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.

Every now and then I scratch my head: is there something better than IUSB, our index fund for US bonds? I look at two kinds of funds in this post: funds that buy and hold short-term, high interest loans banks make to their customers and one that buys and holds US Treasury short term Inflation-Protected Securities (TIPS).

 

I plan to put one year of spending into FFRHX, a fund that buys and holds short-term loans by banks to their customers. It outperformed our IUSB by about three percentage points per year over the last ten years and the TIPS fund I show by two percentage points per year. FFRHX also held up much better in 2022, the year that bonds funds with longer average maturity dates tanked to their worse one-year return in history.

 

== IUSB ==

 

I chose IUSB for our portfolio in 2014. It’s an index fund that holds a bit of all US bonds: nearly 18,000 securities. I think it hold more securities than any other bond fund. The average maturity is about 5.5 years. That falls in the category of an intermediate bond fund.

 

Over the last 100 years, US treasury intermediate bonds have returned 2.1% real return. Over the last ten years, and especially in 2022, they have been well below that. IUSB roughly matches their ten-year return rate, but was worse than this index in 2022.

 

 

== Bonds are insurance ==

 

We hold bonds as insurance, the thing we will sell to get cash for our spending when we don’t want to sell stocks. We know stocks can crater, and we want to disproportionately or solely sell bonds to give them time to recover. Patti and I now have about 3½ years of spending in bonds. That means we can go +4 years before we would have to sell stocks.

 

Bonds have been terrific insurance when stocks cratered. They averaged nearly 20 points better in return for the ten worst years for stocks out of the last 100 EXCEPT FOR 2022. Stocks declined -23% real return, their sixth worst year in the last 100. Bonds (in general) fell even more. That was their worst year in history, and 2021 ranked in the top ten worst years.

 

It was a bummer to sell bonds at the end of 2022 for our spending for 2023 after they tanked, but I still wanted to give stocks time to rebound and they did fairly quickly. It was a bummer later to have to sell more stocks just to buy more bonds to get them back to my design mix.

 

Selling stocks just to buy bonds is not an unusual event. If I’ve counted correctly, I’ve sold solely stocks for our spending in six of the past 11 years. Stocks have outperformed bonds by a wide margin in those years. I’ve then sold more stocks those years to buy bonds to rebalance our portfolio or get them back to our desired number of years of spending.

 

== The ideal ==

 

I’d like bonds to steadily earn, say, 2% real return.

 

I want bonds to hold up when stocks crater. After 2022, I weight this insurance value more than the amount of return.

 

== Two other types of bond funds ==

 

This short video describes two different kinds of funds. Two funds buy short term, high interest (higher risk) loans made by banks or other financial institutions. One buys shorter term (less than five-year) US Treasury Inflation-Protected Securities (TIPS). The video is from March 2022 and was the right call as interest rates rose steeply in 2022 and longer-term bond prices fell.

 

I gathered data on the three mentioned. I display others. See here for pdf.

 

 

== One fund stands out: FFRHX ==

 

One fund stands out to me: FFRHX, Fidelity Floating Rate High Income Fund. It’s actively managed, which I don’t like, but it has earned about three percentage points greater real return per year than IUSB; three percentage points greater than money market; and two percentage points greater return than the TIPs fund.

 

I plan to put at least one year of spending into FFRHX.

 

 

Conclusion: This post displays two different kinds of bond funds and compares them to my IUSB. Two funds buy and hold short-term, high interest loans banks make to their customers and one fund buys and holds US Treasury short term Inflation-Protected Securities (TIPS).

 

The standout is FFRHX, Fidelity Floating Rate High Income Fund. It invests in riskier loans but has beaten the IUSB that Patti and I own by about 3 percentage points greater real return for all periods over the last ten years. It similarly beats a fund that invests in Treasury Inflation Protected Securities by two percentage points.

 

I plan to put at least one year of spending in FFRHX.

Yep. It’s time to fill out a draft of your 2026 tax return. I’ve cranked mine out no later than this time every year. I enclose a spreadsheet for a single filer here and for married, joint filers here.

 

== Three reasons ==

 

I fill this out early since, in most years, I can engineer our QCD, sales of securities from our taxable brokerage account, and sales of securities from my Roth to get the cash we want for spending and avoid taxes that we then will never have to pay. I can lower our taxable income by at least $20,000 for the same or similar amount of sales of securities for our spending: I might avoid more than $8,000 in tax and surcharges by doing that: 40% benefit for my efforts.

 

I’ll update this in late November and use my calculation of total taxes to withhold the right amount when I take our RMDs in December.

 

I’ll also use that calculation as check when I use TurboTax to complete my 2026 return. When I work on TurboTax, that’s the only measure I have to be sure I’ve completed everything accurately. It isn’t letting me see my complete tax return until after I pay.

 

== Three differences ==

 

1. If you are subject to RMD, you have a real increase this year because you had very good returns in 2025 and your RMD percentage increased. Even though the tripwires that trigger IRMAA adjust for inflation, that real increase pushes you closer to the nearest one you’d like to avoid. (My estimates on the IRMAA tripwires are conservative; I’ve assumed very little for the inflation adjustment; I’ll have a better handle after the adjustment announced in November.)

 

2. You are pushed even closer to the trigger point for Net Investment Income Tax, a 3.8% tax surcharge on a portion of investment income. That trip point does not adjust for inflation. It’s relatively closer for married, joint filers than it is for single filers.

 

3. We get an added deduction for donations other than QCD. That’s up to $1,000 for single filer and up to $2,000 for married, joint filers.

 

 

Conclusion: I enclose two spreadsheets that should give you a close result to your 2026 tax return. I complete it now to help me plan how I might avoid a trigger point of higher taxes. I’ll update to make sure I withhold the right amount of taxes when I take our RMDs the first week in December. I’ll use it again when I start to complete my tax return with TurboTax next February.

 

If you are subject to RMD, it’s more in real terms than last year. You are pushed toward the nearest IRMAA tripwire; you are pushed even further toward the trigger point for NIIT, because it does not adjust for inflation.

 

You have a new deduction available. You can donate in addition to donating with QCD.

The amount of Traditional IRA that is low tax is much less than most retirees think: an example for a single filer in this post shows less than $20,000 is taxed less than 22% marginal rate; it’s roughly double that $amount for married, joint filers. The tax on the balance is much more than most retirees think. The example shows tax of 27% on the amount over that first $20,000. It could be worse: 29%. This post explains:

 

• Distributions from your Traditional IRA increase the amount of Social Security (SS) that’s taxed. In effect, distributions up to roughly equal your SS benefit almost give you a double dose of taxable income, tax rate, and tax. Distributions are taxed, in effect, at 18.5% in the 10% marginal tax bracket. The first ~$20,000 of distributions increase the taxable portion of SS by $17,000 and you’ve reached the top of the 10% marginal tax bracket. Further distributions are taxed greater than 22%.

 

Two other effects add five percentage points to the tax rate on the amount greater than that first $20,000:

 

• When distributions roughly equal your SS benefit, you trip the tax rate on dividends and capital gains from 0% to 15%: a sudden spike in tax. When I average this spike over distributions, the effect is more than 3¾  percentage points greater tax rate.

 

• Again, when distributions roughly equal your SS benefit, you cross the point where you start to lose a portion of the Enhanced deduction for seniors. This loss results in 1.3 percentage points greater tax rate.

 

It’s another two percentage points to a total of 29% for some: at distributions roughly twice your SS benefit, you run afout of IRMAA. That surcharge of Medicare premiums effectively adds two points to total 29% effective tax rate. (About 10% of those on Medicare have income that crosses a tripwire.)

 

 

Detail:

 

The only way to understand this is to see how taxes increase with increased distributions from Traditional IRAs. I use a spreadsheet that calculates a 2026 tax return. I make some assumptions of income for my example:

 

 

The total tax with $60,000 of distributions from Traditional is $11,417. This is the sum of $9,917 tax on ordinary income and $1,500 of capital gain income.

 

 

I divide the $60,000 in two parts: the part taxed less than 22% and the part taxed more than 22%.

 

== The first $20,000: taxed less than 22% ==

 

About one-third, $19,800, is taxed at less than 22% effective, marginal rate. That amount results in taxable income to the top of the 10% tax bracket, and ordinary and total tax of $1,240.

 

 

That’s a relatively small amount because distributions from Traditional almost give you a double dose of taxable income and tax: each added $1 increases SS that is taxed by $.85. The 10% tax bracket is effectively 18.5% when applied to distributions from your IRA.

 

Once you cross into the 12% marginal tax bracket, you effectively pay 22.2% tax. (12% times 1.85.) The tax on the next $1,000 distributed from traditional increases by $222 to $1,462.

 

 

== The rest: tax is ~25% ==

 

The added ~$40,000 of distributions in our example is taxed at 25%.

 

 

Two things increase the tax rate on the added ~$40,000 of distributions. Both happen at ~$35,000 of total distributions or equal to your SS benefit in this example.

 

1. ~$35,000 of distributions result in >$49,450 of taxable income. The tax rate on qualified dividends and capital gains jumps from 0% to 15%. That’s a $1,500 spike in tax at that point.

 

2. ~$35,000 of distributions result in total income (MAGI of $75,000) that begins to reduce the Enhanced senior deduction. The effect is 1.3 percentage point increase in the marginal tax rate.

 

== It could be ~two percentage points worse ==

 

If total distributions were $75,000 – a bit more than twice your SS benefit – MAGI would cross the tripwire that triggers an increase in Medicare Part B and D premiums. (IRMAA = Income Related Medicare Adjustment Amount). That’s will be about $1,300 based on this 2026 return. Total tax + Medicare premium surcharge = $16,215.

 

 

 

 

Conclusion: A small amount of distributions from Traditional IRA is taxed at less than 22%: roughly $20,000 for a single filer; it’s roughly double that $amount for married, joint filers. It’s a small amount because distributions from Traditional almost double your taxable income. Each $1 distributed increases Social Security that’s taxed by $.85. You quickly reach the point where the effective tax rate is 22.2%.

 

The balance of distributions is taxed at ~25%. Distributions trigger the increase in tax on dividends and long-term capital gains from 0% to 15%. Distributions trigger the loss of Enhanced deduction for seniors which effectively raises the marginal tax rate by 1.3 percentage points for a single filer and by 2.6 percentage points for married, joint filers both over age 65.

 

It could be worse: the balance of distributions is taxed at ~27% if distributions result in crossing income (MAGI) that triggers a surcharge for Medicare Part B and D premiums: IRMAA.

DEFLATION! Inflation was below 0% in June. Inflation for the most popular measure was -0.42% in June. This compares to +0.42% in May. On a 12-month basis, Core Inflation, the measure nearest to the one the Fed favors, also was below 0% for June; inflation ran at 2.6% for the last 12 months. The outlook for our SS increase is much lower than I predicted in this post. Your portfolio’s real return is better than I estimated in this post.

 

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. June inflation was -0.42%. The decline is primarily from energy. The six-month rate is 4.0%, and the 12-montn rate is 3.5%.

 

 

Core inflation excludes volatile energy and food components. June was a slight decline. The last time we had a month of deflation was May 2020. The six-month rate runs at 2.6% inflation, the same as the 12-month rate.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy is the measure of inflation that the Federal Reserve Board favors. The graph shows data ending May. We get the data for June at the end of this month. The measure has been running about one percentage point greater than core inflation. It usually shows lower inflation. The last six months average 4.1% inflation and the last year was 3.4%.

 

 

== History of 12-month inflation rates ==

 

Full-year inflation measured by CPI-U (not seasonally adjusted) fell to 3.5% from 4.3% last month.

 

 

== Producer’s Price Index ==

 

The PPI fell in June. The last six months run at 6.6% annual rate. The 12-month rate is 5.5%.

 

 

== Services ==

 

Inflation for services increased slightly in June. The rate for the last six months average is 3.4% annual rate. The 12-month rate is 3.2 %.

 

 

== Wage Growth ==

 

Wage growth averaged 3.8% over the past year. That’s slightly better than the 3.5% increase in the CPI.

 

 

== Inflation measure for SS COLA ==

 

Social Security uses the measure CPI-W to calculate COLA. The calcuation is the average for the next three month compared to same three month’s last year. My last look showed we were on track for 4.6% COLA. We’re on a much lower track now.

 

 

== Greater real portfolio return ==

 

I use SS’s measure of inflation to judge the real performance of my portfolio. The lower track for inflation means a greater real return and greater real increase in our Safe Spending Amount for 2027.

 

 

Conclusion: Inflation data released this week showed deflation for June. Past year inflation for the CPI dropped to 3.5% from 4.3%. The inflation measure the Fed favors does not include food and energy and is running at about 4.1% annual rate, but this is through May.

 

SS COLA looks to be lower than I previously thought. The year-to-date real return on your portfolio is greater than I previously thought.

I’m seven months into my 12-month year that I use to calculate our Safe Spending Amount for the upcoming calendar year. (SSA, Nest Egg Care (NEC) I usually take a hard look at the end of July, but I calculate at the end of every month. We have earned ~8.3% real return so far. We are on track for a real increase of ~7.9% for our spending in 2027. You are on track for a real increase, too.

 

A lot can happen in five months, however!

 

Detail:

 

Our real portfolio return for seven months through June is 8.26%. I assume annual inflation of 4.6%.

 

 

Our SSA calculates to 7.9% real increase. Our increase is high relative to the real increase in our portfolio because of the jump in our applicable Safe Spending Rate (SSR%, Chapter 2, NEC.)

 

 

You can download my spreadsheet here.

 

 

Conclusion: Our portfolio is +8% real return for the seven months starting December 1. We’re on track for a real increase in our Safe Spending Amount for 2027.

 

If your portfolio is similar to ours, you also track to a real increase for 2027.

I’ve read this argument: delay the start of SS and distribute from your Traditional IRA because you will pay less tax on your distributions from Traditional. I did not consider the tax consideration in my post that recommends you start SS when you are ready. Now that I’ve thought through the tax implications, I definitely think you should NOT delay when you know you have enough for your spending that includes your SS. You pay more tax if you delay, not less.

 

You pay the same amount of tax on the amount you would normally distribute from your Traditional IRA before and after the start of SS. When you delay, you pay more tax on the increment you would distribute to get cash to replace SS; you pay less tax on the amount you would get from SS because a portion is tax-fee.

 

Details:

 

Base case: Let’s assume you are a single filer over age 65. Up to the first $74,550 of distributions from your Traditional IRA are low tax in 2026. That’s the amount of taxable ordinary income taxed to the top of the 12% bracket. None reaches the 22% marginal tax bracket. You pay tax of $5,800 or 7.8% of the $74,550.

 

 

That’s really a good deal. You avoided paying a much higher rate than this when you contributed; you are coming out WAY ahead in after-tax dollars for spending on difference in tax rates

 

== Start or Delay: example ==

 

Bob is 65. He is deciding whether or not to start SS at the start of his retirement – the start of his Spend and Invest phase of life.

 

Let’s assume Bob decides his Safe Spending Amount is $60,000 from his investment portfolio (see Chapter 2, Nest Egg Care), and all that will come from Bob’s Traditional IRA. If Bob has no other income, his total tax for 2026 would be $4,054: 6.8% of the $60,000.

 

 

Start SS. Bob adds the $35,000 he gets from from SS. His total for spending is $95,000.  $5,250 of his SS is tax-free. (Income other than SS increases the percentage that is taxed; it reaches the maximum of 85% taxed when other income is roughly 1 1/2 times the SS benefit.) His taxable income is $89,750. His total tax is $9,669. He pays $5,619 tax on his $35,000 SS, an effective rate of 16%.

 

 

Delay SS. Bob decides to delay SS. He has to sell an added $35,000 from his Traditional IRA to get to the same $95,000 for his spending. All of that is taxable. Bob’s tax is $10,893. He pays $6,843 on his added $35,000, an effective tax rate of 19%. He pays $1,224 greater tax.

 

 

== Summary of two bad effects  ==

 

• If Bob delays, he pays more tax, because he gives up the tax-free portion of SS. When his sells the added amount that equals his SS benefit, he has less net after taxes for spending. He has to make up that up by selling more than the $35,000 he would get from SS.

 

• If Bob delays, he increases his “sequence risk” – his chance of depleting his portfolio that he set in his original plan. He sells more securities for his spending than his calculation of what’s safe to spend. I use FIRECalc and find his $35,000 added spending from his portfolio chops off one year of NO CHANCE for depletion for one year delay. DON’T DO THAT.

 

 

Conclusion: I find no tax benefit for delaying the start of SS. I find the opposite: the added amount more that you distribute from your Traditional IRA to match the amount you would get from SS is taxed more than SS is taxed. You are selling more from your portfolio at the start of retirement than you have calculated is safe to spend: you are increasing your “sequence risk” – the chance of depleting your portfolio if you ride a most harmful sequence of stock and bond returns.

Social Security (SS) now estimates that SS benefits can remain at 100% of current benefits through 2032; that’s one quarter less than the estimate last year. Thereafter, benefits would be cut by 22% if there is no change to SS. We’ll see changes to SS, but I don’t think anyone contemplates cuts for current recipients. They’ll solve this problem with a combination an increase in the SS tax and a cut in benefits for future recipients.

 

• They can increase revenues.

 

– They can increase the combined employee-employer tax rate from the current 12.4%.

 

– They can increase the top amount subject to tax; thats’ $184,500 in 2026.

 

• They can decrease benefits.

 

– An increase in the Full Retirement Age, 67, means a cut for all future recipients.

 

Example: currently you get 100% of your “Primary Insurance Amount (PIA)” at your Full Retirement Age, 67. If you delay to age 70, you get 124% of that. If they changed the Full Retirement Age to 70, (This is an extreme example to illustrate the point.) you’d get 100% of your PIA at age 70, not 124%: that’s a ~20% cut from now. That math (but not 20% in all cases) would apply to all 96 months you could choose to start SS from age 62 to 70.

 

– They can change the formula that calculates your PIA. The current formula weights your average monthly SS wages over your best 35 years to give greater SS benefits to those with lower work income. 90% of the lowest increment (equivalent to about $14,000 in average annual pay) is included in your PIA, but just 15% of the highest increment (equivalent to average annual pay over $92,000). SS could change the formula to keep (or improve) the amount that lower wage workers get by lowering the amount that higher wage workers get.

 

SS is the sole income for about 25% of all retirees. Any cuts to the lower 25% or even the lowest 50% of recipients is a big financial hit.

 

This is a good article on how small actions can close the gap.

 

 

Conclusion: Social Security estimates that with no changes current benefits remain the same through the end of 2032. Thereafter, benefits would have to be cut by 22%. This will be fixed with a combination of higher taxes and lower benefits for future recipients. No one, I think, contemplates lowering benefits to current recipients.