All posts by Tom Canfield

What will you pay yourself for 2023?

This is my ninth year of calculating our annual Safe Spending Amount (SSA; Chapter 2, Nest Egg Care [NEC]). Our portfolio return was -18% real return over the last 12 months, clearly the worst since the start of our retirement plan, and it  was the worst since 2008. None of us following the steps in NEC calculate to a real increase in our SSA; your amount for 2023 is your 2022 amount increased by 8.7% for inflation. This post displays my detailed calculation sheet: the biggest change from a normal year is that Patti and I use our Reserve – selling only bonds – for our spending in 2023: my sheet shows our that our Investment Portfolio is almost the same as it was at the start of our plan nine years ago.


== Minus 18% real return ==


Our real – inflation-adjusted – portfolio return was -18% real return for the 12 months ending November 30. This was about -18% for stocks and -19% for bonds. This follows three years of very good stock and portfolio returns. Bonds have NEVER performed so badly relative to a year with lousy stock returns.


We’ve had three prior years of excellent, real real returns for our portfolio: roughly double the expected portfolio return for Patti and me of about 6.4% per year. This year, obviously, was a very poor one.


== SSA: 8.7% nominal increase ==


None of us will calculate to a real increase in our SSA. We’ll adjust last year’s SSA for inflation. This is the third of eight years that I’ve not calculated to a real increase in our SSA.


The eight year summary shows our SSA increased in real spending power in five of the eight years. Our SSA has increased by 46% in real spending power. The calculation this year – for spending in 2023 – is no real increase from last year: I only can adjust for inflation of 8.7%


== I’m using our Reserve ==


The -18% real return for stocks ranks as roughly the tenth worst annual return in the last 100 years. I hoped we would never see a year like this, but we have. What do we do? Chapters 1 and 7 NEC spell out the remedy: sell our Reserve for our spending: I have to sell securities now for the cash for taxes to withhold from our RMDs (a form of spending), and I’ll earmark the net value of securities that I’ll sell monthly throughout 2023 for our spending.


I describe in this post a slightly different tactic. View our total holdings of bonds as insurance; that’s why we’ve accepted low returns for bonds relative to stocks for years. Adopt the tactic of using your insurance – selling only bonds for your spending – in years when stock returns are this bad.



I’m displaying the first tactic in my calculation sheet. I display that I’m using our Reserve for our 2023 spending. Our Reserve has been apart from our Investment Portfolio. My calculation sheet therefore shows that I am not withdrawing – further depleting – our Investment Portfolio for our spending for 2023. (See annotation.) My calculation sheet shows our portfolio is the same value for the start of this upcoming year (December 1) as it was at end of the last year value (November 30).


This is an annotated portion of calculation sheet. I am using our Reserve and therefore not withdrawing from – further depleting – our investment portfolio. I end the year and start the next year with the same Investment Portfolio value.


== Same portfolio value as 8 years ago ==


I can get frazzled if I look at the how much our portfolio declined in dollar value over the last 12 months. It’s a lot worse if I focus on the decrease in real spending power.


I don’t feel frazzled, however. The picture from the start of our retirement isn’t alarming. I’d rather look at that. My calculation sheet shows that our investment portfolio now is 1.5% less than it was in December 2014 and this is after seven years of withdrawals that total 42% of its initial spending power. And my SSA now is +46% greater in spending power than at the start.



== Tasks on Thursday, December 1 ==


What did I do on December 1? I prepared last week and here for the tasks this first week of December, so these tasks were simple.


• I went to the Morningstar site and looked up the 12-month returns ending November 30 for the four securities in our portfolio. I entered four numbers on the spreadsheet displayed at the start of this post to find our nominal returns for our stocks (-11.22%) and our bonds (-11.90%).


• I entered those two returns in the highlighted yellow cells on the calculation sheet. I previously extended the cells that calculate the rest of the spreadsheet. I manually entered the cell “NO”, our $80,000 SSA, and changed the cell that normally would have deducted our withdrawal for our SSA from our Investment Portfolio. Our investment portfolio is $985,400 for the start of the next 12-months. I won’t touch this sheet until next October when I enter the COLA from Social Security that I use as the measure for inflation.


• I sold bonds (a mix of IUSB and BNDX) in our retirement accounts to get the cash I want to withhold for taxes for our 2022 return.


    • I transferred shares of FTBFX that I bought last week with a sale of IUSB to our taxable account equal to the balance of our RMDs. I’ll sell the bonds from our Reserve and FTBFX throughout 2023 for our spending: I’m hoping bonds bounce back during the year, and I’ll have some left over this time next year.


    • I rebalanced our portfolio, the part that I did not earmark for our spending in 2023. The return differences between stocks and bonds and between US and International were small this year. The task was almost trivial this year, but I’ve returned our portfolio back to its exact design. I therefore can use 12-month returns ending next November 30 to calculate accurately calculate my portfolio returns to enter in my calculation sheet next year.


    See Chapter 11, NEC for detail.


    Note: My final rebalancing is in our IRA accounts; I do not want to incur taxable gains – pay taxes – to rebalance.


    == Remaining Tasks  ==


    I have to wait two business days – until Monday – for the sales of bond ETFs to settle before I can ask Fidelity to send the amount to be withheld to the IRS.


    I have to change the monthly amount that I will transfer to our joint checking account. I’ll do this after our December payment that comes from last year’s sale of securities.



    Conclusion: I calculate our Safe Spending Amount for the upcoming year based on our 12-month returns ending November 30. None of us who follow the steps in Nest Egg Care calculate to a real increase. We inflation-adjust last year’s amount. Returns were so poor this year that I decided to use our Reserve for our spending for 2023. The math of my calculation sheet shows that I did not withdraw from our Investment Portfolio this year: I start on December 1 with the same portfolio value that we had on November 30.

    What’s my checklist of tasks to get ready for December 1?

    I use November 30 as our calculation date to determine our Safe Spending Amount (SSA; Chapter 2, Nest Egg Care (NEC) for the upcoming year. This post shows the checklist I ran through this week. I think November 30 is a good 12-month calculation date: my checklist may be helpful to you. I have one mechanical change from my normal process, and I find that Patti’s life expectancy is a bit longer than I had found before.


    1. Review the amount we will have or want for spending for 2023. Returns clearly won’t be good enough to support a real increase in our SSA. Our SSA – the gross amount of securities I would normally sell – will be last year’s SSA adjusted for inflation: +8.7% using Social Security’s COLA.



    Patti and I won’t be paying ourselves the SSA I would normally calculate. I  went through the exercise this year to understand our spending needs and desires. See here and here.  I basically plan for our total pay (SS, other pension income, and payments from our next egg), net of taxes,  to be 10% to 15% greater that we will generally spend in a year; that’s  a pretty big cushion, and I like it that way.  The part from our nest egg works out to less than our calculated SSA. Patti and I can start from what we want to pay ourselves since our calculated SSA has outpaced our spending. I start with what we want to pay ourselves, net of taxes,  from our nest egg: I work from there to get to the gross value of securities I need to sell.




    2. Review my tax plan that I first drafted in early August to make sure I am happy with what I am selling to get the net after taxes. We have to take our RMDs, but that is not enough for our total spending desires, so I need to decide what I will sell to get the balance: securities in our taxable account with capital gains or securities with no taxable income from my Roth account.


    I’m generally trying to minimize Federal and State taxes for our current-year tax return and therefore minimize gross amount of securities we will sell. I usually hoard my Roth IRA to use when I can keep our Adjusted Gross Income (AGI) below a tripwire that triggers higher Medicare premiums (Part B and D). The first tripwire, based on AGI on our 2022 return, would cost the two of us ~$2,000 in greater premiums – lower SS payments – in 2024.


    This year will be different: I’m not following my normal practice of selling securities in December to get our 2023 spending into cash before the start of the year. I won’t have any year-end sales from our taxable investment account. I’ll be selling monthly throughout 2023 to get the amount to be transferred to our checking from our investment account.


    The capital gains that I would have recorded this year basically shift to the 2023 tax year. Shifting won’t have that much effect on our total 2023 taxes, since our RMDs will be less than this year.


    3. Decide on the securities to sell in our IRAs for taxes to be withheld for our 2022 tax return. My tax plan gets me very close to the amount I need to withhold for federal and state taxes. I don’t like selling at what may be a very low point, but I have to get cash for taxes.


    I will sell bonds and no stocks – that will be IUSB – to get this in cash from one or both of our IRAs. My sale of IUSB will settle a day or two after December 1. I’ll call and ask Fidelity then to directly withhold this amount for the IRS; our state taxes will be very low this year, and I won’t worry about that withholding.


    This is my usual pattern: I withhold in December the total taxes I will pay for the current tax year; I generally do not pay quarterly estimated taxes. I suffer no penalties from late payment of taxes when I withhold close to our total taxes.


    4. Pick the securities that Patti and I will transfer in-kind from our Traditional IRA accounts to our taxable account. This is the balance of our RMD after withholding taxes and this choice is again easy: solely bonds.



    I plan on using the automatic sell & transfer feature at Fidelity for our monthly paychecks from our nest egg throughout 2023. This feature does not work with IUSB: Fidelity’s process works by selling an amount from a mutual fund and not  ETF (IUSB) or other stock shares.


    I chose to sell IUSB and buy FTBFX – Fidelity Total Bond fund – in our IRAs on Tuesday. I’ll call Fidelity on December 1 to execute the transfer of the shares of FTBFX that will be the balance of our RMDs. (As an alternative, I could have sold IUSB in our IRAs, transferred the cash, and then bought FTBFX in our taxable account.)


     5. Check my calculation of Patti’s life expectancy. Patti’s life expectancy leads to the age-appropriate Safe Spending Rate I test to see if our SSA can increase in real spending power (SSR%; Chapters 2 and 4, NEC). The SSR% for this year clearly won’t figure in the calculation, since I know I can only inflation adjust this year. But I should see if my table, similar to the one I prepared in Appendix G, NEC is accurate.


    I now use the Social Security (SS) Life Expectancy Calculator to find Patti’s Life Expectancy. I checked last checked on Patti’s life expectancies in 2020, and SS’s years were roughly one year greater than I had obtained seven years ago with the Vanguard Probability of Living Calculator, which no longer exists.


    My check this week shows an increase from my table from two years ago. The SS Life Expectancy Tables and algorithm that predicts future mortality at any age adjust over time. Typically, this results in a progression of slightly longer life expectancies for any age.



    My new table shows Patti’s life-expectancy is about 0.1 or 0.2 years greater than I last displayed. Rounding means that I need to change the SSR% that I had for this year’s calculation: I had her life expectancy for this as 13 years and it now rounds to 14 years. For accuracy, I need to change our age appropriate SSR% for this year’s calculation to 5.05% from 5.30%. Again, that won’t make a difference our SSA, since I’ll only be inflation-adjusting last year’s SSA.


    6. I made of copy of my long form calculation sheet from last year and got it ready for the entries from the November return data I’ll get on December 1 (See here). 1) I filled the columns and formats as much as I can for this upcoming calculation. 2) I added 8.7% as the inflation adjustment I’ll use to adjust last year’s SSA to maintain the same spending power. 3) I corrected the age-appropriate SSR% for this November.



    Conclusion: My 12-month calculation date for our SSA is November 30. I spent some time this week on a short checklist of tasks to be ready for the final calculations. The mechanics will be a bit different this year: I won’t be selling securities as part of our RMD; I’ll be transferring shares of a mutual fund and sell that on a monthly schedule throughout 2023. I found Social Security’s estimates of Patti’s life expectancies are a bit longer; this resulted in a change in my table of age-appropriate Safe Spending Rate (SSR%) to test to see if our Safe Spending Amount (SSA) might increase in real spending power.

    How attractive is the financial return of a Single Premium Immediate Annuity (SPIA)?

    A reader – I’ll call him Jim – wrote and wanted my views on a financial instrument called a Single Premium Intermediate Annuity (SPIA). Earlier this year, before he had read Nest Egg Care (NEC), Jim purchased for $500,000 an annuity that pays $2,500 per month for the next 34 years, well past his life expectancy. This post describes this SPIA and its investment return. I conclude that the real return for this SPIA is low (~2% real return per year), less than half that Jim would earn from the worst-case sequence of future returns.


    Rather than buying the annuity, Jim should pay himself his annual Safe Spending Amount (SSA; Chapter 2, NEC). He would meet his objectives for monthly cash payments deposited into his checking account, and he’d be much better off in the future. Don’t peel off a portion of your portfolio to buy a SPIA.


    == The motivations ==


    We all want to know what’s safe to spend. We DON’T WANT TO RUN OUT OF MONEY. Ever. We want to avoid the uncertain results of poor stock and bond returns. Without a framework that’s in Nest Egg Care, folks are flying blind as to what is safe to spend. NEC leads you to your annual Safe Spending Amount. You know what you can spend for the rest of your life, and it can only get better from your initial SSA.


    Those who buy SPIAs take a portion of their financial assets – Jim picked 20% of his total financial assets – to lend to an insurance company who promises to pay them a fixed monthly payment for the number of years they pick. They’ve totally removed the risk of uncertain market returns on a portion of their nest egg, and they get comfort from the regular monthly deposit into their checking account.


    But the key questions are, “What is my financial return? How does this compare to the worst I could expect if I held onto the money and invested it? What generates the most cash to be able to safely spend throughout my lifetime?”


    == Jim’s annuity contract ==


    The financial transaction of a SPIA is analogous to a mortgage. You’re the bank, though. You want to lend money to someone you trust will be able to make fixed-dollar monthly payments for the number of years you desire – and you can add a “lifetime wrinkle” (explained below). Just like a mortgage, a portion of each payment that you receive is income and a portion is return of principal: you have no residual value at the end of all payments.


    Here is Jim’s situation: Jim tells me he had $2.5 million at the end of last year. He has recurring pension and other income for the rest of his life such that $2,500 per month after taxes – $30,000 per year – currently meets all his spending needs. Jim, in essence, asked for quotes from insurance companies to find out how much he would have to lend them to receive . . .


    1) $2,500/month for 34 years – 408 payments – to his age 95; this means that if Jim dies before age 95, heirs will receive the balance of the contractual payment stream, and


    2) $2,500/month to Jim if he lives longer than age 95. This is the “lifetime wrinkle” that adds a bit of complexity to the return calculation.



    The best quote he received – the lowest amount of money he needed to lend for this stream of payments – was $498,000. That’s what Jim paid for his annuity.


    == Jim earns ~2% real return ==


    Jim earns ~2% real, annual return on his $498,000 investment.



    I use the basic equations of a mortgage calculator to find the nominal rate of return that Jim is receiving. I use the RATE function in Excel for the minimum 408 payments of $2,500. The calculation tells me the monthly interest rate is .41%. I multiply this by 12 to get a nominal annual rate of 4.9%. I need to adjust this for inflation to get the real return rate. I assume inflation of 3% per year. That’s the average since 1926. That means Jim’s real return for the guaranteed period is 1.8% per year. (This post gives the math equation to adjust for inflation.)



    Jim’s return rate is greater if the insurance company pays more than 408 payments. Let’s assume Jim lives to 100 and receives 60 more payments for a a total of 468 payments. In this case, Bob’s nominal investment return is 5.3% and his real return is 2.2%.



    Let’s summarize it as ~2% real return. Jim earns ~2% real annual return on his $498,000 investment.


    == Alternative worst case is ~5% real return ==


    Jim would earn >5% real return per year if he (and heirs) kept the money invested in the same way Jim invests the balance of his portfolio. His SPIA returns less than half this.


    We can look at what Jim would earn if returns were average in the future. The expected real return rate for Jim’s portfolio is 6.4% per year. Jim’s choice for the balance of his portfolio is 85% stocks and 15% bonds.



    For perspective, this is a significant financial difference: Jim is paid back his $500,000 investment over 34 years. His average investment per year over the 34 years is half this initial $500,000. If I compound $250,000 for 6.4% and 2.0% per year, the difference in terminal value is about $1,500,000 in today’s spending power.



    But we should really compare the return for the SPIA to the WORST return if Jim held on to the $500,000. We can find the lowest return rate for a 34-year sequence for a portfolio of 85% stocks and 15% bonds from the data from Ibbotson (since 1926) or Shiller (from 1871). The worst real, annual return for that portfolio mix is 4.9%: that’s the sequence from 1969 through 2002. Stocks returns are particularly poor: the sequence starts with the steepest six-year dive for stocks in history and ends with the second worst three-year dive in history. That sequence is one full percentage point lower in annual return than the next worst 34-year sequence of return in history.


    A straight line on this semi-log graph is an annual return rate. The shallower the slope, the lower the return rate. The 34-year line with the shallowest slope for stocks is the red line from 1969 though 2002. The 34-year line that starts one year earlier or one year later is more than one percentage point greater in return.


    The 2% real return Jim earns from his loan to the insurance company is about 40% of the the WORST real return rate that he would earn if he kept the money and invested it. The difference in these two return rates still compounds to $500,000 in today’s spending power. Jim’s SPIA is not a great investment.


    == What would I have done? ==


    I would not have purchased a SPIA. If I had purchased it, I would not consider buying another. I’d apply my appropriate SSR% to my Investment Portfolio.


    I would have assessed the situation this way. Jim had $2.5 million last December. He wants after-tax payments of $2,500 per month after taxes. That’s $30,000 per year. I’ll gross that up to $38,000 to allow for a rough estimate of taxes. Unlike the payments from the insurance company, we’ll assume this $38,000 retains the same spending power over time, meaning it adjusts for inflation each year.


    $38,000 constant-dollar spending divided by $2,500,000 is about 1.5% spending or withdrawal rate. I look up Bob’s Safe Spending Rate (SSR%; Chapter 2 and Appendix D, NEC): his life expectancy from the SS Life Expectancy Calculator is 22 years; Jim’s SSR% is 4.2%. Jim could safely withdraw from his portfolio about 2.8 times the $38,000.



    Here’s an alternate view: Jim needs about $950,000 to support $38,000 withdrawals. He has $2,500,000 or $1,550,000 that is More Than Enough to support his withdrawals for spending. This is a very pleasant problem to have!




    Conclusion. This post looks at the return rate from a Single Premium Intermediate Annuity (SPIA). The real rate of return is about 2% per year for the example. This is less than half the rate of return you could earn assuming the worst, Most Harmful sequence of returns in history. You are financially much better off getting the cash for your spending by translating your annual Safe Spending Amount into monthly payments. Don’t peel off a portion of your total financial assets to buy a SPIA.

    What’s in the inflation report to cause the market to JUMP?

    New data on inflation came out yesterday, and US stocks jumped +5.7%. WOW! That’s the third month with big changes on the day of the monthly report on inflation. The jump for stocks in October was +2.5% and the dive was -4.5% in September. This post displays the trends in inflation data: 1) Monthly seasonally-adjusted inflation was +0.4%, the same increase as last month. 2) Core inflation – inflation less the volatile energy and food components – was +0.3%, half that of the prior two months and the lowest in the past year. I suspect this latter measure of inflation gave a spark to the stock and bond markets.



    I show the monthly changes for inflation in the next two graphs. Each month replaces the same month from a year ago. Next month, inflation for November, will replace November from a year ago. We hope each future month is low inflation and lower than the month it replaces: the 12-month record of inflation will continue to decline.


    == Seasonally adjusted CPI: +0.44% for October ==


    Seasonally adjusted inflation was 0.44%. This was about the same as September. Those two average to annual rate of about 5% inflation. That’s high relative to the Fed’s target of 2%, but inflation over the last four months has been 1%; that’s an annual rate of about 3%. This month’s change was half that of October of 2021. Therefore, the rate for the last 12 months fell to 7.8%.


    October inflation was 0.4%, about the same as last month. Inflation for the last four months adds to 1% or ~3% annual rate.


    == Core Inflation: +0.27% for October ==


    Core inflation was 0.27%, half that of the last two months. 0.27% is the lowest monthly increase in the past year. The 0.3% this month was half that of October 2021. Therefore, the rate for the last 12 months fell to 6.3%. Core inflation has been lower than the other measures since the two excluded items increased much faster: food prices increased 11% and energy prices increased 18% over the last year.


    Core inflation for October was the lowest increase in the last year.


    The 7.8% 12-month inflation (CPI-U; not seasonally adjusted) is trending down from its peak of 9.1% in June:


    The 12-month inflation rate (CPI-U, not seasonally adjusted) is 7.8% and has declined from its peak of 9.1% in June.


    == Some components of inflation ==


    I don’t see the effects of inflation in our spending. I track our total monthly spending from our checking account, and I don’t see our total spending increasing that fast. But inflation is affecting us when when I look at a number of components of inflation shown here. Some of these increases are staggering: airfares + 42%! Patti and I will see big increases in our gas bill for heating this winter.




    Conclusion: The stock and bond markets jumped yesterday on the latest inflation report. I think the key measure was Core Inflation: total inflation less the volatile components of food and energy. The monthly increase was half that of the last two months and is the lowest in a year. I suspect that news was the reason for the big jump in stocks and bonds.

    How long might it take for stocks to recover?

    For the ten months of 2022, the real return for US stocks is about -23%. If this is result for the whole year, 2022 would clearly rank in the worst ten years since 1926 and close to the worst five. This is not a different conclusion that I mentioned in this post. The purpose of this post is to look at the 20 worst years for stocks since 1926 and find out how many years it took them to recover. It’s more years than most folks think. It’s clearly more years than we retirees would like. On average it took seven years for stocks to recover.



    An average of seven years from a major decline like this year is tough news for us retirees. We’re hard on our portfolio, since we sell from our portfolio each year for our spending. Our upcoming withdrawal will just magnify the decline this year. We make it harder for our portfolio to recover to the point where we would calculate a real increase in our Safe Spending Amount (SSA; Chapter 2, Nest Egg Care [NEC]).


    == We’ve all done well in the past decade or so ==


    We all have had a great run for the 13 years since the last really bad year for US stocks in 2008. Through 2021, stocks averaged about 13.5% real return per year, well above their long-run average of 7.1% per year. Those increases meant we all had more portfolio value at the end of last year than at any time in our life.


    You portfolio likely grew more than it did for Patti and me. You may have started your withdrawals for spending later than we did. You may be younger than we are, and your Safe Spending Rates (SSR%s; Chapter 2, NEC) are lower than ours: you’ve withdrawn less than we have since our first withdrawal in December 2014. Assuming you’ve invested close to our mix of stocks and bonds, you’ve seen more growth in your portfolio than we have.


    As a point of referece – if you don’t track your history in as much detail as I do –your portfolio value HAS TO BE at at least 25% greater in real spending power at the end of 2021 than it was at the end of 2015. At the end of last year, Patti and I had 27% more portfolio value, measured in real spending power, than we started with in December 2014, and we almost certainly have withdrawn more than you have. I annotate our calculation sheet from last December to highlight the real change in portfolio value and the total that we’ve withdrawn for our spending.


    It will be tough to calculate to a real increase in the future. The market has to rebound mightily, and it always has. But the average time to rebound, measured in real spending power, is much longer than most folks think. I am not optimistic about a fast recovery that will lead to a real increase in our calculated SSA in the future. We may be adjusting only for inflation for many years.


    == Ten worst years: seven years to recover ==


    I display real – inflation-adjusted – US stock returns for the ten worst years 1926 through 2021. That’s 96 years. Three most horrible years round to -37% real return: 1931, 1937 and 2008. We’ve had two back-to-back years with both in the worst ten: 1930-1931 and 1973-1974.



    I rearrange the table to display the years starting with the worst in 1931. I also show the number of years it took for stocks to recover – the number of years it took for stocks to get back to their initial value and improve from there.



    • These ten are the worst ~10% out of 96. We could say, that based on history, we have a one-in-ten-year chance of experiencing -14% or worse real return for US stocks. The worst five are the worst ~5 percent. We could say we have a one-in-20-year chance of -24% or worse real return. A -23% real return for 2022 would be right on the edge of a one-in-20-year bad event.


    • Recovery ranged from 2 to 14 years. It took more than 10 years to recover for three years: 1937, 1969 and 1973.


    • It took seven years, on average, for stocks to recover.


    == Next ten: also average 7 years ==


    I show the next ten worst years in order. The average recovery period also was ~7 years. It took only one year to recover for four of those years. Three had recovery periods greater than ten years. The longest recovery period in history was 16 years.




    Conclusion. This post displays the 20 worst years for US stock returns. This year is on track to easily be in the worst ten and maybe in the worst five. This post also displays the number of years it took for stocks to recover – to get back to their initial level in real spending power and improve thereafter. On average, it took stocks seven years to recover. That’s longer than most folks think and is certainly longer than we retirees would like. It’s going to be tough for stocks to bounce back to a level that results in our calculating to a greater real Safe Spending Amount in the future. We may have to stick with the same real Safe Spending Amount in the future, only adjusting each year for inflation.

    How much did tax schedules adjust for inflation?

    Last week the news reported that the IRS announced the tax schedules for 2023 and some reports stated, “Some will be able to keep more money.” I think you’ve got this: this last statement isn’t true. Accurate inflation adjustment of the tax tables mean that if your ordinary income is the same in real terms in 2023 as in 2022, you will pay the same real amount of tax. You’re not paying the IRS more because of inflation; your taxes are the same measured in spending power; the amount you keep is the same real spending power. The purpose of this post is to describe the two tax tables that adjusted for inflation.


    == The ordinary tax table: 7.1% ==


    The IRS adjusted the 2023 tax table for ordinary income for 7.1% inflation; this compares to the 3.1% increase last year. The ordinary tax table applies to income other than that taxed at capital gains rates. For example, the standard deduction for a single tax payer increased from $12,950 to $13,850: that’s an increase nearest to 7.1% when rounding to the nearest $50. The tax tables all adjusted by 7.1%. For example, the start of the 22% tax bracket and the amount a taxpayer owes at the start of the 22% bracket increased by 7.1%.



    == Is 7.1% the correct measure of inflation? ==


    Why the 7.1% increase when all the reports are that inflation has increased by more than 8% over the past year? Does the IRS adjustment really reflect the inflation we experience? I can’t give clear answers.


    The IRS by law must use a different measure of inflation than we normally consider. It’s called the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). It tries to account for the most current shifts consumer buying habits: when beef prices rise, more consumers will buy less costly chicken. The C-CPI-U reflects these shifts in the market basket of goods that consumers buy more quickly than other more commonly used measures of inflation: CPI-U or CPI-W. The C-CPI-U calculates a lower inflation than CPI-U or CPI-W. You can watch a five-minute video explanation here.


    I don’t understand how the IRS uses the C-CPI-U index to calculate 7.1%. When I use a recent quarterly average of the index from here, I calculate an 8.0% increase.



    Over the past three years, IRS adjustments trail the adjustments for Cost of Living calculated by Social Security. The lag is about five percentage points. If the IRS adjustment is lower than the inflation we are experiencing, we have what some call “bracket creep”: we’re paying taxes on inflation: as measured in real spending power, we’re paying more in tax and we’re keeping less. Alternatively if Social Security is paying us more than the inflation we are experiencing, we’re really paying in less tax and keeping more in spending power.


    The IRS adjustments are about five percentage points less than those by Social Security over the past three years.


    == Medicare Premium Tripwires: 10.7% ==


    Medicare issues a table of tripwires in income – for most all of us that’s the same as Adjusted Gross Income, line 11 of your 2021 tax return as an example – that trigger higher Medicare Premiums. Cross the first tripwire of income by $1 and you could pay about $1,000 in added Medicare Premiums. Married, joint filers who receive Medicare would pay $2,000 in added premiums. For most of us retirees, the base Medicare B premiums and any added premiums are deducted from our Social Security benefits.


    The tripwires issued by Medicare in September increased by 10.7%. I do not know exactly what Medicare uses for its calculation, since the recent adjustments do not track with recent measures of inflation. Perhaps the 10.7% inflation increase was catching up from last year’s low adjustment – or to make up for many prior years of no adjustment for inflation.



    I’ll use the table just issued as input to my tax plan for 2022 that I will finalize next month. I’ll calculate our Adjusted Gross Income given our RMD and taxes on sales of other securities I’ll have to sell to add to the total we’ll withdraw from our nest egg for our spending. If I think I can avoid a tripwire, I’ll change what I sell for our spending in the upcoming: selling from my Roth results in no taxable income, for example.


    I revised the planning template that I first provided in this post last August. Here’s the revision. I have a very good view – not a perfect view – of the the table of tripwires that will be issued next September that will apply to my 2022 return. My planning assumption is the tripwires will increase by 4% for inflation next year; I’d double the tripwires displayed below for Patti and me as joint, married filers.




    Conclusion. The IRS issued tax tables that will apply to your 2023 tax return. Everything increased by 7.1%. If that is the exact right measure of inflation, we all will pay the same, real amount of tax and keep the same, real amount after tax for our spending. The 7.1% increase is based on a different measure of inflation than used by Social Security for its Cost of Living Adjustment: 8.7% for the benefits in 2023.


    Medicare increased by 10.7% the tripwires of income that can trigger higher Medicare premiums. This increase is greater than other measures of inflation. It may have increased that much since prior adjustments have been far lower than any measure of inflation. I always calculate my Adjusted Gross Income in November for our current-year tax return to make sure I don’t cross a tripwire that I can avoid.

    Should we lower spending to buy a bit more time for our portfolio to recover?

    We can’t control what happens to stock and bond markets. We had no control in 2020 and 2021 when US stocks soared +20% each year, and we have no control over the 25% decline this year. But when the market declines we have the urge to DO SOMETHING to control what happens to our portfolio, and some folks choose to do the exact wrong thing. Doing NOTHING is a good move, but I list some things that I’ll do to help protect the value of our portfolio. The most meaningful decision – the one with the biggest long-term effect – is to spend less than we have been spending. Should Patti and I plan now to spend significantly less in 2023? My conclusion: it’s too early for me to consider doing that.


    Let’s first get a view of the stress that this decline places on our portfolio. The decline is bad enough, but we always add stress since we retirees need to sell securities – withdraw from our portfolio in effect – for our spending each year. We start each year with less portfolio value than we had just a few weeks before. Ideally, returns over the next year are good and we earn back what we have withdrawn. We always calculate to a greater Safe Spending Amount when that happens (SSA, Chapter 2, Nest Egg Care (NEC))


    But a year of negative returns means our portfolio declines before our next withdrawal for spending. When we withdraw the same real spending amount, the percentage that we withdraw is a greater percentage of our portfolio. We’re adding more and more stress and a bigger and bigger challenge to earn back all that we’ve withdrawn.


    == Our SSA of 5.05% was < expected rate ==


    Returns in 2021 meant all of us retirees had more money than we ever had in our lives. All of us calculated our SSA by using our age-appropriate Safe Spending Rate (SSR%, see Chapter 2 and Appendix D, Nest Egg Care). Patti and I used 5.05% for our calculation last November. See here. That’s a greater rate than many use because we’re older.


    Our 5.05% SSR% was about 25% less than than the expected real return rate of 6.4% on our portfolio. That means we had a bit of a buffer. If returns starting in 2023 match expected returns, our portfolio will almost certainly earn back more than we have withdrawn. We then calculate to a greater SSA in a future year.



    == Withdrawal this year > expected rate ==


    Our Safe Spending Amount really is a constant dollar spending amount divided by our initial portfolio value. We sell securities for – at least – that same real spending power no matter the future sequence of returns. We tested the Most Harmful return sequence in history to know how many years we have of Zero Chance for depletion. 5.05% SSR% means Patti and I would withdraw $50,500 per $1 million of Investment Portfolio, and we have 14 years of Zero Chance of depleting our portfolio.



    When we sell the same $50,500 in spending power this year, the percentage withdrawn will be greater than last year. I use November 30 for my calculation date. Our portfolio now is down 25% from last November 30 – our calcuation date – measured in real spending power. Assuming we withdraw the same $50,500 in spending power, Patti and I will be withdrawing 7.1% from our portfolio. That’s 40% greater that the percentage withdrawn last year. That 7.1% is obviously greater than the long term expected return rate for our portfolio. We may have thought we had a buffer a year ago. Now we don’t.



    If the returns in 2023 are not enough to earn back the $50,500 withdrawn at the start of the year, the annual percentage withdrawn the following year will increase. (We’d need 7.6% real return in 2023 to earn back the $50,500.) It gets harder and harder for a portfolio to earn back the amounts being withdrawn, and our portfolio can continue to decline.


    == What can we do to lower the stress? ==


    We all have the following options to lower the stress on our portfolio and therefore our emotional stress:


    • Sell bonds and not stocks. I likely will sell our Reserve for our spending this year. That means I’m skipping a year of withdrawing any from our Investment Portfolio. I discussed this point here. I’ve effectively lowered our total withdrawals from our Investment Portfolio for our lifetimes.


    Even if we don’t use our Reserve, we all will be selling solely bonds for next year’s spending. Bond returns will be better; they’ll decline ­less than stocks. The math of rebalancing our portfolio works out that we all will be selling bonds.


    • Delay sales of bonds. As I discussed in this post, the only amount I MUST sell in 2022 when I take our RMD in December is the amount I want to withhold for the taxes I will pay on our 2022 Federal and state tax returns. That’s going to work out to about 25% of our RMD, since I withhold no taxes and do not pay estimated taxes for Social Security or other income during the year. I’ll transfer to our taxable brokerage account 75% of our RMD as the value of shares of securities (e.g, IUSB).


    My normal practice is to sell all our calculated SSA in December so that it is in cash to then transfer 1/12th monthly to our checking account for 2023. I call these transfers our “monthly pay from Fidelity”.


    But I won’t follow my usual practice. I’ll be selling securities for our spending each month in 2023. I can automatically schedule to sell bonds – e.g, $X,000 of IUSB each month – and then transfer the $X,000 to our checking account on a specific date each month. I’m buying some extra time for inflation to decline and – I would expect – for bond returns to improve.


    • Carry over any from 2022 that we don’t spend. What we carry over from 2022 means we have to sell less for our spending in 2023. Patti and I have always had some left over in our checking account that I know we will not spend by the end of the year. My practice has been to never carry-over any that we have not spent by the end of the year: Patti and I work through gifts we make to family and to charities. We won’t do that this year. I’ll basically tell the charities that I have donated to that it looks like I’ll be taking a hiatus this year. Cash gifts to our family will be modest, but bigger gifts have only been in years with outstanding returns, so they won’t be disappointed.


    • Spend less in 2023 and future years than in 2022. Spending less (including investing costs as spending) than your calculated SSA is the BIGGEST LEVER you have to add safety to your portfolio: when you consistently spend less than your calculated SSA, you extend the number of years of zero chance of depleting your portfolio. In effect you’re using a lower SSR% that ties to more years of Zero Chance for depletion. That’s why using your Reserve for spending this year is important: you have effectively lowered your spending rate from your Investment Portfolio for your total retirement period.


    Patti and I have been fortunate. We started our plan almost eight years ago now, and our SSA that I calculated last year was a real increase of 11% from the prior year. It was a 46% increase from the start of our plan. See last year’s calculation sheet here.


    I decided not to sell securities equal to our SSA – withdraw our full SSA from our portfolio – but to sell less to pay ourselves the amount that’s more in line with our actual spending. See here. As a result of not paying our full SSA, we had a cushion of “more than enough” portfolio value for our spending. But I can increase that cushion by deciding to spend less than we now spend to enjoy retirement. We can’t lower our investing costs; they are already rock-bottom low.


    The simplest way to lower spending is to skip the inflation adjustment or not fully adjust for inflation. If I skipped the 8.7% inflation adjustment, I’d pay ourselves the same number of dollars, but I’d be decreasing our real spending power by 8.7%. Social Security inflation-adjusts to maintain its spending power, but our SSA is a bigger component of our total pay. An 8.7% reduction in spending power from our nest egg would significantly lower our total spending power.


    At our age (I’ll be 78 next year and Patti will be 75.), we’d rather face the decision to spend less in a future year, not 2023. We’d have to plan on less travel – our biggest discretionary expense – and we’d actually like to travel more: we didn’t travel as much as we would have liked in 2020 and 2021 because of COVID, and we would have liked to have travelled more this year; my surgery in March squashed that a bit. We are in good health and are energetic enough to travel. We just don’t have that many years where that will be the case. We decided that this is not the time for us to cut back


    == Some things make no sense ==


    I would not consider any of these two options: 1) change my design mix of stocks vs. bonds; that has almost no effect on the long run safety of your portfolio. 2) sell my total market investments (e.g., FSKAX) to overweight a segment of the market that I think will rebound faster; I’d just be guessing on that.


    It’s not very pretty, and it could get ugly, but we plan on riding this out.



    Conclusion: We have limited opportunities to DO SOMETHING in the face of the steep decline in our portfolio. We can: 1) sell only bonds for our spending for the upcoming year to give time for stocks to recover; 2) delay in selling bonds – sell them monthly throughout 2023 rather than in December if that has been your practice; 3) apply money that you paid yourself in 2022 but have not fully spent to your 2023 spending; this means you’ll sell less from your portfolio for 2023; 4) spend less that you have normally been spending. I’ll do the first three, but Patti and I don’t want to decide to spend less – travel less and therefore enjoy less – in 2023.

    What’s the news on inflation?

    New data on inflation came out yesterday, and the US stocks jumped about +2.5%. I have no idea why, but I’ll take it: last month stocks dropped about 4% on what looks like very similar news to me. This post summarizes the inflation data: 1) The gross increase in Social Security (SS) benefits in 2023 will be +8.7%. 2) Monthly seasonally-adjusted inflation for September was 0.4%, more than the last two months; this measure of inflation over the past 12 months has been 8.2%; 3) Core inflation for September – inflation less the volatile energy and food components – was .6%, about the same as recent months; core inflation over the last 12 months has been 6.7%



    = Gross Social Security Benefits +8.7% ==


    SS announced that the gross benefit will increase by 8.7% for payments in 2023. SS calculates COLA based on the average increase in Q3 of this year from using a measure CPI-W. See here. This table summarizes the detail calculation:



    You will have a slightly greater increase than an 8.7%. Most all of us retirees have Medicare premiums deducted from our Social Security benefit. Medicare announced those premiums last month, and Medicare Part B premiums will decrease by about $60 per year for each on Medicare.


    == Seasonally-adjusted CPI: 0.4% for September ==


    The increase in September was 0.39%. This was greater than the last two months. It was about the same increase as in September 2021, meaning the historical annual change this past month did not change from last month: 8.2%.



    You can see from the chart, upcoming months are those with very high inflation in 2021. One would hope we beat those months and historical annual inflation will drop steeply.


    == Core Inflation: 0.6% for September ==


    Core inflation was 0.6% for the month, similar to recent months. It’s stubborn. The monthly rate is not decreasing. The increase this month was greater than in September 2021 meaning the inflation for the past 12-months increased to 6.7%.



    Core inflation is lower than the other measures since over the last year food prices have increased 11.2% and energy prices have increased 19.8% . In September, food prices increased 0.8% and energy prices decreased 2.2%.



    Conclusion: We retirees have to be concerned about inflation. It’s eaten a big chunk of the spending power of our portfolio. High inflation means the very poor returns for stocks and bonds are really much worse than they appear. This blog post updates the information from last month. Inflation rates look similar over the last three months, and I don’t see much of a decline, especially in Core inflation ­the measure that excludes volatile food and energy components of the calculation.

    How much do I need to sell this year for our spending in 2023?

    Unless there is a dramatic change in prices for stocks and bonds, I will not be happy the first week of December when I sell securities for our spending for 2023. For the past eight years, I sold securities that week for the total that I planned to spend in the upcoming 12 months. I think I should change my normal process this December: I can sell far fewer securities in December at what may be a low point. This post explains my thinking.


    == My normal process ==



    1) Immediately after November 30, I calculate our Safe Spending Amount (SSA; chapter 2, Nest Egg Care, NEC) for the upcoming year based on the 12-month returns ending November 30. I sell securities to get the gross proceeds into cash for our SSA. This is the math approach in FIRECalc, and I like having it all in cash for the full year; I don’t have to worry about the downs and ups of the market during the next year; I just have to be concerned when I approach my next date to sell – like now.


    2) I sell securities our RMD then. When I sell for our RMD, I withhold taxes – basically all the taxes that I will have to pay on my current-year return: I get this amount from my tax plan that I first worked on in early August. I withhold in December almost all our current-year taxes, since I do not withhold taxes from our Social Security benefits, and I generally don’t make estimated tax payments. When I withhold ~all our taxes for the year in December I effectively get an interest-free loan from the IRS. The IRS treats taxes withheld in one lump before the end of the year as being withheld throughout the year. I transfer the net cash to our taxable brokerage account.


    3) I sell added securities from my taxable brokerage account, since our SSA is always greater than our RMD.


    4) I now have the net, after taxes in cash for our spending for the up coming year. I  schedule automatic transfers from my Fidelity brokerage account as monthly payments throughout the year.


    == This year? ==


    My change would be to only sell securities in our Traditional IRAs in the first week of December equal the amount I want to withhold for current-year taxes. I’d transfer the balance of our RMD as shares. I’d then execute automatic sales each month throughout 2023 to get the cash I want transferred to our checking for our spending.


    The benefit: I’m hoping that the sales over the next year are at better price per share than on November 30. I’m keeping more portfolio value than if I sold all of spending for 2023 in December.


    == Here is the example ==


    Let’s assume it’s just me who is subject to RMD and that is $50,000 for 2022. I’ll meet RMD requirements the first week of December.


    I did not withhold taxes from my Social Security payments; I made no other estimated tax payments for in the year for other income I’ll receive in the year: dividends and interest would be an example.


    I prepared a tax plan for the year in early August and I’ll refine it in November before my final decision as to what I will sell. Assume my tax plan says I will pay $15,000 in total federal tax on my 2022 return: taxes on my RMD; Social Security benefits, and other income, including taxes on gains of sales of taxable securities to get to our total SSA.


    I want to withhold that $15,000 for federal taxes when I take my RMD. Again, the IRS assumes that I withheld this amount throughout the year. I don’t get hit with any penalties by paying too little in estimated payments throughout the year. I’ve effectively borrowed that $15,000 interest-free throughout the year.




    The Fidelity web site allows me to pick the withholding percent on an RMD distribution up to 99%, but if I call Fidelity and ask the representative on the line, they can withhold 100% of an amount. I ask for a distribution of $15,000 with 100% withheld, and Fidelity send $15,000 directly to the IRS. That makes the rest of this easy.


    I still must meet $35,000 balance of my required RMD. On the same call I ask Fidelity to transfer shares of a security or securities – let’s assume that’s all bonds and IUSB this year – equal to $35,000. That would be about 764 shares at a recent closing price of $45.67.


    I now have 764 shares with $35,000 of value of IUSB in my taxable account; since I have no other IUSB in the account, my cost basis for these shares is $35,000. This will be the source for my spending over the next year. I can then use the “Automatic Transfers and Investments” for Fidelity to sell $2,920 of IUSB each month and transfer that $2,920 to my PNC checking account on the 20th of each month.


    If IUSB improves in price throughout the year, I’ll have some shares left over at the end of 2023; I would have made the right bet by not selling all 764 shares for ~$35,000 in the first week of December. I’ll have remaining shares and portfolio value than if I had sold all 764 shares the first week of December.


    But if IUSB declines further in value throughout the year, I would have made the wrong bet. I will run out of shares to sell before my 12 months are up; I’ll need to sell something else toward the end of 2023 for our spending needs.



    Conclusion: I normally sell securities the first week of December to get the net for our spending into cash the first week of December. Our net for spending is the total proceeds of security sales less withholding all taxes that I expect to pay on our current-year tax return.


    I don’t have to do it this way: I am not forced to sell securities when I take RMD. I can transfer shares and then sell those shares later for our spending. I think I will only sell securities from our Traditional IRAs the first week of December equal to the amount of taxes I want to withhold for our 2022 tax return. I’d sell securities for our spending monthly throughout 2023: I’m hoping that share prices improve and that I’ll have more portfolio value near the end of 2023 than I would have had if I sold this December.