I read this article in the Washington Post, “This widely touted retirement move isn’t all it’s made out to be.” That’s wrong: if you save and invest well, you ALWAYS want to convert to Roth if you can stay in the 22% tax bracket. You won’t pay less than this on your topmost distributions from Traditional when you’re retired and on Social Security, and more Roth ALWAYS lowers the chance that you will pay income-related surcharges on your Medicare Part B and Part D premiums: IRMAA.

 

The correct, apples-to-apples conversion of Traditional to Roth is clear to me, and the article did not state this correctly. Before age 59½, pay the tax due on the conversion amount from your prior Roth contribution basis. (In “five years,” you will also be able to pay the tax from prior conversion basis. After age 59½ the steps are much simpler. I wrote about these steps before here.)

 

DETAILS:

 

== RMDs push you toward IRMAA tripwires ==

 

You don’t want to pay income related surcharges (IRMAA) to your Medicare Part B and Part D premiums after you are retired. The surcharges can add to $10,000s per tax payer in your retirement years. If you’ve saved and invested well, IRMAA is a real risk. About 10% of retirees pay this surcharge and the percentage is increasing.

 

 

Required Minimum Distributions (RMDs) for Traditional will push you closer and closer to the next tripwire of income that triggers a surcharge. At expected returns for stocks and bonds, in ten years your RMD will double in real spending power from the one you took in your first year (age 73  now and age 75 in 2035): your portfolio grows despite the withdrawals for RMD, and your RMD percentage increases by 50% in ten years.

 

== $100 in Traditional = $78 in Roth ==

 

You can direct $100 to Tradtional and avoid 22% tax now or you can direct $100 toward Roth, pay 22% for a net of $78 in your Roth. They’re invested the same way and increase by the same multiple over time. You have the same after-tax value for each in the future assuming you would pay 22% tax on the distribution from Traditional.

 

It’s the same for a conversion. You want to convert-shift $100 from Traditional and wind up with $78 in Roth. You’re shifting the same future after-tax value from one to the other. They’re similarly invested the same way and increase by the same multiple over time. You again have the same after-tax value for each in the future assuming you would pay 22% tax on the distribution from Traditional.

 

 

== Roth is always better ==

 

You ALWAYS win when you contribute or convert to Roth in the 22% marginal tax bracket.

 

1. You can’t lose with Roth because you will NEVER pay less than 22% marginal tax rate on your topmost distributions from Traditional. A relatively small amount of distributions from Traditional is truly low tax (NO TAX!) after you have started Social Security (SS) – roughly the first $15,000 distributed per taxpayer.

 

The effective tax rate JUMPS after this. For example, you NEVER pay 10% or 12% marginal tax on distributions from your Traditional IRA. The culprit is the math that drives the increase in the percentage of SS that’s taxed. Each $1 distributed increases $.85 of SS that’s taxed. What you may think is the 12% marginal tax bracket is an effective 22.2% tax rate: 12% times 1.85.

 

2. You ALWAYS win with Roth because more Roth ALWAYS lowers the risk of paying IRMAA: you have no taxable income when you sell and distribute from Roth. The amount of risk reduction for a specific contribution or coversion may be small, but your are lowering the chance of paying IRMAA.

 

== Correct way to pay taxes ==

 

You want to move $100 of Traditional to Roth in the 22% tax rate. You owe $22 tax. You want to wind up with $78 in your Roth.

 

You’d like to pay the taxes directly from Traditional and put the net amount in your Roth, but can’t do it that way and you shouldn’t try do that because you pay 10% penalty any distributions from Traditional before age 59½. (You have no penalty on the amount you convert-shift to Roth.) When you pay a  penalty, you have thrown away some of your after-tax spending power for no good reason.

 

The correct way to convert is to pay the taxes from your prior Roth contribution basis. You owe no tax or penalty when you distribute Roth contribution basis.

 

Transfer $100 from your Traditional IRA to your Roth IRA; distribute $22 of prior contribution basis from your Roth but withhold it all for taxes. The $100 winds up as net increase of $78 in your Roth IRA. That’s what you want. (Later – there is a “five-year” aging period – you can pay tax on another conversion from your $100 conversion basis. It’s simpler after age 59½; there is no aging period on conversions.)

 

 

== Not apples to apples ==

 

Paying tax with “outside funds” – paying tax from your taxable account isn’t an apples-to-apples conversion. You are actually adding to your Roth.

 

Start with $100 in a Traditional IRA and pay the $22 tax out from cash in your bank account or from of sales of securities in your investment account . (That’s painful for most folks.) You wind up with $100 in your Roth IRA. You’ve effectively added $22 to your Roth. That’s good: you have more growing tax-free, but it’s not an apples-to-apples conversion.

 

 

Conclusion: I assume you’ve saved and invested well. If you have too much in Traditional IRA, you run the risk of paying surcharges to your Medicare Part B and Part D premiums after you’ve retired. Surcharges can add to $10,000s in retirement.

 

You ALWAYS want to convert Traditional to Roth if you stay in the 22% marginal tax bracket. You will never pay less than 22% on your topmost distributions from Traditional, and you ALWAYS lower the chances of paying IRMAA, because you have no taxable income when you distribute from Roth. “This widely touted retirement move IS all it’s made out to be.”

 

You get the correct apples-to-apples amount to your Roth when you pay the taxes out of prior contribution basis in your Roth before age 59½. (It’s much simpler after age 59½.) Paying added taxes with “outside funds” – from current income or from sales of securities from your investment account – is painful and doesn’t result in an apples-to-apples conversion.

It’s a bit over five weeks before I take our RMDs and sell securities to get most all the cash I budget to pay ourselves for our spending for 2027. Unless something wild happens in the next five weeks, it will be a terrific, routine year: our portfolio is up +7% real return.

 

Anyone with a portfolio that is similar to ours going to calculate to a real increase in their Safe Spending Amount (SSA, Chapter 2, Nest Egg Care) for the upcoming year: you sold-withdrew less than 7% last year, so you now have more in real spending power than before your withdrawal last year. That will be three “pay” increases in a row.

 

I’m happy that it looks like we’ll calculate to a real “pay” increase, but I consider it to be a terrific year when stocks have not tanked. I don’t want the anguish that I faced at the end of 2022. I was looking at a deep hole from the -18% real decline for stocks, and selling stocks then would have made that hole a lot deeper. I sold our Reserve that I held in bonds for our spending in 2023. That was “one year” of bond insurance that I sold, and we now have three more years of insurance. I hope to never use our bond insurance again, but I know the odds are roughly 1 in 10 that we’ll hit a year of -20% real return or worse.

 

I show status of our portfolio as of yesterday’s close.

 

 

 

 

Details:

 

I see these highlights and tasks I’ll need to complete the first week of December.

 

1. Our real portfolio return YTD = +7.5%: +one percentage point greater than our expected portfolio return of ~6.4% based on 7.1% for S and 2.3% for B. That’s from our mix of stocks at ~10% real return and bonds -4% real return. (That means bonds have declined about 25% in spending power over the past six years.)

 

2. My habit is to sell securities the first week of December to get cash (money market) for our spending for the upcoming year. I’ll solely sell stocks for our spending this year, but then I’ll have to sell more stocks to buy ~4% more bonds just to get back them to the same real spending value that they had a year ago; I’ll do that transaction in our retirement accounts. (Last year I “pre-balanced” the first week of November; I’ll wait to the first week of December this year.)

 

[Note: I no longer rebalance to a fixed percentage mix of S&B after our withdrawal for spending; Patti and I are at the point where I budget to sell-withdraw the same real amount for our spending each year: our SSA has increased since December 2014, to well beyond our desire-capacity to spend it. I now target now to keep three years of spending in bonds; after my sale this December, I could wait four years before having to sell any stocks.]

 

 

Conclusion: I’m getting close to the time I’ll officially recalculate to find our Safe Spending Amount for the upcoming year. At the 47-week mark, our portfolio return is +7% real return. I’ll have more at the end of this year than I had before our withdrawal for our spending last year. (You’ll have more then, too.) That mean I have to calculate to a real increase in our SSA. That’s great, but I am happiest that stocks did not crater as they did in 2022. I don’t have to look into a deep hole and ponder selling more that would make the hole deeper.

You couldn’t miss the news on inflation and the Social Security COLA increase for next year. The stock market reacted negatively. Every measure of inflation was greater in September than in August except one: wage growth. The most dramatic increase was the producer’s price index which increased by 1.3% in September, the biggest monthly increase in +four years.

 

Inflation for the most widely reported measure of inflation, Seasonally-adjusted inflation, bumped to historical 3.7% for the last year. Core inflation, which excludes the more volatile energy and food components, is lower and ran at 2.6% over the last 12 months.

 

September inflation for the measure (CPI-W) used to calculate Social Security COLA was hot last month, and the SS COLA is 3.6% for 2027. This more than the increase of Medicare Part B premiums, estimated at 3.3%. (COLA using the CPI-W is more than if SS used CPI-U.)

 

I summarize three key readings of inflation that I follow. I include a table that shows the calculation of COLA for SS.

 

 

 

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. Inflation accelerated in September. The six-month rate is 3.6%. Inflation for the past 12 months was 3.7%, up from 3.4% last month. 

 

 

Core inflation excludes volatile energy and food components. September was greater than August. The six-month rate runs at 2.8% annual inflation, and inflation for the past 12 months was 2.6%.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy is the measure of inflation that the Federal Reserve Board favors. The graph shows data ending August We get the data for September at the end of this month. The measure usually shows lower inflation than Core inflation. The last six-months run at 2.7% on an annual basis vs. 2.8% for Core inflation, but the 12-month rate was 3.0% – greater than Core inflation.

 

 

== History of 12-month inflation rates ==

 

Full-year inflation measured by CPI-U (not seasonally adjusted) rose to 3.7% from 3.4% last month.

 

 

== Producer’s Price Index ==

The PPI shot up in September to its highest increase in +four years. The last six months run at a 7.0% annual rate. The last 12 months was 6.4%.

 

 

== Services ==

 

The rate for the last six months average is 3.5% annual rate. The 12-month rate is 3.1%.

 

 

== Wage Growth ==

 

Wage growth averaged 3.3% over the past year, less than the 3.7% increase in the CPI.

 

 

 

Conclusion: Inflation data released this week showed a sharp increase in inflation in September. The measure the Fed favors is running at about 2.5% annual rate through August. SS COLA will be 3.6% for 2027.

I calculate that Patti and I pay about 12% total tax to get the cash we want for our spending; it’s 16% if I add back the tax I previously paid to get the amount I distribute from Roth – the amount of tax I would pay if I had not previously converted. The bite is less than I thought it would be. I’m guessing you don’t think your overall tax rate is this low. I give you a spreadsheet if you want to do the same calculation.

 

 

Details:

 

The spreadsheet here gives the detail of how I get to 12% total tax on the gross amount of cash we want for our spending. The spreadsheet I used to calculate total federal taxes is in this post.

 

== Four sources of cash for us ==

 

Patti and I have four sources of cash: 1) Social Security; 2) a small defined benefit pension that I have; 3) some “other income”, and 4) sales of securities from our portfolio.

 

Sales of securities from our portfolio are more than twice the sum of first three sources; that’s likely true for you. Sales of securities for our spending are from 1) our Traditional IRAs (RMD less QCD); 2) sales from my Roth from conversions I started in 2018; and 3) sales of securities in our joint brokerage account.

 

== Two tax bites ==

 

The tax bite is the sum of 1) taxes on ordinary income and 2) taxes on income taxed at capital gains rates. The amount I sell and distribute from Roth is not taxed. I include IRMAA, if any, to get the total bite.

 

== Spreadsheet calculates total federal tax ==

 

I use the tax return spreadsheet from the prior post to calculate our total federal tax; I know where we stand on IRMAA that will be paid in 2027 from our 2025 return filed before last April 15. I separately calculate our state tax.

 

 

Conclusion: I calculate that the tax bite is 12% on the gross amount of pre-tax cash for our spending in 2027. It’s 16% if I add back the tax I previously paid on the Roth I distributed. The tax bite is smaller than I thought it was. I give detail on my calculation in this post and give you a spreadsheet if you want to do the same calculation.

You ideally have no more than $1 million in your Traditional IRA at age 73; you would want the the balance as Roth. At average long run return rates for stocks and bonds, you won’t cross the first IRMAA tripwire until your late 80s: 88 by my calculation.

 

IRMAA is by far the biggest financial pain you face in retirement if you have too much Traditional IRA. Too much Traditional – too little Roth – triggers surcharges that you could avoid with a healthy amount of Roth.

 

When you cross the first tripwire of income, you pay $1,300 in Medicare premium surcharge; that amount increases with inflation and maybe a bit more. At the point you cross, the 22% marginal tax bracket is an effective 26% rate.

 

If your Traditional IRA exceeds $1 million per taxpayer at age 73, you hit the first IRMAA tripwire at a younger age. Each additional $250,000, shortens the age by roughly three or four years. You get a sense of how I derived this table from this pdf of a spreadsheet that projects future RMD for $1.25 million at 73.

 

 

You could state this differently: each $250,000 you pare from your Traditional by age 73 gives you three or four more years before you start paying IRMAA.

 

== Older folks are sorta stuck ==

 

We older folks, in our Spend and Invest phase of life, can’t significantly change the trajectory of our Traditional IRA. Most all of us have a lot of Traditional and very little Roth. Patti and I started with no Roth. Roth made little sense before the flattening of marginal tax rates tax law in 2018. The large 22% and 24% marginal brackets that we have now have favor Roth. The marginal rates before 2018 were far too high to consider contributing or converting Traditional to Roth.

 

At average return rates, our RMD increases about 5% in real terms up to our mid 80s. We have a hard time slowing the creep to the next IRMAA tripwire. We can’t convert much at all in the 22% marginal bracket, because we bump into a nearby tripwire. About the only thing we can do  is to distribute some of our RMD as QCD and then,  perhaps, contribute more as QCD. That latter action knocks our Traditional down somewhat. (We have to be sure we have “more than enough” to do that.)

 

== Younger folks can act ==

 

Younger folks in the Save and Invest phase of life can change the trajectory of their Traditional IRA. They should ALWAYS contribute as Roth to their employer plan; they can convert their own Traditional before age 59½; they have to wait to convert any of their employer’s contributions as Traditional after age 59½: that’s the time they can roll it over to their own IRA and start to convert it. Once they start Social Security and Medicare, the amounts they can convert each year is limited: they run in the IRMAA constraint we older folks face.

 

== Example ==

 

My niece is 43. She has $300,000 in Traditional IRA. That’s very good. She’s “above the line” for her age. It sounds crazy, but she’s on track to have $1.5 million at age 65 and $1.7 million at age 73! You can see how I estimate that here.

 

She has to get her Traditional at age 65 to about $850,000 to keep it under $1 million at age 73. Here’s what she should do.

 

 

 

Conclusion: IRMAA – the surcharge in Medicare premiums – is the topmost  disadvantage of Traditional IRAs. If you have less than $1 million (2026 spending power) in Traditional IRA, you won’t experience the pain of IRMAA until your 90s – longer than your life expectancy.

 

Every additional $250,000 is lowering the age that you will pay IRMAA: if you have $1.5 million in Traditional at age 73, you will start paying IRMAA roughly at age 80. If you have $2 million at age 73, you’ll start paying IRMAA at 75 and you’ll cross the second tripwires in your early 80s: ugly $3,200 surcharges per year (stated in 2026 spending power).

 

You want to control the trajectory of your Traditional. Those of us already on Social Security and Medicare are limited. Those in the Spend and Invest phase can control Traditional by getting a healthy mix of Roth. They should contribute to Roth, not Traditional, to their employer’s retirement plan; convert any other Traditional to Roth; convert some (or a lot) of employer’s contributions after age 59 ½. That the age they can rollover their employer’s plan to their own IRA and convert it.

I list the things I do to try to be an effective and efficient investor. You may find ways you can be more effective and efficient.  Why is this important? I estimate that the total adds to about $30,000 more for Patti and me per year. Here’s the list:

 

 

The big one is the net $18,000 that Patti and I earn on average each year on the amount we keep invested in our taxable account from our very low-rate mortgage loan. That is more important than that for us; without that added amount in our taxable account, we’d have to rely almost solely on distributions from Traditional for our spending, and that would be a much bigger tax bite each year.

 

Several items on the list are small, but they only take a key stroke or two on a web site to implement.

 

I provide a detail description here. The assumptions that went into this display are representative and do not match our financial picture.

 

 

Conclusion. This post lists the things I’ve done to be an effective and efficient investor. You may find ways you can be more effective and efficient. I use representative assumptions on portfolio and spending, but I conclude that Patti and I gain about $30,000 per year relative to many investors.

The $150,000 interest-only HELOC that I got seven years ago was scheduled to expire December 31. If I did nothing, I would be on schedule to pay off the balance, I think that was over 10 years. I just plowed ahead with the steps to get a new HELOC that will expire in in 2036. I had used about $40,000 of my HELOC that rolled over to the new one. I added $100,000 of financial capacity: I now have a $250,000 interest-only HELOC.

 

In ten years, I’ll have to go through this process again. I hope I get to do that. I’ll be 91!

 

This post describes the basic steps.

 

My prior HELOC was with PNC. I just proceeded with them again. I concluded that I wouldn’t find a better rate, but I did not really push to find alternatives.

 

• The process took five weeks.

 

• I had to give them the usual documentation: two past tax returns, a recent brokerage statement, recent mortgage statement, recent bank statement, evidence of homeowners insurance with PNC listed as a lender. Those were easy to post on the PNC site for the application. There were a few pesky items, but I’ve already forgotten what they were.

 

• The $42,000 balance of my current HELOC rolled into it. The $42,000 that accumulated includes a new furnace, three new air conditioners, replacement of the landscape lighting, new dishwasher, new microwave and several fairly major limestone repairs on our patio.

 

Our home continues to beg for money. I am replacing our asphalt driveway this month; that will be our single biggest home expenditure in the last 20 years – a healthy addition to my HELOC balance.

 

• My new loan rate is more than I was paying. My new rate is 0.35% above the 6.75% WSJ posted prime rate or 7.1% My prior rate was 0.25% above that measure. We don’t itemize, on our tax return, so that’s 7.1% after taxes.

 

At current ~3.0% inflation, that’s ~4% real rate as compared to ~6.3% expected average tax-free growth in our retirement accounts (our mix assuming 7.1% for stocks and 2.3% for bonds). If returns are average over the long run, I’ll come out ahead, roughly 2% per year on the amount I borrow.

 

I don’t really pay +7% interest on my HELOC. For much of the year, my rate is the money market rate. My practice is to sell securities in December to have the amount we will spend in the upcoming year into cash. I’m awash with cash in December. I park most of that into our HELOC. That means I’m not paying 7% interest until I need to tap it for our spending later in the year; I’m forgoing +3.0% interest on money market for most of the year and incurring the 7% rate in the later months in the year.

 

• I had a $399 origination fee on this loan. I did not have that on my prior HELOC. That raises my effective rate a bit.

 

• I have a $50 fee each year.

 

• I owe PNC a fee of about $300 if I close this loan in three years. I had something like that before. I would have to reimburse them for something or another that they will absorb if I don’t close it. Our primary mortgage is a 30-year term loan at 3.1%, so I definitely won’t be refinancing that in the near term; that would likely require closing the HELOC.

 

 

Conclusion: I replaced our expiring interest-only HELOC with a new one. I increased the credit limit by $100,000. The process was straightforward. My balance was $42,000 that rolled over to this new HELOC. This HELOC lasts for ten years. I’ll have to go through the same process in ten years.

I bought more than “a year of spending” in FFRHX two weeks ago. (Fidelity Floating Rate High Income Fund.) This post gives more information on FFRHX and similar funds. I recommend you buy FFRHX or a similar fund for at least one year of spending. The addition of FFRHX gives you a more stable source for cash for your spending when stocks tank – when you want to sell something other than stocks to give them time to recover.

 

 

Patti and I have held IUSB as our primary bond fund since late 2014. (iShares Core Universal USD Bond ETF.) I show 20 years of history of FFRHX as compared to an Intermediate-Term bond index fund similar to IUSB. (IUSB was first formed in 2014.) I include money markets fund and US stocks as reference. See here for more detail on this image. You will also see that FFRHX has steeper declines but faster recoveries. US bonds have not recovered from their depths in December 2022: 45 months and counting.

 

 

Stock decline of -37% in 2008: intermediate-term bonds held up: 50 percentage points better in return, but FFRHX did not: 30 points less in return than intermendiate bonds.

 

Stock decline of -24.5% in 2022: intermediate bonds offered no protection; they declined -24% in 2021+22. FFRHX was better by 16 percentage points over the two years.

 

Over the last ten years, FFRHX outperformed intermediate bonds by 3.8 percentage points real return per year: 2.2% vs -1.6%. That’s significant: FFRHX compounds to 45% more spending power.

 

You have many choices. My table compares four funds similar to FFRHX. Morninfstar has a long list. FFRHX looks the best to me.

 

 

 

Details

 

== Two different kinds of funds ==

 

FFRHX and IUSB are two different types of funds.

 

• FFRHX and similar funds. I think of FFRHX (almost) as a high interest money market fund: the duration of the fixed interest period on the securities it holds is typically less than three months. It’s in a category called Bank Loan funds: senior loan or floating rate fund category.

 

FFRHX and similar funds buy loans issued by banks or other financial institutions to companies. These are higher risk, floating rate term loans. Rates typically adjust every three months. This is “senior debt,” meaning it would be the first to be paid in the case of default; loans may not be fully collateralized. Rates are above the prime rate and adjust with changes in the rate. (Prime now is 6.75%.) As prime increases, FFRHX’s return increases. As prime falls, its return declines.

 

• IUSB and similar funds. I think of IUSB as an intermediate-term bond fund: it holds fixed interest rate bonds with an average term of ~five years. It’s is a “Core plus” bond fund because it owns a wide mix of securities (US government, corporate) with wide a range of bond ratings and maturities: IUSB holds 18,100 securities; I can’t find another fund that owns more.

 

The price and therefore the total return of bonds move in the opposite direction of interest rates. As interest rates increase, the fixed interest payments on the bonds it holds are less attractive; bond prices fall to the point where they match the rate paid on newer bonds. As interest rates decline, the fixed interest payments on its bonds are more attractive; prices on bonds it holds increase to match the rate paid on newer bonds.

 

== We’d like bonds to earn a real return ==

 

We’d like bonds to earn a real return. We want them to least maintain their same spending power in year after year (That’s what Patti and I target: the same number of years in real spending power at the start of each calendar year.). Bonds our insurance when we don’t want to sell stocks, but if they don’t keep up in real spending power, we have sell stocks just to buy more bonds just to get them to where they should be.

 

Historically, intermediate bonds have earned 1.9% real return per year over the last 100 years. Over the past 20 years, they’ve earned 0.3%. They’ve returned -1.6% per year for the last ten, meaning, Patti and I typically sold stocks for our spending for the upcoming year and then sold more stocks to buy bonds to maintain their real spending power.

 

We don’t have a 100-year history for FFRHX or an index of variable rate loans, but FFRHX returned 2% real return per year over the past 20 years and a bit more than that over the last ten years. Had Patti and I held FFRHX for the last ten years, on average we wound not have sold stocks to buy bonds to maintain their spending power. They would have performed well enough that we could have sold bonds to buy more stocks: that would have been a good thing.

 

== We want bonds to hold up when stocks crater ==

 

We hold bonds as insurance: the thing we will sell when stocks crater to give them time to recover. Stocks can crater in recessions: we’ve had three since 2000. Stocks declined sharply in each. The worst was a real decline of -38% in the three years 2000, 2001, and 2022; the steepest was -37% in 2008.

 

The Federal Reserve fights a recession by lowering interest rates to stimulate our economy. Bond prices and total return increases.

 

Bonds have been good insurance. They’ve outperformed stocks by and average of 35 percentage points in seven of the worst ten years for stocks. Their best year relative to stocks was 2008 and their worst ever was 2022.

 

 

== IUSB worked its magic in 2008; FFRHX did not hold up ==

 

The longest recession in the last 60 years was from late 2007 to mid 2009. Stocks cratered -37% real return in 2008. The Fed aggressively cut rates. The rate it charged banks fell from 5.25% to 0.11%. Bond prices and total return soared. Intermediate bonds outperformed stocks by +50 percentage points: -37% real return for stocks and +13% real return for intermediate bonds.

 

If Patti and I were retired at the end of 2007, we clearly would have sold only bonds for our spending in 2008. Because they gained in the year, we would be selling a relatively small percentage of the shares we held in a bond fund.

 

 FFRHX did not hold up. Interest rates fell. They should have not earned as much as the prior year, but the price of the loans it held fell steeply (-16.5% real return) on fears of defaults. If Patti and I only had FFRHX for our spending for 2008, we would have sold a relatively high percentage of shares.

 

The fears of default were unfounded, and FFRHX recovered from its decline in less than a year.

 

== IUSB failed us in 2021+22; FFRHX did not ==

 

The Fed was fighting short-lived (three month) recession starting in mid 2020, and then it turned its attention to fighting inflation. The Fed raised the rate it charges banks from 0.09% in July 2020 to 5.06% two years later. The 10-year rate on US Treasury bonds increased from 0.55% in July 2020 to 4.88% in May 2023. Bonds prices collapsed. The total spending power of bonds declined -24%. That’s the worst two-year decline in history.

 

Patti and sold IUSB at the end of 2022 to get the cash we needed for spending in 2023 even though that was a relatively high percentage of shares. I assumed (correctly) that stocks would rebound much faster than bonds.

 

Bonds are still 20% below their spending power at the end of 2020. I had to sell a significant amount of stock (I mostly sold in November 2025.) to buy bonds to get them back to the proper level of insurance – to match the level we held at the end of 2020.

 

FFRHX held up much better in 2021 and 2022. They declined -8% over those two years, one-third the dive of bonds. If I had FFRHX I would have sold a much smaller percentage of shares to get the cash for our spending for 2023. FFRHX recovered that decline in one year. By the end of 2025, FFRHX was 10% more than their value at the end of 2020 meaning I would not have had to sell any stocks to get them back to the same spending power in 2020.

 

== I recommend you hold some of both ==

 

I’m roughly 50% IUSB and 50% FFRHX for the +three years of spending that I hold in bonds.

 

== Other options ==

 

You have other options than FFRHX as shown on this table. Also see here. FFRHX looks like the best choice to me.

 

 

 

 

Conclusion: I bought FFRHX (Fidelity Floating Rate High Income Fund) several weeks ago. We now are about half in FFRHX and half in IUSB for our bonds. I start each year with the spending for the year in money market and then three years of spending in bonds.

 

This post provides more information on the history of returns for FFRHX compared to IUSB, the primary bond fund Patti and I have held since last 2014.

 

IUSB held up when stocks cratered in 2008, but FFRHX did not. IUSB cratered in 2021+22 when stock cratered in 2022, but FFRHX

 

Over the past ten years FFRHX has returned 3.8 percentage more real return than IUSB: 45% more cumulative return.

Inflation for the most widely reported measure of inflation, Seasonally-adjusted inflation, barely budged in July. Wholesale prices were flat. Core inflation, which excludes the more volatile energy and food components, increased more in the month, but the last six months and 12 months run at about 2.5% inflation. The Fed favors a different measure that runs more than one percentage point greater.

 

We have our first glimpse of the increase in COLA for Social Security (SS). That first reading points to 3.4% increase in benefit next year.

 

== Summary Table ==

 

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

 

 

== SS COLA ==

 

I add a chart that tracks the COLA adjustment for SS. SS benefits adjusts with the average inflation increase of July, August and September for the measure CPI-W. July’s CPI-W was 3.4% greater than last July.

 

 

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. June inflation was flat. The six-month rate is still high, 3.8%, and the 12-montn rate is 3.4%. 

 

 

Core inflation excludes volatile energy and food components. July’s increase was similar to the average of the last 12 months. The six-month rate runs at 2.4% inflation, and the 12-month rate runs at 2.5%.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy is the measure of inflation that the Federal Reserve Board favors. The graph shows data ending June. We get the data for July at the end of this month. The measure had been running about one percentage point greater than core inflation. It usually shows lower inflation. The last six months average 3.7% inflation and was 3.3% over the last year.

 

 

== History of 12-month inflation rate ==

 

Full-year inflation measured by CPI-U (not seasonally adjusted) fell to 3.3% from 3.4% last month.

 

 

== Producer’s Price Index ==

 

The PPI was flat in July. The last six months run at a 5.4% annual rate. The last 12 months was 4.7%.

 

 

 

 

Conclusion: Inflation data released this week showed a modest increase in inflation in July. The measure the Fed favors ran at 3.3% over the past 12 months ending June.

 

Our first snapshot of SS COLA points to 3.4% increase; two more monthly readings get us to the final increase.