Hedged by Year
Each year's draw is split in two portions:
- Tor "Cash", read "inflation adjusted cash". This comes from inflation adjusted income, in this case, Social Security, and a ladder of TIPS bonds, US obligations that return constant inflation adjusted dollars plus a small real yield.
- S&P assets are lodged in an ETF that mirrors the constituents of the Standard and Poors 500 index. Historically, the S&P has returned about 6% after inflation.
Cash values are fixed and guaranteed by the US government. S&P draws are denominated in S&P index values, and so will vary year-to-year. You don't run out of money, but some years you come up short; other years, you get extra.
Each year is hedged separately. Anchoring the hedge, we have the TIPS real yield. A portion of S&P is added to bring up the yield to a point commensurate with your risk tolerance. These portions (shown by the black line) are determined by an open algorithm, soundly based in History and Economics.
Tax Optimized
When you set up your Hedgematic profile, you specify spending requirements for each individual year in after-tax, inflation-adjusted dollars. Hedgematic computes your estimated taxes for each year and includes them in each year's draw. Taxes are optimized over the entire course of your retirement. Illustrated here are the tax inputs and total federal income tax for each of these years. Notice the following:
- The black line shows the actual tax bill (in today's dollars). In this case, with $1.5 million in initial assets and yearly after-tax withdrawals of $110K we never see more than about $10K in taxes, and sometimes $0.
- Check out how the adjusted gross income keeps hitting the same marks. It turns out that those marks are the exact tax rate thresholds. Hedgematic is never going to subject you to a 20% rate if there is somewhere else in your retirement to squeeze some extra 12%.
- Hedgematic makes this possible by specifying yearly draws from after-tax, IRA, and Roth accounts, including optimized rollovers. Compare this to "Consult your tax advisor."
Shopping Lists
Enter your profile and compute your results. For each of your accounts, you are provided a year-by-year list of transactions, spanning your retirement, to execute and maintain your Hedgematic portfolio.
Illustrated here is are instructions for the first year of your after-tax broker account.
- Start with $400K
- Draw $112K. This will cover expenses and estimated taxes for the next year.
- Buy 3.32 S&Ps at $4,124 for $13,708.
- Buy four different TIPS issues, in decreasing amounts, maturing in each of the four following years.
- Over the course of this year, you will see one of your TIPS issues mature. You will also collect coupon income from all of the bonds.
- The TIPS proceeds total $110,880 which will be drawn one year from today.
One such list is provided for each of your accounts, including this broker account, as well as you and your spouse's IRA and Roth accounts. IRA accounts include roll-overs. Roth accounts include roll-ins.
But Wait!
There's more!
- Am I going to run out of money? Results include your estimated estate. Gain confidence.
- If your current assets are insufficient, Hedgematic tells you the date you will be able to commence retirement and/or how much more money you would need to retire today.
- If I buy this car today, what does that do to my kids' inheritance? Hedgematic tells you!
- Yearly after-tax withdrawals are specified individually. Spending more in early years? OK!
- All inputs and results are denominated in today's dollars. Ignore inflation!
- Social Security is included. Start dates are optimized. Or, you can see the effect of current or proposed dates.
- You retain full control over your assets. Flexibly respond to unanticipated events.
- Nobody is skimming off your accounts. The difference between a half-million over 25 years at 5% and 6% is $453K.
- No secret "proprietary algorithms." Our methods, described on this site, are public and economically sound.
- No need to worry about whether some institution is going to exist in thirty years.
For more details consult the rest of this site.