Cotton on Ret-Fin 2018

I love this recent post ( Lessons from 2018 ) from Dirk Cotton. It reminds me that I spoke to him recently and that in addition to discovering that to some minor degree we have led parallel lives, he is also as gracious and intelligent in person as he come across as in his blog posts.  His points in this particular post resonate, probably due to the parallel lives thing. Here are some thoughts.

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. 

Merry Christmas from RH

A little self-promotion just for fun

Re: Process 1 - Return Generation [draft]

fattailedandhappy on FIRE and 4%

Here is a site I haven't seen before (fattailedandhappy.com) and a post I just read ($1 Million Isn’t Enough).  I may have the world's smallest quibbles or extensions to this post, perhaps, but this dude is totally right-enough for me. The chart of "probability of being broke" is probably a bigger deal than even he is making out. Also note that: me? I got supper lucky and, in his framework in the conclusions, did conclusion #3.  Watch out for #4, though. earlyretirementnow.com has a good piece (not linked) on how spending retrenchment may not save you at all but I think that's what fattailed got at in sentence 2 of conclusion 4.  I have expended 1000 times as much digital ink to make the same points he makes in one short post. 

Process 1 - Return Generation [draft]

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Note: as in the previous essays, this is a draft as I hone some of this content. Also, since I view these essays as consolidating and integrating what I've learned about ret-fin so far, I will continue to add to and update this provisional latticework over time in response to new findings or errors.
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This is a continuation of a previous essay on “Five Retirement Process” which can be found here or a blog page summary here..

Process 1 – Multi-period return generation.

It was a little bit of a revelation to me when I started to realize how little I knew about financial processes at the age of 50.  I thought my MBA(finance) had taught me something and I had naively leaned on that credential confidently for decades or at least I did in a cocktail party conversation sense.  And what I knew about what I didn’t know (or didn’t know I didn’t know) wasn’t even the worst part. It’s that what I did (think I) know, I have started to now realize, can mislead.  This section of my look at retirement processes is about how I have misled myself when it comes to “return generation” over multi-period time. It is very much not about portfolio design or optimization which is another topic altogether and something I assume as a precursor or even prerequisite to this topic.  The discussion here is: what happens after you turn on an optimized “return machine.”