Some Core Work in My Mid 60s

In my 64th year on earth I am not exactly where I want to be either physically or geographically. I thought I would be wrapped a little tighter than I am after four years of hitting it pretty hard. I also thought that I would be able to be out of FL a little sooner than 2023.  On the other hand I've come pretty far physically since 210lbs in 2017 as well as since a little retrograde weight-add during covid season. Geographically I now have an active plan to move with realtors actively engaged on both ends.  So, all good, right? 

Contradictions in longevity expectations and longevity vol as we age

David Cantor sent me a piece today on pensions and annuities which reminded me about how longevity expectations are more or less dynamic in odd ways I often avoid. While it is true that as one ages one's prospective longevity "interval" comes in a bit in absolute terms -- one has a shorter expected remaining interval at 90 than 60 -- in relative terms the uncertainty actually gets a little bigger or has more prospective "volatility," if you will. 

On Not Building and Memory

Most of the people I interact with in life and on social media are younger than I am, maybe 30ish to mid 50s, sometimes older but that is rare. I get teased, or sometimes aggressively chastised, for my comments about being old. Generally speaking I am joking because 63 is the new 61, right?  Even that is a joke. I get that I have a young mind and fit appearance (I'd go toe to toe with an "average" 30 year old on pull ups: yesterday I did 21 full extension pull ups in one set, 51 in three sets. Try that at any age) and a looong way in life to go still. This means I probably have some room and some basis on which to play the old man game as a big fat tease because I know I've still got the goods.

Fragment On Monte Carlo

David Cantor recently sent me a decent piece on Monte Carlo analysis by Sandidge, Tharp and Powell in the Investments and Wealth Monitor that covered the limitations of Monte Carlo analysis in retirement situations. It's pretty good and takes a proper posture of caution about overthinking MC. I myself once imputed magic to MC after my divorce. I did not gain a proper skepticism on this until I had built quite a few simulators of different types and became intimate with the black box: its coding, its errors, its flaws, its assumptions, its biases, its inability to say much, really, about the future.  

A Bunch of Random Thoughts in my 64th Year

Just thinking about a couple things and jotted them down. Might add later 

On My Divophilia

“Classical models of finance and consumption-saving decisions predict that [a] dividend will have little effect on…consumption... Under the assumptions of Merton Miller and Franco Modigliani, for example, investors can always reinvest unwanted dividends, or sell shares to create homemade dividends, and thereby insulate their preferred consumption stream from corporate dividend policies. Thus, in traditional models, the division of stock returns into dividends and capital gains is a financial decision of the firm that has no “real” consequence for investor consumption patterns.” Baker 2007 [who then goes on to critique the proposition]  

We use the term fecundity here to refer to a portfolio's long-term ability to generate spendable cash for its owner, because fecund means "fruitful or fertile," and cash withdrawals from a portfolio are effectively its fruit… This paper will demonstrate that the fecundity of an equity portfolio — before expenses and (if applicable) taxes — lies somewhere between the earnings yield and the dividend yield of the portfolio.” Garland 2004 [1]

Dividends and Retirement – Some First Pass Thoughts


I’ve been retired for 13 years now and I have always had an unexamined – and according to others an unreasonable and un-theoried -- love for my dividend income stream (my made-up term for this is divophilia). It just feels like it is a good thing. I have rationalized myself into believing that goodness even though I am fairly conversant with financial theory and retirement finance…enough so to be quite skeptical of my own flawed inclinations and behaviors, a skepticism which might be warranted in this case. TBD

Component Analysis #3 - Mortality

“….One need hardly be reminded that a consumer who makes plans for the future must in one way or another take account of the fact that he does not know how long he will live…” - Menahem Yaari 1965

Up until maybe 5 or 10 years ago, most papers I've read in RetFin did not take random lifetime seriously (might be wrong, just an amateur observation) which is not a great place to start a conversation with people that don't live exactly 30 years after a retirement, the start date of which is itself uncertain for some. 

In chapter 8 of Moshe Milevsky's Retirement Recipes in R (RinR), he gives a slick tool, divorced from formal "life tables" and based on "the Gompertz Law of Mortality," that can model conditional - and continuous - survival probabilities (CSP) with some nice malleable parameters. Probably won't land a rocket on Mars but very effective for RetFin models. 

Talebian Redundancy - redux

Like the last post, don't take this post too seriously. This is playtime with Taleb and one of his anti-fragility ideas now expanded a bit.  As in the last post, it is more or less like this with some changes highlighted in blue: 

IF

- robust systems are identifiable by the reduction of single points of failure and redundancy of resources at critical points, and

- we assume a $1M portfolio P1 for a 60-95yo, spending an age adjusted spend[1], and

- of that 40k (in t(0) only) in spend, 20k (real, all periods) is a life-or-death floor forever, and

- we use SS-like life table to assess the probability of spending anything at a future time but now conditional on advancing age, and

- the PV at t(0) of the probability-weighted cashflow of the floor is variable by age , and

- we simply and blindly double that part of the portfolio (.43) that defeases the floor at t(0), and then we also, as age advances:

- recalculate the spend as the "heuristic rule spend amt" divided into the "total" capital, where the total now includes the extra redundancy

A Talebian Spend Rate

First of all, don't take this post too seriously. This is playtime with Taleb and one of his anti-fragility ideas. I think I have done this before but I wanted to mentally run through it again. 

IF

- robust systems are identifiable by the reduction of single points of failure and redundancy of resources at critical points, and

- we assume a $1M portfolio P1 for a 60yo, spending a deterministic (real) 40k, and

- of that 40k in spend, 20k is a life-or-death floor, and

- we use SS-like life table to assess the probability of spending anything at a future time, and

- the PV at t(0) of the probability-weighted cashflow of the floor is .43 of the initial P1, and

- we simply and blindly double that part of the portfolio (.43) that defeases the floor at t(0),

THEN

- the initial portfolio P1 is now 1.43 x P1 = P2

- The spend rate of 40k of P1 is now .028 of P2 at age 60

- The need for redundancy will decline towards zero at later ages. I haven't gotten into that.

Visualizing Simulated Spend Crashes

Here in Figure 1 [note 1] is a quick visualization of a couple retirement process: 

1. in grey, different spend paths from a portfolio without any "life constraint" over time, and 
2. in red dashed, the "life constraint" in terms of a survival probability conditional on achieving (here) age 68 and parameterized to look a little like a Social Security life table.  

On the left-Y axis we have the spend (using .045) i.e, #1. Fwiw, in this case the spend is an amount not a rate, even though it looks like a rate, because initial wealth is = 1.  On the right-Y axis we have the conditional survival probability, red dashed line, for a 68yo. i.e., #2. The X axis is an arbitrary 50 years, long enough to capture early retirements but not too absurdly long.

Shapes and Flow

Comment from feedback: no one needs this post. It is just a weird flourish...

I never really set out to find specific answers when I embarked on my finance mission back in 2012. I was just curious about stuff...and ticked off at my grubby advisor. What I really did want was to be able to see what I call the "shape and flow" of retirement.  So, here is a fun "shape and flow" I was surprised to see, mostly because I never looked for it. It is the shape of consumption utility over time when considering the possibility of wealth depletion. Let's look at it like this in simulation mode:

A 500 year portfolio and min-max spend rates

What is the spend rate that maximizes median terminal wealth at a horizon of 500 years (why 500? idk, just messin' around and anyway that's the game we played in the last post)? Obviously the proper spend rate for doing that is zero. That's why it is sometimes hard to talk about portfolio growth optimality in a retirement spending context, granting that the 500 years here is absurd. Better to discuss portfolio longevity + mortality, and/or (gasp) life consumption utility. 

Ok, what is the threshold spend rate that minimizes median terminal wealth at a 500 year horizon? idk, let's look.

Some Random Thoughts on Growth Optimal Portfolios

“Theorem: If Harry repeatedly invests in a portfolio whose E log(1+R) is greater than that of Paul [i.e., the growth-max proposition], then -- with probability 1.0 — there will come a time (T(0)) when Harry’s wealth exceeds Paul’s and remains so forever thereafter.” Harry Markowitz in a 2016 book poking fun at Paul Samuelson on their past argument about growth optimal investing criteria.

"Mean log of wealth then bores those of us with tastes for risk not real near to one odd (thin!) point on the line of all tastes for risk -- and this holds for each N with N as big as you like...For N as large as one likes, your growth rate can well (and at times must) turn out to be less than mine -- and turn out so much less that my tastes for risk will force me to shun your mode of play. To make N large will not (say it again, not) make me change my mind so as to tempt me to your mode of play. QED"  Paul Samuelson (1979)

Intro

There seems to have been an uptick in the last few years of interest in the growth optimality consideration for portfolios. Ergodicity Economics feels like the new kid on the block, but this topic has a pretty long history, and the general interest bubbling up I find useful because it is an interesting and worthy topic. I won’t recapitulate all the math or notation in this post since it is tedious blogging [7] and one can read it comprehensibly, for the most part, and quite usefully, in the following bulleted references. Or check out the recommended reading list at the end and in particular pay attention to the references inside the various papers: 

A Random List of 50 Things I've Learned over a Decade of Blogging Quant Retirement Finance

[recent updates in brackets, see item 50]9/20/21

1. The planning interval of keen interest in retirement, often pegged at “30 years” by many advisors, academics and retirees, is actually a random variable by way of the dynamics occurring at both ends. The end, and in an underappreciated way the beginning, of retirement are uncertain. This uncertainty has to be acknowledged somehow in the planning process with some method whether it is scenarios, ranges, distributions for key parameters and output variables, probability weighting, random draws, provision for life income, estate planning etc.
   
   
2. Fail rates are a bogus metric. Dirk Cotton, now gone, wrote on this better than I can. No one in the modern world does a real mathematical fail where there is a continuous dive into the ground. People adapt, spending changes, annuity ripcords are pulled if possible, family steps in, institutions – to the extent we even trust institutions anymore in 2021 – of government and association help out. Stuff happens. I mean bankruptcy is possible but that’s a different problem. Also most savvy commentators will mention that magnitude is ignored. Failing by a dollar under some goal on the last day of life is different than running out of money at 72 with another 30 years to go.
   
   

On Anti-travel

I’m interested in anti-travel.

Travel has become a personality and a fetish and a brag (pre 2021 anyway) these days. But look at it this way. In, say, my 1994 world in MN, I might have considered a Mongolian-located herder-yurt “exotic” but we have to also consider the idea that the Mongolian herder next to the yurt would’ve considered my St. Paul back yard exotic as well given the distances in either meters or culture and the relativistic framing. Which was exotic, then, and worthy of "travel" in the western sense we know from the modern decadent world we now live in? Well...both I guess. So that means I needed to have considered my back yard worthy of examination from a travel sense in the same way that the braggarts -- with pictures of the pyramids or Antarctica or the great Wall -- might conceive of things from their superficial iphone perspective from the side of the yurt as they stood with their Apple-product triumphancy. Heh. I mean cmon.

On the Head-Fake of Precision in Spend Rates in Retirement.

The impulse in the retirement finance lit I read seems to be to come up with mega-ultra numbers, the right answer, the unified field theory. I’m not sure that this can be done even though I took my own shot at it for a few years. The following post has exactly zero science so you can more or less blow it off. This piece is just an opinion. The images/charts are completely, entirely illustrative: not real; just trying to make a point.

End of my wine collecting career

Barolo - La Spinetta 2000 Campe

I started drinking wine in 1976, my 18th year. Instantiating my journey, my older brother gave me a glass of wine at dinner once. It was a 1974 Napa cab which had just been recently released. For those that don’t remember, 74 was a remarkable year in CA. I was ~18, dumb, and so I said: “huh, this is pretty good" and that wrapped up my experience for the moment. Then, in 1992 or so, I had a business lunch at an Italian restaurant in Montreal – full linen service with 8 glasses per setting and a tasting menu method – that had 50,000 bottles of Italian wine downstairs in an abandoned subway tunnel; this lunch-wine vignette now had my full attention.

On picking a baby name in 1996

When my ex was about 8.85 months pregnant in 1996, we travelled from Montreal to Gaspe. In a bookstore in Quebec, there were no English titles and few English speakers beyond QC, so I bought a baby name book there in French just cuz and there was some time pressure coming up, too. *I* picked a name because my ex and I ended up taking turns and this was my turn and, in the process that was unfolding in 1996, I had an opinion: Genevieve. This name, btw, is a 2 or 3000 yo pre-Celtic name that means roughly “white wave” or “white woman” or something close to that if we go back far enough. Oops, I had no idea that 2021 was on its way at the time, heh. Sorry D.

Chatwin on The Estate of Maximilian Tod

Would that I had such an estate. I had this story in my "stories" tab but thought I'd push it here...for reasons.

Camus on Sisyphus

The gods had condemned Sisyphus to ceaselessly rolling a rock to the top of a mountain, whence the stone would fall back of its own weight...he [Sisyphus] is accused of a certain levity in regard to the gods.  He stole their secrets. Aegina, the daughter of  Aesopus, was carried off by Jupiter. The father was shocked by that disappearance and complained to Sisyphus.  He, who knew of the abduction, offered to tell about it on condition that Aesopus would give water to the citadel of Corinth. To the celestial thunderbolts he preferred the benediction of water.  He was punished for this in the underworld.  Homer tells us also that Sisyphus had put Death in chains.  Pluto could not endure the sight of his deserted, silent empire.  He dispatched the god of war, who liberated Death from the hands of her conqueror.

It is said also that Sisyphus, being near to death, rashly wanted to test his wife’s love.  He ordered her to cast his unburied body into the middle of the public square.  Sisyphus woke up in the underworld.  And there, annoyed by an obedience so contrary to human love, he obtained from Pluto permission to return to earth in order to chastise his wife.  But when he had seen again the face of this world, enjoyed water and sun, warm stones and the sea, he no longer wanted to go back to the infernal darkness. Recalls, signs of anger, warnings were of no avail.  Many years more he lived facing the curve of the gulf, the sparkling sea, and the smiles of earth.  A decree of the gods was necessary.  Mercury came and seized the impudent man by the collar and, snatching him from his joys, led him forcibly back to the underworld, where his rock was ready for him. (Camus, pp. 88/89)