRAs that are well under 1/12th of their RMD and then in December take a large enough withdrawal to get up to their RMD amount. They are living month to month on what they need and then that lump sum at the end of the year could be for traveling or some other discretionary spending.

George's point in her blog post is similar to my anecdotes about not perpetually tweaking it to the penny. "Financial professionals and FIRE personalities who lead the SWR debates and build complex models to analyze them to the third decimal place are usually so enamored with achievement that they never stop earning anyway" which I thought was pretty funny.

If I am reading correctly, it seems like George pays no heed to it and if that is the case I disagree with that pretty strenuously. What I think makes the concept work is thoroughly understanding what Bengen originally derived. Understanding what it's built on, understanding what type of environment challenges his concept and then moving forward with some reasonable even if not rigid implementation that suits your needs. I would expect any advisor to have this dialed in, it's not rocket science. There's also not much of a barrier to understanding for anyone managing their own accounts but take the time to learn it thoroughly. 

If nothing else, "whatever you got, 4%, more precisely, 1% every quarter" will work for anyone who can be a little flexible, able to take less in years where the markets are down. Even then, there is a work around to the need to be flexible in that way, just set aside 18-24 months of expected withdrawals in cash or some sort of cash proxy to greatly reduce the odds of ever having to sell after a large decline to meet income needs. 

I think George is right about not needing to obsess or overly stress about this. More time spent understanding how it works on the front end should reduce stress but also enhance understanding the reality that anyone taking 8-9% has a real chance of running into trouble or realizing that based on Bengen's process, a 6% withdrawal rate was successful 75% of the time (per Gemini). One of my high spenders does not care about running into trouble, this person is 20 years in taking more than 8-9% in most years but just is not worried. I don't know how but I bet they sleep well at night which is a pretty important component to this topic, having a plan that allows you to sleep.

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 Drone From Sector 7-G

Lately my timeline on Threads has had a lot of posts from people who are 59 or 60 and completely lost in terms of figuring out what life is all about, what comes next, what to do about retirement or if they even can retire. Yes, they could all be bots or otherwise fake accounts but what if the sentiment is real? 

I'm sure I am seeing these because Threads must know from my Facebook profile that I am about that age although my birthyear is not on my profile. If you're anywhere close to that age, do you feel lost in this manner or maybe more constructively, do you know anyone close to that age who is similarly lost?

We've addressed this here and there over the years. To me this is all about having sense of purpose or maybe more correctly finding a sense of purpose. 

I appreciate that anyone who thinks they are a drone from Sector 7-G may find it difficult to develop a sense of purpose at work but it is up to us to figure this out for ourselves. My tagline for this sort of thing has been to paraphrase Joe Moglia by saying that no one will care more about your outcome than you.

A drone from Sector 7-G can find purpose in pursuing the next thing. I figured out in my nid-20's that I wanted to manage money from home, it took a couple of stops along the way and almost ten years to get there but there was purpose getting to that point. Time spent planning and learning for their next thing is very purposeful and provides hope for someone who is really unhappy at work.

Part of this has to be figuring out how to be happy at home. That's going to be different for everyone I imagine and maybe it takes work but it is a crucial building block to this conversation.  

I am always going to talk about the importance of health and fitness which if nothing else, can simply be one less thing to worry about for the older Gen-X or younger Boomer trying to figure it out. Feeling crappy all the time or being unable to do enjoyable things or perform tasks that have to be done will make it much harder to live a full life. Any day that you exercise is always a little better.

Living below your means should result in not having too much financial stress. Pulling that off makes every other aspect of life easier. 

It is important to have a positive attitude in life and be grateful but everyone says that. The only thing I can add there, but I think it matters a lot, is that it has to be genuine and that probably takes some self-training to make happen if those aren't already personality traits. Or maybe a lot of self-training.  

Any article you read along these lines will talk about the importance of having social connections. I think this is widely accepted as accurate but that is difficult for a lot of people. It certainly is for me. I am terrible at making and enjoying idle chit chat. When there's something to talk about, some purpose, there's no hang up.

If it weren't for the fire department, this is probably what I would look like. 

Actively volunteering can check a lot of these boxes. It is very purposeful and likely to involve a lot of social engagement. Volunteering as a firefighter creates an obvious need for some level of fitness as do many volunteer endeavors. My older brother volunteers at a food bank which involves a lot of lifting and moving of food. My wife does a lot with dogs and other tasks at the animal rescue that require being fit. 

I am sorry for anyone struggling for answers, all the more so if the posts I see on Threads capture the actual sentiment of people but as is the case with everything, the more we put in to solving it, whatever it is, the more we will get out. 

I'll close with a quote I used to cite very frequently from our friend Bill here in Walker, "you can figure it out now or you can figure it out later but you'll be much happier if you figure it out now."

At What Point Are Yields Crazy?

First, I'll answer the question in the title. A 20% yield is crazy in terms of not having a realistic shot of being sustainable. Maybe the crazy threshold should be a little lower but twenty for sure. 

We've spent some time on developing a bridging strategy to make a smaller piece of money, smaller in relation to a rollover IRA, last for some number of years until the next financial milestone like starting Social Security or taking RMDs. Sticking with the ten year example we've worked before, we'd be willing to spend 1/10th of the original balance each year, depleting to zero after ten years. With that in mind can we take that big distribution and have something left over at the ten year mark or make that pot of money last longer. 

I've said this research is probably aimed at our (my wife and me) financial situation at some point down the road. We've looked at some crazy combinations that I probably wouldn't want to pursue but I think by adding one of those distributing ladder ETF, we can dial the crazy way down.

Here's the latest version, TIPB matures in 2035 which does not fit in with my timeline for any of this but will do for long term research/following.

The highest yielder is CAIE at 14% so we're nowhere near crazy if we're sticking with 20%. There's not much equity beta but there is some. The backtest can only go back a year so there's not a lot of useful information but here it is.

The yield is 8.25% which is pretty high considering how much is in TIPB and JAAA. TIPB though has a sneaky high yield and the first tranche of TIPS in the fund will mature next month which will kick the "yield" up considerably when it returns principal as it is designed to do. 

If we implemented this with $450,000 and took out $11,250 per calendar quarter in a ten year period that was identical to 01/01/2000-12/31/2009, Copilot says there would be $330,000 left over. The next stress test was a ten year period where the yield on the ten year US treasury went from 1.5% to 7% over a ten year period. In that scenario, everything else being the same, Copilot says $106,000 would be left over. Rates can't start at 1.5% because were at five and change but the point is something terrible happening in the bond market.

I would imagine the product landscape continues to improve, maybe in six-eight years when I might need to consider this, it can be a little more robust.

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.

Retirement Planning Stream Of Consciousness

Yesterday, I mentioned the webinar for distributing ladder ETFs from Northern Trust. At one point the conversation talked about go-go retirement (early years), slow-go (middle years) and no-go (the period in which someone is old).

This creates what is referred to as the retirement smile, spending a lot early on for travel maybe or other activities. Then at some point retirees slow down but are still relatively healthy and able bodied, hopefully. The final tranche in this metaphor is possibly needing some sort of outside care. 

Does that resonate with you? I turned 60 this year and I'm starting to look ahead with more specificity than when I was younger. My focus was simply accumulate what I can so that I have optionality. 

If that does resonate, does it look like you will have the go-go years that you want both financially and physically? That could be a difficult conversation for people to have with themselves. Doing things is expensive and it would unfortunate to spend many years looking forward to taking a bunch of trips or whatever go-go means but being physically unable to do so. 

For the last few months, I've been thinking in terms of blocks of time loosely connected to financial milestones. I made a joke to my wife that I am spending my first decade of retirement, my 60's, by working. We've talked about this, there is visibility at some point for income from my practice to start to decrease. I expect it to be a significant contributor relative to our financial needs for quite a while even if it doesn't remain lucrative for that much longer. 

I am no longer with Del E Webb Foundation, I resigned earlier this summer so that income stream is gone. There haven't been too many instances in my life where I didn't fit in with a group but that was the case here. I never understood their decision process for running the org, not talking about how grants are awarded, but how they operated. That's not a knock on them, I did not fit in with them. I said I would get around to explaining what happened and this seemed like a good spot. Where people tend to want to do less as they get older, I'm glad to have it off my plate. I did not expect to have that reaction. 

For now, there's no visibility on ever preferring to take Social Security before 70. If I hold out beyond 69, I will think of that as having stayed on plan with that. Taking it as 70 has been my intention since I first thought about it. 

We've looked at all sorts of ideas for bridging to the next financial milestone with a smaller piece of money. I really like this idea but that might be because our situation appears to be heading in that direction if we sell our vacation rental in maybe ten years or so. We might live in it to avoid the capital gains, if you live in what was an investment property for two out of five years, that relieves the capital gains burden, not the depreciation recapture but ask your tax advisor. 

When I first started blogging in 2004, one of the things I wanted to do was chronicle how my thoughts on my own retirement would evolve. I think this is a useful exercise for people. The more we put into our retirement planning including thinking and evolving strategy, the more we will get out of it. 

Solving Actual Problems

We're in Tucson this week and on Wednesday afternoon I went to go pickup some garden tools that my wife found on Facebook marketplace, $20 for more that we needed, not too shabby.

The seller lives in a 55 and older mobile home park closer to the middle of town from where we live. The place was immaculate, it looked to be about half occupied, not sure if that is because it's still warm here or some other reason. Naturally I got curious about the actual dollars and cents.

As is common, residents own the house but lease the lot.

That price is toward the lower end, the upper end was $160,000-$180,000 and there were a handful closer to just $40,000. Gemini said the rent for lot ranged from $658-$717 which must be a dated number versus the $825 in the picture. All in utilities range from about $150 in the less hot months to about $350 in summer months. Insurance runs about $1000/yr and taxes (for the house, not the lot) are about $200/yr. So all in, after buying the house, it might be about $13500/yr or $1125/mo. 

Regardless of who may or may not be interested in this situation, it is relatively affordable. For anyone unable to accumulate a meaningful retirement but who bought a house could downsize into something like this and have a useable piece of money left over after selling and buying into the property I visited. As a primary residence it is not a lavish circumstance but it is workable outcome.

It is also an inexpensive way to snowbird. Someone in South Dakota might want to take a chunk out of their winters without actually moving away. There are plenty of ways to snowbird of course, in a recent blog post we cited someone who got an Airbnb for an entire month which is probably less expensive than buying one of the mobile homes we're talking about which is cheaper than buying a regular house in a neighborhood.

My wife and I probably have our retirement sorted out which I am grateful for but plenty of people will have to figure it out and make some difficult choices. Mobile home communities like the one I visited can solve problems. 

Speaking of solving problems, I sat in on a webinar for the Northern Trust distributing ladder ETFs. We've looked at them before. There are two versions, one that pays tax free income by owning muni bonds and the other protects against inflation with TIPS. The way these work, if you buy one that matures in 2036, so ten years from now, it pays out 1/10th of the NAV every year plus a little interest. In the final year, the fund pays out it's final 1/10th of the original investment and then closes. 

We've looked these in the context of a bridging strategy. Someone who is today 65 might use one of these as a way to hold off taking money from their IRA until RMDs start in 2036 when they are 75.

We've looked at putting together a bunch of very high yield products with different types of risks to do something similar but hopefully end up with some money leftover. Going all in on the 2036 TIPS Distributing Ladder (TIPF) means you have nothing leftover in ten years. Owning ten or 12 very high yielding with disparate risks has a reasonable chance of not completely depleting but that is aggressive. A strategy of half in TIPF and half in a very yieldy portfolio would be safer. 

None of that is new though from our previous conversations about these funds. The one new thing I pulled from the webinar was pretty much a throwaway line that wasn't followed up on. Yes, bridging seems to be the primary use for these but Chris Huemmer from Northern Trust made a comment about using the 2056 TIPS version for something like property tax. The symbol for that fund is TIPH and it matures in 2056. Each year it will pay out 1/30 of the original investment amount plus a little interest.  

Our property tax in Walker is around $2000/yr. In theory, $60.000 invested in TIPH would cover our property taxes until I am 90. Property tax is one the higher dollar items people have to deal with but it does not inflate the way health insurance premiums do or over the last few years the way home insurance premiums inflate. We probably need equity exposure to keep up with healthcare costs and now homeowners insurance but this angle on property tax is interesting and new to me even if I am the last to know. 

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.

Closed End Crazy

Dan Ives is throwing his hat into the closed end fund (CEF) ring with the upcoming Ives Ultra AI Opportunity Fund (IVAI). That article mentioned a couple of other recent closed end funds in the AI and private tech realm. It hasn't gone well.

PWRL just owns private companies and it appears as though the market price is trying to price the underlying illiquid portfolio that does price everyday.

Someone bought up in the $300's, yikes. These types of funds are real hot dot stuff that tries to appeal to people's greed. You can reach whatever goal you might have without it. 

Another day, another autocallable ETF. The VegaShares US Equity Autocallable Income ETF (VAIE) targets about a 16% yield so my guess it it will be a little more volatile than CAIE, see what VegaShares did there with the symbol, which is closer to a 14% yield. 

The autocallable space in the ETF market is just getting started and I think that unlike the closed end funds above, the lower yielding, less volatile funds will help contribute to solving people's need for income without nauseating volatility. Matt Kaufman from Calamos was on ETF IQ this week with a helpful explanation of how they work. The conversation around these from fund providers is evolving in response, I believe, to questions not addressed when they first started trading a year and half ago. 

This is a good contrast in yields/volatility that we probably looked at once before. ACSP targets twice the yield and the price is all over the place, no distributions yet per Yahoo Finance so that is all price. JELM is the lowest yielding autocallable ETF that I am aware of. To each his own but if I ever allocate to one of these for clients it will not ACSP. If anything, it will be a small slice to a lower volatility version. 

Next, a follow up on the WisdomTree Efficient Long/Short Equity Fund (WTLS). They hosted a webinar to explain the fund and recap its results. So far it has been lights out. It leverages up 90% beta with the S&P 500 and 90% alpha with a long/short overlay that seeks a volatility level around 7%.

Portfolios 2 and 3 leverage up the long/short symbol with SPY in the same manner that WTLS leverages up and you can see WTLS has favorable results. Portfolio 1 is QLFIX which has a similar leveraged strategy. The fifth portfolio isolates just the long/short strategy by shorting SPY out of it and although the timeframe is short, the result has been very steady but a little higher vol than 7.

When I first looked at WTLS, I just made a couple of casual comments that it was doing what it should for the most part, noting it was way too early to draw any conclusions and I also warned about using leverage to stack betas. WisdomTree talks about WTLS as being beta and alpha but arguably, a long biased long/short strategy could be thought of as a beta exposure. 

That frames the risk, it might turn out actually be two betas if something nasty happens with the stock market. That was not the case in the quick drawdown when we attacked Iran. It wasn't a problem for QLFIX either which is a fund we haven't looked at before today. 

A use case for WTLS in the context we've talked about lately could be in a portfolio that barbells a high volatility equity fund to be a small slice of the overall portfolio as the growth engine in a portfolio that is overall intended to be very low volatility or have a high distribution rate or both. In that circumstance there still needs to be a little growth. A 10% weight to WTLS is 18% of equity exposure and if that is the vast majority of the equity exposure then yes the portfolio is using leverage but in this context I think it is closer to leveraging down than leveraging up. 

Last one. We've talked a lot over the last few months about combining value, quality and momentum for domestic equity exposure. It turns out that iShares has three funds that do different versions of that factor combo for foreign equity exposure with INTF, IDYN and CORO. INTF is a relatively simple index fund that includes these factors and IDYN is similar to DYNF trying to rotate factors to try to outperform the index. CORO has been the best performer. It owns mostly country funds with a few individual stocks thrown in. The largest holdings currently, and this has been the case for a bit, are Japan EWJ, Canada EWC and Switzerland EWL. It also currently owns Taiwan Semi and SK Hynix.

The fund reports its holdings in an interesting way. It includes a look thru to the sectors.

This was always part of the template I used for writing about country funds for theStreet.com many years ago and while I do less with country funds these days, looking through to the sectors is very important. If you want to own Taiwan, cool, go for it but EWT is 73% technology. Owning a lot of QQQ with EWT on top of that is going to be very painful if there is ever any consequence for the excesses currently in the tech sector. Another example, iShares Singapore (EWS) has always been heavy in financials and sure enough, during the financial crisis it fell 60%.

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.

"It's A Meltdown"

That was the subject of the daily afternoon email from Bloomberg referring to what is happening in the treasury market as yields continue to work higher, sending prices lower.

I pulled up the following, halfway through the trading day thinking more like the pain continues for holders of long bonds more than thinking it was a meltdown.

Bespoke Tweeted out that since inception, TLT is down slightly on a price basis and that on a total return basis it is down going back to 2012. There's been a flood of pundits weighing in across the webs about why longer bonds are now attractive but the same or similar arguments were made at lower yields on the way up to the now current 5.11% on the ten year treasury. 

I'm sure the textbook logic expressed in those opinions is correct but yields still keep going up. It is correct that losses from 4% going up to 5% are different than losses from 1% up to 2% were because as the price does its thing, investors are collecting 4% versus collecting 1% or less five years ago. That does nothing for the volatility or the risk that rates go higher from here. It is difficult to see the price inflation problem subsiding soon and that certainly is relevant. 

The way we have been framing this has been as a matter of adequate compensation. Forget all the textbook logic, what return do you find to be adequate compensation for the volatility of owning intermediate and longer dated debt? For me, low fives doesn't do it. Maybe at 6% if it ever happens, not sure but at 7% probably a little. 

I've been repeating the above sentiment about 6 and 7%....if it ever happens for quite a while. I have no idea if it will ever happen but I do know that 5+% is not adequate compensation. 

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.