Weekend Links - Fri 2/24/17

QUOTE OF THE DAY

The heterogeneity of personal financial plans and the interplay between economic considerations and individual aspirations make the problem of personal finance one of the most challenging in economics.    -- Medova, Murphy, Owen, and Rehman.

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

The Impact Of Decreasing Retirement Spending On SafeWithdrawal Rates. Kitces.com  And what researchers have found is that both the composition of spending and the level of spending vary throughout retirement – with both tending to change in some predictable ways. As it turns out, on average, most retirees actually experience decreasing rates of real spending throughout retirement… Overall, the results reveal that reduced spending scenarios result in a safe withdrawal rate increase of at least 0.32%, and as much as 0.75%... there is still such thing as being “too” conservative and potentially constraining a retiree’s lifestyle unnecessarily.   [comment: the sharp-eyed will note I wrote on this a year ago.  Also regarding being "too conservative:" just remember, as someone once wrote: the disutility of running out of money is infinite.  ]

Retirement Spending and Biological Age, Huaxiong, Milevsky, Salisbury, York University.  We solve a retirement lifecycle model in which the consumer's age does not move in lockstep with calendar time. Instead, biological age increases at a stochastic non-linear rate in chronological age, which one can think of as working with a clock that occasionally moves backwards in time. Our paper is inspired by the growing body of medical literature that has identified biomarkers of aging which -- practically speaking -- offer better estimates of expected remaining lifetime and future mortality rates. It isn't farfetched to argue that in the not-too-distant future of wearable technology, personal age will be more closely associated with biological time vs. calendar age or time. Thus, after introducing our stochastic mortality model we derive optimal consumption rates in a classic Yaari (1965) framework adjusted to our proper clock and time. In addition to the normative implications of having access to biological age, our positive objective is to partially explain the cross-sectional heterogeneity in retirement spending rates at any given chronological age. In sum, we argue that biological age is not a sufficient statistic for making economic decisions and you need information about both your ages to behave rationally. 

Legacy Savings Organizations: Beating Deferred AnnuityInsurance Benefits by Over 50%; Practical Plan for Funding Extra-LongRetirement.  M. A. Gumport,   [comment: huh?]

Defensive Equity, Part 2. AQR.  Defensive equity seeks to provide the “best of both worlds,” promoting not only wealth accumulation by delivering the equity risk premium but also wealth preservation by investing in less risky equity securities. This paper describes ways to implement defensive equities within a retirement portfolio.

A Baby Boomer Makes Peace With Less, WSJ.  

Maximum Withdrawal Rates: An Empirical and GlobalPerspective, Estrada, 2017 

A Little Can Go A Long Way, M Batnick.  Investors would be better off if they spent less time thinking about the perfect portfolio and avoiding bear markets and more time thinking about why they’re investing in the first place.  

The Life Cycle Model, Replacement Rates, And RetirementIncome Adequacy, Andrew Biggs. A replacement rate calculation more consistent with the life cycle model would compare retirement income to an average of real earnings calculated over a significant number of years.  

The Actuarial Approach and the Importance of OngoingFinancial Planning, Ken Steiner.  

Retirement Decisions with Expiration Dates. Dirk Cotton, TheRetirementCafe.com 

A Bigger Bite Out of Social Security, Center for Retirement Research, Boston College, 

MARKETS AND INVESTING 

The Biggest Myths in Investing, Part 5 – Bonds Lose Value ifRates Rise, Cullen Roche. 

Geometric Mean Maximization: An Overlooked PortfolioApproach? Javier Estrada, IESE.edu.  

Geometric Mean Maximization: Expected, Observed, andSimulated Performance, Estrada and Santiago, 2013.  

Annuitization and Asset Allocation, Milevsky, 2006.  

Money, inflation, and rising prices: What are the risks forthe short-term outlook? AIER. Given all these concurrent forces, the prudent behavior is to be diligent in tracking activity in the U.S. economy. … For now, economic activity appears to be accelerating and price increases remain moderate, but risks to both remain. 

A Bull Market For Junk Bonds As Interest Rates Rise, CapitalSpectator.com In sharp contrast with the slump in the prices for Treasuries, high-yield bonds remain in a powerful bull market.  

Prospecting For Returns, Swedroe.  …investors buying individual stocks should avoid those with lottery-like characteristics.  http://www.etf.com/sections/index-investor-corner/swedroe-prospecting-returns/page/0/1

ALTERNATIVE RISK

As Investors Search for More Alternatives to Boost Returns,Private Equity Tops the List, ai-CIO.com.  Institutional investors are ramping up their appetite for alternatives, including exotics such as unlisted infrastructure and private debt, but continue to be dissatisfied with hedge funds, according to Preqin’s H1 2017 Investor Outlook. 

Volatility risk premia and FX returns, sr-sv.com  “The regression estimates suggests that one percentage point of annualized currency VRP leads to a 0.28% currency appreciation on average over the next month for the first sample and 0.16% over the next week for the second sample…The only currency with statistically negative VRP coefficient is the Japanese Yen, meaning that investors favor the Yen when risk sentiment increases.” 

SOCIETY AND CAPITAL

Getting Rich vs. Staying Rich  Morgan Housel.   The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time. There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place. [comment: this is a good retirement planning article in disguise]