Wall Streets' Focus on Wealth Unproductive

It’s “an impossible math problem.”¹

Alison Schrager, in Wall Street Just Doesn’t Get Retirement, points to confusion and frustration felt by prospective retirees who have no idea whether or not they are on the right track to retirement. She blames the financial industry’s focus on wealth to the exclusion of daily income needs, concluding:

But the goal of retirement finance isn’t your wealth level on a particular day. It is predictable income for the length of your retirement. Getting this basic premise wrong burdens retirees with an enormous and intractable risk.

In the end, she calls on the financial industry to provide better benchmarks and products and promote them in statements and customer communications, regrettably adding that “Making actual changes is just about impossible.”

It just may be that these improvements won’t come from Wall Street. A few years ago, I found myself between jobs. I wondered if I had enough to retire. Being a software developer, I thought “There oughta be an app for that.” There wasn’t an app for that. Digging in, I quickly encountered all the frustrations Alison described in her article. No one told me it was an impossible problem, so I commenced grinding. Years passed.

Hedgematic

Hedgematic is an app that, based on your unique position, constructs a hedged after-tax income stream to cover your individually specified yearly needs for the duration of your retirement. Figures are expressed in today’s dollars and are tax-optimized. Allocations are made via a public algorithm, with sound economic support.

The Recipe

Hedgematic Portfolios

Serves 1 or 2.

Gather ingredients.

• Your birthdays and tax status
• Your lifetime/health percentile rank (Sorry, gotta ask.)
• Current dollar income requirements for each of your remaining years of life.
• Estimated Social Security benefit (plus start age if not “full retirement age”.)
• Your after-tax, IRA, and Roth account balances.

Form one hedge for each remaining year of life:

1. Roll out a base of TIPS inflation protected bonds.
2. Top with some spicy S&P average. Consult Robert Shiller’s CAPE10 work to get the risk-adjusted proportions just right.

Combine ingredients and hedges in optimizer bowl and process until smooth.

Your Hedgematic Portfolio is Ready to Serve

Start with an amuse bouche: Answers to your biggest questions (benchmarks, if you will):

• Do I have enough to retire?
• If not, what’s the shortfall? When can I actually start?
• If so, what is the size of my estate (in current dollars)?

Once your appetite is stimulated, dig into other delicious offerings:

• Day-zero broker-ready shopping list for each account includes:
  • An S&P ETF purchase order summing tranches targeted at each of your following years.
  • A ladder of TIPS bonds to drop off yearly inflation protected cash.
• A year-by-year list of all transactions that hit your accounts. This includes the yearly S&P tranche sale, bond redemptions, interest payments, social security benefits, reinvested dividends, and IRA draws and rollovers.
• A tax return for each year. Note that yearly draws include estimated taxes in addition to your after-tax income requirement. Note also that IRA draws and rollovers are scheduled to minimize total taxes over the length of your retirement.
• Lots of charts.

Not to Your Taste?

Too rich? Thin gruel? It’s ok! Adjust your ingredients and make up another batch. With repeated experiments, you will find the combination that’s right for you!

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