All posts by Tom Canfield

How much should you pay yourself from your nest egg?

Last week I described that Patti and I fall in the category of having More Than Enough that I describe in Chapter 10 of Nest Egg Care (NEC). Our current portfolio value supports a Safe Spending Amount (SSA; Chapter 2) that means our total pay is greater than our actual spending. Our planning focus is different than when we started our financial retirement plan: I can work from what we spend (described last week) to what we should pay ourselves (this week) to how much portfolio we need to have (next week). The purpose of this post is to give you my thoughts on that second step: how much we should pay ourselves from our next egg relative to our spending? I settle on total pay that is about 15% more than our spending.


Total pay for Patti and me equals the after-tax proceeds of Social Security benefits and other pension income + the after-tax proceeds from the sales of securities from our nest egg that I distribute each month into our checking account.



Even with the steep decline in our portfolio so far this year, Patti and I – and you most likely – remain in the category of having More Than Enough: for example, Patti and I have almost the same amount we had in December 2014. If you started you retirement plan and withdrawals later than we did, you have more now than in December 2014. (The historical data for this display is from the spreadsheet you can download in this blog.)


== Sloppy checkbook: $10,000 minimum balance ==


I wrote in this blog that I like to keep a sloppy checkbook. I want to have healthy checkbook balance. I formally decided this week that I want to target a minimum balance of $10,000, an amount that many would judge as too much.


I learned my lesson this year. I used some of the cash balance in our checking account to buy a $10,000 I-bond in May; the rest of the cash came from advanced pay from the cash I have set aside for our total pay for 2022 in our Fidelity investment account.


I found the effort to maintain a low cash balance was a hassle. I checking on our checking balance too often to make sure we’d have enough to fully pay our credit card statement that is debited on the 22nd of each month. I hate thinking I need to carry that thought around in my head. That is a tiny bit of stress I do not need. It’s much better for me if I keep a high checkbook balance.


I estimate that I might be giving up 6% annual return on the excess that others might be able to keep. (+6% is the expected real return rate for our mix of stocks and bonds.) That might mean I’m forgoing $40 or $50 per month in added return so I can avoid the hassle of thinking about not having enough to pay all our bills. That’s worth it to me.


== Total pay: 15% more than we spend ==


Does the 12-month total for spending I found last week really represent typical spending? I remembered that Patti used frequent flyer miles for our airline tickets for our upcoming trip to England in August. I adjusted the 12-month total to include the price of those tickets. We don’t have many miles left and we won’t be earning more any since I switched our credit card to 2% cash back.


I decided to pay ourselves 15% more than our average monthly spending. I think the lowest I would go is 10% more, so 15% is more on the sloppy – too much – side, but I’m happy with that.


My friend Steve does not pay a regular monthly amount from his nest egg. He is proud to say, “I only sell when I need money.” He’s passionate about keeping a bigger percentage of his total portfolio invested. I would not like that approach. I think it is constraining. I don’t think he and his wife spend their annual Safe Spending Amount. I don’t want to have to have a discussion with Patti on whether or not we can afford taking a trip and go through the anguish of judging whether or not it is a good time to sell – as in now, for example.


I like selling once in the year (the first week of December) and paying the total out monthly. I like the subtle pressure to think about enjoying and spending more. If Patti suggests we travel to visit our nephew and family in Seattle, I don’t want to hesitate. I want the money sitting in our checking account to pay for it.


The extra I pay means we likely will build an excess in our checking account toward the end of the year; that’s happened in most years. We then have the decision of 1) donating the excess; 2) giving it to heirs; or 3) using it, in effect, to lower spending for the next year; we’d do that by just applying it to next year’s target for spending. We’d sell fewer securities in the first week of December to get the cash we need for our spending in the upcoming year; this third option looks more probable this year than in any other year.


== What we need for 2023 and beyond ==


I now have a very good handle on the total cash I want to have in early December for our spending in 2023. I don’t think our spending pattern is going to change in the future. I’ll just have to adjust the amount for 2023 for inflation in the following years; I’ll similarly adjust the amount of securities we need to sell from our nest egg.


== My remaining task ==


My remaining task is to calculate how much portfolio value we need for the annual gross withdrawal from our nest egg. We’ll have an excess, and we need to decide what to do with it. I describe the basic calculation and options in Chapter 10, NEC, but I’ll discuss more of my thinking next week.




Conclusion: Patti and I fall in the category of having More Than Enough – greater portfolio value than we need for our spending: excellent stock returns are the primary reason. Our calculated Safe Spending Amount added to our Social Security and other income is more than we spend. I can start from what we spend, decide on what to pay ourselves, and then derive how much portfolio value we need and find the amount that is More Than Enough.


Last week I found out how much we spend in a year from our checkbook statement of spending: “Checks & Deductions”. I can then figure out how much I want to pay ourselves in the year. Patti and I are at the age where we DO NOT want to think about not having enough to enjoy. I want to pay ourselves MORE than we spend: I want the subtle pressure to spend to ENJOY MORE. I made two decisions. The minimum balance in our checking account should be $10,000. I decided that our total pay should be 15% more than what we spend.

How much do you spend in a year?

I looked in detail at our spending in this blog about 18 months ago as a way to help me understand how much we needed to pay ourselves from our nest egg. I did the same exercise this week, but in a much simpler way. I just track the “Checks & Deductions” from our checking account to get the total that we spend for the past 12 months. This post describes how I did that.


A snippet from my monthly checkbook statement.


== Why do I want to know? ==


I want to know how much we spend in a year to know how much we need to pay ourselves from our nest egg. Patti and I are really settled in our spending habits. I don’t think our annual spending – measured in constant spending power – is going to change much the rest of our lives. We might have a bigger trip or extra trip in a year, but I think it’s more likely that we reach the point that we don’t travel as much. Once I have a good handle on what we spend now and will spend in a year, I can calculate how much total portfolio we need to have.


I do this exercise, because Patti and I have fallen into the category of having “more than enough.” (See Chapter 5, Nest Egg Care [NEC].) All nest eggers and many of those planning for retirement are in this category: returns have been excellent. We all have more now – even with this downturn – that we thought we would just a few years ago. We all have seen an increase in our Safe Spending Amount (SSA; Chapter 2, NEC.)


Returns for Patti and me since we took our first withdrawal for spending in 2015 have been such that our calculated SSA for 2022  is 46% greater in real spending power than for 2015. (That’s 76% when I add in inflation.) Our spending has not increased in real terms: we aren’t traveling more or more expensively, and travel clearly is our biggest discretionary expense.


If I pay 46% more from our nest egg, it will swamp our spending. It makes less and less sense to pay ourselves our annual SSA. It makes more and more sense to think of taking an amount off the top for significant gifts or donations: we don’t need to die with far, far more than we needed for our spending.



== What we spend: the simple way ==


The simple way to figure out how much Patti and I spend is to look at our monthly checking account statements. I don’t spend from our Fidelity investment account; I only transfer our monthly SSA to our checking. The “Checks & Deductions” on my monthly checkbook statement includes all spending. I made this spreadsheet that you can download and entered the “Checks & Deductions” each month for the last year.



I want to exclude items I don’t consider as spending. Examples: I had an accumulated surplus (pay less spending) that I transferred back to my Fidelity investment account in December. I purchased an I-Bond in May; that hit my June checking account statement; that was an investment debited from our checking account.


I want to calculate the total spent over the last 12 months, but I saw three lumpy months that I wanted to understand before I just accepted the total as accurate.


1. Property taxes hit in my March bank statement. Big. Ugly. I get no joy by using our FUN money for property taxes. I always ask, “Why am I using our FUN MONEY to sink in a non-financial asset that that I’ll never get back in my life time?” I think I should use our HELOC to pay them, but I haven’t yet. Maybe next year!


2. Two credit card payments debited were roughly double the others. The big items are airline fares (At our age we fly business class for long trips.) and trip fees if we prepay all lodging and local transportation on an organized trip (Italy was the example last fall.) I can find those lumps by going on the internet and looking at the credit card statements, but I don’t have to do that since I use Quicken as our checkbook register. I have those items singled out in the detail of our credit card bill.


The lumps will always be there until I bit the bullet on those property taxes. They are part of our spending. But it was helpful to see that the on-going spending – excluding the lumps – is not that variable. That on-going spending is basically flat may be an obvious conclusion, but it was reassuring to see that. I see no pattern of increased on-going spending over this past year, although inflation has to be taking a toll.


This is step one of a process. Next week I’ll discuss the details of my thinking on the next steps.




Conclusion: I want to to understand how much we spend in a year. I think what we spend now won’t change much for the rest of our lives. The easy way for me to figure out how much we spend in a year is to add up “Checks & Deductions” for our last 12 bank statements. I can eliminate items that really aren’t spending. I can look for any unusual items in the months with lumps of added spending. In our case they are just lumps; we’ll incur similar lumps in the future. I found that our monthly spending, excluding the lumpy items, does not vary much at all. Maybe that’s an obvious conclusion, but it was reassuring to see that.


Understanding what you spend is key to understanding what you should pay yourself from your nest egg. And then you get to how much you really need in total portfolio value. I’ll get to my thinking on those steps next week.

When will this bear market end?

I have no idea of when this bear market will end. I have no crystal ball. But I was not remembering what has to happen for it to officially end. The purpose of this post is to describe that event.


We can only have a bull market or a bear market. There is nothing in between. The S&P 500 – the index that tracks the market value of the top 500 stocks – became a bear market because the index dropped 20% below its previous peak. The S&P 500 index closed at 4,796.56 on January 3. It closed this past Monday at 3,749.63. That’s more than a 20% decline.



The S&P 500 will become a bull market when it closes on a day when it has increased 20% above its previous low point.


== We won’t be whole ==


That will mean we will be in a bull market before we get back to the peak on January 3. I think you remember the math: it takes a greater percentage increase to gain back the percentage decline. If you had a $100 and it declined by 20% or $20 to $80, you need a 25% increase to grow by $20 to get back to $100. The steeper the percentage decline, the greater the percentage increase you need to get back whole.



If the decline from the peak was 20% to be then be an official bear market and then immediately improved 20% to then be an official bull market, you’d still be 4% below the peak.



And we know that the decline as of yesterday is greater, so a 20% increase from that point leaves you 8% below the peak.


== Thinking real ==


The usual math ignores inflation. We nest eggers always try to think real. We track our portfolio value and return rates by eliminating the distortion of inflation. We’ve had almost 5% inflation since December, so we’ve really had nearly -27% real decline in the S&P 500 portion of our stock portfolio as of yesterday. Ouch. It’s a big lift to get back.



It may take more time to reach the low point. It will take time to see a nominal 20% increase from that low to then be a bull market. Each month inflation will nibble at the the spending power of our portfolio. We’ll really have a greater distance – more time – to go truly reach a bull market and to truly get back to the January 3 level.


== I ignore the Jan 3 peak ==


Our brains always focus about the change from the peak, but January 3 is not the peak that concerns me. I’m concerned about 12-month real returns and real portfolio value on November 30, the date I use to see if our Safe Spending Amount (SSA; see Chapter 2, Nest Egg Care) will only adjust for inflation or if it will increase in real terms. My peak is 3% below the January 3 peak. I don’t have to come back quite as far, but it is still a distance. It looks now as if I won’t calculate to a real increase in our Safe Spending Amount for 2023, but that’s Okay. Patti and I are more than fine with what we pay ourselves now.




Conclusion. We entered a bear market this week. The market is 20% below a prior peak on January 3 this year. We can only be in a bear market or a bull market. We get back to a bull market when the market closes at 20% above its prior low point. Even if the market turns on a dime now, a 20% increase and the declaration of a bull market doesn’t get us back to the prior peak. The math tells us we need a greater percentage increase to gain back the decline.


The descriptors of bear and bull markets ignore inflation. Month by month inflation is nibbling away at our portfolio value. The portion of our portfolio represented by the S&P 500 really declined by 20% before this past Monday. When they announce we’re back to a bull market, it won’t really be a 20% increase from the prior low.

Does the start of the worst sequence of returns start exactly in January 1969?

FIRECalc builds many historical sequences of stock and bond returns in history and displays how a portfolio will fare over time for all the sequences. Nest Egg Care uses THE Most Harmful sequence as the baseline assumption for determining a Safe Spending Rate in retirement – the rate that has Zero Chance of depleting a portfolio for the number of years you pick. FIRECalc builds its sequences to test using annual, calendar year return. This post examines the option of using an alternative start date for the test sequences of return, say, the 12-month returns starting on February 1, not January 1. This post finds that THE Most Harmful sequence of return started on January 1, 1969. Not a bit earlier or a bit later. This means THE Most Harmful sequence of return that one finds from FIRECalc is, indeed, THE Most Harmful sequence in history. Trust FIRECalc and the Safe Spending Rates displayed in Nest Egg Care.


== The question ==


I examined THE 1969 Most Harmful sequence in history in greater detail. That sequence applies the greatest stress on a porfolio for all periods greater than ten years. A portfolio will decline to its lowest value over time on that sequence. The 1969 sequence is worse than the one that starts in 1968. It’s worse than the sequence that starts in 1970. But should we be using calendar year returns? Might a different start date earlier in 1968 or later in 1969 result in a more harmful sequence of 12-month returns and therefore a lower Safe Spending Rate (SSR%) that one would find by using FIRECalc or that I display in Nest Egg Care, Graph 2-4 and Appendix D? This seems to be a small issue, but I find that a lower the first 12-month return has a big effect on our calculation of Safe Spending Rate, even if the subsequent 12-month returns are better.


== Shiller data ==


FIRECalc builds its sequences of returns using data for stock and bond returns published by Robert Shiller, a winner of the Nobel Prize. You download the data series from the Yale site; it’s a big spreadsheet of returns for the S&P 500 and 10-year US government bonds. It displays monthly and cumulative returns since January 1, 1871. Wow! His choice of stock and bond returns are appropriate for our planning, and his data is the only source I find for returns prior to 1926.


FIRECalc builds sequences of return using calendar year returns that it obtains from the Shiller data. It builds and tests 132 20-year return sequences as an example. (We can separately examine 19 sequences that don’t run a full 20 years.)


FIRECalc did not have to use calendar year returns. Since Shiller’s spreadsheet displays the monthly returns for stocks and for bonds, FIRECalc could have tested all 132 20-year sequences starting with February 1871; all 132 sequences starting with March 1, 1871. And so forth. Rather than testing 132 20-year sequences of return, it could have tested 1,584 sequences (12 times 132)! One could find that THE Most Harmful sequence is different; it may not align with the one we find using calendar year returns.


I examine all the optional starts of sequences on before and after January 1, 1969. Might THE Most Harmful sequence start in a different month?


1. I examine the detail of monthly returns leading up to January 1, 1969. The annual return for stocks in 1968 was 10% and -1.5% for bonds. Perhaps, though, the peak of portfolio value was early in 1968 and then it declined very steeply the balance of the year. Perhaps stocks first rose 20% and then declined by roughly 10% for the total year return of 10%. That could mean the first 12-month return from that peak was worse than the -16.8% for calendar 1969.


What’s the data tell us? The data show that a portfolio peaks on December 31, 1968. It does not have a peak in an earlier month. See here for the detail. THE Most Harmful sequence of return did not start earlier than January 1, 1969.



2. I examine the detail of monthly returns after January 1, 1969; the calendar year return for stocks was -16.8% and it was -10.5% for bonds. Again, perhaps the start of the year was good and the peak for that year came later than January 1. That would likely mean the 12-month return from the later start and steeper decline was worse than -16.8% for stocks.


What’s the data tell us? The peak portfolio value for 1969 was January 1 and not a later month. FIRECalc hit it on the nose: THE Most Harmful sequence of returns in history started in January 1969.




Conclusion: January 1969 is the start of THE Most Harmful sequence of 12-month returns in history. The start of the THE Most Horrible sequence isn’t a few months earlier or a few months later. We can trust the results from FIRECalc: it’s use of calendar year returns is correct. We can also trust the Safe Spending Rates (SSR%s) that I show in Nest Egg Care.

My bout with COVID

Dammit. It got me. I have no idea how. I’d put myself in the super cautious category. I wear a mask when others don’t. I avoid crowds. I hope you have not gotten it and won’t, but an article I read said roughly 50% of us have had it in the last six months. I report my experience with COVID in this post. This has to be old hat if you’ve had COVID, but it might be useful if you haven’t.


== First signs ==


I might have had the first signs a week ago Tuesday or Wednesday. That was the feeling of a small lump in the back of my throat. It isn’t a lump, but that’s my best description. I get that lump a day or two before I get any symptoms for a cold. I can usually predict the severity of a cold from that feeling. I think I thought this might be a worse one.


== Actual Symptoms ==


Symptoms hit on Thursday. Patti and I had a late lunch in a Greek restaurant – more of a deli – I’ve been wanting to try. We were the only customers. No symptoms there, but later that evening it hit me. Runny nose, sneezing, coughing, and the start of a sore throat. I was uncomfortable and took a test: negative for COVID. After all, I’d taken the fourth shot six days before; that’s supposed to be a boost to not even get it.


I moved over to the guest bedroom before Patti went to bed. Sleeping was not great Thursday, and I was worse on Friday. Runnier. Sneezier. My throat was very sore. I waited until after dinner to take another test, and it showed I had COVID. I took my temperature: 100.8. Breathing was fine. My oxygen saturation was 98%.


== Paxlovid ==


The hurdle was to be able to take Paxlovid; one must start it within the five days of first symptoms. Paxlovid is an anti-viral medication and is very effective in minimizing hospitalization and death for the unvaccinated. The effect is unclear for those vaccinated, and especially those vaccinated and boosted. But my knee-jerk reaction was to take it.


I had to get a prescription, and that was not easy to do starting on Friday night of a holiday weekend. I think there will be Test and Treat sites to make this easier. The web site lists a CVS two miles away, but it’s a test site – drive up window to provide a sample for a PCR test – and it can fill a prescription for Paxlovid; it does not provide a prescription based on the test result.


I found no help from our normal local provider, UPMC. Patti found a number for a 24/7 nurse with the second big health system, AHN, and called. The nurse said we could connect with them through MyChart and make an online appointment. (I think you can use the same line or you can Google “COVID telehealth appointment” to find a provider.) I scheduled it for 10:20 PM. It took me awhile to upload images of my health insurance card and fill out the list of the medicines I take.


The session started on time and took about 30 minutes. That was great. I found out that Paxlovid does not play friendly with some other medications. The one of most concern for me is the one I take to lower bad cholesterol: simvastatin.


• I had to start Paxlovid no earlier than 12 hours after my last scheduled dose. That means I should skip my Friday night dose and start Paxlovid no earlier than Saturday morning – 36 hours after my last dose Thursday night. The half-life of simvastatin is five hours. I decided to wait to start it Sunday morning (day three); that was a wait of 60 hours from my last dose. 60 hours means the amount of simvastin in me was 12 half-lives of my dose Thursday night – 1/4000th.


• I cannot take simvastin while taking Paxlovid, and I can only restart it five days after the end of the course for Paxlovid. The half-life of Paxlovid is six hours; five days is 120 hours or 24 half-lives. They want the concentration of Paxlovid to be far less than one-one millionth of value after a dose before I start simvastin!


I took an NAAT/PCR test Saturday afternoon. That verified that I had COVID but did not have the flu: one swab for the two tests.


== Isolate for five days ==


One has to isolate for five days from the onset of symptoms. I stayed in the guest bedroom. Patti delivered me food. Dudley was not allowed in. Every now and then I could hear him scratch the door and whimper, but he did not get his daily rubdowns.




I think most of my symptoms resolved by the end of Saturday, day two. My throat was a bit sore, but I slept well. By Sunday, day three, I felt fine. No sore throat. I had and still have a residual cough. Still, I tested positive at the end of day five. I’ve tested negative on days six and seven. I’ll keep testing to make sure I’m not headed for a rebound, which can happen.


== Mask through day ten ==


I got out of the cage Wednesday morning. Through day ten (Sunday for me) I must wear a mask all times in the house. I have to pass muster with Patti on pinching the masks at my nose and making sure the sides lie flat on my face. I won’t go in to stores, but if I did, I’d have to wear a mask and stay six feet away from anyone.


All in all, this was not bad. I’ve had worse bouts with a cold or flu. The stress is on Patti: serving me when in isolation; worrying about not getting it herself. She’s been a helluva caretaker with my surgery and now this.



Conclusion: I got COVID at the end of last week. This is getting to be a more common experience; a recent article estimated half of us had had COVID in the last six months. This post describes my bout. I hope it provides useful information for for those who haven’t gotten it.

How much is $500 worth?

In a way this is a silly question. $500 is worth $500, but in my case $500 isn’t worth much. Last week I locked up $10,000 of what I have in money market or interest-bearing checking to buy an I-Bond that I cannot redeem for a year. I’m going after at least $500 in more income, but I’m creating a headache for the normal way I manage our cash flow. I mixed up my phases: I’m not in the Safe and Invest phase for MORE; I’m in the Spend and Invest phase with the focus of DON’T RUN OUT OF MONEY. That $500 has almost nothing to do with the chances of running out of money. The $500 or so that I will earn that is tied up for a year isn’t worth the headache of messing up my plan for our monthly cash flow. I can’t wait to redeem my I-Bond on May 21, 2023.


== The I-Bond ==


I mentioned last week that I bought a $10,000 I-Bond. (This was not a painless process; I had to invest the time to figure out how to do it; it is not that clear as to how I get paid interest and how I redeem the bonds. I show some added detail here.) I will earn at least $500 more – maybe $650 more – this next 12 months than the alternative of ~$25 per year that I earn on $10,000 that I keep in our money market at Fidelity.


But I’ve locked up that $10,000. I cannot access it for our spending until May 2023. That throws my standard planning for our cash flow for the year out of kilter. Here is my standard process: In early December 2021, I sold the securities for our Safe Spending Amount (SSA; Chapter 2, Nest Egg Care). I withheld the taxes that I forecasted for our 2021 tax return when I distributed for our RMDs. I therefore got net cash for our spending in the upcoming year. I pay that total out monthly from our account at Fidelity to our checking account. By the end of November 2022, before my next sale for our SSA for 2023, I don’t have much cash in money market (MMKT) at Fidelity. I may have some excess cash in our checking that we did not spend, but I’ll typically donate that or give it to heirs.


Example: Let’s assume our SSA for 2022 was $75,000 and I withheld $15,000 for taxes in December when took our RMDs. Our net cash for our spending in 2022 was $60,000. Starting with December, I then (basically) paid $5,000 per month to our checking account for the next 12-months. That’s our regular paycheck from our next egg; it comes in like clockwork like our net pay from Social Security. At the end of November 2022, I have paid out the $60,000 and have ~no cash in our money marker at Fidelity until I sell for next year’s SSA.


I bought the I-bond last week and, in essence, took the $10,000 from our Fidelity MMKT. (It made no sense to me to sell stocks or bonds in their depressed state; I’m hoping they both rebound in value to much more than 5% or 6% in a year.) That means I now forecast to be ~$0 in money market at Fidelity as the end of September and not the end of November. I won’t get a paycheck from Fidelity for two months unless I break my pattern of when and how much I sell at the end of the year. (And this year, I think I’d like to delay selling for our SSA as long as possible.) Maybe my process is too mechanical for you, but it’s the way I’ve done it for eight years to make sure I pay out our full SSA and do not spend one dime more.


The incentives for our spending are wrong, too. Unless I do something different than my usual cycle of selling in the first week of December, by brain tells me we should spend less now or plan to donate or gift less to heirs at the end of the year, and that’s the EXACT OPPOSITE thought I want to have. I want to see that cash rolling in every month that signals, “You have plenty of income. Figure out what to spend it on that will be FUN. If any is left, you have the pleasant task of deciding who gets it.”



Conclusion: Last week I bought a $10,000 I-bond. I thought it wouldn’t bother me to tie $10,000 up for a year. Now that I think about it, it is a hassle. It’s messed up my routine for our cash plan for the year. Right now I won’t have enough at Fidelity for our paychecks into our checking account for October and November. I have a different perspective on the $500 or more that I’ll earn from the I-Bond: the hassle isn’t worth $500. I cannot wait to sell my I-bond on May 21, 2023.

What do we do now?

Oops. This is getting serious. My stocks are down more than 17% from the start of the year. My bonds are down more than 9%. (And the real declines are greater when I adjust for inflation.) Those are steep declines. Not nearly as steep for stocks as in 2020, but steep enough. At times like this, the emotional part of my brain shouts, “DO SOMETHING. YOU’VE GOT TO ACT TO CONTROL THIS.” The thinking part of my brain says, “Don’t panic. You can’t control the market. You can’t predict. It’s a long game. Stand pat as you have in all other declines in the past.” But there are a few things to consider than can win you a few bucks. This post mentions three actions. I acted on two this week. My thinking brain can say, “See. I did do something!”



== Consider taking part of your RMD now ==


Patti and I are both subject to RMD. I’ve described this before, but it makes sense to take your RMD when the market declines: assuming your investment rebounds, you are saving on taxes. It’s simplest and clearest to take your RMD now by transferring securities from your retirement account to your taxable account.


• Option #1. Let’s assume I take $10,000 of RMD now. I transfer shares of FSKAX worth $10,000 from my Traditional IRA to my taxable account. (When I transfer shares, I do not withhold taxes; I’ll withhold the proper amount for the year the first week of December when I sell added securities in our Traditional IRAs for at least the balance of our RMDs.)


Let’s assume the value of FSKAX rebounds +20% at some time in the future: that would be a gain of $2,000 from its present value. Assume I sell those shares no earlier than a year for our spending. I incur a capital gain tax of 15% on the $2,000 gain: $300. I get to keep $1,700 of the $2,000 for our spending.


• Option #2. I just keep the $10,000 in my Traditional IRA. It similarly rebounds by 20% or $2,000. Assume I sell and distribute it to my taxable account when I would have sold in Option #1. I pay 22% tax on that $2,000 gain: $440 in tax or $140 more that in Option #1. I get to keep $1,560 for our spending, roughly 8% less.


Summary: I likely will make $140 for each $10,000 of FSKAX transferred now from a Traditional IRA.


My action: I took about half my RMD this week by transferring shares of FSKAX to my taxable account.


== Consider converting from Traditional to Roth ==


You never lose when you convert from Traditional to Roth if the tax bracket when you convert is the same as when you spend from your Roth. You come out ahead if your marginal tax bracket is greater in the future or if you can use Roth to lower your AGI and avoid a Medicare Premium surcharge. The first AGI tripwire for married, filing jointly costs about $1,900.


In my tax planning, I will project our AGI and judge to see if it is close to the first first tripwire that could cost us $1,900. If I am, change the source of cash we’ll need for our spending: I’d sell securities from our Roth (no AGI) to lower our total AGI. Smart use of Roth could save $1,900 in Medicare Premiums, so that is a big potential savings. (This is a more obvious concern when it is just one of Patti or me who is alive; income for the survivor won’t change much, but the Medicare tripwire will be half of what it is for married, joint filers.)


If you don’t have enough in your Roth account, this is a good time to convert. You are getting more bang for your tax dollars if you convert when stocks have dipped. They rebound in your Roth account at no future tax consequence.


My action: I already converted enough in my Roth account. I’m pretty sure I can avoid Medicare tripwires in the future. I’m not converting more now.


== Buy an I-Bond: likely $500 more ==


My friend Jay pointed this out to me. This is a good video on I-bonds. You can buy an inflation protected bond that will earn more interest than you can from, say, money market or bank CD. Rates are variable and are stated every six months: May and October. You are limited to $10,000 per person per year. You must hold the I-bond for a year. You forego three months of interest when you redeem your bond unless you hold on to it for five years; I’ll never hold it that long.


The guaranteed annual rate for the six months May through October is 9.62% – 4.81% for the six months. I will earn $481 on my $10,000 invested before November 1. The rate that  starts November 1 will be  restated in October. I’ll earn that rate for the next six months. Assuming that rate will be lower, the annual rate may be more than 7%: $480 + more than $220  if the next rate is greater than 4.40%).


Even if I sold in one year and did not earn 3 months of interest, the interest for the year will exceed ~6% ($480 + $110 if the rate is greater than 4.40%). That handily beats my money market rate, currently at 0.25% annual rate; we hold no CDs; we earn 0.01% rate on our checking account. The math for us: forgo $25 to earn +$500 – more likely $700 – on the $10,000.


Patti and I easily have $10,000 in our checking account + money market at Fidelity at any point in time. The total peaks in December each year (That’s when I sell securities for all our spending for the upcoming year.) and it is lowest at the end of November. Owning an I-bond isn’t as flexible a money market. I have to plan on lowering our average cash + money market balance by $10,000.


You have to buy I-bonds direct from the US Treasury. Yesterday I opened an account at TreasuryDirect on this site. That took 10 or 15 minutes. This video is clear. My account is linked to our joint checking account. The BuyDirect tab on the site led me to the purchase of my $10,000 bond. I looked this morning and they debited from our checking account at midnight.


The $10,000 will accrue interest until I redeem the bond. I may redeem in one year, but I’m guessing I’ll likely hold it longer. I’d guess the next three-month rate will be attractive; I wouldn’t to forego 3 months of interest at a high interest rate, but, then again, the difference may only be $100 or so. I’ll sell three months after the newest six-month rate drops to what I judge as too low of rate.


I have two administrative tasks to track that I entered into my 2do app: I need to check the six-month rate each May 1 and November 1. I need to decide on next May 20 if I should sell the bond.




Conclusion: Stocks and bonds are making me ill right now. The emotional part of my brains says, “DO SOMETHING.” The thinking part of my brains says, “HANG IN THERE. Don’t do anything crazy.” But it also knows and finds a few things to do that might make me a few $100 or even more than $500 per $10,000: 1) take a portion of RMD now; 2) convert from Traditional to Roth; 3) buy an I-bond. I did two of these three this week. My thinking brain can say to my emotional brain, “Pipe down. I am doing SOMETHING.”

Is inflation slowing?

The purpose of this post is to provide information on recent trends in inflation. We’ve all been hit with inflation: it hurts our spending power; both stocks and bonds react negatively to increasing inflation. The last time it was this high was about 40 years ago. I have no idea of when it will come down closer the Federal Reserve’s target of 2% per year. I suggest that we’ll see lower annual rates of change at least for the next two months. I’d guess we nest eggers – especially those who recalculate at the end of November like I do – will be seeing ~6% adjustments for inflation in our gross Social Security benefits and our Safe Spending Amount for 2023 (SSA; see Chapter 2, Nest Egg Care). That will give us the ~same spending power in 2023 as in 2022.


== Recent history ==


I plot the monthly change in inflation for the past 3 1/3rd years. The April increase in inflation was .56%. That’s the lowest monthly change this year; it’s less than half the 1.33% change in March. April is the first month in 2022 that the change has been less than the change for the corresponding month in 2021.


Inflation in 2021 exceeded inflation in 2020 at the first of the year and at the end of the year. Inflation in 2022 has exceeded inflation in 2021 for the first three months of the year, but the increase in April 2022 was lower than the increase in April 2021.


I plot the 12-month change in inflation for each month for the last 2 1/3rd years. Inflation over the last 12 months was 8.26%. The 12-month rate has steadily increased for ~20 months. (There was a slight decline for 12-month the period ending August 2021.)


The 12-month inflation rate in April 2022 (8.26%) was less than the rate ending March 2022. April marks the first decline in the 12-month rate in 18 months.


== The future ==


You can see from the first graph that for the next two months we’ll be comparing the monthly change in inflation to the highest two-month change in 2021: 1.74% for those two months from the .80% increase in May and .93% increase in June. Assuming the monthly changes for May and June will be less than in 2021, the news will be that the 12-month rate is falling.


Then we’ll be comparing monthly changes to the lowest three-month period in 2021: July, August and September. Inflation averaged 0.3% per month, half of the rate this past month. The 12-month inflation rate may climb in those months.


Social Security calculates its Cost-of-Living Adjustment (COLA) in October based on the average change in inflation for the three months July, August and September. It uses a different measure of inflation (CPI-W) than is widely reported (CPI-U). CPI-W increased 5.9% for 2022, and that was a greater increase than would have been calculated using CPI-U.


Assuming no big turnaround in current market performance, our annual Safe Spending Amount for 2023 will only increase for inflation. We won’t see a real increase, unlike the ~10% real increases all nest eggers averaged over the last two years.


Refer to blog post of December 3, 2021 for detail.



Conclusion: We’ve all been hit with inflation: it hurts our spending power; both stocks and bonds react negatively to increasing inflation; that’s a double-whammy. The last time inflation was this high was about 40 years ago. I have no idea of when it will come down closer to the Federal Reserve’s target of 2% per year. We clearly have a way to go. I suspect we will see 12-month rates decline for the next two months; it will be tougher sledding for the three months after that. I’d guess we nest eggers – those who recalculate at the end of November like I do – will see ~6% adjustments for inflation in our gross Social Security benefits and our Safe Spending Amount for 2023.

What did you do that was fun this week?

My fun project for this week was to spend time planning our next big walking vacation in England in August. It was a good distraction from thinking about the stock market! The purpose of this post is to simply tell you what was fun for me: I dove into the details for our trip to England in August. It’s very concrete in my mind now, and I get pleasure now from anticipating a future experience.


Patti and I have traveled enough times to England to know we can completely plan our trip. Walking is our primary activity. The UK has 16 national trails but 150 long distance paths of more than 50 miles. We’ve liked the long-distance paths in northern England, and we’ve visited the Lake District and planned day hikes for at least five years. We plan so we don’t have to rent a car; we find it’s far more relaxing for us to stay in as few places as possible. That means takes some work to make sure we have the logistics right. Our August trip is a bit more complex: it’s an area we have never visited before, and we are walking a 47-mile linear route. I’ve got to make sure I can arrange buses or taxis to take us to the start of our walks and get us back to our lodging.


The internet makes this so much easier than my efforts years ago. I describe some of the things one can do.


== Pick the trail ==


We are walking 47 miles of The Norfolk Coast Path, from Hunstanton to Cromer. I picked this trail because it is accessible from London and very easy. Easy is definitely okay for our first trip after my surgery. I planned it as seven walking days. I added a rest day. We definitely aren’t pushing it. Most days will be six miles. Two days are a bit over eight. This looks to be a nice trail because most days we walk through a nice village roughly the middle of the day. It’s a real luxury to be able to stop and find a place for coffee or lunch.



We can see what the trail looks like for the full 47 miles. I can enter “Norfolk Coast Path” into Google Maps. I see an overview of the trail. I can zoom in on the satellite view, I have the view of someone walking the trail! I find this amazing. This YouTube also gives a great overview.


== Where to Stay ==


The guidebook I ordered arrived last weekend. It has very detailed maps. It shows distance for suggested walking itineraries, describes the villages, recommends best places and stay, and suggests other things to do.


I picked out two places to stay along the 40-mile stretch. The first place is in Thornham at the end of the first day’s walk. The second is in Blakeney, two days from the end. I used Google maps and TripAdvisor to find places that look to be way above average. We are happier when we spend a bit more on the place to stay and a nicer room. (Patti paid for the flights with miles, so spending a bit more on rooms is an easy decision.) All the places I looked at show their rooms on their web site. I couldn’t book the room we wanted on their site. I called. At both places, we have one room for the first night and then our preferred room for three nights.


== Logistics ==


We won’t rent a car. It’s pretty easy to sort out the logistics to get to where we stay the first night in Thornham. We land at Heathrow at 7:40 AM. I can buy tickets now for the Heathrow Express to Paddington Station. Google tells me that it’s a 20-minute cab ride to King’s Cross Station. I use this site to find we can catch the 9:42 AM direct train to King’s Lynn. At King’s Lynn, Google tells me it’s a 35-minute cab ride from the train station to Thornham. We’ll likely be in Thornham by 1:00 PM UK time.


The return is a bit easier. We’ll take a train from Cromer to Norwich and stay there to explore for a day and then take the direct train to London; we’ll stay four nights there.


I had to sort out the logistics for each day. We have to get to a different starting point each day and get back. This route is similar to our travels along a 23 mile stretch of Hadrian’s Wall last fall. A road closely parallels the trail. A bus runs at one-hour intervals both ways. I can zoom in to see that Google shows all the stops. The stop is right at the first place we stay and .2 miles from the second. We can always catch a bus to our starting point and back. Taxis are generally easily available, but I haven’t figured that option yet.


== Where to eat ==


I normally use Google maps and TripAdvisor to make a list of places to eat and figure out the details when we get there. The person we talked to at Anna’s in Thornham suggested we make dinner reservations at that time of year. Google, TripAdvisor and this site were great in help in figuring out where we might want to eat. It must be a busy time of year. I can book now for August at a surprising number of restaurants.


== Entertainment ==


On our free day, we’ll probably take a boat ride from Blakeney to see seals and birds on an outer island. That will depend on the weather. Patti and rocking boats don’t mix.


Ideally, we find a theater or playhouse near where we are staying. The guide book said Hunstanton had a theater. I went on the web site and found they have a Queen tribute band on our second night. It looked like we were the first to buy tickets. Patti bought the best in the house. That should be fun.


There’s also a variety show in a pavilion on the pier at Cromer at the end. We haven’t decided on that one. Patti will sort out the London theaters for the four nights we stay in Covent Garden. She’ll book three shows for sure. Those theaters and shows are always great.



Conclusion: I really enjoy the task of detailed planning for our trips abroad. What we will do and where we will stay is very concrete. I get present pleasure by anticipating a future experience. I can do all the detailed for our trips to England. It’s comfortable for us, since we’ve been there so many times. It’s easy to find a new walking trail or an area with great day hikes.

Are we overdue for a big dive in stocks?

Returns for stocks and bonds are down sharply this month and year to date. In the last week or so, I’ve read a number of articles implying that we retirees should be nervous: we should be lowering our spending; we should be taking special cautions to protect our portfolio. The implication is that we are headed for a period of sharp decline; an implicit assumption is that returns have been too good recently. The purpose of this post is to emphasize that you should plan on NO DECLINE in your current Safe Spending Amount (SSA. See Chapter 2, Nest Egg Care [NEC]). You hit a high-water mark in your last calculation, and your SSA does not decline in spending power, essentially for the rest of your life. That’s the most important consideration.


== The recent past: how good? ==


A friend of mine said that the most recent past has been the best bull market for stocks in history. Is that true? No.


Stocks have had a very good run for the past 13 years. They’ve averaged 11.6% real return per year from 2009 through 2021. That’s well above the long-run, historical return rate of ~7.1% per year. I can calculate returns for all 13-year return periods. I find this most recent one is the ninth best since 1926. It’s an excellent return period, but it’s not a shocker.





We also need to put the last 13 years in context: the last 13 years followed the worst 9 years in history: stock declined in real value by 42% from 2000 through 2008. Wow. (Bonds performed well above average for this period.) One would expect stocks to rebound toward their long-run average of about 7.1% real return per year. The rebounded mightily, but over the past 22 years stocks have averaged 3.1% real return, well below their expected 7.1% annual return rate.


== Are stocks too high? ==


You can find lots of sources that say the market is overvalued and will decline. Some of these predictions are downright scary. I don’t put much faith in those predictions. I see little reason to argue the future trend line for returns will be different than the past. The cumulative return for stocks is above its historical average 7.1% trend line shown on this graph, but it is not wildly above the line as in the late 1960s or 1990s.



== Our SSA will not decline ==


Patti and I recalculate each November 30 to find our Safe Spending Amount for the upcoming year. I’ll assume you use the same date: you calculated to at least a 10% increase in your SSA this past November. You calculated to your peak SSA. Following the worst-case planning in NEC , it will never be less than that. You know you have very, very close to ZERO CHANCE of being able to spend that amount – in constant spending power – every year for your remaining years.


I worry very little about declines in our portfolio. I can’t worry that our current SSA is too little for us. Patti and I have been at this a number of years now. Our SSA is close to 50% greater in real spending power than it was at the start of retirement, and we were happy with it then. I spend no emotional energy thinking that we might run out of money. If we need to revert to lower spending – lower the SSR% we use to calculate our SSA – we’d extend our years of Zero Change of depletion beyond the age of 95. And that is still assumes we strike out and hit the 1 in 150 chances of riding a sequence of return that matches effect of the most harmful sequence in history.


I have other things I should worry about: will I make it to my life expectancy – less than 11 years now? Will both Patti and I be alive for that many years? Will we be both be healthy enough to travel to enjoy the money that we pay ourselves.



Conclusion: I keep reading articles advising retirees about what to do to protect themselves from lower returns and higher inflation. I really don’t worry about a decline in my portfolio. Like all nest eggers, our Safe Spending Amount is the highest it has ever been. Patti and I have experienced an increase of nearly 50% in real spending power for our SSA over the past eight years. You would have seen a similar increase: your SSA, effectively, has increased more than 50% over the same eight years, even though you likely didn’t start your retirement plan then: you haven’t withdrawn nearly as much as we have. Focus on your SSA: it won’t decline in spending power essentially for the rest of your lives. Distance yourself from the anxiety or worry about declines in your portfolio and the risk of running out of money.