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.

Mostly Uncle Frank [0:37]

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 the finest podcast audience available.

Mostly Mary [1:28]

Top drawer, really top drawer, along with

Mostly Uncle Frank [1:31]

a host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis. But now onward, episode 261.

Mostly Uncle Frank [1:40]

Today on risk parity radio, we will continue to hack away at the pile of emails that keeps growing. Since I keep traveling on weekends, I'm not making too much progress here. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob.

Mostly Voices [2:02]

But we'll do what we can do, and without further ado, here I go once again with the email.

Mostly Uncle Frank [2:08]

And... First off, we have an email from my contact info.

Mostly Voices [2:15]

Oh, I didn't know you were doing one. Oh, sure.

Mostly Mary [2:20]

And my contact info rates. Frank, continue to enjoy your podcast. Thank you. Below is a topic that most are aware of, but I thought the below article provides meaningful detail.

Mostly Voices [2:32]

You are correct, sir, yes.

Mostly Uncle Frank [2:36]

All right, what he is referring to here is an article from Michael Kitsis. It is entitled Navigating the Capital Gains Bump Zone when ordinary income crowds out favorable capital gains rates. And this is about the phenomenon that your capital gains income for a year, any given year under US federal tax law stacks on top of the ordinary income. And so the amount of ordinary income in effect changes your capital gains Tax rates. And not only that, the capital gains tax brackets do not exactly line up with the ordinary income brackets, making it even more complicated. Don't be saucy with me Bernaise. So it is something that you should be acutely aware of as a US taxpayer, particularly if you have significant Capital Gains, and I will link to the article in the show notes. Although the topic is not very conducive to discussing on a podcast because it gets very complicated very quickly and you do need to be looking at the brackets and charts and graphs that are presented there. In the end though, I'm not certain how helpful it is to be talking about bump zones of higher taxation for small amounts of money. What really matters in the end is what you would call your effective tax rate being when all is said and done, how much of your total income will you have to pay in taxes? And so I always try to focus on that and do the calculations using some tax software. And for most people, especially retirees, the time to really focus on this is in the fourth quarter of every year. Because by that time you have a sense of what your income has been like for the year. And then you can decide whether you're going to do any IRA conversions, tax loss harvesting, or make any other moves, if you will. I like to move it, move it.

Mostly Voices [4:44]

I like to move it, move it. I like to move it, move it. You like to move it. In terms of your assets, so that you can minimize the tax burden.

Mostly Uncle Frank [4:56]

And when I say minimize the tax burden, it should be done over time because you can easily fall into the trap of minimizing your tax burden for one particular year and then ending up with even more to pay in other particular years. So it tends to be better to spread out your income over as many years as possible, thereby keeping yourself in the lower tax brackets. on a marginal basis.

Mostly Voices [5:24]

Yes!

Mostly Uncle Frank [5:28]

But I will leave the article there in the show notes for perusal by our most august audience.

Mostly Voices [5:36]

All hail Caesar, Emperor of Rome, Monarch of the Roman Empire, Ruler of the World.

Mostly Uncle Frank [5:43]

And thank you for your email. Second off, Second off, we have an email from Mark.

Mostly Voices [5:59]

All hail the commander of His Majesty's Roman Legions, the brave and noble Marcus Vindictus.

Mostly Mary [6:11]

And Mark writes, hi Frank, I know you made the request a while back for suggestions of additional foundational episodes But I just got finished listening to all of the episodes and had a couple of recommendations. Yeah, baby, yeah!

Mostly Voices [6:23]

I thought that both episodes 208 and 209 should

Mostly Mary [6:28]

totally be added to your recommended list. 208 is a well-crafted masterpiece to explain investing in a creative way to beginners. Loved it. Bing! 209 does a really great job rebutting financial myths that so commonly get thrown around. It actually made me realize that I was holding on to some of those myths in my own financial independence planning. So I really appreciated that episode. Bing again. Looking forward to many more episodes. Keep up the great work, Mark. Bing, bing. All right, Mark, thank you for identifying those.

Mostly Uncle Frank [7:08]

It does remind me I probably do need to update the little intros I stick on the beginning of these podcasts. since we often start in the weeds with the emails and then stay in the weeds or maybe end up in another place.

Mostly Voices [7:23]

You're gonna end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [7:32]

But anyway, for reference, episode 208 was advice for new investors were off to see the wizard. And this was done at the general suggestion of Paul Merriman, who asked me if I would have an episode directed at beginning investors. And so it follows a Wizard of Oz theme for those beginning investors.

Mostly Voices [7:57]

Do you presume to criticize the great Oz? You ungrateful creatures think yourselves lucky that I'm giving you audience tomorrow instead of 20 years from now. The great Oz has spoken.

Mostly Uncle Frank [8:14]

Now, episode 209 is entitled Popular Safe Withdrawal Rate Delusions and the Madness of Gurus, along with portfolio reviews for September 30th. And that one gets at some of the hysterical pessimism and other inappropriate assumptions that I often hear in popular finance because saying everything's falling apart and nothing's going to work in the future and we can't spend any of our money. Real wrath of God type stuff. Tends to attract more attention. Fire and brimstone coming down from the sky. Then practical advice about how to approach these things. So that we can spend more of our money. Rivers and seas boiling.

Mostly Voices [9:03]

40 years of darkness, earthquakes, volcanoes, the dead rising from the grave, human sacrifice, dogs and cats living together, mass hysteria. And I go through a laundry list of those things there, as suggested by one of our listeners.

Mostly Uncle Frank [9:18]

You can't handle the dogs and cats living together. And so you can all check those out if you haven't already. And I'll get to work on redoing my second introductions to include your suggestions as foundational episodes people may want to check out.

Mostly Voices [9:38]

Of course people do go both ways.

Mostly Uncle Frank [9:42]

And if any of the rest of you besides Mark have any ideas for what to suggest as foundational episodes for newer listeners to listen to, I would be grateful if you would Send me an email and tell me what you think.

Mostly Voices [9:57]

That and a nickel get you a hot cup of Jack Squat! And be kind.

Mostly Uncle Frank [10:05]

Or if you're not going to be kind, at least be entertaining. Like I'm a clown, I amuse you? I'll take it either way.

Mostly Voices [10:13]

I award you no points and may God have mercy on your soul. And thank you for your email.

Mostly Uncle Frank [10:19]

Next off, we have an email from Casey.

Mostly Voices [10:31]

And Casey writes, hi Frank,

Mostly Mary [10:35]

Big Earn really likes to bust your opinions on his blog. He again called your ideas on home ownership a wacky idea in his last post. Forget about it. Do you have anything to refute his conclusions? I don't own a house and I'm not planning to do so because I don't believe in it. I don't agree with his passionate conclusions on home buying. I share the millennial revolution approach that not buying a house will set you free and so far it certainly has been. Thoughts?

Mostly Uncle Frank [11:15]

Well, Casey, Carsten and I are a little bit fond of taking intellectual shots at each other now and again.

Mostly Voices [11:23]

You're insane, Goldmember! And that's the way, -huh, -huh, I like it.

Mostly Uncle Frank [11:30]

And you shouldn't read too much into the banter. Duck season.

Mostly Voices [11:35]

Rabbit season. Duck season. Rabbit season.

Mostly Uncle Frank [11:40]

Because it really is kind of like that cartoon celebrity death match we talked about back in episode 223.

Mostly Voices [11:48]

Only in America could there be a fight like this on a night like this in a beautiful city like this. Don't. No.

Mostly Uncle Frank [12:02]

So anyway, before he posted that, he did give me the courtesy of sending me an email and telling me it was coming and asking me to Comment upon it, which I have done on that post in the comments section, and you can peruse that at your leisure.

Mostly Voices [12:20]

Johnny, the dreaded purple Nerfle! I haven't seen this move since the fifth grade.

Mostly Uncle Frank [12:24]

Amazing, Nick! If you haven't already, since this email is over a month old now. But anyway, this debate that we were having there, or have been having, has to do with the appropriate assumptions for inflation for a retiree. And I had said, and I still say, that personal inflation is personal, and that it is something that is well within the control of most retirees, and that one way one can minimize their personal inflation is to minimize the growth of their housing costs, which can be done if you own your own house or have a fixed rate mortgage. And he put together something to refute that in the form of a simulation that he ran in his toolbox. And I don't disagree that the fact that you can come up with a simulation or an example of where paying rent would be the better choice than buying a house.

Mostly Voices [13:30]

Fight fans, this is the stupidest match I've ever seen. It's the fight about nothing.

Mostly Uncle Frank [13:35]

But it's kind of just looking at one tree within a large forest. And what that forest tells you and what the research has told us is that the inflation rate for an average retiree in the United States, and this comes from David Blanchett and then from Morningstar is approximately 1% less than the CPI. And that includes all retirees. Who granted are mostly older retirees, but it does include all the ones that Blanchett has surveyed. And my observation was, well, if that is the average capability of managing expenses for all retirees, then somebody with some intentionality ought to be able to do even a little bit better than that. The consequences of that for your safe withdrawal rate are that it tends to raise the safe withdrawal rate. So if your personal rate of inflation is 1% less than the CPI, that in effect raises your safe withdrawal rate of the money you can take out of your portfolio by about 0.6%, as found by Morningstar in their recent analysis that came out in December of 2022. Now, as to housing, usually this is done in more of a lumpy way in terms of reducing expenses and then maintaining that reduction over time. And Carsten's experience is exactly that if you look at his earlier posts about him retiring from San Francisco, moving from there doing some geo arbitrage to a lower cost area and then buying a different house, obviously that reduced his overall housing costs by a great deal. And so if you were to compare what his living costs are now compared to what they would have been had he stayed in San Francisco, and perhaps rented. His rate of personal inflation from that point is probably negative. But I did suggest in the end of my post commenting on his post that perhaps it would be interesting for him to run those figures since he had those at hand and he had already discussed them before in his blog there. Another place where you'll find this discussed very recently is on the Earn and Invest podcast that came out last week, which featured Christine Benz and Joe Cihak and Christine was talking about this study that they did in late 2022 and about how using variable withdrawal rates could improve your effective safe withdrawal rate and that one of those mechanisms was in fact managing your personal rate of inflation And she did mention housing costs as one of the ways to do that. Now, as to your specific question, do you need to own a house to do this? And the answer is no.

Mostly Voices [16:55]

Forget about it.

Mostly Uncle Frank [16:59]

But if you are early retired and not Chain down to any one location, your best option is probably to do some geo arbitrage and simply move to a lower cost location if the rents in your area get too high. And that would be another way of minimizing your housing costs and reducing your personal inflation rate, thereby allowing you to have a higher safe withdrawal rate. And so there are many ways to skin this cat. Ultimately, the main point I was trying to get at, and what we actually talked about back in episode 209, now that you mention it, is that the assumption made originally by Bill Bengen that your personal inflation rate would rise at the rate of CPI when he was first calculating safe withdrawal rates back in 1994, is actually a conservative assumption and is probably an inaccurate assumption. And we know that from all the research that David Blanchett and others have done since then, which means that on that basis, the projected safe withdrawal rate was too low and is probably too low if you are making that assumption. So you can either adjust What you are doing to reflect inflation or simply recognize it as a buffer or additional fail-safe.

Mostly Voices [18:28]

You need somebody watching your back at all times.

Mostly Uncle Frank [18:32]

Our own personal experience since 2020 is that our expenses actually have declined overall and for a variety of reasons. And I do anticipate that they will decline further in the future. especially after we finally move out of our big family raising house into something less expensive, as Karsten's family has also done. So as long as you understand the principle that personal inflation is personal, and that if it's below what the CPI says your safe withdrawal rate, as commonly calculated, is likely to be higher than it otherwise would be according to the calculation. Did you see the memo about this?

Mostly Voices [19:16]

If you understand those principles and can apply them,

Mostly Uncle Frank [19:19]

then I've gotten my message across. Didn't you get that memo? Regardless of what simulations others may propose. I'll go ahead and make sure you get another copy of that memo. Okay? And thank you for that email. Last off, last off, we have an email from Eric from Cincy.

Mostly Mary [20:02]

She's a killer, queen, dynamite with a laser beam, Galactica, it's a And Eric from Scentsy writes：Dear Uncle Frank, There have been a lot of recent discussions about bucketing on the podcast lately, and I wanted to contribute with a link to a blog post by Ben Carlson at A Wealth of Common Sense blog. The title of the post is the Mental Accounting of Asset Allocation. Perhaps you can add a link to the show notes and then we can put this subject to bed. I think it is reasonable to suggest that we can agree that bucketing is not a strategy or allocation. Bucketing is a mental trick to help give individual investors a sense of comfort. Thank you, Eric Incensey.

Mostly Uncle Frank [20:49]

Well, Eric, I agree with you, although I'm not sure we'll ever be able to put this to bed because it's also something that is popular and creates headlines in addition to confusion. But I think Ben Carlson explains that pretty well in his blog post and he writes some very nice blog posts, including one last year about the non-difference between bond ladders and bond funds, which also ends up being a form of mental accounting. Now, to me, there's nothing wrong with using some mental accounting in your management of your financial affairs, particularly if it helps you sleep at night and all you were doing is matching up some assets with future liabilities or something similar. The problem only comes when you mistake that kind of management as an actual strategy from a mathematical point of view. Because if you do get fixated on the mental accounting aspects of this, it can make you distort your actual strategy in the form of your actual portfolio allocations or other things. And when you do that just to fit with some mental accounting framework, you are just getting suboptimal results. But we just did a whole lot of discussion about this back in episodes 251 and 253. And so I would go listen to those if you haven't already. Because that's where we do try to separate the wheat from the chaff, the actual strategies from the mental accountings, the dogs from the tails.

Mostly Voices [22:35]

Who let the dogs out? Who let the dogs out?

Mostly Uncle Frank [22:44]

And including the tails with the buckets attached to them. which is not always a pleasant sight or sound. But I will link to this in the show notes, and I'm sure we will continue to beat this dead horse on occasion, and thank you for your email. But now I see our signal is beginning to fade, as seems to be our tradition this month. There will not be a podcast this weekend.

Mostly Voices [23:16]

because I'll be once more on hiatus. I don't like my job and I don't think I'm going to go anymore. We will update the website.

Mostly Uncle Frank [23:27]

Hopefully that'll be good enough. In the meantime, 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. You haven't had a chance to do it, pleaselease go to your favorite poodcast provider and like Subscribe, give me some Stars, a Review. That would be great. No care? Thank you once again for tuning in. This is Frank Bascus with risk quity radio.

Mostly Mary [24:26]

Signing off 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.