Think, when reading the following, of a constant inflation-adjusted spend rate, set at the beginning of retirement, and then never revisited...
“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
RETIREMENT FINANCE AND PLANNING
How screwed are you when it’s time to retire? Allison
Schrager @ quartz.com
Saving enough, managing investment risk, and knowing how
much you can spend in retirement is hard. https://qz.com/1335391/how-screwed-are-you-when-its-time-to-retire/
Divorce Very Bad for Retirement Finances, Boston College
When a marriage ends in divorce, there are no fewer than
seven ways that it could damage a person’s finances…for most people who
divorce, their retirement finances will take a hit. The good news is that
divorce rates, having peaked with the baby boom generation, are now in decline.
http://squaredawayblog.bc.edu/squared-away/divorce-very-bad-for-retirement-finances/
New research on loss aversion is causing me to think deeper
- Worth a closer look, Mark Rzepczynski
Now we have research that calls into question loss aversion
as the core reason for these effects both from a theoretical and empirical
point of view. There is clear evidence that contradicts loss aversion, but it
has either been dismissed or ignored. Loss aversion is a description of
behavior and not an explanation of behavior. This research is not offering an
alternative to loss aversion but rather a commentary on its usefulness and
explanatory power. https://mrzepczynski.blogspot.com/2018/08/new-research-on-loss-aversion-is.html
Why the Most Important Idea in Behavioral Decision-Making Is
a Fallacy, Scientific American
as documented in a recent critical review of loss aversion
by Derek Rucker of Northwestern University and myself, published in the Journal
of Consumer Psychology, loss aversion is essentially a fallacy. That is, there
is no general cognitive bias that leads people to avoid losses more vigorously
than to pursue gains. Contrary to claims based on loss aversion, price
increases (ie, losses for consumers) do not impact consumer behavior more than
price decreases (ie, gains for consumers).
[wait til they retire…] https://blogs.scientificamerican.com/observations/why-the-most-important-idea-in-behavioral-decision-making-is-a-fallacy/
The Critical Factors of Portfolio Ruin Aren't Predictable,
Dirk Cotton
If I am stranded on a desert island with a limited water
supply, I can choose to drink decreasing amounts as the supply dwindles but at
some point, I can't drink less and survive. Likewise, when variable
"safe" spending drops below non-discretionary spending for a
sustained period I still have to buy food and pay the mortgage even if that
entails an "unsafe" level of portfolio spending. Variable spending
isn't a flawless strategy but it seems more sound than the alternative. http://www.theretirementcafe.com/2018/08/the-critical-factors-of-portfolio-ruin.html
Asset Allocation and Spend Rates in a Lifecycle (WDT)
Utility Model, Me.
Over some broad asset-allocation ranges, spending looks like
it trumps asset allocation as a lever for lifetime consumption utility. This is
more evident as risk aversion rises. My take-away from this is that once a
consumption plan is rationalized, asset allocation -- over a broad range from
30-40% to 80-100% to a risk asset -- is of less importance than spending
control. https://rivershedge.blogspot.com/2018/08/asset-allocation-and-spend-rates-in.html
5 Lessons Learned In My Year As a Landlord, Chris Mamula
buying properties with cash is very tax inefficient. It
requires spending after tax dollars to purchase property and creates
unnecessary taxable income for those who don’t need immediate cash flow. Buying
with cash also adds risk by having to tie up a large sum of capital in only one
property, rather than spreading money out across a diversified portfolio. https://www.caniretireyet.com/lessons-landlord-real-estate/
Ten Possible Ways to Increase Your Current Retirement
Spending Budget Under the Actuarial Approach, Ken Steiner
when it comes to spending “you can spend it now or you (or
your heirs) can spend it later.” http://howmuchcaniaffordtospendinretirement.blogspot.com/2018/08/ten-possible-ways-to-increase-your.html
Report: Most Americans Have Enough Saved For Retirement To
Live Comfortably On Streets. The Onion [note… the onion]
“Our research indicates that the typical American retirement
plan, be it defined-contribution or defined-benefit, should yield enough for a
relatively modest, but secure, life of impoverished transience for up to 20
years after leaving the workforce,” https://www.theonion.com/report-most-americans-have-enough-saved-for-retirement-1819576731
Individual Tontine Accounts, Fullmer and Sabin 2018
The ITA exploits the property that participants in a fair
tontine need not be confined to a common investment portfolio or to a common
payout method. Instead, participants are allowed to select and trade
investments as they wish and to choose from a variety of payout methods, with
each participant's results being largely unaffected by the investment and
payout choices of others. We envision the ITA as being complementary to an
individual retirement account (IRA), allowing retirees to derive extra income
from savings without taking on additional investment risk and to obtain
lifetime income at a lower cost than with comparable insurance products. The
mortality-pooling features of ITAs compare favorably to those of insurance
products. The cost per dollar of income is lower. The opportunity for
individual choice is increased. Fees are transparent rather than opaque.
Accounting is transparent and conveyed simply on account statements. The
downside of ITAs is that income from mortality pooling is not guaranteed, and a
participant might experience less income than hoped for if other participants
live longer than expected. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3217551
MARKETS AND INVESTING
Mean Reversion and Bond ETF Returns, Corey Hoffstein
While bond investors may be frustrated today, mean reversion
suggests that poor returns merely mean they have been pushing returns into the
future, giving themselves something to look forward to. https://blog.thinknewfound.com/2018/08/mean-reversion-and-bond-etf-returns/
The Best Research Paper Ever Written on Trading Costs, Wes
Gray
The summary from our analysis of the research published on
the topic is that factor strategies have capacity limits due to transaction
costs, but that the capacity on these strategies might be much higher than
academics have previously considered. How was that conclusion reached? Simple:
practitioners have better data that can more accurately answer the question
than academics. [ comment: I obviously do not move markets so I do not incur
market impact costs. But I have, in the past, estimated an amateur (my) trading
cost for a factor/trend strategy on fixed income ETFs at under 20 bps and
probably closer to 10 in equilibrium before allocations of overhead. Feels consistent
with what I am reading here.] https://alphaarchitect.com/2018/08/14/the-best-research-paper-ever-written-on-trading-costs/
Log, Annualized and Total Return, price action lab
When I see use of log return in reference to trading
strategies, I immediately assume the individual involved has no skin in the
game besides knowing some finance. Real traders have their own languages and do
not care what people in finance do or use. http://www.priceactionlab.com/Blog/2018/08/log-annualized-and-total-return/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+PriceActionLabBlog+%28Price+Action+Lab+Blog%29
ALTERNATIVE RISK
What variance swaps tell us about risk premia, sr-sv
The swap rates conceptually produce more accurate estimates
of variance risk premia than implied volatilities from the option markets. An
empirical analysis suggests that swap-based variance risk premia are positive
and increasing in maturity. A drop in equity prices or rise in credit spreads
pushes variance risk premia higher. The effect is strongest for short
maturities up to 6 months, but more persistent for long maturities. http://www.sr-sv.com/what-variance-swaps-tell-us-about-risk-premia/
Alternative risk premium versus bonds - A choice of factor
risks and diversification, Mark Rzepczynski
Diversification going forward can be achieved holding
alternative risk premia across momentum, carry, value, and volatility to name a
few. These alternative risk premiums can be executed through swaps which can be
done as an overlay on bonds. http://mrzepczynski.blogspot.com/2018/08/alternative-risk-premium-versus-bonds.html
SOCIETY AND CAPITAL
Postmortem Austerity and Entitlement Reform, Rutgers Law
[without comment although I am tempted….] This Essay
proposes a novel policy of "postmortem austerity" to address the
unsustainable, rapidly escalating cost of federal entitlement programs
following the 2017 tax reforms. If Social Security and Medicare continue on
their current path to insolvency, then they will eventually require austerity
reforms absent a politically unpopular tax increase. This Essay argues that, if
austerity becomes necessary, federal entitlement reforms should be implemented
progressively in a manner that minimizes displacement of benefits on which
individuals relied when saving for old age. A policy of postmortem austerity
would establish new eligibility criteria for Social Security and Medicare that
postpone the effective date and economic consequences of benefit ineligibility
until after death. All individuals would continue to collect federal
entitlements during life, but at death, wealthy decedents would be deemed
retroactively disqualified from part or all of Social Security and Medicare
benefits received during life. The estates of such decedents would then be
liable for repayment of disqualified benefits.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3214746
How Gauss and Markov Met Pythagoras: Geometry in
Econometrics, Boris Demeshev and Olya Gnilova
[no way for me to form an opinion since I can’t really read
this] Pursuing abstractness and generality, a number of books and articles in
econometrics rely heavily on standard algebraic proofs. However, most of the
theorems proved in such a way have a strong geometric appeal. This paper
demonstrates how shorter, less technical and even more beautiful the proofs can
be when they are based on geometric theorems. We show that this technique can
be extended to explain concepts in probability and statistics. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3214945
Estimating the chances of something that hasn’t happened yet,
John Cook
The rule of three gives a quick and dirty way to estimate
these kinds of probabilities. It says that if you’ve tested N cases and haven’t
found what you’re looking for, a reasonable estimate is that the probability is
less than 3/N. https://www.johndcook.com/blog/2010/03/30/statistical-rule-of-three/
Bankruptcy Filings Surge Among Older Americans, WSJ
The rate at which Americans age 65 and older are filing for
bankruptcy has more than tripled since 1991 amid reductions in the social
safety net and a shift away from pensions, according to a new study. https://www.wsj.com/articles/bankruptcy-filings-surge-among-older-americans-1533641401?emailToken=e9b8cfacda7dce9314740a6b866057feQw6H4838JyOi8pH+pcBTkXcHVAqRvCdc2YJOo1zzWEW3kqLMJ8Sd93PR11FzKv5f6n8vDbUr/5LtonW8XxiVQWoCcQ9QQs9Vx1MxpMaKvio%3D&reflink=article_email_share
Economics of Climate Change: Three Recent Takes, Tim Taylor
Most economists took their last course in physical science
many years ago, back in college days, and lack any particular in-depth
knowledge of how to model weather or climate.
But economists can contribute usefully to the climate change debate in
other ways. https://conversableeconomist.blogspot.com/2018/08/economics-of-climate-change-three.html
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