Innovative But Uncomfortable

A couple of different posts related to retirement from Humble Dollar to look at today. 

First up, Richard Connor offered his thoughts on sequence of return risk with five ideas to try to mitigate the consequence of an adverse sequence around the time you plan to start taking from your portfolio whether that is when you retire or some other point. He laid out a scenario where a $1 million starting point turns in to $406,000 in just five years. 

Several of his suggestions are ones we regularly talk about here; setting cash aside ahead of time, working and cutting spending. We've also talked about downsizing. The bigger macro is that if you don't have enough, either because the market went against you or you weren't able to save as much as you hoped for, then something will have to give. Dealing with this potential outcome takes some adaptability which might be difficult for some people to come to grips with. 

A new wrinkle to the conversation we've been having here might be having to factor in price inflation more seriously than maybe we've thought about it before. I have no idea how long the current inflationary event will last but it is difficult to have much confidence that the FOMC will get it right whatever that means. 

We talk about padding retirement budgets for unbudgetable expenses by $1000/mo or some other number relevant to your circumstance and history with unexpected one-offs. Maybe we should do the same for things in our life that are vulnerable to higher prices like food, medical expenses, fuel for vehicles, various things we subscribe to, what else? The last thing I would hope anyone would cut back on is healthy food. Eating well and exercising effectively provides the opportunity to avoid being vulnerable to rising medical costs by not having to pay for prescriptions. 

Quick sidebar, we ran a medical call the other day for an 81 year old male. Soon after getting there he mentioned he's been lifting weights his whole life. He looked like he was in his mid-60's, and although he had an issue he only took two prescriptions. One was a statin and the other was for the side effects of statins. That's a lot of money saved not taking a bunch of meds and as I've said before I am betting my life that high cholesterol is not the thing killing us. This list on Twitter will point you to volumes of research done on this point, I'm not pulling this out of my ass. 

I would also really hit on cultivating multiple streams of retirement income and to start figuring that out now to avoid being overly dependent on just one income source like your portfolio or Social Security. How can you adapt and protect yourself if something happens with your portfolio or Social Security? Game that out, what could you do? Figuring that out now, ahead of time, before you need it is the best chance for a more robust and resilient retirement plan. 

The other Humble Dollar post was by John Yeigh with 10 Reasons To Claim Social Security, the context being that you not wait until 70. His reasons not to wait included some reasons relevant to his particulars like thinking he may not make it past 80 and just not wanting to keep thinking about it and some were pretty universal arguments related to tax planning and the threat of benefit reductions. 

I will continue to say there is no wrong answer here. I continue to want to wait so that my wife will have the largest payout possible if I die young. Breaking even just isn't on my list of priorities. I'm not critical of that as a priority, it just isn't one for me. 

Part of Yeigh's tax argument does not resonate at all, he will pay lower taxes with the lower payout once he starts taking is IRA RMDs. First of all that won't be true for everyone and I would not let how much I might pay in taxes be that high up on the priority list as I believe it is for Yeigh. He's not wrong, there is no wrong answer, it's just wrong for me. That's the point, what is right for you? Figure that out. If this general argument does appeal to you, I would suggest getting familiar with possible changes coming to RMDs. They look like they might be scaling up from 72 up to 75 in ten or eleven years. 

I am open to the possibility that I could change my mind about waiting until 70 which is why I continue to pursue reading about it like Yeigh's article. I cannot envision a scenario where I want to take it at 62 but 62 is not that far away, it's time to pay attention.

There's a window of time between 60 and 70 that most of us need to account for as most people either recently retired, are about to retire or know when they will retire even if it is later. Hopefully when you hit this window you've figured out some sort of preference for when to take SS, when you'll stop working (if that is even your plan) whether you need to side gig to cover part of your expenses, have optionality with different types of brokerage accounts to pull from (taxable, traditional, Roth, HSA) and if you're lucky some sort of "passive" income like from real estate. 

Here's an idea that some people will hate. An investor is 60, wants to retire right now but not take SS until 70 or at least hold out as long as possible. He needs $4500/mo but wants to $5000 so he has a little buffer every month. $3000/mo comes in from real estate. Most of his money is in IRAs and he has $200,000 in a taxable account. If he takes the other $2000/mo from his taxable account then he could take for 100 months before depleting the $200,000 which gets him just past 68 years old, remember he was hoping to make it until 70 before taking SS so 68 looks pretty good in this context. 

Obviously I assumed no interest which is of course incorrect now, cash proxies are yielding 4%. He could put some money into closed end funds with high "yields" which often include returns of capital (ROC) or the Strategy Shares NASDAQ 7 Handl Index  ETF (HNDL) which aims to pay out 7% including returning capital. Here, the investor is expecting to deplete the $200,000 while his IRA asset grow untouched. ROCs in this instance are not bad because they are not taxable.

Putting maybe $100,000 in a money market and maybe getting 2%, $50,000 in a two year treasury and getting 4% and $50,000 in HNDL or the like and getting 7%. If things go well, he's getting more than half of the $24,000 he needs annual from interest/dividends/ROC for a while. If HNDL completely blows up after a year or two he still has 3/4 of his capital, has shaved off a good chunk of the time between when he started and 70 and has a good chance of getting pretty close to his Plan A working out. I would label this a success story if he made it to at least 68 before taking SS and it is very likely he'd make it longer that 68. Remember the preference was waiting until 70. 

Is this risky? Hell yes but only 1/4 of the money is at risk and the fall back is he takes SS earlier than he wants and/or starts taking from the IRA. Allowing an account to deplete is emotionally difficult but in some circumstances it is the best strategy.

For all of us, even those who are wealthy, this is a problem to solve, a puzzle to figure out for ourselves. Seek out different ideas, be willing to learn about ideas you may not use. This specific idea has greatly softened my view toward funds that payout ROCs for example. The more effort you put in, the better off you'll be.