Wade Pfau: Lifecycle Finance

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Re: Wade Pfau: Lifecycle Finance

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500Kaiser wrote:I have (some) very basic questions.

After reading the wiki and some of the articles, my interpretation is that a "floor" plus upside approach, say 10 - 15 years of TIPS in a non rolling ladder used to spend as income, and a coventional portfolio with the intent to extend the ladder at some point in future is not a pure lifecycle finance approach since part of this strategy is relying on a probabalistic approach. Is this interpretation accurate? How unpure is it?
The life-cycle approach ("floor" plus upside approach) is the general economics approach to financial planning including retirement planning. The older approach (called mean/variance or "probabilistic") is based on risk-return tradeoffs along the efficient frontier and is a special case of the life-cycle approach. In that special case the floor goal is either non-existent or very low, and the aspirational goal is soft. (I would like to have this much or more, but perhaps not realizing that the “or more” reduces the chances of meeting the goal.)

There is no pure life-cycle approach. You pick two goals. One goal is what you want. The other goal is a lower conservative goal that typically you want to hit with very high probability. You are serious when you set or reset the goals and you employ investment strategies that are explicitly targeted to meet the goals. If you want to hit the lower goal with near certainty, you are going to have to hedge or insure, not diversify, the risk of reaching that goal. That means you need a matching strategy to reach that conservative goal both before and during retirement .

(H)ow does one figure out how far out to take the floor if self annuitized via TIPS? Isn't there always going to be some uncertainty that I can live past the end of the ladder?
As a practical matter I think in early retirement it’s prudent to have both annuitized income and a TIPS ladder. You get the mortality credit from the annuity and you get more flexibility in the income stream from the TIPS. I would suggest building the TIPS ladder from retirement to no later than your life expectancy year. Either at retirement purchase a longevity annuity that begins when the ladder ends, or wait to buy an annuity when the ladder ends to replace the laddered income. In the second case you may never need the annuity. :wink:

A bit off topic, but I have never been able to get comfortable with the idea that I can substitute a mix of different duration TIPS bond funds and say a MM fund to replace a non rolling TIPS ladder. I guess maybe if someone had ever worked through an example of this, mathematically, I would be interested to know about it and try and understand it. I have looked before, but most of the threads here get into a clarification around bond funds and bond ladders and the difference of non rolling and rolling ladders. Occassionally, this mixing thing gets thrown out, and I don't disbelieve it, but before I would consider utilizing it for a floor, I would want to be 100% clear on how it would work, like I am with a non rolling TIPS ladder.
Financial engineers can replicate the characteristics a bond ladder with bond funds precisely. We at home, doing this on our own and taking only bond duration into account, will only loosely match the bond ladder characteristics. This becomes more problematic if adjustments aren’t made as frequently as monthly or at least semi-monthly. So I agree that DIY bond fund duration matching to a ladder is only a loose approximation of the ladder’s characteristics.

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Merton's course on life-cycle investing & retirement finance

Post by bobcat2 »

Here is a link to videos of Robert Merton's MBA course at MIT on life-cycle investing and retirement finance. The portion of the course dealing with retirement finance begins with the (3/14/12) video.
Link - http://robertcmerton.com/retirement-fin ... 12-20.html

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Re: Wade Pfau: Lifecycle Finance

Post by 500Kaiser »

Thank you for your thoughtful reply to my questions and for helping educate us throughout this post BobK.
Higher risk = higher HOPEFUL returns, not expected returns.
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Re: Wade Pfau: Lifecycle Finance

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learning_head wrote:BobK, ... . I have a similar kind of question as Richard. Let's imagine a simple scenario: someone with wierd name R40 who wants to retire at 40 and provide a floor of $25k/year. I think following assumptions would be reasonable:
- R40 accumulated $300K in tax-advantaged space (due to restrictions on contributions over these years), and the rest of their savings are in taxable. So, any TIPS related investments can be made up to that amount only.
- There is no DB plan for R40 (younger folks don't have those for the most part and those that do would not have much vested at 40)
- SS in unclear to them as to how much they will REALLY get in 30 years.

So, it seems like R40's only choice under LCF is annuities. For 40 year olds current rates are around 2% payout for inflation-adjusted SPIAs and one should probably stay under $250k insurance limits for these (some states would be eliminated by lower insurance limits as of today). So, if R40 wanted to cover their floor 25k, they would need $1.25M in taxable and they would have to find 5 annuity companies willing to sell to them inflation-adjusted SPIA. I do not think there are 5 annuity companies today selling inflation-adjusted SPIA's to 40 year olds... Not even 4 in fact... ?

So, is LCF not possible for R40?

How about R50 (someone who wants to retire at 50) with same $25k floor requirement. They may have $600k in tax-advantaged account for TIPS. They still are unclear about SS availability in 20 years. Payout is now around 3% and they would need to find $833k in annuities to cover $25k/year, i.e. still need 4 insurance companies to spread those across... What's the advice for R50 to guarantee the floor income?
I’ve been asked to comment on the above post, so here goes, for what it’s worth. :) There is not any strategy that can help much, if you are only going to work to age 40, or even 50. There are simply too few years of work compared to many years of expected retirement. You have to be either wealthy, or be willing to live a simple inexpensive lifestyle in retirement.

LCF is a better framework or general strategy for approaching financial planning for households than any other general strategy, but it won’t produce rabbits out of hats. Anyone who has used ESPlanner for more than just a few hours can tell you that one thing you readily come to realize is that working for more years is the best way to achieve a secure retirement. Many of us, including me, are unhappy when explicitly confronted with this unpleasant, but obvious truth. Our unhappiness doesn’t make it any less true.

I’ve viewed most of the Merton videos on LCF & retirement planning. Monday I viewed the one on facts & fantasies in investing (2/27/12). There is hardly any math in the video, but there is a lot of hard thinking. The case study in the second half seems to have flummoxed nearly the entire class of MIT MBA students. I have the feeling Merton expected that. :wink:

Here again is the link to the videos of the entire course. The portion of the course dealing with retirement finance begins with the (3/14/12) video.
http://robertcmerton.com/retirement-fin ... 12-20.html

Unless you already know an awful lot about personal finance, you will learn a lot about personal finance watching these videos.

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Re: Wade Pfau: Lifecycle Finance

Post by learning_head »

bobcat2 wrote:There is not any strategy that can help much, if you are only going to work to age 40, or even 50. There are simply too few years of work compared to many years of expected retirement. You have to be either wealthy, or be willing to live a simple inexpensive lifestyle in retirement.
Thanks for your reply, BobK and for the links. I do want to point out that the question already assumed that both R40 and R50 are both wealthy enough (how much wealth is needed for them?) and are willing to live inexpensive lifestyle - my question specifically asks for "only" 25K floor, after all... :-)

I guess the answer is still the same then - no LMP way for R40 / R50 to provide a floor (given limited tax-advantaged space)...
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Re: Wade Pfau: Lifecycle Finance

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learning_head wrote:
bobcat2 wrote:There is not any strategy that can help much, if you are only going to work to age 40, or even 50. There are simply too few years of work compared to many years of expected retirement. You have to be either wealthy, or be willing to live a simple inexpensive lifestyle in retirement.
Thanks for your reply, BobK and for the links. I do want to point out that the question already assumed that both R40 and R50 are both wealthy enough (how much wealth is needed for them?) and are willing to live inexpensive lifestyle - my question specifically asks for "only" 25K floor, after all... :-)

I guess the answer is still the same then - no LMP way for R40 / R50 to provide a floor (given limited tax-advantaged space)...
LCF is not a set of tactics involving life annuities and bond ladders. It is the economics based general strategic approach to household financial planning.

To reach the retirement standard of living you desire when you are falling short of that goal you can: save more, work longer, or take more risk. If someone goes for LCF advice and wants to retire at age 40, I can assure you of what the first piece of advice will be. Work longer. If you are not yet age 40 and insist on an age 40 retirement target then the advice will be, "save like hell". Same set of advice for age 50.

One thing that appears to separate LCF retirement advice from conventional advice is that often conventional planning starts by picking the retirement age and then finding ways to reach a retirement goal. LCF does not preset the retirement age. Instead it sets a retirement income goal and picks ways to meet that goal. Ways to meet that income goal include flexibility in the retirement age. If you do not have flexibility in the retirement age, LCF says as you approach retirement you should be taking very little risk, because that inflexibility gives you very little risk capacity.

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Re: Wade Pfau: Lifecycle Finance

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learning_head wrote:BobK, thank you so much for all the info and great posts. I have a similar kind of question as Richard. Let's imagine a simple scenario: someone with wierd name R40 who wants to retire at 40 and provide a floor of $25k/year. I think following assumptions would be reasonable:
- R40 accumulated $300K in tax-advantaged space (due to restrictions on contributions over these years), and the rest of their savings are in taxable. So, any TIPS related investments can be made up to that amount only.
- There is no DB plan for R40 (younger folks don't have those for the most part and those that do would not have much vested at 40)
- SS in unclear to them as to how much they will REALLY get in 30 years.

So, it seems like R40's only choice under LCF is annuities. For 40 year olds current rates are around 2% payout for inflation-adjusted SPIAs and one should probably stay under $250k insurance limits for these (some states would be eliminated by lower insurance limits as of today). So, if R40 wanted to cover their floor 25k, they would need $1.25M in taxable and they would have to find 5 annuity companies willing to sell to them inflation-adjusted SPIA. I do not think there are 5 annuity companies today selling inflation-adjusted SPIA's to 40 year olds... Not even 4 in fact... ?

So, is LCF not possible for R40?

How about R50 (someone who wants to retire at 50) with same $25k floor requirement. They may have $600k in tax-advantaged account for TIPS. They still are unclear about SS availability in 20 years. Payout is now around 3% and they would need to find $833k in annuities to cover $25k/year, i.e. still need 4 insurance companies to spread those across... What's the advice for R50 to guarantee the floor income?
I don't know much about LCF, but what is so difficult about solving this problem?

First of all, it usually doesn't make sense to buy an immediate annuity until you are in your sixties or seventies. That's when the mortality credits start to kick in. Before that, you might as well just have TIPS.

So if R40 want inflation-adjusted $25,000 for the rest of his life, first he could buy a 30-year TIPS ladder. Using the famous spreadsheet with TIPS prices from 30-Dec-2013, this would cost about $638,206. That would take him out to age 70.

For age 70 to infinity, there are several options:

1. buy today a $25,000 deferred Inflation-indexed annuity that starts paying in 30 years for whatever that costs. Don't ask me who sells them. Maybe ask Vanguard.

2. put the price of a $25,000 inflation-indexed annuity in a 30 year TIPS and buy the IA annuity when it matures. I'm gonna guess this will cost about $400,000 to $500,000 (6.0% to 5.0%). You can get a quote for more accurate cost estimate. Let's say $500,000 inflation-adjusted up. Using the same spreadsheet says that this costs $388,293 today.

3 Other methods that get more complicated using ladder of fixed annuities, TIPS, etc.

So the total cost is somewhere around $638,206 + $500,000 = $1,026,499

Any money you have beyond the cost of this can be invested in stocks, such as Total World Stock Index. Or whatever. E.g. if R40 has a total of $1.5 million, he would have about $473,501 left over to invest in stocks for the next 30 to 60 years. This would probably grow to a couple of million, inflation-adjusted, by then.

:arrow: To summarize, at age 40 buy a TIPS ladder for the first 30 years plus a 30-year TIPS that will be used to purchase an IA annuity (or functional equivalent) at age 70.

It sounds pretty straightforward to me.
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Re: Wade Pfau: Lifecycle Finance

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Let's imagine a simple scenario: someone with wierd name R40 who wants to retire at 40 and provide a floor of $25k/year.
grayfox's advice provides R40 with a ceiling of $25k/year, not a floor. Assuming the floor is truly a floor, R40 won't have anything like $474,000 leftover to invest in stocks. Most of that will be eaten up by spending above the floor. (In 30 years or more from now real income of $25,000/year would be pretty low on the standard of living scale.)
buy today a $25,000 deferred Inflation-indexed annuity that starts paying in 30 years for whatever that costs. Don't ask me who sells them. Maybe ask Vanguard.
You don't have to ask Vanguard. Nobody sells them.

R40's SS benefits will be small, because about half of his 35 top earning years will be zero earnings.

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Re: Wade Pfau: Lifecycle Finance

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grayfox wrote:<snip>I don't know much about LCF, but what is so difficult about solving this problem?<snip>
The lack of existing products. LCF works well (assuming they have adequate savings) for anyone whose needs are covered by Social Security, a TIPS ladder in a tax deferred account and an inflation indexed annuity covered by a safe state guarantee fund. Anyone else will have to wait for the introduction of better products or live with a lower level of safety.
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Re: Wade Pfau: Lifecycle Finance

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It doesn't matter what strategy you pursue or what financial products will become available in the foreseeable future. Most people are going to have low retirement income, if they want to save less than 3% of their income or retire no later than age 50. :(

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Re: Wade Pfau: Lifecycle Finance

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grayfox wrote:
learning_head wrote:BobK, thank you so much for all the info and great posts. I have a similar kind of question as Richard. Let's imagine a simple scenario: someone with wierd name R40 who wants to retire at 40 and provide a floor of $25k/year. I think following assumptions would be reasonable:
- R40 accumulated $300K in tax-advantaged space (due to restrictions on contributions over these years), and the rest of their savings are in taxable. So, any TIPS related investments can be made up to that amount only.
- There is no DB plan for R40 (younger folks don't have those for the most part and those that do would not have much vested at 40)
- SS in unclear to them as to how much they will REALLY get in 30 years.

So, it seems like R40's only choice under LCF is annuities. For 40 year olds current rates are around 2% payout for inflation-adjusted SPIAs and one should probably stay under $250k insurance limits for these (some states would be eliminated by lower insurance limits as of today). So, if R40 wanted to cover their floor 25k, they would need $1.25M in taxable and they would have to find 5 annuity companies willing to sell to them inflation-adjusted SPIA. I do not think there are 5 annuity companies today selling inflation-adjusted SPIA's to 40 year olds... Not even 4 in fact... ?

So, is LCF not possible for R40?

How about R50 (someone who wants to retire at 50) with same $25k floor requirement. They may have $600k in tax-advantaged account for TIPS. They still are unclear about SS availability in 20 years. Payout is now around 3% and they would need to find $833k in annuities to cover $25k/year, i.e. still need 4 insurance companies to spread those across... What's the advice for R50 to guarantee the floor income?
I don't know much about LCF, but what is so difficult about solving this problem?

First of all, it usually doesn't make sense to buy an immediate annuity until you are in your sixties or seventies. That's when the mortality credits start to kick in. Before that, you might as well just have TIPS.

So if R40 want inflation-adjusted $25,000 for the rest of his life, first he could buy a 30-year TIPS ladder. Using the famous spreadsheet with TIPS prices from 30-Dec-2013, this would cost about $638,206. That would take him out to age 70.

For age 70 to infinity, there are several options:

1. buy today a $25,000 deferred Inflation-indexed annuity that starts paying in 30 years for whatever that costs. Don't ask me who sells them. Maybe ask Vanguard.

2. put the price of a $25,000 inflation-indexed annuity in a 30 year TIPS and buy the IA annuity when it matures. I'm gonna guess this will cost about $400,000 to $500,000 (6.0% to 5.0%). You can get a quote for more accurate cost estimate. Let's say $500,000 inflation-adjusted up. Using the same spreadsheet says that this costs $388,293 today.

3 Other methods that get more complicated using ladder of fixed annuities, TIPS, etc.

So the total cost is somewhere around $638,206 + $500,000 = $1,026,499

Any money you have beyond the cost of this can be invested in stocks, such as Total World Stock Index. Or whatever. E.g. if R40 has a total of $1.5 million, he would have about $473,501 left over to invest in stocks for the next 30 to 60 years. This would probably grow to a couple of million, inflation-adjusted, by then.

:arrow: To summarize, at age 40 buy a TIPS ladder for the first 30 years plus a 30-year TIPS that will be used to purchase an IA annuity (or functional equivalent) at age 70.

It sounds pretty straightforward to me.
Grayfox, thanks for your thoughts but I think there are a few issues with what you are proposing:

(1) Regarding income before 70:
R40 would not have 638k in tax advantaged space. I specifically highlighted it and indicated they would have ~300k there with rest of savings in regular taxable accounts... TIPS in taxable space are *not* usable for obvious reasons, as the tax drag quickly becomes very large with increased inflation. It's easy to use TIPs if there were no taxes...

(2) Regarding income after 70:
(a) I don't know of any company selling "$25,000 deferred Inflation-indexed annuity that starts paying in 30 years for whatever that costs" which also is inflation protected; i.e. in 30 years, it starts paying NOT 25k but 25k + 30 years of inflation increases and continues on paying with inflation increases. Are you aware of any? Or are you trying to suggest that if such product existed then...

(b) Again, R40 is limited to 300k in tax-advantaged space due to relatively few years and low limits on adding to such space

(c) Ok, so, what are they more advanced options that actually work today?
You mentioned:
- ladder of fixed annutities: how do you ensure that whatever you did not add to initial annuity will keep up with inflation to buy next annuity? What's the strategy for that amount? Say R40 gets $25K or more in nominal dollars, what exactly will they need to do for inflation protection for rest? And if in fact that could do something, why not do it for the whole amount and buy insurance later for bigger mortality credits?
- TIPS - again... not in taxable?
Last edited by learning_head on Sat Apr 05, 2014 1:58 pm, edited 1 time in total.
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Re: Wade Pfau: Lifecycle Finance

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Is it too early for nominations for "Thread of the Year"?

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Re: Wade Pfau: Lifecycle Finance

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bobcat2 wrote:If you do not have flexibility in the retirement age, LCF says as you approach retirement you should be taking very little risk, because that inflexibility gives you very little risk capacity.
Hi BobK,

The point of the question was HOW IN PRACTICE with TODAY's products could R40 take the least amount of risk to get the $25k floor (inflation-adjusted)?

If you are saying "work longer", that's another way of saying "there is no way" to accomplish this. I would hope someone with a $Billion dollars (in taxable, aside from 300k in tax-deferred) for example could accomplish this...

If you say, yes they could, then question becomes what about $100Million? how about $5M? i.e. what is the most effective way that requires least amount of taxable money for R40 to provide that floor with TODAY's products while taking that very little risk you mentioned? (As you observed, they have very little risk capacity, which will cost them dearly - so... how much? and how to achieve it?)

Thanks!
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Re: Wade Pfau: Lifecycle Finance

Post by grayfox »

learning_head wrote:
Grayfox, thanks for your thoughts but I think there are a few issues with what you are proposing:

(1) Regarding income before 70:
R40 would not have 638k in tax advantaged space. I specifically highlighted it and indicated they would have ~300k there with rest of savings in regular taxable accounts... TIPS in taxable space are *not* usable for obvious reasons, as the tax drag quickly becomes very large with increased inflation. It's easy to use TIPs if there were no taxes...

(
Suppose there were no TIPS at all.

1. Make a guess about inflation, Say 3% inflation per year. (Actually inflation expectations are more like 2.5% right now, so 3% has a margin for error.)

2. Build a ladder of STRIPS, i.e. zero coupon Treasuries. For another thread I calculated this in a spreadsheet using STRIPS prices from a few months ago.

Code: Select all

Initial Spending	$25,000		
Spending Increase	3.00%		
			
Year	Spending	Price	Cost
2014	$25,000	100.000	$25,000
2015	$25,750	99.989	$25,747
2016	$26,523	99.759	$26,459
2017	$27,318	99.054	$27,060
2018	$33,000	97.177	$32,068
2019	$33,990	94.206	$32,021
2020	$35,010	91.089	$31,890
2021	$36,060	87.384	$31,511
2022	$37,142	83.236	$30,915
2023	$38,256	79.399	$30,375
2024	$39,404	75.716	$29,835
2025	$40,586	72.162	$29,288
2026	$41,803	68.530	$28,648
2027	$43,058	65.033	$28,002
2028	$44,349	61.906	$27,455
2029	$45,680	58.941	$26,924
2030	$47,050	56.181	$26,433
2031	$48,462	53.552	$25,952
2032	$49,915	51.057	$25,485
2033	$51,413	48.784	$25,081
2034	$52,955	46.648	$24,703
2035	$54,544	44.636	$24,346
2036	$56,180	42.749	$24,017
2037	$57,866	40.917	$23,677
2038	$59,602	39.102	$23,305
2039	$61,390	37.330	$22,917
2040	$63,231	35.286	$22,312
2041	$65,128	24.121	$15,710
2042	$67,082	32.585	$21,859
2043	$69,095	31.098	$21,487

Total Spending	$1,351,841	Total Cost	$790,480
So the $25,000 spending for the next 30 years, increasing 3% per year, costs $790,480.

3. For the age 70 onward, In 2044, you will want to purchase an IA annuity that pays IA $71,168 for life. (that is $25,000 after 3% inflation for 30 years.) Let's say that it pays out at 5%, so will cost $1,423,360 in 2044.

Here is STRIPS quote:

Code: Select all

Maturity	Bid	Asked	Chg	Asked yield
2043 Nov 15	32.565	32.659	0.322	3.82
$1,423,360 STRIPS maturing on 11/15/2043 costs $464,855 today

:arrow: Total cost is $790,480 + 464,855 = $1,255,335

Of course your are not getting the unexpected inflation insurance that you would for TIPS, i.e. there is risk of unexpected inflation.

:idea: Make use if whatever investment vehicle is available. If the only thing available is a shoebox, you could make it work by putting enough cash in the shoebox to cover spending for the next 65 years. My calculation shows that you would need to put $4,858,766 in the shoebox. I'm sure it would cost less to use TIPS or STRIPS or coupon Treasuries, even if you have to pay income tax on the gains each year.
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Re: Wade Pfau: Lifecycle Finance

Post by bobcat2 »

The point of the question was HOW IN PRACTICE with TODAY's products could R40 take the least amount of risk to get the $25k floor (inflation-adjusted)?
The way for R40 to take the least amount of risk to get the $25k floor (inflation-adjusted) is to work longer. The fact that R40 doesn't like the least risk option does not make it any less true. Being retired for possibly 50-60 years is risky, given that R40 is supporting all those years without labor earnings with only 20 years or so of earned income.

Yes R40 can use TIPS ladders and I-bonds and annuities to help in this situation, but the least amount of risk strategy is to work longer. We can come up with tactics for any situation, but in this situation the least risk strategy is to work longer. If for some reason R40 can't work longer, then he should save as much as he can before age 40. That is the least risky option after working longer. If that too is not possible, R40 will need to go to other strategies that entail more risk.

LCF explicitly takes into account human capital in developing best strategies. This is a classic example of taking human capital into account when making financial decisions. I probably haven't made that point strongly enough in past posts.

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Re: Wade Pfau: Lifecycle Finance

Post by learning_head »

I appreciate your response grayfox... I guess this is the best R40 can do... Unfortunately, I don't think it's realistic just because of this:
grayfox wrote:Make a guess about inflation, Say 3% inflation per year. (Actually inflation expectations are more like 2.5% right now, so 3% has a margin for error.)
BTW, your signature line is from a saying in a country where inflation jumped from almost nothing for many decades to 100s of percent; is more recently at 6-15% per year, with an occasional spike to over 80% one every decade or two... Planning for 3% for 50-60 years does not seem to provide adequate protection for the *floor*... even if you add 0.5% "buffer" for a guess of inflation ;-)

But I understand that if there are no tools, there are no tools... So, perhaps we back to just annuities up to the the limits provided by the state guarantee organizations (whatever they mean). Maybe if someone came up with deferred annuity at reasonable costs that could use TIPS while deferring taxes... but perhaps I am venturing into not-available-today land again...

@BobK: with all due respect, I understand your point but you are not answering the question. I am asking for what is a solution for problem X and you are saying we should be solving problem Y. Closest you came as part of your response was when you said,
... he should save as much as he can before age 40. That is the least risky option after working longer ...
Ok, and then what? That is where my question begins, but unfortunately that is where your answer ends... Anyway, I still appreciate your perspective and outline you have given in this thread for a framework on how one can think about the issues more generally.
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Re: Wade Pfau: Lifecycle Finance

Post by bobcat2 »

Hi learning_head,

Suppose R40 didn't give a hoot about when she retired. Instead she came to you for advice in the following situation. I want very little risk in my portfolio, but I want the portfolio to consist 100% of emerging market small cap stocks. What AA advice would you give? Might you consider suggesting that if she wants little risk then perhaps all of the portfolio shouldn't be invested in emerging market small cap stock? Even though that's not what she wants.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
learning_head
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Re: Wade Pfau: Lifecycle Finance

Post by learning_head »

bobcat2 wrote:Suppose R40 didn't give a hoot about when she retired. Instead she came to you for advice in the following situation. I want very little risk in my portfolio, but I want the portfolio to consist 100% of emerging market small cap stocks. What AA advice would you give? Might you consider suggesting that if she wants little risk then perhaps all of the portfolio shouldn't be invested in emerging market small cap stock? Even though that's not what she wants.
Easy... I would say, what you are asking is impossible to implement because emerging market small cap stocks are risky by their nature.

Now, what I am asking is
(a) for someone retiring at 40 who wants 25k in constant purchasing power income for rest of their life with 300k in tax-advantaged accounts and $1 Billion in taxable account, is it possible to achieve?

If you say no, it's not possible with tools that are available today, that's fine - then just say no, it's not possible...

If you say yes, my next question is
(b) what is minimal amount of money would you say one needed for (a) instead of $1 billion? And what today's products would you recommend for them?

Yes, I am fixing retirement age and floor amount, and yes, I am fixing tax advantaged space they have today (of course if you suggest some product they can use to expand it that is sold today, that is perfectly fine). If you think it's possible to solve this, I'd love to hear how and how much it will cost. If in your opinion, this problem is not possible to solve, that's a valid response as well...
Last edited by learning_head on Sun Apr 06, 2014 3:10 pm, edited 1 time in total.
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NoRoboGuy
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Re: Wade Pfau: Lifecycle Finance

Post by NoRoboGuy »

grayfox wrote: 1. Make a guess about inflation, Say 3% inflation per year. (Actually inflation expectations are more like 2.5% right now, so 3% has a margin for error.)
According the Cleveland Fed, 10 year inflation is projected to be 1.74%.
There is no free lunch.
meyer99
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Re: Merton's course on life-cycle investing & retirement fin

Post by meyer99 »

bobcat2 wrote:Here is a link to videos of Robert Merton's MBA course at MIT on life-cycle investing and retirement finance. The portion of the course dealing with retirement finance begins with the (3/14/12) video.
Link - http://robertcmerton.com/retirement-fin ... 12-20.html

BobK
Bob,
Thank you for sharing all these great information.
Do you have the handouts for the course or know where they can be downloaded?
I am up to video 4 and got a little lost (sometimes a lot) on videos 3 and 4 without the handouts.

Thank you,

Adrian
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bobcat2
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Re: Wade Pfau: Lifecycle Finance

Post by bobcat2 »

Hi Adrian,

Merton has sometimes in the past put his class lecture notes online. However, I haven't seen any class notes online for this class.

Here is a short informal paper he wrote recently on applying life-cycle finance and how he structured a DC retirement plan to be consistent with life-cycle finance. I think he spends one or two classes in the course on this topic.
Link to Merton LCF paper.
https://www.nestpensions.org.uk/schemew ... cs,PDF.pdf

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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