The absurd simplicity of my own retirement process

This from a PhD-pension-dude yesterday to someone else about my last post: "...he could use some help..."  Heh. No doubt. But probably not in the way he thinks.  What I need help with is getting firmly into what I call act IV of my V-act life and/or monetizing what I've learned.  What I need less help on is blogging or retirement finance.  And anyway, PhD dude is still young and getting paid. He doesn't feel any of this in a real way yet. 

Here is an example of why I need very little help.  Over the last 7+ years I have done what, for me, is some complicated stuff here on the blog. All of it was almost 100% curiosity and self-learning  -- with the blog as reportage of what I was trying to pick up along the way.  Does any of that complicated stuff matter and do I use all that stuff on my own retirement, at an age that, at less than 65, is still a little risky? No, not really. I even got a figurative eye-roll once when I mentioned that all I use for myself was:

• A balance sheet (with actuarial but not stochastic elements)
• An income statement (basically a 12 year record of what I spend)
• A "spending process control" chart

Hmmm...with all those stochastic present values, perfect withdrawal rates, utility simulators, Monte Carlo simulations, Merton Optima, backward inductions, reinforcement learning AI attempts, lifetime probability of ruin sims, etc and that's it??  Yup. I mean it's not that simple if one were to look closely but basically that is it. Allow me to explain:

1. Balance sheet.  

This is pretty much what one would expect. Assets and liabilities tracked over time. I also keep track, by "account," of value, title (though less important now when divorced), location, beneficiaries, etc.  The BS is also actuarial in the sense that I estimate the PV of flow items like SS and spending.  It is mostly not very complex since I do not have weird business entities or a lot of private placements, though I used to. So like this

Assets

• Cash
• Investment accounts
• IRA
• Stub of some direct private investments now worth zero
• PV of SS discounted at an inflation rate and then cut in half...because: no trust
• 529 Plans sorta jointly held with ex
• 1 tiny bitcoin
• Hard assets[1] like home, car, etc.

Liabilities

• Any pending tax liabilities
• A small mortgage with some time still on it
• Other hard debt (borrowed from myself, but on a firm schedule)
• Education obligations to kids for independent schools and college[2] (soft liability)
• Deferred maintenance [3] (soft)
• Some other reserves (soft)
• PV estimate of spending (idk, this is kind of a hard liability but subjective)

That's it. I also keep some metrics on this over time on a monthly basis but that is relatively minor[4]. The PV of spending is the hardest one because it is the most subjective and in some ways the most important. In general I create a policy liability for future spending based on a "shape" that is custom to me and my family. That means that I will use several tools to determine the number which I then choose based on judgement. I use a simple PV calc for starters and this is my bulwark. For anyone not initiated, go to howmuchcanIspendinretirement.com where Ken Steiner lays out with solidity how and why this is done. 

For discount rates I simplify by assuming my inflator and discount are the same giving me a real cash flow which I can shape if I wish. I can and do play with these assumptions sometimes. I, of course, complicate it after that. I probability-weight the cash flow with a survival probability. I realize most won't do this but it has become habit now. I also validate any number against a distribution of spending liabilities I generate via a stochastic present value calc. But that is just a check on my judgement of the policy choice for the liability amount on the BS. Also I have not pinned down exactly how I want to model SPV. I don't dwell on SPV since retirees are adaptive compared to the hard liabilities of a pension and I view this whole retirement enterprise as a process of judgements -- maybe even sometimes optimally made, though that is dubious -- that constantly go stale and then get refreshed.

Note: I am clear with myself on what is and isn't monetizable.  I have some stuff that shows up on my BS, like my dwindling-to-zero wine collection, some furniture, the non-consumable part of my home, and some other stuff that is on the BS but will never be used for retirement consumption. I back this out of net worth to come up with a denominator (net monetizable wealth or NMW) for the spend calcs in #3.   A positive net worth, btw, under this "actuarial" framework, is what is called a feasible retirement. Sustainable is a different concept tied to forward projections. 

2. The Income Statement

This is again pretty much what you'd expect. I mean, I complicate it as is my habit, by making it formal, like a small company where I'm CEO -- I even have a type of EBITDA -- but basically it is a record of my spending sorted into categories and tracked monthly.  I've never really understood those that don't track these things but whatever, people are different.

3. Spending process control

Whatever the academic papers say, spending is random and has, at least behaviorally, some correlation to wealth, either directly by some rule-set or indirectly by the sense of unease that comes with large market downdrafts. That means it is a random process over time and adjusts to the environment (or filtration I guess if we are talking math). It can vary, it can drift, it can jump, it can step down or up, goals and policies change, etc.  

In addition, the "policy rate" of a "proper" spend changes with age, wealth and other external factors that can influence it.  What policy rate? Used to be 4%, right? But 8 years of doing this tells me that there are many rates depending on what theory/model you use and how old you are. There are 3,014 optimality models (I made that up) so I have to choose carefully. Actually, what I do is triangulate a policy rate using everything you see in this blog and come up with some rate that makes sense to me personally now and in the near future. I then create a zone of acceptable spending around it because over some smallish range it probably doesn't matter too much as long as I have the ability to: a) know when I am at or near being out of bounds, and b) self correct.

Those seasoned in continuous process improvement or 6-sigma will recognize this as a type of industrial process control, a Deming cycle. And so it is.  If my spend rate, which is a function of both wealth and spend dollars, both of which are random variables btw, is random, then I must watch it to make sure it is within my "policy control boundaries" and under control. I also, of course, complicate this by adding 2-std dev boundaries, like bollinger bands, to add to the process control but I've never really used that info.  I won't much elaborate here -- I've written on this before -- but will illustrate it in a rough way like this:

This chart, which I update monthly is the "check" part of the Deming "plan, do, check, act" cycle. The "act" part might've been 2012 when I cut spending by half - yep - to get into a controlled process. I will admit that this is way more anal than most people will put up with but the trade-off, for me, is that every month I have great confidence that I am doing ok or I have great certainty about being or trending out of control with the knowledge that I can nudge myself back into the zone. The real test however, since spend rates vary with denominator-wealth, will be what happens if markets halve. But I've done drastic change before and I'll do it again if I have to.

The astute will realize that in pure-form optimization, spend and allocation are a joint choice. Yes, but since: a) spending for me is a zone not a number, and b) I seem to care less about allocation (now) than other people (I also think that is a "zone" issue as well) then for the most part if I am sailing in the middle and not at the edge of the earth I generally feel ok even if it is not "optimal."   I am not a pension fund with legal obligations to the liability, just moral obligations to my future self and kids.  Those are more tractable...I hope. Nor am I an asset manager trying to eek out miniscule differences in expectations of Sharpe or Omega ratios, though to pat myself on the back I'm pretty sure I could've attracted some capital with what I used to do. Too old and lazy for that now, though. 

---------

So, literally that's it.  I mean, yes, every time I do some weird new thing on the blog, I will generally check it against my own personal situation, but for the most part I don't do much with all that complexity; it was all just a curiosity thing anyway. "For the most part" now I just want to live -- take care of my kids, spend time with my gf, move to Montana in 3y, study art literature & philosophy, create some post-covid social connection, etc. -- and not live in some kind of fearful retirement hold-my-you-know-whats death crouch. These tools above help me manage a calm life with the cost of just a tiny bit of data collection and charting every month. 

-----------------------------------------------

[1] I split my house in two, fwiw: 80% is non-monetizable and 20% is potentially monetizable if I downscale. TBD.

[2] I've had a model for 2 decades on what I would if I could and if they will spend for college. Details are not important it is just that as a "soft" liability it was once a large number and getting smaller, but not small enough, by the year. I could disclaim this but why?

[3] I stopped spending on my house for a while in 2012+ and then realized the spending doesn't go away it just gets pushed.

[4] I track the time-weighted value of NMW so I can back out consumption and compare my estate to benchmarks.  Given that it is NMW and not assets this is a custom prop benchmark not discussed here but it works pretty well for at least the last decade.