On changing advisors

"Live a little bro..."

"I gotta make a (commission) living, too"

These epigraph statements came from the same, now fired, financial advisor. The first one was in response to me describing my careful spend rate -- which I will humbly assert was pretty well-informed at 57 when he said it...after more than 5 years of me doing this blog -- that was designed to confront my long-horizon superannuation risk since I have no major hedge like a pension or annuity. The second statement came not long after -- this after 25 years of paying something like a point and a quarter, btw -- when I insisted that we discuss (negotiate, reduce) fees. After my divorce and retirement fees became an absolute yoke and on the forefront of my consciousness because fees are no more and no less than part of our spend rate.  

Regime Change

 After running through a few posts lately, what do I have? Basically this:

1. Spend 2% if you want your $ to last forever though even a 2% spend could possibly flame out over a long enough horizon if you have a crap portfolio. Probably not a problem for mortals and spending less than 2% would be weird if the whole point is to be using the money for something. Spending more than 2 demands a little extra thought...

Spending at 63 using life expectancy

Based on an email from David C, I had forgotten that a rule of thumb for spending is 1/e where e is remaining lifetime. The super quick look here is from a page from Gordon Irlam's aacalc.com site: 

• Simple Rules of Thumb for Investing

where the operative text is this:

Perhaps less well known than Markowitz's modern portfolio theory (MPT) is the subsequent work of Merton and Samuelson. This is a shame because while MPT only concerns itself with optimizing investing in a single time period, Merton's portfolio model concerns itself with optimizing over time, where it is possible to change asset allocation and consumption in response to portfolio performance. This is far closer to the problem faced by most investors. Unfortunately the math involved is quite complex. I've been trying to derive some very simple rules of thumb for stock/bond asset allocation and consumption planning using Merton's portfolio model and the current returns environment as a guide. Here is what I came up with: 

My Horizon Spending

This is the last post of 3 part series.  The previous two were on long-horizon spending, the first one was about a kind of an endowment-ish thing that looked at spend distribution "medians" at the 50 year mark and the second was a consumption utility framework for what I'll call "very very long retirement:" 

• On the Behavior of Long Horizon Adaptive Spending
• Long Horizon Spending (con't.)

This post, however, is all about me. Dang, I feel like an Instagram model when I say that ;-) but thankfully you will not be subjected to 10,000 pictures of nothing but selfies of me in a bikini. We'll leave that to our nightmares. What I will do is adapt my software -- this is, I think, the fourth consumption utility sim I've written [1] -- to my own personal parameters to see where it goes with my data in the context of what I have done before in at least the last couple of posts. Again, no charts, just some basic spend rates if I can get away with it. 

Long Horizon Spending (con't.)

This post, still about "Long Horizon Spending," follows the last post on the same topic:

• On the Behavior of Long Horizon Adaptive Spending

where I was playing around with what a percent-of-portfolio approach does to spending and portfolios at a 50 year mark. 50 is pretty arbitrary but one of the cited papers used 50 years for some kind of reasonable endowment policy cycle. 50 years is pretty long and not a typical assumption in the retirement finance I read but it is not terribly unreasonable were we to be given both early retirements and extended longevity.[1]  

On the Behavior of Long Horizon Adaptive Spending

I always assume that the constant spend assumption -- set spending at the beginning of some interval and then adjust it for inflation -- is well known to be an active risk position because that approach guarantees, in the absence of mortality, that it will someday stop working where "stop working" means zero[1]. But maybe that isn't as obvious as I think since I look at this stuff all the time and others don't.  

On the other hand, I've also heard "% of portfolio" touted often because it kinda-sorta lasts forever. But that is an active risk position as well for a couple reasons:

• Spend volatility becomes high (ignoring that irl that spending is, in fact, even more random than just the portfolio effects and sticky to the down side while loose to the upside). 
• Over long horizons the higher spend rates keeps chipping away at the portfolio and so: while it lasts forever, that high spend also eventually diminishes what one can spend in real dollars over time. 
• Since there is uncertainty, the spending possibilities at some distant horizon are best viewed as a distribution rather than a number if we can even think in distributions anymore. 

Some thoughts on force of mortality and hazard rates

I mis-titled. This post is really more about spending but hazard is not un-implicated... 

When endowments -- or long dated trusts or, dare I say, early retirees -- spend the idea is that whether one spends in constant dollars or even within a rule-set one can't spend too much too soon because the money has to last a long time and it has to anticipate a lot of problems: from adverse spending to adverse markets to sequence of returns risk, etc (we can also talk about intergenerational fairness here too). This is true for both constant spend and other rules. Constant-spend, btw, incurs a penalty in the sense that there is a time distribution of unavoidable, over enough time, depletion cliffs. Rules, and rules all the way to the % of portfolio rule, incur either the former in a now slightly deferred way or a distribution of lifestyles (consumption) at time x that might disappoint expectations if one were to happen to land in the left tail of of the consumption distribution at that time. Or we can say: "perpetuities are hard."