Rather than attempt the complex calculations necessary to arrive at an optimal strategy for drawing down and spending their retirement savings, retirees rely on easy-to-follow rules of thumb such as the 4-percent rule advocated by some financial planners. This brief suggests that the IRS’ Required Minimum Distribution rules may be a viable alternative. For financial and practical reasons, the effectiveness of the alternative RMD strategy compares favorably to traditional rules of thumb. And a modified RMD strategy does even better.
This is hardly a complex calculation
. Take your portfolio balance as of Dec 31 and divide by your life expectancy. That gives you a base withdrawal amount for the coming year. The modified strategy is to add to the base withdrawal amount the value of your interest and dividends in the prior year.
I have confidence in you LH.
You can do this calculation.
The "complex calculations" is a direct reference to, well, the "complex calculations" including in the original post....... If I refer to "complex calculations" and you put "complex calculations" in your post....... Well..... To be explicit, Its not the noncomplex calculations
I am refering to..... Its the "complex calculations" you referenced I am taking about.
Garbage in, garbage out.
Pure and simple.
I have faith in you that you will see you have clearly made a logical error, which I assume is not purposeful, in assuming, that I am not directly addressing the "complex calculations" you referenced in the post, when I say "complex calculations"............. Right?
Again. Any attempt at "complex calculations", to achieve an "optimal" solution, is near nonsensical, and conflates, at minimum, the ability to average out groups of people, to achieve some sort of half assed ok guess for large groups of people, with that of the ability to achieve meaningful inputs for an individual.....
For an individual, is all a wild ass guess
1)what will the individual earn in his lifetime (for "income smoothing")
2)what will the individual need 30 years hence
3) TIPS are the risk free investment...... really.... how is that working out now with negative yields tens years out?
Its garbage in, garbage out on all fronts. The inputs are garbage
. You could make up near anything for a given person, and the end result is gonna have HUGE error bars expectantly. Its like trying to use the Gordon equation to run a mutual fund (tracked=fail ). Its product to be sold.
Then BobK, even for large groups of people you can statistically average..... How are defined benefit plans doing????????????????????????? Oh, yeah, all sorts of "complex calculations" there. Call in the actuary! But same problem, garbage in, garbage out.
Rules of thumb are used for good reason. We are limited by the uncertainty of inputs to "Complex equations" such that they are near meaningless ex ante.
Now if you are saying your quote about "complex equations" is false, they are actually noncomplex, then fine I guess. Complex=noncomplex would go along with the whole approach of "matching" highly imprecise/inaccurate needs with highly imprecise/inaccurate income streams over long periods of time, and pretending you have a precise meaningful answer. Complex=non-complex. Precise=non precise. That would fit.
I would just love to see some matching "math" EXAMPLE applied pre 2007, written in 2007, using "riskless" TIPS and such to achieve some sort of "safe" outcome, just in the current short medium term..... with negative TIPS yields coming in the near unknown future to screw up the projections, not to say anything of the uncertain longer term. It would almost certainly be failing, TIPS at negative yields would blow any pre 2007 TIPS model out of the water (should we assume 3 percent real TIPS return? one could laugh or cry), just like falling home prices did subprime.
Complex equations are a mirage, they have near zero utility, or as much meaningful utility as the 1959 Gordon equation did in predicting much of anything since 1959 ex ante. I do not recollect the Gordon equation referenced in the in hindsight rosy IMF 2007 report for instance. http://www.imf.org/external/pubs/ft/weo ... f/text.pdf
If it was referenced, and the inputs they chose made it come out bad, its was not given any weight.
The trouble with "complex" financial calculations applied to achieve an "optimal" result is the garbage in garbage out input problem. The inputs are just expectantly wild inaccurate guesses. Which is why people use rules of thumb.
4 percent, RMD are both rule of thumb approaches as I read the your referenced paper. The paper uses a "complex calculation" as the benchmark, as I understand the phraseology, but does not appear to validate it, its simply made true by definition
, which is very convenient, but quite likely does not describe any meaningful reality.
Anyway, as always, I enjoy reading your posts BobK. Its all good theory, but I cannot see how much of it is ready for prime time application? There just seems to be a schism between real world practicality, and theorectical models used in finance papers. LTCM, 100 percent TIPS ladders, and portfolio insurance were fine on paper, and this stuff looks great too.... but real world is not true by definition, its messy.