GRAPHIC OF THE DAY
RETIREMENT FINANCE AND PLANNING
Exploring the Pros and Cons of Retiring Before Your Spouse.
Darrow Kirkpatrick
No decision is without trade-offs. Having one spouse working
when the other leaves their career creates new challenges at the same time it
solves others. Retiring before my wife produces new relationship stress, limits
financial and personal options that would be available if we were both retired,
and creates unique risks. There are major personal and financial implications
for partners retiring at different times. They need to be considered to
determine if this strategy makes sense for you.
One of the core tenets of our money management philosophy is
to talk about concentrated investments in terms of regret minimization. When we
speak with the employees of companies like Amazon or Google who reach out to
us, our job is to frame the issue in terms of what would hurt you more, both
emotionally and financially – diversifying away from the company’s stock and
watching it soar, or holding on through a company-specific catastrophe.
Presenting the pros and cons this way allows for our client to think in terms
of two different realities that may or may not occur. We often make a
break-through with this technique, but not always.
Retirement Strategies in Pictures, Joe Tomlinson
Advisors providing retirement recommendations need to
evaluate strategies and present options to clients. Communication is key and it
can be a challenge to come up with the best way to compare alternatives. One
way involves presenting metrics such as expected bequests and plan failure
probabilities. However, it may be more helpful to use a graphical approach to
show the year-by-year progression of funds available during retirement. I’ll
demonstrate a graphical approach by comparing a variety of strategies.
Things We Can All Learn From The Yale Vs. Buffett Debate,
PortfolioCharts
But in my opinion the passive Swensen portfolio competes
quite well with the active Yale Endowment, and I think there are some important
lessons here for normal investors like you and me… while Yale has a point that
portfolio design can improve risk-adjusted returns, they overstate how much of
that effect is attributable to active management rather than simple intelligent
asset allocation…I personally think the right path is to reap the best of both
worlds by learning strategy from the endowments while applying that strategy
with low-cost and low-maintenance index funds.
With the tools available to investors today, you have a lot more power
than you realize. [good analytical cover…worth the read]
Robust vs. fragile: Perpetual Withdrawal Rates,
PortfolioCharts
One of the biggest problems with traditional safe withdrawal
rates is that it’s really difficult to know in real-time (without the benefit
of hindsight) when a significant drop in your portfolio value is normal or if
it indicates that the plan is fundamentally broken. … Perpetual withdrawal
rates designed to maintain principal serve as effective guideposts along the
retirement journey to reassure that you’re on the right path. I would argue that this last point is
especially important for early retirees, as remaining grounded in the
real-world will ultimately make any plan much easier to sustain for an
investing lifetime than relying on faith in a retirement study looking only at
distant endpoints and very long term averages to come to your rescue.
Could “Tontines” Expand the Market for Longevity Insurance? Boston
College
If tontines did exist, they would likely make the most sense
as part of a larger portfolio that also includes some liquid wealth and
annuities.
Arcane but Shrewd Retirement Solution? BC squaredaway blog
Tontines’ big advantage is their guaranteed payouts to each
investor. But a tontine costs less than annuities, because its investors – rather
than an insurance company – bear the risk. A modified tontine for retirees
would address their current downside: very old people get the largest payoffs,
by default, as others in the pool die, but age and poor health can prevent some
from fully enjoying the money. The modified retirement tontine could make
equal, regular payments to all the participants over the years – rather than
give the biggest payouts to those who live the longest – Wettstein said.
How to protect a retirement plan in a down market, financial-planning.com
[some simple and predictable thoughts…]
Many Americans go broke in retirement, but many grow their wealth, financial-planning.com
There is a common belief in many FIRE circles that if one’s
Safe Withdrawal Rate actually runs into problems — maybe 3.5% isn’t safe
because of a Japan-style recession or maybe one’s personal expenses rise faster
than CPI — the smart, hard-working, savvy person who was able to get to FIRE
will be able to land another job that gets them back in the workforce to make
up that shortfall. This 2013 article in the New York Times is a good antidote
to that kind of thinking…It certainly isn’t a slam-dunk that any transition
back to work will be easy.
MARKETS AND INVESTING
Treasury Yield Curve Flattens As Retail Spending Rebounds.
Capital Spectator
The difference between the 10-year and 2-year Treasury rates
narrowed to 47 44 basis points on Monday (April 16) – the smallest gap since
late-2007. The last time this widely followed spread was this close to zero the
US economy was
close to a recession. Is this indicator flashing a similar warning today? No,
according to a broad reading of the economic data, which reflects a healthy
trend. The question is whether the narrowing yield spread is still a reliable
late-cycle warning that the macro profile will weaken in the months ahead?
[good thing I bought those curve steepener bonds]
bond yields can’t be compared to dividend yields on an
absolute basis. Dividends offer the potential for long-term growth in income
payments, but looking at dividends alone doesn’t tell the entire story for stock
market yields. You also have to consider share repurchases and debt repayments
by corporations, both of which make stock market yields look more attractive
when seen through the lens of a shareholder yield approach.
Bond Investing: Reach for Safety, Jack Vogel
This paper highlights that within the bond market, it was
possible in the past for an investor to “reach for safety” and generate higher
returns than the market bond portfolio (at least on paper). Since investors
have a preference for yield, they may push up the prices of higher-yielding
securities which thereby reduces future returns. A simple screen proposes to
eliminate the bottom quintile of bonds on either Quality, Value, or Both. By
doing so, and purchasing the market-weighted portfolio of remaining bonds, the
paper finds a higher return and Sharpe ratio compared to the market portfolio,
before transaction costs.
we should also ask the question about what happens to future
yield changes if there is a yield curve inversion. For the period November 1976
to April 2018, we compared the 10-year/2-year constant maturity speed against
the change in 10-year yields over the future six months. Only 14.5% of the time
period shows negative spreads.
Multi-Period After-Tax Reporting: A Practical Solution,
Sosner et al. AQR
After-tax performance reporting is critical for taxable
investors but is unfortunately often overlooked due, in part, to its complexity
and lack of offerings in the space. Instead, most performance reporting models
available today provide only pre-tax reporting, ignoring the after-tax aspects
so relevant for taxable investors. In this paper, we seek to resolve this issue
by proposing an effective and workable after-tax performance report aimed at
enhancing wealth preservation and accumulation for taxable investors. We also
outline and offer justification for the various choices that we make in our
report in the hope that others will adopt our proposed solution, but also
review, comment, and improve on it.
The correlation risk premium, sr-sv.com
The correlation risk premium is a premium for uncertainty of
future correlation of securities among each other or with a benchmark. A rise
in correlation reduces diversification benefits. The common adage that in a
crash ‘all correlations go to one’ reflects that there is typically not much
diversification in large market downturns and systemic crises, except through
outright shorts. Correlation risk premia can be estimated based on option
prices and their implied correlation across stocks. There is evidence that
these estimates are useful predictors for long-term individual stock
performance, over and above the predictive power of variance risk premia.
ALTERNATIVE RISK
Risk Ignition with Trend Following, Corey Hoffstein
While investors are often concerned about catastrophic
risks, failing to allocate enough to risky assets can lead investors to “fail
slowly” by not maintaining pace with inflation or supporting withdrawal rates…
Despite reducing upside capture, trend following strategies may represent a
beneficial diversifier for conservative portfolios going forward, potentially
allowing investors to more fully participate with equity market growth without
necessarily fully exposing themselves to equity market risk.
The Behavioral and Performance Benefits of Trend Following,
econompicdata
As the chart below shows, trend-following outperformance has
occurred at a much higher rate than a coin flip and that beat rate has
increased over longer periods. This specific 12-month trend model outperformed
a 60/40 portfolio over ~80% of rolling 60-month time frames since 1926 and 90%+
of the time over 10 and 15 year periods. … In other words, if trend following
is your base allocation, would you as an investor allocate to a different
strategy that underperformed at a 70%+ rate over 3-5 year rolling time frames
and 90-100% of rolling 10-15 year time frames, and had materially more downside
risk? Not only would I not make that allocation, I'd love to bet someone with
proceeds going to charity that trend following would outperform.
SOCIETY AND CAPITAL
The Pension Time Bomb: $400 Trillion by 2050,
visualcapitalist
Are governments making promises about pensions that they
might not be able to keep?
According to an analysis by the World Economic Forum (WEF),
there was a combined retirement savings gap in excess of $70 trillion in 2015,
spread between eight major economies.. The WEF says the deficit is growing by
$28 billion every 24 hours – and if nothing is done to slow the growth rate,
the deficit will reach $400 trillion by 2050, or about five times the size of
the global economy today.
U.S.Pension Fund Collapse Isn't a Distant Prospect. It Could Come in 5 Years.
Bloomberg (aaron Brown)
It's important to distinguish between actuarial problems
(the present value of projected future benefit payments exceeds the funds set
aside to pay them plus projected future contributions) and cash problems (not
having the money to send out this month's checks). Actuarial problems are
always debatable and usually involve the distant future. Cash shortfalls are
undeniable and immediate.
“Well, Chicago
is not an articulate town, Saul Bellow notwithstanding. Maybe it’s because so
many of us aren’t that far removed from parents and grandparents who knew only
bits and pieces of the language.” The classic Chicago
accent is heard less often these days because the white working class is less
numerous, and less influential, than it was in the 20th century. It has been
pushed to the margins of city life, both figuratively and geographically, by
white flight, multiculturalism and globalization: The accent is most prevalent
in blue-collar suburbs and predominantly white neighborhoods in the northwest
and southwest corners of the city, now heavily populated by city workers whose
families have lived in Chicago for
generations.
Ranked: The Best and Worst State Economies,
visualcapitalist.com
the United States
is also the sum of its parts. America
represents the union of 50 states and other jurisdictions such as D.C., and all
of these state-level economies have their own unique problems to overcome,
drivers of growth, and local resources that factor into their prosperity.
Heuristics are Biased. But are They Lazy and Dumb?
Marketfox.org
Gigerenzer makes a convincing argument that heuristics work
better (greater accuracy and faster decision-making) when decisions involve a
high-degree of uncertainty…. Say you invested in 50 funds. How many years of
stock data would be needed before the mean variance method finally does better
than 1/N? A computer simulation provides the answer: About 500 years!...
Heuristics recognise that the future is uncertain. They deliberately give up on
trying to find an optimal solution and instead focus on trying to find a
reasonable, common-sense alternative. Turns out that they aren’t really losing
much as the optimal solution is effectively unknowable.
How Different Generations Would Invest $10,000, Visual
Capitalist
But here’s a situation that might be a bit more peculiar.
One would guess that with student debt being at $1.5 trillion in the United
States , many Millennials would opt to pay
down debt with their $10,000 check. Interestingly, fewer Millennials (22.4%)
chose to pay down debt than either Gen X (25.3%) or Boomers (33.1%). On the
same token, Millennials were more likely to choose either real estate (15.1%)
or cryptocurrency (9.2%) as an investment. For contrast, look at Boomers, a
group that had 11.2% choose real estate and only 3.1% choose crypto.
The Difference Between Reversible and Irreversible Decisions.
Farnam Street
Reversable decisions are not an excuse to act reckless or be
ill-informed, but is rather a belief that we should adapt the frameworks of our
decisions to the types of decisions we are making. Reversible decisions don’t
need to be made the same way as irreversible decisions. … Once you understand
that reversible decisions are in fact reversible you can start to see them as
opportunities to increase the pace of your learning.
"Moreover, this weakness implies that discrimination in
the labour market is measured at only one point of an individual’s career, i.e.
his/her access to a job interview. It says nothing however about his/her
likelihood of being hired, or paid equally and promoted once hired.
Nevertheless, audit studies indicate that, conditional on being interviewed,
individuals from the minority (i.e. the group that typically receives the
lowest rate of invitation to a job interview) are also less likely to be hired
(e.g. Cédiey and Foroni (2008)). These findings suggest that correspondence
studies underestimate hiring discrimination."
Think the rural heartland is the struggling core of modern America ?
Actually, America ’s
middle has been outperforming the coasts for decades. And while Trump’s
ascendance has shined a spotlight on the plight of white men left behind by a
changing economy, they still enjoy vast advantages over blue-collar black and
female workers. … If you gather all of rural America
into one homogeneous blob, the story looks bleak indeed, with the population
shrinking as job growth lags. But this rural vs. the rest approach muddies the
picture more than it reveals — because the experiences of rural areas vary
widely across the country. In particular, counties in the Plains states and the
resource-rich middle of the country have enjoyed some of the largest per capita
income gains in the entire country. And that includes lots of thinly populated
spaces that easily fit the definition of rural.
Research conducted by Francine Blau, a professor of
economics at Cornell, suggests that this division between which jobs and
industries men and women tend to work in — called sex segregation — is now the
single biggest factor explaining the pay gap between men and women.
If you automate first, you get automated errors. [and] The
ultimate conclusion of that survey is stark: “59% of last year’s crowdsales are
either confirmed failures or failures-in-the-making.”
What Happens When Countries Increase Tariffs? St
Louis Fed
These findings suggest that previous unilateral tariff
increases have reduced economic activity.
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