Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez. Thank you, Mary, and welcome to episode 132 of Risk Parity Radio.

Mostly Uncle Frank [0:48]

Today on Risk Parity Radio, we are going to have an episode with the Barry Manilow theme. I write the songs that make the world sing. Actually, we just have one big long email for this episode and it has a lot of questions embedded in it that are pretty interesting and I think will be interesting to a lot of listeners. So without further ado, and first off, and last off, we have an email from Mandy. And Mandy writes：Dear Uncle Frank, His name was Rico. He wore a diamond.

Mostly Mary [1:37]

I'd like to stay anonymous, so if you could call me Mandy, perhaps with a quick Barry Manilow clip, that would be great. I found your wonderful podcast at the perfect time in my life and have binge-listened to catch up. My husband and I had planned to retire when he turned 60, but health issues are going to force us to retire about five years earlier within the next three years or so. I, the finance person in the family, need to change up our allocation. Until now, I've mostly focused on accumulating as much as possible, which means our portfolio has been 90% stocks. The good news is that this means the portfolio has done well, so we're closer to our retirement goal than I thought we would be at this point. I have a few questions for you, if you're willing. Feel free to edit them down. My husband, the primary breadwinner, receives half of his pay in stock, so we have a large taxable brokerage account, about one-third of the total portfolio. I expect that much of the next few years' savings will land in this account. So at retirement, our savings will be about 50% taxable brokerage, 45% pre-tax retirement accounts, 5% Roth. The plan is to live off the brokerage account and also use the money from it to pay taxes on Roth conversions in the first few years after retirement. That account is currently mostly invested in stock funds with big capital gains. Volatility has never bothered me, but now I'm concerned about sequence of returns risk. But we're in the 32% tax bracket, so I also need to keep taxes low. Given all that, my thought is to gradually move to a combination of NTSX short-term municipal bonds as a sort of cash equivalent and preferred shares in this account. I've been selling stock ETFs in the retirement accounts and buying REITs, long-term treasuries, and gold, which felt very weird until the market dropped and my portfolio dropped a lot less. I love gold. Which brings me to my questions. Do you think that mix in the taxable account is a good idea, or would you have other ideas for that account? I would like to add the kind of ballast that longer-term treasuries provide, but I can't see a way to do that without raising taxes. My research indicates that most, but not all, preferred share ETFs are considered qualified. Is there a way to figure out which preferred share ETFs have the highest percentage of qualified dividends, or are they all about the same? I've noticed that preferred shares come in regular and floating rate varieties. Under what circumstances should someone consider floating rate preferreds? Which would you recommend for my situation? Also, do you have thoughts on how to think about my retirement accounts versus my husband's? Should I think of them all as one portfolio or should I think of my retirement accounts separately since I'm younger and have a longer life expectancy? Is, say, my Roth account a place to make riskier investments as I de-risk the rest of the family portfolio? I like the idea of using some additional leverage, for example, but I'm guessing that's not a good idea for funds I might need in the next 10 years. And finally, with the caveat that I know this is not advice but only ideas, we'll have less than anticipated at retirement but want to have the best quality of life possible, so I'm trying to figure out what a good target for a withdrawal rate should be. I'm encouraged at the way the models show a risk parity portfolio will allow us to draw down more than the often cited 4%, but how much more? I'd be happy to die with 100 bucks in the bank, but we will likely have some years with high expenses. If you were retiring now and had your money in something like the Golden Ratio and you were willing to be somewhat flexible with spending, what starting percentage would you truly feel comfortable with given a 40-year time horizon? By the way, I found your YouTube video about using the Portfolio Charts Retirement Spending Inputs very helpful. Yes!

Mostly Voices [5:43]

Also, by the way, I would add your Money, you,

Mostly Mary [5:46]

Wealth to my list of favorite personal finance podcasts. Like you, they answer listener questions clearly, completely, and accurately. Many of the questions are about things like tax planning and asset location, so it's a good adjunct to your podcast. And I like your sound clips as long as you don't deploy them multiple times in a single podcast. If and when I hear you read this, I will skip ahead in the podcast while you play a few clips multiple times. Thanks so much for all you do, Mandy.

Mostly Uncle Frank [6:19]

Oh, Mandy. Thank you for this very nice Long email with lots of nice comments in it and some very interesting questions.

Mostly Voices [6:34]

The best Jerry, the best.

Mostly Uncle Frank [6:38]

Let's just go start at what to do about the stock that you have and the taxes in the taxable brokerage account. It sounds like you've got a lot of your assets in one company stock, which is really the problem in terms of Diversification because you can probably hold on to the stock index funds, at least for now, and don't need to convert those. You do want to focus on selling down what's in the company stock and turning that into more diversified investments. But I think what you really need to focus on there is your capital gains tax rate, your long-term capital gains tax rate. if your tax rate for the ordinary income is 32%, that means it's probably under $418,000 for 2022, which means that you have some space in there still where your capital gains are only going to get taxed at the 15% rate. Because if your income is completely below about $517,000 for 2022, then you are going to qualify for that 15% rate for your long-term capital gains. Now, I say this because it's not clear to me that your income in retirement is going to qualify you for the 0% capital gains tax rate, which it would be if your income was less than $100,000. So I think you're going to be stuck with 15% either way and that you can use some of that now, pay some of those taxes and do it in a kind of planned staggered way over the next few years. You really should sit down with a CPA, a tax person, to plot this all out because it's a bit complicated and it's going to depend on what your income is going to be in the next few years as well. So I would advise getting a tax person sitting down with a CPA, planning out some various scenarios, and then see how much you can comfortably sell and essentially filling up that 15% bucket even before you get to retirement, which will make things easier overall. What you want to avoid is paying 20% on your capital gains, which would happen if your total income is over 517,000. But you should be pleased that your long-term capital gains tax rate is only going to be 15 or 20 and not 32. Just make sure you're not selling anything that's short-term capital gains because that'll be the 32. All right, moving on to your proposal for the taxable account, which would be the NTSX, that's a composite S&P 500 treasury bond fund that's also leveraged one and a half times along with some preferred shares ETF or ETFs and some short-term municipal bond funds. I went ahead and modeled this, and we'll link to this in the show notes so you can see what this looks like at Portfolio Visualizer. What I did was I sort of deconstructed NTSX because NTSX itself only goes back three years. But if you deconstruct it into its components and then lay them all out and then put some negative cash into this portfolio, it will analyze this thing and so we could go back to April of 2007. to analyze it. And so what you'll see in these portfolios looks like some SPY, the S&P 500 ETF, some TLT, some IEF, some SHY, those are long-term intermediate term and short-term bonds, and then PFF for the Preferred Shares Fund, and I used VWSTX for the short-term tax exempt because that had the longest history. So anyway, I did three models. One where I modeled 50% NTSX, 30% in the preferred shares PFF, and 20% in VWSTX. Another one where I modeled 60% NTSX, 30% PFF, and 10% in the municipal bond fund. And then the third model was 70% NTSX, 20% PFF, and 10% in the municipal bond fund. And then for comparison purposes, I also included a Vanguard Balanced Index Fund, which would be a traditional 60/40 portfolio. And what you'll see over this time period is that the one that's 50% NTSX is closest to the performance of the Vanguard Balanced Fund, but it does have a lower Sharpe ratio slightly. They both have 8% compounded annual growth rates. It also has a larger maximum drawdown than the Vanguard Balanced Fund of -37%. You get better performance with the more aggressive choices. So the best one is actually the 70% NTSX in terms of overall risk reward. It has an overall risk reward for this period of 0.82 in a sharp ratio. but a max drawdown of 39.35. The one that's 60% NTSX actually has a lower Sharpe ratio and a larger maximum drawdown. I should note that both the 60% NTSX version and the 70% NTSX version have a significantly higher compounded annual growth rate than the Vanguard Balanced Fund. The 70% NTSX is up at 9.9% for this period. the 60% is at 9. 13% for this period and the Vanguard Balanced Fund is at 8.26% for this period. The 50% NTSX one has a lower compound annual growth rate of 8.08% for the period. So what does that all mean? What it means is those kind of mixes are going to feel like having a traditional 60/40 portfolio in that part of the portfolio, which may be fine if you're much more conservative in other parts of the portfolio. Now you had asked about adding the kind of ballast that long-term treasuries provide to this part of the portfolio, but thought that you couldn't see a way to do it without raising taxes. Well we already talked about taxes, they might not be as bad as you think. One way to get around this is to hold a smaller portion of that leveraged bond fund TMF which will act like three times as much TLT as you buy of it. It's not a perfect solution, but it will tend to dampen the overall volatility of that part of the portfolio, and it really won't generate much in the way of taxes because it just doesn't have large distributions. But depending on how much you're converting, you could also buy a more traditional long-term treasury bond fund. But I will let you take a look at the analysis from Portfolio Visualizer that you also may want to run some analyses using the stock funds you're already holding since I don't think you'll necessarily need to sell those, at least not right now, because those could be integrated into a risk parity style portfolio as the stock portion of it or much of the stock portion of it. But let's talk about these preferred share funds and their dividends. As a matter of fact, the dividends that come out of these preferred shares funds are mostly qualified for PFF, which usually has the largest share of qualified dividends, but may not be, or maybe a lower percentage for things like PFFD or SPFF or a couple of other funds that are out there. Now, I'm not sure what it is yet for PFFV, which is the new floating rate preferred that has come out in the past year and a half. I do have an article about some of these funds I will link to in the show notes so you can take a look at that. It is a couple of years old. I will tell you that I have another listener who's also a client for consulting purposes who has actually called up some of these fund providers and asked them because this information, how much of your dividends are qualified for a given year, changes some every year and is not printed publicly until you get the tax forms. But I do believe that the qualified dividend percentage for PFF is somewhere between 65 and 80% with some of the other ones coming in with something less. So if it doesn't annoy you too much, you might just call up the fund providers of the preferred share funds that you are most interested in and see what they have to say about it. Now as to these floating rate preferreds, yeah, in theory these are supposed to be more like shorter term bonds. In practice, all of these funds seem to perform pretty close to the same. I think over the past year, if you look at the charts for PFF and PFFV, they look almost the same. I think PFF is done better in terms of absolute return, but PFFV paid a larger dividend. So I don't know that they're going to be that much different in practice. It would not be wrong just to hold some of each and see how they go, because chances are if you need to switch from one to the other, you're not going to have large capital gains to deal with. I should say we also talked about these back in episode 94, if you want to go listen to that. And there's another link to the article I found there as well. All right, as to whether you should treat your collective accounts like one big portfolio or keep them separate, I think I would do it this way. I would treat whatever assets that you plan to live on as one big portfolio. Now you may have some other assets that you don't ever plan to use and are going to leave to heirs or do something else with, in which case you could Take more risk with that or do whatever you'd like with it. Take less risk if you'd like. The Roth account is usually a good place to do that with. So if you were going to plan to leave that Roth account to somebody else, taking more risk in it now would not be wrong, just as long as you don't actually need it to live on. One other thing you may need to consider in those calculations is also where are you living now? Are you likely to downsize? Is there going to be money coming out of real estate or from other places that might be used, in which case you could be more aggressive with the Roth. All right, now as to your question about safe withdrawal rates for somebody who has a portfolio that looks kind of like the golden ratio and has a 40-year time horizon. This one's for you. This one's for you.

Mostly Voices [17:41]

This one's for you.

Mostly Uncle Frank [17:53]

Well, I have to tell you that I resemble that remark. At least I hope so. My father is 92 and still kicking quite well. So I am hoping that a 40-year time frame does indeed happen for me. But here's the way I like to think about this issue. I like to take it from the perspective of the expenses which you can control better. than thinking about it from the theoretical perspective, which you get when you're running these simulations and getting out 4%, 5% as safe withdrawal rates and things like that. I think I've improved on your methods a bit too. And the way I think about it is this, that we have basically three kinds of expenses. We have what I call the KLO expenses, and then we have the comfort expenses, and then we have the fun money or fun expenses. Now, what does KLO mean? It means keep the lights on. So the idea is that's all of your expenses that you need to just maintain your lifestyle, paying your taxes and paying your utilities and paying for your health insurance, all that basic kind of stuff. And you're also talking about food, probably cooked mostly at home or non extravagantly eaten out at every day, which gets you to the next category, which I call the comfort expenses. And these are the things that make your everyday life more comfortable. Paying for people to mow the lawn, paying for somebody to clean the house, going out to eat lavish dinners, getting a massage, gym memberships, all of that kind of stuff that you could live without, but it's really nice to have them and you should have them if you can afford them. And then the third category, that fun money, that is ridiculous trips, buying boats, anything that is a lavish kind of blow a pile of money and have a lot of fun doing it. Surely you can't be serious.

Mostly Voices [19:44]

I am serious. And don't call me Shirley.

Mostly Uncle Frank [19:48]

And here's how I think of dividing those things up. I think if you are at 3% or less for those KLO expenses, you're probably going to be fine because that is never going to kill you in terms of reducing the size of your portfolio in any significant way. even if it's not a risk parity style portfolio, then I would put 1% as your comfort money, and then I put another 1% as your fun money. And so I do want to spend up to 5% every year, but I won't necessarily spend 5% in any particular year. And this gives you the flexibility to reduce spending if the markets are bad and you're feeling bad about it. and it also gives you a way to think about it as your expenses change because the KLO money might be more or less depending on people's health, depending on where you're living, depending on a lot of other things that can change. For most people that amount actually goes down over time, but everyone's situation is going to be a little bit different. And hopefully that answers at least most of your questions in a useful way.

Mostly Voices [20:59]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [21:07]

And now just looking at your last comments, I'm glad you liked the YouTube video. I'm gonna try and make more of those.

Mostly Voices [21:11]

Yeah, baby, yeah!

Mostly Uncle Frank [21:15]

We won't be letting the perfect be the enemy of the good, so I'm just going to sit down and crank them out, hopefully at least one a month. Thanks for the podcast recommendation. If you are looking for other Retirement related podcasts. The Retirement Answer Man with Roger Whitney is usually pretty good, as is the White Coat Investor. But as always, take what is useful, discard what is useless, and add something uniquely your own. But now I see our signal is beginning to fade. I'm going on travel again this week, so there may or may not be a podcast this weekend. I will try to update the website regardless, however, of the seven sample portfolios on the portfolios page at www.riskparityradio.com if you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and fill out the contact form and I will get your message that way. Hopefully. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, and a review. That would be great. Mmmkay. And if you're feeling in the giving mood for Giving Tuesday, please go to our support page at www.riskparityradio.com where we have some giving opportunities for our charity, the Father McKenna Center.

Mostly Voices [22:53]

I'm asking you to do that. But what's easy to do is what? Easy not to do. Thank you once again for tuning in.

Mostly Uncle Frank [23:05]

This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Voices [23:27]

The Risk Parity Radio Show is hosted by Frank Vasquez.

Mostly Mary [23:31]

The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here. making sure to take into account your own personal circumstances.