Wealth Depletion Time Simulator - an update and summary

While I'm waiting for the software I built to simulate the below to be pulled off a crashed hard disc now in a geek squad clean room in Kentucky (have I posted on doing backups more frequently? I think I have) I thought I'd update my WDT notation and comments to more accurately reflect what I was trying to do. The past post I'm updating is here:

The Wealth Depletion Time EDULC Simulator is live!

Now, from that post but with some new edits...

Robert Merton on Fixing Retirement, 6-28-18

Here's an interesting new podcast by Steve Chen & Davorin Robison at newretirement.com

Nobel Prize Winner Robert Merton on Fixing Retirement, Episode 11 Jun 28, 2018

"...there's a big difference between wealth and income."

Parenthood reduces wealth by about 4 percent per child for workers ages 30-59.

according to a CRRB study.

and

The effects of children persist even after the transition from work to retirement. About half of U.S. workers are facing the risk that their standard of living will decline in retirement, according to the study. Each child raises that risk by 2.5 percentage points for workers in the middle class. Since so many Americans are behind the 8-ball when it comes to retirement planning, it’s wise to get serious about saving after the kids leave home – and while you still can. Once the kids are gone, the parents who fail to curtail their spending “may be headed for trouble,” the researchers warned.

Maybe that's I keep telling my kids I'm going to run away to Colorado in a tiny RV, never to be seen again.

ERN on the 4% rule

Suggesting that we should follow a 4% Rule is about as ludicrous as suggesting that we should all wear size 10 shoes. - ERN

The 4% rule has been blogged and flogged more than enough but here is another worthy addition and worthy takedown...  The only disagreement might be on the comment "The 4% Rule is likely way too conservative for many early retirees." Just remember that ERN won't be there for you to make up the difference when it (spending more than 4% as an early retiree) doesn't work. You are on your own and conservatism may be your only saving grace at some point in the future.  He actually makes the same point in his point #9 so I give him cred, especially since a bunch of his other points take some of the wind out of the 4% sails as well. I mean, it was always a rule of thumb rather than a rule... 

Ten things the “Makers” of the 4% Rule don’t want you to know, June 27, 2018, earlyretirementnow.com

Risk defined in a context of status seeking and signaling rather than volatility or beta

Envy will get you every time.  Here is a paper by Erik Falkenstein on risk and return in a relative risk utility context where risk premia in status equilibria are more or less zero (not sure I have that right) and returns are earned for deviations from the status quo.  I don't have the chops to critique this but have enough experience of independent schools to know the destructive power of status seeking and signaling.  Maybe he's right. Who knows?

Risk and Return in General: Theory and Evidence

Eric G. Falkenstein

Pine River Capital Management

Date Written: June 15, 2009

Abstract:

Philly Fed on Elder Financial Victimization

Combining Forces to Combat Elder Financial Victimization
How Consumers Can Avoid the Financial Pitfalls of Cognitive
Aging and What They Should Be Asking Their Financial
Institutions

Jeanne Rentezelas, J.D.
Larry Santucci

June 2018

Federal Reserve Bank of Philadelphia

White Coat Investor on retirement withdrawal plans

WCI:

"I think it is actually really important to know a little bit about this topic. But it is NOT important to know a ton about it. And the reason why is because there are lots of people who think knowing a lot about this topic will somehow allow them to come up with a scheme that will allow them to maximize their happiness and spending while minimizing their risk of running out of money should they live a long time. Which is pretty much nonsense...

Retirement is uncertain too. You don’t know how long you’ll live. You don’t know how many big expenses will come up. You don’t know what kind of market returns your portfolio will see nor in what sequence. Deal with it...

The funniest part about some studies and the things some people say in this regard is the false precision they use. I’ve seen withdrawal plans where the withdrawal rate went to three decimal points. Give me a break...

The most important factor in your retirement withdrawal plan is not your asset allocation, nor your longevity, nor your initial withdrawal rate. It is your flexibility...Put your effort there and you can afford to ignore an awful lot of the withdrawal rate chatter out there on blogs and internet forums.

Good common sense at The Most Important Factor in Retirement Withdrawal Plans, www.whitecoatinvestor.com.  I agree with the concept of flexibility, adaptation, and avoidance of false precision.  On the other hand the one quibble might be about his comments on the approximate withdrawal rates.  While "around 4% is close enough" is ok enough, I find the comments about the three decimal precision, in my world anyway, to feel a little strawmanish.  I seriously doubt anyone with an ounce of common sense or experience is going to believe there is a difference between a suggested 3.750% rate and 3.751%.  Also the one thing I found missing is a sufficient discussion of "age of start" (it's implicit in the table but not clear).  "Around 4%" is great for 65 (maybe adjust down for current forward expectations on equity and fixed income returns as of June 2018 ... while keeping the "stay flexible" advice in mind) but for a 50 year old, I'd call that kind of advice a type of malpractice. I would also call it the same thing for someone starting at age 80.

Is There a Limit to the Human Lifespan? - The Wall Street Journal.

Is There a Limit to the Human Lifespan? - The Wall Street Journal. June 25 2018

Excerpts:

• To some researchers, this suggests there’s a natural limit to how long humans can live—and we’ve pretty much reached it. Yes, average life expectancy has increased, thanks to things like clean water, improved living conditions and modern medicine. But these improvements can only do so much, and eventually the body wears out.
  
• Others say, in effect, that past performance doesn’t guarantee future results. New and emerging medical technologies, they say, might be able to slow aging to such an extent that not only will we live much longer, but we’ll stay biologically “younger” well into what used to be old age.
  
• Brandon Milholland, co-author of several research papers on aging and longevity and a research associate at pharmaceutical-consulting firm Michael Allen Co., says that 125 is probably the upper limit for the human lifespan. Joon Yun, the president of Palo Alto Investors and the $2 million founding sponsor of the National Academy of Medicine’s Grand Challenge for Healthy Longevity, says it may be possible to extend the human lifespan by increasing the body’s ability to respond to stress.

Rzepczynski on Tobin's separation theorem

Tobin's separation theorem - It can be applied anywhere, Mark Rzepczynski, 6/23/18

This is a good intro to the idea behind notional trading by Mark Rzepczynski in a post on Tobin's separation theorem.  I have found this concept incredibly useful in personal trading of spot currencies, currency futures, commodity futures and futures options.  Maybe it was a little less than useful on a failed hedge fund startup where I was a GP, an LP and I lost an amount of money I was not really prepared to lose.  The concept is maybe sorta theoretically available to a retail investor but I'm guessing it would be nearly impossible to implement in any remotely efficient way.  

A Dark Era of Retirement

"Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president…In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement, a Wall Street Journal analysis concluded. That is around 15 million American households…Things are likely to get worse for a broader swath of America…For many Americans facing a less secure retirement than their parents, the biggest reason is the shift from pensions to 401(k)-type plans."

A Generation of Americans Is Entering Old Age the Least Prepared in Decades, WSJ 

Capital Spectator's R-analytics book on my to-buy list

James Picerno's new book on Quantitative Investment Portfolio Analytics in R is now on my buy list. And it's not just because I have been playing around in quant finance and economics for a few years in R.  It's also because James very generously offered a couple years back, an offer I should have taken up, an offer made after I asked a dumb R question by email, to help me with whatever finance-R problems I ran into in the future.  Now with the book, it looks like I can bump up my human capital a bit while bumping up his financial capital a bit.  A fair value-exchange I think. 

Saving Preferences After Retirement in US, Netherlands and Australia

Just looked through Saving Preferences After Retirement, Garcia et. al 80 p  May 2018. Not a ton of surprise. Here are some excerpts:

Father's day 2018

"Like the attempt to make a work of art, being a father is an ongoing encounter between a man’s ideal notion of himself and the sobering truth of his limitations. As they go about the precious work of creation, the best artists, like the best fathers, seem achingly aware of where they themselves fall short, still hoping all the while to realize their original conception."  Lee Siegel WSJ Saturday Essay

You are probably trying too hard

In response to my hard drive crash post, I had this:

AnonymousJune 15, 2018 at 8:22 AMyou are probably trying too hard.

In response to which I thought the following:

I've never known what this kind of thing means. It reminds me of my last two girlfriends, both of whom often used the "you're over-thinking things" phrase more often than I thought was necessary. Neither of those people I found very helpful in the long run and both led me to a distaste for the comment on overthinking. And neither one is here anymore...

For that reason, I at first thought I would maybe curse "anonymous" with a hard drive crash on something important to them. That'd teach him/her, right? And it might even be satisfying. Then I thought: no, wait, let's reinterpret this comment. So, my recast of the anonymous comment is to "keep things simple" (this is the proper English translation of "don't try too hard"). That is in effect my new path anyway given recent experience and common sense.  So that means that Anonymous' words are now redundant with how the arc of my life is moving anyway; whether the impetus comes from him/her or me the message and call to action are pretty consistent: "simple" is accretive to anti-fragile...which is where we all want to be.  It's just that saying "you are trying too hard" is the wrong way to phrase it and less constructive than it needs to be though my response to the response does, in fact, seem to confirm his/her judgement about me...because here I am doing what s/he says I'm doing...again. 

Warshawsky on Retirement Income Combination Strategies

The Mercatus Center just pushed a bunch of papers out onto SSRN on topics related to pensions and retirement.  Several are authored by Mark Warshawsky, someone whose work I have read and respected in the past.  Here is one example from the recent push:

Reforming Retirement Income: Annuitization, Combination Strategies, and Required Minimum Distributions MERCATUS WORKING PAPER, 46 Pages Posted: 7 Jun 2018

This is the abstract which deserves to be quoted in full: 

Laddered immediate life annuity purchase and asset withdrawal combination strategies represent an excellent way for retirees to manage their retirement assets in order to get lifetime income in a flexible manner while still maintaining growth, liquidity, and bequest potentials. Simulations show that even by age 95, a retiree using this strategy will get higher income, in inflation-adjusted terms, on average and across most scenarios than by using full and complete annuitization or just using the common 4 percent withdrawal rule. Moreover, a significant fund balance remains to the retiree throughout life, on average, but with no risk of running out of assets. The minimum distribution requirements that govern tax-qualified retirement accounts for older retirees should be reformed to encourage the use of these partial annuitization combination strategies. This broad reform of the required minimum distribution rules needs to be done for the same reason the Obama administration made a narrow exception to the required minimum distribution rules for longevity insurance to achieve the reasonable public policy goal of encouraging the use of partial annuitization by retirees.

I have not read the paper yet for lack of ink in the printer and I no longer read papers online. It will be in my pile shortly.  

Public Service Announcement from RH on fragile systems

I recently read Taleb's Antifragile.  Let's ignore the shrill insistence on the idea that he doesn't need an editor. This is a claim that sits on a spectrum somewhere between self-deluding and narcissistically demented because he really does need one.  The message underneath what needs editing, however, is solid and has vast applicability to the retirement project.  I was going to write a post on this once but FarnamStreet did one better and sooner.  But that is not my point here.  My point here is that I just went through a knock-down hard-drive crash that, while I have sorta-recent backups, is more or less going to force me to walk away from a track record of 8-9 years of my systematic rules-based investing that shows that I am a genius (a genius like T doesn't need an editor. Follow me? for the dense: I am not a genius...though the track record was, in fact, world class imho).  In a parallel universe, this release from the bonds of continuing to do what I was doing is probably a big fat relief.  In this universe it is a pain especially since I had just read Antifragile where one of the main points of the book (among many) is to brook no risk from single points of failure.  I had a big SPOF and I even knew it before it bit me. That thought bites me.  I now have a disc going to Kentucky for a level 2 data extraction.  Probably at a CIA black ops site. 4-6 weeks.  $400. Nothing guaranteed.

So here is my RH PSA:

Don't allow single points of failure

Back-up more frequently if not instantaneously

Don't build highly custom software that depends on a particular platform and a set of machines

Don't assume machines live forever

Pay attention to your power supply and its continuity

Don't get attached to really old commercial software that is so out of date that it probably pre-dates disco.

If you instantiate 3 years of "apex" knowledge capital into software just before a procrastinated backup cycle then :'-(

Custom-coded, mirrored, amateur RAID arrays are really cute only if the process backs up very often

Don't allow single points of failure

Australian Innovation in Retirement Solutions?

I don't really follow the exact details of this link on retirement solutions by some Australian entity but here are some thoughts:

- Prof. Milevsky gave these guys a positive shout out on Twitter

- Their solution appears to comport with the issues in retirement that I pound on over and over

- Their first chart could be a copy/paste from some of my Wealth Depletion Time posts

- I've seen, over the last 18 months, a ton of really smart Australian thinking on retirement/pensions

- They seem to have a bead on something here that makes sense to me

- I have almost never met an Australian I didn't like even though I have met a few that had a strong anti american bias. I probably need to go there soon. These are some fun smart people...

- My "spidey sense" tells me to watch Australia and maybe even these guys for interesting innovation in annuities and retirement solutions.  I have despaired of innovation lately so I take this kind of thing as good news.

Hindsight 11: The underappreciated power of non-digital social connection

I have been reading through some more research papers lately but this time they do not have anything to do with retirement finance or economics or portfolio theory or the behavioral quirks of investing.  They are about the soft science of social isolation in retirement. This reading binge is for reasons that should, to the sharp-eyed, become manifest shortly.  There is a ton of this kind of stuff in the air these days, though. Here are two representative examples among the zillions out there:

- 20 Facts about Senior Isolation That Will Stun You, Senior Living Blog 2017

- Social isolation, loneliness, and all-cause mortality in older men and women, PNAS 2013

The abstract of the latter of those two in particular deserves to be quoted at length because it gives a good flavor of what I'm seeing (emphasis added):

Housel on Behavior

This is worthy...

The Psychology of Money. Morgan Housel, Collaborative fund

#16 (“Russian Roulette should statistically work” syndrome) has some good affinities with retirement finance.