If you drove drunk but got home unscathed, you wouldn’t wake
up the next morning and think, “I guess it’s okay to get behind the wheel after
13 beers.” Yet, when handling our finances, we do that all the time. Jonathan Clements
CHART OF THE WEEK
RETIREMENT FINANCE AND PLANNING
Reverse Mortgages: When the Last Resort is the Best Resort,
Dirk Cotton. If you expect to remain in
your home throughout retirement, my advice is to consider opening a HECM line
of credit today, while interest rates are low and the maximum HECM loan value
is high, but to hold off on spending much of it until you see what life has in
store. Often when spending home equity, the last resort will prove the best.
How Variable Withdrawals Improve Retirement Outcomes, Joe
Tomlinson. Once a retiree secures
funding for essential spending needs, the remaining assets are “liberated” and
can be invested more aggressively. [comment: I can't recall a single article by Joe that
I have not found useful and insightful]
Refining the Failure Rate, Estrada, IESE
Business School
Putting the Pension Back in 401(K) Plans: Optimal VersusDefault Longevity Income Annuities,
Horneff et al. Goethe U, Wharton, etc.
We find that introducing a longevity income annuity to the plan menu is
attractive for most DC plan participants who optimally commit 8-15% of their
plan balances at age 65 to a LIA [longevity insurance annuity] that starts paying out at age 85. Optimal
annuitization boosts welfare by 5-20% of average retirement plan accruals at
age 66 (assuming average mortality rates), compared to not having access to the
LIA. We also compare the optimal LIA allocation versus two default options that
plan sponsors could implement. We conclude that an approach where a fixed
fraction over a dollar threshold is invested in LIAs will be preferred by most
to the status quo, while enhancing welfare for the majority of workers.
[comment on the above link:
in June of this year I wrote a post I called "An Amateur's Hack To Figure Out How Much Spending Might Be Increased By Hedging Out Longevity Risk With A Deferred Annuity." This post of mine was a little bit of a different question
and answer than the research linked above but it's similar. I came up with an estimate at the
time that I could probably increase my current spending by 14% if I were to allocate enough capital to a longevity insurance annuity that it would hedge out age 85-?? longevity risk at some
minimal non-poverty level. I feel like the general
order of magnitude of this estimate is more or less right and that the linked research -- when I
finally read all of it, and which might turn out to be a worthwhile read -- looks like it confirms my analysis if only indirectly. We'll see.
I also think [trigger warning, an opinion! or is it a micro-aggression?] that the loss to US workers of the DC pension model, which had
some advantages over 401Ks (with pooled risk not being the least of it), was a big loss to society and that combining 401K style investing with a deferred annuity hedge is
probably pretty wise if we can't entirely go back in time to a world with DC plans]
An Overview of Retirement Income Strategies, Finke andBlanchett. Abstract: This paper provides
an introduction to strategies that can be used to turn a retirement portfolio
into income. Defined contribution savings present a retirement planning
challenge when asset returns, longevity, and spending needs are uncertain. We
present the fundamental trade-offs of managing an investment portfolio and
decumulating investments in retirement, and we discuss the potential benefit of
financial products that address portfolio and spending risks. Simulations
illustrate the trade-offs among legacy, liquidity, and shortfall risk. We
dis-cuss a comprehensive strategy that combines longevity protection, portfolio
allocation, and dynamic spending based on realized portfolio returns to provide
a guideline for professionals building retirement income plans for clients. We
then provide an overview of the benefits of adding products such as annuities
to a traditional investment portfolio to reduce longevity risk and increase
expected spending. The primary purpose of this paper is to provide a
fundamental overview of current research and theory on retirement income
planning.
[comment: this is a pretty good basic intro tutorial on the full scope of the retirement "problem"]
Required Retirement Savings Rates Today, Blanchett, Finke,
Pfau. "… decrease in bond yields,
coupled with increases in longevity, has doubled the cost of funding a real
dollar of income in retirement since 1980 for a 65-year-old retiree… Results
from a life cycle planning model show that savings rates would need to rise
sharply for households hoping to maintain the same standard of living in
retirement if real asset returns are low… Advisors may need to modify expected
returns in planning software to provide clients with more realistic projections
on meeting long-term spending goals.
MARKETS AND INVESTING
Should you ignore financial academic research?
Investmenteurope.net Look at [it] another way, would you base a decision to buy
Apple today on a research report from 2002?
On rebalancing. Global
Focus Capital. while the benefits of
true diversification stand the test of time the same cannot be said about
rebalancing especially when done in a highly automated way such as frequently
seen in many robo-advisor offerings.
Dealing with Low Interest rates: Investing and CorporateFinance Lessons, Aswath Damodaran. A few
months ago, I tagged along with my wife and daughter as they went on a tour of
the Federal Reserve Building in downtown New York .
While the highlight of the tour is that you get to see large stacks of US
dollars in the basement of the building, I considered making myself persona non
grata with my immediate family by asking the guide (a very nice Fed employee)
about the location of the interest rate room.
The Oil Market is Bigger Than All Metal Markets Combined,
Visual Capitalist. [graphic]
‘Free Lunch’ Investing Takes Time To Cook, Swedroe @
ETF.com. Recency is the tendency to
overweight recent events/trends and ignore long-term evidence. This leads
investors to buy after periods of strong performance (when valuations are
higher and expected returns are now lower) and sell after periods of poor
performance (when prices are lower and expected returns are now higher). This
results in the opposite of what a disciplined investor should be doing:
rebalancing to maintain their portfolio's asset allocation.
The dangers of dividend obsession, Institutional
Investor.
ALTERNATIVE RISK
The Problem of Uncertainty: Trading Model EnsemblingTechniques, 361Capital. Additionally,
assuming proper bankroll management, they also know that the only way to
monetize their edge is to continue playing even when recent performance has not
been successful. Given enough time, the edge will work in their favor and they
will earn back their losses and generate profits. The key here is time; however,
the stress of mounting losses can make minutes or hours seem like days or weeks
(or even years), and may lead a player to give in before they are able to earn
back their losses.
Capital Efficiency in Multi-factor Portfolios, Newfound
Research. This week we explore whether
integrated portfolios are more capital efficient than mixed portfolios in
theory. We find that for some broad
assumptions, they definitively are. We find that for specific implementations,
mixed portfolios can be more efficient, but it requires a higher degree of
concentration in security selection.
How To Measure Momentum? AlphaArchitect.
Old-Timer Traders Still Fighting A Market Regime Change ButWant To Teach You How To Trade, priceactionlab.com. It is interesting that some
old-timers are posing as mentors to young traders when in reality they do not
understand markets.
VIX tutorial. RCM
Attain. "...this general discussion on how
the VIX works oversimplifies things a bit. It’s not as simple as just selling
the VIX futures and collecting that roll yield. Remember those nasty VIX spikes
plastered all over CNBC when there’s a market sell off? They’ll rip your
(investor) face off if in a simplistic short VIX position. Of course, just
buying the VIX and hoping to cash in on the spikes doesn’t seem to work either,
as evidenced by the nasty downwards sloping VIX trading ETFs. "
SOCIETY AND CAPITAL
How Clones Can Experience Unequal Economic Outcomes. Tim
Taylor. The you/clone thought experiment
may seem extreme, but recent research that I have conducted with colleagues
finds that the earnings of workers with near-clone similarity in attributes
diverged so much by the place they worked that rising inequality in pay among
employers has become the major factor in the trend rise in inequality…In other
words, a lot of inequality is about where you work.
Vehicle Miles Traveled: Another Look at Our EvolvingBehavior, AdvisorPerspectives.
Rising Sea Levels and a Falling Margin of Safety, CFA
Institute.
Divorce Is Destroying Retirement. ThinkAdvisor.
Even as divorce rates for younger Americans have fallen, failed
marriages among people over 50 doubled from 1990 to 2010. [retirement and divorce counselling should be a state mandated requirement to get a marriage license. That and child raising skills]
Narrow networks in Obamacare, Tyler Cowen.
Why Women Pay More for Mortgages, Wharton. “Our research finds that despite their low
incomes women are better at paying their mortgage.”
How Do the French Do it? Timothy Taylor. None of this discussion should be read as a
prediction of doom for the French economy, which seems certain to remain a high-income
economy. But it does suggest that French dirigisme is not cost-free:
specifically, the costs in the last couple of decades are measured in elevated
unemployment, lower labor force participation rates, a larger number of temporary
jobs, and sluggish growth in productivity and the standard of living.
Tomáš Sedlácek: The Junction of Moral Values and EconomicChoices, CFA Institute.
Will the USBecome a Nation of Renters? Timothy Taylor.
Their mid-range projection, based on this cohort analysis, is for a US
homeownership rate below 55% by 2050. But in their pessimistic projection, in
which the last few years mark a permanent change in the willingness or ability
of younger cohorts to purchase homes, the homeownership rate could fall below
45% by 2050... the level of homeownership is in some ways a social choice,
related to policies affecting supply of different kinds of homes (like the
zoning decisions that affect large detached homes, small detached homes,
condos, or rental apartments get built) and demand for homes (like whether the
financial and tax system is set up in a way that encourages buying homes. [see the last link in this post...]
As Land-Use Rules Rise, Economic Mobility Slows, Research
Says, WSJ. Trend of income gap between
poorest and richest states steadily closing is upended by growth in regulations
Buy Your Freedom; Rent the Rest, jlcollinsnh and FireCracker.
No comments:
Post a Comment