Mary and Others [0:01]

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 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.

Mary and Others [0:50]

Yeah, baby, yeah.

Mostly Uncle Frank [0:52]

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. Whoa, and you probably should check those out too, because we have the finest podcast audience available.

Mary and Others [1:26]

Top drawer, really top drawer.

Mostly Uncle Frank [1:31]

Along with a host named after a hot dog. Lighten up, francis. But now onward, episode 375. Today, on Risk Parody Radio, it's all about you. You need somebody watching your back at all times, as we try to do here, and so we are going to attend to your emails, and so, without further ado, here I go once again with the email. And First off. First off, we have an email from Frank Serenity. Now, Serenity. Now what is that? Doctor gave me a relaxation cassette when my blood pressure gets too high.

Mary and Others [2:14]

The man on the tape tells me to say Serenity now, and Frank writes Frank, happy birthday.

Mary and Others [2:22]

I previously sent you an email asking about bond allocation. You could not answer my question because you did not know my asset allocation, stage of retirement and source of income. I am 60 years old and semi-retired. We are in the 32% tax bracket and half is ordinary income while the other half is investment income. My asset allocation is 38%. Total stock market, 21% international stocks, 8% SCV, 2% gold, 17% intermediate municipal bonds and 14%. Cash Brokerage account is 88% and IRA 12% of the assets. I want to invest. Some of the cash I have recently bought some DBMF. Gold seems very expensive now. Should I increase our bond allocation? If so, should I buy EDV, vglt, vgit or a combination of them? How much do you recommend for the bond allocation? Thank you, frank. At the Festivus dinner you gather your family around and tell them all the ways they have disappointed you over the past year.

Mostly Uncle Frank [3:33]

Well, before we get to your email or the substance of your email, I must note that you have moved to the front of the line. Now, how did Frank move to the front of the line? Are you trying to keep us out of Del Boca Vista? Well, he did not move to the front of the line just because his name is Frank and we are the same age, although that's true. Now, that was weird, wild stuff.

Mostly Uncle Frank [3:58]

Frank moved to the front of the line because he is a donor to the Father McKenna Center, which is the charity we support in this podcast. We don't have any sponsors, we just have a charity. And Frank gives through Patreon, which is one of the ways you can give to the Father McKenna Center. The Father McKenna Center supports hungry and homeless people in Washington DC. And full disclosure, I am on the board and am the current treasurer. And full disclosure, I am on the board and am the current treasurer.

Mostly Uncle Frank [4:25]

And so if you give, either through Patreon, which you can do on our support page at wwwriskpartyradarcom, or you can give directly to the center and let me know, then I will move your email to the front of the line. Yes, and I'll put a link in the show notes just to help you with that. Now getting to your email, this is a follow-up to your email and the answer in episode 369. But you are still making me play a little bit of detective here. So you mentioned that you're in the 32% tax bracket, half in ordinary income and the other half is investment income. So what does that mean? That means that your adjusted gross income, the taxable part of it, is between 384,000 and 487,000 dollars annually, or at least last year. For a married couple and I'm assuming you're married, because you said we oh, how convenient.

Mostly Uncle Frank [5:26]

So let's just say that it's somewhere between that, that your annual income is $425,000, which means if half of it is coming from your investments, that's about $210,000,. Let's just say Now, if that's all coming from the investments that you described, you're probably getting income of about 3% out of those collectively when you include the stock market and the municipal bonds and the cash. And yes, I am assuming things, but I've got to assume something to get somewhere. So if you are getting 3% out of your investments and that 3% adds up to $210,000 a year, that means your portfolio is about $6.9 or $7 million, at least according to the assumptions I have made.

Mary and Others [6:19]

I am a scientist, not a philosopher.

Mostly Uncle Frank [6:22]

And, as you mentioned, it's 88% in ordinary brokerage account and 12% in an IRA or IRA assets. Also, just for reference, at this income level, you are still in the 15% long-term capital gains tax bracket, and that is significant because this is one of the places to be where there is the biggest difference between your ordinary income tax bracket and the long-term capital gains tax bracket. In fact, your ordinary income tax bracket and the long-term capital gains tax bracket In fact, your ordinary income tax bracket is more than double the long-term capital gains tax bracket, which tells you that you really want to be taking your income as long-term capital gains or qualified dividends wherever possible. And for those of you listening at home, I really want you to appreciate that the situation that Frank is in is probably much different than the situation most people live in, which is having ordinary income in the 20% tax bracket, the 20s somewhere in there, or having ordinary income that is below 20%, and the strategies and concerns of people in these different categories are quite different. And when you are in a situation like Frank is in, taxes do play a much higher role in deciding what to do. I should say a much bigger role, but you know what I mean.

Mostly Uncle Frank [7:51]

So, before we get to the portfolio, my first thought is that you should probably be looking for ways to shelter more of your income if you're still in this tax bracket, because you mentioned that half of your income is ordinary income and so, if you can get that into retirement accounts, iras if you're self-employed, look at a SEP IRA or a solo 401k. If not, you're going to just have to use whatever else is available. Since there's two of you, you can both have IRAs and you're over 50, so you can put more in there, because you have the opposite situation that most retirees actually find themselves in having not very much money in IRAs and a lot outside of IRAs. That makes things actually easier for you to manage going forward, because you're not worried about well, how am I going to get money out of the IRAs and do I want to do Roth conversions, and blah, blah, blah, blah, blah, blah blah. You don't have any of those issues. In fact, you can get more money into the IRA and wait until you're 70 and then start dealing with required minimum distributions or whatever you need to do there. They're just not going to be that big, and so there are advantages right now with your ordinary income in that 30% plus bracket to shelter that money now.

Mostly Uncle Frank [9:13]

And it's funny I realized this after I turned 59 and a half that what you're really doing at this stage of your life is you're just deferring when you're paying the taxes on it. So, for instance, we don't file our taxes until October every year because they're too complicated and we get extensions October every year because they're too complicated and we get extensions. That also allows us to decide in October or September of every year what we want to put into a SEP IRA for the prior year, because that deadline gets extended as well. So we look at our overall tax situation and decide whether to move money essentially from one account to another in that year to save on the taxes that year so we can pay them in a different year. You may or may not be in that same situation.

Mostly Uncle Frank [9:57]

I don't know the source of your income, but I would be looking at those kind of strategies and you are someone if you do have a portfolio that's $7 million would probably benefit from a financial planner that specializes in tax issues that I would pay a flat fee for a plan or advice specifically about how to manage your tax situation, because you could be saving tens of thousands of dollars annually if you just optimize what your taxes are and maybe they already are optimized, I don't know. But going from not thinking about it to pulling all the levers can make a big difference in these kind of tax brackets, and that is going to make a lot more of a difference than the question you actually asked, which is why I'm mentioning it. But let's get to that question you actually asked what should you do with this 14% in cash? It doesn't sound like to me that you need to be holding any cash really, because you've already got this other ordinary income coming in, which is cash, and all cash does besides sit there and not grow is throw off ordinary income. So, unless you have some specific short-term expenses you're covering with that, I would try to minimize the amount of cash you're holding. So let's talk about reallocating this 14%.

Mostly Uncle Frank [11:17]

Right now, your portfolio looks like 67% in stocks, 17% in bonds, 2% in alternatives in this case, gold and 14% in cash in alternatives in this case, gold and 14% in cash. Now, if you are trying to construct a portfolio that is best for drawing down upon and we went over these kind of basic guidelines in the last episode 374,. You're at the top end of what is ordinarily a good percentage in stocks, which is usually between 40 and 70. So you're right up near 70. So I would say this is an aggressive portfolio for holding in retirement. You have 17% in bonds. The usual amount you want to have is somewhere between 20 and 30% in intermediate and long-term bonds usually treasury bonds and 30% in intermediate and long-term bonds usually treasury bonds. But I appreciate why you have municipal bonds in your tax situation, which makes sense in your situation. Now, typically you also want to have between 10% and 25% in alternative assets, because that is going to give you the kind of diversification that you really want to have.

Mostly Uncle Frank [12:29]

So if you are looking for a portfolio that is best for drawing down on, I would probably split that 14% in cash right now and move that about half of it into the bonds and half of it into the alternatives. Now, on the bonds, you already have 17% that are of intermediate duration in the form of those municipal bonds, and so I don't think you need any more intermediate duration bonds. Which you should probably be looking at are the long-term treasury bonds and whether you put that in the VGLT, which can make sense, or something like EDV. If you want to go out further, it's not going to make that big of a difference. We're only talking about 7% of the portfolio. You're going to have more diversification duration-wise if you do go with something like EDV or GOVZ.

Mostly Uncle Frank [13:22]

But if you don't want to have the volatility, then I would just go straight to VGLT. And you do want to put those in the IRA because they're going to be paying ordinary income, like the cash does, which may involve shuffling a few things around, but you can sell one thing outside and buy another thing inside. It's the way you do that, and with the other seven I would put it into alternatives, probably gold or the Managed Futures Fund, dbmf, or just split it. That is on the low end of things. But in terms of drawing down on this portfolio, I think you're going to want to lean mostly on the stocks and so over time that will effectively reduce the stock holdings into the lower 60s and, relatively speaking, increase the percentage in the other holdings, and that will give you a pretty good portfolio for a high safe withdrawal rate.

Mostly Uncle Frank [14:16]

The other thing I would look at, if you can do and I don't know if you can do it because of the tax bracket you're in is shift more of the total stock market and international stocks specifically to value-tilted things, whether that's small-cap value or international small-cap value. I'm telling you, fellas, you're going to want that cowbell or other value-tilted allocations. That is also going to reduce the overall volatility of this portfolio and improve its projected safe withdrawal rate. Ideally, the stock portion of your portfolio is at least half value tilted, but again, one way to accomplish that over time would simply be to sell down the more growthy things and not the valuey things, which also needs to be tax managed. But remember, we're only in the 15% long-term capital gains tax bracket, so that's pretty advantageous even for making a few shifts there.

Mostly Uncle Frank [15:15]

Now, other considerations that you're going to want to think about, particularly with a tax planner, is when are you taking Social Security and how is that going to affect your income? I assume you're going to take it late, given what you've told me, which makes the most sense to me, and then is your income going to decrease? Are you going to go from semi-retired to fully retired at some point? When's that going to happen and what is that going to look like? There was this sound like a garbage truck dropped off the empire state building. And there is one other thing I think you should consider, given the size of your ordinary brokerage account, which is to move some of these assets over to an account at Interactive Brokers. Sounds like you're probably at Vanguard right now, given the funds you've mentioned.

Mostly Uncle Frank [16:08]

The reason I would move some of that brokerage account over to Interactive Brokers is so you can take a margin account there, and the reason you want a margin account there is not so you can make investments, but that so you have a ready source of cash and you don't have to then really be holding any cash for any kind of emergency, like a new roof or you want to spend $30,000 on a vacation next month or something.

Mostly Uncle Frank [16:34]

The reason you would use interactive brokers for this is because they have the best margin rates, particularly if you're talking about holding millions of dollars there. This is basically the Karsten Jeska big earn cash management strategy. He's also somebody that is choose holding any cash at all, simply because if you have access to margin like that, you probably don't need any, and this is also one of the advantages of having a large amount of your invested assets outside of retirement accounts and an ordinary brokerage account that you can easily borrow against it. The other advantage there is the tax advantage that any margin interest you pay is going to be tax deductible against any ordinary income made in that account. So there are a lot of advantages to holding a structure like that. Anyway, you have a very interesting situation here with a lot of optionality to it, and I hope everybody appreciates that. When you have high income like this, tax planning really starts mattering a lot, whereas if you were a person with an income less than $100,000 for a married couple, tax planning is almost irrelevant.

Mary and Others [17:46]

That's the fact, Jack. That's the fact, Jack.

Mostly Uncle Frank [17:50]

But this is why you really can't take a lot of common advice just off the shelf and just apply it without thinking about things like your tax situation and your overall level of income. Hopefully this helps your very interesting situation and thank you for your email.

Mary and Others [18:10]

Why'd you put the bananas in there? George likes the bananas, so let him have bananas on the side. Alright, please, please. I cannot have this constant bickering.

Mostly Uncle Frank [18:20]

Serenity. No, but I spent so much time on that one, I think I only have time for one more email today, and so, last off, last off. We have an email from Dan.

Mary and Others [18:37]

What do you want? Sonia Henney's out, we'll take Danny Noonan. And Dan writes I have a simple question.

Mary and Others [18:46]

I'm not a smart man, this may be covered on your website, but I have not seen it. When you distribute monthly from the portfolio, from which of the holdings do you distribute? For example, the All Seasons is listed as holding five funds GLDM, PDBC, vgit, vglt and VTI. If the monthly distribution amount is 0.33%, do you sell a small amount of each of these five holdings? Can I ask you something? Sure thing, shoot, timmy. Danny, danny, when you were my age, did you ever have trouble deciding what you wanted to do with your life? No, I never had that problem. Really, why Forget it? I didn't think you'd understand you take drugs.

Mary and Others [19:37]

Danny, every day.

Mostly Uncle Frank [19:38]

Good. So what's the problem? Well, this is one of those perennial questions that I don't mind answering multiple times during the year, because it's an important one, and it does affect how you manage your drawdown portfolios. There are two basic methods that we use in terms of drawing down on the sample portfolios. One of the methods we use for seven of the portfolios, and we use the other method for only one of the portfolios, which is the golden ratio. You could use either method with almost any kind of portfolio, though, so let's just talk about the method that we use with most of the portfolios.

Mostly Uncle Frank [20:18]

So most of these portfolios get rebalanced on a calendar basis. Some of them get rebalanced on bands, but they do get rebalanced from time to time, and after a rebalancing, obviously, the assets in the portfolio perform in various ways. Some of them go up, some of them go down. Some up a lot, some down a lot, some not much movement at all. So in between the rebalancings, we can use the withdrawals effectively to advance the rebalancing. And what do I mean by that? It means we're trying to sell high. So after a rebalancing, when we're taking those monthly distributions, we are looking at which assets have performed best since the last rebalancing, which is easy to look at. If you just look at the percentages in the portfolio that Fidelity gives you for each thing and then look at the. You just look at the percentages in the portfolio that Fidelity gives you for each thing and then look at the target percentages, you can see which ones are high and which ones are low, and so we're always going to be selling from the highest ones. So you'll notice that, for instance, recently, since gold has been outperforming just about every other asset, we've been taking lots of our distributions from gold. Now, while we could take distributions from multiple assets, it's much simpler just to look at one asset to take it from in any given month.

Mostly Uncle Frank [21:39]

So when it comes time for distribution, the first thing we do is we look and see if there's accumulated cash in the portfolio that we can just take. Because if there's accumulated cash out of dividends or other income that covers the amount of the distribution, then we don't need to sell anything. We just take the cash out and spend it. But if the cash amount does not cover what the distribution would be, then we go ahead and sell something, and I usually just sell enough of whatever it is to cover the whole distribution and leave the residual cash there alone so it can build up and be taken in another month.

Mostly Uncle Frank [22:20]

But you've also probably observed that some of these portfolios generate a lot more cash than others. In particular, that reference portfolio, the all seasons because it's got all those bonds in it throws out lots and lots of cash, and so about half of the distributions that come from that are just accumulated cash, and if there's not enough in there, then we sell something With a portfolio that's more like the golden butterfly, that does not generate as much cash. Then we are selling things more often to cover the distributions. Okay, now what is the other method that we follow? The other method is a simplified method and it is the original bucket strategy that was invented by Harold Avinsky back in the 1990s. That was before people turned bucket strategies into psychotic things that actually damage your portfolio construction.

Mary and Others [23:12]

That's not an improvement.

Mostly Uncle Frank [23:14]

But originally what Harold Levinsky did was, when he rebalanced his client's portfolios, he would take out some amount of cash and put it on the side, and then that is the amount that the client would live off for the next year or six months or whatever time frame they decided they were going to work that on. So we have set up the golden ratio sample portfolio, in this case like that, for that purpose. It has a 6% allocation to a money market fund or cash and all of the distributions come from that. So the management of that portfolio is really easy and there are hardly any transactions in there. All we do is rebalance the whole thing once a year, make sure the cash bucket is refilled with the 6% in cash and the distributions are flowing in there throughout the year, and so by the end of the year it's still 3% or 4% in cash, but then we just take all the distributions for the entire year out of that one place and we don't have to worry about what the other assets are doing. In fact, we don't need to look at them at all, and that is the psychological advantage in particular to managing your drawdown portfolio that way.

Mostly Uncle Frank [24:29]

That is, by the way, the way that Paul Merriman manages his personal portfolio. They have a portfolio that is 50% in stocks and 50% in bonds, more or less, and at the beginning of the year they used to take out 5%. Now they take out 6%, put it in a money market or savings account and then just spend that for the year and that works very well for him and it works very well for a lot of people and in fact I think most people would be benefited by using that kind of simplified bucket strategy so they don't have to be looking at their portfolio throughout the year. Which then leads to the question well, which one is better?

Mary and Others [25:12]

Better, better, better than a bucket I'm going to throw up, I guess. So A bucket for me, sir.

Mostly Uncle Frank [25:20]

The truth is they're not that much different because you're really not taking huge distributions out of these portfolios. If you think about it, if it's 5% and you divide that by 12, it's something like 0.4% every month, and then in a lot of months you're just taking accumulated cash anyway. So it's not even all the months of the year. But in theory, doing it as you go every month is probably slightly more efficient than doing it once a year. In practice, I don't think it makes really much difference at all, at least with the kinds of distributions we're talking about. So this is all described on the portfolios page in the individual descriptions of the portfolios, but not laid out in excruciating detail like I'm doing right now.

Mostly Uncle Frank [26:08]

Anyway, I think this is one of those questions that people fixate on because they think it's really really, really important, and the truth is it's not really really really important.

Mostly Uncle Frank [26:17]

The reason it's not really really important is because if you are rebalancing your portfolio on some schedule or plan anyway, whatever, your distributions are kind of wiped out whenever you do a rebalancing. So the more frequently you rebalance, the less this kind of thing actually matters, which is one of the reasons we adopted a more lengthy rebalancing schedule for the Optra portfolio as an experiment. That portfolio may only get rebalanced once every few years, and so taking from the highest performer over that time in theory will make more of a difference. But for most people who are rebalancing their portfolio every year anyway, this methodology you use to take your distributions on a monthly basis really does not make that big of a difference. But that is probably enough on this topic, at least for now again, although I do not mind addressing it one or more times a year, because it is one of those fundamental things that I think is important to come back to from time to time, particularly for the newer listeners who haven't heard it. So thank you for bringing it up again and thank you for your email.

Mary and Others [27:35]

The most important decision you can make right now is what do you stand for?

Mostly Uncle Frank [27:38]

Danny.

Mary and Others [27:41]

Goodness or badness.

Mostly Uncle Frank [27:46]

But now I see our signal is beginning to fade. As I mentioned in the last episode, there will be no episode this weekend. I'm off to visit some friends and I'm not sure there'll be one in the middle of next week either. It depends on whether I get back here in time. Forget about it, we'll see. Forget about it. So it may be a week and a half before you hear from me again, but in the meantime, if you have comments or questions for me, please send them to frankatriskparodyradarcom. That email is frankatriskparodyradarcom. Or you can go to the website wwwriskparodyradarcom. Put your message into the contact form and I'll get it all 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 follow, a review. That would be great. Okay, thank you once again for tuning in. This is Frank Vasquez, with Risk Priority Radio signing off. I like you, betty.

Mary and Others [28:48]

That's Danny. Sir Danny, I'm gonna give you a little advice. There's a force in the universe that makes things happen, and all you have to do is get in touch with it. Stop thinking, Let things happen and be the ball. You try it, danny, pardon me.

Mostly Uncle Frank [29:12]

Pardon you here. You try it.

Mary and Others [29:14]

Danny, pardon me, pardon you. Here you try it. Ah, I don't know. Go ahead, just relax. Find your center. Picture the shot, danny. Picture it. Turn off all the sound, just let it happen. Be the ball. Be the ball, danny. You're not being the ball Danny. Well, it's kind of difficult with you talking like that. Okay, I'm not talking. Stop talking. I'm not talking, now Be the ball Where'd?

Mary and Others [29:55]

it go Right in the lumberyard. The Risk Parody 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.