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

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Nov 6, 2025

Explore the pros and cons of leverage in retirement portfolios, including how it amplifies risks during withdrawals. Discover the intricacies of tax optimization through account buckets and learn whether to prioritize Roth or traditional contributions. Dive into the debate between small cap value index funds versus Avantis and DFA options. Finally, examine a hybrid annuity-and-withdrawal plan, focusing on balancing mandatory and discretionary spending to enhance retirement financial strategies.

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INSIGHT

Leverage Raises Volatility Drag

Leverage can boost returns but increases volatility drag, especially harmful during withdrawals.
Frank Vasquez stresses leverage suits accumulation more than drawdown portfolios due to recovery difficulty after losses.

ANECDOTE

Aggressive 50/50 Leveraged Experiment

The aggressive 50/50 levered portfolio peaked early then lost half its value after 2022.
Frank uses this experiment to show how heavy leverage plus withdrawals produced persistent underperformance.

ADVICE

Add Modest Leverage To Conservative Bases

Start with a conservative diversified base before adding modest leverage; very high leverage often fails.
Use better diversification to mitigate drawdown volatility if you choose to lever up.

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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 Center

Ben Felix Leverage Video: Investing With Leverage (Borrowing to Invest, Leveraged ETFs)

Leveraged ETFs Paper: Double-Digit Numerics - Articles - The Big Myth about Leveraged ETFs

Optimized Portfolios Article/Website: How To Beat the Market Using Leverage and Index Investing

Jim Sandidge Chaos Theory Applied to Drawdowns: RMJ081-ChaosAndRetirementSecurity.pdf

"Buffet's Alpha" Paper: Full article: Buffett’s Alpha

New Tax Planning In Early Retirement Book: Amazon.com: Tax Planning To and Through Early Retirement: 9798999841599: Garrett, Cody, Mullaney, Sean: Books

Merriman Best IN Class ETF Selections: Best ETFs 2025 | Merriman Financial Education Foundation

Breathless 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.

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