May 18, 2019

First derivative of deterministic portfolio longevity

Using a deterministic formula (see figure 1) that I borrowed from Milevsky's book 7 Equations as well as from his lecture notes, provides some insight into the effect of withdrawal rates on portfolio longevity (L): High w = shorter, low w = longer. That is trivially easy and intuitively accessible without the math.

Figure 1. Portfolio Longevity

A little bit more obscure but perhaps of more interest is the derivative of L, also lifted from the lecture notes and seen in figure 2, here presented over different


Figure 2. Derivative of L wrt w

which could have also been gathered from the chart in figure 1.  Figure 3 varies v the growth rate for different w where w/M > v. ...less than v tends to be a little perpetual. 

Figure 3. Derivative of L wrt w for different v 

This post is not ready-set for conclusions but if I were to make conclusions they might go like this:

  • Spend more = shorter lived portfolio, obviously 
  • Withdrawal has a non-linear impact on L with a little counter-intuition that at high w the sensitivity is lower.  
  • Also counter-intuitively, the impact of v (growth rate) is higher for lower withdrawal rates  
  • It may not be obvious but I'll say that this supports the contention I made in my 5-process series that first and second derivatives, speed and acceleration, of a process, and retirement is a process, are often of more interest than "position." They reveal aspects of the "personality" of a process that single numbers and point estimates cannot. That's one of the reasons why that ad series "what's your number" was always kind of a joke.  








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