Pity the poor fellow who doesn’t write. He likely cannot
think. Rayward
RETIREMENT FINANCE AND PLANNING
Debugging Your Retirement Calculations, Darrow Kirkpatrick
After all these years of retirement modeling, I still don’t
get very fancy when doing my own calculations. I model the basic factors that I
can predict with some accuracy. Then I live frugally, maintain a healthy
cushion to guard against the unknown, and don’t spend much time or effort
trying to predict how the future will unfold… For most of us, a middle way
works best
Developing a Sustainable Spending Plan (SSP) vs. Using a Systematic Withdrawal Plan (SWP) Ken Steiner.
SWPs provide a retiree with an algorithm for withdrawing
funds from their investment portfolio.
Sometimes this is also referred to as “tapping” one’s savings. Common examples are the 4% Rule and the IRS
RMD approach…. A Sustainable Spending Plan develops a spending budget that is
consistent with the individual’s (or couple’s) spending goals… The focus of the
SSP is on spending, not withdrawals from savings. [I'm going to have to agree with Ken on
this. Withdrawal methodologies often get
confused with spending but are not the same.
An annuity is a type of "withdrawal plan" and a person would be blessed if their spending exactly matched the annuity cash flow...but it won't]
Increasing Client Withdrawal Rates in Retirement, CFA
institute
two recent studies … aim to tip the odds when it comes to
spending from a portfolio.
Evaluating Retirement Strategies: A Utility-Based Approach,
Estrada & Kritzman
Retirees need to make two critical financial decisions,
namely, the withdrawal rate and the asset allocation of their portfolios. We
propose a methodology that retirees, and particularly advisors, could use to
make these decisions in an optimal way. We introduce a new variable, the
coverage ratio, and a theoretical approach, based on utility. Our approach can
be used to make optimal decisions during both the accumulation and the
retirement period, but we illustrate it by focusing on the latter, and
particularly on the choice of an optimal asset allocation. We find that the
strategies selected by our utility-based approach are in general somewhat more
aggressive than those selected by the failure rate and other existing approaches.
The Utility Value of Longevity Risk Pooling: Analytic Insights Milevsky Huang 2018
In this paper we derive some closed-form expressions for the
value of longevity risk pooling with fixed life annuities under constant
relative risk aversion preferences. We show, for example, that this value
converges to the square root of Euler's e -1 (=65\%), when the interest rate is
the inverse of life expectancy, lifetimes are exponentially distributed and utility
is logarithmic. In general the various formulae we derive match previously
published numerical results, when properly calibrated to discrete time and
tables. More importantly, we focus attention on the incremental utility from
annuitization when the retiree is already endowed with pre-existing pension
income such as Social Security benefits. Indeed, due to the difficulty in
working with the so-called wealth depletion time (WDT) in lifecycle models, we
believe this is an area that hasn't received proper attention from actuarial
researchers. Our paper offers tools to explain the value of longevity risk
pooling.
Sequence-of-Return Risk, HumbleDollar
Consider this hellish scenario: You retire with what you
imagine is plenty of money—and you’re immediately hit with a brutal market
decline, even as you pull out a growing sum from your portfolio each year to
cover rising living expenses. This double drain quickly depletes your savings.
A few years later, the markets bounce back. But you don’t benefit much because,
by then, your portfolio has been whittled down by your need for spending money.
MARKETS AND INVESTING
Learning from the Dumb Money, Institutional Investor
High-quality private wealth managers endeavor to understand
their clients' goals and create an investment strategy that offers the best
chance of achieving those goals. They focus equally on their clients' assets
and liabilities. Most of the time, a variety of easily accessible investment
options - often low-cost vehicles - can put clients on a likely path to
success. The thoughtful attention to
matching an investment strategy with the purpose of the money changes the way
advisors spend their time. These wealth managers have little need to spend an
inordinate amount of time building relationships to access capacity in the
leading India-focused venture capital manager, for example. The pursuit of
optimizing investments independent of a holistic understanding of liabilities
is irrelevant to the bigger picture. …. In
contrast, institutions spend immense amounts of time fine tuning one side of
their balance sheet - the asset side.
An Interview with Nobel Laureate Robert C. Merton. Mark
Kritzman @ CFA pubs
I was able to reconcile the practical, intuitive,
closed-form-solution optimal portfolio rules of the Markowitz–Tobin
mean–variance theory with expected utility theory and a prototypical lognormal
return distribution, which doesn’t have the negative-price perversities that a
normal one has. When you worked it through, it turned out that when you keep
constant proportions—as you would—nothing changed in terms of the risky assets’
distributions. When you trade continuously and combine lognormals, they
aggregate to a lognormally distributed portfolio. Therefore, the Markowitz–Tobin
two-fund separation theorem obtains as well.
ALTERNATIVE RISK
“Having faced an extended period of low investor confidence
and net capital outflows, the hedge fund industry is now experiencing a
renaissance among institutions,” said Amy Bensted, Preqin’s head of hedge fund
products, in a release. “2017 saw the asset class mark four quarters of net
inflows, and at the start of 2018, the highest proportion of investors in five
years are planning to increase their exposure over the year ahead.”
Long/Short Can Have Tax Edge, Swedroe
Contrary to conventional wisdom, investment strategies that
take advantage of short-selling can generate relatively low tax burdens. Short
positions not only allow investors to benefit from the anticipated
underperformance of securities, they also expand the opportunity set for
realizing short-term losses, which is particularly beneficial because the
short-term capital gains tax rate is substantially higher than the long-term
rate. In addition, realized short-term losses are first used to offset highly
taxed, short-term capital gains. By employing tax-wise strategies, accelerating
capital losses and deferring capital gains, tax burdens are reduced.
Short-selling creates tax benefits because the long positions of a portfolio
tend to realize net long-term capital gains, which are taxed at relatively low
rates, whereas the short positions tend to realize net short-term capital
losses, which can offset short-term capital gains realized by other strategies
in the investor’s portfolio. The benefits of tax-aware strategies mostly come
from losses realized by short positions. As a result, these tax benefits are
positively correlated with the market return, because short positions realize
tax losses exactly at the time when other investments in the investor’s
portfolio are likely to be at a gain. A tax-aware strategy significantly
reduces capital gains realizations, and thereby the turnover, of the long-only
portfolio.
The Behavioral and Performance Benefits of Trend Following,
economipicdata.blogspot
The consistency of a trend following strategy’s relative
performance vs a 60/40 portfolio (impacting the ability for investors to stick
with trend following) is the basis of an argument that’s taken place offline
(yes, I also argue offline) with a FinTwit friend who is a huge proponent of
buy and hold. It’s progressed to the point that we’ve discussed making a mini
(very mini) Buffett style bet related to whether trend following or a 60% US
Stock / 40% Bond allocation will outperform over the next five years (with
money going to the winner's charity of choice).
SOCIETY AND CAPITAL
Rebalancing the Economy Toward Workers and Wages, Tim Taylor
"In the making of the wages contract the individual
laborer is at a disadvantage. He has something which he must sell and which his
employer is not obliged to take, since he [that is, the employer] can reject
single men with impunity. ... A period
of idleness may increase this disability to any extent. The vender of anything
which must be sold at once is like a starving man pawning his coat—he must take
whatever is offered." John Bates Clark …
…there is currently no generally accepted method of
measuring TDF risk. This presents a challenge to policymakers, plan sponsors,
plan participants, and financial advisers. The target-date fund industry today
is analogous in many ways to the automobile industry of the 1960s. We note a
number of issues that this analogy brings to light. The public policy
discussion that occurred in the automobile industry then provides a useful
framework for interested parties to discuss policy matters in the
defined-contribution industry today…
Road deaths over the long-term, OurWorldInData.org
Prevalent Place of Death by US State 1999-2016, metricmaps
On Weird Niche Investing. Institutional investor
I was expecting the list to include payday and auto title
lenders, strip clubs, porn sites, dark web hacker funds, loot boxes, and
companies that develop facial recognition software that scans the faces of men
on dating apps to identify those who are married.
One main result is that the actual evidence is pretty thin.
"Of more than 100 combinations of policies and outcomes, we found that
surprisingly few were the subject of methodologically rigorous
investigation." For example, evidence on four of the eight outcomes was
"essentially unavailable," including defensive gun use,
officer-involved shootings, hunting and recreation, and effects on the gun
industry. None of the studies of waiting periods and licencing and permitting
requirements have reached more than inconclusive results. There are no
methodologically sound studies at all on the effects of gun-free zones or requirements
for reporting of lost or stolen firearms.
Scott Kelly Spent a Year in Space, and Now He Has Different DNA Than His Identical Twin Brother. Livescience.com
A new NASA statement suggests the physical and mental
stresses of Scott Kelly's year in orbit may have activated hundreds of
"space genes" that altered the astronaut's immune system, bone
formation, eyesight and other bodily processes. While most of these genetic
changes reverted to normal following Scott Kelly's return to Earth, about 7
percent of the astronaut's genetic code remained altered — and it may stay that
way permanently. [Alien]
Ironies of Luck, Morgan Housel
People are good at discounting risks that threaten the
continuation of their past success. They are equally good at discounting the
role of luck in their past success. What’s the saying? “Like every self-made
man, he worshiped his creator.” Calling someone’s past success lucky is
insulting, because it undermines the effort that person put into their
endeavor. But risk doesn’t care about how much effort you put into something,
and neither does luck. Both just show up, unannounced, eager to humble you. The
only difference is that risk humbles you as soon as it arrives, while luck
humbles you down the road, once it vanishes, leaving you with only the memories
you shared together. You can manage risk and luck. You can ignore risk and
luck. But you can’t get rid of either.
It seems the worst is yet to come for California
cities already reeling under the strain of rising pension costs. According to a
new report from the League of California Cities released after reviewing data
for 451 municipalities that use CalPERS to administer their pensions, from
fiscal year 2019 to 2025, city payments for pensions will increase an estimated
50%. Pension costs, which consumed an average of 8% of cities’ general fund
budgets in 2007, will drain an average 16% by 2025. The bottom line — without
tax increases there will be even less money for public services.
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