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 [0:20]

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.

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. Yeah, baby, yeah! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Voices [1:28]

Top drawer, really top drawer.

Mostly Uncle Frank [1:32]

Along with a host named after a hot dog. Lighten up, Francis. But now onward, episode 247. Today on Risk Parity Radio, we're just going to try to get back into the swing of things and catch up on some of these emails. Mary and I just got back from the economy conference last weekend. In Cincinnati, Ohio, we had a very nice time. Do the things that we like to do. Oh, do a little dance, make a little love, get down tonight, get down tonight. It was nice to meet a number of you in person.

Mostly Voices [2:17]

Yeah, baby, yeah.

Mostly Uncle Frank [2:20]

I had expected a workshop of about 50 people, but I think it ended up being more of a workshop of about 150 to 200 people, which made me wish I had done slides instead of the working on the whiteboard. But it was what it was, and I will be publishing some of those pictures of what was on the whiteboard somewhere with the economy materials probably on their Facebook page at some point. I'm working that out. I did enjoy being able to work in a few of my favorites during the presentation, including this. Here's a horoscope for everyone. Aquarius, you're gonna die. Capricorn, you're gonna die. Gemini, you're gonna die twice. And this. You're gonna end up eating a steady diet of government cheese and living in a van down by the river. And of course this. I'm telling you fellas, you're gonna want that cowbell. But I think we are done with conferencing for a while because as we say here at Risk Parity Radio, I don't think I'd like another job. And so I am back here in the easy chair doing what I seem to do best in retirement.

Mostly Voices [3:37]

Snooze and dream, dream and snooze, the pleasures are unlimited.

Mostly Uncle Frank [3:42]

But enough of my prattling. Let's just get to what you want to hear. Here I go once again with the email.

Mostly Voices [3:51]

And first off, we have an

Mostly Uncle Frank [3:54]

email from Clint. Go ahead. Make my day. And Clint writes.

Mostly Mary [4:06]

Hi Frank, I am 62 and two and a half years away from retirement. Upon retirement, when I am no longer contributing to my employer's 457 program, I would like to consolidate my various retirement investments with a single company that offers a range of low administrative cost index fees and ETFs. However, I am leery of the huge size that firms like Vanguard, Fidelity, and Schwab have grown to and the potential for institutional failure that can happen the larger a firm is.

Mostly Voices [4:49]

Do you have any recommendations of smaller to mid-size investment firms that offer a good range of index funds and ETFs so I can create a risk parity type of portfolio? You could ask yourself questions.

Mostly Uncle Frank [4:53]

Well, Clint, there certainly are other options besides the big three. Personally, I use Interactive Brokers for our main brokerage account. It's designed more for traders and professionals, so it's not as user friendly as one of the big three, but it works just fine and I'm happy with it. You could also use something like M1 with its pies. There is a new kid on the block called Composer, which offers an ability to create portfolios in algorithmic form. So it's kind of complicated. It has a programming function on top of it. And then there's something like E-Trade, which is currently being bought by Merrill Lynch. I guess it's already bought by Merrill Lynch. They just haven't completely integrated yet, and we have a legacy account there, and it works fine. But I think what you should also appreciate is that brokerages are not like banks in that the money you deposit in a bank becomes the bank's assets. and then the bank has a liability to you and they can reinvest those assets by loaning money out or buying other financial instruments and things like that. The way a brokerage, a US brokerage is set up and regulated is as a separate entity from its customers and the funds held by its customers and the ETFs and other things in the accounts of its customers, which are often at a completely different entity as a custodian. And there was a good explanation of all of this about a 15-minute video by Rob Berger that I will link to in the show notes that will help explain this in a lot more detail. He made a good point is that the kinds of places that you should be concerned about would be smaller places, particularly if they do not have separate custodians. And he gave the example of Bernie Madoff as one of those sorts of things. And occasionally you hear about scams run by small shops who have their own funds or own kinds of investments, and that's where people will get into trouble when the firm goes belly up. So the upshot is I think you should feel fairly confident with the big three or the other ones I mentioned. They all have a full slate of ETFs on offer, although Vanguard makes it sometimes difficult to invest in things that are not their own, and they are all very well regulated by the SEC and carry SI PC insurance. And they are certainly not set up like banks, although I do note that Schwab has a separate banking function to it. But banking functions and brokerages have to be legally separate under the way the regulations work. So hopefully some of those suggestions will help you and you can check out that video, which I think is a pretty good explanation with a lot of documents being shown. So hopefully that'll help too. And thank you for your email.

Mostly Voices [8:04]

You're a dinosaur, Callahan. Your ideas don't fit today. You know who you're talking to? You know my record? Yeah. You're a legend in your own mind. Second off.

Mostly Uncle Frank [8:21]

Second off, an email from Jeff and Jeff writes. Hi, Frank.

Mostly Mary [8:25]

Thanks as always for all the great content and the laughs as well. Your podcast continues to be something that I recommend to many people.

Mostly Voices [8:34]

Well, that right there may be the reason you've had difficulty finding gainful employment.

Mostly Mary [8:38]

My question is regarding how someone should try to find their financial independence number when they are on the younger side. I am 47 and have two kids, so my expenses are very high for things like private school and big family vacations. When trying to use the 4% rule, it is so hard to know how much my expenses will be at, say, age 75 with Social Security coming in and the kids grown up, etc. Just curious if you have any methodology you use to help figure this number out, and if you think the risk parity portfolios would be changed in any way for someone retiring at age 40 or 50 versus retiring at age 70. I think that calculating my FI number would be a huge help, but I tend to err on the side of caution. But I also don't want to account for spending huge amounts of money at age 95 when I likely won't be taking too many European vacations. But hey, you never know. Thanks as always, regards, Jeff.

Mostly Voices [9:37]

I guess what we do is just drive around this circle here. Should be the second left exit, there's the hotel. Hey, look, kids. There's Big Ben and there's Parliament. There it is, there it is, there it is. I know, I can't seem to get over to the left, honey. I'll try next time. Sorry. We'll get out of this jam in a minute. Kids, Big Ben, Parliament again. Kids. We know, Big Ben. Parliament. Look, kids. Forget it. It's amazing. I cannot get left.

Mostly Uncle Frank [10:22]

There's Big Ben kids, Parliament. Well, Jeff, first you might want to be careful about who you recommend this podcast to.

Mostly Voices [10:34]

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

Mostly Uncle Frank [10:38]

It's rather an acquired taste, like drinking single malt scotch that tastes like dirt. The best, Jerry, the best. But it does tend to keep away the riff raff.

Mostly Voices [10:49]

Yes, you take my drinks like the one that you just interrupted. It was marvelous. I was foreclosing the mortgage on a lifelong friend. I was creating a poverty pocket right in the heart of Beverly Hills.

Mostly Uncle Frank [11:02]

And I do really appreciate this audience because if you like this podcast, you probably really, really like it. And if you don't, you probably don't listen to it more than a couple of times. But I'd rather have a very engaged and enthusiastic audience that's relatively small. Everything that has transpired has done so according to my design. Because you all seem to have very good questions and very good ideas.

Mostly Voices [11:26]

That and a nickel will get you a hot cup of Jack squat. But now getting to your questions.

Mostly Uncle Frank [11:35]

To tell you the truth, I don't have any magic formulas, but I do have some ideas and observations. Crystal Ball can help you.

Mostly Voices [11:43]

It can guide you.

Mostly Uncle Frank [11:46]

The first one comes from the research done by David Blanchett about what's called the retirement spending smile and the observation that most people's spending tends to decline for most of their retirement and only increase towards the end, but never really gets back to where it was when they first retired. And that's certainly likely to be the pattern for us, because we're still supporting children and other family members and so on and so forth right now. And we believe that most of those expenses will go away, although you never know when grandchildren might show up. The other exemplars that I have to observe are my own parents and my in-laws. My father just turned 94 and my mother is 89 and they still live unassisted along with my sister or one of my sisters I should say. And my in-laws still live unassisted there in their 80s and downsize their big house to a small condo and do not spend a whole lot of their retirement money. A lot of that was because of COVID but a lot of it is because they are slowing down. So in my own mind, I'm kind of viewing this as a kind of before 70 and after 70. The reason I picked 70 is simply because that's probably when we're going to be taking our full Social Security. We'll probably delay mine until then. And it's also at that point we'll be making an assessment of our likely health span and how long we're likely to live and then decide whether we should be buying single premium immediate annuities or QLACs or other things. which will simplify some of our retirement expenses. And I can imagine by that point we'll be downsizing the house and other things, or at least thinking and talking about that. But now if you want to be more granular about this and really think through it, the first step is to evaluate your current expenses, whatever they are right now. And yes, a lot of it is going to be child and education related. And your expenses are likely to peak around the time your children are graduating from high school or going to college. So if you can estimate those costs, that will give you kind of an upper boundary to what you're talking about. I will say that while we might have pulled the plug a little earlier, we did not want or think to do that until we knew where our youngest was going to college and our eldest was completely off the dole and our second one was nearly off the dole. Now, as for the portfolios themselves, I'm not sure that they would actually change much in any meaningful way, at least not based on this consideration. It was interesting, one of the things I spent a lot of time talking about at this presentation I just gave was the adjustment factor to your spending, which in traditional or academic settings has always been set to CPI inflation. but we know for a fact that retirees don't spend that much and tend to spend less. One way of modeling that using the Blanchard assumptions is to assume that it's going to be CPI minus 1% and the effect of that does effectively change your safe withdrawal rate by raising it about 0.5 or 0.6% on a standard kind of portfolio. And this comes from some recent research that Morningstar did in their last State of Retirement report from December of 2022. And I'll link to that in the show notes. Read the second half of it because it also talks about some other variable kind of withdrawal strategies using guardrails, those sorts of things. It's really those things, the change or lack of change in your expenses that is going to be you're ace in the hole, if you will, as you go forward. And so I do tend to think in terms of, well, what if we had to make some drastic changes and go to half the house we have or something like that, or just move to a different location that was a lot cheaper to live in, things that I wouldn't want to do or plan on doing, but could be done in a pinch if it had to be done. But then I always come back to this big picture issue about the difference between risk and uncertainty. and when you're talking about a world of uncertainty like our futures, where there could be plus factors and minus factors that we're not aware of right now, it's actually better not to try to be too precise because the more variables you try to plan out or predict, the more likely you're going to get a precise answer that is precisely wrong. Whereas if you use ball parks, Safe withdrawal rates and estimates of future expenses based on your current expenses or what you would think your max expenses are likely to be in the near future. Those will get you in the right area so that the actual outcome will be within the penumbra, if you will, of those possibilities and you won't be fixated on something that ends up being precisely wrong. I honestly think this is actually a problem with a lot of retirement planning tools is that they attempt to be too detailed and too precise about things in the future that can't be predicted with that precision and so can give a false sense of security or insecurity as the case may be. Because if you take something that's an input and it's either too conservative or too aggressive and then you compound it What you end up with is a result that is highly unlikely to occur, which is another danger of retirement planning softwares that you really want to put in the most average or best prediction of your inputs and then look at a range of outputs and figure you're going to be within that range, as opposed to trying to make adjustments to the inputs. Now, I realize those may not have been the droids you were looking for, and you may have been hoping for something a little bit more tangible and precise, but hopefully at least some of that helped, or at least got you thinking. And thank you for that email.

Mostly Voices [18:09]

These aren't the droids we're looking for. You can go about his business. You can go about your business, but move along. Move along. Move along.

Mostly Uncle Frank [18:22]

Last off. Last off, we have an email from Penny.

Mostly Voices [18:29]

Penny Lane is in my ears and in my eyes. And Penny writes. Hi, Frank.

Mostly Mary [18:41]

Thanks to you and Mary for everything you do for the DIY investment community. If possible, with tax season upon us, could you give us some tips about how to optimize your taxes when using a risk parity style portfolio on a taxable account? Particularly if you are still in your 40s and pulling money from your portfolio already. Thanks, Penny.

Mostly Uncle Frank [19:04]

Taxes, taxes, taxes.

Mostly Voices [19:08]

Marsha, Marsha, Marsha.

Mostly Uncle Frank [19:11]

Yes, it is unfortunately tax season for some. My first advice is to postpone it by getting an extension, and then your tax season will be in the fall. And your accountant will be much happier with you doing your taxes in July when there's nobody else around. At least that's a procedure I've followed for about the past 15 years. But if you're gonna do that, make sure you do pay your estimated if there is an estimated left over for you to pay by April 15th. But now let's talk about optimizing portfolios. And I don't think optimizing a risk parity style portfolio is much different than optimizing most any other kind of portfolio. So these same principles would apply pretty much across the board. Now part of this depends on what you are withdrawing from as you go forward, because there are a couple different ways you could be managing this. You could be just simply drawing down on a cash portion like we do with the sample portfolio, the golden ratio, or you could be going month to month or quarter to quarter drawing out of the best performer that month or that quarter. If you're talking about a taxable account and you have other assets that are in retirement accounts, then your taxable account is probably composed mostly of stocks and of cash or cash equivalents. And those are relatively easy to manage. The first principle, if I didn't have to say this, but do not reinvest dividends. Just do not reinvest dividends if you are in your drawdown phase. And that goes for whatever the account is in because it just makes it easier to pull the cash out of it. It actually makes it easier to rebalance it. and it doesn't get you into wash sale territory or problems like that. So to the extent that you have any dividend reinvestment going on, just turn all that off. And to interrupt that thought, what I should have said before in the first place is that there's not a whole lot of tax planning you can do at this stage for what has already occurred in the past tax year. About the only thing left to do is that you could if you were still working, either fund IRAs or SEP IRAs. And if you get an extension to file, you can actually file that SEP money all the way up until you pay your taxes in the fall after you figure out what they are. But it didn't sound like you were in that situation. You're particularly withdrawing, in which case you are really not dealing with last year's taxes. You are really dealing with how to manage this year's taxes for next year's payment. Okay, getting back to where I was, after you've turned off all of your dividend reinvesting, you can get a good idea, a projection of what your likely income is coming out of this portfolio for the year. And oftentimes, you can get a projection of that through your brokerage. Poke around in there and see if you can get something like that. Most of them will do it. That will give you an idea of what you'll be paying taxes on strictly out of dividends or interest payments. Remember that your qualified dividends though are going to be taxed at the lower long-term capital gains tax rate and not the higher ordinary income rate. Now, depending on what your overall income is and where it's coming from, you may need to start paying quarterly tax payments that you would have had taken out of a paycheck were you still employed. Those quarterly's are due April 15th, June 15th, September 15th, and January 15th of the next year for the previous quarter. So make sure you are paying those on time if they are due for you. The next key is simply to minimize the number of transactions you are making. So hopefully you're not doing a lot of trading and hopefully the things you are selling are over a year old in a taxable account. and would qualify for long-term capital gains tax treatment. The only wild card in there, which may apply this year in particular, is if you have some gold or gold ETF that you are selling, that will be taxed at an ordinary income rate up to a maximum rate of 28% the way it works out. But really, without knowing your specific situation, my best advice is to simply minimize the number of transactions that you actually have. Now, the real planning occurs when you get more to the fourth quarter of the year, because at that point you will have a really good idea as to your overall capital gains for the year, and then you may be considering some tax loss harvesting, assuming you're in the 15% or 20% long-term capital gains tax bracket. If you're in the 0% bracket, you'll be thinking about doing some tax gain harvesting. And to do your tax loss harvesting, you want to be selling something that is going to generate a loss and then replace it with something that is very similar but is not exactly the same. So for example, you could replace a fund like VTI, Vanguard Total Stock Market Fund, with something like VOO, which is an S&P 500 fund, or even maybe some VUG, which is a large cap growth fund. All of those funds are highly correlated. Every fund out there these days is going to have some kind of pairing. There was a nice list of these provided by Tyler over at Portfolio Charts in an article about tax loss harvesting some bond funds, which he did last November or December. I will link to that in the show notes, but it's got a number of different pairings that you would consider for that. But I probably really wouldn't be focused on that until towards the end of the year when you have a better idea of what your whole year actually looks like. Just make sure you are keeping track of these things. Your brokerage should be keeping track of these things and you should be able to look up what your current status is in terms of gains or losses for the year and whether those are short-term gains or losses or long-term gains or losses. I would hope that all of yours would be long-term gains or losses because really that's where you want to get all of your assets into that status to minimize your taxes overall. But honestly, what I've just given you is probably about all there is for you to do, given what you've told me, because other things that you might be doing would be conversions to Roths from traditional IRAs or 401 s. And there could be a whole host of deductions and other things you might take, depending on whether you have any residual income. But none of that seems to be very pertinent to what we're talking about here and what you had in your email. I would have to say that I'm certainly not a tax expert, although I tend to know enough to know what I don't know. Forget about it. And know how to look it up, or at least ask my CPA. No, Will Robinson. Danger. It is interesting though, and I haven't mentioned this for quite some time, your tax situation in retirement tends to divide along three lines. And it has to do with whether you are in the 0% long-term capital gains tax bracket, the 15% bracket, or the 20% bracket. Now, a lot of people are in the 0% long-term capital gains tax bracket.'Cause if you're a couple making less than about, I think, about 120,000 these days, you could be in that 0% long-term capital gains tax bracket, which means you can do tax gain harvesting. You're really not going to be paying anything on your capital gains and your taxes should be very minor. I will link to a good article by Go Curry Cracker that's called Never Pay Taxes Again and they are in that kind of situation and go over a lot of the strategies that they use to really minimize or negate their tax bills. Now, if your income as a couple is somewhere between 120,000 and 500,000 for the year, then you're probably in the 15% long-term capital gains tax bracket. And that's mostly what I've been talking about here. Then you are looking at some basic tax loss harvesting and other strategies like that. Now, if your accumulated assets are large enough that you are taking over about half a million dollars in income a year, you may need professional help, professional tax help, because you're also probably going to be paying estate taxes eventually, and there is a whole different set of rules and opportunities and options for people who are dealing with that, that include things like private placement insurance and other things that really do not apply to most people most of the time. But I just wanted to mention that in passing because the rules that apply to your particular tax situation can be completely different depending on which of those three categories you're in. And the best practices are certainly going to be different. Surely you can't be serious.

Mostly Voices [28:34]

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

Mostly Uncle Frank [28:38]

Hopefully all that was somewhat helpful and did not put you to sleep.

Mostly Voices [28:41]

I took the liberty of putting away something in your teeth. What are you talking about? I'm putting you to sleep.

Mostly Uncle Frank [28:49]

Although I see our dog is sleeping now based on that presentation. Fortunately, she's keeping her snoring to a minimum right now. We have a 15-year-old chihuahua named Godzilla who has her own easy blanket very close to my easy chair. and has been waiting patiently for her last walk of the day.

Mostly Voices [29:11]

Frank settled down out in the valley, and he hung his wild ears on a nail that he drove through his wife's forehead. He sold used office furniture out there on San Fernando Road, and a little Chihuahua named Carlos that had some kind of skin disease and was totally blind. And with that, Now I do see our signal is beginning to fade. Thank you for that last email.

Mostly Uncle Frank [29:37]

Hopefully I'll be done running around the country, at least for the next month or so, and we'll get back to two a week on the podcast with all the bank failures and whatnots going on.

Mostly Voices [29:49]

Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [29:56]

But anyway, 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 put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a review. That would be great. Okay. I do note that we were having some trouble with the Apple podcast feed, but I think that's been fixed. So hopefully you didn't miss anything there. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [30:41]

They had a thoroughly modern kitchen, self-cleaning oven, the whole bit. Frank drove a little sedan. They were so happy. One night Frank was on his way home from work, stopped at the liquor store, picked up a couple of Mickey's Big Mouths, drank them in the car on the way to the Shell station. Got a gallon of gas and a can. Drove home, doused everything in the house, and torched it. Parked across the street laughing, watching it burn. All Halloween orange and chimney red. And Frank put on a top 40 station, got on the Hollywood Freeway, and headed north. Never could stand that dog.

Mostly Mary [31:47]

The Risk Parity Radio show is hosted by Frank Vasquez. 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.