I Might Build a Bridge

The closer I get to my retirement goal the more I focus on risk analysis.  Up to this point of my journey I have viewed risk from a macro or big event perspective.  The process for mitigating the risk was fairly straight forward, I would calculate the total financial value of the risk, plan a cash position to mitigate, and call it a day. 

However, recently I decided to take a more micro view by year to see how much of my planned income was being exposed to market risk and it changed my view on how much emergency cash I was allocating foe sequence of return risk.

Under our current plan I will retire at 59 and my wife will retire at 65 while I ride on her health insurance until we both switch to Medicare and file for Social Security at age 67.  Financially we could both retire at 59 but my wife has only recently entered back into the workforce and loves her job working with special needs children. 

As long as my wife finds it rewarding, I will not push her to retire early but will take advantage of it for the healthcare and income.  Until she hits 65, the gap in income will be backfilled from our dividend checks that keep rolling in.  Considering her earned income from age 59 to 64, 69% of our annual income will be exposed to market risk.

After my wife retires, we have a 2-year gap from age 65 to 66 with no earned income and no social security.  Our entire annual income will come from our dividends which equates to 100% of income that will be exposed to market risk.  After that we both collect at 67 and our income exposed to market risk drops down to 41%. 

I was comfortable with risk exposure from 59 to 66 however my wife was not.  We have always had an agreement that since our finances are combined, we have to be on the same page. To get us on the same page I had roll up my sleeves and come up with a different solution we would both be comfortable with.

My search landed on the concept of using a social security bridge.  In short, the bridge concept is using retirement funds for income needs until you are eligible for the maximum social security payout at age 70.  This is not a new concept and it does have drawbacks with the two largest being; longevity (lack thereof) and needing income now (i.e., little to no retirement savings).  The only added twist for us was the funds had to have no exposure to market risk and we would not reduce our existing dividend portfolios. 

Regarding longevity, if it was just myself this would be a no-go but my wife’s side of the family tend to have long lives into their early 90s and as such this concept had merit for consideration. As far as a funding source it left us with one choice, my current 401K plan (wife’s employer does not offer a 401K). 

The next piece was selecting a source that did not have exposure to market risk.  The options available are cash, CDs, government bonds, or an annuity.  Cash is a no-go for me as it would earn near 0 for 10 years.  Building a CD ladder might be viable using brokered CDs but I run the risk of lower interest rates in the last 5 years.  For bonds, an ETF or mutual fund would not work because you would be exposed to bond market risks so it would have to be laddered individual government bonds held to maturity. The simplest approach would be to use an annuity.

In the past I have expressed buying a lifetime annuity would not be a good fit for me as I already have a lifetime annuity with a built-in COLA via social security and we are willing to take on risk for bigger portfolio gains/growing dividends. 

A 10 year annuity on the other hand fits in perfectly for this scenario.  I would consider this as a viable option as from a return perspective it sits neatly between CDs and bonds with the returns being +/- 0.5% of those options after annuity fees are factored in (slightly better than a CD and slightly below individual bonds).  For this analysis we chose to use the annuity and would fund it with 10% of our portfolio coming from my 401K and the payout would be the same as claiming social security at age 62.

Implementing the annuity and moving our social security claim out to age 70 changed our exposure to market risk with every age bracket improving except the 67-69 range which increased from 41% to 72%.  The largest impact is in the 70+ range as we are looking at a potential 20 year period with just 28% of income exposed to market risk.

Advantages & Disadvantages

The long-term reduction in risk reduces my sequence of returns risk which in turn reduces my emergency cash position by 44%.  This money can now be funneled back into the stock portfolio. Disadvantage is the portfolio value at time of death (circa age 90) would be 5.1% lower.  

From a tax perspective we also get a slight improvement as our projected effective tax rate after age 70 would drop from 8.7% to 7.89% but the downside is our effective tax rate from age 67 to 69 goes up from 8.7% to 15.3%.  Stretching this out over the full 30 years we will only pay a projected $4,000 less in lifetime taxes which is a negligible amount and hardly a benefit.  However, the important piece is the increase in income and discount in taxes comes when we need income the most at the end of life.  Expenses in retirement are not a linear straight line going up.  It’s more of a rollercoaster where expenses gradually go down but start steadily rising in later years as medical costs and assistance needs become greater. 

Other Considerations

Raising the monthly bridge payout equal to what we would have received at age 67 and 70 were considered. When I ran these two scenarios my wife loved it but I just could not warm up to it. In both scenarios we would not have enough funds from my current 401K and as such we would have to pull funds from our other portfolios. Getting a larger payout on the front-end at the sacrifice of growing dividends on the back-end when we need the most income for health care or long term care just did not sit well with me.

Declining cognitive ability is something we have both considered and highly probable based on my wife’s family medical history.  Not an enjoyable conversation to have for sure but a reality we need to address. A larger social security payout diminishes some of that concern as it removes some decision-making regarding investments.

Lastly, we considered that current state of the Social Security program.  Will benefits remain the same, get cut or eliminated completely?  We both agreed for now its nothing more than political banter.  The voting block for both Boomer and Gen X is too large and any politician looking to cut or eliminate social security would be committing political suicide.


The beautiful part of marriage is the ability to compromise. While I initially approached this with skepticism and my wife with optimism we met part way. We both liked the use of 10% of our portfolio as a bridge as it brings her satisfaction of less risk but still leaves enough on the table for significant future returns. Those future returns should be enough to fund any long term care my wife may need and still have the ability to leave our children with a decent inheritance.

When I started this process I thought there was no need for a bridge, but after running through different scenarios I have changed my tune. This may be the most affordable route to buying longevity insurance via social security.

Buys and Sells for the Week 11/4

Markets recovered off of October lows and stalled. Guessing we won’t see significant movement until post elections. Here are my trades for the week:

  1. Schwab U.S. Dividend Equity ETF  – increased position – With a P/E ratio of 13.48 I view this as the best way to buy into the market right now. Grabbed 6.86 shares @ $72.86 and a 3.4% yield.
  2. CTO Realty Growth (CTO)  – increased position – SCHD does not include REITs. Grabbed 10.8 shares @ $20.18 and a 7.53% yield
  3. United Parcel Service (UPS)  – increased position – Big brown is my largest position but at this price it doesn’t hurt to add a little more. Grabbed 1 share @ $163.15 and a 3.73% yield.

Revisiting Dividend Growth & Inflation

Some older readers of my blog may remember my old blog site on the wikidot platform (was surprised it is still up by the way) and one of the topics I was extremely focused on back then was dividend growth companies that routinely beat the rate of inflation. I viewed it as such an important topic I even created the Inflation Beaters Index that was based on David Fish’s Dividend Champion list and the end of the year there would be a summary post that looked like this:

I stopped maintaining the index at the end of 2020 because it took quite a bit of effort to maintain and I believe only one fellow blogger outside of myself was actually using the file. As such, when I migrated to the wordpress platform I dropped the topic.

The motivation for pulling his list together was to validate the claims that dividend growth investing is good for combating inflation. At the end of the day the results were just…ok. Not great but no bad either. At the end of 2020 the Dividend Champions list (companies that have grown their dividends for 25+ years consecutively) totaled 138 companies. Out of that only 49 companies (36%) were able to not just raise their dividend but also beat the rate of inflation every year. Needless to say companies whose dividend raises exceed the inflation rate are much more rare.

Going back to that original list, I pulled the top 6 with the longest streaks and updated their streaks. I realize 2022 is not over but if I list the companies most recent raise announcement we can take an educated guess if these companies will remain at the top. With only 2 of 6 having a definitive outlook of raising their dividend more than inflation it doesn’t paint a great picture.

CompanyTickerConsecutive Yrs Inflation Beat thru 20212022 Div Incr.Likelihood of beating 2022 Inflation
McDonald’s Corp.MCD4310.14%Definitely
Johnson & JohnsonJNJ406.60%Unlikely
Medtronic plcMDT387.93%Slim
Automatic Data Proc.ADP0Failed to beat 2021 Inflation
Computer Services Inc.CSVI377.40%Slim
Target Corp.TGT3720%Definitely

By the end of this year I would estimate the list gets viciously cut down to just 16 to 18 companies out of the original 49. Inflation has been brutal this year all around and even dividend growth did not provide a reprieve. However, the raises we did receive did dull the pain some and it is better than the alternative of a dividend cut or freeze.

Movie Fun Night – Vote for your Movie

Me and the family are once again starting up our backyard movie night and this year we decided to try something different and let readers have a vote in the movie choice for this Saturday (7/16). To cast a vote simply leave a comment below by Friday. The choices for this weekend are:

  1. O Brother Where Art Thou – votes (2)
  2. My Cousin Vinny – votes (1)
  3. Stripes – votes (1)
  4. Big Daddy – votes (1)

Its a tough choice no doubt…I’ll update later in the week once I have the Family’s votes.

Dividend Growth is Psychological

Throughout the years I have tried to quantitatively justify my attraction to dividend growth investing to both myself and others.  However, I never felt 100% satisfied with my explanations.  It is not that I did not believe the math & analysis or the books, articles and studies I have read on the subject. I just knew there was something else and my conclusion at the end of the day is that psychologically it comforts me.

Through self-reflection I have come to the conclusion the reasoning why it is psychologically comforting is simply a reflection of the environment I was raised in.  Since my earliest memories of childhood, I have been told that to be an adult you need to earn a regular paycheck and pay bills.  This is what I was taught by both my parents and educators.  This is how children’s books, cartoons, media, and movies depicted adults.  When I looked around at other adults (Aunts, Uncles, friends, etc..) this is what everyone else was doing, this was and still is the social norm.  Essentially, I have been psychologically programmed to expect a regular paycheck and to pay my bills every month.

This psychological programming explains why I was struggling to envision how to drawdown my wealth when I hit financial independence or retirement.  For me, saving a pile of cash was intended for buying something or to have in emergencies.  But to use a pile of cash to drawdown from to pay for day-to-day expenses was just difficult to get my head around.  My only choices were to either break my programming or find a different alternative.  I obviously choose the easier of the two paths and went to the alternative by using dividend growth investing which focuses on investing for cash flow. 

A growing cash flow felt like such a natural replacement for a paycheck.  I would get regular disbursements and the dividend growth aspect was like getting an annual raise at work.  Mentally this was a replacement for what I have been doing for the last 35+ years.  I completely understand that if I embrace a total return investing style (equity growth + dividends) my wealth might be greater however I also want to be mentally comfortable in so much that I have the luxury of focusing on other things in life and not money.   This is the number one reason why I chose and will keep continuing down the dividend growth investing path.  From my perspective I would rather spend my energy on other things in life rather than undoing my programming. Yes there are risks with this investing style but there are risks with any investments and that is okay if you recognize what they are and plan for them accordingly.

Today we are in a bear market with the S&P down 20% and the NASDAQ down 28%.  For young investors that have never experienced a bear market it seems like the worst of times.  For older investors it feels like retirement just moved that much further out.  For retirees that did not have a significant cash position now face a risk of cashing out more shares than they planned.  But as a dividend growth investor my dividend income is not down 20 or 28%.  As a point of fact, my June dividend payments this year will be larger than last June and next year’s payment will be larger than this year.  This is a comforting feeling and leads me to a feeling of being simply content.  Being content I can relax and enjoy the simple things in life while not stressing over finances.  What is your motivation for choosing dividend growth investing?

Living off a 100% Dividend Growth Portfolio May Have Risk

The idea of living off dividends and not touching the principal is always an appealing thought and I judge no one negatively for striving towards this goal as long as they enter the journey eyes wide open.

The two counterarguments to income investing I hear regularly are 1. What happens when dividends are cut? and 2. What about inflation?   In response to these two questions is the Dividend Growth Strategy and then the debates go on from there.  I am a big supporter of Dividend Growth but also grounded in the reality that it is not risk free. 

The two counterarguments have some merit albeit not as much of a “gotcha” moment as critics think.    As for dividend growth investors, the day you decide to retire and live off a portfolio with a 100% allocation to dividend growth stocks you may have just exposed yourself to a Sequence of Returns risk.

The best example to demonstrate this would be the 2008 great recession as the collapse of the financial industry had the largest effect on dividend cuts in the markets.  The Vanguard High Dividend Yield Index Fund (VYM) will be used to represent a basket of dividend growth stocks that generates $20,000 annually in dividends for someone that decides to retire on January 1, 2008.

From its dividend high of 2008 to its lowest point in 2010 our retiree would have seen their annual income from VYM drop from $20,000/yr to $15,120/yr.  If the retiree can figure out how to cut expenses and live on the reduced amount their reward for their sacrifice would be a return to the $20,000/yr mark in just 3 years.  However, if the retiree cannot cut expenses, we now run into a sequence of returns event.

The only way to meet their expenses a retiree begins to sell-off equity to cover the gap in dividend income.  However, selling stock reduces the amount of equity that can benefit from the dividend increases from 2011 to 2013.  Our retiree ends up selling off circa $11K of their portfolio and loses $460/yr in dividend income.  It now takes just over 4 years for the annual dividend income to recover.

Total Equities SoldLost Dividend IncomeYears to recover
No to Low Inflation$10,758$430.344

Luckily for the retiree inflation was non-existent to low during this time which allowed for a decent recovery.  But what would have happened if the first 3 years of the recovery period there was 8% annual inflation and then 2% annual inflation every year after that? With an 8% inflation rate our retiree would have ended up selling circa $19K of their portfolio and loses $756/yr in dividend income.  It now takes our retiree 7 years for the annual dividend income to recover.

Total Equities SoldLost Dividend IncomeYears to recover
No to Low Inflation$10,758$430.344
8% Inflation (first 3 years)$18,893$755.707

While the dividend income may have recovered in the short-term, it may cause a shortfall long-term.  That $756/yr in dividend income loss will never participate in future dividend growth and can throw a monkey wrench in where you thought your income might be 20 years down the road. Without that $756/yr earning dividend growth you potentially decrease your annual dividend by $3,500/yr 20 years down the line.

The easiest way to mitigate this risk is the same as in any other portfolio and that is with cash.  If the retiree included a cash position as part of the portfolio equal to 1 year of dividend income the cash could have been used to fill the gap until dividend recovered allowing all your original equity to benefit from a rising market.

Total Equities SoldLost Dividend IncomeYears to recover
No to Low Inflation$10,758$430.344
8% Inflation (first 3 years)$18,893$755.707
Portfolio w/1yr of Cash$0$03

The other option that could have mitigated this scenario is if dividend income greatly exceeded your expenses (by at least 30%) at the time of retirement.  While some may achieve this mark, the bulk of investors probably will not and should not plan to have a portfolio 100% dedicated dividend growth stocks but include some allocation to cash.

While an almost 25% dividend cut is difficult to live with, when you put it in perspective to the S&P 500 which during that time it dropped 56% and took 5 years to recover in a no to low inflation environment.  The amount of cash you need allocated to offset that would have greatly exceeded what a dividend growth investor needed to avoid a sequence of returns risk (imagine a cash position anywhere from 2 to 4 years of annual expenses).

Why I’m not a fan of Annuities

While perusing finance articles I came across one from MarketWatch called “Why don’t retirees like annuities?“. The article touched on the most common issues that annuities are not flexible, can be complicated to understand and laden with excessive fees. Without a doubt these are serious concerns for investors but the article did not address an additional concern I have with the total actual payouts.

Annuity salespeople are extremely pushy. Besides sidestepping any disclosure about commissions and fees they also dodge the question of how much money will actually be paid out over a lifetime. Instead they redirect you to a % that your money will return and how great it is because you can’t get a guaranteed income at that rate anywhere. But who exactly is it great for? You, the Salesperson, or the Insurance Company?

To answer this question lets look at an example where I have $100,000 I would like to invest into an immediate annuity. I head to my local annuity store and they provide me the following table:

Depending on which age I chose the annuity, my $100K investment will pay out a guaranteed rate of 5% to 6% for rest of my life. Sounds pretty good but the key words here are “for the rest of my life” and exactly how long is that?

I’m going to be generous and use pre-covid U.S. Life expectancies of 76.61 for males and 81.65 for females. We can also look at the region with the longest life expectancy (Hong Kong) with 82.38 for males and 88.17 for females. We can now compare these to the highest payouts for each annuity age bracket.

Life Expectancy Age76.6181.6582.3888.17
Immediate Annuity at 60$83,116$108,337$111,990$140,963
Immediate Annuity at 65$66,734$95,704$99,900$133,181
Immediate Annuity at 70$39,977$70,459$74,874$109,892
Table: Anticipated Lifetime Annuity Payouts for a $100K Immediate Annuity

In most scenarios you do not even get back your base investment. Assuming you are extremely lucky and get to age 88 the largest payout is ~$141K and that amount is over 28 years which equates to a growth rate of just 1.25% per year on the initial $100K investment.

Unless there is a medical breakthrough that allows us to live well beyond the age of 100 it appears the only person that benefits from this deal is the insurance company and it shouldn’t come as a surprise. First they are a business an need to make profit, second they employ actuaries that analyze your life expectancy risk and adjust your payouts to that risk.

Recently the House of Representatives passed the Secure 2.0 act which will allow annuity offerings in 401(k) plans. One of the bill sponsors,  Richard Neal, D-Mass., spoke on the House Floor on March 29, 2022 stating the act “…is protecting Americans and their retirement accounts.” Of course the question is protecting us from whom? Not the insurance companies that’s for sure. As a note, I am not railing against the good U.S. Representative Richard Neal, for the most part I thought the act introduced some welcome changes to the 401K system (like auto-enrollment). However you can see insurance lobbying influence with the annuity aspect.

One might argue that annuities benefit those who have little financial knowledge or financial self-control. This is a pretty good argument as many of us know quite a few financially irresponsible or illiterate people but there are other alternatives. The mutual fund industry has what is referred to as managed payout funds that solves the issue of figuring out how to do drawdown and sends you a monthly check but still allows you access to your investment.

The problem with managed payout funds is they were introduced during the worst time of the financial crisis (circa 2008) and it was for a market (baby boomers) who had yet to begin retiring. As such they have not really gained traction over the years and are not offered in 401K plans. My biggest issue with these is they are modeled on old outdated portfolio allocations of bonds with some equities all based on their other mutual fund offerings. There are so many more income sources they could employ (REITS, utilities, dividend growth, or covered calls to name a few). If the mutual fund industry adjusted their portfolio mix to include some higher yielding or dividend growth components it might be the best solution today. But alas there is little to nothing out there that fits this bill so I will continue to manage my own assets to generate income as annuities are a benefit to only the insurance company.

My Final Adjustment for FI – Income Diversity

Being just 5 years out from reaching Financial Independence (FI) I have started to fine tune everything as the acquisition phase of my investing journey is coming to an end.  Losing the safety net of my steady weekly earned paycheck means I have to do more to avoid investing mistakes or unplanned events.

Recently I posted my my first fine tuning with target emergency funds I plan on having during FI as well as eliminating a rainy-day fund and instead amortizing replacement costs and adding that to my monthly budget.  A quick summary of that is as follows:

  • The Market Crash Emergency Fund – equal to 9 months of expenses
  • The Healthcare Emergency Fund – equal to 3 months of nursing home care
  • Additional $583 added to my monthly expenses – amortization of replacement costs for home, transportation, and appliances.

The final piece of fine tuning my plan revolves around achieving my income goal of passive income equal to 115% of my annual expenses while mitigating the risk of inflation, which for this exercise I will use the long term inflation average (since 1913) of 3.24%.

Jumping straight to the final solution, I determined the best mix to maximize income and reduce risk would be an allocation of 70% Dividend Growth Equities, 20% Real Estate (REITs), 5% Business Development Companies (BDCs) and 5% in Leveraged ETFs.

Fidelity Cash Management

The Fidelity Cash Management Account is one item I have not spoken about in the past.  To consolidate my financial sources, I have chosen to use Fidelity as a replacement for my bank checking account as most of my investments are already with Fidelity and this just simplifies things.   

The other aspect of the cash management account is the reference to 6 months of expenses. No this is not another emergency fund.  The intent of this balance is to smooth out my dividend income into a steady monthly cash flow amount.  As many investors are aware, dividend income is not the same month to month so again this is another simplification step.

Finally, achieving this is quite simple actually as 6 months before I hit my FI target I simply turn off all my DRIP and reinvestment activities and allow the dividends to pool.

Growth Rates & Inflation

Starting with my Dividend Growth bucket, my annual growth rate fluctuates between 4% to 5%.  This came down quite a bit as I leaned heavily into buying utility stocks in 2020 when they were on sale. While this provided stability it came at a price of muting my growth rate.

The REIT bucket can vary wildly. Some years my REITs saw a 6% rise while other years its was less than 1%. For this analysis I will stay conservative assuming an annual growth rate of 1% on the low end to 2% on the upper end. 

Regarding the BDCs bucket, this is an ebb & flow with dividend raises. Some years are 0% while others I have seen 5%. For this analysis I will stay conservative assuming an annual growth rate of 0%.

The Leveraged ETF bucket is a fairly new aspect to my portfolio and something I have been researching.  Leveraged funds such as QYLD and JEPI have become quite popular as of late in the investing world due to their high yield and monthly payouts.  Some seek the high yields while others look at total return, however, my take on them is slightly different.  One factor I have noticed amongst these funds is their monthly payout varies immensely depending on the option activity so it is understandable.  For my portfolio I prefer more consistency and predictability, as such I have narrowed my list down to just three funds that currently have the least variability in their monthly payouts:

  • NUSI (Nationwide Risk Managed Income Fund) – The average monthly payout for NUSI is $0.17 per share.  Its payout variation ranges from -10% to +10.59%.  Of all the funds I reviewed NUSI by far had the most consistent month to month payout. The only downside to NUSI is in a slow declining market it increases the costs of theirs puts & calls strategy and I do have some concerns if they can stay consistent with their payouts.
  • XYLD (Global X S&P 500 Covered Call ETF) – The average monthly payout for XYLD is $0.40 per share.  Its payout variation ranges from -16.75% to +25.25%.  XYLD surprised me being the runner-up to NUSI when it comes to a low variable payout, I thought its sister fund XRMI which uses a collar strategy to limit risk would have performed better but that varied from -23.5% to +26.5%.
  • DIVO (Amplify CWP Enhanced Dividend Income ETF) – The average monthly payout for DIVO is $0.14 per share.  Its payout variation ranges from -22.14% to +12.14% however the instances of negative months are dramatically lower than other funds.   Of all the funds DIVO has the smallest dividend at just 4.82% however (this is the best part) it has annual dividend growth! Excluding a single long term capital gain event in 2019, DIVO has increased their dividend over the last 3 years at an average rate 6.28% and makes DIVO my favorite out of the three.

Because of DIVOs growth rate, my Leveraged ETF bucket will have a projected annual growth rate of 2% that I will use for both the low and high end.

Combining all the growth grates and adjusting for weighting, my overall portfolio will see growth on the low end of 3.45% and 4.4% on the upper end. Using the long term average annual inflation rate of 3.24% my portfolio will achieve a positive real growth rate.

Low End CAGRUpper End CAGR
Portfolio CAGR3.45%4.40%
LT Inflation Rate-3.24%-3.24%
Real CAGR0.21%1.16%

As you can see in the table above, a 0.21% real CAGR does not leave much left on the table but it is positive none the less. Considering the amount of money I will be investing over the next 5 years, this was the best combination I could use that would allow me to achieve FI. If I reduce the allocation to dividend growth stocks I would, in the short term, exceed my income need but after inflation is factored in I would have a negative CAGR and longer term that benefit would quickly erode.

Now my entire FI plan for next 5 years has been laid out, my only task left is working towards the final solutions. Of course no one is perfect, I have tried to account for as many scenarios as possible that could occur during my FI years but I may have missed something and I am always open to any input or a glaring omission I might have missed.

Buys and Sells for the Week 4/8

Not a lot of excitement (positive or negative) for the week. The Fed released some new commentary about more rate increases but nothing that caused the stock market to panic as most investors are expecting additional rate hikes.

Only weakness was in transports and not sure why. If I had to guess maybe there is some worry of the economy slowing down (i.e. recession talk). Other than that it was a pretty quiet week so here are my trades for the week:

  1. Snap-On Inc. (SNA) – increased position – It dips and I buy. Grabbed 1 share @ $204.37 and a 2.78% yield.
  2. Best Buy Co. Inc. (BBY) – increased position – Love it when a stock I like is just floating near their lows as I can slowly build up a position. Grabbed 2 shares @ $90.39 and a 3.87% yield.

Reimagining my Emergency Fund in Retirement

(note: this is part 2 to the previous post “Cost of Getting Old”)

Up to this point of my career, my emergency fund had one simple focus; to mitigate the risk of income loss.  I kept 2 months’ worth of expenses in cash and the rest I poured into the stock market in the hopes that a combination of unemployment benefits, severance pay, emergency cash, and dividend income I could cover 6 months of expenses until I found a new job.

However, this changed after I turned 50 and retirement was suddenly in view.  I am not naïve to believe ageism or age discrimination does not exist.   I knew going forward if I lose income from my job the odds of bouncing back and finding new employment were stacked against me.  At this point, prior to collecting social security, my only source of income would come from dividends so I would need to mitigate for a market crash and high inflation.  My current emergency fund was not setup for this and needed to be reevaluated.

I analyzed my portfolio against different market conditions for crashes and time periods for inflation.  In a quick summary, I discovered my portfolio could suffer a 30% cut in income and it could take up to 4 years to recover. At the end of the day, for my portfolio to weather that period I determined I would need the equivalent of 9 months of expenses in cash and developed a plan on how to fund it.  Of course life is not just about stock market performance, there are also unplanned expenses like a new roof or furnace so I decided that I would also need a $10K rainy-day fund for these instances. This was cash I already on hand so I dismissed thinking about it any further.  But this rainy-day fund is where I was wrong.

In determining my rainy-day fund, I was lazy and gave it little thought and I did not realize it until my recent experience with my father-in-law going into a nursing home leaving his children to make life altering financial and life decisions on his behalf. It was at this point I realized s $10K rainy-day fund was not even close to handle a situation like this.  At a minimum I needed at least $45K (3 months of nursing home expenses).  While I had concerns of how to fund this, I was more worried about the doubt creeping in if I was planning correctly.

As I was pondering my predicament I came across a video episode of Two Sides of FI where one of the vloggers (Jason) mentioned that for major repairs he amortizes the cost into his monthly expenses.  His statement was like a concrete block being dropped on my head!  With all my years looking at financial statements its not like I did not know what depreciation cycles were. I felt like a complete idiot for not viewing it this way.  I need to reanalyze this and its not that hard. 

Most of the major purchases we make have a defined or expected life before they need to be replaced and there is no reason to treat emergency care in the same fashion and amortize that cost assuming I will need the funds around age 75.  Taking all of this into account here is the additional monthly expenses I need to account for:

ItemUseful Life (Yrs.)Remaining Life (Yrs.)Replacement CostMonthly amortized cost
Furnace or HVAC2019$8,000$35
Hot Water Tank1210$800$7
Washer and Dryer116$1,600$22
Electric Stove1310$800$7
Emergency Care22$45,000$170
Sub-Total Monthly Expense$621
Minus Existing Cash-$10,000-$38
Total Monthly Expense$583

There we have it, an additional $583 in monthly expenses or approximately $7K a year. Now I will need to revisit what my planned expenses were in retirement and add these figures. In theory it should increase my targeted dividend income I need for retirement. Though not good news I think it is better to find this out now rather than later and plan accordingly.

There is a quote from Alan Lakein that inspires me at times like this:

Planning is bringing the future into the present so that you can do something about it today

In other words I have the means to do something about it today while I will not have the means to fix it in the future,