You win the tax game with Roth when you are retired, assuming you stay in the 22% marginal tax rate when you contribute or convert to Roth. You come out ahead by perhaps $1,000s per year in retirement. You want to get to roughly 80% of your retirement accounts as Roth by the time you retire and start Social Security.

 

Only a small amount of distributions from Traditional IRAs – I argue it’s less than $15,000 per year for a single filer (double that for married, joint filers) – is low tax when you are retired and on Social Security. For simplicity, you can assume that all distributions greater than $15,000 are taxed at more than 22%. This post shows that some distributions from Traditional can be taxed at 25% to 30%.

 

You want to pay up to 22% tax now (Roth) so you don’t pay 25% or 30% tax later (Traditional). Those  are the $1,000s in tax that you do not have to pay. Those who know they will have very large IRAs win by paying 24% tax now, and they will save even more.

 

== What’s this mean? ==

 

If you are in the Save and Invest phase of life, I’m assuming you can stay in the 22% marginal tax bracket when you implement these actions:

 

• If you are a single filer, target to have less than $300,000 in Traditional, pre-tax IRA before you start Social Security with the balance in Roth. (Married, joint filers target no more than $600,000.)

 

• Contribute to Roth, not Traditional (pre-tax), to your employer’s plan and to your own IRA.

 

• Convert to Roth. Convert all the Traditional IRA you have now to Roth before age 59½. Convert most all your Traditional in your employer’s plan (e.g., your employer’s contribution) to Roth when you become eligible at age 59½ and before you start Social Security.

 

 

If you are older, in or near the Spend and Invest phase of life, your actions are limited.

 

• Folks, like Patti and me, roughly age 65 and older have no or very little Roth. We did not make a mistake. All or many of our prime work years were before the flattening of marginal tax rates in 2018. Marginal tax rates before 2018 were as many as eight percentage points higher. Roth made no sense then. The tax rate we now pay when we distribute from Traditional is much lower than the tax rate we avoided. We win the tax game when we distribute despite our headaches of trying not to pay taxes we can still avoid.

 

We’ll never get much into Roth. We really can’t convert to the top of the 22% tax bracket. Those over 65 lose a portion of the Enhanced Senior Bonus deduction before the top of the backet. Those on Medicare bump into an IRMAA tripwire roughly in the middle of the bracket. Our hands are really tied after we start paying RMD.

 

 

Details:

 

I explain why so little of distributions from Traditional are low tax by walking through the details of a tax return for someone age 65 or older and on Social Security. This is a lot of numbers!

 

== Bob: our example ==

 

Bob is a single filer and over age 65. He has started Social Security (SS). His gross benefit is $35,000.

 

Bob’s sole source of cash for spending other than SS is from sales of securities from his $1.5 million financial portfolio. He has $1.2 million in his retirement accounts and $300,000 in a taxable brokerage account.

 

Bob’s sells 4% or $60,000 from his portfolio for his spending: $48,000 from his retirement accounts and $12,000 from his taxable brokerage account; he’s held the same index funds for decades; his gain on this $12,000 is $8,000.

 

Bob has some interest and dividends from his taxable holdings that reinvest. He uses the standard deduction when he completes his 1040.

 

 

== Case 1. $48,000 from Roth: NO TAXES ==

 

All Bob’s IRA is Roth. I assume he paid 22% tax when he contributed or converted. He distributes $48,000 from Roth. (See here for PDF of four charts.)

 

 

Bob pays NO tax. He has no taxable income. Bob has $95,000 for spending. Bob will never pay tax when retired since he prepaid taxes when he contributed and converted; he’ll never have enough taxable income to trigger tax on his dividends and capital gains.

 

 

== Case 2. $12,120 from Traditional: NO TAXES ==

 

Let’s now assume Bob has a different mix in his retirement accounts: he has a mix of Roth and Traditional. He distributes $48,000 from his retirement accounts, but $12,120 is from his Traditional and $35,880 is from Roth.

 

 

The added $12,120 income from Traditional bumps the amount of SS that is taxed by $8,830. His total income increased by $20,950 to $24,150.

 

Bob pays NO TAX. After his standard and enhanced deduction, taxable ordinary income is $0. His total taxable income is below the threshold that triggers 15% tax on dividends and capital gains.

 

Bob wins the tax game big time on this $12,120. He did not pay tax on the amount that he contributed years before and pays no tax on this $12,120 distributed. You can’t beat that!

 

Note: This means Bob lost the tax game in Case #1 by $3,420. He paid 22% tax when he contributed to Roth that he did not have to pay to wind up with $0 tax when he distributed the first $12,120 in the year. The 22% tax that he paid when he contributed was 28.2% of the net amount he had in his Roth then and today. That tax that he did not have to pay would have grown to $3,420 today.

 

== Case 3. An added $6,700 from Traditional: 18.5% tax ==

 

Bob distributes $6,700 more from Traditional and $6,700 less from Roth. This bumps taxable SS by $5,700. Total and taxable income increased by $12,400 to reach the top of the 10% marginal tax bracket.

 

 

Bob pays an effective tax rate of 18.5% on this $6,700. He paid $1,240 tax on the $6,700. Each $1 distributed increased the amount of SS that is taxed by $.85. The 10% marginal bracket is effectively 18.5%. Bob has $93,760 for spending.

 

I don’t consider 18.5% as low tax. The difference between 18.5% and 22% on this $6,700 is $235. I judge this as insignificant in the grand scheme of things.

 

 

== Case 4. Added from Traditional: 22.2% rate ==

 

Added distributions are taxed at 22.2% until 85% of SS is taxed. The next $1,000 from Traditional increases the amount of SS that is taxed by $850. Taxable income increases by $1,850. Taxes on $1,850 in the 12% bracket are $222. The 12% marginal tax bracket is effectively 22.2% on this distribution.

 

 

== Higher taxes and more headaches ==

 

If Bob distributes another ~$28,000 from Traditional to get to $48,000 solely from Traditional, he pays an effective tax of 25%. That’s three percentage points more than if he were distributing Roth; that’s an added $850 tax per year. He pays more tax because taxable income crosses the threshold that increases the tax rate on capital gains from 0% to 15%; taxable income reaches a point where Bob starts to loss part of the $6,000 Enhanced Deduction for Seniors.

 

 

==It can be worse ==

 

If Bob had added ~$20,000 of distributions from Traditional – to total $68,000 – he crosses the first IRMAA tripwire that costs ~$1,300 in added Medicare premiums. Bob would have paid an effective tax rate of 30% on that added $20,000. That’s about eight percentage points or $1,600 greater tax per year than if he were distributing Roth.

 

 

Conclusion. Very little of distributions from Traditional IRAs are low tax. Less than $15,000 of distributions in a year are not taxed (single filer). About another $7,000 is taxed at 18.5%, but I don’t consider that low tax. Further distributions are effectively taxed more than 22%.

 

If you are in the Save and Invest phase of life, you want to wind up with roughly 80% of retirement accounts as Roth to avoid higher tax rates in retirement. Assuming you can stay in the 22% marginal tax bracket, you should …

 

• Only contribute to Roth

 

• Convert Traditional to Roth: convert your own Traditional before age 59½. Convert your employer’s Traditional to Roth when you are eligible at age 59½ and before you start on Social Security.

 

Older folks, like Patti and me, in our Spend and Invest phase of life are stuck with very little Roth, but we were correct to contribute to Traditional. Marginal tax rates then were much higher than they are now. We are winning the tax game when we distribute even though it doesn’t feel like it. We still get headaches trying not to pay taxes we can still avoid. IRMAA is the big one. None of us would ever get close to IRMAA if we had a lot more Roth than we do.

It’s been over seven weeks since we returned to from India. We’re back to our normal routine! The memories – particularly the experiences that got us out of our comfort zone – are seared in our brains forever! I enclose a list of those things that we will never forget. It’s a long one. Here are six highlights.

 

• The bicycle rickshaw ride in Old Dehli. The seats on the rickshaw are narrow. You had a small place to brace your foot to stop you from being thrown out if you hit something or if something hit you. The lanes are narrow. It was crowed, crowded, crowded. It was noisy, noisy, noisy. There are motorbikes and scooters aimed right at you as you ride through. Horns are honking. There’s an incredible tangle of electrical wires overhead that is almost unbelievable. And monkeys. There’s a man pulling a cart of wholesale goods. There’s a Brahma bull pulling a cart. The shops are all one kind along the street: jewelry stores; fabrics for saris; wedding dresses; kitchenware. Incense is burning from a shop.

 

 

• Sikh temple in Dehli. All Sikh temples feed people for free: selfless service. This temple feeds maybe 20,000 per day. 20,000 bread servings, chapati. All the food is donated. All the labor is volunteer. I think there were 500 at a seating every 20 minutes. Nobody looked particularly poor. You must be barefoot in the temple, and we were there about 45 minutes. We’re not used to that.

 

 

• Tiger safaris, Ranthambore national park. We went on three safaris and saw a total of six tigers. We must’ve followed a tiger as it walked down the road for maybe a half a mile. Our guide in our jeep said only one in five safaris see a tiger. We also saw a sloth bear, which is pretty rare.

 

 

• Traffic in Jaipur. The traffic was unbelievable everywhere, but particularly in Jaipur. We first stopped at a busy intersection and visited a small Hindu temple. I will always remember the holy man who is the caretaker of the temple. We crossed the street and walked along an area with shops. There are no crosswalks. The traffic does not stop for people walking across the street. You have to just hope they slow down and don’t hit you. We were glued onto Raj,  our guide, as we cross a street.

 

 

•  Hugging elephants in Jaipur. We visited a site that had two rescued Asian elephants. (2 ½ hour drive to go 15 miles.) They no longer carry tourists up the hill to the courtyard in Amber fort. Each elephant has a caretaker who lives with them 24 hours a day for 11 months of the year. The caretaker gets one month off to be with his family. The elephants do not particularly like the replacement caretakers for the for the one month!

 

 

• Funeral pyres along the bank of the Ganges in Varanasi. Hindus are cremated, and ideally they are cremated with their ashes tossed into the Ganges. This is a faster path to meet their god. The funeral pyres are burning 24 hours a day every day of the year.

 

 

 

Conclusion: Our guide in India, Raj, told he was going to make memorable experiences for us. He sure did. India sure did. We have memories seared into our brains. We’ll never forget.

The decision of when to start Social Security is a relatively small financial decision, but it can be a confusing one. The decision is straightforward if you’ve made the right decision as to how to invest your retirement portfolio. With two exceptions, you would NEVER DELAY the start of SS when you are retired. START now. The point where DELAY overtakes START is never less than age 85 and averages age +98 for the 96 months between age 62 and 70 that you could choose to delay. Your age to the breakeven point (BE) is greater than 95 for about 2/3 of the 96 months.

 

Details:

 

• It’s a small financial decision. In the example below, you are deciding whether or not to invest $3,000 to get $20 increase in SS for the rest of your life. I’ll assert your financial portfolio is $1 million. You are deciding how to invest 0.3% of it: small potatoes.

 

• The decision can be confusing because the number of months to breakeven (BE) – when DELAY overtakes START – is different for all 96 months between ages 62-70. And the number of months to BE is affected by the return rate you assume for your portfolio.

 

• The decision is clearcut if you’ve invested your retirement portfolio correctly. I would have assumed 6% real return on our retirement portfolio. I think you should that investment rate, too. You would NEVER decide to DELAY because  your age to BE > 85 in all months and averages +98.

 

If I use a 5% real return rate, delay makes sense for nine months starting at age 64, but the cumulative benefit from delay for those nine months is small. The average age to breakeven is 89.

 

• Two exceptions favor DELAY: #1) those retirees with “more-than-enough” in their pre-tax IRA will want to delay to age 68; #2) a married, joint filer may want to delay (but never to age 70) if your SS benefit is greater than your spouse and your spouse is younger.

 

DEEP Dive:

 

== The BE calculation ==

 

How many months does it take $20 per month invested to overtake $3,000 invested?

 

Let’s assume you are 67+0 and your SS benefit at this Full Retirement Age is $3,000. Let’s imagine SS mails you a $3,000 check this month but offers you an added $20 per month for the rest of your life if you return it. You have two options:

 

1. Cash the check: START. You accept SS’s offer to pay you $3,000 per month in constant spending power for the rest of your life. You’ve got that $3,000 for your spending this month. You don’t have to sell $3,000 of securities to get that. You keep $3,000 more invested for the rest of your life.

 

2. Send the check back: DELAY. You sell securities from your investment portfolio to get the $3,000 for your spending. You have $3,000 less in your investment portfolio. Next month, SS will mail you a check for $3,020. If you cash that check, you get that added $20 per month in constant spending power for the rest of your life. You don’t have to sell from your investment portfolio for that added $20 each month for your spending. You keep each added $20 invested for the rest of your life.

 

At some point the $20 per month invested adds up to more than the $3,000 invested. We can calculate the months to BE. We add those months to your age and find your age to BE. If your age at BE is before your life-expectancy age, I argue that you should DELAY: you will have more at your life expectancy age.

 

== Months to BE change ==

 

SS offers a fixed monthly increase in three brackets from ages 62-64, 64-67 and 67-70. The offer for delay at the start of each bracket is a different percentage of your SS benefit at ages 62, 64, or 67. Those offers set the pattern of months to BE for each bracket. (See here for more detail.)

 

The months to BE increase every month in each of those brackets.

 

Example: next month you get a check for $3,020 but SS offers to add the same $20 per month if you DELAY again. You now are deciding whether or not to invest $3,020, not $3,000, to get a $20 per month increase. That’s at least one more month to BE ignoring the effect of investment returns. And you are one month older.

 

Example: You keep delaying. In 35 months at age 69+11, SS mails you check for $3,700 and offers an added $20 if you delay. You are deciding whether you should invest $3,700 to get a $20 per month increase. It will be many more months for the $20 to match the growth of $3,700 relative to the $3,000 when you were 67+0. And you are 35 months older.

 

== Your expected portfolio return ==

 

Your expected portfolio return is real ~6% per year if you follow the recommendations as to how to invest in Nest Egg Care [NEC]. See Chapter 8. You’ll have no less than 75% stocks in your retirement portfolio. That’s also the default portfolio mix in FIRECalc. Patti and I started at 85% stocks for our investment portfolio and our investing cost is less than 0.03%; our expected real return was +6.3%; it’s turned out to be better than that since our start in 2014.

 

 

== Graph of age to BE: 6% real return ==

 

At 6% real return, your age to BE is more than 85 years for all 96 months for ages 62-70. It makes NO SENSE to delay in any of those months. The age to BE is > 95 in 65 of the 96 months. The average age to BE is 98.

 

 

(Your age to BE is below age 86 for two months; the amount extra that you’d have at age 86 from delay in those two months is less than $50 in today’s spending power; it’s the same amount you’d have if you spend 10¢ less per month starting at age 64.)

 

== Graph of age to BE: lower real return ==

 

I enclose the graph of age to BE with 5% real return. Your age to BE is less than age 85 in nine of the 96 months. You would delay those nine months starting at age 64+0, but I calculate the accrual of the benefit equal to an added $120 per year. That’s nice, but it’s trivial relative to what you spend in a year or will earn on your portfolio at your expected return rate.

 

That pattern repeats if you assume lower real portfolio returns. You find more months where age to BE is less than age 85. When you invest with a low expected portfolio return, you are buying a more complex decision.

 

== Exception #1: those with MUCHO ==

 

The big exception is for those who are retired and know they have “more than enough” for their spending in retirement. And they have a large pre-tax IRA that they know will eventually trigger IRMAA and might result in higher marginal tax rate from their RMD.

 

They may have been (should have been) on the march to convert as much of their pre-tax IRA to Roth. It is most tax efficient convert before you start on SS. About the first $20,000 converted in a year (single filer; $40,000 for married, joint filers) before SS is very low tax. After starting SS, that amount is not low tax because it triggers an increase in the percentage of SS that is taxed.

 

When I give this tax benefit to delay, I lop about 15 years for the age to BE. One would want to DELAY the start up to age 68.

 

== Exception #2: one has larger SS benefit ==

 

If you are a married, joint filer, your SS benefit may be much bigger than your spouse’s. Let’s assume your spouse is younger. You’d add more years to your life expectancy age to judge whether you should consider DELAY.

 

Example: At age 67+0, I had 18 years to my life expectancy of 85. Patti is three years younger and had 20 years to her life expectancy. If my benefit was greater than hers, I should add that five-year difference to my line on the graph for life expectancy. I should DELAY in months where BE age is less than 90 for me.

 

 

Conclusion: The decision of whether or not to delay the start of SS is a relatively small decision compared to decisions as to how you will invest your retirement portfolio. But it can be complex. The good news is that it is not complex if you have invested your retirement portfolio correctly: no less than 75% stocks and low investing cost (index funds). The decision is START now, since your age for DELAY to overtake START is never less than age 85 and averages 98 for all 96 months between age 62 to 70.

 

Exception #1: You should DELAY for all months up to age 68 if you are retired and on the march to convert pre-tax IRA to Roth to avoid the ills of future RMDs. You pay very low taxes on a portion of your distributions before you start SS. Your age to BE shrinks by about 15 years.

 

Exception #2: You may want to DELAY if your SS benefit is greater than your spouse and your spouse is younger.

Several measures of inflation that include energy and food components SOARED in March; the monthly change was the highest since the recent peak in inflation ~four years ago in June 2022. Gasoline was up 20% from the prior month. Fuel oil was up 30%. Core Inflation, the measure that does not include more volatile food and energy components, was similar to past months: the recent six-month rate was about 2.2%.

 

I display a table and four graphs that I use to follow the trends in inflation.

 

 

Details:

 

The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.

 

Seasonally-adjusted inflation is the most widely reported measure of inflation. March inflation was nearly 0.9%. This is the largest monthly increase since the recent peak of inflation in June 2022. The six-month rate jumped to 3.3% annual rate; that’s the highest in two years. The 12-month rate is 3.3% and is also the highest in about four years.

 

 

Core inflation excludes volatile energy and food components. The last six months run at 2.2% inflation and the 12-month inflation is 2.6%. Those are about the same or slightly better than the last two years.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy is the measure of inflation that the Federal Reserve Board favors. This similar to Core inflation, but this measure shows higher inflation. (It usually shows lower inflation.) The last six months average 3.4% inflation and the last year was 3.0%.

 

 

== History of 12-month inflation rates ==

 

Full-year inflation measured by CPI-U jumped to 3.3% from 2.4%.

 

 

I add a graph that shows the monthly trends. Inflation JUMPED 1.1% in March. Again, this is the largest monthly increase since June 2022.

 

 

== Producer’s Price Index ==

 

The PPI increased by 2% in February! March’s report comes out next week. recent six-month rate is at 4.4% annual rate.

 

 

== Services ==

 

Inflation for services for the last six months average to 2.7% annual rate. The 12-month rate is 3.0 %.

 

 

 

Conclusion: Inflation measures released this week for March SOARED if they include the more volatile food and energy components. The inflation measure the Fed favors does not include food and energy and is running at about 3.4% annual rate. We clearly are not trending to the Federal Reserve’s goal of 2% annual inflation.

It’s a good time to consider converting Traditional to Roth. The market is down. Each dollar amount you convert buys a few more shares – a greater percentage of your Traditional IRA. You are getting a bigger bang for your buck.

 

This is a slam dunk: You should ALWAYS convert to Roth if you can do so in the 22% marginal tax bracket. You CANNOT LOSE when you do this: we retirees with relatively large Traditional IRAs, never pay less than 22% marginal tax on ordinary income when retired, and we’re pushed to pay more as our RMDs increase over time. We never lose after-tax dollars to spend when we convert at 22%, and we can win more by avoiding higher taxes: primarily the 24% tax bracket and IRMAA.

 

I enclose a sheet you can use to see how much you can convert at the 22% marginal tax bracket in 2026. The tax bill late in 2025 put a new wrinkle in the ceiling for the 22% tax bracket for folks over age 65.

 

• If you are under age 65, you’ll stay under the top of the 22% bracket for ordinary income.

 

• If you’re over age 65, you’ll stay in the 22% tax bracket until you hit the start of the senior bonus standard deduction. This is the new constraint from the recent change in tax structure. You pay more than 22% when you start to lose bonus standard deduction.

 

 

(I have some friends will have very large Traditional IRAs who should convert to Roth to the top of the 24% tax bracket; that’s really up there.)

 

Details: Why convert to Roth?

 

== More Roth is happier ==

 

When you are retired, you have less anguish about paying taxes on distributions from your Traditional IRA. You have less RMD and far less worry about running into IRMAA, as an example.

 

I’ve converted about 10% of our Traditional to Roth since the marginal tax rates dropped in 2018, I’m happier that RMD is 90% of what it would be: I’m less unhappy when I file our taxes. Patti and I both take RMD (At our ages it’s about five percent of our total Traditional.) and now lose senior bonus standard deduction and pay more than 22% if we convert. I won’t convert more now. I’d be happier if I had converted more, but I can’t get happier.

 

== You pay less tax ==

 

1. You avoid the 24% marginal tax bracket. The most obvious case is for married, joint filers now in the 22% tax bracket. That’s Patti and me. The survivor of us will be in the 24% marginal tax bracket: 24% for single filer starts at about the same point as the 22% for married, joint filers.

 

2. You avoid IRMAA. The first tripwire for IRMAA is a bit more than the start of the 22% tax bracket. About 10% of retirees have income that cross an IRMAA tripwire; the number paying IMRAA is estimate to increase by 70% in the next ten years. The first tripwire costs about $1,300 per year; this cost tends to increase faster than inflation.

 

When retired, your income is pushed toward a tripwire. Your initial RMD will roughly double in real terms in 10 to 12 years: that’s the effect of portfolio growth at expected returns for stocks and bonds and increasing RMD percentage. Ours more than doubled in ten.

 

Again, the chance that a survivor of married, joint filers crosses an IRMAA tripwire is greater: tripwires are half as far away for a single filer. If you’re worried about tripwire #1 as married, joint filers, the survivor will likely cross two tripwires. Two tripwires cost ~$3,200.

 

3. Heirs get more after taxes from Roth. Heirs can hang on to Roth IRAs longer and keep the benefit tax-free growth longer. They’ll have to distribute fairly large chunks of Traditional each year or run the risk of paying far greater tax rate in the future.

 

== Steps to convert are straightforward ==

 

The conversion steps are straightforward for those over age 59½. I’ve described this in a previous post. Convert, say, $10,000 to Roth from Traditional. Distribute $2,200 from Roth and withhold it all for taxes; report that distribution correctly on your tax return if you don’t have “five-year old” Roth. (If you are over age 59½, you could convert $7,800 to Roth and distribute and withhold another $2,200 from Traditional. You can’t do that without penalty if you are younger than 59½.)

 

You correctly have moved the same after-tax value of $10,000 in Traditional to $7,800 in Roth assuming 22% tax rate in the future; you’ve made money if you assume you avoid a greater tax rate in the future.

 

(If you already take RMD, the rule is than you can only convert your Traditional after you’ve taken your RMD for the year; that applies to both Patti and me.)

 

 

Conclusion: It’s a slam dunk: you should ALWAYS convert to Roth if you stay within the 22% marginal tax bracket. You will be happier with less RMD. You never lose financially and most likely win: perhaps $1,000s per year: you avoid the 24% tax bracket in the future; you avoid crossing an IRMAA tripwire; your heirs keep more after tax since they hold on longer to your Roth and its tax-free growth.

(Back from India. Unforgettable experience. More Later.) On the topic of this post: Nope. Inflation was basically the same in February as in previous months. Inflation reported yesterday shows the February rate Core Inflation, the measure that does not include more volatile food and energy components, was less than 2.5% on an annual basis. Inflation measures that do include food and energy show a small uptick for Feburary, but the February rate for those is less roughly 3% on an annual basis.

 

I display a table and graphs that I use to follow the trends in inflation.

 

 

Details:

 

The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.

 

Seasonally-adjusted inflation is the most widely reported measure of inflation. February inflation higher was not substantially different than prior months. The rate for last six months was at 2.5% annual rate. The 12-month rate is 2.7%.

 

 

Core inflation excludes volatile energy and food components. It’s a similar story to seasonally-adjusted inflation. The last six months run at 2.3% inflation and the 12-month inflation is 2.6%.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy is the measure of inflation that the Federal Reserve Board favors. I show the most recent data for December. Reported data is one month behind schedule. I exclude that graph.

 

 

== History of 12-month inflation rates ==

 

Full-year inflation measured by CPI-U was 2.4%. It’s bobbled  around that rate or a little higher for about a year or so.

 

 

I add a graph that shows the monthly trends. Inflation in Jan and Feb was higher than other months. The recent increases reflect higher energy prices.

 

 

== Producer’s Price Index ==

 

This chart was updated this week through January. February’s report is issued next week. The recent six-moth rate below 0% inflation.

 

 

== Services ==

 

Inflation for services for the last six months average to 2.7% annual rate. The 12-month rate is 2.9%.

 

 

 

Conclusion: The inflation measures released this week for December were in line with past months. We have not seen much of an increase due to greater tariffs. Inflation runs at about 2.5%. We are not trending to the Federal Reserve’s goal of 2% annual inflation.

I updated my two favorite graphs this week. The first shows the cumulative real return for stocks and bonds for the last 100 years. Stocks outperformed bonds by a factor of 100. The second shows the results of head-to-head competitions for stocks and bonds for 25-year holding periods. Stocks are risk free because they’ve never lost money; stocks ~always have outperformed bonds.

 

== Fuel for growth ==

 

The point of this graph: jet fuel (stocks) outperformed candlewax (bonds) by a factor of 100.

 

 

Jet fuel: My straight line for stocks indicates they have averaged ~7.1% real return per year; if I drew the line to the exact end point, it would be 7.3% real return per year.

 

Using the Rule of 72, stocks double in real spending power ~every ten years; 100 years is ten doublings; $1 invested in stocks is now +$1,000.

 

Candlewax: Bonds have averaged ~2.3% real return per year; bonds double in real spending power ~30 years; 100 years is three doublings and 1/3 of the way to the next doubling. $1 invested in bonds in January 1926 is now <$10 in the same spending power.

 

I enclose a .pdf of the graph here.

 

== Stocks crush bonds for 25 years ==

 

The point of this graph: younger folks should be invested in STOCKS ONLY for many years. NO BONDS. Younger folks with an employer retirement plan contribute every month and their employer contributes for them. They can’t even touch this money without severe penalty to age 59½. They clearly have 25-year holding periods for those monthly investments.

 

 

Stocks have NO RISK of loss for 25-year holding periods. Their worst return was a 67% gain. Bonds are risky; they lost money in 22% of the sequences averaging 16% loss in those sequences.

 

Stocks are essentially RISK-FREE relative to bonds: stocks win the competition in 1552 of 1560 25-year sequences since 1871. (And they are on track to win the upcoming 300 next complete sequences). The last time bonds beat stocks was an investment in March 1984.

 

My graphs for shorter holding periods (not shown) aren’t quite as dramatic, but it’s still obvious that those in the save and invest phase of life must invest ONLY IN STOCKS for many years before they hit retirement age.

 

I enclose a .pdf of the graph here.

 

 

Conclusion: I updated my two favorite graphs. One shows the long, long-term trend for stocks is ~7.1% real return per year. Stocks double in real spending power ~every ten years. The trend line for bonds is ~2.3% real return per year; bonds double in real spending power ~every 30 years. Over the last 100 years, stocks have outperformed bond by a factor of 100.

 

The second graph plots the multiple of real return from an investment in stocks and bonds for 25-year holding periods. That’s 1,560 complete 25-year periods since January 1871. Stocks are risk-free because they’ve never returned less than 0%; bonds are not risk-free because they’ve lost money 22% of the time. Stocks are essentially risk-free relative to bonds because they have outperformed bonds in 99.5% of the sequences of return since January 1871.

 

Invest in STOCKS ONLY if you are in the Save and Invest phase of life.

Fidelity issued my 2025 tax reporting statement, and I used TurboTax to file our taxes yesterday. I came close to the 1 hour 32 minute time estimate that TurboTax estimated for our Federal return.

 

I previously issued a line-by-line display of your 1040 to use as a check with TurboTax. The calculation of the “Enhanced (Standard) Deduction for Seniors” was a bit different than I assumed. The bonus deduction is a bit more; the amount of taxes you owe will be a bit less. This is the revised spreadsheet for single filer over age 65, and this is the revised spreadsheet for married, joint filers (both over age 65).

 

This post compares the performance of IUSB (iShares Core Universal USD Bond ETF) to similar Intermediate Core Plus bond funds. In general, nine funds displayed have outperformed IUSB.

 

Everything we own in our portfolio other than stocks is to protect us when stocks decline. We ideally sell something that grows over time and goes in the opposite direction of stocks when they crater. We sell this “insurance” to give stocks time to recover. With one major exception in 2022, bonds have gone in the opposite direction or declined MUCH LESS than stocks when they’ve cratered in the last 100 years.

 

I bought IUSB in 2014 as our “insurance” when Patti and I started our Spend and Invest phase of life. It was the only Intermediate Core-Plus Bond index fund at the time. I thought this was more representative of the total US bond market.

 

== Core Plus Bond Fund ==

 

A Core Plus bond fund holds bonds other than investment-grade. IUSB holds about 7% of its portfolio in bonds below investment grade. This sheet shows the performance of IUSB compared to the Bloomberg index it tries to match.

 

IUSB returns about 0.3 to 0.5 percentage points more per year than an index fund of only investment-grade bonds.

 

== Other Core Plus Funds ==

 

This recent Morningstar article lists seven top-performing actively managed “Intermediate Core-Plus Bond” funds. I show the performance of these seven and two more: one from Fidelity and one from Vanguard. (PDF here) All have outperformed IUSB.

 

 

I highlight DODIX, which looks most attractive to me: high return and lowest decline in 2022; it has less below-investment grade bonds (Grade BB and lower = 4.4%) than the index (7%) or all others on this list; CINCX holds 23% bonds below investment-grade, for example. (Our money is at Fidelity and DODIX is not one of their No Transaction Fee mutual funds; I will not pay a commission to buy DODIX.)

 

 

Conclusion: We retirees need to hold bonds. We want to solely or disproportionately sell bonds when stocks crater. With one major exception in 2022, bonds have gone in the opposite direction or declined MUCH LESS than stocks when they’ve cratered.

 

Patti and I have held IUSB since we started our retirement plan in 2014. It’s categorized as a Core Plus bond fund; 7% is higher risk, not investment-grade, bonds. It’s more representative of the total bond market. IUSB has returned more than the index for investment-grade bond funds. This post shows nine actively managed Core Plus bond funds that have higher expense ratio but have returned more than IUSB.