All posts by Tom Canfield

What did Nest Eggers score in calendar 2017?

Fellow Nest Egg Team members: you should be happy with our team’s scoring for last calendar year ending December 31. Our team had a very good year. If you followed the recommendations in Nest Egg Care, you came out with handsome results. As in all prior years, our scoring is solidly above the average of others (funds and investors). (You’ll see added support for this assertion in an upcoming post.) Here are our team’s scoring results.*


Your combined return for stocks plus bonds might differ from mine based on your decision on mix of stocks and bonds. You are still above average for all those who chose a similar mix.


As mentioned in previous posts (here and here), your return rate for your 12-month period (for the date you pick for your Recalculation) exceeded the Safe Spending Rate you used last year. That obviously means you have more now than you did then, and you can (or have already decided to) ratchet up to a new Safe Spending Amount for 2018. (You could have decided to lop off some of the More-Than-Enough as gifts now, like Alice did).


Just for reference, I could also display the result for prior calendar years, and that would look like this since 2015.



Conclusion. 2017 was a good year – well above expected the return rate for stocks (6.4% real) and for bonds (2.6% real). Our team was above average for all others (funds and investors), just as it is in all years. Our combined return rate for stocks and bonds meant all of us had more money when we recalculated for our Safe Spending Amount (SSA) for 2018. We all could ratchet up to a greater spending amount (or gift more now). In essence, all of us are starting on a new financial retirement plan (hockey stick) for 2018.


* Your results may differ by a small amount depending on your choice of fund and your weights between US and International. Your returns on your Recalculation date (e.g,  October 31 or November 30) would  differ.


Note: On Jan. 15, I updated the numbers in the displays to correct for small errors I recorded for return rates. The biggest change lowered 2017 Bond returns by .16%. Cumulative three-year returns were slightly greater for both stocks and bonds.

A great gift from Tom to Tom and Patti

I opened my Gift Envelope this morning, the one I gave to Patti and me on January 2, 1982 – 36 years ago. I emptied its contents on the kitchen island counter: $102,800!*


I followed the same investment plan as for the envelope I opened last year: $2,000 put into my IRA and invested in US stocks for 36 years. Stocks are only thing that makes sense for a 36-year holding period; bonds have never outperformed stocks for that length of time. Our return is from investing in a bland, boring US stock index fund for all those years. Because of the fund’s low expense ratio, our return is just a bit less than the gross return from the market.


Now, $2,000 invested then is not the same as $2,000 now. When I do the calculation to adjust for inflation, it was more like $5,200 in today’s purchasing power. So, that means in real purchasing power, I invested $5,200 then and found it compounded to $102,800 over these past 36 years. Nearly 20X.

That’s better than the 14.5X from the envelope I opened last January 2. Both are much better than one would expect from the long run average return rates (maybe 9.5X**). Why is the one I just opened so much more than the one I opened last year? For the sequence ending now, I dropped a bad year (1981: stocks were down about 5%) and added a good year (2017: stocks were up over 20%).


I know the contents of 36-year envelopes I plan to open every January 2 will vary depending on the actual sequence of returns. The returns in the 1980s and 1990s will be hard to match moving forward; my guess is that this one just opened may be the highwater mark in terms of the multiples earned: 1982 was a +20% year, and my next sequence will not include that year. But for now, we’ll ENJOY that $102,800. We’ll spend or give away all of it by the end of this year (or the portion of it within our calculated Safe Spending Amount). Oh, boy. We have work to do to figure that out.


Conclusion. We retirees have ridden a very favorable sequence of returns starting in the early 1980s through the 1990s, compounding savings then by many multiples with a simple investment plan. The 36-year envelope we just opened increased nearly 20X in purchasing power, well above what one would expect.


We don’t know the future sequence of returns. But the chances are that a similar, relatively small gift – not to ourselves but to those we love – will compound to many multiples of purchasing power. You can dramatically improve lives of those you love.


* Source. Morningstar. VFINX’s “Growth of 10K” graph. Change the start date to 01/02/1982 and the end date to 01/01/2018. You will see $10,000 grew to $514,000 or 51.4X. $2,000 * 51.4 = $102,800


** I plant in my head 6.4% real return per year as the average for stocks over the past 90 or so years. 6.4% translates to doubling in purchasing power about every 11.25 years, and 36 years would be about 3.2 doublings or a multiple of about 9.5X.

Tell me again: why do Patti and Tom have this mountain of cash that is More-Than-Enough for current spending?

In our Recalculation the first week of December, Patti and I found that we had far more than enough to support our current spending. A small mountain of cash: +$147,000 per $1 Million starting Investment Portfolio (December 2014). And a calculation of a new Safe Spending Amount (SSA) of $54,000. (I have to use the multiplier I set in December 2014 to get to the grand totals.)

You also have a similar mountain of cash if you are just reasonably close to the correct decisions of How Much to Spend and How To Invest. But I’m guessing you don’t exactly understand this. You can only quantify the size of your mountain when you know how to Recalculate. (See Nest Egg Care, Chapter 9.)


Let’s just review. How did Patti and I get our mountain of cash again? Why is it we can increase our Safe Spending Amount by so much? It may be easier to look at this over a three-year time period rather tracking changes year-by-year.


Let’s assume that Patti and I waited three years for our first Recalculation: start in December 2014 and now Recalculate in December 2017. In December 2014 we started with a Safe Spending Rate (SSR%) of 4.40% and applied that to $1 million Investment Portfolio. That gave us $44,000 per $1 million as our Safe Spending Amount (SSA) for 2015, and I’d use our multiplier calculated then to get to the total. That $44,000 is a constant dollar spending amount that does not change (only adjusts for inflation) independent of our portfolio value.


I’ve abbreviated the complete Recalculation sheet for the three years assuming we made no real changes to spending in 2016 and 2017. We only inflation adjusted the initial $44,000. That’s the three-year series of $44,000, $44,130, and $45,000. (That’s the row beginning “A  Current SSA …”)


The sheet shows we now have $192,200 (outlined green cell) More-Than-Enough for our constant dollar spending amount adjusted for inflation – $45,000. We could lop off that $192,000 for gifts, for example, or we could dole that out over time as an increase to our new constant dollar Safe Spending Amount of $54,100 (outlined blue cell). Or, some combination of the two.


Why is this increase so big? What happened? Two factors are at play here.


• The first obvious factor is the series of returns we rode was clearly not a track of most HORRIBLE ever. Over the three years (for spending years of 2015, 2016, and 2017) we withdrew a total of +$132,000 (row highlighted in blue), but our total return over the period was ~$272,000 (row highlighted in purple). We obviously have more that we started with, about $140,000 or about 14% more (See row below the purple).


(Stock returns in particular were above their long run average rates for the three years. Stock returns averaged about 11% per year relative to their long-run real return rate of about 6.4% per year.)


• The less obvious second factor is that we are older; we are three years (approximately) closer to the end of our journey. We, therefore, logically don’t need to plan to have our money last as long as we did before. In terms of the hockey stick, we don’t need one with as long of a shaft length – as many years of zero probability of depleting. We can take the current stick we’ve been using and saw off a little bit. A shorter stick has a greater SSR%. (Recalculation steps in Chapter 9 in Nest Egg Care tell you if it’s Okay to saw off a bit or not.)

For Patti and me at the end of 2017, our shorter, applicable stick (SSR%) – based on Patti’s age and life expectancy for the probable shorter journey – is 4.75% (That’s from the Data Table in Appendix D in Nest Egg Care.), not 4.40% that we started with in December 2014.


That .35% seems like a small change, but it’s is an 8% increase in our SSR% over the three years (.35%/4.40%). This 8% increase has two effects.


• We use the inverse of our SSR% is to find the amount we need for a given level of spending: at SSR% of 4.40% we needed 22.7 times a given spending level; at SSR% of 4.75% we need 21.1 times. For Patti and me at the end of 2017, I multiplied 1/4.75% times $45,000 – this is 2017 spending adjusted for inflation. That calculates to $947,600 needed for the $45,000, but we have $1,139,800. We have $192,200 More-Than-Enough.*


• Or we apply the 8% boost in our SSA to our portfolio value right before our withdrawal for next year. I multiply the 4.75% SSR% and the $1.14 million portfolio value to get to a new SSA of $54,100. That’s 23% greater than our initial $44,000 (some of which is inflation). We’d get to that same percentage increase by just dealing with the percentage changes: 8% greater SSR% applied to the 14% greater portfolio value. Using inflation adjusted results, 40% of our increase is due to an increasing SSR% and 60% of our increase is due to favorable returns.


Conclusion. Each of two factors work to calculate that you have More-Than-Enough for your current spending. And when you have More-Than-Enough for your current spending, you know you can increase your Safe Spending Amount (SSA).


The first obvious factor is favorable returns – returns that exceed withdrawals rates are obviously favorable. The second less obvious factor is the potential to use the greater SSR% applicable to our age (and its decreasing inverse).


* You may notice that the $192,000 calculated here is much greater than the $147,500 that I calculated for Patti and me when we recalculated annually. That’s because we paid ourselves more in 2017 from the Recalculation. That greater amount in “A  Current SSA, infl adjusted” was $47,000, not $45,000. The use of the 21.1 (inverse of the 4.75% SSR%) to that $47,000 worked out less More-Than-Enough.

What’s our Financial Retirement Plan for 2018 look like?

Yep. It’s a hockey stick with that inflection point locked in right where I want it to be – 2035. That’s zero probability of depleting our portfolio for 18 years. The Safe Spending Rate (SSR%) of 4.75% and other original design decisions determined the shape of this stick.


Financial risk is generally defined by the variability or unpredictability of results, and there is no unpredictability in the shape of this stick. The stick assumes we hit the MOST HORRIBLE sequence of financial returns history: BIG negative returns very soon. Maybe even worse than -35% real return for stocks in 2018. (Oh, let’s hope that doesn’t happen, buy it has happened three times since 1926.) So, there is no downside market uncertainty or risk in the stick. It can’t be worse. Only better. Therefore, I control all design decisions that determine the length of the shaft – the number of years of zero probability of depleting our portfolio – and the resulting blade angle.


Is this stick “Aggressive” or “Conservative?” (That’s how financial professionals like to characterize a financial retirement plan.) Is it “High” or “Low” in Risk Tolerance? It has ZERO TOLERANCE FOR RISK. There’s NO UNPREDICTABILITY to that inflection point. It’s LOCKED IN PLACE as determined by my design decisions: spending rate and the key ones as to how to invest.


I guess you could quibble with my choice for 18 years from now for the shaft length (to Patti’s age 88 and my age 91). We have some “life span risk”, but that’s different than unpredictable results from other factors out of our control.


Patti and I see our 18-year choice as worry free. Here are two reasons:


• Of our parents, only Patti’s mother lived longer than 88 (to 89); all others died before 84. It’s just 19% probable that I’ll live to 91, for example.


• Patti and I and you – as fellow readers of Nest Egg Care – know that 2035 is not frozen in concrete: we know what to do to push to later years if we need to or want to. Our Safe Spending Amount with our current stick is 20% more than we started with. Going back now to our original spending of $44,000 in constant dollars, we’d be using a  spending rate that would push out the inflection point to 2040, for example – to my age 95 with just 7% probability of being alive then. Since it’s almost certain that we’ll be better off in the future than now (even after this 20% increase), we’re certainly not going to lower our current Safe Spending Amount now.


I can only mess up this stick by doing stupid stuff that inadvertently shortens the shaft to fewer years. Here’s stupid stuff WE WON’T DO.


1. Patti and I won’t spend more than the stick says we should. This stick is a Safe Spending Rate (SSR%) of 4.75% that leads us to our Safe Spending Amount. (We likely will find that both our SSR% and SSA will increase in time.) We rigidly control spending by paying ourselves our annual SSA in monthly paychecks and no more. We know to never spend one dime more in a year. (And we have no need to spend one dime less!)


2. I will make no changes to our portfolio to give us a less than the certain result of 99.93% of what the market as a whole will give all investors. I’m not trying to beat the market to get more than 100% of what the market gives. I’m not adding costs to fiddle with our portfolio. EVER.


3. I won’t fail to rebalance our mix of stocks and bonds right after our withdrawal for the upcoming year. (That’s early December for us.) Rebalancing takes less me less than 15 minutes, so it’s inexcusable if I forget to do that.


Conclusion: Our financial retirement plan (your plan) can be viewed as a hockey stick. If you follow the decision steps in Nest Egg Care, you wind up with ZERO RISK TOLERANCE in your plan for the number of years you pick for zero probability of depleting a portfolio (and your probability of outspending and outliving your portfolio in the years thereafter is extremely low.) You LOCK IN the shape of your stick with your design decisions. The only risk in the shape of your stick is if you do stupid stuff and inadvertently shorten the stick. DON”T DO STUPID STUFF!

Whooowee. I made two changes to our plan this year.

I reviewed our extensive Retirement Financial Plan (Written out, it fits on a 3 by 5 card.) and made the following changes:


1. On my 3 by 5 card, I erased the $46,100 that I had written in pencil last year for our Safe Spending Amount and wrote in $54,000.  (I get to our total by using our multiplier.)


2. On my 3 by 5 card, I added a mutual fund to our extensive list (NOT!) of funds and ETFs that we own. I did this to simplify my task of rebalancing our portfolio. It was simple to do that before, and now it’s even simpler.


Our investment accounts are at Fidelity, and I added FTIPX (Fidelity Total International Stock, a mutual fund). That means I now own two Total International Stocks securities: VXUS (an Exchange Traded Fund basically identical to the Vanguard mutual fund VTIAX) and now FTIPX. (FTIPX did not exist when I started our plan in December 2014; it’s essentially identical to VXUS/VTIAX in holdings and cost. [It’s actually a shade lower in cost.])


Adding FTIPX allows me to easily “exchange dollars” between two Fidelity mutual funds to rebalance US Total Stocks and International Total Stock holdings. I can now do this task with one transaction. With only VXUS, it was two transactions: for example, I would have had to “sell dollars” in FSTVX (the dollar amount I wanted to buy of VXUS to be in perfect balance) and then wait to the next day to calculate the number of shares I should buy of  VXUS and place the order.


Conclusion: Fidelity or Vanguard both have stock index mutual funds that are essentially identical in composition and cost (rock bottom low) for US Total Stocks and for International Total Stocks. If your accounts are at either one, it’s easiest to rebalance between mutual funds in the same family (within Fidelity or Vanguard) by “exchanging dollars” between the two mutual funds.


It’s December 15. My day spent bottling the wine I’ll drink next year.

This is my imagined task every December 15. I even mark this day as Bottling Day on my calendar. Why do I do this? To imagine my portfolio differently.


We all need to form our view of risk tolerance. The real shape of my and your risk tolerance curve looks like a hockey stick. You lock in your stick – the number of years you want of zero probability of depleting your portfolio – with your spending rate and other decisions. It’s already assumed HORRIBLE sequences of bad variability in returns (early, big negative returns); we logically don’t need to pay attention to bad variability of returns.



But sticking with the stick – trusting the stick – is hard to do. We’ve all spent decades thinking that risk is the ups and downs of market returns. The financial pros only talk about risk tolerance this way. (That’s not correct! But it helps them if you fear these ups and downs.) While I want to think only in terms of our hockey stick, I also look at our portfolio in a way that helps me be more accepting of bad variability when it will inevitably strike.


I don’t view our portfolio as one big lump – one pile of money – that moves up and down with market variability. I view it in parts that move up and down differently. Each part has a different holding period. (Holding period is the length of time one holds on to an investment before selling it for spending.) The mix of stocks and bonds varies with holding period.


I don’t want much variability in the parts with short holding periods. I’ll be selling securities relatively soon for our spending; I want more bonds. I’m accepting of more variability in the parts with longer holding periods; I’m good with more stocks. Since I have many years to wait before I will sell, I have plenty of time to recover from bad variability. (I have this same view for a Trust where I am Trustee; you can read about that here.)


I envision that that our portfolio is in ten wine barrels, aging over the years in a precise way, and in a large vat. (It’s far too hard for me to actually display our portfolio this way on my login screen for our investment accounts, but I’d really like to. I just have to do the calculations this time of year as if it were in the wine barrels and the vat.)


Each of the ten barrels holds about one year of spending. The barrels are in a precise mix of stocks and bonds. I consulted with a world-class vintner who told me that the number of years (10) was the right amount of aging and that the mixes in the barrels are ideal. He told me to think that each drop of wine I drink has followed his precise aging and mix schedule. (Just that thought seems to make it taste better!)


The ten wine barrels are in my garage in sequence; I have bottling equipment in the garage, too. The large vat is out back down a short trail from the garage.

• The first three barrels are the Finishing Barrels, and they’re invested in 80% bonds and 20% stocks. That means their volume isn’t going to change much year to year. That barrel closest to the bottling line sat with that mix for three years.


• The next seven barrels are the Aging Barrels, and they’re invested in 60% stocks and 40% bonds. Barrel #4 has aged for seven years now.

• The Large Vat out back is 100% stocks. It will have the most variation in volume. I won’t touch the first drop of that for a decade. I have 10 years to recover from bad variability in the vat.


I woke up early today. Brrr. It was cold and icy, 17 degrees. I went out to the garage to bottle the wine that I’ll consume in the upcoming year (2018).


I opened the Finishing Barrel closest to the bottling line. (I’d written “1” in chalk on it last year.) and that’s what I bottled. Later today I’ll take the bottles to the house and put them in a wine cooler in the basement. I’ll consume and give away all those bottles during 2018.


After I emptied and bottled the first barrel in line, I had some work to prepare for next year. I rolled empty barrel #1 to the end of the line. I rolled the full barrels forward to make space for it in position #10. I wiped out my prior chalk marks and renumbered the barrels from #1 to #10.


I adjusted the mix in my new #3 from 60% stock and 40% bonds to 80% bonds and 20% stocks. And I got wine from the Large Vat to fill #10: I adjusted that to 60% stocks and 40% bonds. (Getting that wine from the Large Vat to the garage is the most physically taxing work. Also, the trail can be icy, like it is this year. I think I may hire someone to help me with that next year.)


Okay. Now I’m ready for next year, and I’m ready to show you how those two groups of barrels and vat performed over the past three years.

You can see the range or variability of returns is smallest for the Finishing Barrels (roughly 7.7 percentage point spread) and greatest for the Large Vat (roughly 23.5 percentage point spread). That’s what I’d expect.


I’ve had three years of positive returns in the Finishing Barrels; that’s probably a bit unusual. In the first year I had small negative returns in the Aging Barrels and the Large Vat. But those return rates don’t approach what I think of as bad variability.


The cumulative returns are positive for all three. The greatest cumulative return is in the Large Vat. That’s also what I would expect.


Conclusion. None of us should view our portfolio as one big lump that rises and falls with market returns. That tends to make us too sensitive, too emotional when we are hit with bad variability in returns. It’s really our hockey stick that defines our risk tolerance, and it already has assumed the most HORRIBLE sequence of market returns.


It helps to view our portfolio in parts related to different holding periods. Each part should have an appropriate mix of stocks and bonds. This example is three parts starting with 80% bond and 20% stock and ending with 100% stocks. Each part will have its own degree of variability.


It’s too difficult for me to actually arrange my portfolio into parts with different mixes of stocks and bonds for our investment accounts, but I can calculate at least once a year to see the results as if it were organized this way. Looking at that longest holding period (10 years away before I spend any) helps distance my potential emotional panic when I’ll be hit (We’ll all be hit.) with bad variability of stock returns: I’ll know I have a decade to recover.

Our 15% “Pay Raise” Calculation. December 2017.

If you follow the CORE in Nest Egg Care, you Recalculate this general time of year. You may have Recalculated using your 12-month results ending October 31 (like Alice) or November 30 (like me now). Perhaps you will use December 31.


No matter which date you choose* you find you now have a small mountain of cash that is More-Than-Enough for your current spending. You can lop off parts of that mountain as gifts now and/or you can ratchet up to a new spending plateau for the rest of your life (lives) – a healthy pay raise for 2018 and all future years.


Folks who don’t follow the CORE don’t know how to Recalculate, and it’s impossible for them to figure out the size of their mountain after this year’s solid returns. They also won’t know the height of their new plateau. They just can’t get to the correct story: “You can spend (and gift) Much More in 2018  and all future years than you did in 2017.” But we know the story since we know how to Recalculate.


My recalculation (for Patti and me) is on this spreadsheet (pdf). (As reference, you can read about my recalculation a year ago here.)


The work to get to see if we have More-Than-Enough for our current spending is simple. I entered three numbers on the spreadsheet in the cells highlighted in yellow. The speadsheet calculates the rest.


• I first entered the return rates for our stocks and for our bonds for the period ending November 30.** I get those straight from my Fidelity portfolio page when Fidelity updates the 12-month returns ending November 30. They did that in the early hours of December 5 this year. (I have stocks and bonds in separate accounts, so there is no confusion on returns for each.) The spreadsheet calculates +19.0% as our total return for the year. That was obviously driven by high stock returns.


• I also entered the inflation rate for the year. That’s the Cost of Living Adjustment rate stated by the Social Security Administration each October for payments for the upcoming year.


The spreadsheet does the rest once I move the calculations one cell to the right. So, what do we find? Here’s a summary table similar to the one in Nest Egg Care, page 72.)




1. The spreadsheet shows that if we chose to only adjust our current spending for inflation, we have over $147,000 more than is needed to support that $47,000 in spending – a small mountain of cash. (And that’s before applying our multiplier.) Wow! Wow! Wow! We certainly could chose to make LARGE gifts this year from that.


Do we lop off all or a portion of that mountain now? (Alice lopped off $25,000 off her mountain this year.)


2. If we don’t lop off any of the mountain now, the spreadsheet shows that our Safe Spending Amont (SSA) per $1 million starting Investment Portfolio increased to $54,000 –  $7,900 more per year than last. (I again would apply our multiplier to get the total we can spend.) That’s a real increase of nearly 15% this year and 20% more than the $44,000 we started three years ago. That $54,000 is a whole new plateau: $54,000 in constant dollar spending for the rest of our lives; it won’t ever be worse than that. We’ve left our initial $44,000 in the dust.


You can also see on the table that after the withdrawal of $54,000 our Investment Portfolio is about $60,000 greater now (in constant dollars) than the $1,000,000 we started with. (See the row “Invest Portfolio after withdrawal” and the row below which states the result in C$2014.) That surprises me a bit.


You can also see that I’ve displayed the More-Than-Enough relative to our initial $44,000 Safe Spending Amount. (See cell below the one with $147,531.) That’s saying that if we dropped back to that spending level (which is possible for us to do), we have $187,000 More-Than-Enough.


Those two now have me scratching my head about how long I can wait before I would be forced to sell stocks when they’ve cratered. That time is stretching out to longer than I really think is necessary. Within a few days I’ll have next year’s Safe Spending Amount in cash. (I’ll peel that out monthly to our checking account.) And because Patti wanted an extra Reserve at the start of our plan (See Part 2, Nest Egg Care), I have about two years of spending sitting in short term bonds. That adds up  to three years. And now that $60,000 looks like fourth year to me. And that $187,000 strikes me as a huge cushion. I didn’t think I’d wind up like this. I feel like I’m wearing two belts and two sets of suspenders.

The question is: should we lower our Reserve (increase our Multiplier)? Patti is beginning to understand: that extra Reserve she wanted is looking superfluous now. But I’ve decided to wait a year. We certainly don’t have pressure to lower the Reserve (raise the Multiplier) to be able to spend more in 2018. I’ll look at this again next December: might be a big year for gifts.


* Pending a wild decline over the next few weeks in December for those who recalculate based on December 31.


**You can see at the top of the sheet that I used November 30 as year-end this year as compared to December 15 in prior years; it was too confusing to get 12-month return rates at a mid-month point. It’s much easier to get those rates for every November 30. The change this year means I’m using return rates for 50-weeks: December 15, 2016 through November 30, 2017.

A perfect gift idea for your loved ones: start 529 College Savings Plans

This is the time of year that we all think about giving to others we care about. If you’re like Patti and me, you have some left over from your 2017 Safe Spending Amount. Or, if you’ve recalculated for next year (following the CORE), you know that you have a small mountain of money that is More-Than-Enough for your current Safe Spending Amount. You can easily give some of that away and still increase your Safe Spending Amount for 2018. That’s what Alice did.

I mention in Nest Egg Care that my friend Chet gave $5,500 to his 22-year old daughter’s ROTH IRA last year. What a great gift. In effect, at age 65, she’ll open the envelope that’s held that $5,500 for 43 years and, at expected rates of return, find it has $80,000 in today’s spending power. Tax free. Wow.


I also like the idea of using a 529 College Savings Plan (or plans) as a way to give to your heirs – your children, grandchildren and even great grandchildren (even if not yet born). I like 529s for a bunch of reasons. Here are the top five for me from the list below: the specific use of your gift may be one you like; your gift is not irrevocable; your gift grows tax free; you have wide flexibility as to who benefits from the plans you start; plans can be very low cost.


I dug to understand 529s better than I had before, but you’ll likely have to dig more. I read the detailed descriptions of 529 College Savings Plans available at both Fidelity and Vanguard and talked on the phone to their representatives; they were extremely helpful. (The plan document from Fidelity was 88 pages long!) I looked at the descriptions of plans at T. RowePrice and Charles Schwab on the web, but I didn’t download and read the details of their plans. I’m sure your brokerage house will have a detailed information package and a representative who can answer your questions. You can also find many sites with excellent information. You can get overwhelmed.


The basics. You open the 529 plan. You are “owner” of the account (529 uses a different legal term, but “owner” fits my brain more easily.) You name a child as the beneficiary for each account. You also name a successor owner on your death for each account.


I like the restriction that means disbursements from this account have to be used for educational expenses. Patti and I like to give gifts that are then used for educational expenses, and clearly a 529 fits that bill. I guess that really means we don’t like gifts that might result in immediate, frivolous spending.


Your gift is not irrevocable. If in the future you find you want or need this money you can withdraw it from the 529 – perhaps you’ll get extremely worried when hit by bad variability of market returns; or you may have large, unforeseen healthcare expenses. You pay a penalty tax on the growth portion, and the growth portion is taxable income (similar to an early withdrawal from an IRA), but you have your money back.


You don’t even have to tell your children about the gift. You can tell them in a few years when you know you’ve dodged bullets of bad variability of stock returns, for example, and are more comfortable about truly giving it away.


The growth and distributions are tax free. The account compounds with no federal taxes and distributions for eligible expenses are not taxed. Eligible expenses are for post-high school education. (They’re what you’d expect: tuition, books and computers, room and board; you’ll find more detail on these eligible expenses.) The hassle, if you want to call it that, is that you (as owner) must keep records to ensure that you spend for eligible expenses.


The right choices for your plan result in really low investing costs. Low investing costs means your investment is compounding at rates very close to what the market is going to give. This is particularly important for plans that might be inter-generational. (See below.) Plans have costs for states (the official trustee of a plan), brokerage house administrative fees, and fund fees (expense ratio). Even with these three, total investing costs are the range of .10% per year at Fidelity (New Hampshire plan) and Vanguard (Nevada plan) if you invest in Index Funds – which is the obvious choice for long-lived plans. Almost too good to be true.


You have flexibility as to who receives the benefit of the 529 plans you open. You are not required to spend the amount in a 529 plan on the beneficiary you initially name. You (or your successor owner) can move money in a 529 plan to others in your family (among plans with the same owner). Let’s assume you open accounts and name each of your five grandchildren as beneficiary. You can move money from the plan of one grandchild to the plan of any other. Family is defined broadly; it’s just not lineal descendants who can benefit.


You can think of your gift as stretching out over two or more generations. I like this potential. That means your gift now can compound for many years. Here’s an example of how this might work. And you can refer to this sketch.


My friends Joe and Judy have two daughters and five grandchildren. They plan to put $50,000 total into five 529 plans that they will open this year – $10,000 in each plan with the grandchild as beneficiary. (This would be their first large gift like this, and they do like the fact that it’s not irrevocable.) Joe will be owner and daughters will be successors. However, Joe and Judy think their two children and spouses will actually pay for all the college education expenses for the five. Perhaps Joe and Judy will help out, but that’s separate from this $50,000 in their mind.

So in that sense, the total may sit there for years before any is tapped for eligible expenses. And it’s easy to shift money from grandchild to great grandchild. As each great-grandchild is born, the owner at the time (Joe or a daughter) will open a new 529 plan and move money into it. So eventually beneficiaries of the initial gift are the great grandchildren (and, of course, their parents who will have to spend less on college expenses).


That $50,000 could be viewed as $400,000. It may be 15 years on average before Joe and Judy’s grandkids marry and have children; it may be another 15 years or so for their children to reach the age when the owner is cutting checks for expenses. In 30 to 35 years, $50,000 compounds to about $400,000 in today’s spending power (constant dollar amount). Wow. A $50,000 gift is terrific. I’d consider a $400,000 gift as a legacy. And of course Joe and Judy and their daughters’ families can add to these accounts in future years.


You may get a state tax deduction for your gift. Patti and I live in Pennsylvania, and a gift to a 529 plan with one of us as owner is tax deductible even if it’s another state’s plan. We save about 3% of our gift in lower PA income taxes. (And we avoid future PA inheritance tax.) Your state may or may not give a tax deduction for one of these really low cost plans like the Fidelity/New Hampshire or Vanguard/Nevada plans. You’ll have to do some homework to figure out what’s best for you; if your plan might be long-lived, you might want a really low cost plan even if that means you forgo the state tax deduction. Here’s an excellent site that describes the deduction for each state.


Alice thought about all this and, in essence, said, “I’ll just give the gift to each of the two 529 plans my son has already set up. I don’t want to be bothered with any decisions as owner down the road. And I’m really giving it; I trust I won’t want it back. In effect, my gift is to him, and he put it in the 529s. He can take the PA state tax deduction.”


Conclusion. We retirees should consider gifts to a 529 College Savings Plan. If you are starting out on your retirement plan, you may not be comfortable about giving away some of your calculated More-Than-Enough. Your gifts to 529 plans you set up are not irrevocable. You can easily move money from the plan of one family member to another. Some or all of your gift might be inter-generational, meaning your gift now has the potential to compound to much more in today’s spending power.


Your worry point is far down the shaft of your hockey stick.

Most of us worry about bad variability in stock returns. Our focus, our worry point, is usually no further than 12 months away.  The image in our head is a seesaw or roller coaster. When we’re retired – with the right plan – our real worry point is many years away, typically decades for most of us: that point is the first possible time we might deplete our portfolio. You totally control that point and the probability of depleting your portfolio in the years thereafter by decisions you make for your retirement financial plan. The correct image in our head should be a hockey stick.


Financial risk is defined in terms of variability of returns. We’ve had it drummed into our heads that risk is measured by one-year variability of returns. The statistical measure of the ups and downs of one-year returns (Standard Deviation) calculates that stocks are three times more variable in return than bonds. We can view stocks as a wildly swinging seesaw. Bonds less so. We therefore correctly conclude that stocks are riskier than bonds.

This model of annual variability in returns as the measure of risk, fear, and worry is reinforced time and time again. Financial professionals are excellent in probing to make customers “Feel the Pain.” The pain they want you to feel is FEAR. It’s the same fear our ancient ancestors on the savannah felt when they heard unusual rustling in the bushes behind them. “Is that a predator that might kill me?” Financial folks like clients who think variability  of returns is the predator that might kill them. Some argue that some financial professionals exploit fear to sell investment products you don’t need.


This image of risk, fear, and worry is incorrect for our retirement financial plan. The right approach to a plan removes the variability of market returns. What? Yes! A seesaw or roller coaster is the wrong image of risk. The correct image is a hockey stick.


We must use a Retirement Withdrawal Calculator (RWC) to get the right view of risk, fear, and worry. The right kind of RWC tells us the ABSOLUTELY MOST HORRIBLE sequence of annual returns we might face in the future. Once we know that sequence (and the few others like it), we then set our spending rate such that we know that we WON’T DEPLETE OUR PORTFOLIO for any number of years we pick. That rate is our Safe Spending Rate (SSR%). (We must follow certain investing rules that RWCs implicitly tell us to follow; the most fundamental rule is for us to keep as much of what the market gives us in returns as possible.)


This approach – ALWAYS SPEND AT A RATE THAT ASSUMES THE WORST FUTURE POSSIBLE FUTURE – has taken out all concerns about the variations of annual returns. We’ve assumed no variations of cumulative returns. Only the absolute worst. The basics of our plan is built on NO OPTIMISM about the future.


(We can see from the data an RWC presents, however, that it’s 99% probable that the sequence of returns we really will experience will be better than worst case. And the average sequence we might experiece is much better. In that sense, we should be very optimistic. Part 3 of Nest Egg Care shows we can figure out if we’re no longer on a WORST CASE track and if we can step up our spending. But even when we step up, our spending rate will always be based on the worst possible future from there on out.)


We can plot the probability of depleting our portfolio from the data an RWC gives us. Typically all of us will pick a spending rate that gives us decades of zero probability of depleting. That plot on a graph is a long line at zero. Then there’s an inflection point and a rising probability of depleting thereafter.


I like to think of each of the plots for a spending rate as a hockey stick: a long shaft, an inflection point, and a blade angle thereafter. And I like to describe the stick in terms of spending per $1 million initial portfolio value. A 3.5% spending rate is a $35,000 hockey stick, for example.

You can also see on this graph that a 3.5% spending rate results in about 32 years shaft length (years of zero probability of depleting). That 3.5% spending rate is not much different than one would calculate if one  assumed zero percent real growth over that period. And that’s generally true for all return sequences that RWCs build: the worst sequence of returns for any period of time has long stretches of zero percent cumulative return; shorter sequences of return are worse and cumulate to less than zero percent return.


Your decisions COMPLETELY control the shape of your hockey stick – the year-by-year probability of depleting your portfolio. Remember: there is no Market Return Risk in your stick, since it’s assumed the WORST EVER sequences of returns. You’re in complete control of the shaft length of your hockey stick – the point where the blade angle rises. Your first decision is to pick a desired shaft length (years of zero probability of depleting) and you then know your spending rate. Two other decisions you make can shorten or lengthen that stick. Many retirees ignore investing cost – the net cost all of us incur relative to market returns when we buy and hold securities. But that’s an important design decision: high cost shortens your hockey stick significantly. A stick that you think is safe is rendered unsafe with high investing cost. And your choice of mix of stocks and bonds also affects shaft length, but (surprisingly) to a much smaller degree than investing cost.

Once you understand your stick, it may take time to grow to trust it. I attended an evening presentation last week, and the speaker said it takes six months to change a behavior – it takes that length time to rewire the thought patterns in your brain. It’s not easy to shift your thinking from the image of the seesaw or roller coaster of daily, monthly and annual variability of returns to a hockey stick. But we all need to do that.


You can see here that I really like our stick! It’s the one Patti and I will use for our 2018 spending – a $47,500 stick (a 4.75% SSR%). I tell myself as look at that stick: “You should not be very concerned about one year or even two years of bad variability of returns. Your real worry point is nearly two decades away. Put worry into the distant future. Enjoy More. NOW.”


14.5X on my investment. Other Baby Boomers did that, too.

The game of Save and Invest that we retirees have played for decades has turned out to be a somewhat easy game. The timing has worked out great for us. We retirees have ridden an above sequence of annual returns for stocks. That’s added up BIG TIME for retirees who saved and chose the logical, simple way to invest.


Baby Boomers were born between 1945 and the early 1960s. Therefore, I’m about the oldest Baby Boomer. I’m using the example here of an investment made in 1981. I was 36 then. The youngest Baby Boomer would have been under 20, so he or she was not in the phase of Save and Invest then. So, maybe 1981 is applicable to folks who were at least in their late 20s in 1981 and could get serious about Save and Invest. Those are folks born in 1952 or earlier. They’re 65 or older now: that’s about 15% of our population; 48 million of us. Oh, if we Saved ANYTHING and Invested logically in 1981, we are very happy campers today.


IRAs that you could contribute to, separate from your employer’s retirement plan, started in 1981. You could contribute up to $2,000. You can contribute $5,500 now; that’s really the same inflation-adjusted amount of purchasing power as $2,000 in 1981. As it is now, the contribution was deductible from income for the calculation of Federal Income Tax. (That deduction is subject to certain income limits now and maybe then, too, but those never applied to me.) (Let’s forget in this discussion that I’m pretty sure I also invested that piece of taxes saved.)


Did you contribute? I did. I was 36 in 1981. I’ve always been a saver and investor. A top priority every year was to first contribute to my IRA. In 1981 think I drove a nine-year old VW Beetle, purchased used. I got a $50 Earl Scheib paint job, so it actually looked pretty good. But I certainly wasn’t spending on a fancy car. Saving for my IRA was at the top of my list. I remember I was compulsive about writing a $2,000 check on about December 29 and mailing it on December 30 so it would be deposited and invested in my IRA on January 2.


I know how that $2,000 invested on January 2, 1981 turned out, since I made three good decisions.


The simple and obvious one was that it was always invested in stocks. My time horizon was going to be 30 years, maybe more, and for that length of time I knew stocks would outperform bonds and anything else I could consider in my IRA. Real stock returns have averaged about 6.4% over the past 90 or so years. That 6.4% translates to a doubling in purchasing power in every 11.25 years following the rule of 72. Over 30 years, I could have expected about 6.5X increase in purchasing power.


The second great choice was a mutual fund that closely matched what the market has given us over all those years. (I’ll get to my exact fund in a bit.) But let’s just assume I invested in a boring and dull Index Fund that, actually, because of its expense ratio, gave me a bit less than what the market would have given me without those costs. About the only one around at that time (Index funds first started in 1976.) was the Vanguard fund that tracked the S&P 500 index: VFINX.


The third best decision was that I did not change what I held all those years. I blithely blew right through some periods of very bad variability in stock returns. The real decline for stocks was about -14% in 1981, the first year out of the box. (I don’t remember regretting my investment that year.) The stock market declined by -22% in one day in 1987. Oh, my! The cumulative real decline for 2000, 2001, and 2002 was -42%, and who can forget the almost -39% real decline in 2008, the worst year in the history of the stock market dating back to 1802? Call it faith in the long run or inattention: I never changed what I held.


How did that turn out?


Let’s assume I put the $2,000 in an envelope on January 2, 1981 and wrote on it, “Open only on January 2, 2017 for your spending to enjoy that year.” (I think you have the idea that I have a series of envelopes like that.) How much was in that envelope when I opened it on this past January 2, 2017, 36 years later?


I can use the “Growth of 10K” graph at to see how a starting investment $10,000 investment grew over any time period. (You enter the start and stop dates in the upper left hand corner on that graph.) I can then see how $10,000 invested  grew. When I do that for my 36 years, I find VFINX went up 40X. That envelope contained $80,000 for spending to enjoy this year!


So, in real terms, I put in $5,500 of today’s purchasing power and had $80,000 for spending in 2017. That’s 14.5X in purchasing power. That means over that period I averaged a real return rate of 7.7%, not 6.4%. That was obviously a better than average 36-year sequence of returns. That’s the same stretch of stock returns all retirees experienced. The stock market has been very, very good to those of us who saved and invested in stocks in ways that most nearly matched what the market has given.


What’s in the next envelope that I will open this coming January 2 for spending in 2018? I put in $2,000 on January 2, 1982. When I open it on January 2, 2018, it would have traveled its own 36-year journey of returns. I can magically peer into the envelope using that same Morningstar graph. We’ll see what happens in the remaining weeks before January 2, but right now I can see $98,000 in that envelope! More than the 1981 envelope! An even better 36-year sequence! More Fun in 2018 than in 2017!


(I actually invested in FCNTX. I’m sure I picked FCNTX for a logical reason, so I’d like to think I was a very smart person to have picked it. But I now really think that it just turned out to be a lucky pick. You can use the same Morningstar “Growth of 10K” graph and see how that turned out. [I sold my last FCNTX in the fall of 2014 when Patti and I set our course for our Spend and Invest game, but my replacement investment that I mention in the book has performed close to FCTNX since then.])





For those of us who saved many years ago and invested in stocks that simply mirrored what the market has given us, it’s been an amazing ride. We’ve been able to travel a favorable – above average – sequence of stock returns. Those returns and the effect of compounding over many years has meant many multiples of increase in purchasing power.


We retirees still have a long planning horizon. For most of us, it’s more than two decades. We have slices of our portfolio that we’ll hold for many years. Stocks will almost certainly outperform other alternatives for those slices, and (when we travel other than a horrible sequence of returns) almost certainly will result in multiples of their current purchasing power.


If you have heirs who would use your gift now to put into an IRA, as an example, the ultimate purchasing power of those gifts will almost certainly be many times your current gift.