Some Self-Reflection on the Joint Spend-Allocation Choice...For Me This Time

A lot of tech bluster on this blog notwithstanding, most of the count-on-one-hand readers of the blog might be surprised to learn that I directly use very little of the methods on this blog to manage myself on a regular basis. Most of what I do here on the blog comes from mere curiosity, a curiosity that when sated accrues to my general understanding, to be sure. In reality, on a monthly basis I mostly use the following:


1. Actuarial Balance Sheet (feasibility) that is basically Ken Steiner's with some customization. Part of this process includes monitoring assets and drift in allocations as well as staying in touch with any product innovations that are worth considering (e.g., life income class products), expectations for interest rates, expectations for capital markets, and fees, among other things,

2. An income statement to track spending including, importantly, a spend control chart that renders spending as a "12 month moving average percent of the current net monitizeable assets" which is contrasted against policy control levels and some other statistical boundaries that are tuned to what I understand as risk, and

3. Periodically I will do a forward sustainability check (think MC sim or similar) but I generally know that if my spending is in bounds, and my boundaries are economically sound, I don't really have to do this quarterly. Maybe annually.

4. I'll also periodically (rarely) price hypothetical annuities to keep a weather eye on hedging out longevity uncertainty in part or in whole. Me? I like my assets unencumbered so I'm a poster boy for the annuity paradox.

That's pretty much it.  Because life changes so rapidly and unfolds in odd ways, I have not specifically attempted to calculate precise numbers (they can go stale) and defer rather to a "middle way" of risk combined with a constant process of triangulating on what is looming on the horizon.  That has meant, between ages 50 and 61, that for the two of the major classes of levers on retirement, spending and asset allocation, I have been hovering somewhere around these regions:

• Spending ~3.5% (i.e., under 4 because I am under 65 and we are in an era of  suppressed forward return expectations)  

• Asset Allocation: 35-45% to risk but my portfolio is complex so that 40ish is hard to explain.

(remember those regions for later...)

But that effort, for the most part, has been a seat of the pants "opinion" and an hypothesis that I felt was pretty well founded, but it was not something hyper-mathematical that popped fully-formed out of a machine. Also pretty conservative, I'll agree. So conservative, in fact, to those types that don't tend to perseverate on retirement finance that I've been harassed before for the reticence to spend or allocate-riskily: by wives (ex, singular), advisors (fired), girlfriends (ex, plural), and friends (mostly still around) for at best being a little too conservative or, at worst, a penny pinching life-sucking miser.

So as any self-respecting miser would, I now feel the incipient urge towards self-justification.  Conveniently and recently I was going through some unrelated analysis that was attempting to understand the concept of asset allocation "glide paths." Part of that understanding-process was to take the "discounted utility of lifetime consumption" simulator I built and use it to evaluate a joint spend vs allocation choice (there are other ways than this, maybe Merton Optima, or trial and error MC sims? Advisor products like MaxFi? Idk.) for someone my age and with my circumstances and lifestyle.  I might have done something like this before but it was probably in fragments rather than a joint choice.

When I plug "me" into my machine -- the parameters of which are redacted to protect my info -- this is more or less what it looks like, while we also recall from above my "seat of the pants" heuristic thoughts on spending and asset allocation. This is a little hard to see since you can't rotate it so I'll rotate it for you - allocation axis first, spend axis second, then a topo:

Figure 1. Self EDULC - allocation perspective

Figure 2 - SELF EDULC - spend perspective

So, what do we see in this, you miser-shamers out there? The world's most advanced amateur utility simulator (pay no attention to the man behind the curtain) decrees the following, by Figure:

• Figure 1: Optimal allocation (in joint region) to risk is in the 35-45% region, give or take. My seat-of the pants was, gasp, 35-45% 

• Figure 2: Optimal spend rate (in joint region) is in the 3.5 - 4% range. My seat-of the pants was 3.5 or under.  On the edge but it's still rational and allocation-aware "wise"

• Figure 3: same scene from the top but we can see here that I am hugging the southeast side of the mountaintop. That's called either unreasoned conservatism or alternatively we'd call it prudence when the winds are heavy.  The north west side of the peak has a nasty drop-off I don't even want to see. The abyss has no scenic viewpoint.   

To the shamers: at least I "appear" rational and not as dumb as someone once thought I was. I'm right where it looks like I should be if we trust the model, but trusting models is another whole post, at least.