A quick housekeeping note, with regard to my new book:

• Please feel free to submit any follow-up questions that you think might be useful as future articles.
• If you liked the book, I’d be super appreciative of a review on Amazon given that the book is very new still.
• If you didn’t like the book for any reason, please let me know. As with any of my books, I’m happy to provide a refund.

When it comes to retirement spending, the most famous strategy is the “4% rule” in which you do not actually spend 4% of your portfolio balance per year, but rather spend 4% in the first year and then increase that dollar amount with inflation every year, regardless of portfolio performance.

And then there’s a multitude of variable spending strategies, in which you allow your spending to fluctuate in some way based on your portfolio’s performance.

Retirement researcher Wade Pfau recently wrote a two-part series about such variable spending strategies. In Part 1 he describes a framework for how to evaluate such strategies, and in Part 2 he takes a look at how a handful of the most popular such strategies measure up.

• A Framework for Assessing Variable Spending Strategies from Wade Pfau
• A Comparison of Variable Spending Strategies from Wade Pfau

Other Recommended Reading

• Growth of Index Investing is No Threat to Market Efficiency, Study Says from Bob Pisani
• How to Get Clients to Spend More Money (or how to spend more yourself) from Allan Roth
• Set It and Actually Forget It from Charlotte Cowles
• Defying Logic from Adam Grossman
• Opt Out of Underpayment Penalty in TurboTax and H&R Block from Harry Sit

Thanks for reading!

Much of retirement spending research — as well as many financial planning programs — assume that a retiree household will keep spending the same (inflation-adjusted) amount each year throughout retirement. But common sense tells us that retirees probably would not keep spending the same amount, regardless of whether the portfolio is growing quickly, shrinking quickly, or holding steady.

David Blanchett highlights a recent survey of 1,500 defined contribution (DC) retirement plan participants between the ages of 50 and 70, which found that respondents were much more capable of cutting back on different expenditures in retirement than the conventional models suggest. Blanchett writes, “For example, only 15% said a 20% spending drop would create ‘substantial changes’ or be ‘devastating’ to their retirement lifestyle, while 40% said it would have ‘little or no effect’ or necessitate ‘few changes.'”

And when you account for that flexibility, an assortment of financial decisions surrounding retirement need to be adjusted. The decisions that make sense for a household that intends to never adjust their spending (other than to match inflation) are different than the decisions that make sense for a household that has spending flexibility.

• Redefining the Retirement Income Goal from David Blanchett

Other Recommended Reading

• State Tax-Exempt Muni Bond Interest from Mutual Funds and ETFs from Harry Sit (a follow-up to his previous piece about state tax-exempt Treasury interest)
• An Open Letter to Insurance Agents from Jim Dahle
• How to Balance Social Security’s Books from John Rekenthaler
• Derek Tharp: An Alternative Approach to Calculating In-Retirement Withdrawals (The Long View podcast episode)
• Corporate Democracy and the Intermediary Voting Dilemma from Jill Fisch and Jeff Schwartz

Thanks for reading!

Interest from Treasury bonds is exempt from state income tax, and that’s just as true for interest from Treasury bonds held by mutual funds that you own. But as Harry Sit points out this week, the 1099-DIV the brokerage firm sends you doesn’t tell you how much of the dividend distribution from a fund is from Treasury bond interest. If you don’t go look it up yourself, you can end up paying unnecessary state income tax.

• State Tax-Exempt Treasury Interest from Mutual Funds and ETFs from Harry Sit

Other Recommended Reading

• Worried About Social Security’s Future? Make A Plan For When To Start Your Benefits from Steve Vernon
• People Aren’t Buying Disability Insurance, But They Should from Jim Dahle
• Perfect is the Enemy of Good from Ben Carlson
• Functional Longevity: What Use Is Retirement If You Can’t Move and Think? from Anthony Ellis
• Crypto Scam Aimed at Online Acquaintances Costs Victims Billions from Tory Newmyer

Thanks for reading!

A reader wrote in, wanting to share this experience in case it’s helpful to anybody else who has recently purchased I Bonds for the first time.

“I purchased $10K worth of I-Bonds for the first time in 2022, specifically on July 1st, when the annualized interest rate was 9.62%. Funds left my bank account on that same day, July 1st. Fast forward to mid-January; using straight-line logic, I’m expecting to see $481 posted into the account, perhaps a few bucks less, but only associated with timing issues. I didn’t expect to see only $236 posted (???) Could not work the math, any which way.

Called the Treasury Department, waited almost two hours on hold before talking to a human being. The Rep was fabulous to deal with – polite, professional, and knowledgeable – but the two hours on hold was brutal. He assured me that I HAD earned the full interest, but shared with me that Treasury does not actually post the interest accrued into the account, even if only for viewing purposes, due to the ‘3 month penalty’ rule for holding the security for less than 5 years. According to the Rep, this is on a rolling calendar basis and the most current 3 months of interest will NEVER show in the account, until the ‘held for 5 years’ criteria is met. The owner will never see the full interest accrual until year 5.”

Other Recommended Reading

• Is Delaying Social Security Benefits Still a Good Deal? from Steve Vernon
• The 10 Most Important Things I Tell Clients from Allan Roth
• Do You Have a ‘Humpty Dumpty Portfolio’? It May Be Costing You Thousands from Ryan Ermey
• Q&A With Rick Ferri: The Evolution of the Bogle Center from Karen Damato
• How the Greatest Female Poker Player Reduces Risk from Peter Neuwirth
• My Investment Portfolio Review: 2023 from Darrow Kirkpatrick
• Your Investment Lost Money Last Year. So Why the Big Tax Bill? from Jeff Sommer

Thanks for reading!

Monte Carlo simulations are a popular way to determine how risky a given level of spending is, for a particular set of household circumstances (i.e., assets, age, other sources of income, etc.). Different software will do such simulations differently — and provide different output as well. But the most common form out output is to show a probability of success/failure — that is, in what percentage of the simulations did the household end up depleting the portfolio before the desired length of time had elapsed.

As David Blanchett discusses in a recent article, many “failure” scenarios wouldn’t even occur in real life. In part, that’s because people tend to cut their spending, if they see that it doesn’t look like things are going according to plan. Second, Monte Carlo simulations are often run using a conservative time horizon estimate (e.g., to age 100). If a “failure” scenario shows the portfolio being depleted at, for example, age 97, there’s a good chance that the original owners of the portfolio would no longer be alive and spending from it.

In another recent article, Massimo Young and Wade Pfau point out a danger of Monte Carlo simulations, which people might not recognize. Namely, while such software randomizes the results, it does so using constraints/assumptions set by the user (or set by the software developer, if the user doesn’t have options to adjust). And the results of the simulations are very sensitive to the assumptions used.

• Monte Carlo Failures Aren’t Plane Crashes from David Blanchett
• The Dangers of Monte Carlo Simulations from Massimo Young and Wade Pfau

Other Recommended Reading

• Challenging Morningstar’s Safe Withdrawal Rates from Allan Roth
• When is Consumption Smoothing a Good Idea? from William Bernstein
• The Never-Ending Failure to Identify Future Mutual Fund Outperformers from Larry Swedroe
• What’s Up with the Medicare Advantage Ads? from Kim Blanton
• Conversations about Life with 15 Clients over 2 Days from Meg Bartelt
• Your 401(k) Isn’t Enough: To Invest for Retirement, Build Friendships and Hobbies from Anne Tergesen
• It’s Time to Work from Nick Maggiulli
• Security Hardware for Vanguard, Fidelity, and Schwab Accounts from Harry Sit

Thanks for reading!

The SECURE Act 2.0, signed into law 12/29/22, made a long list of changes to retirement accounts. The two best write-ups I’ve seen so far are from Jeff Levine and Jim Dahle.

• Jeff Levine’s article provides a deeper discussion of most of the provisions relating to retirement accounts.
• Jim Dahle’s article provides very brief explanations, but covers more of the provisions.

And of course reading the legislation for yourself can be informative. (The link above will take you to text of the whole Consolidated Appropriations Act, 2023. Do a search for “Division T” on that page to get to the SECURE Act 2.0.)

Other Recommended Reading

• Wells Fargo to Pay $3.7 billion Over Consumer Law Violations from Ken Sweet
• How to Find Clarity When You’re at a Career Crossroads from Simone Stolzoff
• The Gift of Time from Nick Maggiulli
• Trading Games from Nick Maggiulli
• Vanguard Exit Has Lawyers Mapping Out Wall Street’s Top ESG Risk from Alastair Marsh
• A Heat Pump With DIY Installation Can Decarbonize Public Housing from Sabiq Shahidullah and Coco Liu
• 6 Conversations About Money to Have With Your Family from Amy Arnott
• How to Talk to Adult Kids About Money and Inheritances from Elliott Appel
• Same Old Same Old from Adam Grossman
• Consumers Are Getting Payments from Equifax Data Breach Settlement from Sarah O’Brien

Thanks for reading!