All posts by Tom Canfield

Should Safe Spending Rates (SSR%s) be 25% lower?

I spent a lot time this week trying to understand the details of a new report from Morningstar, The State of Retirement Income – Safe Withdrawal Rate. I summarize the 59 page report. Morningstar predicts much lower stock and bond returns for the foreseeable future. The forecasts are similar to those in this post: 5.7% real return per year for stocks and .4% real return for bonds; these are about 2.4 percentage points lower than historical returns for both. Morningstar translates those lower average returns to find that Safe Withdrawal Rates should be 20% to 25% lower than those calculated using historical returns – the calculations in Nest Egg Care and elsewhere.

 

== Terms and Definition ==

 

Morningstar uses the term Safe Withdrawal Rate (SWR). I’ll use that here. (I use the term Safe Spending Rate or SSR%.) I define that the Safe Withdrawal Rate is the withdrawal rate for spending that results in NO CHANCE that a portfolio will deplete to a level that would not support a full withdrawal for a desired number of years. Patti often asks, “Will we run out of money?” I answer, “No, at the rate we spend, we have No Chance of running out of money before 2036. You’ll be 88, and that’s well past my life expectancy.”

 

(A withdrawal rate is the initial withdrawal amount divided by portfolio value; the amount thereafter adjusts for inflation, maintaining its spending power over time.)

 

== Finding the SWR ==

 

The clearest method that finds a Safe Withdrawal Rate for a given number of years tests a withdrawal rate (and mix of stocks and investing cost) against the actual most-horrible sequence of stock and bond returns in history. A portfolio will deplete the fastest on the most horrible sequence. That sequence will result in the lowest withdrawal rate that provides a full return for a desired number of years: the Safe Withdrawal Rate.

 

== Much lower future stock and bond returns ==

 

Morningstar predicts the real rates of return for stocks and bonds will be much lower over the next 30 years than they have been from 1926 to the present, roughly 2.3 percentage points per year lower for both stocks and bonds. This is 30% lower for stocks and 87% lower for bonds – almost to the point of 0% real return for the foreseeable future. OUCH. The predictions are consistent with those of others that I wrote about in this post and this post.

 

 

Morningstar assumes the same variability in returns over time. Historically, a year of -9.9% return for stocks varied by -18 percentage points from an 8.1% average return. The same kind of year in the future will have the same -18 percentage variation, but it will be from the lower 5.7% average return. The historical -9.9% return is predicted to be -12.3% return.

 

 

== What’s the impact on SWR? ==

 

Morningstar suggests retirees should use a 22 to 25% lower SWR than they would use if it had been calculated using historical returns. The “4% Rule” should be the “3% Rule”. Morningstar would say the SSR%s in Nest Egg Care are too high; the results you find at FIRECalc are too optimistic.

 

The simplest way that I can explain the impact is to apply their prediction of lower returns for stocks and for bonds to the actual Most Horrible sequence of returns in history. I’m going to lower the annual return rates in that sequence and find the new Safe Withdrawal Rate.

 

The Most Horrible sequence is our not so good-looking friend, the sequence of returns starting in 1969. It’s the Most Horrible for a very wide range of mix of stocks and all periods longer than ten years. It ALWAYs depletes a portfolio the fastest and results in the lowest withdrawal rate for a desired number of years: the Safe Withdrawal Rate.

 

I’ve described this sequence before. It starts with the steepest six-year decline for stocks in history, -44% real return. It has 0% cumulative return for stocks for 14 years, and 0% cumulative return for bonds in 15 years.

 

== I lower the rates of return ==

 

My choice for stock and bond returns reproduces the original “4% Rule”. A 4% withdrawal rate will provide 30 years of full withdrawals for a wide range of stock mixes. The SWR is greater for shorter periods. The SWR is also pretty darn constant for a wide range of stock mixes..

 

 

To see the effect of lower average returns, I simply lower each annual return in the 1969 sequence: stocks by -2.4 percentage points and bonds by -2.3 percentage points. (I’ll describe that seqence next week; we may be talking about 30 years of 0% cumulative return for stocks and for bonds!) I then use my spreadsheet to find the new withdrawal rate that gives the desired years of full withdrawals. That’s the new Safe Withdrawal Rate. The SWRs are lower by 22% to 25%, depending on the number of years. I show the result for one mix of stocks, but the declines apply to other mixes.

 

 

The corollary is that a retiree needs to have 25% to 33% greater portfolio value to support a desired Safe Spending Amount than he/she may have calculated or found up to now.

 

== Change the definition of Safe? ==

 

Morningstar suggests, “It really isn’t all that bad.” It suggests you could choose a spending rate that isn’t Zero Chance of depleting a portfolio. They suggest that you could use a spending rate that is successful 90% of the time. To say it differently, you could accept a withdrawal rate that will fail 10% of the time. Example: there are 76 20-year historical sequences of return 1926-2020. Rather than using the Most Horrible sequence for your withdrawal rate – the one that starts in 1969 – use the withdrawal rate you get using the 7th worst sequence of returns.

 

Oh, my, I’d have trouble even asking these questions, “You want me to use a spending rate with a 10% chance that I’ll run out of money? And you aren’t telling me the earliest that I could run out of money. How exactly do I tell Patti that at the rate we’re withdrawing from our portfolio, there’s a 10% chance that we’ll run out of money before we die. How do I explain that?”

 

 

Conclusion: Morningstar published a report, The State of Retirement Income – Safe Withdrawal Rate. Morningstar predicts stock and bond returns will be almost 2½ percentage points lower than their historical average since 1926. Real stock returns will average 30% lower and bonds will average 87% lower – almost 0% real return for the next 30 years. The implication for retirees is that current Safe Withdrawal Rates using historical returns are too high. I calculate that Morningstar states that current SWRs are 22% to 25% too high. The corollary is that a retiree needs to have 25% to 33% more portfolio value to support a desired Safe Spending Amount.

 

What’s the story you tell yourself this time of year?

I typically use December 15 as a day I take a different look at our portfolio. I’ve described my imaginary “bottling day” in prior posts. Here’s one. I recast the performance of our portfolio into three holding periods or groups of wine barrels or buckets if you like those analogies. You can see my table here, but the purpose of this post is to state the story I want to tell my thinking brain about our financial retirement plan.

 

== Two things I learned this year ==

 

• I read the book, A Thousand Brains this year. (See this post.) I learned we fundamentally have two brains: a rational, thinking brain and an emotional, intuitive brain: this is similar to the concept in the book, Thinking, Fast and Slow. I learned that in times of stress my emotional, intuitive brain can easily overrule my rational, thinking brain. It’s going to kick in BIG TIME with fear and anxiety when something is wildly different from the usual pattern of life – it will go into panic mode when stocks nosedive, as an example. It will want to make decisions that are the exact opposite of what is appropriate.

 

I want to keep telling my thinking brain that I’ve made the right decisions that control the risk of outliving our money. I want my thinking brain to RULE and make the right decisions when times are tough.

 

• I also want to reinforce the new way I want to use bonds in the future. Bonds are insurance that I’ll use in difficult times. That’s a new model of behavior I want my thinking brain to follow. Here’s the story I’m telling myself this week.

 

== The right view of risk and I control it ==

 

I’ve got the right model of risk in my head. Risk is the uncertainty that Patti and I will outlive our money. Patti and I control that risk. 1) We will never spend a dime more than I calculate is a safe to withdraw our nest egg for our spending. 2) We invest to keep close to 100% of what the market will deliver in the future. 3) We have an action plan when things get rough.

 

My risk point is many years in the future. I have many years with No Chance of depleting our portfolio. My choice this year is to have 14 years of Zero Chance of depleting our portfolio. That choice­ determined the spending rate I just used for our 2020 spending. (Maybe it’s really 17 years from this recent post.) Fourteen years carries us to Patti’s age 88. I’d be 91. I see a hockey stick with shaft length representing the Zero Chance years. We’re locked in on 14 years.

 

Patti and I have shaft length equal to 14 (or more) years: Zero Chance of depleting our portfolio. Chances increase when we are in our late 80s or 90s, but the chances of one of us being alive then are low, low.

 

I DO NOT want my brain to think that risk is short-term variability of returns. The financial industry reinforces this view; they want to be paid to be the calming force when their clients’ emotional brain panics. Short-term dives in returns – the -35% dive for stocks in March of 2020 is an example – have nothing to do with our hockey stick and its shaft length. I want my thinking brain to look at the good graph that reinforces that it is a long game. I want it to reject the bad graph the financial industry likes to show.

 

Hey, brain, look at the graph on the right. NOT the one on the left.

 

== Many piles of money ==

 

I want my brain to see that Patti and I don’t have one pile of money. We have many. I want it to look at this loaf of bread: we eat one slice a year. Each has a different holding period: a holding period is the number of years we’ll hold on to an investment before we sell it for our spending. I just sold a ~5% slice two weeks ago. I’ll sell another slice the same time next December. I’ll sell another slice two years from now, and so on. I could view that I have 20 slices. My life expectancy is less than 11 years and Patti’s is 14. I conclude I’m being VERY prudent in the amount I spend per year.

 

Patti and I have many slices. We’ll eat one per year for the rest of our lives.

 

== We’ve planned for the WORST CASE ==

 

I get to that low 5% spending rate, because we could be starting now on the Most Horrible sequence of stock and bond returns in history. We don’t have to invent a Most Horrible sequence of return. The worst in history is Most Horrible in my view.

 

That sequence starts with a six-year period of -45% real cumulative return for stocks, the worst in history. It also has a five-year period of -30% cumulative real return for bonds, the worst in history. Both are 0% cumulative return for at least 14 years. It’s almost statistically impossible to construct a sequence with those events. I’m convinced I’m using the WORST-CASE scenario for my planning. I’ve driven out market uncertainty. All of us will ride a better return sequence. An average or normal sequence of returns is MUCH BETTER.

 

== Investing cost is darn close to 0% ==

 

My decision on our investing cost is the second key to predicting how long our money will last in the face of the worst sequence of return. High-cost kills. I’ve driven our cost to lower than low with my choice of broad-based index funds. We keep 99% of what the market delivers before consideration of cost. We may pay 1/20th of what the average investors pays; those folks are giving up more than 15% of what they can safely spend or leave to their heirs.

 

== Bonds are insurance ==

 

My choice of mix of stocks and bonds is the third – and least impactful – decision that affects how long our money will last. I can actually lock in the number of years of Zero Chance of depleting our portfolio at any mix of stock and bonds by wiggling the spending rate.

 

Our mix of stocks really tells us how much more we will have when stock and bond returns aren’t Most Horrible. The mix of stocks that I picked for Patti and me has driven the high increase in our pay from our nest egg. We also have 25% more real spending power in our portfolio than we started with seven years ago.

 

Bonds are insurance. I have three years of bond insurance. When stocks fall off a cliff, I’ll sell bonds, not stocks, for our spending. I’m buying time for stocks time to recover. I plan on using my insurance in a one-in-ten-year event of Very Bad stock returns – -12% real return or worse. It’s very rare that I would have to tap all three of insurance payments during retirement. The chances are, though, that I will at least see one Very Bad year.

Our insurance policy pays us the cash for spending when stocks have cratered. Gives us a year for them to recover.

 

== Happiness is 46% real increase in pay ==

 

Our pay from our nest egg can only get better. l always calculate to a real increase in pay when Patti and I earn back more than we’ve withdrawn for our spending. We earned back more than we withdrew in five of the last seven years. We have +46% greater pay for 2022 than for 2015, the first year of our plan. (Every retiree following Nest Egg Care has calculated to +15% real increase in pay over the last two years.)

 

Future returns may not be as good as they have been over the past decade or so. Stock returns have been well above average since 2009. Since we’re withdrawing each year for our spending, we’re always putting stress on our portfolio. Patti and I are older. We withdraw more. We stress our portfolio more than younger folks. We may never earn back enough to calculate to another real increase in spending. Our portfolio value may decline. But that does not mean we’ll ever have to lower our current pay. We won’t be unhappy if it never increases for the rest of our lives.

 

 

Conclusion: Every December 15 I recast the performance of our portfolio arranged in three broad holding periods. I did this on the 15th, but I decided this week to write down the things I wanted to reinforce in my thinking brain. When times get rough – stocks fall off a cliff – my emotional brain could take over and make dumb decisions. I want to my thinking brain to RULE when times get rough. I want it to understand that Patti and I have a solid financial retirement plan.

Use this sheet next year for your Recalculation of your Safe Spending Amount for 2023

Here’s a spreadsheet that you can download and use to Recalculate to see if your Safe Spending Amount (SSA) will increase in real spending power for 2023. (SSA; See Chapters 2 and 9, Nest Egg Care [NEC]) This sheet is similar to the one I provided last year; I revised it slightly. You can also find this sheet in the Resources section of the web site.

 

== One significant change ==

 

I apply my design mix to my total portfolio: the amount I had as of November 30 after withdrawing our full-year SSA for 2022. I no longer have a Reserve hidden under our bed that I keep separate from the rest that I called our “Investment Portfolio.” (See Chapters 1 and 7, NEC.)

 

The change follows the logic in this post: I clearly view bonds as insurance that I may or may not have to use during retirement.

 

• In all normal years from the start of our plan I Rebalance back to our design mix to maintain our original level of insurance. I’ve rebalanced back to 85% each year for Patti and me.

 

• In an abnormal year (none since 2008, 14 years ago ) I’ll solely sell bonds for our spending. At a mix of 85% stocks and roughly 5% withdrawal rate, Patti and I have three years of insurance.

 

An abnormal year is when we are hit by a tornado. I set the mark for a tornado as -12% or worse real return for stocks. Tornados have hit ten times in the 96 years since 1926: call it a one-in-ten-year event. I’ll solely sell bonds for our spending, and I’ve used one-year of insurance. I won’t replace it in a future year by rebalancing back to our initial design mix. I’ll have two years of insurance, meaning I’ll have a greater mix of stocks. I hope to heck that I never use our insurance and Really Hope not to use it more than once during retirement, but chances are that we all will be hit at least one time in our retirement.

 

There are no other significant changes from the sheet last year; some of the text is clearer, I think.

 

== Store it prominently ==

 

My file name is “ 1201 22 SHORT FORM Calculate SSA for 2023.” (I also have the file for the LONG FORM for the total history since 2014 in the same folder.)

 

I’ve stored both those sheets in a folder called “  1201 22 Calculate SSA for 2023.” I skip a space or two before the text so they display in the order I want. That folder is in the big folder “Investments and Tax” in my Documents.

 

 

== Set up the sheet==

 

You’d change this sheet enclosed to reflect your plan:

 

1) List your securities in cells C30 to C33. You’d change the math in cells D30 to D33 that reflect your decision on mix/weights of the securities you own. You can refer to a small table to the right of those cells.

 

2) Enter your Multiplier for cell C21. (I show .80 as an example.) It won’t be the same as the one you used last year. You have more after your withdrawal this year than you did after your withdrawal last year. This assumes you did not take out some of your More-than-Enough for year-end gifts or donations.

 

3) Enter your age adjusted SSR%s for cells C14 and D14 that you get from Appendix D, NEC. I show the ones for Patti and me on the sheet. I describe how I get the life expectancy calculation for this in this post: I use the Social Security Life Expectancy Calculator for Patti and round the years for November 30.

 

== During the year ==

 

I’ll look at this sheet in early August when I make my first attempt at tax planning for 2022. I’ll get an idea of our SSA for 2023. I’ll estimate how much securities I will be selling in December and figure out where it is best to sell them: Traditional IRA, Taxable account or Roth IRA.

 

In mid-October when Social Security announces the Cost-of-Living Adjustment for the year, I’ll enter inflation in cell C28.

 

 

Conclusion. I Recalculate each year to see if I’ve earned a real increase in our Safe Spending Amount for the upcoming year. If not, I stick with last year’s amount and inflation adjust it. (You can Recalculate less frequently if you like.) I enclose in this post a short-form spreadsheet you can set up now for your Recalculation next year.

How big is your retirement pay raise for 2022?

If you use November 30 to calculate your Safe Spending Amount (SSA) for the upcoming year, you AGAIN calculated to a healthy real increase for your spending in the upcoming year. Patti and I calculate to an 11% real increase for next year; our SSA has increased by 46% in spending power from the start of our plan (See Chapter 2, Nest Egg Care [NEC].) All nest eggers have a new “the worst it will ever be”. The purpose of this post is to provide a quick summary of my calculation to our 11% real increase in our SSA for 2022.

 

 

This year marks the fifth real increase in our SSA in the seven years that I’ve recalculated from start of our plan in December 2014.

 

 

I show details of our calculation for all years on my long-form spreadsheet. Here is the pdf. I also entered five data points in the short form spreadsheet that you can download; I tweaked this version from the one I provided last December 10. Use that short-form spreadsheet if you recalculate using the same 12-month period that I do. The spreadsheet has a hypothetical Multiplier to show how you get to your total SSA for 2022; you’d use your Multiplier that you set last December.

 

If you want more detail, I described the calculation steps and annotated my long form sheet in last year’s post. I also discuss the calculation steps in Chapter 9, NEC.

 

== I’ve almost completed my year end tasks ==

 

I sold securities to get the total that I’ll withdraw. Stocks dipped from right before Thanksgiving, so the task of selling did not feel good this year; I will never pick the perfect time to sell. I polished the cash and tax planning that I first drafted in August. After a couple of transactions settle, I will distribute/transfer money from our Traditional IRAs to our Taxable Account: our RMD less QCD + any other that I want to withdraw. I will withhold my estimated taxes for 2021 when I transfer. I rebalanced in our Traditional IRAs to get back to the proper percentages of the four securities we own. After we receive our December “paycheck” from last year’s SSA, I’ll change our Automatic Withdrawal schedule at Fidelity for the monthly paychecks to arrive in our checking account throughout 2022.

 

I rebalance in our IRA accounts. I don’t incur capital gains and tax when I rebalance.

 

== Highlights ==

 

• Our nominal return rate for the year was 18.5%. With inflation near 6%, our real return rate was 11.9%. Our real return for stocks was 15.2% and -6.5% for bonds.

 

 

• Two factors led to 11% real increase in our SSA.

 

1. We earned back more than the 4.85% we withdrew for our SSA last year. The 11.9% real return on our portfolio means we have 7% more in real spending power this November 30 than we had before our withdrawal for our SSA last year. I therefore have More than Enough for our current SSA: that always leads to a real increase in SSA. (The alternative is that I could withdraw some of the More-than-Enough and not increase our SSA as much or at all.)

 

2. Because we recalculate to More than Enough, we can apply our greater, age-appropriate SSR% to our portfolio to calculate our SSA. In essence, we’ve ripped up the old plan that assumed the Most Horrible sequence of returns started December 1, 2020. We are starting the first year of a new plan that assumes the Most Horrible sequence of returns started a few days ago. Our age-appropriate SSR% on this plan is 5.05%, a 4% increase from the prior 4.85%.

 

The combination 7% greater portfolio value and the 4% greater SSR% leads to the 11% real increase in our SSA.

 

• Our SSA is 46% greater in real spending power than at the start of our plan. Our first SSA for 2015 was $44,000 per $1 million portfolio value. It’s $64,200 for 2022 in the same spending power. Inflation makes the nominal dollar amount $73,600 that I can pay out this next year.

 

• Our portfolio on November 30, before my withdrawal for 2022, is 27% more in real spending power than it was before our first withdrawal for spending in 2015. On the basis of a starting $1 million in December 2014, I’ve withdrawn $351,000 in spending power and have $272,000 more in spending power than I started with.

 

• I’ve recalculated seven years to see if our SSA could increase in real spending power. I’ve recalculated to a real increase in five years. Portfolio returns were poor in two years, and I only inflation-adjusted the prior SSA. Over those seven years, the real return on our portfolio averaged 8.6% per year, while our expected return for our mix of stocks vs. bonds is 6.4%.  You’ve also had a very good last seven years – actually more than that.

 

I’m happy that returns have been good, but I’m really not trying for MORE. I JUST DON’T WANT TO RUN OUT OF MONEY. I’m happy when we’re not hit with a Really Bad year for stocks. Our worst year in the last seven, 2018, was just -1.7% real return for our portfolio; that’s a good year in my mind,  because it wasn’t a Really Bad year. I hope we keep avoiding them, but the chances are that we will hit one sometime. The 46% real increase in our SSA means I have a low level of anxiety if we’re hit. It is very easy for Patti and me to lower our spending + gifts/donations; that’s a Big Boost to safety of our plan. We are not going to outlive our money.

 

 

 

Conclusion. I calculate our Safe Spending Amount for the upcoming year based on our 12-month returns ending November 30. All retirees who follow the steps in Nest Egg Care calculate to a healthy real increase in their SSA for 2022. Ours is +11%, and that’s +46% from the start of our plan eight years ago. This post shows the detail of our calculations and provides a spreadsheet that you could use to calculate your SSA for 2022.

Are you CELEBRATING the new high-water mark for your portfolio?

I set December 1 to November 30 is my “calculation year.” On the morning of December 1 I’ll calculate and find our Safe Spending Amount for 2022 (SSA; see Chapter 2, Nest Egg Care [NEC]). That will be a very good day. Patti and I will reach another high-water mark for our portfolio on our calculation date. I’ll calculate to another real increase in our SSA. ALL OF US should CELEBRATE, whether we have started our retirement plan or not. We are all at a high-water mark of portfolio value. Our SSA calculated now is the highest it’s ever been. It’s also the worst it will ever be for the rest of our lives; the math used to calculate our SSA uses the worst case assumption for future stock and bond returns; our SSA can’t get worse; it can only get better. The purpose of this post is to explain why ALL OF US – particularly for those who have not yet retired – should be ecstatic for the for SSA we calculate now.

 

== We’re retired: our new SSA ==

 

Next week Patti and I will take our eighth withdrawal from our nest egg for our SSA. It will be the sixth real increase in eight years. I’ll update this sheet in the post next Friday.

 

I withdrew 4.85% from our portfolio last December for our spending in 2021. I can see now that our real portfolio return – calculated for the 12-months ending November 30 – will be more than double that. I’ll have more in real spending power this December 1 than I had before my withdrawal last December 1. I have More-Than-Enough for our current SSA, and therefore our annual SSA moving forward has to increase in real terms (unless I decide to take out a lump of the More-Than-Enough to spend or gift).

 

When we’re retired, we’re always asking, “Was this year the start a Most Horrible sequence of returns?” The answer for this past 12 months is obviously “NO!” A Most Horrible sequence of returns cannot start in a year that you earn back more than you withdrew the prior year; you’ll always calculate to an SSA with greater spending power. The Most Horrible sequence of returns may start this December 1, but it clearly didn’t start last December 1.

 

== Your first SSA ==

 

If this year is the start of your plan and you are withdrawing for your first SSA, you should be happy as hell. You may think, “Wow, we’ve had three FANTASTIC years for stock returns. The SSA I calculate now is WAY BETTER than I thought it would be just last year. Is the market at a peak? Maybe I shouldn’t withdraw my calculated SSA, and I should pay myself – or ourselves – less that I calculate for 2022.”

 

Don’t do that! I think that is a natural concern given the returns these past three years. But we have no indication that the 12-month period beginning December 1 is the start of a Most Horrible sequence. Yes, inflation is higher than the last 30 years, but the economic conditions now are far better than at the start of Most Horrible sequences. We all may experiences a decline in real portfolio value next year or we may not, but it is WAY TOO EARLY to think about spending less than your SSA. We older folks only have a limited number of years left, and we should pay our full SSA to ourselves to ENJOY retirement when we are younger.

 

== Your first SSA, say, in a year from now ==

 

I owe my thinking here to my friend Jay, who is planning to start retirement in one or two years: that’s when he’ll take his first withdrawal for his SSA. Here’s the conclusion: if your first full withdrawal for retirement is in the future, you should calculate your SSA NOW as if you were withdrawing this December 1 for your spending in 2022. That SSA is the worst it will ever be – even if the market declines from now to when you actually take your first withdrawal, say, two years from now. This sounds flakey, but the logic is clear.

 

My friend Jay suggests a thought experiment. Patti and I visited the Einstein Museum in Bern Switzerland about six years ago. Einstein discovered his theory of special relativity by constructing a thought experiment. Jay is my new Einstein. Here’s the thought experiment:

 

Jay and Ray are identical twins. They look at their portfolios at the end of this November, and they have the exact same amount, $1 million; it’s their high-water mark. They have identical portfolios, holding the index funds, weights and mix recommended in Nest Egg Care. They both decide they want to take a full withdrawal for spending in 2022.

 

They email me and ask me to help them calculate their Safe Spending Amount to withdraw the first week of December for their spending in the upcoming year. They both are of good health, and they both agree that 19 years – through 2040 – for Zero Chance for depleting their portfolio makes sense. (See Chapters 2 and 3, NEC.)

 

I look up their Safe Spending Rate (SSR%) in NEC (See Appendix D) and find it’s 4.40%. I email back and say to both, “You can withdraw and totally spend/give $44,000 from your nest egg over the next 12 months. That’s in addition to your Social Security and other income. That $44,000 is the WORST it will ever be. It will at least adjust for inflation in future years. It’s unlikely that you are starting out on a Most Horrible sequence of returns, and chances are that you’ll calculate to real increases in your SSA over time. (See Chapter 9, NEC.)”

 

I don’t hear from them for a year. It’s December 1, 2022. Ray emails me, “Tom, help me. What can I withdraw now?” The 12-month period has not been good. Their real – inflation-adjusted – return on their portfolio return is -12% (mine, too!). That’s similar to 1969, the start of the actual Most Horrible sequence in history. Let’s assume inflation was 0%, just to make the explanation simple.

 

I email back to Ray. I think Jay must have the same question, so I email him, too. I give both the same answer, “You don’t calculate to a real increase in your SSA for spending in the upcoming year based on the poor returns this past year. You have no adjustment for inflation this year. You should withdraw the same $44,000 that you did last year and you can spend/give it all in the next 12 months.  Yep, this was a bad year, and this could be the first year of the start of a Most Horrible sequence of returns, but we don’t know that. Remember your 19 years of Zero Chance of failing to be able to take a full $44,000 of today’s spending power is still intact.”

 

A few days later, Jay emails me, “Hi Tom, I failed to tell you: I actually changed my retirement date. I kept working at my parttime gig last year. I decided that I wouldn’t travel much. I lived off my Social Security and my other income. I did not withdraw anything from my portfolio last year, and I did not add to it.”

 

“I will take my first withdrawal for my spending now. You just told me I could withdraw $44,000. I talked to Ray and he tells me you said the same to him. I have $880,000 portfolio value; that has to be a bit more that Ray has because of his withdrawal last year. Do you agree that I can still take a withdrawal of $44,000?”

 

I tell Jay, “Yep, Jay, take the $44,000. You’re in the same basic boat as Ray. You both – actually all of us – may have ridden the first year of what may turn out to be a Most Horrible sequence of returns. That was the assumption that got you to your $44,000 SSA a year ago. You knew you could withdraw the $44,000 each year – adjusting for inflation – for your spending through 2040. In that worst case you’ll beat 19 years by a bit or you’re able to withdraw a shade more than Ray because you have a bit more in your portfolio than Ray does now. But let’s keep it simple, Jay: stick with $44,000.”

 

What I’m not going to do: I’m not going to apply a 4.40% SSR% (Jay’s one year older, but let’s assume that his SSR% did not change.) to a lower portfolio value than his high-water mark of $1,000,000. I’m not going to apply 4.40% to his current $880,000 portfolio and tell him he can only take $38,700 withdrawal for his SSA. That would be incorrect.

 

I’ll show exactly how this works – the detail calculations – in an upcoming post, but I think you have the basic logic if your first full withdrawal for spending is in a future year:

 

1. You can only ride the Most Horrible sequence of returns once. If you’ve had a down year or cumulative down years from your high-water mark – meaning you can’t calcuate to a greater, real SSA – you may be riding on the Most Horrible sequence of returns. But you never recalculate your SSA on the basis of lower portfolio value. It remains the same in real spending power. To recalculate would be applying the worst case assumption (your age appropriate SSR% that assumes you are starting anew on the Most Horrible sequence) on top of what already may be the Most Horrible sequence of returns.

 

2. The math of your plan really starts at your most recent high-water mark of your portfolio value. Assuming you use my November 30 calculation date in the future, you should calculate your SSA next week as if your first withdrawal is on December 1 this year. That’s your high-water mark, too, and the SSA you calculate NOW is the worst it will ever be for the rest of your life.

 

 

Conclusion: We all have reached a high-water mark for our portfolio value, and we all should CELEBRATE. Next week I’ll calculate to greater, real SSA than this year’s. Our new SSA is worst it will be for the rest of our lives; it will at least adjust for inflation in future years.

 

Someone who is starting their retirement plan now, withdrawing their first full SSA for spending in 2022, should similarly use their age-appropriate SSR% applied to their current high-water portfolio value. The SSA they calculate is the worst it will ever be; it will at least adjust for inflation.

 

Someone who thinks they will retire in, say, a year or two, has also really started the math of their plan now. They should calculate their SSA NOW– even though they won’t withdraw their SSA from their portfolio. The SSA they calculate is also the worst it can ever be; it will at least adjust for inflation in future years. That amount is  the minimum they’d withdraw for their spending when they really start retirement.

 

 

How much more will you pay for Medicare Premiums in 2022?

Those of us on Medicare pay Part B (medical insurance) and Part D (prescription drug) premiums directly to Medicare. If you receive Social Security like Patti and me, your premium is deducted from your gross Social Security benefit. This post describes the premium increases you’ll pay in 2022 and the income thresholds from your 2019 tax return that you filed by April 15, 2020 that can trigger higher Medicare premiums.

 

I use the income thresholds stated now as a guide to my final tax planning that I do this week for my 2021 tax return. I’ll sell securties in about ten days to get the cash for our Safe Spending Amount for 2022 (SSA; see Chapter 2, Nest Egg Care.) I get a close estimate of my total income – Adjusted Gross Income – for 2021. I’ll have a good idea of how close I am to the current thresholds that trigger higher Medicare premiums. But I won’t know in detail since there’s a lag: my total income on our 2021 return will  determine if we will pay premium increases  in 2024, and those thresholds won’t be announced until November 2023. But if I stay under a current threshold, I’ll be under a future threshold.

 

 

You also need to plan where you will get your cash for your spending. You want to estimate your total income for the year, and you want to compare that to the income thresholds just announced. You don’t want to carelessly cross an income threshold on your 2021 tax return that would result in higher Medicare premiums in 2024.

 

== Part B: 14% increase ==

 

We all pay at least the same minimum Part B premium, which increased 14% from about $148 per month to about $170 per month – to a total increase of about $260 per year. That’s not a deal breaker for all of us with a nest egg, but that $22 increase in cost is more than the cost of living adjustment from Social Security for the average recipient. The minimum Part D premium you pay is based on the plan you’ve chosen. These are two good detailed explanations: here and here.

 

== Triggers of higher premiums ==

 

Your your MAGI – Modified Adjusted Gross Income – on your 2019 tax return (You’ll filed that in the spring of 2020. ) determines if you pay more Medicare premiums for 2022. Five thresholds result in greater Medicare premiums. Each threshold is a tripwire. Cross a tripwire by $1 and you pay the added premium. For this next year, a person with REALLY HIGH income in 2019 who blew by all five tripwires will pay about $6,000 more; $12,000 more for a couple.

 

 

This year Medicare inflation-adjusted the thresholds of income that trigger higher premium payments and states it will adjust the thresholds for inflation in the future. This is a new, good process; thresholds did not adjust each year, meaning that inflation alone was pushing us towards higher premiums.

 

== Current thresholds are my guide ==

 

I use the current thresholds as a guide to my tax planning now for my 2021 return, even though I know they’ll inflation adjust in future years. I’ll calculate our Safe Spending Amount (SSA) for 2022 in less than two weeks. I’ll finalize my plan as to where I will get the cash that I’ll have by the end of December. I have three sources for cash. Each source has a different tax consequence. My choices determine our MAGI for our 2021 tax return. I may be able to adjust the source of our SSA to avoid crossing a threshold that would result in higher premiums. See recent blog posts here and here.

 

 

 

Conclusion: This week Medicare announced premium increases for 2022. The increase was 14% for the base, Part B (medical insurance) premium. That’s greater than the 5.9% Cost of Living Adjustment for the gross Social Security benefits for 2022. All of us who receive Social Security and are on Medicare will see less than 5.9% net increase.

 

Medicare also announced the income levels on your 2019 tax return that can trigger higher premiums that you would pay in 2022. Cross a threshold or tripwire by $1 of income and you can pay $1,000 or even $1,000s more. I keep those tripwires in mind for my planning now on our 2021 tax return. I can adjust our taxable income when I decide my of mix of three basic sources for cash for our upcoming annual Safe Spending Amount (SSA).

Is my choice of 85% stock mix risky?

I’ll rebalance back to my design mix in the first week of December. I want to review my choice, since the math has changed slightly as I described in last week’s post. I will now apply my choice of mix of stocks vs. bonds to our total portfolio, not the ~95% portion that I describe as our “Investment Portfolio” in Chapters 1 and 7 in Nest Egg Care [NEC]. I decided on 85% mix of stocks. To some, a mix of 85% sounds risky. The purpose of this post is to explain that I think that my choice of 85% mix of stocks – coupled with my spending rate – is NO RISKIER than any other mix I might consider.

 

The discussion in this post is similar to the discussion on mix in Chapter 8, NEC, but I use a more detailed spreadsheet rather than results from FIRECalc to show why my choice of 85% mix of stocks clearly makes sense.

 

== The basic conclusion of this post ==

 

Any mix of stocks can give you the exact same predictability of a minimum, acceptable future portfolio value. You have to spend a little less now to hit the target with a greater mix of stocks. But you gain an advantage from a greater mix of stocks, because you can expect MUCH GREATER future portfolio value in all but the Most Horrible sequences of stock and bond returns in history. MORE portfolio value is a good thing; it means you can spend or gift more during your lifetime and at death.

 

== Three critical assumptions ===

 

You have to buy into three critical assumptions to agree with me that 85% mix of stocks can be just as safe as the conventional mix of 60% stocks that is most often recommended to retirees.

 

1. Risk is the uncertainty of the end point you want to achieve. The end point we want when we are retired is to have enough portfolio value that allows us to spend to truly ENJOY and know we won’t outlive our money.

 

Here’s a football analogy. You want your favorite football team to hit a minimally acceptable scoring margin at the end of the game. You don’t care about quarter-by-quarter scoring, the number of first downs, or other game statistics. We just want to know that a minimally acceptable end result is – as close as possible – totally predictable.

 

2. You use worst case planning to eliminate the uncertainty of market returns. You assume the worst sequence of returns imaginable. If your team hits your target of minimum scoring margin playing in the THE WORST playing conditions ever, you know it will only be better in all other playing conditions.

 

3. You use the actual Most Horrible sequence of stock and bond returns in history as the worst sequence of returns we could ever imagine. It’s really bad. We don’t have to imagine or construct a worse sequence. It’s the coldest white-out blizzard in history. And your team wins by the desired scoring margin.

 

Example: Patti and I decided that we wanted 19 years of Zero Chance of depleting our portfolio at the start of our plan in December 2014; see Chapter 2, NEC.) The endpoint was enough portfolio value at the end of the 18th year to allow a full withdrawal for the 19th year in 2033. That’s our minimally acceptable scoring margin.

 

We used the Most Horrible sequence of returns ever. That’s our white-out blizzard. We use a Retirement Withdrawal Calculator, and we found we would hit our target at a constant-dollar withdrawal or spending rate of $44,000 per $1 million initial portfolio value – we lable that as a 4.40% spending rate. (See Chapter 2, NEC.) Yes, that’s not exactly the same as truly knowing that we won’t outlive our money, since we both could be alive or one of us could be alive after 2033, but we also know the actions we can take during retirement to extend the Zero Chance Years beyond 2033. (See Chapter 4, NEC.)

 

== You lock in with three decisions, not one ==

 

Most financial planners talk about risk in terms of one decision: your mix of stocks vs. bonds. But you eliminate risk – the uncertainty of not having an acceptable portfolio value in a future year – by three decisions: your spending rate (a constant dollar amount relative to your starting portfolio value), your investing cost (the overall expense ratio of the securities you own); and your mix of stocks and bonds.

 

You can hit the exact same minimally acceptable target of portfolio value in future year by a mix of those three decisions. In this post I fix investing cost at 0.10% (You are invested almost solely in index funds.) I can then find the tradeoff between spending rate and mix that hit the exact same target for portfolio value.

 

A slightly lower spending rate and a greater mix of stocks hit the EXACT same endpoint of portfolio value in a future year. Given that you’ll have greater portfolio value with greater mix in all other potential sequences of return, you want to favor slightly lower current spending and greater mix of stocks.

 

== The numbers ==

 

I use the same spreadsheet and Most Horrible sequence of returns in history to track portfolio value over time that I used in recent posts starting with this one. You sell bonds solely for your spending in years when stocks have cratered, and you don’t adjust back to your original mix of stocks vs. bonds. I set the base case at 75% stocks for this post; that’s the minimum mix of stocks that I think you should consider.

 

I use the example of 20 years of full withdrawals for spending. That means I want enough at the end of the 19th year for the withdrawal for the 20th year. I set the target for portfolio value at the end of the 19th year as $60 relative $1,000 initial portfolio value. That $60 will ensure a full withdrawal for the 20th year, but there won’t be enough for a withdrawal for the 21st year.

 

I show two spreadsheets here that hit the $60 at the end of the 19th year: 1) for the base case of 75% and 2) for 85% mix of stocks. A 3% lower spending rate at 85% stocks hits the target.

 

I ran spreadsheets for a wide range of mixes to find the the spending rate for each that precisely matched the end target. The first table is the summary of stock mixes and spending rates the precisely hit the desired target. The second table shows the tradeoff of lower spending amount vs. future portfolio value at expected returns for stocks and bonds. See both of these tables on this pdf.

 

 

What do these tables tell us for this example for 20 years?

 

1) In no case does a mix of less than 75% make sense. At lower than 75% mix of stocks, you have to lower your spending rate and your expected portfolio value will be less. That’s a losing combination: worse now and worse in the future.

 

2) At mixes greater than 75%, you have to spend less now but your expected gain – averaged over all future years – is about five times more than your lower spending. I like those odds.

== 15 years ==

 

I run the same exercise for 15 years of full withdrawals for spending. I get a similar answer. I can hit the exact same desired minimum portfolio value at 85% mix of stock by spending a little less than if my mix was 75%, for example. And I have the potential about 3 times more in portfolio value than I give up in current spending. That’s less gain potential than for 20 years solely due to fewer years of compounding of returns.

 

== It’s a value judgment ==

 

The Safe Spending Rates (SSR%s) that I provide in Appendix D, NEC are lower than those I obtain from my spreadsheet, as I describe in this post. For example, I post 4.30% SSR% for 20 years, and the spreadsheet shows that is 25 years of full withdrawals. See here for more detail. That means if you stick to the SSR%s posted in NEC, you are more than safe for the number of years you pick and you therefore are free to pick any mix of stocks vs. bonds.

 

 

I chose 85% because it feels right to me to hold three years of bonds as insurance. I can solely spend bonds for three years when stocks crater. I’m just uncomfortable with holding fewer than three. It is rare event to have three years when stocks crater in a retirement period, but as we see in the sequence starting in 1969, those Horrible years can come in bunches.

 

 

Conclusion: Your financial risk is the uncertainty is outliving your money. You can lock in a minimum-acceptable portfolio value in a future year that guarantees you’ll have enough for a full withdrawal for spending. You lock in with your decisions on spending rate, investing cost, and mix of stocks vs. bonds. This post shows that you can slightly lower spending rate and increase your mix of stocks and hit the exact same, safe future portfolio value in the face of the worst sequence of returns for stocks and bonds in history. Safety is locked in with a number of choices. You should always favor a greater mix of stocks, since you gain the potential for far greater portfolio value at all but the Most Horrible return sequence imaginable.

 

Do you have too low mix of stocks for your retirement portfolio?

This is a good time of the year to reassess your choice of mix of stocks vs. bonds. The purpose of this post is to convince you: you should not have less than 75% mix of stocks for your total retirement portfolio. The safety of your financial retirement plan can decline if your portfolio is less than 75% stocks. That conclusion counters conventional wisdom, which argues that a portfolio with more bonds is always safer – more conservative – than one with less bonds. This post explains why less than 75% stocks – more than 25% bonds – is the wrong decision. (I address your planning decision on mix of stocks vs. bonds in Chapter 8, Nest Egg Care [NEC] and in this post.)

 

== Good time to reassess ==

 

This is a good time for me to reassess my mix of stocks and bonds. I rebalance my portfolio the first week in December, but the real reason is that I should use a different math to calculate my mix of stocks vs. bonds.

 

I altered the logic of how to use bonds for withdrawals for spending in this post four weeks ago. The right way to use bonds is to think of them as insurance. You use your insurance – sell only bonds for your spending – in years when stocks have bombed. I recommend that you want to have enough insurance – a big enough amount of bonds – to absorb at least three explosions that could tear your portfolio apart. Those big hits seem to occur every 20 or 30 years.

 

 

The post showed I should pick a mix of bonds based on my total portfolio. In Chapter 7, NEC I thought about using bonds differently. My choice of mix only applied to part (most) of our total portfolio. My choice of 85% mix for my “Investment Portfolio” is much closer to 80% of the total.

 

 

== Risk: the relative uncertainty of an end result ==

 

I hope we are on the same page as to how to think about risk to measure the impact of greater or lesser mix of stocks vs. bonds. I’ve covered this thinking before. I argue risk is the predictability of an endpoint result, not how you get there: let’s look at who wins most often and by how much; let’s not worry about the score inning-by-inning. All of us just a few basic choices of how to get to the best end point: invest in stocks, in bonds, or some mix of stocks and bonds. Which choice gives us the best end result?

 

The endpoint for someone in the Save and Invest phase of life is different (How to do I invest for MORE?) than for us retirees in the Spend and Invest phase off life (How much can we spend and not outlive our portfolio?)

 

== My base case ==

 

I use a base case in this post. I picked the target of a guaranteed 20 years of full withdrawals for spending. I use an investing cost of 0.10%. I use 75% mix of stocks. I test those three decisions against the Most Horrible sequence of stock and bond returns in history to find the spending rate that equates to 20 years of full withdrawals. I use the spreadsheet math that I introduced in this post; it uses the tactic of solely selling bonds when stock returns are -10% or worse.

 

 

I iterate to hit a fixed amount at the end of the 19th year that is a bit more than what I think the final withdrawal rate will be – I picked $60 relative to an $1,000 initial portfolio. I iterate and find the precise spending rate that hits that target amount. That is $47.318 per year relative to a starting portfolio value of $1,000: 4.7318% Safe Spending Rate (SSR%). This is the spreadsheet for 75% mix of stocks (top half); I also show the spreadsheet for 70% mix of stocks (bottom half) .

 

== Less than 75% stocks is less safe ==

 

The question is, “What happens when I lower the mix of stocks? Does that target $60 at the end of the 19th year increase or decrease?”

 

 

The result is WORSE when I lower the mix of stocks. Each time I decrease the mix of stocks – increase the mix of bonds – portfolio value at the end of the 19th year declines. At 70% mix, portfolio value declines at the end of the 19th year to less than the desired withdrawal of $45.7. That small change in mix calculates to a decline that equates to the loss of one year of a full withdrawal for spending. That’s NOT GOOD.

 

As I lower the mix of stocks, the portfolio value continues to decline. The declines are small, and you do not lose another full year for a full withdrawal. The conclusion is that a mix of stocks that is less than 75% – a mix of bonds greater than 25% – harms the safety of your financial retirement plan to the point where you can lose a full year of withdrawal for spending.

 

Why is this? Why isn’t the opposite true? The reason is that returns for bonds returns in this period were worse than the really horrible sequence of stock returns. Both had long periods of cumulative returns: -10% for the first 14 years for stocks and -33% for the first 14 years for bonds. -33%! I always want to assume THE WORST future to drive my spending rate and choice of mix of stocks vs. bonds. The worst case shows we can’t count on bonds to save the day when stocks crater, and a mix with more bonds is not the answer to improve future portfolio value.

 

== Same basic result for 15 years ==

 

I ran this same exercise to see the effect of mix on the value at the end of the 14th year to ensure a full withdrawal for the 15th spending year. That’s a tougher test than for 20 years since that’s just two years after hitting all five years when stocks bombed -12.7% or worse.

 

The result is a bit different in that portfolio value improves slightly with a lower mix of stocks, but the changes are not meaningful. Lower than 75% mix never results in one more year of safety – never adds enough in 14 years to get you to a full withdrawal for the 16th year.

 

== And ten years ==

 

I ran this for ten years. That’s an even tougher test with four stock explosions in the first nine years. I come to the same conclusion: lower than 75% mix for stocks never results in one more full withdrawal for spending. More bonds are not buying you a meaningful measure of safety.

 

== You won’t have MORE with mix less than 75% ==

 

After you’ve made your plan decisions and locked in on safety – e.g., 20 years “guaranteed” of full withdrawals for spending – we retirees want to see how our choice of mix affects future value when stock and bond returns are more normal. In all cases, a lower mix of stocks results in lower future portfolio value. Over a 20-year period, the difference is staggering as I describe in Chapter 8, NEC.

 

 

Conclusion: I built a spreadsheet that tracks what happens to portfolio value for a given set of inputs: spending rate, mix of stocks vs. bonds, and investing cost. My sheet uses the Most Horrible sequence of returns for stocks and bonds in history. That single sequence is the severest stress-test to judge the safety of your decisions for your financial retirement plan.

 

YOU SHOULD NOT HAVE LESS THAN 75% MIX OF STOCKS. (I examined 10 years, 15 years, and 20 years.) In my example for 20 years, less than 75% mix of stocks – more than 25% bonds results in enough of a decline in future portfolio value that you lose one full year of withdrawal for spending. That’s a BAD thing.

 

The results are a bit different for shorter retirement periods, which are impacted more by the bunching of Horrible Years of stock returns. A lower mix of stocks added portfolio value, but never enough to add one year withdrawal for spending.

What’s the effect of 5.9% inflation on our spending for 2022?

Inflation has been 5.9% over the past year based on the way Social Security (SS) calculates its Cost-of-Living-Adjustment. (See here for how SS calculates.) That’s the most since 6.1% inflation in 1990. (See here.) The purpose of this post is to describe what that 5.9% means for us retirees. It’s pretty straightforward: inflation slashes the real value and real return rates on our portfolio, but portfolio returns for the year are on track to handily beat inflation. We nest eggers are on track for a real increase of our Safe Spending Amount (SSA) for 2022. (See Chapter 2, Nest Egg Care[NEC].)

 

== The basics ==

 

• Social Security gross benefits will increase by 5.9% to ~maintain the same gross spending power as in prior years. Your net monthly payment you receive will be affected by the increase in payments for Medicare premiums that are deducted from your gross SS benefit. Those premiums haven’t been announced yet.

 

• Your SSA for 2022 will almost certainly increase by more than 5.9%. You are on track to earn more in real spending power than you withdrew for your spending in 2021. When that happens, you always calculate to a real increase in your SSA.

 

For example, Patti and I withdrew 4.85% in the first week of last December for our spending in 2021. We have less than five more weeks before my calculation of our SSA for 2022 on November 30. We have earned 13% real portfolio return over the past ~11 months. Assuming stocks don’t crater over the next few weeks, we’ll have the fifth real increase in our SSA out of the past seven years. These increases in our SSA are getting out of hand!

 

 

== Other effects of inflation ==

 

Patti and I have a component of our income for spending that does not adjust for inflation. I have a small monthly payment from a defined benefit plan from an employer in the early 1980s. The payments have been the same each month for nearly 12 years now. Year after year, the spending power of those dollar payments decrease. My pay decreased in real spending power by ~ 6% this year. The cumulative decrease in spending power from 2010 has been -22%.

 

 

While stocks gained in real value this past year – returns were greater than inflation – my bond portfolio declined sharply in real value. My nominal bond return is about -1.3% so far. With 6% inflation, that nominal return translates to about -7% real return. (That’s bad, but not wildly unusual: real bond returns have been -7% or lower twice in the last 20 years.) Stated differently, the real value of my bond portfolio fell by 7% this past year.

 

But the fall in the real value of my bond portfolio is offset quite a bit because I owe 6% less in real spending power on the money I’ve borrowed. The benefit of owing less in real spending power roughly matches the hurt of the decline in the real value of our bond portfolio.

 

Patti and I have a mortgage and a HELOC; I started our current 30-year mortgage in the summer of 2020 to take advantage of the low rates. Our total loan balance is not far off from my total bond portfolio. The real amount that I owe – our mortgage + HELOC loan balances – fell by 6% this year because of inflation.

 

How do I tap that? I only get the dollars that will increase my total financial assets to offset the real decline in our bond portfolio if I refinance in the future. I’d be converting the increrased dollar value in our primary non-financial asset to financial assets – dollars we can spend or invest.

 

Our home may not have increased in real value this past year, but it increased in dollar value due to inflation. If our house was valued at $400,000 last year, it is likely valued at 6% more or $424,000 this year. The dollar amount that we owe on loans remained the same or slightly declined with principal payments. Therefore, the ratio of my loan balance to the dollar value of our home is declining.

 

Someday, let’s say in 2028, a bank will be willing to lend me the same percentage loan amount to appraised value that I had in the summer of 2020. When I refinance, say at the same real mortgage value measured in spending power that I have now, I will get many more dollars that I can spend or invest after I’ve paid off the current mortgage. I’ve repeated this feat a number of times over the years. We always net more dollars to invest or spend after we’ve paid off the old mortgage.

 

  

Conclusion: Inflation over the past year has been about 6%. That’s the most since 1982. Your gross Social Security benefit will increase by 5.9%. Your Safe Spending Amount or your “pay” from your next egg will increase by more than 6%. Your overall portfolio return is more that the rate of inflation. You will earn back more than you withdrew for your spending for 2021. You will have more portfolio value measured in real spending power than when you withdrew for spending last year. When you earn back more that you withdrew last year, you will always calculate to a real increase in your SSA.

Buongiorno!

Hello from Montepulciano, Italy. Patti and I have been in Tuscany for 12 days now. This is the second of two international trips we wanted to take in 2021. I usually write blogs to post ahead of time when we are traveling, but I didn’t for this week’s post. So, this post simply describes what it is like to travel in Italy at this time of COVID-19.

 

Patti and I booked a self-guided walking tour through this company: Girosole. A driver met us at the Rome airport and drove us about 2 1/2 hours north to Siena where we stayed four nights. One half day was a guided tour of Siena. One half day was a guided tour of San Gimignano, about an hour away. Then we transferred south to Montalcino, and we basically walked east through San Quirico d’Orcia and Pienza to Montepulciano. Very scenic. We had not been to this part of Tuscany before. The weather was good for walking. The highs have been in the 60s. I’m not sure we could have done this earlier in the year. It would have been too hot for us just a few weeks before.

 

For most all of the pandemic, Italy has had the highest cumulative death rate of wealthy western countries. Unfortunately, the US just this week surpassed Italy’s cumulative death rate. We’re number one where we would have wanted to be last.

 

To get into Italy you have to have proof of double vaccination and a negative NAAT-PCR test taken in the US within 72 hours of arrival. We landed in Rome at 3 AM our time on a Monday, so we took our test Friday morning at the drive-through at CVS and received our results the next morning. You also have to complete a passenger locator form. These steps were basically the same as for our recent trip to the UK.

 

Italy has strict rules to prevent the spread of COVID-19, much stricter than any state or city in the US. You must wear a mask to enter any public space: airport, museum, church, store, hotel, or in any restaurant before you are seated. Our driver wore a mask, and we had to wear a mask. You must present proof of full vaccination at each hotel, museum, and restaurant. All employees wear masks.  Everyone we see complies without complaint.

 

The proof is in the pudding. Italy’s rate of new cases is about 1/5th of the US. Its rate of new deaths is about 1/8th of the US. 71% of Italians are fully vaccinated. This compares to 58% in the US.

 

Patti and I feel safer here than at home: we don’t feel comfortable indoors at restaurants at home. I still stay away from our favorite coffee shop where I’d routinely meet friends.

 

 

Conclusion: Italy has strict rules to prevent the spread of COVID-19. From what we observe, compliance is very high. The payoff for Italy is low rates of new cases and new deaths relative to the US. Patti and I feel safer in Italy than we do at home.