Links - Society and Capital

QUOTE OF THE DAY

 Then you have kids and kids are not cheap. -- Ben Carlson

CHART OF THE DAY

  

SOCIETY AND CAPITAL

Links - Alt Risk

QUOTE OF THE DAY

Even a mediocre plan is better than none. - Ben Carlson

CHART OF THE DAY

 ALTERNATIVE RISK

Links - Retirement Finance and Planning

QUOTE OF THE DAY

…people are often surprised to learn it is specifically designed for a thirty-year retirement. The 4% rule wasn’t necessarily meant to apply to eighty-five-year olds, nor can it be safely used by early retirees who leave the workforce by age forty. --Pfau

CHART OF THE DAY

  

RETIREMENT FINANCE AND PLANNING

A Closer Look at "Family Inc." By Douglas McCormick

I really like this book.  On the other hand, I thought I was going to love it (based on my prior post 

Retirement and "Family Inc").  That difference between like and love is probably meaningless to anyone but me but I was curious about the difference. That means that the point of this post is for me to take a peek at where I think my expectations and the real-book-in-my-hand might have diverged rather than try to do an in-depth serious review of the whole thing cover to cover.

Revenues for Schools by Source 1890 - 2010

Links - Retirement Finance and Planning

QUOTE OF THE DAY

For many people, being asked to solve their own retirement savings problems is like being asked to build their own cars. —Richard Thaler, University of Chicago

CHART OF THE DAY

For a 60 year old -- what might happen to spending risk by adding a 25year deferred annuity to hedge longevity risk.  -RiversHedge

RETIREMENT FINANCE AND PLANNING

Links - Markets, Economy & Investing

QUOTE OF THE DAY

“But what is surprising is that even the most sophisticated investors, traders and commentators continue to rely on predictions issued by those who have no record of success at such forecasts.” Paul Singer

CHART OF THE DAY

MARKETS ECONOMY AND INVESTING

My Collected Thoughts on Brexit

"............"

Links - Alternative Risk

QUOTE OF THE DAY

I believe that individuals spend far too much time studying billionaire fund managers and not enough time studying normal people who have successfully retired. -- Ben Carlson

CHART OF THE DAY

ALTERNATIVE RISK

Links - Society and Capital

QUOTE OF THE DAY

...the world feels like a wet piñata full of shit and spite -- Wired 

CHART OF THE DAY

SOCIETY AND CAPITAL

An Amateur's Hack To Figure Out How Much Spending Might Be Increased By Hedging Out Longevity Risk With A Deferred Annuity.

I remember reading, over the last year or two, a statement like the following from one of our leading retirement research luminaries -- I don't remember which one but all the usual suspects are in play: "In the absence of annuitization a retiree must spend less in order to hedge the risk of uncertain longevity." That means that in the presence of annuitization, a retiree could spend more.  Foolish me, I decided to try to figure out how much more I could spend now if I happened to try to hedge out longevity risk.

Retirements get longer

http://bcm.bc.edu/issues/spring_2015/features/picture-it.html

North

"At dawn I flew to Detroit, for a trip into the interior to reach Lincoln, Nebraska...the actual heart of this country, driving through a sea of grass, then a sea of corn, a sea of wheat, then back north to the upper reaches of Minnesota, where the forest is a vast green sea, its treetops rippling like green water in the wind." -- Jim Harrison*

What does this post have to do with retirement finance or markets or investing? Nothing.

ZIRP and NIRP Sucks for Retirees

Jeffrey Gundlach, about 1 minute ago on CNBC, just made the point I have been proselytising for a few years: ZIRP (zero interest rate policy) or NIRP (negative...) is a screwjob for retirees or about to be retirees.  His comment was: take a person in their 60s planning to retire at 70. In the past they might have rationalized $1M being ok or enough, thinking "yeah, I can earn 5%" or $50k.  Now, Gundlach says, that same person needs to work longer or save more like $2M (or more!) to make retirement look like it will work.

This is a very unfriendly environment for retirees.  Early retirees, in particular, have an economic knife to the throat and need to think carefully about what they are trying to do and how they are going to pull it off.  Taking on more risk, or "going  back to work for the man"  are two obvious solutions, of course, but that is not where most people probably want to be, myself included.  Let's try to get economic policy back where it belongs while at the same time we are grateful that we are not living in, say, Venezuela.

The Economic Efficiencies of Defined Benefit Pensions

I have no personal credentials, data, or research to back up this assertion -- and I think the estimate of 48% savings is without doubt debatable -- but, based on intuition and at least 3 years of researching and thinking about the financial mathematics of retirement, I believe the following research paper to be more likely true than not.  I have no idea whether the authors are conflicted or whether the content is politically tendentious. The abstract below mirrors a growing suspicion in my mind that an awful lot of people would be (would have been) better off with a pension-style model than with a 401k/IRA individual savings model for retirement income.  

Still a Better Bang for the Buck: An Update on the EconomicEfficiencies of Defined Benefit Pensions, William B. Fornia, Pension Trustee Advisors, Inc.  Nari Rhee,  University of California, Berkeley - Institute for Research on Labor and Employment December 4, 2014

Links - Retirement

Links - Markets and Investing

Flipping Withdrawal Rates and Success Probabilities Upsidedown

A recent article at Forbes.com by Wade Pfau on WhatDo Market Expectations Have To Do With Safe Withdrawal Rates?  uses Monte Carlo Simulation to flip withdrawal rates and success probabilities upside down.  He calculates the highest sustainable withdrawal rate linked to a particular probability of success, overlays an efficient frontier, and then presents it in a graph and table for use by retirees or about-to-be retirees.  The article is short and simple and does not require much effort to read and certainly does not require me to digest and analyze it…yet here I am.  Just for fun, here are a few take-aways -- none of which are new or surprising -- if one were to look at the article strictly thru the lens of an early retiree with a 40 year planning horizon: 

• "The exhibit further shows, unsurprisingly, that sustainable withdrawal rates are higher for shorter retirement durations" 

• "the optimal stock allocation tends to increase both for longer retirement durations and higher allowed failure probabilities."

• "the upside potential from stocks is increasingly important to sustaining a longer retirement" 

• "an acceptance of greater lifestyle risk (the risk of portfolio depletion) allows for more aggressive behavior in relation to a higher spending rate and stock allocation." 

• "clear evidence that lower stock allocations can compete with higher stock allocations in retiree portfolios"

Taking his Exhibit 2 and distilling it down for a 40 year retirement with fail rates less than or equal to 5% (what most early retirees probably think they want before they realize they don't have sufficient capital) we get: 

            - Suggested Withdrawal Rates          2.8 - 3.4%

            - Optimal Equity Allocation              30%-47%

            - Optimal Bond Allocation                53-70%

            - Range of Stock Allocations             18-65% for WR within .1% of max

            - Range of Bond Allocations              35-82% for WR within .1% of max

(I am combining the rows for 1% and 5% fail rates for a 40 year duration from Exhibit 2)

Thoughts?

- Withdrawal rates are similar to what I've seen in other research and my modeling

- Optimal allocations look a little counterintuitive or low from what I've seen in the past.

- The range of allocations does not surprise me too much; I have seen similar before

- Allowing a higher fail rate, say 20%, permits 79% equity but one might ask "why do this?"

Yield Curve - 10 Year Gone Wild

Yield curve from CBOE interest rate options as of June 15, 2016.

The range of rates over time (yellow) represents a relatively arbitrary date range from Jan 2013 to Jan 2016 but it also represents the approximate high-low over the last few years. The % range numbers: 100% is the top of the yellow, 0% is the bottom. Chart: Me. Data: Interactive Brokers/CBOE.
See also: German 10-Year Government Bond Yields Dip Below Zero asBrexit Fears Hit Market. WSJ  

Links - Alternative Risk

Links - Society&Capital

ISIL Mass Terror in Perspective

Salil Mehta at Ritholtz.com

My Theory of the "Two Retirements"

I have had, over the last two or three years, an ongoing "discussion" with a friend about whether I am retired: her-yes, me-no.  She's more or less right of course, but not just because she tends to be right.  On the other hand I don't think I have ever successfully gotten my idea (i.e., "not retired") articulated exactly right or understood very well, and again, it is not just because she tends to be right, which she usually is. 

The (Not So Clear) Advantages of Monte Carlo Simulation

PFAU ON MC

In this post by Wade Pfau, he stakes out a net positive position on Monte Carlo Simulations.  Despite the many pros and cons of this type of tool he comes down firmly on the positive side after weighing the core issues he sees as an academic researcher. These include, by my reading and in super digested form:

John Oliver on Retirement Plans and Financial Advisors

VIX Term structure - June 13 2016

Educational Inflation - A Personal Perspective

Here is a chart of four different "price" series related to the cost of education. Being a parent, I've kept an eye on these for a little while. Series are realized historical data:

1) College Index -- "Comprehensive fees" for a custom index of upper quartile, selective private liberal arts colleges. Comprehensive fees include tuition, room and board, and misc fees but exclude things like travel and books,

2) Private K12 -- Pretty idiosyncratic here; this is just me watching the only two places I know,

3) HEPI -- The Higher Education Price Index, time shifted forward 1 year,

4) CPI-U -- A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

CO2 by Country by Max R

Links - Alternative Risk

Links - Markets and Investing

Links - Retirement Finance and Planning

Links - Society&Capital

World Population Projection by Level of Education

Retirement and "Family Inc"

I took an early retirement situation that in 2010 had fail rates north of 50% (only realized in retrospect*, kind of like hiking thru fog only to realize once the fog lifts that one was hiking along the edge of a 1000 foot sheer cliff) to one that in 2016 has fail rates south of 5% (the bull market helped, of course).  Ex the 2009+ bull market, I owe almost everything in that transformation to applying the self-discovered hard lessons of treating retirement holistically and more or less as a "family Inc." kind of thing...with me as CEO and board of directors, not to mention un-paid intern, mail guy, tech help desk, cook, and cleaning lady. These Family Inc. style principles are the same principles articulated in this post (and the underlying book) at Alpha Architect: Book Review — Family, Inc.: Using Business Principles To Maximize YourFamily’s Wealth.    

Seven Years of Investing in Peer-to-Peer Lending In 4 Charts

--------------------
Update 7/23/17: Read this post first. The post below might've been a little too sanguine and the performance since then has only gotten worse.  I'm not as optimistic on peer lending as I might have been when I first wrote this up.
--------------------

Earlier this year I posted -- since I have an interest in, and a non-trivial allocation to, a whole slew of alternative risk premia from momentum to peer lending to tactical fixed income to alt international credit to FX to short volatility etc… -- a comment on peer-to-peer lending on LinkedIn.  I almost immediately got a comment (that I can no longer retrieve) from a friend from college, a professional financial advisor, that said something like: "beware of peer lending, it's not ready for prime time…I lost X% in my first year."  I can't remember but it was more or less -10% or so.  That was so different from my own experience that I decided to do a moderately deep dive into my own data.  Maybe he was making individual loans or high risk loans or whatever. Me? I have done lower risk, automatically invested, and very, very diversified lending. Maybe it's apples and oranges. Here are five things I see from my vantage point:

Million Dollar Homes in San Franscisco Area

Visual Capitalist/Trulia graphic on SF real estate values.  I sent my daughter to college out there. She'll probably stay. Hope she gets a good job...

Courtesy of: Visual Capitalist

Weekend Links - Retirement Finance, Markets

A Few Thoughts on Sequence of Returns Risk

I was reading a good article by Wade Pfau at Forbes.com today and it made me think about a couple of things that  have been rumbling about my mind on Sequence of Returns Risk and the various spending rules.