Seth Godin on Math

Here is Seth Godin in a recent post, with his post quoted in its entirety.  Emphasis is added by me.

More better math

Math’s important. It’s elegant. It’s a magical way to deal with abstract concepts on your way to finding out the provable truth. There's not enough math in the world.

Math isn’t the same as arithmetic. Basic arithmetic is necessary, but everything beyond that is simply easily-graded compliance disguised as busy-work.

A high school principal told me that there’s a high correlation between students who fail to complete algebra and those that drop out of school before graduation. It’s not surprising if you think about it—factoring polynomials is a totally useless activity that only demonstrates that you’re good at school.

What would happen if we introduced variables and intuitive algebra and then immediately switched gears to probabilities (gambling and decision making) and statistics (sports, predictions and understanding the world as it is and it might be.)

What would a year of hands-on truth-finding do for a class of freshman? What mathematical and vocational doors would it open?

Every day we spend teaching hand factoring of binomials to non-math majors is another day we raise mathematically illiterate kids. What are we waiting for?

Snap-to-income scenarios can come from below not just above

I'm still shaking out my software so this is not credible ret-fin analysis, just me playing around.  In this case I took the software for the "WDT utility with random life and random returns 'game' " and ran it like before but here I am just looking at real consumption (not utility) over time under the following circumstances (that are on top of the assumptions already mentioned in "The Wealth Depletion Time EDULC Simulator is live!")  The key things to note here are:

1. There is no reason to do this. I am just horsing around working on the software and curious.

2. Returns here are a more volative and nominal 8% arithmetic and 15% sd. They get geo-ed out in the sim time-averaging process

3. The spending plan is an age-based %-of-portfolio described in the past post

4. The "income" here is made up of two parts: (a) inflation adj SS of 16k starting at 70 and (b) (an initially nominal, but inflation adj thereafter) 10k of annuity income purchased from wealth at 75. Note that much more than 10k in annuity purchase or much higher vol means that there become a non-zero number of scenarios that can't afford to buy an annuity at age 75.  That is a topic for another post. 

5. No expected discounted utility calcs in this post. Just looking at real consumption in a volatile spending world. This is still part of a software shakeout.

6. The point of the visualization (to myself) is to show myself that while I typically think of consumption, in a scenario where wealth runs out, "snapping down" to available income...it can also snap up in a volatile variable spending scenario.  Frankly, though, I'm not convinced this would really unfold in real life.

This is what a snap-up in consumption might look like (again, ignore the hot mess of the graphic...I needed all the lines to see the snap up to a deferred floor). Only the first 200 of the 20000 iterations are charted:

Another way to look at the wealth depletion concept using two spend rules and charting real consumption

The assumptions here piggyback on the last post (The Wealth Depletion Time EDULC Simulator is live!). Here I wanted to see what real spending looks like in the sim.  To do this I borrowed the data from the last post and plotted the first 1000 iterations of the simulation, a simulation that was run once with a constant 4% spend and a second time with an age based pct of portfolio rule not all that different from RMD.  No annuitization is assumed. 

The Wealth Depletion Time EDULC Simulator is live!

BACKGROUND

I described the basic idea for my WDT simulator here (Putting it all together: a wealth depletion time "utility simulator") and in a rudimentary form here (3D "utility surface" in a Wealth Depletion Time model: spend rates vs annuity) and also here so I won't completely repeat all that again.  That last link is probably the best one to help visualize the basic concept.  The basic idea is that the sim -- over x,000 iterations that each have random lifetime -- sums discounted utiles of real consumption over each individual life and then averages over the iterations to calculate the expected discounted utility of lifetime consumption (EDULC).  The major things to note here are that:

(a) the modeled lifetime for each iteration is random but random to probabilities inherent in the SOA IAM annuitant life table, and

(b) spending snaps to available income (e.g., SS, purchased annuities, and pensions) when wealth runs out.

That snap is important and has a blunt force effect on utility which is why I am doing this.  This post, by the way, is mostly me announcing to myself that I am done. I will also take a quick stab here at running a comparison between a constant spend and my RH40 spend rule (like RMD) to see what happens.  Nothing rigorous yet. This is just an initial shake out.

Retirement and Food Intake

This topic is a departure from what I usually post but what the heck. In "Changes in Nutrient Intake at Retirement," NBER Working Paper No. w24621, 62 Pages, 25 May 2018, NBER reports the following: 

• ...we find that caloric and nutrient intake fall at retirement in numerous cross-sectional datasets. We can reconcile these contrasting results as being due to well-documented differences and improvements in methodologies used to measure food intake.
  
• Second, using longitudinal data, we also find that intake falls at retirement.
  
• Third, we show that a food consumption index used in prior work to capture the relationship between permanent income and foods eaten can severely underestimate the impact of retirement on consumption. We show that a minor methodological revision circumvents this bias and that the revised consumption index falls at retirement.
  
• Finally, while unemployment reduces the consumption index, we find, in contrast to prior work, that the impact of retirement on the consumption index is larger.
  
• Overall, we consistently find that retirement reduces food intake.

This is where you'll find me...

...when I hang up the RH spurs.

Just completed my ~25th land crossing of America between the Mississippi and the Pacific. Might be more. I lost count at about 15. This, readers, is a great country. 

RH Links - 5/10/18

QUOTE OF THE DAY

“Things that have never happened before happen all the time.” Scott Sagan

MISCELLANEA 1

Reader: "what the deal with the links?"

RH: "just some stuff I've been reading; thought you might be interested."

MISCELLANEA 2

Just for fun here below is one window into seven years of me managing my systematic alt risk strategy.  The strategy evolves over time so it's hard to characterize it consistently over time but for the sake of  argument let's say it looks like this at some point at least: 

I am my own behavioral case study on annuitization

Everything I've ever done here at RH -- that is, if I were to want "funded contentment" (Portnoy in The Geometry of Wealth which I have not read) or an almost fully defeased retirement goal-set or an optimized utility of lifetime consumption...or whatever -- invariably leads me to the logical conclusion that I should do (must do?) something like create a TIPs ladder for a "floor," hedge longevity risk with a deferred annuity or at least a plan to layer into income annuities as a displacement to my bond allocation, and then go up the investing risk spectrum with what's left.  No proof here, just trust me for now. 

And yet...I don't.

This tension is obvious and has been nagging me in my annoying little inner voice for a long time.  What, exactly, is holding me back?  It's time to take a look. This is not a hard analytical look, just a preliminary warning shot across the bow-of-self to pay attention to this in the front of mind rather than the back. Here is my starter list to which I will hopefully add some analytical insights as the future months unfold:

Swedroe on Ideas for Goosing Portfolio Efficiency

In this article at Advisor Perspectives (How to Diversify Beyond the 60/40 Portfolio), Larry Swedroe lays out some ideas for enhancing portfolio efficiency beyond 60/40 going into what looks like a challenging return regime.  To quote Larry on the basic end game:

By moving to increase allocations to these alternatives, I believe investors can significantly improve portfolio efficiency, and in particular reduce left-tail risk (critical to those in the withdrawal phase, when sequence risk can matter a great deal) thanks to the benefits of the anticipated premiums from these assets, as well as the diversification benefits provided by their low correlation with traditional stock and bond returns.

A worthy goal so I thought I'd take a look at RH positioning against the "Swedroe 6:"

Powerful audio: family oral history on Vietnam war and the student movement

This is awesome stuff. Very powerful and worthy of something like NPRs Storycorps or some other professional podcast.  The kicker is that she's only 16 and this is a first effort (school project). My talented daughter of course.  This is editing artistry at its very best and a tour de force of composition.  I am not biased, of course.

Her project was to do first-person interviews on the Vietnam war and the student movement.  My daughter chose to interview her three uncles and me.  The interesting part about that choice was that the four of us as a group spanned the entire history of what went on and all of us had different experiences of and interaction with what was going on at that time.  Birth dates ranged from 1947 to 1958.  I was mesmerized by her integration of voiced family history.  I was also impressed that the editing genius was not to do just a bland concatenation of four interviews but to edit and splice the affinities of commentary themes and then to layer on thematically coherent music as a background overlay.  If I needed audio I know whom I would hire in a heartbeat. Try it out.

Podcast: family oral history of Vietnam war era and the student movement - a project

Somebody let me know if the link doesn't work.

Putting it all together: a wealth depletion time "utility simulator"

Over the last month or two I've been playing around with a spreadsheet that helped me look at the concept of wealth depletion time and the utility of lifetime consumption in a situation where consumption is forced to whatever income is available when a nest egg runs dry.  I thought I would take that simple spreadsheet instantiation and now try to put together almost all the pieces of retirement finance that I've been working on for a couple years in a more complete and robust way. And actually I think it's kind of neat how a ton of what I've learned over three years comes to an almost unified point in this effort[1].  To do all this I had to leave the deterministic spreadsheet (fixed returns, probability weighted lifetime) behind and go into simulation mode (randomized returns and lifetime as random variable) in R.

I'm not quite done but I have maybe 80% of the stub of a decently interesting simulator (what is this? my 9th or 10th so far?). I have some more work on the core and some additional features to complete but I thought I'd take a break and pass along what I am doing for the interested (are there any?).  Fwiw, there is no real purpose for any of this. This is mostly just to do it and for me to learn a little bit. I suppose I could use the tool on my own data and retirement process but I don't get nearly this complex in my own efforts.  Certainly this is not a commercial endeavor.  Unless, of course, you want to pay me.  Then it is. 

The basic idea looks like this:

On Uncertainty

Retirement, especially an early one, is a time of life that is rife with all sorts of risks coming at us from all directions. Most of these regular risks can be imagined and planned for or at least hedged. They can be blunted and contained.  But there is another place beyond risk which we can call uncertainty. This is the place of unknown unknowns where risk management tends towards the futile and planning is blind.  I've been thinking about this a lot lately. I've even been doing my reading.  I've also been in a correspondence with four guys that know this kind of stuff better than I do that are thinking about the same kinds of things at the same time.  The topic is clearly within my active, conscious view.