Inflation Part 3: Protecting Yourself Against Inflation (2008-06-30)

Inflation Part 3: Protecting Yourself Against Inflation

(2008-06-30) by David John Marotta

Officially, inflation today is calculated about 4%. Unofficially, it is over 7%. Since 1997 the government has stolen productivity gains from Social Security recipients and pushed middle-class taxpayers into alternative minimum tax rates. But you can learn how to hedge your assets against underreported inflation and protect your retirement goals.

First, don't count on Social Security for your retirement, especially if you are young. It may be unthinkable, but Social Security payments will probably be eliminated for the middle class and above. And even if you qualify, the government's official cost-of-living adjustments will continue to be calculated significantly below actual inflation. If you don't keep pace with inflation, by the end of your retirement you will have lost your lifestyle, your independence and ultimately your dignity.

An irresponsible government may underreport inflation and jeopardize the retirement of truly needy seniors. But responsible citizens will strive to take care of themselves in retirement without government assistance. Public funds thus will be available for those who can't take care of themselves. In other words, financial planning is simply planning not to be the truly needy.

Second, ask yourself, "What are safe investments that should more than keep up with inflation?" This is a challenging question.

Because of inflation, cash, normally a safe store of value, has been the riskiest investment since 2002 when the U.S. dollar began losing much of its purchasing power. Since then, the U.S. Dollar Index has dropped over 39%, from 120 to 72.95. It has also dropped more than 44% against the euro and over 67% against gold.

During inflationary times, U.S. bonds are not a safe store of value either. They pay a fixed rate of return in diminishing dollars. In a rising interest rate environment, intermediate- and long-term bonds drop in value too. When interest rates are rising, keep your money in a money market account where the rates adjust immediately.

Inflation-indexed bonds only do slightly better. Because actual inflation is underreported, these bonds have not kept up with the real inflation rate. The adjustments on them are tied to the official consumer price index, so they also are depreciated for any productivity adjustments. These investments may do better but only to the extent that inflation is reported accurately.

Foreign bonds provide the best protection against a falling dollar but only if they are unhedged. Many foreign bond funds hedge their investments against a rising dollar, providing returns tied to U.S. dollars. If your goal is to guard against a falling dollar, a fund that hedges against the dollar defeats this purpose.

Unhedged foreign bonds yielded about a 10.5% return in 2007 and about a 6% return so far in 2008. Determining if a foreign bond fund is unhedged can require some research. Also, foreign bonds of developed countries perform differently than those of emerging market countries. They represent two distinct baskets of currency. Emerging market bonds at times have a higher return, but they also have a higher risk and volatility. We recommend putting a small portion of your foreign bond allocation into emerging market bonds.

The danger with any unhedged foreign bonds is that the U.S. dollar may strengthen against foreign currencies. Also, unhedged foreign bonds cannot protect you against global currency inflation. So you don't want all of your fixed-income investments in unhedged foreign bonds, although this investment does protect you to some degree against U.S. dollar inflation.

Cash, U.S. bonds and foreign bonds are all investments for stability rather than appreciation. Stable fixed-income investments generally make about 3% over inflation. It's not a wide enough margin to stay ahead of inflation during times when interest rates are low or rising.

A significant allocation to appreciating equity investments is necessary to accomplish the long-term growth that ensures a comfortable retirement. Equity investments, on average, make about 6.5% over inflation. Although they are more volatile in the short term, they give you a better chance of achieving the appreciation necessary in today's longer retirements.

The third way to protect your portfolio against inflation is to refrain from being too aggressive or too conservative. Keep most of your investments in appreciating equities, but plan the next five to seven years of spending in stable fixed-income investments.

If you don't have the next five years of spending in stable investments, you may be forced to withdraw from your portfolio while stocks are down. Your portfolio will be depleted and unable to rebound. However, if you are too conservative, you may sleep well tonight but eat poorly a decade from now because your fixed-income investments haven't exceeded inflation.

The balance between risk and return should not depend solely on your emotional risk tolerance. Rather you should focus on what risk-return allocation mix affords the best chance of meeting your investment goals. Your allocation to stability should be fixed and your allocation to appreciation should appreciate. The goal of stability eliminates risky, or junk, bonds. The goal of appreciation also eliminates speculation, which adds needless noise rather than real return.

The fourth principle is that investing for appreciation means selecting only investments that on average go up, are publicly traded, and have low expenses and fees. Savvy investors buy shares of long-term businesses that produce worthwhile goods and services.

Speculation, in contrast, can include trading options or commodities. It can encompass limited partnerships or hedge funds that are illiquid and often subject to high fees and expenses. Diversification does not mean buying every kind of investment regardless of its suitability to help you meet your financial goals.

The fifth protection against inflation is to guard over half of your portfolio against the risk of a falling dollar. The asset classes of foreign bonds, foreign stocks and hard asset stocks offer the best protection. As a class, hard asset stocks have also yielded one of the best returns since 2002.

Hard asset investments include companies that own and produce an underlying natural resource, such as oil, natural gas, precious metals, base metals, and other resources such as diamonds, coal, lumber and water.

Keep in mind that investing in hard asset stocks is not the same as investing directly in commodities. Buying gold bullion or a gold futures contract is an investment in raw commodities or their volatility. Buying a gold mining company is a hard asset stock investment.

The Goldman Sachs Natural Resources Index tracks hard assets investments. It is comprised of 85% energy and 13% materials. At the end of May 2008, this index was up 12.12% year-to-date. Its three-year annualized return is 30.47%. Its five-year annualized return is 29.56%.

Foreign stocks also protect you against a falling dollar. They are priced in foreign currencies and benefit when the dollar drops in value.

The MSCI EAFE foreign index is only down 3.03% year-to-date compared with the S&P 500, which is down 3.80%. Over the past five years of a dropping U.S. dollar, the MSCI EAFE index has on average done much better than the S&P 500.

Adding international investments to your portfolio is an excellent way to diversify for safety while boosting returns. International stocks have appreciated more than U.S. stocks. What's more, companies located in countries with the most economic freedom have appreciated more than the broader international average.

Since 1994, the Heritage Foundation Index of Economic Freedom has used an empirical system to measure economic freedom in countries worldwide.

One of the 10 categories it measures is monetary freedom. The worldwide average inflation rate per country from 2004 to 2006 was 10.6%. Having a monetary authority to maintain a sound currency clearly is critical to economic freedom. As the Heritage Foundation report states, "Monetary freedom is to market economics what free speech is to democracy. Free people need a steady and reliable currency as a medium of exchange and store of value. Without monetary freedom, it is difficult to create long-term value."

When investing overseas, emphasizing countries with the most economic freedom can help prevent trying to avoid U.S. inflation only to be caught in some other country's inflation.

Finally, tax management is critical. Underreported inflation pushes middle-income Americans into higher tax brackets. Many techniques to tax-manage your investments are worth exploring. Putting fixed-income investments into pretax accounts and foreign stocks into taxable accounts can mean a tax benefit of about 1% a year.

Normally a Roth conversion does not have any benefit unless you are in a higher tax bracket during retirement. With inflation underreported, you are being pushed into a higher tax bracket every year. And with the political winds portending higher taxes regardless of inflation, you will almost definitely be paying more in the future. Paying the taxes now and funding or converting to a Roth account while you have a relatively low rate could result in significant tax savings.

So despite inflation rates that are higher than reported, you can still protect your investments, achieve your financial goals and enjoy a comfortable retirement.

from http://www.emarotta.com/article.php?ID=290

Inflation Part 1: How the Government Lies About Inflation (2008-06-16)

Inflation Part 1: How the Government Lies About Inflation

(2008-06-16) by David John Marotta

Officially, inflation today is calculated about 4%. Unofficially, it is over 7%. Since 1997 the government Consumer Price Index (CPI) has manipulated the raw data and significantly underreported inflation.

Recently I watched the 1997 movie "Conspiracy Theory" starring Mel Gibson and Julia Roberts. Before the opening credits have finished rolling, we understand that Gibson's character is a crackpot cab driver who sees conspiracies everywhere. But our perception changes by the end of the film when we realize for ourselves that some of his theories are true.

For years I've hesitated writing about the CPI, computed by the Bureau of Labor Statistics, for fear of being compared with a paranoid character like the one in "Conspiracy Theory." The message that the government lies to us about inflation and, as a result, quietly confiscates hundreds of billions of dollars from its citizens isn't the easiest message to swallow. It only goes down when accompanied by a healthy draught of political cynicism.

What's changed over the past year, however, is that we are closer to the end of the movie. It is clearer now not only that inflation is running rampant but also that the government's numbers are still ridiculously low. More Americans have come to mistrust official inflation statistics, and therefore they are ready to understand how and why the government skews these numbers and to learn how they can protect their family's savings.

Take 2007 as an example. Bread price rose 7.4%, gasoline 8.2%, health insurance 10.1%, whole milk 13.1%, eggs 29.2%, but according to the CPI, somehow inflation was only calculated as 4.1%. This year to date we have seen an even shaper rise, which still has barely affected the official numbers.

In 1975 programs such as government pensions, Medicare and Social Security were indexed to inflation. With rising inflation in the early 1990s, public officials realized that entitlement programs made government deficits impossible to control. Politically it was just too difficult to cut spending to this program. It was much easier simply to lower their cost-of-living adjustments.

So a commission of five economists in 1996 studied the CPI and issued a report stating that the index overstated inflation by at least 1.1%. Lower CPI adjustments would not only save money in entitlement programs but also raise tax rates mostly among the middle class. Tax brackets, personal exemptions and the standard deduction are all indexed for inflation. Lowering these adjustments has the effect of increasing the tax paid, with the greatest impact on middle-class taxpayers.

The argument that the CPI was overreported went something like this: In 1970 a mid-priced car cost about $3,500. Today, in 2008, the same size car costs about $25,000. After adjusting for inflation using official CPI data, today's car costs $4,515 in 1970 dollars.

It certainly looks like inflation has been significantly underreported, even though the government argues the exact opposite. In their 1996 study, they suggested that although it looks like today's cars are more expensive even in inflation-adjusted dollars and that CPI has been underreported, in fact it is the opposite. They claimed that today's cars are simply better built.

According to their logic, what we called a car in 1970 doesn't even qualify to be called a car today. It wasn't fuel efficient. It had no airbags, no power windows, no power door locks, no heated seats, no tilted steering wheel and no CD player.

The government has decided that the enjoyment you get from all of these extra features is why a car costs more today. Thus you are buying a better model than you did in 1970 and therefore it should cost more. The extra pleasure you get from the car should be measured as your choice, not as inflation.

You can see the problems with these government assumptions. You still need a car today. Apparently, you can't buy what we used to call a car in 1970. A combination of government mandates and changes in market preference have added features. Rather than being able to take advantage of these improvements simply because you are living in the 21st century, these improvements have diminished the value of your currency.

The official term for this type of adjustment is a "hedonic deprecator." If the computers available this year are twice as fast, then the government counts that as 50% deflation. You are getting twice the hedonism for the same dollar, so only half the price is reported in the price indexes. It evidently doesn't matter that you paid the same price. And it doesn't matter that a computer at the old speed won't run any of the new software.

Hedonic adjustments are a way to discount any improvements in productivity. Under the old method, when a reserved Federal Reserve kept inflation in check, productivity improvements resulted in every dollar of your paycheck buying more. Now, an unreserved Federal Reserve deflates the value of every dollar. By counting the bonuses from increased productivity, the government does not need to report the real inflation it is causing.

Not everything is more expensive. Clothes cost less, thanks to continued globalization. And communications costs less too, along with many other electronic gadgets. However even these items are used against consumers. In a concept called "creative substitution," the government CPI numbers did not count electronics when they were expensive but now counts the drop in their price as anti-inflationary.

The government's argument is that very few people owned a calculator when it cost $100. But now that the same calculator can be purchased for $5 and everyone owns one, it should be counted as deflationary. According to this mindset, the fact that your calculator and cell phone each costs $100 less should more than make up for the fact you can't afford to buy basic foodstuffs or drive your car.

With food, the government adjustments are a little more imaginative. They assume if the price of beef goes up, you will eat less beef and more chicken. If chicken goes up, you will choose pork. And if pork goes up, you will eat more tofu. They assume that when the price of something goes up, some people creatively substitute something less expensive.

Lacking any standard for a U.S. dollar, we can make two observations: your currency has been devalued, and this devaluing is not reported as inflation. Standard of living improvements due to technological advancements have been withheld from those who are on fixed incomes and those who keep their wealth in dollar-denominated investments.

It was none other than former Federal Reserve chairman Alan Greenspan who in 1966 wrote, "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value."

Unreported runaway inflation has made dollars unappealing to hold. This is good for our trade deficit because those outside the United States now want to trade dollars of diminishing value for real goods and services, but it could have detrimental effects on our country and its citizens. Next week we will describe those effects and how to protect yourself against them.

from http://www.emarotta.com/article.php?ID=288

Maximum Safe Withdrawal Rates in Retirement (2008-06-09)

Maximum Safe Withdrawal Rates in Retirement

(2008-06-09) by David John Marotta

Last week's column described how certain critical assumptions can affect retirement planning. Here we discuss how to determine maximum safe withdrawal rates that will not compromise a long retirement.

Imagine you knew you were going to die peacefully in your sleep at the end of your 100th year. Becoming a centenarian is more common these days, and it's a much safer assumption than using average longevity. Half the people live longer than average, and a significant percentage live much longer. So our best case scenario is not just a fantasy.

As you turn 100, you could plan to spend 100% of your portfolio. At the end of the year when you run out of money, you also run out of life, literally dying broke. It makes sense to keep all of your assets in cash or a money market account. Investing in stocks risks a market correction that could leave you short on funds and make your last days miserable.

Now back up a year. You are 99 and could spend about half of your portfolio's value, reserving the other half for your final year. You will keep money for your 99th year in cash. Money reserved for your 100th year could be put in a CD or a bond for more interest. You should be making a real return on your investments that is greater than inflation.

Imagine you planned on reaching your 99th birthday and several years ago bought bonds to mature at the beginning of each of your last two years. The bond for your 99th year has just matured and is waiting in cash for you to spend. The bond for your 100th year has one more year to mature and is earning about 3% over inflation. So after factoring out inflation, you can spend 50.70% of your portfolio this year, knowing the 49.30% of your portfolio left in the bond will grow by inflation plus 3% to cover a cost-of-living increase for your final year.

Back up yet another year. You can spend a little over a third of your portfolio for your 98th year, just over a fourth for your 97th year and just over a fifth for your 96th year. Gradually as you work backward, the amount of interest over inflation you are earning becomes more significant. Once you establish a laddered bond portfolio of five to seven years, putting those assets with a longer time horizon into the stock market is a good idea.

Investing in fixed income gives you peace of mind, knowing your lifestyle for the next few years will be relatively stable and not depend on the whims of an inherently volatile market. Investing in stocks is appropriate only when your time horizon is at least five years or longer. Therefore, we recommend keeping the next five to seven years of spending in fixed-income investments during retirement. You can keep five years of spending in fixed income if you are aggressive and seven years if you are conservative. Five to seven years is an appropriate range. If you keep whatever you feel like based on an emotional risk tolerance, you may jeopardize your retirement lifestyle.

In our examples we assume you have set aside six years of spending for stable investments in fixed income and allocated the remainder of your portfolio in appreciating equity investments. This money is invested in quality fixed-income investments. There is no reason to invest in "high-yield" junk bonds for the stability side of your portfolio. Junk bonds act like stocks and are liable to fail when you need them most. With your fixed-income investments in quality bonds, you can safely afford to put more of your portfolio in appreciating stocks.

Knowing your retirement spending is relatively secure for the next six years, we suggest putting the remainder of your portfolio into more volatile stock investments to achieve a better long-term rate of return. With this technique, not only do you have a maximum safe withdrawal, you also have a maximum allocation to fixed income: to balance the need for six years of stable spending with the need for appreciation to cover the seventh year and beyond.

For your stable investments, we have assumed a rate of return consistent with fixed income, about 3% above inflation. Assumptions for the equity portion of your allocation are more problematic. In the long run, stocks average about 6.5% over inflation, but in that long a run both your retirement and your life are over. Stocks are inherently volatile. Do not count on any reliable rate of return during your retirement. Past performance is no indication of future results. Just because a 30-year loss in the U.S. markets hasn't happened yet doesn't mean it couldn't happen during your retirement.

You can handle uncertainty in two different ways: throw lots of dice and see what happens or make conservative assumptions. What we learn from the first can help us with the second.

In the financial planning world, throwing lots of dice is called Monte Carlo analysis. It involves running a retirement projection against many randomly generated investment returns to see if that portfolio growth outlasts many random lengths of life. Sometimes returns are selected from history; sometimes they are generated mathematically. Hundreds of assumptions are built into Monte Carlo simulations. As a result, the method illustrates risk better than it actually predicts or protects against it.

We learn from Monte Carlo that every plan has some small chance of failure, and you must accept the possibility that you will need to adjust your lifestyle. We also discover that a string of early bad returns with a high withdrawal rate makes for a difficult recovery. Monte Carlo analysis has so many associated problems, we advise taking the lessons learned and simply making some conservative assumptions.

Assume your stock investments will only average bond-like returns, about 3% over inflation. Normally the markets do much better, but sometimes they do much worse. Working backward from 100, at age 90 with 11 year of spending remaining, you should be able to spend 10.42% of your portfolio.

Continuing to work backward from age 100, we can compute exactly what percentage of your portfolio you can spend if you are retired at any age. Here are those maximum safe withdrawal rates by age, along with the maximum percentage you can safely allocate to fixed income and still leave enough in appreciating equities to keep up with inflation:

Age	Withdrawal Rate	Maximum Fixed Income
50:	3.64%	18.4%
55:	3.82%	20.4%
60:	4.06%	22.4%
65:	4.36%	25.0%
70:	4.77%	32.2%
75:	5.35%	36.4%
80:	6.22%	42.4%
85:	7.66%	51.6%
90:	10.42%	67.8%

The safe withdrawal rate never drops lower than 3%. If your portfolio appreciates 3% over inflation and you take 3% out, your portfolio will have grown exactly by the rate of inflation. You can retire the day you are born if you can live off 3% of your trust fund. A 3% withdrawal rate can continue indefinitely as long as your portfolio appreciates annually by at least 3% over inflation.

Every year your portfolio earns greater than 3% over inflation, your standard of living can go up. If your portfolio loses money one year, you may be able to keep your spending constant and wait for above-average portfolio returns to get you back on track.

In this way you can adjust your standard of living dynamically and avoid a "plan once and blindly follow," on the one hand, and "let my standard of living bounce between feast and famine" on the other. This middle ground keeps lifestyle spending appreciating when the market returns are typical and keeps spending constant in terms of dollars during down markets.

Withdrawal rates lower than these maximum safe rates provide an even safer retirement plan and also allow more of your portfolio to remain invested and appreciate. In addition, withdrawal rates lower than the maximum permit greater flexibility in your asset allocation. With conservative enough withdrawals, you can afford to put more assets either in fluctuating equities or in less appreciating bonds.

Staying under these maximum withdrawal rates in conjunction with a diversified asset allocation gives you an excellent chance of having enough money during your retirement. And if your portfolio experiences average market returns (as opposed to the average bond returns used for planning), you will also leave a nice legacy for your heirs.

from http://www.emarotta.com/article.php?ID=287

Taking Early Retirement Withdrawals (2008-05-26)

Taking Early Retirement Withdrawals

(2008-05-26) by David John Marotta

Many academics are 403(b) rich. But they are poor in terms of their spendable assets, which limits estate planning and tax management options. It also makes retiring early difficult. Fortunately, an IRS 72(t) exception can help with early retirement.

Imagine that Professor Reddy Echols II is ready to retire from the mathematics department. Having proved the Riemann hypothesis, his life's work in math is complete. Now at the young age of 40, he is ready to give up the responsibilities of the classroom.

Life planning is less about financial success and more about personal significance. Having achieved a well-paying tenured position relatively quickly, it may be difficult for teachers to contemplate changing careers. But if you focus on reaching your goals, your finances need only match what your goals require. Professor Echols now wants to spend time on other pursuits. So he either needs to seek a new patron or find a way to provide for himself in early retirement.

Retirement, traditionally the brief period between a career that lasted longer than life expectancy and death, is being redefined. In fact, when the Social Security program began, benefits started at age 65 and life expectancy was only 61. My father took his first retirement when I was 16 years old, and retirement is the only endeavor that has ever stumped him. At 81, he has just finished teaching his course on global finance at Stanford University.

The new definition of retirement is financial freedom: having the means to do whatever you want to do regardless of the remuneration. Having achieved financial success, you are now free to seek personal significance.

Many people find it challenging to reach financial independence by age 65. It does require planning, but it certainly is not impossible. If you save 15% of your standard of living starting at age 20, you should be able to retire comfortably at age 65 even if the market performs poorly. But unfortunately, most people don't start saving at age 20, and few save at least 15% of their standard of living. Thus a majority of baby boomers are not on track to achieve financial independence at any reasonable retirement age.

Despite these statistics, however, retiring at age 40 is not a pipe dream. It simply requires more discipline. After adjusting for inflation and considering typical market rates of return on a balanced portfolio, for every dollar you save over 20 years you will be able to retire with a lifestyle equivalent to what you were saving. Start saving $1,000 a month, and in 20 years you can retire with the purchasing power of $1,000 a month today.

In his progression from brilliant PhD candidate to tenured professor in his 20s, young Echols never really left behind the frugal lifestyle of a graduate student. Continuing to live modestly, his salary increased without a parallel rise in his standard of living. Consequently, he started by saving $2,500 a month, or $30,000 every year. At a 10% rate of return, he now has $1.8 million at age 40 and rightly judges that his means should be sufficient for his wants.

You can retire at any age as long as you keep your wants modest compared with your total portfolio value. You must be able to support your standard of living until you reach 100, so the younger you are, the smaller the percentage of your portfolio you can withdraw each year. At age 40, you can safely withdraw about 3.38% of your portfolio's value and still support your lifestyle until you reach age 100. At a 3.00% withdrawal rate, you can support your lifestyle indefinitely because your portfolio should be able to earn at least 3% over inflation.

Having saved $1.8 million, Echols can safely withdraw $5,000 a month, or $60,000 a year. His $5,000 monthly stipend should provide the same purchasing power of the first $2,500 monthly contribution he made 20 years ago. Saving and investing through the university's 403(b) plan, Echols now has all $1.8 million in his retirement account waiting for him to turn 59.5 years old.

Taking money from your retirement account early normally results in a 10% penalty. Income tax always needs to be paid, but there are eight exceptions to the age 59.5 rule that allow for penalty-free withdrawals. You may be able to take money from a retirement account prematurely in any of these five situations: unreimbursed medical expenses, medical insurance if you are unemployed, disability, higher education expenses, and first-time home ownership. Additionally, if you have inherited a retirement account, you may be able to or even required to begin making withdrawals. And you may also withdraw money from a retirement account and roll it into another qualified plan.

The final way to make penalty-free early withdrawals is to make annuity distributions. Because all of these methods are available for traditional IRA accounts, the first step for Echols is to move his 403(b) into an IRA rollover account.

The annuity distribution method allows Echols to retire early by waiving the penalty on withdrawals at any age so long as they are substantially equal periodic payments that continue until age 59.5 or for at least five years, whichever comes later. Maximum payments must be calculated using one of the IRS-approved methods.

The first method is the life expectancy method. The IRS provides a table of divisors at every age for a single life expectancy or a joint life expectancy. The single life expectancy for a 40-year-old is 43.6 years. So Echols could withdraw $41,284 a year, or just 2.3% of his portfolio value--a very conservative number.

The life expectancy method is easy to calculate because it doesn't really factor in any significant account growth or appreciations. Each year your account balance at the end of the previous year is divided by a slightly smaller divisor. Amounts start small, and with any reasonable rate of return, the odds are that the account balance will grow enough to outpace withdrawals. This method works well for taking small contributions but not truly to retire and take the maximum safe withdrawals.

The second method is amortization: You are allowed to assume a reasonable interest rate of return for earnings on your portfolio. The IRS has even ruled that "reasonable" includes anything less than 120% of the "Mid-Term Applicable Federal Rate" for either of the previous two months. Using the month of April, the maximum reasonable rate of return is 3.45%, and Echols's annual withdrawal could be as high as $80,430.

Using the amortization method, Echols can justify any withdrawal less than $80,430 a year. Simply by lowering the reasonable rate of return from 3.45% to 1.81%, the withdrawal rate drops to $60,000 a year. Better yet, Echols can split his $1.8 million into two accounts. One account with $ 1,343,000 using 3.45% as a reasonable rate of return would justify withdrawals of $60,000 a year. The other account of $457,000 could simply continue to grow without withdrawals until he's 59.5 years old.

The advantage of having two accounts is that the second one can start withdrawals on a separate timing schedule and be calculated at a later date.

You would think the IRS rules would be clear and easy to follow, but they are not. Several IRS rulings suggest you can recalculate these numbers annually. Alternatively, you may be able to adjust for inflation annually.

The easiest method for getting more money in a future year would simply be to continue to create a new account and start an additional amortization flowing.

If your goal is retiring early, it is best to have significant taxable investments. As an alternative, the amortization method allows you to begin some withdrawal flows, as illustrated for young Echols. Fortunately, he is a former mathematics professor.

from http://www.emarotta.com/article.php?ID=285