"Finally, the rank ordering of "feasibility" [1] before "sustainability" before "investment performance" is an ongoing discussion..." Collins and Gadenne 2017This quote is in a must-read piece by Francois Gadenne and Patrick Collins titled “The Shapes Of Retirement Planning: Are You A Curve, A Triangle, Or A Rectangle” a well informed discussion (and literature review) of an integrative proto-methodology for tying together disparate domains of retirement finance like MPT, behavioral finance, and what we can call the balance sheet approach. Their paper was also recently covered at Kitces.com here. Now Gadenne and Collins I trust, but when they point to people in the industry (that I probably don't trust) that are debating or "discussing" the question of the primacy or non-primacy and rank ordering of something like a balance sheet (call it feasibility here) amongst other planning frameworks like sustainability or portfolio performance, my first thought was "who are 'they' and have 'they' lost their minds? I realize here that I am conflating the household balance sheet with the feasibility studies that that instrument enables but work with me here for a minute.
I have almost always had a household balance sheet, not always fully actuarial but usually pretty close. It also pre-dates my retirement by quite a few years. The BS concept was reinforced when, for a while in the late 90s early 2000s I worked closely with a regional investment bank/venture firm that also had, at that time, a in-house family office for high net worth Minnesota families. That shop happened to be run by a friend from college and she was generous enough to show me the insides of their family office "process." The very first thing they did was to construct a comprehensive cross-platform "meta" balance sheet. 100% of the client relationship centered on that document. It underpinned success in whatever terms for both client and provider alike. I went home that day and started my re-commitment to the same process, one that I continue to this day. She told me it was surprising how few families had a document like this to begin with. This deficit-of-balance-sheets idea was reinforced later by other RIAs that I know that work with UHNW clients. The RIAs when asked, told me, according to one, not more than 60% of families had any form of balance sheet. The other flat out told me zero did. That surprised be because for more than 20 years, the balance sheet has been, by orders of magnitude, the most useful planning instrument I have. Not useful, necessary. Like air.
So forget feasibility/sustainability rank ordering for now and focus on the document. My personal opinion is that anyone that exits working life in part or whole and enters retirement in part or whole who does not have a comprehensive and hopefully actuarial balance sheet should be thrown out of retirement and told to come back when they are ready. My opinion is also that, to the extent that we can conflate feasibility with the balance sheet (and that might just be a conceit for the post for me to get a point across) the balance sheet is not a choice amongst methodologies that are "best" and it's not something that is ranked as better or worse, it is a must-have that comes before we enter into any discussions and decision making on portfolio optimization, behavioral prioritization and constraints, or anything else. It should just be there "before." Sine qua non.
I won't delve into what goes into it, that can be discovered elsewhere: Ken Steiner' site for one, I thought I had a post but can't find it (I'll keep looking), or a PwC article in the Spring 2105 issue of the Retirement Management Journal "Leveraging Behavioral Simulation to Enhance the 4% Rule." There are no doubt other articles and papers out there. My point in this post is not to tutorialize on balance sheets it is to play the hindsight game one more time. And this time it is not a hindsight of regret about something I should have done and didn't do until too late, it is hindsight-gratitude for having had a solid foundation going into early retirement (forget that I squandered a bunch of that advantage with early-stage stupidity and profligacy). I have been able to have a relatively decent sense of my dollar risk-capacity for around 10 years. I couldn't have done what I did without it. Sustainability is another story, though, and that's not covered here.
Before we part, though, I want to touch on at least some small critiques of the balance sheet/feasibility in the Kitces link. First of all, he makes it sound like it (BS) is a methodological "choice," too. That I addressed above a bit. But he also goes on to ding it for what I'll call the inflexibility or uncertainty that comes from using discount rates -- which to me is more an art form rather than science, which I guess is kinda his point -- and from the inadequacy of the BS approach to support household prioritization. Those are reasonably fair concerns and I respect Mr Kitces for his knowledge capital and prolificity. On the other hand I have to say it is a fairly trivial exercise -- no let's say trivial and essential -- to animate the balance sheet with stress testing and scenario analysis. If you are not testing BS sensitivity to different discount rates and/or changes in asset valuation, you can't ding it (yet) for inflexibility or uncertainty or providing conflicting answers between different analysts. As far as prioritizing goals? Perhaps there are better ways (in the Collins/Gadenne Behavioral Finance triangle, perhaps). But the balance sheet and the sense of risk capacity it conveys has to be (my opinion) the existing substructure for that prioritization discussion to even happen in the first place.
----------------------------------------------
[1] read "feasibility" here as a "household balance sheet" or an actuarial balance sheet that includes the present value of future assets and liabilities or flow assets (or liabilities) like Social Security or pensions and annuities, among other things.
No comments:
Post a Comment