Stocks AND Security
Moises's story about Upside Investing
Thinking about a financial future where you might run out of money is scary.
Getting to retirement in good health gives a humble person a moment to reflect on luck and good fortune. But what next? Risks to the lifestyle still exist, and 2 a.m. thoughts of inflation, a stock market fall, and bank account hacking will crush the calm of a settled mind.
Many risks are impossible to manage, but investment risk is not one of them.
Investment risk can be reframed and given a different perspective. There is a comfortable outcome, one that provides a baseline living standard with all savings and financial assets in very low-risk investments with the opportunity for a higher living standard if stocks go up.
Think of it this way.
Live as if all financial assets invested in stocks have no value: assume every stock investment became worthless. Then, over time, began converting stock investments to safe investments and begin ratching up the living standard, because of course not all stocks will be worthless.
I wrote about Moises and Maria a little while back. In this updated post, I hope it freshens your new financial year. Their new financial plan is attached.
Friends know him as Moises, a silver-haired chef to the stars, who grew up in Spain and then toddled with his mother Juanita to LA in the early 1980s. Moises grew up mainly in Huntington Park in southeast LA, then went to a mid-level culinary apprentice school downtown. An externship, then a spinning wheel rotation of traveling with his knives, Moises worked across the workstations of the LA restaurant scene. Most owners were looking for cheap labor to assist with skinny profit margins. Moises loved his work and liked stability, but he was continually interviewing for his next position because the current position was going away.
Interview. Get the job. Work.
Kitchen goes quiet after a few months. Goodbye business.
Next job.
Moises earned enough in those early years to afford a simple 1-bedroom apartment near the bus line. But, as a chef, he felt he was trying to sprint through a vat of crème brulee. The future dim, he leased a food truck from Monterrey Tortillas for the weekends. Monterrey catered to construction sites Monday through Friday from 5 a.m. to 2:00 p.m. Moises rented the truck for Saturday and Sunday for $500 plus gas and built a hot sandwich business. He bought a couple of “Moises Tortas” placards, placed them over the Monterrey brand, and away he drove toward UCLA, Brentwood, and Santa Monica.
A few months later, Moises's life changed.
One day, Charles Stillwater, stopped by Moise’s food truck. “Chuck” was a Hollywood producer needing a champion chef for a quick catering gig to welcome the new crew of his movie, “On the Road with the Two Hot Tamales,” a call back to the old Hope/Crosby genre featuring star chefs. Chuck said: “Amigo, your food is mucho bien,” in a marginally offensive crafting of Spanglish. “Can you work for me next Saturday afternoon?”
A deal was struck with Chuck for a catering gig, which led to more catering gigs for Moises and a successful business model. Moises trained others to run his food truck so that he could focus on the higher-margin catering business. The food truck became mobile advertising, serving him well; two sources of income helped Moises mix a stable revenue source with the occasional home runs from high-profile catering events.
Moises Has Reached His Pause Point
After twenty years of the daily Vitamix grind of a chef’s life, a mid-60s Moises is ready to stop, encouraged by the interest expressed in buying his catering business. Being reflective: “Can I afford to retire now? What do I do with my IRA? Should I invest in the stock market or avoid it?”
Like Moises, there may not be more important questions on the minds of those of us in our 50s, 60s, and 70s.
You could be an attorney in Houston, a board member living in Palm Beach, or a pharmacy manager in Billings, and share the feeling that retirement could be imminent. As Moises asked Maria, his wife, “How would that work financially? Will we be okay?”
These are not just financial questions.
They are lifestyle questions. The answers permeate every level of life.
A Personal Finance Economics solution is Upside Investing.
What is Upside Investing?
Think about chafing dishes at a buffet line. There are as many chafing dishes as household financial accounts, but we consider only two. The primary chafing dish is a quantity of cash, a container from which dollars are ladled out to support spending. Rice, beans, potatoes, etc. Life essentials. Upside investing is a planning technique for establishing a spending floor based on the chafing dish of safe, low-risk assets.
There is a second, potentially more rewarding chafing dish, an account that contains financial assets like a stock portfolio. Dollars within this chafer can grow or diminish depending on financial asset performance. There are odds involved, but we have a decent idea about the uncertainty because a long history of stock market returns informs it.
The upside investing technique first establishes a predictable foundation of discretionary spending for the balance of life, assuming every financial account is invested in very low-risk investments. Once the floor is set, some financial accounts and their assets are invested in a stock market index fund. These residual assets remain in stock investments and are slowly converted to safe assets over time. The household determines the conversion choice and is part of an upside investing planning process.1
Illustrated for Moises and Maria
The first stop for Moises and Maria is their living standard floor, informed by one more year of work and the sale of the catering business. Both are 65 and would like to stop working in a year. As of today, Moises and Maria have the following set of financial resources:
Moises expects to earn $120,000 in catering this year and plans to sell his catering business to his long-time manager/employee for $100,000. Maria will earn $22,000 over the next year working part-time
Social Security retirement benefits based on their employment histories, drawn beginning at age 66
Moises’s retirement account (IRA) valued at $102,000 - invested in a diversified stock market index fund
Bank savings and checking valued at $39,000 - invested in a safe asset at a 1.47% real return
Strategy and Findings
The Hernandez’s upside strategy involves knowing their lifestyle floor of spending supplemented by a 10-year shift of the IRA assets from a purely stock investment to a safe, low-risk asset beginning at the age of 70. The power of upside investing is the knowledge gained about the optimized floor of discretionary spending based on financial assets linked only to “safe” low-risk returns. It is as if Moises’s IRA is invested in the stock market has a $0 value.
The Hernandez’s annual floor, $25,038, is in today’s dollars and an amount of spending above their basic housing and taxes for each year until their max age of 90. This amount was calculated using MaxiFi Planner and its economic-based methodology. The floor is a precise number as it includes the Hernandez’s, Social Security retirement benefits, the last year of income, the sale of the catering business, and current tax law in California and the federal level. It assumes that Hernandez’s don’t withdraw any of the IRA funds for living until the funds are converted to low-risk investments. “The trajectories show only upside potential.”2
The results for the annual discretionary spending values are quite different when the IRA is invested in stocks and slowly moves to low-risk assets beginning at Hernandez’s age 70 through 79. Stock performance varies in the future, and so does the standard of living. There are 500 “trials” of stock market performance and their impact on living standards. For each living standard trajectory, the average living standard for the household until their max age is ranked from lowest to highest. The 5th percentile column states that 95% of the time, living standards will be better than the displayed numbers: $25,038 at age 65, $27,590 at age 70, $28,682 at age 75, and so forth.
95% of the time the living standards are better with an IRA invested in stocks and a 10-year conversion, than the floor.
Essentially, the result suggests that Moises and Maria should feel comfortable with stocks. The odds of a stock investment falling short of the floor living standard are very low.
By age 75, their median discretionary spending increases to $31,576, a 26% change in discretionary spending.
What this Means for You
I am an energetic advocate for running an upside-investing-informed baseline financial plan for households with members over age 60 or retired. Regardless of risk tolerance, knowing the minimum floor and how stock investments will change the floor produces better financial planning. It is the salt and pepper that season the food.
Before the end of January 2025, I will have a short course on Upside Investing.
My Substack paids always get first access and a 25% discount.
Moises and Maria's results followed from economics-based planning methods using MaxiFi. MaxiFi's creator, Larry Kotlikoff, wrote a piece on Upside Investing in Forbes. Upside Investing is easy to implement in practice,
