An Insane Idea To Fix Social Security

Yahoo had some new doom and gloom about Social Security. I kept the tab open not knowing whether I there was enough there for a blog post and there really isn't but something occurred to me with all the talk of benefit cuts and maybe means testing being considered, instead of forcing people to just eat it, is there a way to incentivize people who are admittedly pretty well off to be willing to impose their own benefit cut. 

This has been a crazy week so I have not had the time to crunch numbers for this idea but some sort of scenario where people give up a lifetime of income (beyond whatever age they plan to take it) in exchange for maybe just five years of their full benefit and then no tax on their RMD amounts or maybe no tax on any IRA distributions once they have started their five year Social Security window. 

If someone starts Social Security at 67 with a $4000 monthly payout and lives until 95, they would be taking 336 months at $4000 per (keeping it simple WRT to inflation) would total $1,344,000. Sixty months at $4000 per would be $240,000. If this person has $2 million in their IRA and other sources of income, tax-free access to the $2 million could be appealing. 

My numbers don't make this seem too compelling but I'd bet there is some fulcrum point where individuals benefit and the program can continue to pay full benefits for longer. The underlying point is that if something has to give at some point but the program can be salvaged by giving people a choice, that seems like a far better outcome. 

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.

Risk & Aging Happen Fast

Let's start with Morningstar appearing to defend a traditional 60/40 portfolio. A lot of the article is devoted to the history of bonds helping balance out equity volatility during large declines which is of course correct. 

Unfortunately they don't dig into the changes that have occurred in terms of how unreliable the correlation between equities and bonds with duration has become. "Risk happened fast" starting in late 2021 inflicting pain that can't be recovered from. AGG is down 20% from its 2021 high so anyone who bought it then and still has it is waiting to make it back 4% per year...unless rates make another meaningful run higher from here would would make the loss worse. The Vanguard Bond Market Index Fund (BND) is in almost the identical spot as AGG. TLT is down 49% from its 2021 high. These are price levels that can't be regained. 

Individual issues are in a similar spot but they will get back to their respective par values. Collecting 2% for ten years waiting to get back to par though would be a tough way to make a living. 

Where we are talking about 40% into holdings to help manage equity market volatility, beyond bonds with essentially no duration, we've studied many different alternative strategies that do what I think people hope bonds will do which is have very little volatility and provide a boring return. There are easily ten different ones that all have different risks meaning that putting 4% into ten of them would diversify the diversifiers. It wouldn't even need to be all 40% into alts, not even close. Owning short dated individual issues and a few diversifiers would very likely be far more effective for whenever the next negative stock market event comes along.

The New York Times waded into the retirement withdrawal discussion acknowledging the emotional challenges of switching from putting money in to then taking money out. I think this will be difficult for me as well which probably contributes to why I spend a lot of time on how to create income streams beyond just relying on an investment portfolio (and Social Security obviously). 

They talk about the difficulties of sequence of return risk and the need to be adaptable but they miss an obvious solution. Bear markets typically last 18-30 months even though the last few have been shorter. The simplest technique is to just set aside some cash for whatever number of months you think you need to ride out a bear market without being forced to sell equities low. A less simple technique would be to have small exposure to holdings that should go up when stocks go down. If someone is using an inverse fund to hedge a large decline, there'd be less need to still hold it after a large decline so it could become a source of funds for withdrawals at that point. 

Lastly, an article from the Washington Post about mistakes people make with how they consume protein. There were some things I agree with and some I don't but there was an interesting point about older people needing more protein because As we get older, our muscle mass starts to dwindle, and this decline grows steeper after the age of 60. At the same time, our muscles become less responsive to protein as we get older, which makes it harder for our bodies to build and repair muscle tissue — a phenomenon known as anabolic resistance. “As people age, we have less and less muscle mass, which makes it even more important to protect the muscle that we have. 

I'm 59 so their reference to 60 caught my eye. The passage is consistent with a theory about aging cliffs that supposedly occur at 44 and then again at 60. Loss of muscle mass actually starts closer to 30 and my understanding is that it accelerates as we get older. 

It's too bad there isn't some sort of activity that could help people build muscle mass back up or at least offset muscle deflation. That's just wishful thinking, obviously no such activity exists. The importance of some sort of resistance training with weight (this includes bodyweight exercises) cannot be overstated. Leg strength, back strength and grip strength are crucial for every aspect of aging. Proper protein consumption allows us to get more benefit from the weightlifting and weightlifting allows us to get more benefit from the protein we consume. 

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.

"We're Living In 'End Times' When You Can't Retire On $1 Million"

How about that for a headline from a Marketwatch article, here's the link via Morningstar.

The magic of having $1 million for retirement is no longer what it once was. Assuming normal withdrawal rates of 4-5%, $40,000 or $50,000 is a fine income stream but it's not a G-Wagon in the driveway, a closet full of $500 shoes and frequent first class tickets to Europe.  

The research cited in the article points to $1.25 million as being sustainable for a 25 year retirement assuming 4%/$50,000/yr. Just about every other thing I've read says 4% has never failed a 30 year retirement but ok, 25 years. The lead researcher is quoted, talking about a comfortable $50,000/yr retirement which I will address below. 

The author concedes that the idea of a universal retirement number is flawed based on several factors, the biggest one probably being where you live. Making $300,000 in NYC doesn't sound so great but that kind of income would be very well off in probably 2/3rds of the country if not more. 

Back to Ben Carlson from the other day showing how far away every age cohort is from $1 million or $1.25 million. 

To use the number above of a comfortable $50,000 retirement (you can fill in your own annual number), there was no mention of Social Security, $50,000 including SS or in addition to SS?

I try to address all this very simplistically. Above a certain amount, your accumulated retirement savings go from being an emergency fund to being a source of sustainable income assuming the withdrawal rate is reasonable. At 70 years old, a $50,000 IRA is just an emergency fund but a few hundred thousand it's a source of sustainable income and the line is somewhere in the middle. 

Stating the obvious, a $400,000 account can be a source of $16,000/yr for a very long time (hopefully that nudges higher over the years). A $1.75 million account can be a source of $70,000/yr for a very long time. How much do you have now and how much are you likely to have when you retire? What is the math for a 4-5% withdrawal rate? 

Whatever the number, that is one income stream. How far does that go for what you think you need? How much will you get for Social Security? How about if you haircut SS by 25%? Making up an example, if you should be able to take $48,000 safely from accounts and a reduced SS works out to $40,000, how far does $88,000 (use your own numbers) go in relation to what you think your post-retirement lifestyle will cost? Is it enough?

There are multiple solutions for it not being enough. Cut expenses somehow or add another income stream which could mean working longer or creating some sort of new income stream. We explore how to do the latter constantly here. 

The reason creating your own income stream is a point of emphasis here is the extent to which we can have a hand in building a successful outcome. With the right kind of effort and a properly long timeframe, I think this is very doable and I don't mean settling for whatever it is you would least want to do. 

I've laid out my own path with wildland fire incidents, Del E Webb and our Airbnb rental, for as much as I write about this, I believe I should be walking the walk. The important theme running through all three is that the runway has been very long for all of them. Trying to shortcut something in six months probably won't work. 

The incident management team work (fire related) probably requires more of a commitment than makes sense in light of my day job so that is sort of back burnered other than maintaining contacts and relationships. I am available to work "locally" which means anything on the Prescott National Forest. A backup for something bad happening with my day job would be to try to get appointed to a team roster which would mean going out frequently. That is far from my first choice but I'd be grateful for the opportunity if we needed it. Also fire related, Walker Fire will be upgrading one of our water tenders (2000 gallon water truck) in the next year or so and I'd be able to take that out if we needed.

I mentioned my involvement with the Del E Webb Foundation turning into an income stream. They asked me to join them three years ago based on something specific related to Walker Fire many years before that. It will be a small stipend but will be enough cover a decent percentage of our expenses if we ever got to the point of relying on it that way.

Our Airbnb covers about 2/3rd of our current monthly expenses plus less frequent expenses like property tax and insurance. The mortgage on our rental should be paid off in six years and everything else being equal, the rental income would cover 85% of our current monthly expenses plus less frequent ones. Of course everything else staying equal is not guaranteed which is why you have multiple streams and figure out how to adapt. 

Part of adaptability is not making bad portfolio decisions like being too conservative with your portfolio. 

That period includes quite a few multi-year declines. I usually phrase this as maintaining some sort of normal allocation to equities because equities are the thing that goes up the most, most of the time. Even if equities compound at just 5% for a while, the index would double in 14 and a half years. Do the math on your having just a 40% allocation which I would say is a little less than normal. From age 65 or 70 to age 80 or 85, where would that leave you? By the way, the CAGR in the period isolated in the Creative chart was 11.56%, miles ahead of 5%. Hopefully, a 5% CAGR going forward is insanely conservative. 

Anyone relying on their portfolio to make their retirement plan work probably needs a "normal" allocation to equities. If someone has $10 million and only taking out $100,000, I would argue they are not relying on their portfolio to make their retirement work. 

Repeated from I don't know how many previous posts, retirement is a problem to be solved or a challenge to overcome. The more effort put in, the more success coming out. "No one will care more about your retirement than you."

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.

An Unimaginable Loss

We'll start with a couple of different links on the same topic of having enough money or better put, figuring out how much you need to have for whatever your idea of a successful retirement is. One link is from Barron's and the other is from Ben Carlson.

A multiple of salary is not the right metric. A couple making $100,000 has an effective tax rate per Gemini of just under 8%, then less another $7500+/- for the employee share of Social Security puts them at about $85,000. Hopefully they're saving a little bit, call it 10% or $10,000 and their net is $75,000 (a little more than that for the tax not owed on their 401k contributions). 

If this couple planned it out well, maybe their $2000/mo mortgage gets paid off right as they are retiring. At this point they might be down to $51,000 in annual spending. Yes we are making several assumptions here but no one lives off their salary, they live off their net and some expenses will go down like a mortgage getting paid off and once someone has retired, they probably don't need to save for retirement anymore. And yes, some things will go up or otherwise cost more. 

Dialing in expected expenses, adding a buffer in case you underestimate and then doing the math on expected income sources makes far more sense. 

Barron's cited a Schwab survey that concludes we are wealthy at $2.3 million. That number as reported was light on details like whether that includes a home and a few other things. The actual number from some survey doesn't matter, at some point there is a number where you feel comfortable and beyond that maybe a number where you do feel wealthy. 

I'd add another viewpoint to this. I have long thought in terms of the cost of the life that I want to live. How much do we need to do what we want and then feel like we have a margin of comfort and/or safety. In past posts we've used the words resiliency and optionality in this context too. 

If you can afford to do what you enjoy and have some financial resiliency then that is a pretty good equation for freedom. At that point then, adjectives like wealthy become unimportant. 

You may have heard that the historic lodge at the North Rim of the Grand Canyon, along with many other buildings, were lost in the Dragon Bravo Fire. If you've been reading this blog for a while, you might remember that my wife and I have gone to the North Rim countless times to hike. The South Rim is two hours from our house and is the far busier spot. The North Rim is about six hours away and the peaceful energy there is magical. We were going to go up for a couple of days in early August. We've been at least a dozen times. 

Here's the link to the announcement from the Grand Canyon National Park Facebook page. I'm not going to give an opinion but taking from the inciweb page for the incident, "The fire was initially managed with a confine and contain strategy" and then changed to "being managed with an aggressive full suppression strategy." 

We are beyond heartbroken. 

Cathedral Point a short ways down the North Kaibab Trail.

Early morning view of the canyon and the lodge.

Pretty much take this same picture every time we go.

The front of the lodge. People stay in little cabins though, not the actual lodge.

There's a heard of buffalo nearby. Haven't heard anything about them yet.

The Park Service station house is/was right on the main road driving in. I visited it several times.

I can't believe it.

Catastrophe is not a big enough word for this. 

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 Tough Way To Make A Living

I went down a little bit of a rabbit hole the other day trying to learn about accessing the crypto industry via individual stocks. I am not talking about buying cryptocurrencies other than Bitcoin which I own and I don't mean Bitcoin treasury companies like Strategy. The context here is more like plumbing or maybe infrastructure is a better word and even then we may need to dial that in a little bit.

Here's some help from Mathew Tuttle with Stablecoins 2.0: The Infrastructure Race. That's where I got the word infrastructure from. He asked AI to rank out the prospects for different segments in this niche. Included were the two big credit card companies (clients have owned Mastercard for more than ten years). My thought about how MA evolves through this is that digital payments and all the rest isn't going to happen without them. We'll see how much of a leader they are as this evolves but it's not going to happen around them, leaving them completely behind. 

Coinbase was listed out in Mathew's study and while of course they could become the Schwab of crypto (maybe they already are), client holding Schwab might become the Schwab of crypto. Sidebar, if you were in markets in the late 90's into the early 2000's, that last line might remind you of Alberto Vilar saying that Yahoo was going to be the next Yahoo. 

A little more interesting to me in terms of really being infrastructure is Circle Internet Group (CRCL) which just IPO'd at $31, went straight to $250 and has been hovering between $200-$220 for the last couple of weeks. Its stablecoin is USDC which is the second largest after Tether. It's market cap is around $60 billion which is about 25% of the entire stablecoin space. The valuation of CRCL might be a little bit stretched, it's also more than 20x revenue.

Back to the credit card companies and we can throw in many other financial companies, what happens to CRCL when they all jump in with their own stablecoins? Does a large market share today mean anything in the context of 2028 or 2030? I have no idea yet but this will be fun to learn about. 

It might be correct to say that the recently passed Genius Act validated the existence of stablecoins with a regulatory framework and paves the way for greater adoption. The infrastructure idea seems straightforward enough but for now, I'm just getting started learning about the company. If you want to start learning, here's a good primer from Yahoo and a deeper dive from Hashdex.  

Part of this stablecoin quest included looking at the Kinetics Internet Fund (WWWFX). How long has it been since you thought about that one. It goes back to the bubble days. It launched shortly before the bubble popped and went down almost 80%. Also going back that far is the Kinetic Paradigm Fund (WWNPX), I don't remember that one. 

The current holdings overlap with a lot of Bitcoin and a lot of Texas Pacific Land (TPL). That's an interesting combo for the very low correlation between the two.

Looking at the long term chart, log scale, these are fascinating but man, what a tough way to make a living. Yikes. 

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.