Plutarch on Retirement

I cribbed this from someone's tweet but thought it apropos of a retirement mindset:

The future bears down upon each one of us with all the hazards of the unknown. The only way out is through. - Plutarch (allegedly; haven't validated yet)

This reminds me of some thoughts I had about retirement finance where there are varying degrees of risk and uncertainty. Here is my own version of the layer cake so far. I'm not married to this, just thinking out loud:

My layers of uncertainty

a. things known with certainty for which we can and should and usually do plan
b. things known with certainty for which we don't usually plan or needn't bother much
c. things that are associated with risk and probability but that are plan-able and hedge-able and are worth planning and hedging due to the consequences
d. things that are risky or probabilistic but not worth the effort or have lower consequences or cost
e. uncertain things for which few can plan and for which holding resources in reserve is inefficient but where one should probably try to do so, at least for a while until the unknown comes in a bit over time. Longevity risk, up to a point, comes to mind
f. uncertain things for which few can plan but also where one should probably not even bother
g. the pure, impenetrable chaos and unknowns of the universe about which it is probably pointless to even consider either occurrence or response, except as a general phenomenon and mystery associated with being alive. Ask Job about that one.

Supplement to post on the "1970s game"

In "A forward walk through the 70s using two types of dynamic asset allocation" I was playing around with some spend rates and asset allocations in the context of retiring through the 1970s to understand some risk viewed through the lens of the economic utility of consumption during a difficult decade.  I used a constant spend and dynamic (glide up) allocation to test some ideas. One scenario was also fully dynamic. The write-up is in the link.

What I didn't do at any point was test feasibility either at the beginning or along the way.  Feasibility is the test, at some point, of whether A > B or A/B > 1, where A is the present value of net monetizable wealth, and B is the present value of the spending liability.  When I applied the test to the scenarios in the link above, it dawned on me that none of scenarios were feasible to begin with.

If we define the present value of spending reductively to be nothing more than a (conditional) survival probability weighted sum of the real (1964 dollars in this case) cash flow, then the feasibility condition is not met until initial spending is reduced to 30,000 in constant spend terms. At that point the CE spend was, predictably, 30k and terminal wealth in real ('64) terms was 962,804. This outcome, if it had been part of the previous illustration, would have lost the utility war except against the 3.9 and 4% spends, won the bequest war, and won the hearts of feasibility aficionados around the world. The cost, however, would have been a pretty large hit to early lifestyle relative to a desideratum of 40k, but would be a rational, implementable choice if one does not happen to live life in relative terms.

A forward walk through the 70s using two types of dynamic asset allocation

Walk-forwards are the anecdotes of the financial modeling world. At worst they set you up for a naively imagined future that will never repeat but can certainly get worse. At best I suppose they provoke a type of useful anti-nostalgia for a past that was bad enough to pay attention to lest it sticks its nose too far under the tent-wall again.  Better modeling options may lay in something like boot strapping history or engaging in open-ended and less-constrained simulation or even scenerio-based strategic planning. But even these can be false orbuculums where the expectation extracted over 10,000 iterations can "bury the lead" where the lead can be conceived of as the special case in which all iterations and paths are bad news of a particular shape. In this case the shape in question is the 1970s, a period of poor returns and high inflation that's more fun to play with than the GFC.  Plus I lived through it. I remember.

This time I'm throwing some simplified forms of dynamic allocation against the 70s to see what sticks to the wall. I'd been playing around with some ideas on glide-paths in an ongoing dialogue with David Cantor, a dialogue that will bear bigger fruit later.  This time it's just the 1970s walk-thru.