Looking for high-yield CDs? Consider an Option “Box Spread” as a tax-advantaged alternative!

April 17, 2024 – People sometimes ask me for a good and safe place to “park” their money for a short period. CDs, high-yield savings, and money market accounts would be the obvious answers. When looking for safe, short-term investments, options are probably the last thing on your mind. Options have the aura of complicated and highly speculative investments. However, sophisticated investors can structure options trades to make them (almost) as safe as CDs but with more flexibility and higher after-tax income, thanks to a Box Spread trade.

You can implement this trade by hand, and I will go through the mechanics. You can also buy an ETF, though with some small drawbacks. Let’s take a look…

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Trading Options: A Primer (Options Series Part 11)

March 7, 2024 – My claim to fame in the personal finance and early retirement community is my Safe Withdrawal Rate Series, which has now grown to 60 parts. But I also have another passion: trading options to generate extra income in retirement. By popular demand, I like to update everyone on how my strategy has evolved since my last update in early 2023. Before I do that, though, I also want to reemphasize the rationale for my options trading strategy: Why does it work? How does it fit into a portfolio, both during accumulation and now in retirement? How do we dispel some of the common objections and misunderstandings? I think of it as an options trading primer.

Let’s take a look…

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100% Stocks for the Long Run?

February 12, 2024 – Last week, I wrote about how equities historically outperformed bonds by a comfortable margin. So, the principle of “stocks for the long run” is still valid. Does that mean a portfolio with 100% stocks is a good long-term strategy? That’s a recommendation from another finance research paper that’s gotten a lot of publicity lately. Three finance professors claim that a 100% stocks portfolio, 50% domestic and 50% international stocks, would have consistently outperformed all other conventional wisdom asset allocations, e.g., 60/40, glidepaths in target date funds, etc. Quite a sweeping claim! They claim they have the empirical evidence to prove it.

I have my doubts, though. Let’s take a look…

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Stocks are STILL a great long-run investment!

February 5, 2024 – Two recent papers in the personal finance area have caused enough of a stir that I’ve gotten numerous requests for comment. I noticed that if I compile all my notes, calculations, simulations, and replies, I already have more than half of a new blog post. So, today I would like to share my results with my other readers who might also wonder what to make of those new research ideas. The first paper claims that the famous “Stocks for the Long Run” mantra is all wrong because stocks don’t outperform bonds as reliably as Jeremy Siegel and many prominent finance pundits claim. The second paper effectively claims the opposite, namely that a 100% equity portfolio, half domestic and half international stocks, handily beats any bond portfolio and all diversified stock/bond portfolios, including life-cycle, i.e., target date funds. Thus, the authors claim they have upended decades of personal finance conventional wisdom on stock/bond allocations, diversification, and target date fund glide paths.

Well, isn’t that ironic; both papers can’t be right! So, which one is right? Or are they both wrong, and conventional wisdom prevails? I started this post and wanted to comment on both papers in one single post but then ran out of space. So, I had to split my material into two posts. Today, I share my thoughts on the first paper and on whether stocks are still a good long-run investment in light of the new data. But stay tuned for the follow-up post, likely later this week or early next week!

Let’s take a look…

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We’re All Millionaires! (on average)

December 3, 2023 – When I wrote my post on the “Die With Zero” philosophy in October, I dug through the Survey of Consumer Finances (SCF). I used the detailed wealth distribution data to study the extent of asset overaccumulation late in retirement. The Federal Reserve releases the SCF only every three years, and just a few weeks ago, we got another survey covering 2022 and providing a wealth of information – pun intended. Quite amazingly, in 2022, for the first time in history, the average household net worth crossed one million dollars, now standing at about $1,060,000. Of course, wealth is unequally distributed, so while we may all be millionaires on average, the number of millionaire households is much smaller.

Then, what’s the percentage of millionaires? Is it a tiny elite, like the wealthiest 0.1% or 1%? I remember reading years ago that the share of millionaires was in the high single digits. So, I was surprised that more than 18%(!) of households were millionaires in 2022. That’s across all households and all age groups, and it is significantly higher for older folks. Also, the overwhelming majority of millionaires are homeowners. Homeownership can’t be such a terrible investment after all.

Since I did all that work, writing a Python program to dig through all those datasets, I thought I might as well write a blog post and share the results with you. Let’s take a look…

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How Crazy is Dave Ramsey’s 8% Withdrawal Rate Recommendation?

November 12, 2023 – If I wanted to comment on every piece of bad advice in the personal finance community, my quiet, relaxed early retirement would be busier than the corporate career I left in 2018. So, I usually stay out of the daily Twitter/X spats. Last week, though, an incident caught my attention, and it was egregious enough that I weighed in. In a recent Dave Ramsey show (original video here, starting at the 1:13:50 mark, Twitter discussion here), Dave doubled down on his recommendation of the 8% safe withdrawal rate in retirement, calculated as 12% expected equity returns minus 4% inflation (his numbers, not mine – more on that later). And several people pinged me and wanted me to comment. Safe Withdrawal Rates are my wheelhouse, given that I wrote a 60-part series looking at the topic from almost every angle I can think of. So here is my analysis, more detailed than I could do in a tweet: Don’t use a 8% Withdrawal Rate! That recommendation is crazy in more than one way. Let’s see why…

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How useful is the “Die With Zero” retirement approach? – SWR Series Part 60

October 6, 2023 – There’s been a lot of chatter about the Bill Perkins book “Die With Zero” and its approach to life and retirement planning. Most recently, just yesterday on the awesome Accidentally Retired blog. After several readers asked me about my views on the “Die With Zero” idea, I finally relented and decided to write a piece in my Safe Withdrawal Rate Series on the topic.

I’ll briefly describe the areas where I agree with Perkins. But then I also go through all of the fallacies in this approach. Let’s take a look…

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Social Security Timing – SWR Series Part 59

September 5, 2023 – Welcome back to a new blog post in the Safe Withdrawal Rate Series! It’s been a while! So long that some folks were wondering already if I’m all right. Nothing to worry about; we just had a busy travel schedule, spending most of our summer in Europe. First Italy, Switzerland, Austria, and Germany. Then, a cruise through the Baltic Sea from Sweden to Finland, Estonia, Latvia, Poland, Germany again, and Denmark. But I’m back in business now with a fascinating retirement topic dealing with Social Security timing: What are the pros and cons of deferring Social Security? If we set aside the ignorant drivel like “you get an 8% return by delaying benefits for a year” and look for more serious research, we can find a lot of exciting work studying this tradeoff. Earlier this year, in Part 56, I proposed my actuarial tool for measuring the pros and cons of different Social Security strategies, factoring in the NPV/time-value of money consideration and survival probabilities. A fellow blogger, Engineering Your FI, has done exciting work studying this tradeoff using net present value (NPV) calculations. And Open Social Security is a neat toolkit for optimizing joint benefits-claiming strategies.

But those calculations are all outside of a comprehensive Safe Withdrawal Rate analysis. How does Social Security timing interact with Sequence Risk? For example, can it be optimal to claim as early as possible to prevent withdrawing too much from your equity portfolio during a downturn early in retirement? In other words, if you’re interested in maximizing your failsafe withdrawal rate, you may feel tempted to pick a potentially suboptimal strategy from an NPV point of view. Sure, you underperform in an NPV sense on average if you claim early. But hedging against the worst-case scenarios may be worth that sacrifice.

Let’s take a look…

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Flexibility is Overrated – SWR Series Part 58

June 16, 2023 – I wonder if I’ll ever run out of material for the Safe Withdrawal Series. Fifty-eight parts now, and the new ideas come faster than I can write posts these days. This month, I initially planned to write about the effects of timing Social Security in the context of safe withdrawal simulations. But one issue keeps coming up. It’s almost like a personal finance “zombie” topic that, after I thought I put it to rest once and for all, always comes back when you least expect it. It’s flexibility. If we are flexible – so we are told – we don’t have to worry much about sequence risk. We can throw out the 4% Rule and make it the 5.5% Rule. Or the 7% Rule or whatever you like.

Only it’s not that easy. In today’s post, I like to accomplish three things:

  1. Provide a simple chart and a few back-of-the-envelope calculations to demonstrate the flexibility folly.
  2. Comment on a recent post by two fellow personal finance bloggers and showcase some of the weaknesses of their approach.
  3. Propose a better method for modeling flexibility and gauging its impact on safe withdrawal amounts. Hint: it uses my SWR Simulation tool!

Let’s take a look…

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May 2023 Macro and Market Musings: Monetary Policy and Inflation

May 17, 2023 – Since early 2022, the Federal Reserve has been raising its policy interest rate at breakneck speed by a full five percentage points. Inflation has indeed subsided a bit, but both price levels and percentage changes remain stubbornly high. When will inflation finally go back to normal? What’s the path forward for monetary policy? Will there be a recession? So many questions! Let’s take a look…

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