5 Processes


----> An updated, edited PDF file of the 5-Processes is here. <----
168 Pages


The linked posts that are listed below represent almost four years of researching and blogging on retirement finance from the perspective of a quantitatively aware amateur. Before I go too far, note that I have no degrees in the subject and the two that I have, a liberal arts B.A. and an MBA in finance, don't count.  The MBA, in particular, taught me nothing I've learned or written about in this blog except maybe present value. I also have neither professional credentials or designations, like CFP, CFA, CPA, RIA, CPA, CLU..., nor do I have any position in or stake in or clients in the financial services industry. I'm retired. My "client" is my future self and my family. I have interest in these things only because they are interesting to me for some reason and also because the stakes are pretty high if I get things wrong. In other words, I have skin in the game. That matters.

I have broken the posts down into what I consider to be the five main, mostly independent, processes I consider to be the essence of retirement finance:

0. Five retirement processes - Introduction
1. Return generation in multi-period time,
2. Stochastic consumption processes,
3. Portfolio longevity in its unconditional sense,
4. Human mortality and conditional survival probability,
5. Continuous management and monitoring processes

Why these five? First, I am of the strong opinion -- notwithstanding the literature out there on some very mathematically elegant and charming optimal solutions (e.g., asset allocation, spending, etc) and notwithstanding the constant and seductive appeal of trying to integrate the forces of retirement finance into single, perfect answers -- that there are in truth no real-world optimal ret-fin solutions that are stable for more than about a day. This is why at least one Nobelist has called personal finance one of the hardest problems in economics.  This particular point-of-view of mine forced me to look at ret-fin to see what I thought the stripped-down essential and independent processes were that go into almost every optimal, integrated solution I ever see.  I wanted to "factor" retirement finance to its components and then understand those components before I tried to put them back together again...if I were to even try to ever do that again. My goal was also to see these processes for what they were on their own terms because much of the finance literature I read, even though the writers (probably) know the complexity, jumps so fast past the complexity to some blinding and sometimes unconstructive simplifications -- normal returns, constant spending, no borrowing, independent and stable processes, arbitrary or ad-hoc "kill times," averaged populations, and so forth -- without stopping to look the complexity of the underlying process in the eye first.  There may be simplicity on the far side of complexity but you gotta walk the hill first to get there.

Whether I have understood or seen things correctly will be tested by time and I guess the true test will be the disposition of my estate some day. I'm hoping the split amongst my legatees will sum to less than a buck. Also, whether the impulse towards integrative thinking on this kind of stuff will now be any easier for me, or more meaningful to me when I read how others do it, remains to be seen.  Mostly I just wanted to document what I've learned. This is less for the reader and more for me. The edifice I've constructed will, in practice, be a type of memory palace for the things I've learned and those things I have yet to learn. I'm hoping that everything new I read and learn in the future will have a place to hang somewhere in this structure that I've built and I'm also hoping that any errors or omissions will be easily correctable while still keeping the narrative relatively coherent.

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