Don’t live in a government designed box
I read a lot of financial advice in the media, and one of the recurring themes is how to manage your 401(k), 403(b), traditional IRA or Roth IRA. How much to put into these boxes, when, how much to take out, etc. Relatively rarely does this advice step outside these boxes.
It’s as if any activity that doesn’t take place within this tax-structured system has no relevance to retirement. Nothing could be further from the truth. While these nominally retirement oriented structures are useful retirement vehicles, any plain old brokerage account, or mutual fund portfolio can contribute meaningfully. Not to mention other assets like real estate, collectibles, and management of debt.
Stepping outside the box can be liberating. No IRS limits on how much you may contribute. No RMDs to compute. No five year rules to negotiate. The tax tail needn’t wag the investment dog.
I personally disdain 401(k)s. It would be better for everyone if they just went away. They provide a limited menu of investments insufficient for adequate diversification; few provide access to commodities like gold. They were born in a bygone era where it was common to spend an entire career with the same employer. No more; that’s leaving countless people with fractured finances. Instead there should be some means of directing the same flow of funds into individuals’ IRAs or other accounts that stay with them.
Another common piece of advice that bugs me is to start investing young, like in your twenties. It’s not unsound conceptually, but it’s usually implied that means buying stocks. But most people that age have student loan or mortgage debt, or both. It’s rarely mentioned that the math of compounding works just the same way with money you owe as with money you have. And unlike portfolio investment, the returns from paying off debt are guaranteed.
And while we’re on the subject, I’m seeing an abundance of questionable advice on retirement spending. The ballyhooed 4% rule instructs adherents to withdraw 4% of their nest egg in the first year of retirement, and CPI adjusted equivalents forever after. There is no provision for the unpredictable vagaries of financial market and investment performance.
Why not just stick to the same formula for subsequent years as the first, withdrawing a set percentage of whatever the portfolio value may be? The conventional 4% rule is an example of a no-feedback system; there is no correction mechanism to adjust for the unplanned over the course of decades of retirement. This gives rise to such artificial problems as “sequence of returns” risk. Such rules are based on so-called Monte Carlo simulations modeled on historical returns, not the future returns you will actually experience. Would you entrust your life savings to a casino?
Instead I advocate the latter model of taking a percentage of whatever the current portfolio value is. The worst fear most retirees have is outliving their money, and that doesn’t happen this way. To make matters worse, some advice recommends higher withdrawal rate of 5% or even 8%. Conservative investors could also consider going the other way and using a 3% withdrawal rate. This makes it likely that with any reasonable portfolio allocation your income can match or exceed inflation. And I don’t mean the CPI, I mean actual inflation. If you depend on CPI indexed income like Social Security, having some that grows faster could come in handy.
This also provides a nice legacy for heirs. Don’t want to do that? Buy an annuity with some of your nest egg. For whatever portion of your wealth you want to last just as long as you do and no more, this is the way. This is what Social Security and pensions do. Add to them with a private product if you please. Take a big picture look at your finances, and divide them into two parts; annuity income that expires when you do, and portfolio investments that don’t. The former is illiquid and the latter liquid. Make a deliberate decision how you want to divide things up. Whatever you do, don’t decide it by accident … it’s the most important asset allocation decision you make.
us debt just hit $38 TRILLON………….
One scary number.
Especially since it only hit the last trillion dollar mark in August. Just a coincidence that that kicked off that breathtaking gold rally? I’ve said it before and I’ll say it again, because while it may seem abstract, the implications are very real.
You can increase your allocation to an asset by buying more of it. If you have, say, 5% in gold, you can instantly increase your allocation to 10% by buying more, reducing your allocation to some other asset.
What you can do as an individual, however, everyone cannot. Everyone cannot increase their allocation to anything by buying more, because in order for one to buy, another must sell.
The only way everyone can increase their allocation of something is for its value to rise relative to everything else. In order for everyone to increase their allocation to gold from 5% to 10%, for example, the value of gold must double relative to everything else. Some will buy and others will sell. What changes is the prices at which the transactions take place.
The example of gold is fitting here because that’s exactly what has been happening. Central banks notably have been increasing their allocations to gold. Private investors are now following suit. As I mentioned before, the move by Morgan Stanley to replace the traditional 60:40 stocks:bonds portfolio with a 60:20:20 stocks:bonds:gold portfolio is tectonic.
What were the aggregate preexisting allocations to gold? I don’t have exact current figures because it’s a moving target, but less than 5% is a safe bet. Even if a minority of investors take this only part way, it leaves quite a stretch to go.
My point here is at the expense of what. Bonds. Even as the supply of bonds is growing by the trillions, asset holders are reducing their allocation targets. This is the quintessential irresistible force meeting an immovable object.
Something’s gotta give.
Either bonds are going to have to become a lot more attractive or at least one central bank is going to be increasing its allocation. By a lot. Hyperinflation, anyone?
I try not to go too much on the Geo-political side of things as its more opinion than hard facts, but its the back drop to all of this. The West has/is living VASTLY beyond its means using bluff & FIAT money to pay its bills…………….now the rest of the World has sussed it all out.
Trump “The peace maker” has now agreed to allow strikes into Russia itself. This is as close to war as you can get. Trump is trying to use Nixon game plan from the Vietnam war (Linebacker)….but Nixon was VERY carful NOT to target USSR forces directly.
Its now a fight to the bitter end, as you say something will give but i have deep fears where this will go?
The West has already had a few nasty surprises, Russian Tec proved a lot better than expected & some weapons have shocked the West. A lot of Western kit has been very disappointing.
Sadly for the West the “Natives” have tec themselves & are using it quite skillfully, note the US Navy getting chased out area by the Yemen!
The Winds of change are blowing once again………
The US has abused its exorbitant privilege and is losing it as a result. Debasing and weaponizing dollars drives the world away from them in spite of their established roles in trade and reserves. The rest of the west has gone along for the ride. Blaming Russia and China and everyone else for responding to the incentives it has created instead of cleaning up its own back yard isn’t constructive. Not only does it exacerbate international conflict but it lowers the living standards of its own people.
The western establishment aggressively promoted globalism for decades, to its own detriment. Now the US aggressively fights it, micromanaging trade, to its own detriment. Is there no neutral ground where government nonaggressively pursues broad policies to level the playing field while letting the free market work out the details?
Its FAST becoming Trumps war now………….
Mega’s dispatch from England:- Extinction level event
Here in dear old Blighty we just had a “By election” brought about by the sudden & unexpected death of an MP (Member of Parliament). Its a seat in deepest Wales, the very birthplace of the Labour party & a seat they held on to for well over 100 years……the safest of safe seats.
So, you expect it to be a Shoe in event, sort of Tom Brandy lead team v local fools?
ER……………as it turns out………….NO!
The seat was a fight between the Welsh nationalists & “Reform” (Trump type party)……the nationalists won with Reform a close 2nd……………..Labour collapsed to 3rd with 11% of the vote.
Starmer was not to be seen, before or now. He going overseas (yet again) to chair a meeting to get Trump to give the Green goblin long range missiles to hit deep into Russia.
Meantime Labour MPs are getting rather PISSED at the fact he spends 90% of his time on project UKraine.
Seeing however they are ALL now facing a trip to the unemployment office @ the next election means some DEEP thinking is going on…………i fear he is on his way out, but there is no strong back up QB to take his place…..
Headlines are trumpeting a “cool” or “soft” or “mild” CPI release this morning. September CPI came in 3.0% higher than year ago. Astonishing. Kinda like Washington budgeting, where they project a 5% increase and call a 4% increase a “cut”. This 3% is a full percentage point higher than the Fed’s target, actual inflation is running at least another few percentage points above that, and Wall Street media are celebrating a low reading. You’d be hard pressed to find ordinary Americans describing inflation as low.
In case there was any remaining doubt Wall Street lives in a different world than Main Street.