RS = f(W, A, Ce, U, B, H, Z, MPIF, O)
is a function of...
W: Wariness. By wariness I mean two things. The first is being mentally plugged into all the standard financial planning stuff you read in the press and that planners and advisers and blogs flog ad nauseum. Wariness is being on the edge of one's seat, when it makes sense to be on the edge, based on inputs like: what you've saved, when you retire, what you spend, personal balance sheets, personal income statements and expense tracking, projections and simulations, portfolio design, fees, taxes, financial plans, spend shocks, longevity expectations, capital market expectations and realizations...whatever. The second thing is that wariness means not setting and forgetting. I've called retirement planning an awareness of the "continuous unstable present." Things change in current continuous time so wariness needs to be "on" not once or annually but in a continuous state of readiness. This puts a premium, not so much on solutions, or equations, or answers, or products (all of which are important, of course) but rather on measuring and monitoring processes. Here is a recent quote I threw up on one of my posts: “Life is a process of becoming, a combination of states we have to go through. Where people fail is that they wish to elect a state and remain in it. This is a kind of death.” Anais Nin
A: Adaptation. This is no math. It is a life skill. This concept ranges from tweaking a financial plan based on changes in inflation expectations to being adaptive as a refugee with nothing in a land at war. When the continuous, unstable present deals you a new card, update your strategy and odds and bets and play the new game. We live in a world as it is not as it was or would be. "No changing reality to suit the self." -Dogen by way of Jim Harrison.
Ce: Early Conservatism. In the absence of pensionization, and short of re-entering the workforce, spending must reserve for longevity risk. I don't see a way around this. Even the most sophisticated spend rules won't survive forever. Loosen up later or pool some of your risk.
U: Responsibility for Uncertainty. We can do equations and simulations and calculate known probability distributions until the cows come home. But there is still residual uncertainty. This is not only a reference to everything that the past data, and statistics on past data, do not know it is also a reference to the idea of owning the knowledge that we don't know. It means not stepping all the way to the edge of known risk without having respect for the unknown risk. This is not the same as "Ce" because while we know spend rules won't make a portfolio last forever, we don't know what we don't know yet...and that we need to at least acknowledge or "own."
B: Boundaries. This is a little open ended and a little bit tied to "W" but W, I think, does not go far enough. We need to have an awareness of how close we are to various "edges." I'm thinking of things like min and max spend rates, annuity boundaries, efficient frontiers, etc. etc. Here is an example. If one does not annuitize a consumption plan, which would allow one (barring insurer default) to consume more or less forever, one can self annuitize...sort of. In that case, one had better pay attention to how close current wealth is to the boundary of what it would cost to annuitize a roughly acceptable lifestyle, inflation concerns notwithstanding. Above the boundary is still achievable and executable. Below the boundary may be an "irreversible passing" through an opportunity foregone forever.
H: Heart. Heart means courage and not just because courage is an English derivation of a french word for heart. Courage here means a posture of willingness to accept risk to achieve goals. I read about retirees that have 100% bonds or spend only dividends. That's ok. But it substantially under-optimizes lifetime consumption utility. There is a middle way that needs to balance risk and goals. A fearful retirement crouch can be mildly effective, with a sufficient asset base, but it is not open or supple or fun. (see my tech analysis of a middle way here)
Z: Zen. This is different from heart. This is a posture of indifference to extremes. This is implacability in the face of big changes that threaten survival (and this is related to "A," I suppose, but speaks more to the psychology). It is about non-attachment. Maybe: if my leg is caught in a bear trap in -20 weather, my attachment to my leg should be provisional and I should be indifferent to its presence or its removal with my pen knife...though it may hurt a bit. Or this: Over more than 10 years of trading I realized that if I want to be indifferent to big down trades or moves, I have to also be indifferent to big up moves; I need to find a way to not be attached to or affected by either. I have to care about nothing but the long term process and the marginal effect of trading decisions on the long term math. Retirement needs a little zen, too because there will be "moves." Let's call it a pre-condition to successful and timely adaptation.
MPIF: Meaning, purpose, identity, and family. All that math I've done...and it all pales...
O: Other. Other, because there is always other.
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[1] This post may be relevant more to early retirement. If one were to be mid 70s, with a giant pile of money, and a heart condition there may be no "fear" except of mortality. The subjective experience of retiring at 50, with a modest pile, and longevity expectations to the horizon? That is another thing altogether. And requires "the equation."
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