Last year I sat down and spent about a week hacking out a
rudimentary Monte Carlo Simulator for retirement (I've enhanced it a bit in the time
since). That seems as preposterous to me
now as it did to some of the people around me at the time who thought I had
maybe lost my mind. It makes sense
though. Just for fun here are some
reasons why I undertook that project:
Jul 29, 2016
Survivor Funds
Survivor Funds,
Michael J. Sabin, Independent
Pace Law Review, Vol. 37, No. 1, Forthcoming
Abstract:
This Article explains how to create “survivor funds” — short-term
investment funds that would pay more to those investors who live until the end
of the fund’s term than to those who die before then. For example, instead of
just investing in a 10-year bond and dividing the proceeds among the investors
at the end of the bond term, a survivor fund would invest in that 10-year bond
but divide the proceeds only among those who survived the full ten years. These
survivor funds would be attractive investments because the survivors would get
a greater return on their investments, while the decedents, for obvious
reasons, would not care.
Survivor funds would work like short-term tontines. Basically,
a tontine is a financial product that combines features of an annuity and a
lottery. In a simple tontine, a group of investors pool their money together to
buy a portfolio of investments, and, as investors die, their shares are
forfeited, often with the entire fund going to the last survivor. For example,
in an episode of the popular television series M*A*S*H, Colonel Sherman T. Potter,
as the last survivor of his World War I unit, got to open the bottle of cognac
that he and his fellow doughboys brought back from France (and share it with
his Korean War compatriots). Similarly, in the reality television show
Survivor, contestants are stranded in a remote location, and the last “survivor”
gets a million-dollar prize.
Of course, the survivor principle — that the share of each,
at death, is enjoyed by the survivors — can be used to design financial
products that would benefit multiple survivors, not just the last survivor. For
example, elsewhere, we showed how tontines could be used to create so-called “tontine
annuities” and “tontine pensions” that would benefit lots of retirees. In this
Article, we show how the survivor principle can be used to create survivor
funds that would only make payments to those who survive for a specified number
of years.
Weekend Links
QUOTE OF THE DAY
CHART OF THE DAY
When trend following pays:
…the vast majority of your life’s results comes not from
birthright or large external events, but from small behaviors, repeated
thousands of times over the decades. -Mr Money Mustashe
CHART OF THE DAY
When trend following pays:
RETIREMENT FINANCE AND PLANNING
Capital Market Expectations and Monte CarloSimulations. Wade Pfau in Journal of Financial Planning. "I find empirical support for the idea
that portfolio return assumptions for the post-retirement period should be more
conservative than for the pre-retirement period."
Social Security Bill Would Raise Retirement Age, Slow COLAs,
ThinkAdvsior.
Jul 28, 2016
On Reading
There ought to be an ugly Germanic word for it, the anxiety at not having read enough (I like NichtLesenAngst). --Giles Wilkes, FT magazine
Jul 27, 2016
Fear the 1970s
This chart below is from Meb Faber's new paper on investing (The Trinity Portfolio: A Long-Term Investing Framework Engineered for Simplicity, Safety, and Outperformance).
I lived thru the 1970s and was the dependent of -- and later a caregiver for -- a single parent that needed to use a small portfolio to provide for a family of five, then a retirement, and then long term care during the 1970s and after. The mind-numbing destructive power of long periods of bad stock returns, bad bond returns, and bad inflation is a hard concept to get across to people born in, say, 1990 but it is very real; trust me. Here, go do this for me: first, read an article on sequence of returns risk, then start a retirement with a big fat drawdown, and then, when you are sitting down and have a suitably stiff drink in hand: come back and then behold and fear the 1970s.
I lived thru the 1970s and was the dependent of -- and later a caregiver for -- a single parent that needed to use a small portfolio to provide for a family of five, then a retirement, and then long term care during the 1970s and after. The mind-numbing destructive power of long periods of bad stock returns, bad bond returns, and bad inflation is a hard concept to get across to people born in, say, 1990 but it is very real; trust me. Here, go do this for me: first, read an article on sequence of returns risk, then start a retirement with a big fat drawdown, and then, when you are sitting down and have a suitably stiff drink in hand: come back and then behold and fear the 1970s.
Jul 26, 2016
Links - Society and Capital
QUOTE OF THE DAY
CHART OF THE DAY
SOCIETY AND CAPITAL
Like all of life’s rich emotional experiences, the full
flavor of losing important money cannot be conveyed by literature. Fred Schwed
CHART OF THE DAY
SOCIETY AND CAPITAL
The L.E.D. Quandary: Why There’s No Such Thing As “Built ToLast” NewYorker. Politically speaking, the reason is obvious: even advocates
such as Cooper describe the transformation of a consumer economy fuelled by
obsolescence as a “radical, systemic change” that is likely, at least in the
short term, to slow economic growth. “This may be unacceptable to governments,
which use economic growth as their primary performance indicator,” Cooper
notes, rather dryly, in “Longer Lasting Products.”
Jul 25, 2016
Jul 24, 2016
Spending Declines in Retirement?
After reading a recent post by Dirk Cotton I wanted to take
a look at spending reductions in retirement as it relates to a
naïve and simplistic assumption I came up with, in it's first form, more than 10 years ago to model lower spending as I age (created before I had read a lick of retirement finance and that has followed me for better or worse in my planning ever since). Then I wanted to compare that personal assumption to a couple of new-ish research-based ways of looking at the same thing (empirically demonstrated spending declines at later ages) that were mentioned by Cotton in his post.
Jul 22, 2016
Weekend Links
QUOTE OF THE DAY
“Alchemy [read "hedge funds" per Josh Brown],
however, is a chaste prostitute, who has many lovers but disappoints all and
grants her favors to none. She transforms the haughty into fools, the rich into
paupers, the philosophers into dolts, and the deceived into loquacious
deceivers …” – Johannes Trithemius
PICTURE OF THE DAY
Grocery shelves in Venezuela
RETIREMENT FINANCE AND PLANNING
The Tradeoff Between Income and Capital in RetirementWithdrawals, John Walton at Advisor Perspectives.
Jul 19, 2016
Links - Alt Risk
QUOTE OF THE DAY
When markets trend you are going to make money,
when they don’t you won’t. -Jerry Parker
CHART OF THE DAY
ALTERNATIVE RISK
Alpha's Measurement Problem, NewFound. " Without an understanding of what risk
factors were utilized in the model, the degree of certainty we have in our
alpha measure, and the variance that exists in our error terms, the
applicability of any alpha figure converges towards zero."
ChesapeakeCapital: The evolution of managed futures from the eyes of a turtle,
FuturesMag.com. " Managed futures
have always been marketed as an alternative to traditional portfolios but now
it is one you can take home to mother. "
Links - Markets and Investing
QUOTE OF THE DAY
"The current low yield environment has turned every bond investor into a trader." -Cullen Roche.
CHART OF THE DAY
MARKETS AND INVESTING
Bonds Aren’t as Wretched an Investment as They Seem, Zweig.
WSJ.
The Relative Irrelevance of Market Highs, Tim Maurer. "My recommendation, therefore, is to
exercise deliberate indifference. Receive the information you likely have no
choice but to encounter and make an active decision to be passively
indifferent."
Jul 18, 2016
Some Thoughts on "Hidden Spending" and Early Retirement
I patted myself on the back earlier this year for what I
considered to be monumentally heroic -- and also what I considered at the time
to be successful -- efforts over the last four or five years to strip my costs
down to a bare minimum given my growing awareness of the unusual spending risk held
by an early retiree. But, wait, not so
fast… While I had cut my operating budget by at least half or more, I kept
stubbornly ignoring what I'll call hidden spending (or at least what I kept
hidden from myself); maybe you already do this kind of thing but me, I never
got around to it. This week I finally took
a look at some of the "other" things that consume retirement assets
just as surely as direct spending does but that do not get my attention as much
as they should. I also wanted, in the process, to give this hidden spending some
context especially from the perspective of an early retiree.
Links - Retirement Finance and Planning
QUOTE OF THE DAY
"…one in four baby boomers has less than $5,000 saved for
retirement." --WashingtonPost
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
Modern Asset Allocations and Withdrawal Rates,
PortfolioCharts.com "The high
returns and low volatility found in modern asset allocations open up new
frontiers in retirement planning that deserve more attention, and modeling the
same tired old stock/bond portfolios over and over (often with dire new
warnings) may attract lots of press but misses the boat on the true
opportunities for smart investors."
Does The 4% Rule Work In Today's Markets? Pfau. "This suggests that in a lower interest
rate world, a 3% withdrawal rate reflects something closer to a chance of
success than a 4% withdrawal rate historically provided over the broad range of
historical market environments."
Links - Society and Capital
QUOTE OF THE DAY
"...life is the ultimate asset and liability mismatch." - Cullen
Roche
CHART OF THE DAY
SOCIETY AND CAPITAL
How Syphilis Came Roaring Back, TheAtlantic. "While the rates haven’t climbed close to the devastating
levels of the early 1990s, they’re rising at an alarming rate."
Experiences Over Stuff Is a Tired—and Sexist—Idea,
Slate.com. "There’s that. And then
there’s also that experiences aren’t the antithesis of stuff. Experiences are
facilitated by stuff no more or less than domestic life is facilitated by
stuff. It’s just different kinds of stuff."
Jul 15, 2016
Links - Markets and Investing
QUOTE OF THE DAY
Don’t stick your head in sand like institutional investors
who somehow think they can generate 10.9% returns over the next 5 years. (abnormalreturns)
CHART OF THE DAY
MARKETS AND INVESTING
Positioning vs. Construction, Josh Brown.
Jul 6, 2016
Links - Retirement Finance and Planning
QUOTE OF THE DAY
In the absence of an annuity, capital is safety. -John Walton
CHART OF THE DAY
In the absence of an annuity, capital is safety. -John Walton
CHART OF THE DAY
RETIREMENT FINANCE AND PLANNING
Financial Security for Future Retirees, National Institute on Retirement Security.
"A new analysis indicates that Americans in nearly every state will fall
far short in meeting their economic needs in retirement."
Catch-22: Too young to retire, too old to rehire, CNBC.
"…between 45 percent and 50 percent of retirees leave the workforce
earlier than planned."
Does The 4% Rule Work Around The World?, Pfau. "In planning for retirements in the
future, it is unclear whether asset returns of this century will continue to be
as favorable as they were in the twentieth century, or whether savers and
retirees should plan for something closer to the average international
experience."
Some Initial Thoughts on the "Divide by 20" Idea as a Retirement Spending Rule
The 4% rule has been beaten up a lot lately. I think this is
for many good reasons that have been covered better elsewhere. For my part, I think the rule (of thumb) is a
little like drug use. If you do it to yourself (and maybe even if you ruin yourself), it might possibly be OK depending on the point-of-view but once your use affects your family or community or society
then maybe it's not OK and someone needs to step in. Except for the occasional Manhattan and my morning coffee ,
I don't use drugs…or the 4% rule.
But then again it is only a rule of thumb and a very
special-case rule of thumb at that. Here is Wade Pfau on the rule: "…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."
So it's not for everyone. If you are a little older you might have a little more latitude to do whatever you want. If you are
younger, you would be taking on a lot of risk, in my opinion, in using 4%. In this early retiree sense, I view 4% a little like jogging with an IED. It can be done but you'd better be pretty careful.
Kitces on "Why Most Retirees Will Never Draw Down Their Retirement Portfolio"
Typically I would put something like this into a "Links" post but I think this is deserving of individualized attention. Michael Kitces recent article "Why Most Retirees Will Never Draw Down TheirRetirement Portfolio" should be required reading for anyone that is thinking about retiring earlier than average. Among other things it provides a coherent, analytical rationale for spending control, or even frugality, early in retirements especially long retirements. From his concluding paragraph:
"...it’s crucial to recognize that accumulating “excess” retirement dollars and seeing the retirement account balance grow, particularly in the first half of retirement, doesn’t mean the retiree is underspending. In fact, spending down the retirement principal early in retirement would be a sign of trouble. Accumulating continued growth throughout the early years of retirement is actually the normal, prudent course of action for anyone who anticipates living a long time, fears the potential impact of future inflation, and therefore recognizes the need for the retirement portfolio to grow in the early years to defend against the uncertainties of a long retirement future."
Me vs. Sea Surface Temperature
*I'm near the little star over south Florida
Jul 3, 2016
On Markowitz's "Individual vs. Institutional Investing" (1991)
I went back recently to take another look at an article that Harry Markowitz wrote
in 1991 (“Individual versus Institutional Investing” in Financial Services Review l(l):1-8). The creator of Modern Portfolio Theory (MPT) was
invited to comment on financial theory as it relates to an individual vs. institutions
such as a mutual fund or a manufacturing company job shop. In the article he makes some distinctions
between individual or family finance and his original thinking on MPT for
mutual funds. He goes on to pitch the
advantages of simulation methods to capture some of the excess -- and more than
likely unsolvable -- complexity a family faces in managing its resources over a (joint) lifetime. I guess it is not surprising
that we have seen simulator type approaches go wild in financial services since
the article was published in '91 (and since the cost of computing resources has plummeted).
The quotes below in no way summarize the seven page
article. The points are merely ones that
I found interesting coming from the father of MPT:
- …an evening of reflection convinced me that there were clear differences in the central features of investment for institutions and investment for individuals,
- The “investing institution” which I had most in mind when developing portfolio theory for my dissertation was the open-end investment company or “mutual fund" [vs. a family or individual].
- For example, some economic theories find it convenient to assume that the individual is immortal, or that death is a Poisson process independent of the age of the individual. For actual financial planning, however, aging and mortality are salient facts that must be included in the model.
- The essentials of the game-of-life [simulation] is probably different for (a) the very wealthy, (b) the class of homeless that used to be called vagrants, and (c) most of my friends and relatives. I have the latter in mind as I sketch the model.
- Since future status is random, the simulated family must follow adaptive decision rules rather than a single plan as expressed on a worksheet.
- the game [of life] is complex; most likely beyond analytic techniques.
- The problem with simulation analysis is that it is not very good at finding near optimum decision rules. It takes many runs of the model to estimate the excellence of a given set of rules. Since the rules we seek may be adaptive i.e., may recommend different allocations of resources under different circumstances, and “circumstances” admit to countless variations-it will not be feasible to search for optimum decision rules.
- The exercise of building a realistic game-of-life simulator-deciding what is essential to the family planning process and incorporating it into a simulator without the severe constraint of producing an analytically tractable model should be highly educational, especially to the model builders. [ a point to which I can personally attest]
Subscribe to:
Posts (Atom)