Process 5 - Continuous Monitoring and Management Processes

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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 essay is a continuation of:

Five Retirement Processes - Introduction
Process 1 – Return Generation
Process 2 - Stochastic Consumption Processes
Process 3 - Portfolio Longevity
Process 4 - Human Mortality and Conditional Survival

Summary here.

Process 5 - Continuous Monitoring, Management and Improvement Processes 

Life can only be understood backwards; but it must be lived forwards. -Kierkegaard

"Irrespective of the investor’s initial portfolio management elections—‘buy-and-hold,’ ‘constant-mix,’ ‘floor + multiplier,’ ‘tactical asset allocation,’ ‘bottom-up security selection,’ ‘top-down strategic asset allocation,’ ‘glide-path,’ ‘passive investment management,’ ‘active investment management,’ ‘benchmark relative,’ ‘asset/liability match,’ etc.; and, irrespective of the initial elections for withdrawal management—‘rules based,’ ‘fixed monthly amounts,’ ‘percentage of corpus amounts,’ ‘longevity relative,’ etc., the critical objective is to assure that the portfolio can provide the required cash flows. Investors spend cash—not Information Ratios or Merton Optimums; and they need to know that the portfolio can sustain a suitable standard of living throughout their lifespan. The need to know whether the portfolio is in trouble is a primary justification for establishing an appropriate surveillance and monitoring program." -Collins (2015)

Cotton on the Fog of Retirement

How do I love the article (Negotiating the Fog of Retirement Uncertainty, Forbes Feb 2019)? Let me count the ways by way of some quotes:

1. "The length of your retirement is quite uncertain and, since your household is a sample of one, could actually range from less than a year to 40 or more. Life expectancy simply provides an average for many people who are a lot like you and there is no reason to believe yours will be average."
2. "Most spending rules ignore how much you will actually spend or even probably spend and instead make the dubious assumption that whatever amount of spending that will not likely deplete your savings portfolio will also be enough to pay your bills…"
3. "In other words, our household's future retirement spending is relatively unpredictable."
4. "Combining the distributions of random variables increases the uncertainty but ignoring one or more of them is worse."
5. "It is extremely unlikely that our actual spending path throughout retirement will even remotely mirror sustainable spending predictions."
6. "This isn't to say that spending rules have no value but they're at best a ballpark estimate from within an enormous ballpark."
7. "The key is to recognize that a spending rule estimate is good for perhaps a year. They should be recalculated at least annually. Retirement plans based heavily on spending rules have a one-year planning horizon."

Supplement to my feasibility game - adding Player E

Loosen up Bro...right?

I've lost count over the years of the number of people that have chided me for my economic conservatism in retirement, from advisors to ex-girlfriends to family to just flat-out strangers (none of them are or were early retirees, btw). The comments can sometimes border on condescending but are probably just a reflection of their incomprehension or ignorance of the risk dynamics. I don't really blame them but I once did fire an advisor from a large national banking empire for being a little too glib and snooty on this kind of thing to my face.  It's my life and my risk and my family and I didn't appreciate a 40 year old advisor with no experience, no math, and no skin in my game looking down his nose and ripping on me in front of a room full of people.  "Live a little, bro." Buh-bye bro.

Supplement to my "playing a feasibility game against the 1970s"

This is a follow-up to "Playing a feasibility game against the 1970s." I can't spoon feed the set-up and background here so you might have to go read the previous post. In this post I just wanted to augment the last one with some context that included showing some forward looking dynamic sustainability and feasibility estimates for each year for each player.

Playing a feasibility game against the 1970s

Why Play a "Feasibility v 1970s" game?

1) I was re-reading Patrick Collins "Monitoring and Managing a Retirement Income Portfolio"(2015) which, unsurprisingly, focuses on managing and monitoring a retirement portfolio (a worthy read, even on the third go-through). Collins has a strong emphasis on feasibility, annuity boundaries and balance sheets. These are all good things and will be important parts of one of my next "process" posts. I wanted to run some feasibility analytics just for fun and to shake off some cobwebs from what I did in this area last year.

2) I was partly inspired by a post by EREVN (The myopia of failure rates) along with some correspondence on the topic (can see this in my post that happened to have echoes of his point) of what gets missed when saying that a spend rule (like the 4% rule) "worked." What gets missed is the dynamic technical evaluation as one flows through the time between the beginning and the "end." The psychological states that might fall out of that evaluation get missed as well.

3) I lived most of my childhood supported by someone running a SWR program through the 1970s and I saw first hand what that kind of environment can do to portfolio longevity.  Maybe next time we'll play against Venezuela but I'm not sure there would be any winners. 1990s Japanese equities might be fun, too.

The combination of these three points got me interested to see what would happen to a run-of-the-mill 4%-rule run deterministically through the 1970s along with some additional variations on that rule-theme while using some elements of modern retirement practice, such as feasibility analysis, on all of them. Hopefully this sets me up for doing a better job on my next post. Maybe it will also add some insights to my own planning efforts.

The Players

A) Constant inflation adjusted spend as a percent (e.g., 4%) of the initial portfolio,
B) Constant inflation adjusted spend as a percent of the initial portfolio but based on initial feasibility
C) Dynamically reevaluated spend based on feasibility in each period
D) Dynamically reevaluated spend based on feasibility in each period but "capped" by player A