1. Retirement Finance v Relationships
At first glance, this might seem like an odd opposition. But when I saw Dirk tease his wife in his post for only having an interest in retirement finance as his hobby when engraved knives are at stake (steak?) I realized that it was not the first time I had encountered this concept. When I met Prof. Milevsky in person, he told me that his wife teased him about his odd choice of interest in something so quantishly obscure...and this is probably the top retirement-quant on the planet. Me? Well, a small part of me kinda sorta maybe thinks that my perseveration on retirement finance is at least a teeny tiny part of the ending of a relationship. That idea is odd from a couple directions. I mean, which is weirder here? My perseveration on ret-fin as a “hobby?” or that someone would be so put off by it. I have to give some serious consideration to #1 when contemplating weirdness before I start to think about #2.
2. The Power and Glory of Sequence Risk
Dimitry Mindlin scoffs at sequence risk as a dominating issue (The pitfalls of sequence risk, 2016) but I might hazard a guess that Mr. Mindlin is not yet retired and does not feel the full force of no W2 income and almost certainly depleted human capital. As Dirk points out, earlyretirementnow.com does a nice cover of the impact of sequence risk. I am familiar with the math that ern uses which is basically the same root as the perfect withdrawal rates articulated by Suarez and Suarez in “The Perfect Withdrawal Amount: A Methodology for Creating Retirement Account Distribution Strategies” (2015). In one of my recent posts I deconstructed their math to show that the intuition on sequence risk can be apprehended directly from just looking at the math itself. If one were to have an initial endowment of $1 and an ending one of zero, it looks like this below which is also the “perfect withdrawal rate” or what one could spend if one were to know with perfect foresight the sequence of returns that will be realized over a planning interval. I call it the capacity to spend because that is what it is, given full hindsight at the end of life.