Episode 463: Pros And Cons of Leverage, Tax Buckets, Small Cap Value And Retirement Spending Frameworks

In this episode we answer emails from Roman, Andrew and Iain.  We discuss the plusses and minuses of leverage, volatility drag, and how leverage interacts with diversification and withdrawals, general observation on tax optimization via account buckets, small cap value index funds and Avantis/DFA merits, and modelling annuities versus mandatory versus discretionary spending in retirement.LInks:Father McKenna Center Donation Page:  Donate - Father McKenna CenterBen Felix Leverage Video:  Investing With Leverage (Borrowing to Invest, Leveraged ETFs)Leveraged ETFs Paper:  Double-Digit Numerics - Articles - The Big Myth about Leveraged ETFsOptimized Portfolios Article/Website:  How To Beat the Market Using Leverage and Index InvestingJim Sandidge Chaos Theory Applied to Drawdowns:  RMJ081-ChaosAndRetirementSecurity.pdf"Buffet's Alpha" Paper:  Full article: Buffett’s AlphaNew Tax Planning In Early Retirement Book:  Amazon.com: Tax Planning To and Through Early Retirement: 9798999841599: Garrett, Cody, Mullaney, Sean: BooksMerriman Best IN Class ETF Selections:  Best ETFs 2025 | Merriman Financial Education FoundationBreathless Unedited AI-Bot Summary:Ever wonder why leverage looks brilliant during bull markets but feels brutal the moment you start withdrawing cash? We break down the promise and pitfalls of adding leverage to diversified, risk parity-style portfolios, then show how the math of volatility drag and sequence risk can quietly erode safe withdrawal rates. It’s an honest tour of what works in accumulation, what breaks in retirement, and how to engineer a calmer path without surrendering all upside.We start with the straight talk: leverage and concentration are the two proven routes to outperformance, but only one of them can be paired safely with broad diversification. From hedge fund history to the “Aggressive 50/50” experiment, you’ll hear why high-octane blends can top the charts and then stall after deep losses, especially when distributions force selling at the worst times. We contrast that with return stacking and measured leverage, which aim for equity-like returns with better risk control, and we share practical tools—rebalancing discipline, cash buffers, and dynamic spending bands—to keep a drawdown portfolio intact.Taxes matter just as much as tickers. We walk through Roth vs traditional contributions, why present marginal rates and future flexibility drive the choice, and how to place bonds smartly across tax buckets. On the equity side, we revisit small cap value: why classic S&P 600 value exposure is solid, and how AVUV and DFA’s profitability filters can sharpen the factor without turning it into active guesswork. Then we turn to spending: build the plan around real expenses, not theoretical annuities. Set a durable floor for essentials, keep a flexible layer for the fun stuff, and consider partial annuitization later in life if longevity and peace of mind are worth the trade.Support the show

In this episode we answer emails from Jess, Phil and Scott.  We discuss an experience of setting up a sample RPR portfolio for one's self, using asset swaps to manage cash, and fun with the low bar standards and other inadequacies of many financial advisors.And THEN we our go through our weekly and monthly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.Additional Links:Father McKenna Center Donation Page:  Donate - Father McKenna CenterHow To Do An Asset Swap Video from Risk Parity Chronicles:  How to Do an Asset SwapBigger Pockets Money Test Risk Parity Style Portfolio:  We Built a 5% SWR Retirement Portfolio Using Fidelity in 48 Minutes (Golden Ratio Portfolio)Excess Returns Podcast With Rick Ferri (forward to minute 49):  Most Never Escape Stage 3 | Rick Ferri on How You Can Beat the Complexity TrapBreathless Unedited AI-Bot Summary:Tired of being told that everything beyond a three-fund portfolio is “too hard”? We pull back the curtain on practical tools that make DIY investing simpler in practice, not smaller in ambition. Starting with a listener’s test portfolios, we show how hands-on experience beats theory, why diversification means loving today’s winners and tomorrow’s comebacks, and how to turn rebalancing into reliable cash flow.We go deep on asset location and the overlooked power of asset swaps. By “selling here, buying there,” you can keep your overall mix unchanged while moving ordinary income into tax-deferred accounts and positioning equities in taxable for qualified dividends and capital gains. If you’ve been parking big cash balances in a HYSA and wondering why your tax bill keeps creeping up, this segment is your blueprint for tax efficiency without extra risk.Then we tackle withdrawal rates with clear eyes. Many advisors still anchor to 3 percent for retirees in their 60s. We explain why diversified, risk parity style allocations can responsibly target closer to 5 percent over long horizons, especially when you harvest from strength. Case in point: trimming gold after a powerful run to fund November distributions across our sample portfolios. We share market snapshots, what’s leading and lagging, and how a rules-based process keeps emotion out of the driver’s seat.If you want an investing plan that funds a life—relationships, experiences, generosity—rather than an accounting hobby, this conversation is your on-ramp. Subscribe, share with a friend who needs a nudge to start that test portfolio, and leave a review telling us your target withdrawal rate and why.Support the show

In this episode we answer emails from Tyson, Patrick, and Shuchi.  We discuss the basics of transitioning, SCHD as a value fund choice, bitcoin vs. gold, why "only works for 30 years" is a fake problem, the difference between our use of value funds vs. Paul Merriman's, and when would me make adjustments to our plans in retirement.Links:Bigger Pockets Money Podcast #1:  The Secret to a 5% Safe Withdrawal Rate | Frank VasquezBigger Pockets Money Podcast #2:  We Built a 5% SWR Retirement Portfolio Using Fidelity in 48 Minutes (Golden Ratio Portfolio)Morningstar Analysis of SCHD:  SCHD Stock - Schwab US Dividend Equity ETF | MorningstarGolden Ratio Portfolio on Portfolio Charts:  Golden Ratio Portfolio – Portfolio ChartsRetirement Spending Calculator:  Retirement Spending – Portfolio ChartsDrawdowns Calculator:  Drawdowns – Portfolio ChartsMichael Batnick Critique of CAPE Ratio "Predictions":  Stocks Are More Expensive Than They Used to BeBreathless AI-Bot Summary:A plan that survives contact with the market looks different from the one you sketch on a napkin. We break down the 80 percent FI pivot—why shifting from an aggressive accumulation mix to a retirement-ready allocation a few years early can defuse sequence risk without surrendering growth—and show how to decide when to pull that lever without second-guessing every blip.We also tackle one of the most popular questions right now: can Bitcoin replace gold? Short answer: not for core diversification. Gold’s role as a Basel III Tier 1 reserve asset and its central bank demand make it a unique stabilizer in a way that risk-on assets can’t duplicate. Bitcoin behaves more like a levered tech proxy, which is interesting for satellite bets but insufficient as an anchor. On equities, we explain why splitting the stock sleeve between growth and value—think a broad growth-leaning fund paired with a true value fund like SCHD—creates the performance dispersion that fuels rebalancing gains during stress, raising durability without betting on factor outperformance.If the 30-year rule worries you, breathe. Withdrawal rates flatten as horizons extend, and real-world retiree inflation typically runs 1 to 2 percent below CPI, offsetting the longer timeline. Add simple guardrails—pausing raises, trimming discretionary spend in bad years—and you can boost sustainability by about a percentage point. The key is to know your portfolio’s historical drawdown depth and length, set bright lines for action, and avoid valuation-based fortune-telling. Diversification and disciplined rebalancing beat crystal balls.If you found this helpful, follow the show, leave a review, and share it with a friend planning their FI transition. Your support helps more DIY investors build portfolios designed to last for life.Support the show

In this episode we answer emails from Eva, Jess and Mr. Toxic.  We discuss the three levers of safe withdrawal rates applied to a listener's upcoming retirement situation, running test risk parity style portfolios to get some practice like with have done with Bigger Pockets money, and what little we know about HSAs.And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.Additional Links:Father McKenna Center Donation Page:  Donate - Father McKenna CenterHow To Do An Asset Swap Video from Risk Parity Chronicles:  How to Do an Asset SwapJackie Cummings Koski on Investing with HSAs:  Investing With The Health Savings Account - Define Your Legacy W/ Jackie Cummings KoskiBigger Pockets Money Test Risk Parity Style Portfolio:  We Built a 5% SWR Retirement Portfolio Using Fidelity in 48 Minutes (Golden Ratio Portfolio)Breathless Unedited AI-Bot Summary:Most retirement plans stumble not on math, but on mechanics. We sit down with a listener who’s 55, VTI-heavy in a taxable account, and ready to pivot into a modified golden ratio portfolio—then unpack a practical path to move from concentration to resilient diversification without lighting up a massive tax bill. Along the way, we map out the three levers that quietly raise your safe withdrawal rate: portfolio design, baseline expenses, and personal inflation that often runs 1–2% below CPI.We get specific on asset location and reallocation: placing treasuries and managed futures in tax-deferred accounts, using gold and equities where they’re most tax-efficient, and gradually trimming VTI by targeting favorable tax lots and capital gains brackets. If you’ve wondered whether a small cap value tilt can help, we explain how it can reduce volatility and lift a portfolio’s historical withdrawal capacity by roughly 0.5–1%—and how to pursue it at a measured pace. We also clear up a common confusion: rebalancing returns you to your target mix; reallocating changes the target itself.Then we turn to HSAs. They’re a triple tax-advantaged powerhouse for you, but a poor inheritance vehicle for kids who must recognize the balance as income in a single year. We break down the strategy of saving receipts, the shift at age 65 when non-medical withdrawals are IRA-like, and why timing HSA spending for higher-income retirement years often makes sense. Don’t count on a costly end-of-life to “use it up”—many don’t have that trajectory. A smarter approach draws down the HSA earlier for qualified costs and Medicare premiums while avoiding a tax bomb for heirs.We wrap with weekly portfolio reviews across classic and levered models and a reminder that simple beats clever: a resilient allocation, tax-savvy placement, and flexible spending can carry you from early retirement through Social Security and beyond. If this helped tighten your plan, follow the show, leave a review, and share it with a friend who’s staring down a VTI-heavy portfolio and wondering where to start.Support the show

In this episode we answer emails from Luc and Nick.  We discuss the four levels of investors, the fundamental problems with identity that terms like "saver" and "Boglehead" cause per Morgan Housel, fallacious reasoning often applied to investing and portfolio construction, equity core with growth–value balance and small-cap value tilt, VTI vs VUG trade-offs and tax considerations, tax efficient asset location for bonds, equities, gold, considerations about alternatives like managed futures, and using risk parity portfolios for intermediate term savings during your accumulation phase.Links:Luc's Boglehead Forum Link:  Golden Ratio Portfolio - Frank Vasquez - Bogleheads.orgMindy Jensen's Risk Parity Style Portfolio:  We Built a 5% SWR Retirement Portfolio Using Fidelity in 48 Minutes (Golden Ratio Portfolio)Breathless Unedited AI-Bot Summary:Want a portfolio that funds your life, not your identity? We dig into the fuss around the “Golden Ratio” name and get to what actually matters: principles that increase safe withdrawal rates and reduce stress when markets turn weird. Instead of defending a formula, we show how to use uncorrelated assets, thoughtful macro-allocation, and enough simplicity to keep you invested without blinding you to risk.We break down four investor levels—from money hygiene and shiny-object traps to the comfort of low-cost indexing—and then the jump to level four, where professional-grade ideas get translated for DIY investors. That’s where uncorrelated assets like Treasuries, gold, and managed futures earn their keep, not because they’re trendy, but because they lower correlation to stocks and smooth cash flows across regimes. We also call out common fallacies that derail portfolio debates: past performance cliches that prove nothing, irrelevant metrics used as cudgels, and cherry-picking that erases the 1970s and 2022 as if rare events never recur.Then we get practical with a young FI couple: how to build a durable equity core by pairing total market or large-cap growth with a small-cap value tilt, why VTI is usually fine while VUG may diversify better against value in tax-deferred accounts, and how to avoid tax pain when transitioning. We map smart asset location—ordinary-income generators in traditional, long-term growers in Roth, tax-efficient equities in taxable—and set realistic ranges: 40–70 percent stocks, 15–30 percent Treasuries, under 10 percent cash, and 10–25 percent alternatives. No dogma, just ranges that historically support higher withdrawal rates.We close with a versatile idea: an intermediate risk parity “slush” portfolio you can tap for big purchases without riding the all-stock rollercoaster. Add to laggards, sell winners, keep it simple, and stay focused on the only scoreboard that matters—sustainable spending. If you’re ready to trade identity for outcomes and marketing for math, this one’s for you.If this resonated, follow the show, leave a review, and share it with a friend who’s rethinking their allocation. Your future self—and your future spending—will thank you.Support the show

In this episode we answer emails from Ron, Mark, Rick and Keith.  We revel in your generosity and discuss the mechanics of monthly withdrawals and how rebalancing smooths that over, modelling portfolio with money going in and money going out, and a follow up on portfolios employing futures contracts as leverage.  And gooooold!  And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.Additional Links:Father McKenna Center Donation Page:  Donate - Father McKenna CenterOur South Africa Trip Video Playlist:  Penguins in Cape TownRemembering Gov. Schaefer:  The Eastern Shore remembers SchaeferRecent Bigger Pockets Money Episode Mentioning RP Portfolios:  FIRE is Dead...and Here's What Replaced ItPortfolio Visualizer Financial Goals Tool:  Financial GoalsAccumulating in a Golden Ratio Portfolio Article:  Minimize Your Miss – Portfolio ChartsKeith's Portfolio Backtest:  https://testfol.io/?s=9Am02OVX6XDBreathless Unedited AI-Bot Summary:Gold doesn’t care about narratives, and this year it’s rewriting a lot of them. We walk through what a powerful gold run means for real-world withdrawals, safe withdrawal rates, and the way diversified portfolios shoulder risk when the regime shifts. From the Golden Butterfly and Golden Ratio to return-stacked experiments, we review performance, drawdowns, and why structural diversification—equities, Treasuries, gold, real assets, and managed futures—often beats clever timing when you’re spending from your nest egg.We also open the donor mailbag with sharp questions from listeners practicing monthly withdrawals ahead of retirement. Should you fund withdrawals from accumulated cash or trim recent winners? How much does trade timing matter at month-end? We share simple rules that reduce friction: let dividends build a cash buffer, sell strength back to targets, and rely on periodic rebalancing to correct small timing errors. For those using volatile tools like UPRO, TMF, or crypto, we explain why defined targets and a steady cadence matter more than chasing the “perfect” price.Futures curious? We touch on financing costs, collateral choices, and the risk realities of leverage, including why even elegant models must respect max drawdown. Along the way, we challenge the habit of erasing the 1970s from gold analysis and highlight how data-driven diversification can protect retirees from sequence risk. Whether you’re simulating withdrawals or already living on your portfolio, you’ll get practical tactics and a clearer lens for portfolio design.If this resonates, follow the show, leave a review, and share it with someone planning their retirement drawdown. And if you want your question answered sooner, support the Father McKenna Center through our site—every donation helps and moves you to the front of the line.Support the show

In this episode we answer emails from Niek, Dustin, Dale, Hydromod and .  We discuss adopting a golden ratio mix and not having unrealistic expectations, the plusses and minuses of the AI-version-of-you fad, the new website and why trying to use gold futures for leverage might not be the best choice for your gambling problem.Link:  Father McKenna Center Donation Page:  Donate - Father McKenna CenterBreathless Unedited AI-Bot Summary:Ever had a month where nearly everything in your portfolio rose and wondered if the universe broke? We unpack why September’s across-the-board lift made sense in a weaker-dollar world, what temporary positive correlation looks like in practice, and how a golden ratio-style allocation helps you ride the wave without refreshing your account every hour.A listener’s note from the road kicks off a candid conversation about trusting diversified portfolios and ignoring daily noise. From there, we dig into the hype and hazards of AI finance gurus—yes, including Ray Dalio’s “digital Ray.” We talk usefulness, accuracy gaps, and the risk of forming unhealthy attachments to bots that sound wise but miss nuance. Along the way, we challenge a popular myth: that copying successful people’s habits will unlock their results. Extraordinary investors aren’t great because they make their beds; they’re great because they’re extraordinarily skilled. For the rest of us, evidence-based allocations, low costs, and sensible rebalancing are the habits that pay.We also get practical. You’ll hear our simple distribution shortcut (divide by 240 for a 5% annualized monthly draw), plus a tour of our streamlined website with faster search and full transcripts. Then we roll up our sleeves on gold exposure: why futures create rollover and curve headaches, when ETFs and return-stacked funds can be smarter, and how modest, low-cost margin—or leveraging equities instead—can open room for diversifiers like gold and managed futures. The throughline is clarity over complexity: build a portfolio that bends without breaking, whether the dollar dips, inflation flares, or correlations get weird for a while.If this resonates, follow the show, leave a quick review, and share it with a friend who’s wrestling with allocation choices. Your questions shape future episodes—send them our way and join the conversation.Support the show

In this episode we answer emails from Jimmy, Anonymous and Matthew.  We discuss financing a home with portfolio leverage via ETFs or margin, revel in the generosity of our listeners and real-life encounters, and review a risk parity style portfolio and plan.  And touch on our recent vacation to South Africa.And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.Additional Links:Father McKenna Center Donation Page:  Donate - Father McKenna CenterNew Father McKenna Center YouTube Channel:  Father McKenna Center - YouTubeSOAR Gala Information:  2025 Washington DC Awards Gala - SOAR! - Support Our Aging ReligiousBreathless Unedited AI-Bot Summary:  A near-miss with lions on safari sets the stage for a different kind of risk: how to fund a new home when most of your wealth sits in a taxable portfolio. We dive straight into the trade-offs between selling positions, taking a margin loan at a low-cost broker, or using a return-stacked ETF like RSST to maintain exposure while freeing up cash. The core question isn’t just, “Can I do this?” but “Can I live with it through a full market cycle?” We break down taxes, financing costs, and the behavior premium that separates clever from fragile.From there, we build a clean, high-conviction risk parity allocation anchored in three pillars—stocks, Treasuries, and gold—and show why that can be enough to lift a safe withdrawal rate if you respect correlation math and rebalance discipline. Within equities, we pair large-cap growth with small value and international value to spread factor and regional risk. In the bond sleeve, we weigh a simple one-fund approach against a two-fund split (VGIT + VGLT) for small fee and flexibility gains. We also get practical on withdrawals: monthly trims from winners can quietly rebalance your portfolio while matching real-life bills, while quarterly or annual withdrawals suit planners who prefer fewer moves and more cash on hand.Finally, we pull up the dashboard. Gold’s massive run challenges narratives that cherry-pick 1980 as a starting point; bonds have life; small value lags; and our sample portfolios highlight why diversification and costs matter more than headlines. The classics keep compounding, while the leveraged set underscores that concentration plus leverage is a rough mix, and thoughtful “return stacking” needs clear rules and flexible spending. If you’re weighing a home purchase, chasing a higher safe withdrawal rate, or simply trying to keep your strategy steady, you’ll find concrete steps you can use today.Enjoy the conversation? Follow the show, leave a quick review, and share this episode with a friend who’s planning a big financial move.Support the show

In this episode we answer questions from Chris, George and "I Have No Name."  We discuss a transition situation with bonus portfolio question, the plusses and minuses of Pralana and similar calculators, and an amusing take on the Golden Butterfly portfolio reimagined.Links:Father McKenna Center Donation Page:  Donate - Father McKenna CenterRational Reminder Podcast:  David C. Brown: The Underperformance of Target Date Funds | Rational Reminder 374Breathless Unedited AI-Bot Summary:What happens when you need to transition from a high-equity portfolio to a risk parity approach but face limited investment options in your 401(k)? How reliable are those fancy retirement calculators that promise to predict your financial future? And do those neatly organized "bucket strategies" actually improve portfolio performance, or are they just psychological comfort tools?Frank Vasquez tackles these pressing questions from listeners who are navigating the complexities of retirement planning and portfolio construction. Beginning with practical advice for a listener four years from financial independence, Frank explores how to handle the transition to a risk parity portfolio despite restrictive 401(k) investment options. Rather than fixating on finding the perfect funds immediately, he suggests focusing on getting the macro-allocations roughly right until more flexibility becomes available through an IRA rollover.The conversation shifts to a critical examination of retirement calculators like Pralana that rely on parameterized returns rather than historical data. Frank cuts through the marketing hype to reveal why these tools often function more like crystal balls than reliable forecasting instruments. "You're supposed to use base rates," he explains, "not make up things from a crystal ball that says things are going to be worse than they were before, better than they were before." This segment offers a masterclass in distinguishing between good forecasting methodologies and mathematically sophisticated but fundamentally flawed approaches.Perhaps most illuminating is Frank's analysis of bucket strategies in retirement planning. While organizing investments into conceptual buckets labeled for different time horizons may feel reassuring, these psychological tools don't fundamentally alter portfolio performance. "Looking at personal finance and separating what is finance from what is personal" becomes the key insight, helping listeners distinguish between strategies that actually improve financial outcomes versus those that simply make complicated concepts easier to visualize.Ready to see beyond the marketing gimmicks and focus on evidence-based approaches to retirement planning? Listen now, then like, subscribe, and leave a review to support the show while Frank takes a brief hiatus until mid-October.Support the show

In this episode we answer one big long email from Mr. Bill (actually Dr. Bill). We discuss a planning process grounded in good data science, forecasting techniques and decision theory, and how we incorporate the concepts described in Bill Bengen's new book, using Dr. Bill as our guinea pig.And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.Additional Links:Father McKenna Center Donation Page:  Donate - Father McKenna CenterRisk Savvy Lecture:  Risk Savvy: How to Make Good DecisionsBill Bengen's New Book:  Bill Bengen's New Book | A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.Portfolio Charts Safe Withdrawal Rate Calculator:  Withdrawal Rates – Portfolio ChartsBreathless Unedited AI-Bot Summary:Retirement planning doesn't have to be rocket science. In this illuminating episode, we dive deep into the transition from accumulation to distribution phases of financial independence, offering a clear-eyed approach based on data science and practical wisdom.At the heart of effective retirement planning lies proper forecasting methodology. Most financial advisors miss this crucial foundation – they load forecasts with conservative assumptions rather than using base rates, creating unnecessarily fearful projections. We explore why understanding the difference between risk (what's calculable) and uncertainty (what isn't) transforms how you should approach planning for the decades ahead.The four levers that control your retirement success form our central framework: supplemental income, asset selection, flexible withdrawals, and fear/hoarding. Each lever offers unique opportunities to optimize your financial independence. Risk parity portfolios consistently demonstrate 1-2% higher safe withdrawal rates than traditional portfolios, while simply accounting for retirees' typical lower inflation experience (CPI minus 1-2%) can safely increase withdrawal rates by 0.5-1%.We tackle the psychological aspects of retirement planning too. Most retirees underspend significantly, pulling the "fear and hoarding" lever while ignoring the other three, ultimately sacrificing quality of life and relationships. Instead, we advocate for thoughtful legacy planning while alive – supporting family members, teaching financial literacy, and creating meaningful impact with your resources.Whether you're approaching retirement or already there, this episode offers practical wisdom to simplify your planning process. By focusing on tracking expenses meticulously in the early years and using simple rules of thumb for long-term forecasting, you'll create a retirement plan that maximizes both financial security and life satisfaction.Support the show