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Author: mikeydawgindm

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Many factors affect the market's performance. Politics is key, but Federal Reserve Policy, foreign events, business reports, and investor sentiment are but a few of the factors which may send the market soaring, crashing, or most often, something in between.

This month saw devastating floods in Houston, North Korean threats and uncertainty, and increased concern regarding Chinese tariffs and trade policies. The market volatility rose in August. None of our investors currently use a financial advisor, but all have in the past. The key to successful investing without one, is to display the same investing discipline an advisor would encourage. In numerous studies, it's been proven that investors in general do a lousy job of managing their investments and underperform virtually all sectors and benchmarks. The main culprit is emotion. Getting scared and making a buy or sell decision based on the news of the day is not an investment strategy! A key to the self-directed investor is to develop a strategy for investing and stick with it.

The fund (Vanguard Dividend Appreciation – VDADX) reversed the July movement and closed the month up 20 cents a share. starting at 25.14 and ending at 25.34. Willie had a month end balance of $196,202. His monthly benefit check would be $1997.10 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $1971 check and withdrew $2365 from her existing account, so her net total is $200,160 ($3958 + $196,202) .

Sam used his benefit check to supply $1552.20 of his monthly expenses. His untouched IRA account sat at $200,951.

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It's July 2017. All three retirees had stopped working when they were 60. In 2017, they were in the 28% tax bracket. Sam and Irma filed for Social Security benefits to start as soon as possible. Since their birthday was in June, that meant they would receive the first check in July. Coincidentally, they were both born on the 14th of June (as was Willie), so they will get their checks on the third Wednesday of the month. If they had been born on the 1st through the 10th, it would be cut on the second Wednesday, and if born on the 21st through the end of the month, the fourth. All three retirees had a good handle on living expenses, and wouldn't you know it, they are identical. Let's assume that inflation and COLA increases in SS will cancel each other out. In July, Irma and Sam received checks for $1971. Of that, 85% is taxable ($1675.35) so 28% of $1675.35 is $469.10 in Federal tax owed. Because they live in Iowa, there is no state tax on Social Security benefits (but IRA distributions are treated like ordinary income), so the real beauty here is NO state tax on SS benefits! (Some states don't tax either and some treat differently, so you should know your state's treatment of income for tax purposes. Your mileage may vary).

The result is they both had a net of $1552.20. If they had withdrawn that amount ($1971) from their IRAs, They would have paid $551.88 federal tax (28% of $1971), plus $177 of state tax (8.98%) for a net of $1242.12 which is $310.08 less, or 19.97% less. If they actually really needed a net of $1552.20 , they would need to draw closer to $2365.20 (119.97 x $1971) from their existing retirement accounts.

But the advantage doesn't stop there. By not withdrawing that $2365 from their IRAs, they are able to leave that money invested, and have it keep working for them. In a historically average year (8.5%), that would add roughly $16.75 per month to their accounts (The 100 year average of market returns is 8.5%). Delayed SS monthly benefits increase at the rate of 8% after age 62 up to age 70. They both made the decision that if their investments beat 8 %, they would always be ahead (plus the sum of money they would receive from age 62 - 66 (or 70)). And never in the history of the market has it averaged less than that over any given 20 year period. In a nutshell, that's the gamble they took.

The fund lost some ground during the month, starting at 25.22 a share, it dropped to 25.14 by the time withdrawals were made. Willie had a month end balance of $197,000. His monthly benefit check would be $1984 if he changed his mind and decided to file for benefits at this time. The benefit increases by 8% a year, or .66% for each month of delay.

Irma deposited the $1971 check and withdrew 2365 from her existing account, so her net total is $198,971.

Sam used his benefit check to supply $1552.20 of his monthly expenses. His untouched IRA account sat at $199,365.

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Life expectancy is an elusive number and an interesting component of the retirement scenario. You could die tomorrow or live to be 110 years old. You really have no idea what the answer to this question is. So, like all the other numbers on this blog, we will look at averages, since there is really no other number we can use with any confidence. Some X-spurts will tell you to take early Social Security ONLY if you are in poor health and do not expect to live very long. By definition, life expectancy is the remaining time one can expect to live, on average, meaning half will live longer and half will not. A current age at any given point in time will exclude all of your fellow humans born in the year you were born who have already died. An example, when I was born in 1955, my life expectancy was 66.7 years (72.8 for a female). According to The Social Security Administration, by 2015 (the year I turned 60), 142 per 1,000 of these poor unfortunates had already died (14.2 %), leaving the average for the rest of us who had survived this long to live another 21.5 years (24.48 for women). That means of the 85.8 % of us who celebrated our 60th birthday, half will live to be older than 81.5 (men) and half will not. As you get older, you become an increasingly important component of calculating the average. The vast majority of us will continue to survive after age 62 as the older we get, the less the impact of the age of our death plays on the average. Other factors including medical breakthroughs, safety regulations, diet, etc. have moved the bar an additional 4.8 years of life for us US males since our birth in 1955.

By the time we are first eligible for SS benefits (age 62), another 20 will have died. So, statistically speaking, 838 (out of the original 1000 born 62 years ago) of us have this decision to make: file now or not?. Keep in mind, each year, of course, claims more lives that by the time us 1955'ers reach age 70, only 731 per 1000 of us will still be alive to collect anything. Put another way, if you are trying to decide to wait until age 70, you have a 12.66% chance you made the worst possible financial decision back when you were 62 by waiting, coupled with the bad luck of dying before collecting a dime.

If you are married, the outcome is potentially less painful. A surviving spouse is entitled to one half of their mate's benefit. Many people (male and female) of this generation have worked a full career and have accumulated a benefit greater than half of their spouse's benefit, so this may or may not be a factor for you. Bottom line is you would never be better off if your spouse dies...as it pertains to Social Security anyway.

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I am going to keep track of the real time outcome of three different strategies. The real time frame of this exercise began in July 2017. I will try to calculate as close to precision as I can, based on what will really happen during the 8 years between July 2017 and June 2025.

For the SCORECARD. I will use Vanguard's Dividend Appreciation Index Fund Admiral Shares (VDADX) as my investment choice for all three retirees. Vanguard defines this fund:

"This low-cost index fund seeks to track a benchmark that provides exposure to U.S. companies that have a history of increasing dividends. The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time.

One of the fund's risks is the possibility that returns from dividend-paying stocks will trail returns from the overall stock market during any given period. Another risk is the volatility that comes with the fund’s full exposure to the stock market. An investor with a well-balanced, long-term portfolio who seeks some income and exposure to dividend-focused companies may wish to consider this fund."

The expense ratio (as of 2019) is .08. It's below most of the funds in this category and the fund's performance is in the ballpark of the Benchmark of the S&P 500.

For the SCORECARD, to keep the primary three strategies simplified, I've invented three retirees. They are: Willie Waiter, Irma Investit, and Sam Spendit.

Willie's strategy is to draw down his IRA to cover living expenses and will wait until he will receive maximum monthly benefit from Social Security, at age 70 1/2.

Irma Investit has a hybrid approach of sorts. She claimed at the earliest possible time (on her 62nd birthday) and will deposit the entire benefit check into her brokerage account. She does not work, so she cannot add to any type of IRA with this money. She will withdraw enough from her existing savings to end up with the net same amount as if she had spent the benefit check.

Finally, Sam Spendit will use his benefit check to help cover living expenses, but will set up a special allocation within his IRA to track against Willie and Irma for overall position. All three of these retirees have identical amounts of $200,000 in their Vanguard Dividend Appreciation Fund allocation in their IRA accounts on their 62nd birthday. They also have identical work records and therefore received the same information regarding their options. That is, when they reached age 62, their benefit was going to be $1971 per month if they filed for benefits at age 62, $2643 if starting at Full Retirement Age (for them, born in 1955, 66.2 years), and $3516 if waiting until age 70 to begin receiving benefits.

This blog is a month by month evaluation of how these strategies are working out.

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Below are the assumptions made for all of my calculations or facts, based on my personal situation.

In 2017, I was in the 28% federal tax bracket. Beginning in 2018, I am in the 24% bracket. Federal income tax applies to Social Security income and IRA distribution income. For me, the first 85% of Social Security benefits are taxed.

I live in Iowa. My Iowa State income tax rate has been 8.98% for the entire period. Iowa does not collect tax on Social Security income, but treats IRA distribution income as earned income.

COLA (Cost-Of-Living Adjustment). Enacted in 1972 and first applied in 1975, this adjustment was created to ensure the purchasing power of benefits was not eroded by inflation. The annual COLA adjustment is tied to the Consumer Price Index (CPI-W). The COLA has ranged from 14.3% in 1980 to zero for the years of 2010, 2011, and 2016. The average over the 40+ years of adjustments has been 2-3%. This is tied to the rate of inflation, which has averaged about 2.46% (since 1990). For the sake of simplicity, I will not include either as they arguably cancel each other out.

Return on investment gets a little tricky. To simplify this component and for the task of projecting, I will base historic performance on Vanguard's Dividend Appreciation Admiral Fund (VDADX) as reported at the end of each month. Historic average returns for the stock market or sectors of it vary in how it is calculated. You will be able to find many different values and ranges. Agree with me or not, I am going to use the value of 7.5% which is the historic average of large cap companies since 1926 with inflation factored out.

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NOTE: I'm currently (January 2022) in catch-up mode. I had attempted to post monthly updates from July 2017 to current. When the virus hit, I kind of lost enthusiasm, to say the least. Instead of trying to recreate the posts since then, I've created one 'end of experiment ' post to tell you how it turned out. Please come back often to see the progression of my investment updates. Most of the monthly updates include investing advice or opinions, so you won't want to skip reading any of them! Thank you.

Remember that time in your life in grade school, when after a hard morning of ABC's or eating glue you were allowed to go out on the playground and have fun? Remember how much fun you had playing and exploring and not having the least bit of worries?

How would you like to recapture that wonderful time? Explore the world? Play all you want?

In this blog, I will present a lifetime plan that should allow you to enjoy a RECESS after you've toiled for many years and accumulated enough savings to last the rest of your life.

In case you hadn't picked up on it, I call my plan RECESS, Retire Early, Claim Early Social Security. It might be a cheesy acronym, but I wanted to plant an idea in your mind that would remind you of the end goal as you go through life – remember RECESS when you get your first job. Remember RECESS when you get a raise. Remember RECESS when you buy a house. Remember RECESS when you stop working. Remember RECESS when you make your Social Security claiming decision. Throughout your life, I want you to remember the principles of RECESS, and you too should be able to retire comfortably and confidently.

RECESS is formulated from my opinions. But those opinions are based on the historical facts of each topic. I cannot predict (nor can any other 'expert') the future of the stock market, Social Security law, inflation, or any other factor, so I do the next best thing, I use known historical averages when applicable. During my own adulthood (beginning in 1973), I've seen 3.31%3-18.63% mortgage rates, .8%-13.3% annual inflation rates, and S&P 500 index annual returns of -38.49% to 34.11%. For those areas outside of my control, I will use the documented historical averages. Some of my opinions and discussions cover factors that are harder or impossible to use historical data. These include wages, career choices, state income taxes, emergencies, family dynamics, and many others. You should apply your decisions and thinking for these items as they pertain to you. As they say “Your mileage may vary”.

This blog is divided into two sections: RE (Retire Early) where I will present the components of what it may take for you to be able to quit working at or before age 62. These posts should help guide your saving and spending decisions during your working life. The second section, CESS (Claim Early Social Security) explains how the Social Security benefit program calculates your monthly benefit based on your work history, age, cost of living and Price Wage Index. I offer an argument for ALWAYS claiming at the earliest possible time (your 62nd birthday). It also offers tips and suggestions for your investments and lifestyle, which are certainly just as important as your claiming strategy.

I do not want to present a blog like so many books I've read that have a lot of fluff or tell you the same thing 5 different ways. This effort is straight forward and a presentation of an plan, You can choose to accept all of my thoughts and assumptions, some of them, or none of them. My conclusions are sometimes contrary to the advise and opinions of famous, well-paid 'experts'. All I can say in defense of these ideas is – I retired comfortably at age 60. And you can too!

Disclaimer: the RECESS approach is not for everyone. If you are reading this blog, that's a great start. You are probably savvy in your saving and spending strategies and decisions. This method will not work for those who think their tax refund is a bonus check, who need to own a new car, are deep in credit card debt, need to buy the most home they can afford or can not account for all the money they spend. Those types of people can be helped tremendously by this plan, but if they refuse to discipline their savings and spending, they cannot hope to achieve the goals of this program, which is to take a career ending RECESS.