043 - Drawdown Strategy Retirement Manifesto

Please note

These transcripts are a work in progress and the initial transcription occurred via automation, so transcription errors are not just possible but likely. Please report transcription errors by clicking the icon at the end of the stanza containing the error.

Transcript

Time Speaker Text Tags
0 - 38 Jonathan Mendonsa All right guys well today we're very excited to get a chance to tackle this episode. We've been promising that we are going to bring on a true expert to help us tackle this idea of implementing a drawdown strategy and this is one of those advanced techniques that you have to cover the basics before you can get to this. You don't just start with drawdown strategy. You talk about investing strategies you talk about risk tolerance you talk about what is your ultimate goal where are you heading where do you want to end up but once you've covered the baselines including things like sequence of returns now you're ready to start talking about how do you implement your drawdown strategy. And in our minds there was no one better to help us tackled this somewhat complicated topic than Fritz from retirement manifesto.
38 - 61 Brad Barrett You know this isn't an episode I've been looking forward to for a while. I frankly know just about nothing on the optimal drawdown strategy or even the different options. So for me this is going to be a learning experience for sure. And like you said Fritz is the perfect person to speak to. So yeah this should be a really great episode for not only learning ourselves but for the audience so yeah it's it's good stuff.
61 - 66 Jonathan Mendonsa And to our show for the first time it's Fritz from retirement Manifesto How are you doing today Fritz.
66 - 74 Fritz "Retirement Manifesto" Gilbert Hey Jonathan Brad I'm doing great. I appreciate you guys having me on your awesome podcast. You guys are crushing it. I'm honored to be on your show. Thank you very much for the opportunity.
74 - 100 Jonathan Mendonsa Well the honor really is ours. We're very excited to have you. You're very highly regarded both in the personal finance sphere but also in our own FI community and there's plenty of overlap between your audience and ours. But I think the nature of your focus which my understanding is you typically focus more on that 40 to 60 year old population. There's so much information to glean and we really get to benefit from all the time and research that you've put in to this particular subset of our population.
100 - 140 Fritz "Retirement Manifesto" Gilbert Well thanks and you know there is a huge overlap. I mean I've looked at a couple of case studies where people hadn't started saving early enough. You know they were maybe in their late 40s early 50s. And guess what. They can use the FI principles and they can retire you know age 60 or whatever that 15 year window you need to reach FI even if you started at 40 OK you can still retire 55 right. So the principles are very much the same. The difference is I think as you said my audience tend to be a little bit older and I spend more time thinking about what's life about post-retirement. You know I focus as much on the post-retirement life as I do on getting yourself to the retirement stage so that's a little bit of a difference but a huge overlap. I agree. So there's a lot of parallels.
savings
140 - 156 Brad Barrett And Fritz when you say I focus on what life is about post-retirement are you talking you know just to explain to the audience like is your blog generally about the nuts and bolts of the numbers or do you delve into what life actually looks like post-retirement.
156 - 218 Fritz "Retirement Manifesto" Gilbert Yeah that's a good question and it's kind of evolved. I've been writing about two and a half years now and when I started it was really financially focused. You know here's how you should do your asset allocation. Here's how you should you know calculate if you have enough to retire. You know I was really focused on the financials. But as I've done more and more research and written more and more posts and obviously you pay attention to this stuff because it's kind of my space right now I'm finding a lot of information that it's the softer side of retirement that can make or break it you know and a lot of people focus on the financials and then they hit the starting line as I call it not the finishing line but the starting line of retirement and suddenly they don't really enjoy retirement. They kind of fail at retirement. And what I've found is a lot of these softer issues about what are you going to do with your time. What are you going to have as a purpose in working for a long time. You've always had the man telling you what to do. Now you've got to design your own life. And most people underestimate the amount of time and effort that they should put into that side of retirement planning. So that's the type of content and put putting quite a bit of effort into and a lot of it. Personally I'm only nine months away from retirement myself so it's stuff that I'm thinking about.
218 - 229 Jonathan Mendonsa I think it's a little bit ironic that it is the total opposite of what our focus is going to be which is absolutely the nuts and bolts of drawing down on your asset accumulation phase.
229 - 263 Fritz "Retirement Manifesto" Gilbert Yeah it's funny you know you've got to have both. No doubt about it it's easy. You're all in a way to talk about the financial side and the draw down specifically. I'm really glad you guys want to talk about that today because you guys see a lot of the stuff in the FI community. It's all about building wealth building wealth building wealth how soon can you get there. Well we put all this effort into the accumulation phase but there surprisingly little content on the decumulation phase and it's equally important arguably more so because if you mess it up you run out of money and you know what are you going to do. So. So it really is a good topic that I think's been under-covered. And I think it's an awesome topic for your audience.
263 - 279 Jonathan Mendonsa I love that you're having that somewhat light bulb moment with us here because I noticed that on your blog even though you've been writing for the last several years it wasn't until very recently that you actually took the time to apply all these tools that you've been building and developing and actually apply it towards developing your own drawdown strategy.
279 - 313 Fritz "Retirement Manifesto" Gilbert Yeah that's right. And you know I kind of had ideas in my head and I kind of knew what we were going to do but there's something about putting it into words and having to create a flow and have it make sense and have logic to it. And it really helped me to kind of cement this thing down and metaphoric what we did is I thought the concept was so under reported that we actually started the blogging chain and there's 25 blog who have written their own drawdown strategies and we're all linked together. So anybody that has an interest can just click into my article and you can read 20 other articles of what other people are doing to manage their drawdown strategy so it's it really is helpful to put it in writing.
blogger
313 - 339 Brad Barrett And we'll definitely link to that in the show notes so everybody can find that chain there. Certainly. You said you're nine months away from actually putting this into place in your own life. Tell us a little bit about your story generally. Obviously I guess you're nine months away from pulling the retirement trigger. I'm not sure how early or not early it may be but that's largely irrelevant. You're going to need these drawdown strategies in the next year. Just give us a back on your story and your path today.
339 - 382 Fritz "Retirement Manifesto" Gilbert Absolutely thanks for that. I'm thirty two years I'll be 33 years in corporate America. Started right out of college and I've had a good job with a good career good corporation I've stayed with one company the whole time which is very unusual but they've been good to me and I've had a lot of different jobs I was a plant manager I ran north american supply chain you know I've done a lot of different things. Now I'm a commodity trader so I've I've had a lot of different experiences and through it all we've been diligently saving and will be getting out at age 55. So it's not as early as a lot of the FI community but it's still pretty early when you look at the average population. So next summer I'll be 55 in the plan at this point is to pull the trigger. I haven't officially announced that at work yet but a lot of people know what's going on. So you know we're looking at next summer. Load up a fifth wheel and spend some time camping and enjoying life.
career, college
382 - 394 Jonathan Mendonsa I think what's so interesting about that is before the surge in the FI community to retire at 55 seemed like a act of rebellion against societal norms. I'm sure at some point you remember thinking I'm there I'm the rebel here. Right.
394 - 430 Fritz "Retirement Manifesto" Gilbert Yeah you know it's funny because in the FI community I'm kind of the odd man out. You know everybody in the FI community you know you look at Steve over things they retired at 35 you know you get a lot of people who are out in the 30s maybe early 40s they look at 55 as kind of always kind of late early retiree. But when you talk to the population at large. Yeah the reaction that you talked about is exactly right. How are you getting out so early. Right it's funny the difference in perspective of what a retirement at age 55 is depending on which audience you're talking to. So it is interesting dichotomy between the way that the FI community thinks and the way that society as a whole thinks. And it's interesting to watch that.
430 - 445 Jonathan Mendonsa And then obviously the next tangent to tie to that is the difference in perspectives on what a good savings rate is between your normal American society or normal you know global society versus how we view it both in your community and in our community.
savings
445 - 473 Fritz "Retirement Manifesto" Gilbert Absolutely I mean you guys know the numbers you look at stuff you know there's and average population savings rate is what less than 5 percent you know and I would argue and I don't know what the averages in the FI community but probably well more with a 25 percent. You know so it's it's a 5X you know 500 x multiplier in that difference and it's it's huge the impact that has on over you know a decade or so of savings the wealth that you create by having a higher savings rate is just unbelievable. So yeah it's a huge difference.
savings
473 - 488 Brad Barrett Have you received any kind of blowback or pushback from any of your friends or family for retiring early at 55 because too many of these people. That does seem radical. Has that occurred in your life or do people know that you're a saver and you have all your ducks in a row.
families
488 - 511 Fritz "Retirement Manifesto" Gilbert Yeah I really haven't gotten much blowback. I've got quite a few friends that are retired their mid-50s. My family's been very supportive of it. They're excited for us and happy for us. And you know my wife's family is the same way. So nobody's really you know they may have some thoughts internally but they don't voice them to us any fear any interactions we've had with friends family both sides all around. It's been nothing but supportive. So it's been really encouraging for us.
families
511 - 532 Brad Barrett Yeah that's great. That's great. And I guess my question this is kind of an abstract question but had you found the FI community let's say 20 years ago do you think that you would have retired before 55 based on your current savings rate or your your savings rate over your career etc. Do you look back and say oh I could have done X Y and Z different or would this have been your path almost regardless.
career, savings
532 - 579 Fritz "Retirement Manifesto" Gilbert Yeah that's a good question. I mean we've always been diligent savers and we started right out of the shoe saving pretty aggressively. But at the same time we've also wanted to balance that and enjoy today. Right. So we always take a nice vacation. My daughter is 22 now but when she was home with us fortunately I got a lot of frequent flyer miles so we always take big vacations you know we've been all over the world together. And those are her priceless memories to me. So even if I had been aware of the aggressively F-I type environment I still think we would have chosen the balanced approach which you know we're getting a little bit early but we had a heck of a lot of fun along the way and to me that's you know you've got to live every day you can't put everything off for tomorrow just to get to that FI date. You know we're only here once you got to you've got to enjoy life and live it. And we've had a pretty good balance and I think I probably would have done the same thing.
savings
579 - 590 Brad Barrett Yeah that's a that's a very important point to live life and balance. I certainly agree with that. And I'm curious so you've been with the same company for 32 years is that what you said.
590 - 621 Fritz "Retirement Manifesto" Gilbert Yeah is that insane or what to last of the dinosaurs and I never intended that when I started you know they were interviewing on my college campus. I went as a practice interview really. Thirty two years later I'm still with them I never really had a reason to leave I had a couple of offers and I've just always been content and fortunately I still have the traditional pension. So you know that was a tremendous benefit to the three decades plus in a company that still had the pension. They discontinued it now but I'm grandfathered in. What a what a huge blessing to have that. You know we're right on the cusp of retirement. That's what's getting us out a little bit earlier than most people do. So it was a huge help.
college
621 - 637 Brad Barrett Yeah I can imagine that. And that was my very next question was Do you have any of the vestiges of the old corporate America like retirement pensions and health care and obviously the pension. Is there anything else that gets your fortune enough to be grandfathered into.
health, pensions
637 - 666 Fritz "Retirement Manifesto" Gilbert That's pretty much it. They killed the health insurance probably five years ago and you know I was starting to map out our plans for early retirement. And I remember the very first retirement cash flow spreadsheet I did years ago I whacked the health insurance even back then my assumption was it would never be around and sure enough they killed it so I'm going to have to go in the private market for insurance for you know 10 years and don't get Medicare Medicaid. So we've got a 10 year bridge. It's unfortunate but you build it into your numbers and when your numbers say you can go we go. That's the biggest benefit is the pension.
healthinsurance
666 - 681 Brad Barrett So what I heard in there also was your retirement drawdown spreadsheets that you evidently have been doing for quite some time. How do you get into having that as an interest. Where did the Web site come from where did your interest in the real technical analysis of this come from.
681 - 743 Fritz "Retirement Manifesto" Gilbert Yeah that's a good question. I mean I think back to when I was in my late 20s I started tracking my net worth. I've always been a I call myself a passionate financial planning hobbyist right. I've always enjoyed this stuff I've always read personal finance magazines articles way before I was in vogue to do so. So I've always had an interest in it I've always track numbers. And I would say it's it's accelerated with the launch of my blog which mainly I launched that to be honest when we talk about this life after retirement. What are you going to do to fill your time. Well I was already having some of those thoughts two and a half years ago when I started the blog and my primary reason for starting it was to kind of just say let's give it a flier you know see if it works and if it does maybe this is something that I can continue after I retire and something that will fill some of my time and give me a purpose. And it's done exactly that. So I think I really started it as a as a little bit of a trial run to develop a potential interest for post-retirement. And it's exploded into this you know wonderful community that you guys are a part of and we've all got so many friends now in the FI community. It's beyond my wildest dreams. It's fantastic.
networth
743 - 746 Jonathan Mendonsa We have a friend in common big Ern from early retirement now.
746 - 747 Fritz "Retirement Manifesto" Gilbert Yeah. Yeah.
747 - 773 Jonathan Mendonsa But I know one of the things that he mentioned as one of his primary motivators to start writing early retirement now was to start documenting these ideas that he already had in coming up with a strategy for himself and instead of just thinking about it there's something to be said for the value of committing your thoughts to paper not only for your own consumption but for the public consumption as well. It allows you to refine your ideas and forces you to think about them critically.
773 - 824 Fritz "Retirement Manifesto" Gilbert Absolutely and he's I mean he's a mathematician wizard. I can't even come close to understanding how spreadsheets let alone created. He's really really good at that and he's right in that writing a blog I wrote one article two weeks old. As you go through life you're always looking for things that you could potentially develop into an idea for a blog. So you know I've got 50 drafts that are just ideas right and what it does is it forces you to prioritize the areas that you want to address. And it really does help develop and formalize your personal plan at the same time helping others you know my byline is helping people achieve a great retirement because I think the steps that a lot of people in the community are taking can benefit people that aren't necessarily in the community and the blog is a perfect way to reach them so there's just a win win win all the way around in this thing but definitely putting it down in written word forces you to really get serious and solidify your plans and a lot of people benefit from that.
824 - 836 Jonathan Mendonsa Creating a blog forces you to always be curious and it also forces you to figure out what's a better question. Life gets more interesting when you realize that it's a series of questions that you're trying to figure out how to ask.
836 - 877 Fritz "Retirement Manifesto" Gilbert Absolutely spot on. And I think one of the things that I've realized I've always been a lifelong learner. But one of the things that I really think makes life enjoyable is having that type of mind that's always seeking to learn and grow and question things and the blogging or even podcasting community is a perfect venue to kind of fertilize that type of mind you know and it's a really it's a good asset to have and for those that don't naturally have that attribute really spend some time and try to develop and the fact that they're listening to your podcast. Yeah most of your audience probably have that attribute but if you don't really try to stir up that curiosity and it makes life more fun it adds a lot of spice to life.
blogger, podcaster
877 - 896 Jonathan Mendonsa So Fritz Let's go and hop right into the main topic for today's conversation which is this concept of a drawdown strategy and I think maybe before we really dive into the specifics of your strategy we should just talk generally about why it's important to have one and what to consider when developing your own personal drawdown strategy.
896 - 943 Fritz "Retirement Manifesto" Gilbert Yeah. That's the right place to start. Just conceptually if you think about it you 20-30 years whatever it is building this pile of resources and you've got to step back and say OK now I've got this pile of resources you have to identify exactly what that pile is. And then within that pile there's a certain logic for sequences that you want to pull income out of that investment portfolio. So you need to sequence What are you going to pull out when and why and how do you structure your asset allocation to minimize your risk of having a terrible bear market and suddenly you. Your portfolio is cut in half but you still have to draw money out of it, sequence of return risk it is called. There's just some basic elements that you have to be strategic on how you pull this money out to make sure that it lasts the rest of your lifetime. That's really what it's all about.
943 - 982 Jonathan Mendonsa And I would imagine that one of the things about this is some people may end up having very simple strategies because they only have one or two buckets that they're pulling from other people are going to have extraordinarily complex situations that they're going to be trying to extract themselves from. Maybe they were a little bit more venturous in their pre-FI days and they got into a bunch of complicated investment strategies. Maybe they were in some high fee funds maybe they were spread all over the map because their 401k was left with several different providers in their past and they never rolled it over. And so depending on where you are in this life when you decide to start tackling your drawdown strategy and whether or not you've begun the process of simplification first this concept can have wildly varying degrees of complexity.
401k
982 - 1030 Fritz "Retirement Manifesto" Gilbert Exactly and I think within that yes you're right. The complex portfolios are more difficult and as much as you're able. And I understand people have different 401k they've got different stuff. You know that you've got to deal with what you've got to deal with but where possible. Simplifying your portfolio in the last five years or so that you're working. Definitely makes your drawdown strategy simpler and actually as I get into some of the early phases of drawdown I didn't put this in my article but the other part I'm thinking about is where I've got these kind of one off account where you get 50 grand over there on something then you know these little pieces around. My plan is to kind of pull those out early and continue to simplify as I move through the drawdown. So I think JL Collins says it best right. the Simple Path to Wealth, there's something to that, you don't have to make any more complicated than you make it. But at the same time you've got to deal with what you've got. So there's a balance.
401k
1030 - 1050 Jonathan Mendonsa Now I almost just want to take that to the next step which is simplify your life just in general don't necessarily wait to the last five years but certainly within the last five years you need to be considering how can I take all of this randomness and structure it and if some of those vehicles aren't adding value or if they're adding extra complexity Maybe I consider burning through those first.
1051 - 1117 Fritz "Retirement Manifesto" Gilbert Correct. correct and I'll tell you another tool that that works really well for me as part of the drawdown strategy there's a bucket strategy. Get some separate posts on that. But I'm using a three bucket strategy so bucket one is you know the next three to five years. Got to be liquid. You don't want it to get it with the stock market downturn the middle bucket is kind of intermediate you know five to ten years you want some growth but still fairly conservative. And then 10 years out is stocks right or equities. So what I've done which really helped me clarify where all the different holdings kind of fit is on my net worth statement I just linked every single line every single investment that we have into one of those buckets. So whenever I update the net worth boom my buckets are updated and you can see here's what I here's what I'm considering. My holdings in bucket one and as you go through the drawdown strategy as you have to refill those buckets it helps you identify whether there's something in bucket to hey it's doing pretty well right now I'm going to go and sell a year's worth of living expenses out of that bucket and move it into cash and bucket one. So you have to have spreadsheet you have to have you know a structure but linking them all together into these buckets really helps kind of visualize how the flow is going to happen as you get into retirement.
networth, stocks
1117 - 1143 Jonathan Mendonsa Fortunately we can replace a lot of the spreadsheet math that you had to do back in the day with tools that a lot of us use like personal capital these days. And there are ways to just rename some of those groupings of those accounts and you could consolidate everything into one of those three strategies and instead of figuring out what am I going to do with this specific fund you just say what am I going to do with this group what's my strategy for this group. And it's less emotional because you're thinking of it in terms of general timelines.
1143 - 1166 Fritz "Retirement Manifesto" Gilbert That's right and I tell you you mentioned personal capital and I'm a big fan. You know we talked about complex portfolios even if you have a complex portfolio with the tools that are out there they personal capital specifically but others like it can simplify a complex portfolio right. Here's your asset allocation and I like your concept of trying to build an automated bucket strata within personal capital and all of that but I'm sure that that's a viable that's a viable approach.
1166 - 1193 Jonathan Mendonsa Here we go choose F-I making its contribution to the blog chain on a crowdsourced show. And since I did go ahead bring that up guys go ahead bring up a quick pitch here. If you have not yet set up a personal capital account it's an app that you can download on your smartphone or tablet but you can set up the account online just go to choose F-I dot com slash P as in Paul C as in cat great software totally free. No reason not to do it today. That is an affiliate link and you'll be supporting the show.
1193 - 1251 Brad Barrett So Fritz I'm actually curious about the five years leading up to retirement that you mentioned a couple of minutes ago to show you talked about simplifying and I love that I'm totally on board. But presumably people who have been saving for many years and especially in taxable accounts they have unrealized gains that if they sold different items they would be taxable consequences and also people are in presumably their highest earning years as well so they'd be in a fairly significant marginal tax bracket. So I could be making a wrong assumption here when you're talking about simplifying but like when I hear that I hear. OK. Take your individual stock that you've been dabbling in and sell them and buy a VTSAX or whatever index fund or bond fund that you that you choose. But of course there's a taxable event there. So again I don't want to make an assumption but talk me through what that simplification strategy looks like for someone and what they need to think about. As far as taxable issues different accounts everything that you personally would consider.
indexfunds, savings, tax
1251 - 1324 Fritz "Retirement Manifesto" Gilbert You're absolutely spot on and I really do avoid the tax hit if there's a taxable event and big capital gains on something. OK it's simple enough right. You don't you don't simplify at all costs you simplify within what makes sense. Now what I have done is if I've got a position that's got a material loss I'll go and sell that part of the simplification right. It was a bad buy and it's just kind of drifting out there and we never want to sell the losers. Go and sell the loser. Do the tax harvesting and use that as an opportunity to sell something that's gained, and between the two. You just knocked off two outliers that you can then move into the more simplified strategy so you can kind of I would say a rifle shot at instead of hit it with a shotgun. You know you've got to be selective on how you do it. But just being aware of that principle of trying to simplify things and I think it goes far beyond finances. One of the things we've done which has worked out extremely well for us. We downsized out of our big city house. You know we moved up to our retirement cabin in the mountains. We got rid of 30 years worth of stuff in 24 hours on Craigslist. That's a that's a that's a separate post in itself. But you know we downsized we simplified our lifestyle we we we got into our retirement town before we actually retired. You know all those lifestyle simplification concepts apply as well as they do on the financial side.
lossharvesting, tax
1324 - 1367 Brad Barrett You are preaching to the choir here man that is my perfect life is really getting rid of all the junk all the stuff that fills my house so yeah I mean that that definitely resonated with me. I wanted to really point out something that you said a minute ago about using the rifle shot as opposed to the shotgun so. And I want to make sure that the audience really hears this is picking out the losers. So you're selling something and then you have that loss and then you can offset it to essentially create a net neutral tax issue. Right so you're selling a gain you're selling one that had gains you're selling one that had losses you're picking them out very specifically and then that's a net neutral issue for your tax return. So I love that that is really important I hope people take that away.
tax
1367 - 1456 Fritz "Retirement Manifesto" Gilbert Yes it helps to offset the gains with the losses. Obviously you don't always have losses and you don't want to have losses. But let's be honest you're going to have some positions in your portfolio that haven't done very well so instead of making the excuse to continue to hold on like I have for years and some cases go ahead and bite the bullet take the loss and use it to offset the gain. It just makes sense. So that's that's kind of the strategy. And I think the other thing that fits into that is you've got to think about the tax issue in a broader question. You know a lot of people jump in and they do all the pretax savings through their employer automatically pulled. Well if you have too much in pretax, Man! when you get into retirement number one you can't access that you're 59 and a half. So make sure you have enough after tax to bridge yourself to when you get your retirement monies. But you've also got a huge risk with the with the required minimum distributions. Right. So what what you should look at and I'll I'll just explain briefly what we're doing and this is this is all about drawdown strategy it's and strategy we're intentionally delaying my pension for two years after I retire to force my income down to zero. And we're going to take those to zero income years and we're going to do massive Roth conversions right up to the tax hurdle rate right we'll pull as much out of the before tax as we can to get us right up to that next tax hurdle rate and we'll convert it all to a Roth. So we're intentionally eliminating my income to allow us to do this and we'll live off our investments to get through that period because the tax savings are so huge to get that stuff out when you're at the lowest possible tax rate that you can set up for yourself.
roth, savings, tax
1456 - 1468 Jonathan Mendonsa And I know nothing about the mega backdoor roth I've read Mad Fientist's article three times it literally doesn't make sense to me after hours of looking at it. So if you have a simpler way of distilling that this would be the first time I'd be introduced on the show that you really cool.
rothbackdoor
1468 - 1474 Fritz "Retirement Manifesto" Gilbert I've done a Mega Back Door Roth for the last three years. I'm a huge fan so I can talk about that for a whole podcast if you want.
megaroth, rothbackdoor
1474 - 1500 Jonathan Mendonsa Yeah I mean I'd be great. I know you have this two year window of time where you're not going to be drawing W-2 income you're me living off of your savings and that's going to open up some unique opportunities for you to really capitalize on some of the advanced FI strategies that we've talked about. I would love to get your take on how you're going to approach this both from a Roth conversion perspective but also talk to us a little bit about that mega backdoor Roth because we really haven't touched on that in this show to this point.
roth, savings
1500 - 1582 Fritz "Retirement Manifesto" Gilbert Okay great question hard to answer in simple terms but let's let's address them one by one. Let's talk about the Mega back door first and I'm doing that now. I've done probably three years worth of mega back doors and the way I'm doing it I'm not necessarily using that as a tool in this two year window. I'm actually doing that now. And what I'm doing I max out all the all the IRA stuff I can do 401k at work I max I max all of that out above and beyond that I contribute after tax money into my 401k at work so I've got an after tax bucket in the 401K. And then twice a year I can roll that from the after tax into a Roth. The advantage of that is once it's in the Roth it's tax free. All the earnings all the growth you know there's never any more tax on it if it stays in after tax. It's just the normal after tax you get the capital gains you get the dividend. You know the distributions all those are taxed. If you can get that over to a Roth. Guess what. It grows tax free. So the mega back door I need to write an article on that and I've been putting it off because it is complicated that there are there are some very good articles out on it. Basically it's after tax contributions into a 401k now which is painful. So I'm in a higher tax bracket. But to me having a diversified tax portfolio post-retirement is worth taking some tax hit now. So I'm intentionally taking the tax hit to increase the amount that I can put into a Roth through the mega backdoor if that makes sense.
401k, ira, roth, tax
1582 - 1605 Jonathan Mendonsa Perfect and let me clarify just a couple of points just for our listening audience. The maximum amount that you are allowed to contribute as an individual to your 401k is $18000. But my understanding is above the $18000 you can contribute up to a full limit and this would be the difference. But up to $53000 total and that difference would be in after tax dollars. Is that right.
401k, tax
1605 - 1620 Fritz "Retirement Manifesto" Gilbert That's exactly right. And I think there is a catch up clause when you're over 50 it's another couple of thousand. So basically I'm pushing in like 50000 bucks a year. You know what let's you rough numbers 20000 of its pretax and then 30000 of it's after tax and I do the mega backdoor with 30000.
tax
1620 - 1659 Brad Barrett So for everyone out in the audience who has never heard of this mega back door thing like what is this. I thought the Roth IRA limits where fifty five hundred dollars a year and only certain people with certain incomes could put money in. So what the heck is this frankly like why are you allowed to put in you know the difference between your 18000 contribution and your to your employer deferral for your 401K. And this. $53000 limits or $35000 a year in what seems like a gimmicky way like. How on earth is this possible. And also like are there certain mechanisms you have to do. Does everyone's company allow this. Talk us through how this is even plausible.
401k, ira, roth, rothbackdoor
1659 - 1666 Jonathan Mendonsa And let me just say that as the host of the Choose FI podcast I'm thinking that this is crazy.
1666 - 1721 Fritz "Retirement Manifesto" Gilbert Well and I do think personally that that loophole is going to get close because it is a huge loophole I have no idea how I got designed in. And I and I suspect that they never anticipated that people are going to use it the way they're using it right. So let me answer a couple of your questions. Your employer has to allow it and many don't. I'm fortunate I heard a podcast three years ago when this concept was first coming out. I jumped on it so like Man this sounds interesting so I did some research. I called Vanguard who is our 401k company and they said yeah your company allows it. So I was like great let's do it. It's manual. It's not something you just click on a computer screen make an app and you've got a dozen phone calls fill out some forms but it's well worth it. So yeah your company does have to offer it and I can not answer why it's in the tax code or the 401k code or the way. Now I don't expect it's going to last. So if it's something that is of interest to your listeners I would really encourage them to try to max out their contributions for the rest of the year and get a Roth conversion in before December 30th.
401k, roth, tax
1721 - 1753 Brad Barrett Yeah that's great. And just to be clear everybody should if you're interested in that and certainly this is after tax money so that $35000 that's going on your tax return as taxable income but you're putting it in a Roth. So it's as if you were making a a regular contribution to a Roth which again is normally limited to fifty five hundred dollars but you're deciding because you have this loophole that you're going to put in 35000 so that it's tax. Now right and then you know down the road because it's it's in a Roth there's no tax implications whatsoever.
roth, tax
1753 - 1813 Fritz "Retirement Manifesto" Gilbert That's right. And you know if you think about the tax logic and again this is all part of the withdrawal strategy theoretically you want it you want to have stuff count as income when you're in your lower tax years. So conceptually doing it now. When I'm at my peak earning years doesn't really make sense right. Financially it's probably not optimized but to me the value of having as much roth as possible in my drawdown strategy is worth taking a potential financial hit to get it set up. You know that's that's that's the thing you should do a Roth when you're younger in your career and you're not in the higher tax brackets max them out right. If any of your listeners are making less than 50 60 grand a year. A hundred percent in the Roth don't even think about it because as your income grows you're into a higher marginal tax bracket that's when you want to do for tax contribution and then wait until retirement to pull that money out and have it counted as income. That's the that's the traditional way of doing it. But this mega back door has so many other attributes that are attractive about it that I'm kind of going against the grain of how you normally fund a Roth.
career, roth, rothbackdoor, tax
1813 - 1835 Brad Barrett Yeah. So anyone listening to this who's interested definitely call up your H.R. department. They might look at you like you have 10 heads but just you know keep asking questions. Do you allow after tax contributions and I think there have to be in-service withdrawals is the is the terminology. But you know just ask a couple of questions. Call your 401K company if you have to. And find out if if your company does allow it.
401k, tax
1835 - 1836 Fritz "Retirement Manifesto" Gilbert That's it. Yup.
1836 - 1856 Jonathan Mendonsa All right so Fritz we started this conversation introducing the concept of having a drawdown strategy and maybe talking a little bit about how to generally approach it. But now we want to take a few minutes and talk specifically about your strategy and based on my understanding of the article that you wrote on this the place to start is asset allocation. So why don't you go ahead and just take a few minutes and walk us through your game plan.
1856 - 1956 Fritz "Retirement Manifesto" Gilbert Yeah perfect. And I think the broader discussion of asset allocation is the right place to start. You know as you get closer to retirement you don't want to have too much exposure to equity because if the market collapses you've still got to pull money out and you can't run that risk. So right now I'm roughly it's conservative enough 50 percent stocks 40 percent bonds and then I've got 10 percent now and some alternatives other stuff that I that I trade on the side just for fun. So basically it's what's called a 60:40. And basically I've increased that 40 percent in bonds and you know safe stuff. As I've gotten close to retirement. So the first question you have to think about is you're setting yourself up to go from accumulation to decumulation is do I have too much risk. Do I have the right amount of exposure to equities to continue to keep up with inflation. But the right amount of safe investments to make sure I can pull money out of this thing for the next couple of years even if there is a market downturn. So that's the first question is asset allocation. In spite of the tax issue you've got to think about what you've got then when you move into the next phase which is thinking about this tax issue. You've got to make sure that the moneys you're going to take first there in the right tax structure that you can get at them. For example if it's in a 401k you can't get it to you 59 and a half. Now there's there's a clause there you can actually get it at 55 if you retire and you're 55 to much detail. The point is do you have enough after tax money to be able to bridge yourself over to the point where you start getting into your retirement accounts. And then once you've identified Yes I do. You need to make sure that the assets within your after tax account aren't subject to massive stock volatility because those are the assets you're going to be pulling first. So they both go together but it all starts with asset allocation.
401k, stocks, tax
1956 - 1980 Jonathan Mendonsa I was a little bit interested in the asset allocation you chose because right I don't know if this struck you but in my mind because you have this corporate pension and because you have Social Security as a reality for you I think that's probably a safe bet at this point in my mind. I almost feel like you could be more aggressive than you are and I wonder does that strike you as well or even with the pinchin kind of being there in place and you know it's going to be there and the Social Security the 60:40 still feels right.
socialsecurity
1980 - 2042 Fritz "Retirement Manifesto" Gilbert You're absolutely right. I've had this discussion with Vanguard by the way a Vanguard is your 401k provider that a lot of times they'll give you a one hour session with the CPA every year. So I have I have a one hour session with a CPA at Vanguard free every year and they always say well the last 18 months I've been pushing more into bonds. You need more you need more exposure to stocks. My answer to that and the retirement answer man Roger Whitney he's he's got a saying and I'll butcher it but it's something you you don't have to take more risk than you have to take. And we've built a significant net worth such that we don't really have to have you know the aggressive growth we know we're okay. So we're intentionally being a little bit more conservative because we don't have to have the pie continue to grow quite as aggressively. So for peace of mind and everything else to just be able to automate this and forget about it. We've chosen intentionally to be a little bit more conservative than a lot of the theory would say you should be so yeah you're spot on it could be more aggressive but it's just a personal comfort level we don't need that we don't need that aggressive position so let's not take it we're OK.
401k, networth, stocks
2042 - 2068 Jonathan Mendonsa That is the balance you know we talk to people about the idea of don't take more risk than you need to but also don't be more conservative than you need to. And then I love Jl Collins approach to this. You need to pick up an asset allocation that allows you to sleep at night. And I love that you've made enough right decisions along the way that you can afford to be more conservative because you have enough. And no matter what happens. On I don't know where that last line is going to go.
2068 - 2073 Fritz "Retirement Manifesto" Gilbert You've got to keep that in the podcast. That's a classic line.
2073 - 2077 Brad Barrett Sometimes he leaves outtakes in. So yeah who knows.
2077 - 2124 Jonathan Mendonsa All right let me try to collect myself. I think what I was going for is you know that is peace of mind. Unfortunately that's not the problem that most of the world faces. They're just trying to get some margin any margin they haven't made any right financial decisions they've made all the wrong choices and they have no interest in fixing those choices because frankly no one has shared with them the idea that there is another way to tackle this journey. But in our community where we see hundreds and thousands of people pursuing this ultra optimized path you can get to the point in time where you don't really need to worry about money anymore relatively quickly. And at that point I think it's really cool that with you we get to talk about the idea of when is enough enough and at what point are you at not asking. How aggressive do I need to be but rather how conservative can I afford to be. And I've got to say that's a pretty good place to find yourself.
2124 - 2174 Fritz "Retirement Manifesto" Gilbert It is. And I think another way to look at it you know you always talk to you talked about bigger Ern earlier his safe withdrawal rates series is mind blowing right 15 articles. It's a doctoral thesis that just phenomenal. But just step back for a second. A nice way to measure that is what you are going to be if you're a drawer it's going to be 3 percent or less. Guess what. You don't need to take a lot of risk you've got you got a bunch of money. You know you can cover your spending you're fine. If you're if you're withdrawal rate is calcuating where It's got to be like four to five percent. Guess what. You better you better keep a lot of equities going you better hold off retirement a little bit. You better build that pile. And that withdrawal rate is kind of a nice little thermometer for how sufficient Are your savings to cover your living requirements and the lower that withdrawal rate. In my mind it kind of correlates to what we're doing in terms of asset allocation. Right we're going to be below 3 percent withdrawal rate and we're you know 60 40. OK. That that kind of fits the way I look at it.
savings
2174 - 2186 Jonathan Mendonsa So Fritz I don't think in today's episode we're going to go into too much depth on your pension. But I do think it's very interesting to note that you made the intentional choice to delay drawing down on your pension. Now I would love to hear your thoughts on that.
2186 - 2219 Fritz "Retirement Manifesto" Gilbert I think the broader question and it applies to everybody. It's exactly the same as Social Security. Right. If you delay Social Security everybody knows or maybe not. But you know it's common known-thought if you delay it it grows 8 percent a year. Right. So don't delay till you're 70 if you can pull enough cash out of your investments to get you to 70 and it's an 8 percent higher per year. Exact same thing with my pension. Every year I delay at a compound 6 percent. So my thought is right now there's not a lot of investments out there that you can have a guaranteed 6 percent rate of return that worth drawing down some of my investments to bridge myself for this two year gap. That's that's really the concept.
socialsecurity
2219 - 2227 Jonathan Mendonsa Yeah. Fritz nice pivot on that one I loved that. Well said and it illustrates to me yet another topic that we really need to dive into on this show.
2227 - 2254 Fritz "Retirement Manifesto" Gilbert And I think everything that you look at should be kind of opportunity cost. You can delay so security and earn 8 percent What's your opportunity cost if you take Social Security early. Are your investments going to earn 8 percent. Maybe you know maybe they aren't 12 but maybe they won't. That's that 8 percent guaranteed lock. That's like a treasury bill right when you can get a guaranteed high return. Look at the opportunity cost. If you don't exercise that option that's really the way you have to think about those decisions.
socialsecurity
2254 - 2271 Brad Barrett Yeah that's the best mental framework I've ever heard for that decision. I think that literally just changed the way I look at it. So thank you Fritz. That's incredibly powerful. And I'm curious though. So you said this two years that you're deferring are you able to potentially defer more than that. Or is two years. The sweet spot.
2271 - 2298 Fritz "Retirement Manifesto" Gilbert Well the way our pension set up is that it optimizes 35 years. So I'm intentionally just deferring it to that you can defer it longer than that but you don't get the 6 percent. So at that point the opportunity cost is hey I'm only going to get 2 percent 3 percent. You know what I would just start to thing I can make two or three percent with my money and just go and take the pension. So it's the same logic that's making the decision. It's the opportunity cost of how much will that pension grow versus what I could do with the money if I don't exercise the pension
2298 - 2305 Jonathan Mendonsa Now the second piece of this is implementing your bucket strategy and I know that it's very helpful to use actual numbers. Brad did you want to try to set up a case study.
2305 - 2367 Brad Barrett Alright Fritz So somebody is going to retire. Let's say they're 55 like you. They've been diligently saving and they have money in a bunch of different buckets as we call them which they have a bunch in their 401K maybe a traditional IRA a Roth IRA and also then just regular savings rate taxable investments as we call them. So let's even just argue they have a significant amount of money if they're retiring early then presumably their net worth is a million plus. So a couple of hundred thousand in taxable investments and the rest spread across four K and brothe et cetera. So they're getting ready to retire. And this is what I want to hear about the actual drawdown strategy. So they pulled the retirement trigger. Their income is now zero. So they have a lot of taxable space to play with to potentially have taxable events but ultimately pay zero dollars in tax. But what does this look like for them in the first couple of years. The intermediate term like how would you counsel someone who is facing that situation who's getting ready to retire. How would you counsel that that they move forward.
401k, ira, net, savings, tax
2367 - 2439 Fritz "Retirement Manifesto" Gilbert Yeah. That's a good question and it really gets into the tactics of how you structure these buckets and if you think about bucket one being cash you need to spend in the next one to say three years. You've got to have three years worth of spending. Clearly that's got to be after tax right? because you're gonna spend it. It's got to be liquid you know it's good to be safe it's going to be a capital one stuff. So you structure bucket one with all after tax and then what we've done I mentioned where we've got our net worth statement and we've link each one of the account into one of the buckets. If you look at the IRA is example where you are forced you know RMD. when you're age 70 and a half. Well guess what that's 15 years. OK fine I'll put that in bucket three. So I've got an intentional line in bucket three. That's my IRA before tax and guess what it's invested in equities right. So. So you do have to take that tax structure into account when you place those specific monies into each bucket. And then as you go through time and you're rolling stuff from bucket 3 to bucket two bucket two to bucket one. Well that might be where you take an IRA distribution you pay the tax on it and you move it into a bucket too and you put it in bonds or someplace safe to kind of stage it for when you're ready to use it in bucket one. That's the way that we've set it up.
RMD, ira, networth, tax
2439 - 2450 Brad Barrett So in bucket one you always have three to five years of liquid expenses like on a rolling basis essentially like you're constantly refilling it. Is that is that how you're mechanically doing this.
2450 - 2496 Fritz "Retirement Manifesto" Gilbert Yes. And the only exception to that would be if you get into a bear market. Again we've got a pretty healthy bond portfolio so I'm hoping we can continue to kind of keep it at the three year level. But if you would get into a bear market that's why you've got three years in that bucket one, the concept is you could theoretically pull that down and maybe six months just keep spending spending spending spending and don't sell anything on the equity side until the equity markets have a chance to rebound and then you know it's just a question of how much risk are you willing to take. Theoretically you could put you know five years 10 years in bucket one and mitigate any risk of sequence or return risk when the stock market is down and you need to sell stocks. The problem with that obviously is you're foregoing any kind of investment return when it's in bucket one. So there's a balancing act between the two but the concept is have enough in there to buffer you against stock market volatility.
health, stock
2496 - 2545 Brad Barrett OK so that makes sense too I guess in my hypothetical. We're saying there with you $60000 of yearly expenses they have three years worth in their liquid accounts. So they're going to use those funds to basically fund their lifestyle for the next couple of years and it's just going to come out like you said of your capital one account and and all is well in the world but they still have some space right to harvest capital gains. So presumably they can expose themselves to some taxable income to some taxable events where they sell some of their appreciated stocks or a mutual funds and create that taxable gain. But ultimately it's $0 in tax because they have this space. But how do you advise people people go about that. What types of buckets are we looking at. And you know how does how does that work in your estimation.
stocks, tax
2545 - 2618 Fritz "Retirement Manifesto" Gilbert yeah no that that's a valid point and it's not unlike what we're going to be doing in the first couple of years when I do these Roth conversion right we're intentionally creating a taxable event by selling our pretax IRA because we know we don't have any income. Well you can continue that through life. Right. And as you look at any given year. Well just look at how much more income can you generate or capital gains you know and look at the tax brackets and continually to top off that tax bracket by generating a taxable event that keeps you just below that next tax hurdle. And that's something that it works I think in parallel with the buckets because you can choose at any given point in time what to sell and which buckets to refill well fine if you want to sell some some before tax IRA stuff and the stock market's gone crazy. Well fine you sell. Twenty thirty thousand dollars of that. It creates a taxable event. It pushes you. You know you get 20 or 30 thousand dollars of income now right. So you manage that. And guess what you just move that from bucket three depending what you buy back with those after tax money. Now you can either keep it in bucket three and just invest it all in stocks or you can move it to a more conservative investment and start refilling the buckets that are upstream so you can merge the two concepts and you should. Because that's how you minimize your tax. Over the course of your retirement.
ira, roth, stocks, tax
2618 - 2621 Jonathan Mendonsa Or a third option is you could buy something different.
2621 - 2649 Fritz "Retirement Manifesto" Gilbert Yeah. Absolutely and if you look at I'm in international stocks international stocks have done great. So I'm going to sell at the peak and what I'm most likely going to do is I'm going to look around for something that's been a lagger maybe it's got a gold or something right. So you can move it into any other asset allocation you want based on what the markets are doing or you may just decide I'm going to keep it in international stock because of the long term play and I'm comfortable that be that they'll be good over the over the course of my life. So yeah absolutely. You can use that as a tool to adjust your asset allocation.
stocks
2649 - 2674 Jonathan Mendonsa The third piece to this general way of approaching it was how to figure out health insurance and I'm just interested in how bleak it really is because you're retiring at 55 and so Medicare is going to kick in at 65 and it sounds like you're going for more of a Fat fire retirement where it's going to be probably at a higher income level you might not qualify for subsidies. What does health care look like in that gap where you're paying the full brunt without any subsidy help.
health, healthinsurance, highincome
2674 - 2774 Fritz "Retirement Manifesto" Gilbert Yeah. Of all the issues right now that we're dealing with that's probably the one that I you know I'm an optimistic guy things will things will sort out at the end of the day it's just money right. But it is a big issue and it's so uncertain right now that it's just it's a huge question mark and you know you're trying to lay out how much I'm going to have to spend every year. I don't know. You know so I've I've done some research and we're planning $24000 a year two dollars a month just for our insurance coverage and that's probably low. Right. And I mean our feeling is as long as we've bucketed in enough cash to cover what we think is a reasonable expense and the numbers still say we can retire then fine we'll retire and we'll figure it out. But it's a big issue and what we're going to do. We're going to pay for the COBRA coverage through my employer for 18 months. The logic being. Number one the group rate is based on my understanding of the average population in the employer's pool. So let's say the average age is 40. I'm paying the insurance rate that a 40 year old would pay whereas if I go out and buy it on the private market guess what I got to pay what a 55 year olds to pay. So I'm going to take my Cobra hoping that at slightly lower rate I'm not even going to shop and I'm going to say I'm going to go with COBRA. It's easy it's done and hopefully over that 18 months the markets kind of sorted itself out. And you know I've got you know a couple of years here I'm really hoping it settles down but it's a big issue and what I've started doing and I'm going to write a post about this. I started a spreadsheet Google Docs and every other blogger that I've seen written articles about what they're doing for health insurance and early retirement and I'm keeping all those and I am and I'm kind of building my my data right now on what the options are and what other people are deciding. And we'll make our decision based on that.
blogger, healthinsurance, insurance
2774 - 2794 Jonathan Mendonsa Yeah. So depressing. Now the other thing that's very interesting is this idea of setting up your paycheck because your paycheck is going to be changing you're no longer going to be getting W-2 income coming in on a biweekly or once a month basis. Instead you are going to have to determine how to pay yourself from your savings. And I'm curious about your approach to that.
savings
2794 - 2902 Fritz "Retirement Manifesto" Gilbert This took me quite a bit of time to figure this out and I'm kind of pleased with the way it came out what we've decided to do we've opened the capital one account. And we're going to put it you know in capital one you can segregate your accounts into different buckets right so we're going have a bucket or major repairs and you know look at major repairs you got to replace a roof every five years 10 years whatever it is you got to buy a car. Five years 10 years whatever it is. Well you can put all that together. And in our case it's about a thousand bucks a month of those kind of one off expenses that are going to happen over a decade. So guess what. We're going to have $12000 or $36000 sitting in one of those Capitol One buckets that will be available to kind of cover those one off expenses. That's an important piece of it. The part that I'm really excited to implement is the other part of it then is we've got a capital one bucket that we're going to start on January 1st with what we think are our years spending is going to be and to make the math easy let's say it's $5000 a month. You do $60000 a year. So what we're going to do is twice a month. We'll start out with $60000 and then every other week or twice a month we'll just transfer over that two weeks worth of spending from Capital One and or checking account so we don't have to do anything we just spend within our checking account just like a paycheck. There's money in there you can spend it. And then the beauty of it we don't have to track our spending. At the end of the year as long as you only move money from capital one into your checking account you look at your starting balance you look at your ending balance you get your annual spending you know it's a really easy way to know how much you're spending without having to do much work. And it keeps you from overspending because you can only spend within your checking account. Now if the roof goes out. OK fine that's why you have that $12000 sitting over there. You'll funnel some of that over and that you just drag that balance beginning a year and a year and you know how much is that I mean. So it's a pretty simple way and I think it's going to work.
2902 - 2926 Brad Barrett Yeah I like that mental appropriation of your cash so I definitely get that. On a conceptual level we talked about opportunity costs before that. Fritz to me it strikes me that you're going to have maybe one to three years worth of these extraordinary expenses plus a year's worth of your yearly your normal yearly expenses just sitting there in an account making 1 percent make up. Was there any consideration as to doing that differently.
2926 - 2975 Fritz "Retirement Manifesto" Gilbert To me the tradeoff of liquidity and safety was worth a little bit of a loss. Now what I'm doing that's like a year maybe you know 18 months worth of cash is going to be sitting in the Capital One. Any other liquid funds that we want to have. But you know they can earn a little bit more money. I'm a big fan of munis. I'm in a high tax brackets on muni bonds. You know it's tax free income. We've got a bunch of money sitting in muni bonds and some other bonds fund. You've got some risk there if the interest rates go up. OK that's fine. We're earning probably two and a half percent and that's on an after tax basis right. So it's really like a 4 percent tax comparable return. So there are things you can do. We tended That's why my bond piece is 40 percent because we've been really taking advantage of the bond ETF mutual funds and treasuries to try to get a little bit better return but maintain that safety of the liquidity you need for you know retirement funding for the first couple of years.
tax
2975 - 2994 Brad Barrett And just to follow up on that so talk me through what happens with that capital one account in year 2. So presumably at some point you're going to need to refill this account like do you sell an entire year's worth of expenses in equities or bonds or whatever it is on one fell swoop or what do you have planned for that.
2994 - 3053 Fritz "Retirement Manifesto" Gilbert Okay. So that's the other piece of it that I didn't get into. Thanks for the question. As I mentioned you can segregate your accounts from capital ones so we've got the one that goes to maintenance bucket maintenance issues. We've got the one that coverage your year one spending. We've got another bucket that's like years two to three of spending and that that dollar amount will kind of float around. You know it doesn't that that's not as important as the year one of spending it is how much I want to spend this year. But you have to have a place to put monies through the course of the year to start refilling that bucket one right. So we've done that. in Capital One segregated account. And what we'll do is throughout the year we're not going to do it all at once because I'm I'm just you can't time the market right. So maybe a couple of months once a quarter will sell a couple of months worth of living expenses out of let's say Bonds we'll sell a bond fund and we'll dump it into that segregated capital one account that's set up for years two and three. We don't want to get too much in there because as you said you don't make any interest on it. But we also want to have a mechanism to consistently move money into that bucket one over the course of each year and it will be an ongoing process.
3053 - 3057 Brad Barrett That's awesome. I love that. That's exactly how I would have done it. Yeah that's cool.
3057 - 3068 Jonathan Mendonsa So you come to the end of the year and you find out Yea I spent when I was expecting to spend we didn't spend what was in an account. So thumbs up. Any other kind of annual task that you do with the year end review.
3068 - 3113 Fritz "Retirement Manifesto" Gilbert Yeah I think obviously update your net worth that's critical. And look at your asset allocation as you're spending money out of cash and you know you're not selling any equities your equity portion will tend to grow. So you know there will be some rebalancing I do that same time we do our networth and then the other piece is obviously let's use our $60000 example if we spent 55 got $5000 in there. We sit down and we kind of do our planning for the next year say hey you know what let's keep it at 60 I think that worked out pretty well. Well then we'll transfer 55000 over from bucket two this other capital one piece over again to that one year spending account and we'll top it off right up to $60000 again on January 1st. And that's our starting balance that we compare with the December 30 first number and we can see next year how much we spent that year. So those are the three main things that I think we'll do every year.
networth
3113 - 3143 Jonathan Mendonsa And now this is one thing that's a little bit interesting to me. I'm going to throw you a little bit of a curve ball here is just that. Typically when we talk about a safe withdrawal rate and I'm specifically referring to big Ern cause here reminded me about this but when we talk about the 4 percent rule or the 3 percent rule those are adjusted for inflation. So I'm just wondering as you're approaching this how are you building inflation into your cost of living and specifically how are you building that into your plan with the 55000 versus the 60 versus you know that ever increasing number potentially.
3143 - 3199 Fritz "Retirement Manifesto" Gilbert Yeah that that's a good question and you know I'm a big fan of kind of this. If you look at Michael Kitsis you know he's got all these different theories. You can do a straight 4 percent withdraw and adjust every year for inflation. I tend to like better this somewhat variable approach where you kind of got to a floor and a ceiling. And based on how well the markets are doing you know you get a great year things up great. You know you can go ahead and go up as much as inflation goes up maybe a little bit more. But if the market's had a terrible year you know what we're going to freeze our spending and last year's level and we'll just absorb the inflation by spending a little bit less right. So I think you've got to be flexible. And the other thing is your personal rate of inflation isn't going to be the same as the consumer price index. Right we've got our house it's paid for. The only inflation there is taxes right. So I think you do have to look at what your personal spending rate is and hopefully if your housing is paid for your cars are paid for things like that. I'm hoping that our personal rate of inflation should be a little bit lower than the economy as a whole.
housing, indexfunds
3199 - 3218 Jonathan Mendonsa Yeah. That's absolutely perfect and I think if we know that the 4 percent rule of the 3 percent rule has inflation built into it yet you as you were just pointing out your personal rate of inflation isn't tracking that same index then that almost builds in some additional buffer for you into these numbers.
indexfunds
3218 - 3234 Fritz "Retirement Manifesto" Gilbert Now you could argue it could be worse right. Because if you look at what percent of your spending is health care and is health care potentially going to be higher than the CPI yet course it probably is. So it could go either way. I think you just have to be cognisant of it and adjust for it each year. You know each year as you put your spending plans together for the following year.
health, healthcare
3234 - 3239 Jonathan Mendonsa Well we're optimists I'm sure they're going to get all the health care problems fixed within the next 12 months.
healthcare
3239 - 3240 Fritz "Retirement Manifesto" Gilbert I hope you're right.
3240 - 3261 Jonathan Mendonsa All right. So let's take a second to talk a little bit more about long term strategy so we mentioned in passing the value of delaying Social Security when you're able and viewing it as the opportunity costs for grabbing it early. I noticed that one of the things that you talk about in your article series is the value of protecting the roth. Do you want explain that ideal a bit more.
roth, socialsecurity
3261 - 3288 Fritz "Retirement Manifesto" Gilbert Sure. If you've got an asset that can generate tax free return forever it should absolutely be the last thing you take because it's growing tax free. So anything that's not growing tax free you should pull down first. So our plan right now is when I'm 85 years old. God willing all we have left is Roth and then I'll spend down in the Roth. But we're going to try to not touch the Roth and keep it invested in pretty aggressive stuff so that it can continue to grow tax free.
roth, tax
3288 - 3307 Jonathan Mendonsa So practically speaking if the Roth is the last thing that you draw down on and there aren't any required minimum distributions the natural implications of that is that the Roth is what would be left for your heirs. That would be your legacy and I know you have a daughter have you thought about the implications of that being what's left over.
roth
3307 - 3347 Fritz "Retirement Manifesto" Gilbert Yeah I think I look at that two ways I think. Number one it's a longevity risk play right. If we do live to 100 you've got to have some money there so you kind of have to plan for a long life. And then if you don't you know live that long. OK fine our daughter you know we told her she's not getting anything don't plan on it we're going to spend it on retirement. You know you don't want her to think there's a nest egg coming. But in reality if we die younger than I think with cash flowed out like 95. It's kind of you know we both die at 95 and we're fine. So there's realistically going to be some money left. And I have not gotten into the tax treatment I think there are forced distributions once she takes it but I'm not sure how the tax works on that if it's if it's inherited I'm not sure I should check into that. But you know what she'll be happy she'll get some money and if she has to pay taxes she has to pay tax.
tax
3347 - 3353 Jonathan Mendonsa Well we'll try not to let her find out about this podcast. So you can let the secret ride a little bit longer.
3353 - 3353 Fritz "Retirement Manifesto" Gilbert All right.
3353 - 3357 Jonathan Mendonsa All right Fritz the next thing that we want to talk about today is life insurance.
lifeinsurance
3357 - 3404 Fritz "Retirement Manifesto" Gilbert Yeah what we did with life insurance this was kind of interesting I bought. We have life insurance through my employer but obviously when I retire I don't get that anymore so I did buy a separate policy. Twenty year fixed terms a little go until I'm 70 and my thought process on that was if I pass away you know you've got different survival clauses on your pension. But the one we're going to probably choose is where my wife would get two thirds of the value. So our thought on that is we'll supplement what she'd get in the pension buy a life insurance policy by the time I'm 70. It doesn't really matter at that point because you know the investments would have done well and she can get by on two thirds of the pension. So we did that in case I would die early and she has to go you know 30 years with a reduced pension. She'd have a little life insurance kicker to help her out. That was the logic there.
lifeinsurance
3404 - 3411 Jonathan Mendonsa All right. And then another one that I know that you mentioned that I think is very reasonable for people to consider post-retirement is this idea of part time work.
3411 - 3456 Fritz "Retirement Manifesto" Gilbert Yeah it's it's huge. I mean if you look at the numbers. So where we're at on that we intentionally are not going to retire until we based on all of our predictions we'll never have to work another day in our lives for money. Right that's the first premise. Once we get to retirement we may well choose to work just for the fun of working right the social interactions you know whatever you get out of it. So what we're thinking right now is we'll have our fifth wheel maybe we'll go out to Yellowstone and we'll work a seasonal job for the summer. You know maybe we'll go pack boxes for Amazon so the Christmas rush you know maybe we'll do a couple things like that. They're not in any of our numbers. So that's a little bit of a buffer again. We will probably do it just because it's it sounds kind of fun. But the financial consideration isn't the reason we're doing it so it'll all be it'll all be gravy.
3456 - 3465 Jonathan Mendonsa I love the if you tie that back to a JL Collins said on our show he said you know I may end up working again but it won't be for money. Money will no longer be the primary motivator.
3465 - 3487 Fritz "Retirement Manifesto" Gilbert Exactly and think about that right if you can do something just because you want to do it and it's not driven by the need for the cash. How much more interesting would that job be right you're just doing it because you know you want to do it if you want to quit you can quit. I mean it had so much freedom. That's that's what F-I is all about right. It's independence to do what you want to do and not be dependent on the dollar. So it does. It changes a lot of things in life.
3487 - 3509 Brad Barrett Yeah and that's just accumulating these different life experiences. Right. And just to have the flexibility and the options to do that. Sure some of them might make money. Some of them might not. But like you said like packing for the Amazon Christmas rush like what a cool idea makes something like that. Who would ever think to do that just like a fun adventure in retirement. But you did right and that there might be something interesting.
3509 - 3541 Fritz "Retirement Manifesto" Gilbert You know maybe you go in with a total bust you're like man my back's killing me this is really you know this is hard work right. Maybe it's a bust OK fine you don't do it the next year but maybe it's hey this is great I'm in here with a bunch of early retirees were having a great time we going to have dinner together afterwards. You know you make friendships. Who knows. Right. But you're you're free to explore and it goes back to what we said earlier about having that mindset of curiosity and that mindset of always learning well heck I'm curious. What's it like to work for Amazon for the Christmas rush right that that all stems from that same mindset of being curious and wanting to explore things as you go through life.
mindset
3541 - 3558 Brad Barrett Does any type of world travel factor into your in this open mindset like a just for the mindset purposes and B. We talked about healthcare and how expensive that is. It's dramatically less expensive in other parts of the world. Has that ever factored into your consideration.
healthcare, mindset, travel
3558 - 3608 Fritz "Retirement Manifesto" Gilbert I've traveled my whole life from one to Bahrain a couple of weeks and you know I've traveled I've got tons of miles so a million million miles on Delta so I got all kinds of frequent flyer miles. So we'll definitely have some international travel. You know we're looking at maybe doing some slow travel where maybe go rent a house in New Zealand for a month. And you just kind of stay put and do a little side trips. The problem is we've got four dogs. We love our dogs. I remember one of you guys have a couple dogs too so you know we're dog people. And those are important in our life. So it's going to hamper how much of that we can really do. But we'll definitely weave in some some international trips here and there where possible you know maybe our daughter will take the dogs for a month and we'll do something like that. I don't think we would do the I don't know if you got Geo arbitrageur what you'd call it for medical insurance. I think we'd rather just make sure we've got enough money set aside to be able to deal with that here. You know I know it's cheaper but that just makes me a little nervous you know that.
geoarbitrage, healthinsurance, medical, travel
3608 - 3611 Jonathan Mendonsa I'm the dog person. So my kind of people for sure.
3611 - 3612 Fritz "Retirement Manifesto" Gilbert OK. There you go.
3612 - 3653 Jonathan Mendonsa So fritz the last thing that we wanted to cover before we let you go was the topic of long term care insurance. I've heard in the past that that is a critical part of financial planning especially when you're approaching your 60s. And I know that's on your radar I know you just recently wrote an article on it but it's pretty expensive right. I mean heck for it. We heard you just a few minutes ago talking about how expensive health care could be if you're in this place where you have a very high income and you're paying for it all out of pocket I mean you are budget 20 to $24000 and then on top of that from everything I've seen long term care insurance could be equally as expensive. And I'm very curious what did your research tell you about this and what did you end up deciding to do about the problem of long term care.
health, highincome, insurance
3653 - 3753 Fritz "Retirement Manifesto" Gilbert Yeah that's a big issue for everybody as well. I just wrote an article two weeks ago so anybody can look it up on my site but basically we're we came down on it is five 10 years ago it probably would have been worth doing. The rates were reasonable and obviously they were too low and 90 percent of the insurers left the market. That tells you something. And the 10 percent that have left that are left have absolutely jacked the rates. So what we did and that's what this article is about is I basically compare it again goes to that opportunity cost mindset. I basically built two columns in the spreadsheet. One was our annual premiums if we buy long term care. And it was something like Don't hold me to the numbers three to $4000 a year and say three thousand. So we put $3000 in column A. And that's how much I'm spending every year for the insurance column B. I would invest that three thousand and it would earn. I think I used a 4 percent conservative assumption and we just let it grow. And every year we put the insurance premium back into the other investment and we will continue to fund it to the same amount that we would have been spending on the long term care insurance. If That makes sense. And then we just compared the two. Obviously if you go in long term care in year one. Shame on us we should about the policy right. You got three years where the coverage and you've only got $3000 saved you can never cover three years of insurance. What we found was in our case at about age 80 to 85 we'd have about three years worth of long term care built up in this investment pool. So we're kind of self-insured and our break even point was in our like mid 80s. And ironically that's when the statistics say you're most likely to require long term care. So we said you know what we'll just self-insure it and then if we don't need it that's just more of that goes into you know the fund money or get passed on to our daughter.
insurance, mindset
3753 - 3817 Jonathan Mendonsa Yeah that's fascinating. And that in my mind is consistently the way that the community tackles problems like this. It's just math and there's certainly an emotional component to it when you start talking about the concept of long term care. But I think this is a very reasonable way to approach the problem. And I think there's two points that are that our audience should latch onto him are going to link to this article in the showboats. One is how to do that calculation how to find that break even point. And then also maybe go check out that study that you talked about by elder law that showed the statistics of where the average individual ended up needing those I think that's useful information. And the second part of that is if you end up taking the choice that you're making which is to self-insure and you just set aside that premium go get a quote. Find out how much that premium is going to be and then set that amount inside continue to invest that aggressively for that period of time. If you end up needing the money you'll have it based on the math that Fritz just did. But then if you don't need it that's a significant extra lump sum that you have available and you found that by the age of 90 you would have an extra 1.5 million dollars.
3817 - 3854 Fritz "Retirement Manifesto" Gilbert Yeah. It's it's material and if you what about long term care and pay those premiums all those years that would have been a million a half hour's worth the net worth that you destroyed because you didn't need the policy. But you spend all the money on it. So you kind of get the best of both worlds you've got enough money there to cover the need if you have it and you've got the investments if you don't need it. So to me it was just a no brainer decision. There's obviously a risk right because when I mean for five years we run out of money. OK. You know we'll deal with it. But there's no easy answer to the long term care dilemma. And it's kind of like the health insurance that's why people are worried about it because it's it's an unknown and it will be until you're 85 years old.
healthinsurance, networth
3854 - 3876 Jonathan Mendonsa Alright Fritz this has been amazing at every level I think this was the perfect end cap to everything that we've been talking about starting really back in the beginning with the pillars of finding going to JL Collins talking about the simple path to wealth and then talking about the dark side with sequence of returns with big Ern. But then once you get past all that you have to talk about drawdown strategy and you crushed it. So thank you so much for coming on the show.
3876 - 3886 Fritz "Retirement Manifesto" Gilbert And it was my honor. I really enjoyed it. And I love your show and and I'm glad that we were able to put some content out there that hopefully can help people achieve a great retirement right. That's what we're all about.
3886 - 3893 Jonathan Mendonsa So now normally we would let you just go but on this show we're going to give you a chance to tackle the hot seat. Are you ready for this.
3893 - 3900 Fritz "Retirement Manifesto" Gilbert I love. Fire Bring it on.
3900 - 3928 Speaker In a world drowning in debt and rampant consumption. Trapped by the chains of lifestyle inflation. These questions highlight the secrets of those who have broken free. Welcome to the choose F-I hot seat.
3928 - 3932 Brad Barrett Alright Fritz. Question number one your favorite blog that's not your own.
hotseat-blog
3932 - 3968 Fritz "Retirement Manifesto" Gilbert Hoo boy I tell you what I read so many blogs you know we talked about having that curious mind and I've just there's so much good content out there. But if I had to pick just one I've got to reach out to my friend the Groovies because I don't think they've been picked by anybody. Freedom is groovy is an awesome couple. They speak with a very unique voice he writes And she writes and they did this awesome Geo arbitrage move from New York City down to the Carolinas and they've retired early and they're personal friends of mine they were the first bloggers that they connected up with and we've had a lot of phone calls and talk with them tomorrow night as a matter of fact. Definitely a great blog you should check it out.
blogger, geoarbitrage
3968 - 3972 Jonathan Mendonsa I think I saw you guys talking trash on the side of the road recently.
3972 - 3985 Fritz "Retirement Manifesto" Gilbert You bet. Yes we actually did he does these these trash talking videos and they're hilarious. He just goes off on these random rants. And I was able to be his first guest host on his on his trash talk so yeah that was fun.
3985 - 3987 Jonathan Mendonsa It was remarkably soothing.
3987 - 3990 Fritz "Retirement Manifesto" Gilbert You weren't the one picking up that crap that was nasty.
3990 - 3997 Jonathan Mendonsa All right follow up question what do you think we should talk to them about when we bring them on the show.
3997 - 4011 Fritz "Retirement Manifesto" Gilbert I would say the Geo arbitrage and kind of how they leverage that. You know that's a that's a really good FI tool a lot of people talk about it but I don't know how many people have actually done it. They've done it successfully and they retired early so I think probably the use of Geo Arbitrage as an FI tool.
geoarbitrage
4011 - 4017 Jonathan Mendonsa All right. Question number two your favorite article of all time. Now this can be one that you wrote or somebody else's.
hotseat-post
4017 - 4042 Fritz "Retirement Manifesto" Gilbert Yeah you know I think if I think about the real. To me that what is what is cornerstone content in the FI community and to me there's no comparison to JL Callan's. I mean he's he's such a legend and you know his stock series is just phenomenal. And maybe I would put in there now big Ern and his 15 20 part withdrawal strategy that's that's classic cornerstone content so I would say the two of those are probably the best content that I've seen.
stocks
4042 - 4045 Brad Barrett Alright Frits question number three your favorite life hack.
hotseat-lifehack
4045 - 4078 Fritz "Retirement Manifesto" Gilbert Yeah. In our case we talked about it a bit during the podcast but we downsized. You know we sold our big city house we bought our mountain cabin and we didn't get into this but we actually did it a second time. And as we speak our first cabin we have an offer on it we're supposed to close in October. And that appreciated quite a bit so we sold it as appreciated and we bought a lower priced cabin just as nice but had some features we'd like so we've kind of done two of these downsizing to generate liquidity out of your home equity to use for retirement. So downsizing to free up money for fire.
4078 - 4082 Jonathan Mendonsa All right. Question number four your biggest financial mistake.
hotseat-mistake
4082 - 4131 Fritz "Retirement Manifesto" Gilbert yeah this is we've all got our stories I guess. I'll tell you what what comes to mind for me is I got a little bit of inheritance from my grandmother not a lot but it was kind of the first time I really had free money that I could just speculate with right so I open up my tD Ameritrade account I was all excited. This was right during the tech boom in the late 90s and there was a company that I was using at work and actually some of the people from my company left and went to work for this company and everybody like these guys are going to the moon they're great so I threw a bunch of money into their stock and absolutely cratered during the tech collapse Fortunately I was early enough in my career I didn't have that much money in there but still from a percent loss I think I lost you know 90 percent of the investment in 18 months. It was absolutely brutal. Good lesson learned. You know manager position sizes diversify and understand what you're investing in before you invest. That was a painful lesson but it's a good one. I'm glad I learned it when I did.
career, stocks
4131 - 4137 Jonathan Mendonsa I felt like I was going to finish that sentence with Enron and.
4137 - 4138 Brad Barrett WorldCom.
4138 - 4148 Jonathan Mendonsa I was like here it comes here it comes. All right. Question lets see question number five the advice you would give to your younger self.
hotseat-advice
4148 - 4194 Fritz "Retirement Manifesto" Gilbert Yeah this is time my daughter is 22 so I look at her and I and I think of my life at that stage actually wrote an article for the first six steps to financial wealth. And if I think about probably the first step that I mentioned her was realizing the value of time and how powerful that compounding is. You know when I first started in the working place I think I was contributing like 6 percent to my 401k get don't give up the employer match right. But I didn't really know what I was doing and I probably dribbled around 6 to 7 percent for the first five years of my career. Now I'm I'm close to 50 percent. You know I wish Back then I would have been saving 15 20 percent earlier. Now I'm fine with getting out early but compound that over 30 years and we probably could have gotten out a couple of years ago. Just on that one move that one move alone. Start early and start big and that's what I'm telling my daughter.
401k, career, savings
4194 - 4207 Brad Barrett Yeah that is wonderful wonderful advice. And I I have young daughters now and I'm trying to come up with a plan for how to introduce this to them when they are a little when it's a little more appropriate. So yeah that's I'm going to check out that article for sure.
4207 - 4239 Fritz "Retirement Manifesto" Gilbert And I tell you it's challenging right because we're passionate about this. Obviously you guys have a podcast. I do a blog our kids tend not to be right they're more like society as a whole. So it's hard to find ways to introduce them to it without them to say yeah this dad talking about that finance stuff again. You've got to find a creative way to make it real to them. And it's a challenge. And you know it's been a challenge since she was 5 years old it's a challenge when she's 22. It's you know raising kids is a it's a challenge but it's rewarding as heck and it's great. But just be realistic in your expectations. They don't care about this stuff as much as you wish they did.
4239 - 4250 Brad Barrett Yeah I like that. Be realistic. I will definitely remember that. So alright we. One last bonus question for you. What's the favorite purchase that you've made on Amazon.com in the last year.
hotseat-purchase
4250 - 4282 Fritz "Retirement Manifesto" Gilbert Well this was actually going to be an H photo thing and a buddy of mine gave me a give me a heads up. Mansingh just came on sale it's a great deal. It was a bunch of money for the FI community. It cost me about 500 bucks but I am so ecstatic about it I finally bought a drone and I bought it because I wanted to develop the photography and video and all that and into retirement. So this is positioning myself to develop an artistic side in retirement. And I love my new drone it's a blast to fly around. I haven't crashed it and it's the best thing ever. It's fantastic. So get yourself a drone there are a lot of fun.
4282 - 4285 Jonathan Mendonsa Techies unite.
4285 - 4286 Fritz "Retirement Manifesto" Gilbert They're amazing. There are a lot of fun.
4286 - 4290 Jonathan Mendonsa You know the guy that's doing the documentary Scott reckons doing the playing with fire documentary.
playingwithfire
4290 - 4292 Fritz "Retirement Manifesto" Gilbert Yeah yeah.
4292 - 4310 Jonathan Mendonsa That is his signature move. You know that's his that was his kind of claim to fame in this space was drone operation so really it really is a whole new industry for people that know how to do photography and camera and they can merge their skill set with drone piloting. You know I don't know exactly.
4310 - 4330 Fritz "Retirement Manifesto" Gilbert And then you think about our space you know FI and social media. Well you know then you set up a YouTube channel and you can do some really cool editing and you know now you're traveling around in retirement. Well guess what. You do a drone out of Yellowstone National Park and you edit it all together and you do some still shots. I mean it feeds so well into what we do anyway. It's it's really a great hobby and so I'm excited about it.
travel
4330 - 4355 Jonathan Mendonsa All right. Thank you so much for coming on the podcast and sharing your time today. This information is like the perfect end cap to everything that we've been talking about up to this point. And I know this really doesn't even touch all the content that you've been creating over the last several years so I'm sure our audience many of them were already familiar with you but I'm sure there's a pretty large segment of people that this is the first time they're hearing about retirement manifesto What's the best way for them to connect with you and connect with the work that you've been doing over the last couple of years.
4355 - 4394 Fritz "Retirement Manifesto" Gilbert Yeah thanks for that opportunity. All my stuff really is based on my web site which is the retirement manifesto dot com one word and I've got probably the easiest way for people I've gotten an about page that talks all about me and that I've got every article I've ever written chronologically outline there I've got stuff sorted by topics you know so you can reach me there you can reach me on Twitter at retirement manifesto those are those are probably the two biggest forums that I'm on and people want to sign up for my email. I have a free net worth template that they can download onto their computer and if you're not tracking your net worth yet please use this form and start tracking your net worth and you know give me give me a note let me know that you found me through choose FI and I you know will reach out to me and say thanks for taking a look at my site. I appreciate it.
networth
4394 - 4468 Jonathan Mendonsa And also guys I know that Fritz is also on our Facebook group so I'm sure you can reach him there as well. So what I love about Fritts is just how willing he is to give his time and answer your questions directly and just just a very very generous guy highly respected in the community so we're just very grateful that he was willing to come on the show today and we absolutely hope that you will reach out. Definitely check out his networth template I've downloaded myself it's a very useful tracking tool. So definitely reach out to him let him know that you got value from the show today. And thank you for being a part of the Choose FI community. If you want to support us here for easy ways 1 leave us an Itunes review. You want to do that just go to choose FI dot com slash iTunes two use our page to sign up for travel credit cards. If you want to travel the world with miles and points instead of your hard earned dollars then just go to choose F-I dot com slash cards and get started today. Three if you're working on the milestones of FI. Set up a personal capital account to track your progress and use our affiliate link. It's completely free and just go to choose F-I dot com slash PC P as in Paul C as in cat and 4 and most importantly find your friends coworkers and family members who might be open to this message and tell them about the podcast. Have them start with episode 38. The why of FI and right behind that have them go listen to Episode 21. The pillars of FI. It is a fantastic starting place. Alright My friends the fire is spreading. We'll see you next time. As we continue to go down the road less traveled.
Jonathan_Catchphrases, families, networth, travel

Stay Connected