Simple Deterministic View of the PV of Spending Rates vs Longevity

I had no real reason for doing this other than I was curious what it looked like plus my SO forced me to think about this after I got a "don't worry, pat on the head" kind of thing.  No one seems to think much about longevity uncertainty these days except the academic researchers.

Weekend Links - Thanksgiving Edition

QUOTES OF THE DAY

More technically, to implement the portfolio construction suggested by modern financial theory, one needs to know the entire joint probability distribution of all assets for the entire future, plus the exact utility function for wealth at all future times. And without errors! … We are lucky if we can know what we will eat for lunch tomorrow –how can we figure out the dynamics until the end of time?
   --Nassim Taleb 

Efficiency is Beauty.  -- Mr. Money Mustache

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

Joe Tomlinson on Variable Withdrawal and ImprovingRetirement Outcomes, my post on his post...  Optimal asset allocations for variable withdrawal strategies are quite different from the research findings and rules of thumb based on fixed strategies. Indeed, the implications go beyond asset allocation and show, for example, that equity glide paths in retirement are relatively unimportant. 

Savings after Retirement: A Survey, Nardi et al.  NBER and Fed (Chicago and Richmond).  The saving patterns of retired US households pose a challenge to the basic life-cycle model of saving. The observed patterns of out-of-pocket medical expenses, which rise quickly with age and income during retirement, and heterogeneous life span risk can explain a significant portion of US saving during retirement. However, more work is needed to distinguish these precautionary saving motives from other motives, such as the desire to leave bequests. Progress toward disentangling these motivations has been made by matching other features of the data, such as public and private insurance choices. An improved understanding of whether intended bequests left to children and spouses are due to altruism, risk sharing, exchange motivations, or a combination of these factors is an important direction for future research.  

What is synthetic tenure, and why is it important? Benefitnews.com  

Retirement Spending, the RMD, and the PMT() Function. Blanchett, Maciej, and Chen (2012) and Sun and Webb (2012) both studied the RMD rule as a spending option and found it to be a reasonable strategy that roughly approximates more sophisticated attempts to optimize spending... Though these methods are more sophisticated, the underlying PMT formula remains as the philosophical core of the spending recommendations.  [comment: I have posted on this (i.e., PMT()) before in a discussion of Waring and Seigel's Annually Recalculated Virtual Annuity(ARVA)]

On Being Careful - Dividends, Part 2

I wanted to take one more look at this question of dividends that I started to address in a previous post On Being Careful… .   And it is not because I am a partisan of dividends or because I wholly buy the party line of dividend-growth-ers. In my calmer moments I still feel that total return is a game to aspire to especially if one has very long timeframes and does not have a large spending requirement, requirements that if turned the other way around might actually give me pause when contemplating concepts like MPT and total return .  I want to take a look at this again because the "emphatic absoluteness" of the statement by an industry expert (“there is literally no logical reason for anyone to have a preference for dividends”) is still ringing in my ears.  

Joe Tomlinson on Variable Withdrawal and Improving Retirement Outcomes

I might have linked to this article before but Joe Tomlinson, in a recent article at Advisor Perspectives (How Variable Withdrawals Improve Retirement Outcomes, Joe Tomlinson. 10/17/16), had a nice distillation of his recent thinking and research on variable withdrawals, asset allocation, and the use of annuities to improve retiree outcomes in terms of consumption, shortfall risk, and legacy planning. I thought I'd add a little personal commentary.  It is a short article that is easy enough to read and it probably does not require a set of bullet point extracts but here they are anyway:

Weekend Links

QUOTES OF THE DAY

Those that prosper consistently will think deeply, reevaluate, adapt, and continually evolve. That is the nature of a competitive world.  -- Farnham Street, Moneyball edition  

“No one can afford anything anymore.” SquaredAway Blog


CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

U.S.Life Expectancy Now 6 Months Shorter, FinancialAdvisor Mag.  The average 65-year-old American man should die a few months short of his 86th birthday, while the average 65-year-old woman gets an additional two years, barely missing age 88. This new data turns out to be a disappointment. Over the past several years, the health of Americans has deteriorated—particularly that of middle-aged non-Hispanic whites. Among the culprits are drug overdoses, suicide, alcohol poisoning, and liver disease, according to a Princeton University study issued in December…This is bad news for almost everyone but pension fund managers…Still, the bottom line is that longevity’s rise has slowed way down.    

A New Tool to Visualize Retirement Planning, Bob Veres.  

The Other Inflation

The results are in for 2017. All I have to say is that if you have an ACA subsidy or if you are employed or if you are over 65, go hug your family and tell them it could be worse.  Me? The spread between health care inflation and "normal inflation" for early retirees who are on their own without a subsidy means they need to take money from one pot (let's say kids or future retirement capital or current lifestyle for example) to pour into another (incremental increases in health care costs under the ACA).  And this time its not pretty.  I finally get, viscerally, the concept of inflation as a tax. Here's what it looks like for me going as far back as 2010:

The top is time series change of costs since 2010. That's regular inflation in red (CPI-U inflationdata.com) and average employer based insurance, single coverage, in grey (Kaiser Family Foundation Survey 2016). My health data is in dark blue.  The bottom in light blue is year over year % change.

My 2016-2017 % change: ~47%
My 2010-2017 annualized rate: 16.3%

Yield Curve 2016 YTD

An Epidemic of Despair

"Quiet ‘Epidemic’ Has Killed Half a Million Middle-Aged White Americans"

"Despite advances in health care and quality of life, white middle-aged Americans have seen overall mortality rates increase over the past 15 years, representing an overlooked "epidemic" with deaths comparable to the number of Americans who have died of AIDS, according to new Princeton University research."

"The results are published in a new paper in the Proceedings of the National Academy of Sciences from Anne Case, the Alexander Stewart 1886 Professor of Economics and Public Affairs, and Angus Deaton, the 2015 Nobel laureate in economics and the Dwight D. Eisenhower Professor of International Affairs and professor of economics and international affairs."

                                               
The items above are from "Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century" Woodrow Wilson School, Princeton

from Proceedings of the National Academy of Sciences

[Comment: This graph above is one of the more interesting, if not startling, ones I've seen this year]

Weekend Links - Election Week

QUOTE OF THE DAY

After all, civility doesn’t require consensus or the suspension of criticism. It is simply the ability to disagree productively with others while respecting their sincerity and decency. That can be hard to do when emotions run so high. But if we understand better the psychological causes of our current animosity, we can all take some simple steps to turn it down, free ourselves from hatred and make the next four years better for ourselves and the country.   - Jonathan Haidt and  Ravi Iyer in the WSJ


CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

How to Navigate and Prep for a Surprise Early Retirement, WSJ.  Understanding where you are financially will give you a sense of control amid a retirement that may be out of your control, financial advisers say. 

A Portfolio Approach to Retirement Income Security, Steve Vernon.  With the decline of traditional pensions, many older workers and retirees urgently need to decide how to make their retirement generate income that lasts for the rest of their lives. With retirements that can last 20 to 30 years or more, this is indeed a daunting challenge for those fortunate enough to have significant savings by the time they retire. 

Before Retiring, Take This Simple Test, WSJ. Many choose to retire too early, much to their regret financially  

Retirement health care estimates vs. reality, financial-planning.com.  Health care costs are one of the largest—and potentially most variable—expenses in retirement. Unfortunately, many clients either ignore these expenses when they make a retirement income plan or make woefully inadequate estimates. A study of almost 2,000 adults by Fidelity Investments found that 48% of respondents estimated they would spend $50,000 per person for health care in retirement. That's a low number according to most published research. Most data illustrates a starkly different scenario, suggesting substantially higher costs.  

The Downside of Retirement, Darrow Kirkpatrick.  Yes, retiring is great fun for most people, at first. 

On Being Careful - Dividend Edition

"In theory there is no difference between theory and practice. In practice there is."

            -- Generally attributed to Yogi Berra

I think that really smart guys that have a little above average visibility in the financial blogosphere have a slightly higher bar than others when it comes to being careful in their commentary.  Me? I could sling whatever I want around my blog and it means almost nothing.  This thought came to me as I was listening to a blog/podcast at Meb Faber's site that consisted of a conversation between Meb (a blogger I like and respect and whose blog I read often -- co-founder and the Chief Investment Officer of Cambria Investment Management) and Larry Swedroe (another guy I like and respect -- principal and director of research for Buckingham, an independent member of the BAM Alliance and a contributor to many finance conversations, especially at ETF.com) on dividend strategies.   

What got me going was the title of the podcast: Episode #28: Larry Swedroe “There Is Literally No Logical Reason For Anyone To Have A Preference For Dividends” November 9, 2016.    My first reaction was not necessarily that I disagree, it was that as an early retiree I know that a few holes can be punched in the absolute apodictic certainty of the tone of that title. Let's try to lay out what I think I mean here.

Longevity and Uncertainty 2

I was looking back at some of the longevity stats in my previous posts and realized that the mean and standard deviation are less helpful in non-normal distributions -- the distribution implied in the SS tables is clearly not normal -- so I thought I'd recast it in quartiles to see what it looks like.  Not sure if I got this completely right; maybe some math-enabled person can correct me at some point.

Polling gap

This is already 24 hrs old but I thought it was interesting going into today's final lap.

Longevity as a Moving Target

I've seen this (and posted on it) before elsewhere but this is what happens to your longevity estimate in your retirement plan when you get the good news you have survived yet another year. This ignores medical advancements that will change the equation, too. Don't forget that if you have some socio-economic edge, the estimates will nudge up as well.

It's been A Long Trip Down "Trading Lane"

I remember reading "Trading for a Living" by Alexander Elder back in 2005 when I was just starting to dabble in trading systems.  I can't remember if it was in that book or in some article I read or in some conversation with a trading mentor but the prevailing idea has always been that 95% of people that attempt to trade (usually middle aged guys [and it's almost always guys isn't it], say 40-55, with a technical or professional background in engineering or software or law or medicine who think that success in one field logically and necessarily translates to the next…maybe a little like Michael Jordan trying to play baseball, for example. I fit this profile, too, btw.) fail when starting to trade and they usually fail three times -- the first time with their own bankroll, the second time with someone else's money and the third time with the last few desperate pennies extracted from the tightly closed fists of friends and family.  The idea out there was also that there was some kind of multi- year process where it took something like 2 years (maybe more) to lose money, then 2 years (maybe more) to break even, then 2 years (maybe more) to make a modest profit, and thereafter it is supposed to work out OK.  Keep in mind I am talking here about retail traders that are doing it solo without the institutional support and systems and mentorship that can make corporate 20-somethings wildly successful and rich.    I was also advised once that since people can't expect to become a successful engineer or a cardiologist or an attorney without sinking some serious time (years) and effort and money (100s of thousands in those examples) into education, apprenticeship, and career development, they can't then expect to just step right up to a computer and shake a stick at a few moving averages and make a mint.  I, of course, believed none of it.  I thought that, like an alchemist looking at a chunk of lead, I could unlock riches just doing a little magic here and there.  

Short Crude Puts Might Be Worth a Look?

Weekend Links - Fri Nov 4, 2016

QUOTE OF THE DAY

The future always will be uncertain. With the progression of time, the expected outcome is overruled by the realized outcome. Goals evolve. Longevity expectations change. Returns are realized—above or below prior expectations. In reality, we must adapt to new information. Recourse decisions are made in the future based on information that becomes available only in the future. -- Peter Mladina

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

Retirement Income Showdown: Risk Pooling vs. Risk Premium, Wade Pfau; ssrn.  Abstract: The retirement income showdown regards finding the most efficient approach for meeting retirement spending goals: obtaining mortality credits through risk pooling with an income annuity, or investing for upside growth through the stock risk premium. Analyzing the question involves understanding how clients view a hierarchy of retirement goals related to spending, liquidity and legacy. Client attitudes toward longevity risk aversion also matter: how fearful is the client of outliving their investment portfolio? Risk pooling offers a unique source of returns not available from an investment portfolio: those in the risk pool who experience shorter lives subsidize the payments to those in the pool who experience longer lives (mortality credits). Risk pooling may provide a cheaper way to meet a spending goal, leaving more assets to cover contingencies and support legacy. The primary advantage of an investments-only strategy is that it can support greater legacy in the short-term compared to a partial-annuitization strategy that uses risk pooling to meet spending goals and investments to meet liquidity and legacy goals. Risk averse retirees, though, may feel obligated to earmark a larger portion of their portfolio to spending goals, which leaves less true liquidity, while also exposing the spending goal to the risk of portfolio depletion. The advantages of risk pooling include a contractual guarantee to support lifetime spending, the ability to meet spending goals with a smaller portion of assets that creates greater true liquidity for the retirement income plan, and the potential to support a larger legacy in the event of a long life. 

Life Expectancy and Uncertainty

A better title to this post is the question I really wanted to ask: "how wide is one standard deviation in life expectancy estimates for a 58 year old guy in Florida." The answer to this kind of question is more than likely covered better elsewhere in some kind of technical finance literature.  It's probably also only one Google search away but I wanted to run it out myself just to see how it went.

Home-Rolled Systematic Alt vs. What Benchmarks?

Since my trading strategy tends to lean heavily on momentum and trend following I generally don't use the S&P500 as a benchmark since that would imply a comparison to a strategy that is 100% allocated to Large Cap US equities...which I do not do in my strategy or elsewhere. That's a comparison, though, that is always out there in the media but I happen to find it to be meaningless most of the time. When I am being honest with myself I compare my "active" self to either a mean-variance map of various multi-asset-class allocations (that's in a past post I did. It would represent a comparison to a whole bunch of asset allocations that I could do passively if I were not trying to be active) or I can compare myself to various benchmarks more closely related to what I actually am trying to do specifically. For example, for benchmark evaluations, I can compare the strategy to a particular asset allocation benchmark (e.g., S&P Target Risk Moderate Index which is something like 50-50 or 40-60 equity bond allocation -- think iShares AOM even with its imperfections) so that I can compare myself to a realistic representation of what I might have done in a passive portfolio that is more or less similar what I do elsewhere as a normal asset-allocating retiree investor.  That, by the way, is a classic comparison of "do something" (me) to a "do nothing" (target risk index) baseline which is a fair comparison and I do make that evaluation often. It sort of answers the question "am I adding any value by being active."  An alternative (no pun intended), since I do a lot of trend following, is to compare myself to the professionals running managed futures private placements or managed-futures-based mutual funds.  In this case the comparison strategies supposedly follow a rule-based and trend following template vaguely similar to what I do. That means that I think it's a fair comparison of head-to-head trading skill...or at least that's the conceit.  I make the weird assumption, though, based on very little, that these guys know what they are doing and that I, for the most, part don't. That's debatable either way, I guess.  In any case, a bad relative performance by me when compared to the MF benchmarks, net of fees, would probably lead me to drop my self-managed active strategy and then either outsource to others (if that approach were to still be accretive to my efficiency...a different analysis altogether) or retreat to an entirely passive allocation.  In other words this benchmark thing is a decision tool, and an important one at that.  This, for what it's worth, is a time series of my strategy vs. a few managed futures funds (my benchmarks):

That's me in the green.  The other three lines are two private placements in managed futures and one managed futures mutual fund.  The time frame is 2012-2016 (untested by a downturn, fwiw). I blocked the names out because I don't remember if I signed something in the placements preventing me from showing their results.  The purple line is a private placement that is relatively well known and that I have some respect for.  The red line I dropped this year because, well because look at it.  The blue line is an off-the-shelf and well known managed futures mutual fund from a large provider of systematic alternative-risk funds.  I like those guys too but I'm still paying them 120 bp which I guess isn't all that crazy all things considered. Better than 2 and 20 is the best I can say.

Conclusion?

Given what I do, it's probably a good and fair comparison to use managed futures funds as a benchmark which I will continue to do in addition to using an asset-allocation-based index for a baseline. Fwiw, I think the purple line has a lot of potential to either sink me or sail past my strategy so we'll see over time whether I can keep up.  For now, I guess I'll conclude that I'm still in the game, if not ahead[1], when looking at it like this and I'm kinda gratified that I can hold my own (and not pay 2 and 20!) over more than 4 1/2 years against guys that get paid way, way more than zero.  Me? I get paid zero.  

Weekend Links

QUOTE OF THE DAY

“We didn’t give ourselves the participation trophies, just saying!”  -A millennial 

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

The 3 Stages of Retirement Income, Darrow Kirkpatrick.  Based on my experience living in retirement, I’m seeing three irreversible stages of retirement income. Once you leave each one behind, you’ll be fully dependent on only what’s left….  

Floor And Ceiling Retirement Spending, With A Twist, W Pfau.   

The Implied Longevity Curve: How Long Does the Market ThinkYou Are Going to Live? Milevskey et. al. Journal of Investment Consulting Vol 17 2016.  In other words, over the past decade markets implied an improvement in longevity of between six and seven weeks per year for males and between one and three weeks for females. Although these values are implied from quotes, they are consistent with forward-looking demographic projections… This research is relevant to practitioners interested in the optimal timing and allocation to life annuities as our results indicate that annuitization procrastinators are swimming against an uncertain but rather strong longevity trend.  

One More Update on an Amateur Alt Risk System

I realize that this is a little repetitive with some past posts I've done but I wanted to throw this out there again because I think that the Fed and interest rates changes are going to kill me later this year and I just wanted to again claim a brief moment in the sun before that happens.  This chart is my core strategy put up on a mean variance map against portfolios of random combinations of either 2 or 5 different asset class ETFs: Bonds, US Large Cap, International developed, Real Estate, and Gold. That is my imperfect representation of stuff that could be plausibly stitched together into a retail allocation.  That and the data is easy to get. I know that posting this chart (especially given the short amount of time covered) can be a type of soft boasting which, if the literary canon of the last 3000 years (and market experience over the last 100) means anything, means that I will likely get my face rubbed in that boast sometime soon but here it is anyway.  

     as of 10/26/2016    2014-Oct2016. 

The strategy itself is more or less this: fixed income momentum using mostly etfs + macro exposure (mostly forex, interest rates and commodities) + short volatility (mostly short futures options) + other (a messy collection of stuff I perhaps shouldn't be doing).  All of this sits on top of what I can only call an assertive, if not dangerous, interpretation of a collateral-yield program.  

Another reason for putting this kind of thing out here again without the details is to convince myself, if not others, that a retail/amateur investor can in fact create an edge in the capital markets and deploy his or her own capital in an efficient manner without high minimums, long lockups or out-flow-gates, and onerous and unpleasant and often unearned fees…at least for a short time. I mean really, look at hedge fund results this year.  90% of these guys are overpriced under-performing bozos (keep in mind I have awestruck respect for the ones that are at the very top of the industry but they are few and far between and not accessible to me). I realize that the kind of active investing/trading implied in the above is not everyone's cup of tea and requires a little bit of time and effort but it is at least doable.  For me, this is not a full time job...at this point, anyway.