A change in the wind?

The current events unfolding in real time are more or less what I've worried about for a good long while in my personal planning and this blog. It's exactly why I fired an advisor for once glibly saying "c'mon, live a little" to me when I laid out my spending approach that conserves early for the possibilities for later risk and uncertainty. That the banker-peasant could not see the convexity of model-able risk as well as being totally blind to the hammer blows that can come from unmodel-able uncertainty was and is certainly his problem, between him and his family (and no doubt between him and the other co-clients I left behind), but me? I did not want that kind of cavalier attitude to infect my family where "infect" seems to be the appropriate analogy in 2020.

But a big question for a lot of people, myself included, is to what extent extreme volatility is already baked into a plan and just needs to be ridden vs being a situation where there have been material changes in the world and the plan no longer obtains, the plan in broken. Spoiler: that distinction is more art than science in my humble opinion and one will never 100% know, except maybe in retrospect.

A riff on the shift from accumulation to decumulation in an early retirement setting...

Those who know me know that I went through a fraudulently-induced move to FL in '08 for reasons I will still hold back with respect to the exact detail. During that time of separation, divorce, betrayal, global financial crisis, and, of course, the move, I also took a lot of Pepcid, a few cocktails, and some unpleasant prescription pharmaceuticals I didn't like at all and quit cold soon enough. I do not recommend this kind of phase-shift in life to anyone. The decision to "retire" at that time was mine alone. Mostly this decision was made because I had been primary caregiver -- almost entirely solo on a 5x24 basis -- for 12 years and I decided that continuity of care would therefore trump money; a lot of money. But whatever.

That shift, at 50, was naive and uninformed. I've learned things since then. Over the last 12 years or so I've done many things, including this blog. One of the many things I've done as well has been to ruminate on the transition from accumulation to decumulation before an age where it totally makes sense to do that.  This post is not designed to be systematic or exhaustive. Mostly I just wanted to seed my own thoughts for a post later on that will be in more detail. The goal here is to think about some of the off the cuff differences between the two states, differences that are filtered through my personal experience as well as through my amateur finance capabilities.  I may add to this post later.

My points are more or less extemporaneous but are also informed by some work by Michael Zwecher and a body of work by Moshe Milevsky, not to mention everything I've read over the last 6 years.

Does allocation matter?

The recent downdraft in markets spooked people. It spooked me. A woman I know, retired, was going to call her advisor and was dead convinced he had her in too much risk. She pressed me: "You do all that blog math magic stuff, tell me..."  I did NOT want to get between her and her advisor but with enough disclaimers, I obliged, especially since my guess is that the advisor, while competent, probably does not dabble in economics or actuarial science and my perspective would be different rather than necessarily conflicting. 

I told her as a prior that my guess was that the allocation probably did not matter much and that spending was a stronger lever. But I took a look. I won't divulge personal details but let's say we have someone in mid to early 60s, a reasonable wodge of financial assets, social security, a few small deferred annuities in the future, a risk position that was relatively high[1], and a spend that as far as I could tell, was at or under 4%.  The exact numbers were less important than the general sense.

I plugged that into a consumption utility simulator[3] and got this in the figure below. Based on this I figured she probably could trim her risk and I think she got him to give in on that.  Otherwise, the idea that allocation doesn't matter too much over a broad range still (sorta) stands. For her spend rate, if it were me, I would (tax issues excepted) trim risk way back, which is what I do for myself but i think she'll be OK but only over the long run and only if the world stays normal. That last assumption is key and my guess is that the world will not be normal for a good long while.

The commentary in the figure speaks for itself in terms of residual conclusions[2] so I'll leave it at that. The third unspoken lever (besides allocation and spending) that is not imagined here is "when to retire" but that was mooted in this case.  I could have broached the idea of immunizing spend via life income (annuities) but didn't. Probably should have.

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[1] Let's arbitrarily call it like this on "levels" of risk:

- 0-30%        Low risk position
- 30-80%      Mid risk
- 80-100%+  High risk

I just made that up but it's not totally unreasonable.

[2] It's implicit in the figure but I'll make it explicit. High spend rates with very low allocations to risk are a bad combo. Low spend rates with either low or high risk are a better bet than that.  Spend rates move the needle in the middle more than allocation does.

[3] covered here in more detail:

• A Wealth Depletion Time Model