The Decumulation Phase
I enjoyed the book immensely. I was not put off by his market timing strategies that he discussed. He derives some of his income from being a financial advisor, so he probably charges a fee for his services based on assets under management. His clients probably need some alpha to pay for his services, so he detailed some possible ways of getting that alpha. Note that I used the word "possible" and not "guaranteed" nor "probable."
It has been enlightening to me to read different people's reactions to the book. In particular, he did use various SWR scenarios that failed, such as a 6% rate. He also used 2% expense ratios as if they were common place before he got to the chapter on fees and expenses. Folks around this forum are incredulous at that fee rate, but Canadians probably are not. Nevertheless, he used these numbers as examples. Later on, he got down to a SWR under 4% and expense ratios around 0.5%.
Anyways, if there was something I didn't agree with, that didn't make me stop reading the book. I just filed it away and kept on reading. It's an excellent book and will be used as a reference by me often in the future.
It has been enlightening to me to read different people's reactions to the book. In particular, he did use various SWR scenarios that failed, such as a 6% rate. He also used 2% expense ratios as if they were common place before he got to the chapter on fees and expenses. Folks around this forum are incredulous at that fee rate, but Canadians probably are not. Nevertheless, he used these numbers as examples. Later on, he got down to a SWR under 4% and expense ratios around 0.5%.
Anyways, if there was something I didn't agree with, that didn't make me stop reading the book. I just filed it away and kept on reading. It's an excellent book and will be used as a reference by me often in the future.
- speedbump101
- Posts: 999
- Joined: Thu Oct 18, 2007 10:54 pm
- Location: Alberta Canada
Page 295:HueyLD wrote:I look at these "active management" chapters differently. I think Mr. Otar had a broad base audience in mind and he wanted to offer something for everyone. He did say somewhere in the book that simple indexing is perfectly fine if you were not comfortable with any of his active management strategies.
Again, I think his annuity sections were broad probably becuase he wanted to offer his readers many options to consider. I have to admit that I know very little about annuities and probably won't need one in the foreseeable future. But who knows???
No farmers here, but a 6 a.m. coffee will do the trick.If you are approaching retirement, or are currently retired, read this book. It will focus your mind far better than a cup of coffee at 6AM, or 4AM for some “farmers” here
“I don’t believe that an active fund manager can beat the index consistently over the long term. Neither do I like to settle for the returns of an index fund. I search for sectors that are on the rise. I keep them as long as they add value to my portfolio. Once they stop adding value, I replace them with others that do. It’s no different than managing “who-plays-when” in a hockey game.
It doesn’t really matter which philosophy you follow as long as you don’t do worse than the index. If your portfolio outperforms the index you’ll have a better chance of a lifetime income.”
I think this is the only area where I start flipping TV channels while reading... Other than this it's A+ in my estimation... and considering the price we paid, maybe A++. I agree with Livesoft that it will be a reference book for me in the future. I can hardly wait for the sequel, however considering the time this one took to write we'll have to wait untilt 2015
The average Canadian mutual fund MER is 2.50%... We are world leaders in destroying investor's wealth by 'costing them to death'... Help, we need Vanguard, and the likes of Jack Bogle up here in the frozen north!livesoft wrote: It has been enlightening to me to read different people's reactions to the book. In particular, he did use various SWR scenarios that failed, such as a 6% rate. He also used 2% expense ratios as if they were common place before he got to the chapter on fees and expenses. Folks around this forum are incredulous at that fee rate, but Canadians probably are not. .
SB...
"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein
Haven't read Otar's book but am a FIRECalc user. What I find lacking in FIRECalc is:
1) no international equities data
2) no way to allocate to TIPS/Ibonds
So I just run it with an allocation split between TSM and 5yr Treasurys. Still the returns series is worth looking at, particular the spreadsheet results. But FIRECalc is just a first step, although a major one.
Since each retiree's situation is generally quite different, we should not take this modeling too seriously. As an example, I've modeled the next 7 yrs for us in a spreadsheet and the modeling considers these tax considerations:
1) Roth conversion before taking Social Security
2) when to take Social Security for 2 adults near same age
3) state + fed taxes
4) RMD given (1) + (2)
It's pretty complicated and can swing my next few year's withdrawals rates by maybe 1%. And that is assuming somewhat static tax policy.
So what's the point? My modeling is very specific to our situation and just would not apply to 99% of other retirees. No one is going to create a calculator that get's down to these levels of details. But if you want to optimize, I think you need to do this. Fortunately, when in retirement one has the time and perhaps the inclination to take on this challenging financial problem -- your mileage may vary
1) no international equities data
2) no way to allocate to TIPS/Ibonds
So I just run it with an allocation split between TSM and 5yr Treasurys. Still the returns series is worth looking at, particular the spreadsheet results. But FIRECalc is just a first step, although a major one.
Since each retiree's situation is generally quite different, we should not take this modeling too seriously. As an example, I've modeled the next 7 yrs for us in a spreadsheet and the modeling considers these tax considerations:
1) Roth conversion before taking Social Security
2) when to take Social Security for 2 adults near same age
3) state + fed taxes
4) RMD given (1) + (2)
It's pretty complicated and can swing my next few year's withdrawals rates by maybe 1%. And that is assuming somewhat static tax policy.
So what's the point? My modeling is very specific to our situation and just would not apply to 99% of other retirees. No one is going to create a calculator that get's down to these levels of details. But if you want to optimize, I think you need to do this. Fortunately, when in retirement one has the time and perhaps the inclination to take on this challenging financial problem -- your mileage may vary
One the biggest take-home messages I got from Otar's book is that one cannot plan in detail and expect reality to match it. Otar does a great job of showing how much luck (or if you will chance) affects the results.
Because there is a significant chance of bad luck, one must plan for the worst and hope for at least average results.
Because there is a significant chance of bad luck, one must plan for the worst and hope for at least average results.
I discovered Jim Otar yesterday and spent a fair part of this weekend trying his free calculator, reading his papers, and ordering the book. Now, I have several questions, answers to which I could not find elsewhere.
1. Is the information in Otar's chapter of Retirement Income Redesigned: Master Plans for Distribution captured in Unveiling The Retirement Myth?
- The free version will not self-destruct.
- As I understand it, there are no regular updates to the purchased version.
3. Does the $19.99 version of the book allow one to insert comments and print selected pages, tables and comments multiple times?
As a general comment, Jim Otar's writing is clear and convincing. His "engineering" approach to personal finance works well for me. I would much rather see more engineers getting into personal finance than the "financial engineering" of the Wall Street
Victoria
1. Is the information in Otar's chapter of Retirement Income Redesigned: Master Plans for Distribution captured in Unveiling The Retirement Myth?
2. What are the benefits of buying the calculator in comparison to using the free version?Ron wrote:Here's a part of it, if you wish to view a chapter to guide your purchase/loan decision:bob u. wrote:For those of us in the distribution phase, I'd also recommend Jim Otar's essay, "Lifelong Retirement Income: How to Quantify and Eliminate Luck" (published in Retirement Income Redesigned: Master Plans for Distribution, edited by Harold Evensky & Deena B. Katz).
It's an expensive book so you might want to visit your local library (assuming the library has it). Bob U.
http://books.google.com/books?id=7ITaIv ... q=&f=false
- Ron
- The free version will not self-destruct.
- As I understand it, there are no regular updates to the purchased version.
3. Does the $19.99 version of the book allow one to insert comments and print selected pages, tables and comments multiple times?
As a general comment, Jim Otar's writing is clear and convincing. His "engineering" approach to personal finance works well for me. I would much rather see more engineers getting into personal finance than the "financial engineering" of the Wall Street
Victoria
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
- speedbump101
- Posts: 999
- Joined: Thu Oct 18, 2007 10:54 pm
- Location: Alberta Canada
1. YesVictoriaF wrote:I discovered Jim Otar yesterday and spent a fair part of this weekend trying his free calculator, reading his papers, and ordering the book. Now, I have several questions, answers to which I could not find elsewhere.
1. Is the information in Otar's chapter of Retirement Income Redesigned: Master Plans for Distribution captured in Unveiling The Retirement Myth?
2. What are the benefits of buying the calculator in comparison to using the free version?Ron wrote:Here's a part of it, if you wish to view a chapter to guide your purchase/loan decision:bob u. wrote:For those of us in the distribution phase, I'd also recommend Jim Otar's essay, "Lifelong Retirement Income: How to Quantify and Eliminate Luck" (published in Retirement Income Redesigned: Master Plans for Distribution, edited by Harold Evensky & Deena B. Katz).
It's an expensive book so you might want to visit your local library (assuming the library has it). Bob U.
http://books.google.com/books?id=7ITaIv ... q=&f=false
- Ron
- The free version will not self-destruct.
- As I understand it, there are no regular updates to the purchased version.
3. Does the $19.99 version of the book allow one to insert comments and print selected pages, tables and comments multiple times?
As a general comment, Jim Otar's writing is clear and convincing. His "engineering" approach to personal finance works well for me. I would much rather see more engineers getting into personal finance than the "financial engineering" of the Wall Street
Victoria
2. The free version is locked on age 55, other than this it is identical to the commercial one.
3. Print all or part, yes... comment your copy, I don't know. If this is a big issue I'd email Otar directly at cotar@rogers.com He answers email very quickly...
BTW as this thread attests it's a worthwhile read...
SB...
"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein
speedbump101,
Thank you. I sent a message to Jim Omar with my question #3 and received a response as follows:
Thank you. I sent a message to Jim Omar with my question #3 and received a response as follows:
VictoriaJim Otar wrote:The printable version will allow you to print it, nothing else.
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
I am too usually skeptical when financial planners use very high precision. Even when tools produce results with two decimal points, it does not mean that practical goals could not be rounded to whole values or even increments of 5%. Thus, if somebody told me that I needed to keep 45.67% in stocks, 43.21% in bonds, and 11.12% in cash, I would dismiss it as unnecessarily precise.livesoft wrote:The Trinity study was for a 30-year retirement nominally age 65 to age 95. Otar's Figure 41-5 on p. 444 gives 3.7% for the top of the Green zone for the same age range. To me 3.7% is "about 4%".!
However, different components of a financial plan may have different sensitivity, and the withdrawal rate seems to be such a component. I think there are several reasons for the difference in the need for precision in the withdrawal rates and asset allocation:
1. The difference between the 4% recommended by the Trinity Study and 3.7% recommended by Jim for a 30-year portfolio is: 4% - 3.7% = 0.3%. 0.3% / 3.7% =~ 8%.
2. Compounding 8% over 30 years could lead to a difference between making it to the end and not making it.
3. The precise withdrawal rates (3.7% or 4%) produce precise results for a given scenario of assets, inflation and luck. The asset allocation, on the other hand, does not produce precise results because different asset classes historically have not performed consistently, and thus more leeway in the asset allocation is possible.
I second your advice to read Otar's book. For me the "fear" category provides a threshold for when I can take an early retirement.livesoft wrote:In the US, social security benefits are a CPI-linked annuity. These are included in FIREcalc if you so desire, so one could consider FIREcalc a kind of Gray Zone calculation which also helps to lead to about a 4% SWR.
As for 60% or 75% equities, we learn from Otar and others that you get about the same results if you are in the Green Zone over a broad range of equity percentages.
Anyways, everyone with a portfolio earmarked for retirement should read this book. If you like risk (I seem to be riskier than others on this forum), then you will land in his "hope" category. If you don't like risk, you will land in his "fear" category. There's something for everyone!
Victoria
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
The fact that 3.7% and 4.0% are meaningfully (ie 8%) different, does not mean that the methodology is sufficiently accurate to recommend one over the other. If the methodology is not accurate enough to decide meaningful differences, then that is a weakness, but to the above degree, for this problem, hardly one that one should worry about given the overall difficulty in producing an accurate result in this field. The actual accuracy of this methodology has not been established, nor, that I could see was an attempt even made to estimate the accuracy, but I may have skimmed too quickly and missed this point.
Note the distinction between accuracy and (false) precision is well noted.
Note the distinction between accuracy and (false) precision is well noted.
The methodology -- as I understand it -- is to tell one what results his portfolio and various planning parameters would have produced during 30-year, 40-year, etc., decumulation intervals over the past 100 years. The next 100 years will be different from the past 100 years, but nobody knows in what ways they will be different.dbr wrote:The fact that 3.7% and 4.0% are meaningfully (ie 8%) different, does not mean that the methodology is sufficiently accurate to recommend one over the other. If the methodology is not accurate enough to decide meaningful differences, then that is a weakness, but to the above degree, for this problem, hardly one that one should worry about given the overall difficulty in producing an accurate result in this field. The actual accuracy of this methodology has not been established, nor, that I could see was an attempt even made to estimate the accuracy, but I may have skimmed too quickly and missed this point.
Note the distinction between accuracy and (false) precision is well noted.
I am not sure it is possible to assess the accuracy of a financial planning model a priori for any model.
Victoria
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
- Opponent Process
- Posts: 5157
- Joined: Tue Sep 18, 2007 9:19 pm
sounds like common sense to me. why don't people just do this and skip the drama? are they bored? what am I missing?Sheepdog wrote:Here I am again. Don't adjust for inflation. Set your withdrawal percentage (I recommend in the 4 to 5% range, but it doesn't have to be) based on your current portfolio balance. Let your investment growth be your inflation hedge. Have more, you can spend more and vice versa. You will never run out. Just have an investment portfolio in your comfort zone when you start out. Caveat: Don't always spend your annual maximum goal, though. Try to budget to be below that amount and save your unspent dollars in your "budget bank" for the year when you need to spend more than your goal, like your round the world cruise or your new car.
Jim
30/30/20/20 |
US/International/Bonds/TIPS |
Average Age=37
- speedbump101
- Posts: 999
- Joined: Thu Oct 18, 2007 10:54 pm
- Location: Alberta Canada
Personally I'd suggest reading the whole book, and afterwards reflecting back on the areas which interest you... Picking a quote or two out of a 525 page book doesn't do his six years of work justice.
I don't believe the intent of the author was to advise anyone to take 3.7% or 4%. He hates MC simulations and this book doesn't profess to forecast anything. Quite the contrary!
Mr, Otar simply aftcasts the top and bottom 10% (the lucky and unlucky) and details what would have happened to them had they retired in any year between 1900 and 2008 using rolling data.
SB...BTW I've read it twice, and it will be a reference here for years to come
I don't believe the intent of the author was to advise anyone to take 3.7% or 4%. He hates MC simulations and this book doesn't profess to forecast anything. Quite the contrary!
Mr, Otar simply aftcasts the top and bottom 10% (the lucky and unlucky) and details what would have happened to them had they retired in any year between 1900 and 2008 using rolling data.
SB...BTW I've read it twice, and it will be a reference here for years to come
Last edited by speedbump101 on Mon Sep 21, 2009 8:14 pm, edited 1 time in total.
"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein
For what it's worth, what you described is close to what most retired Bogleheads are doing. Here are the results of a poll from earlier this month:Opponent Process wrote:sounds like common sense to me. why don't people just do this and skip the drama? are they bored? what am I missing?Sheepdog wrote:Here I am again. Don't adjust for inflation. Set your withdrawal percentage (I recommend in the 4 to 5% range, but it doesn't have to be) based on your current portfolio balance. Let your investment growth be your inflation hedge. Have more, you can spend more and vice versa. You will never run out. Just have an investment portfolio in your comfort zone when you start out. Caveat: Don't always spend your annual maximum goal, though. Try to budget to be below that amount and save your unspent dollars in your "budget bank" for the year when you need to spend more than your goal, like your round the world cruise or your new car.
Jim
What is your preferred withdrawal formula?
1. Fixed Dollar Amount and increase for inflation. 15%
2. Variable Dollar Amount depending on annual portfolio performance. 32%
3. Spend only dividend and interest distributions. 10%
4. Spend only what I need without concern for any formula. 24%
5. Other - Please explain. 5%
6. I'm not withdrawing from my portfolio yet, but I wanted to vote just the same. 11%
Total Votes : 86
http://www.bogleheads.org/forum/viewtopic.php?t=42606
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
Hi Huey,
Thank you for the insights. Even from reading Jim Otar's papers -- and especially his chapter in the retirement planning anthology -- I can appreciate his well-structured, clear approach and prudent advice, free of marketing clutter that is so common in other planners.
I also find it amazing that by not reading everything on this site, it is so easy to miss really remarkable information. It was Bob U's reference in an unrelated thread that prompted me to search for Otar's name and lead me to this discussion.
I am glad I did.
Victoria
Thank you for the insights. Even from reading Jim Otar's papers -- and especially his chapter in the retirement planning anthology -- I can appreciate his well-structured, clear approach and prudent advice, free of marketing clutter that is so common in other planners.
I also find it amazing that by not reading everything on this site, it is so easy to miss really remarkable information. It was Bob U's reference in an unrelated thread that prompted me to search for Otar's name and lead me to this discussion.
I am glad I did.
Victoria
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
- speedbump101
- Posts: 999
- Joined: Thu Oct 18, 2007 10:54 pm
- Location: Alberta Canada
Here is a very nice review on Amazon of Otar's just released 'Unveiling the Retirement Myth.' I totally agree with the reviewer's opinion of this book.
http://www.amazon.com/Unveiling-Retirem ... ewpoints=1
SB...
http://www.amazon.com/Unveiling-Retirem ... ewpoints=1
SB...
"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein
Jim Otar
I am a very junior and very inexperienced investor trying to get in shape for a 2012 retirement. My current plan and asset allocation was suggested to me on this forum and I am comfortable with it.
I'm posting here for two reasons. First is that I have been using Jim Otar's program for 3 years now to help me with budgeting withdrawals, and find that it is very easy to use yet very powerful. This may be important to some forum members who are like me - mathematically challenged and easily put to sleep by columns of numbers. Second is that Mr. Otar is a remarkable person. I sent him an email that included a portion of his spreadsheet built from my modest portfolio and information. I wasn't sure that I was understanding it correctly. He arranged a telephone conference and a desktop-sharing service that took about 45 minutes. Amazing!! I also want to bump the thread so that others like me can read it.
I cannot comment on the statistics he uses but his explanations made perfect sense. I have purchased his book on Amazon and when it arrives I will display it prominently in my study.
I'm posting here for two reasons. First is that I have been using Jim Otar's program for 3 years now to help me with budgeting withdrawals, and find that it is very easy to use yet very powerful. This may be important to some forum members who are like me - mathematically challenged and easily put to sleep by columns of numbers. Second is that Mr. Otar is a remarkable person. I sent him an email that included a portion of his spreadsheet built from my modest portfolio and information. I wasn't sure that I was understanding it correctly. He arranged a telephone conference and a desktop-sharing service that took about 45 minutes. Amazing!! I also want to bump the thread so that others like me can read it.
I cannot comment on the statistics he uses but his explanations made perfect sense. I have purchased his book on Amazon and when it arrives I will display it prominently in my study.
- Bylo Selhi
- Posts: 1310
- Joined: Mon Feb 19, 2007 9:40 pm
- Location: Great White North
- Contact:
Via FWF: Download Otar's book Unveiling The Retirement Myth for free until 02Jan11.
Thanks!Bylo Selhi wrote:Via FWF: Download Otar's book Unveiling The Retirement Myth for free until 02Jan11.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
Due to the popular demand, and to celebrate the festive season a bit longer, I extended the free download until January 9th/ 2011. Enjoy it.
Jim Otar
[url]www.retirementoptimizer.com[/url]
Jim Otar
[url]www.retirementoptimizer.com[/url]
Here's a clickable link to the RetirementOptimizer.com homepage.cotar@rogers.com wrote:[xrl]www.retirementoptimizer.com[/url]
Jim
A big thanks to Jim Otar for his wonderful book and making it available to download.
Chuck |
Past Performance Is Just That - bob |
For info on the SC LowCountry & Savannah GA Area Bogleheads contact me at chucktanner46@gmail.com
- LGRZEMKOWSKI
- Posts: 60
- Joined: Sun Dec 16, 2007 6:01 pm
- Location: GREEN BAY, WI
JIM OTAR
I have down loaded your book and purchased the software and have also ordered your other book "Retirement Income Redesigned". What I have noticed with our parents is that after 75 years old they don't care to travel much. At my present withdrawal rate ($27,000) we are just in the green zone. But I have a what if question. Lets say for the first 10 years I would like to withdrawal an extra $5,000 making the withdrawal rate $32,000 (putting me in the grey zone) knowing that I would revert to $20,000 after we reach 75. These are general figures but is there a way to check this out in the Excel spreadsheet? BTW an annuity is out of the question because I am not sure if our government will survive say nothing about an insurance company. I know in that case nothing matters but I must assume we will all survive.
I have down loaded your book and purchased the software and have also ordered your other book "Retirement Income Redesigned". What I have noticed with our parents is that after 75 years old they don't care to travel much. At my present withdrawal rate ($27,000) we are just in the green zone. But I have a what if question. Lets say for the first 10 years I would like to withdrawal an extra $5,000 making the withdrawal rate $32,000 (putting me in the grey zone) knowing that I would revert to $20,000 after we reach 75. These are general figures but is there a way to check this out in the Excel spreadsheet? BTW an annuity is out of the question because I am not sure if our government will survive say nothing about an insurance company. I know in that case nothing matters but I must assume we will all survive.
TIME the most precious commodity!
Otar seems to be on the same page (or reading from?) Milevsky:
http://www.ifid.ca/pdf_workingpapers/WP2004FEB28.pdf
>
Regardless of title, the concept of lifetime ruin is at the core of various commercial
software packages that provide retirement advice, and motivated by the continued interest
in the topic, our paper goes back to rst principles and employs analytic techniques to
represent the probability of lifetime ruin as the solution to a Partial Di¤erential Equation
(PDE). We then use a numerical Crank-Nickolson scheme to solve this second-order linear
PDE.
With a rapid algorithm at our disposal, we implement our procedure using equity market
parameters derived from US-based ination-adjusted nancial data as reported by Ibbotson
Associates (2002). We conclude that a 65-year-old retiree requires 30 times their desired an-
nual (real) consumption to generate a 95% probability of sustainability which is equivalent
to a 5% probability of lifetime ruin if the funds are invested in a well-diversi ed equity
portfolio earning a real (arithmetic mean) 7% per annum with a standard deviation of 20%.
We provide similar estimates for di¤erent ages and under a collection of di¤ering return
and volatility assumptions. The 30-to-1 margin of safety can be contrasted with the relevant
annuity factor for an ination-linked income which would generate a zero probability of life-
time ruin. Thus, for those retirees who decide to self-annuitize, the lifetime ruin probability
can provide a summary risk metric.
>
http://www.ifid.ca/pdf_workingpapers/WP2004FEB28.pdf
>
Regardless of title, the concept of lifetime ruin is at the core of various commercial
software packages that provide retirement advice, and motivated by the continued interest
in the topic, our paper goes back to rst principles and employs analytic techniques to
represent the probability of lifetime ruin as the solution to a Partial Di¤erential Equation
(PDE). We then use a numerical Crank-Nickolson scheme to solve this second-order linear
PDE.
With a rapid algorithm at our disposal, we implement our procedure using equity market
parameters derived from US-based ination-adjusted nancial data as reported by Ibbotson
Associates (2002). We conclude that a 65-year-old retiree requires 30 times their desired an-
nual (real) consumption to generate a 95% probability of sustainability which is equivalent
to a 5% probability of lifetime ruin if the funds are invested in a well-diversi ed equity
portfolio earning a real (arithmetic mean) 7% per annum with a standard deviation of 20%.
We provide similar estimates for di¤erent ages and under a collection of di¤ering return
and volatility assumptions. The 30-to-1 margin of safety can be contrasted with the relevant
annuity factor for an ination-linked income which would generate a zero probability of life-
time ruin. Thus, for those retirees who decide to self-annuitize, the lifetime ruin probability
can provide a summary risk metric.
>
Here's an Excel equation to compute the chance of "ruin."
http://www.ifid.ca/pdf_workingpapers/WP2007JUN1_RRQ.pdf
http://www.ifid.ca/pdf_workingpapers/WP2007JUN1_RRQ.pdf
[quote="Bongleur"]Otar seems to be on the same page (or reading from?) Milevsky:
>
I wrote about the asset to withdrawal ratio of 30 for a 30-year retirement time horizon in 2001 in my book "High Expectations and False Dreams - One Hundred Years of Stock Market History applied to Retirement Planning"
On the other hand Mr. Milevsky (and Kwok Ho and Chris Robinson) wrote in 1999 in their article "How to Avoid Outliving Your Money" the following: " .. consider a well-off individual, with $1 million upon retirement at age 65 and an expectation to consume $50,000 annually in real dollars - a wealth-to-consumption ratio of 20. As shown, the optimal investment allocation for the female is to have three quarters of her portfolio in equity, putting her risk of shortfall at 8.6%. The male in the example is better off, with a shortfall risk of 5%"
In real life, when you do an aftcast of all retirement years since 1900 (instead of a simulation), the probability of failure is much higher than 5% to 9% professed their article; it is somewhere between 50% and 70% depending which index (DJIA, S&P500, TSX) you pick.
The only reason I started researching the topic of sustainability of retirement income 12 years ago, was to ignore all similar junk science and to find my own truth for my own retirement. Along the way, I found great research, like William Bengen's writings on sustainable withdrawal rates and Bernstein's "Retirement Calculator from Hell". There were no more than a handful of visionaries on this topic. All the rest, especially the academic papers at that time, qualified as "real junk" for me. Throw in a Monte Carlo simulator, a few partial differential equations, and voila, you have a new article. Unfortunately, most of the academic stuff is still junk, but perhaps not as much as 10 years ago, and thankfully many investors and advisors are now better informed.
I am glad my research took me where it took me over the last decade, I am glad I was able to share all my articles freely with others, I am glad that I was able to influence others positively, and I am glad many others have learned from me. Last decade was well worth using my engineering skills to help others on this subject. And finally, I am glad to know that I am in the green zone.
>
I wrote about the asset to withdrawal ratio of 30 for a 30-year retirement time horizon in 2001 in my book "High Expectations and False Dreams - One Hundred Years of Stock Market History applied to Retirement Planning"
On the other hand Mr. Milevsky (and Kwok Ho and Chris Robinson) wrote in 1999 in their article "How to Avoid Outliving Your Money" the following: " .. consider a well-off individual, with $1 million upon retirement at age 65 and an expectation to consume $50,000 annually in real dollars - a wealth-to-consumption ratio of 20. As shown, the optimal investment allocation for the female is to have three quarters of her portfolio in equity, putting her risk of shortfall at 8.6%. The male in the example is better off, with a shortfall risk of 5%"
In real life, when you do an aftcast of all retirement years since 1900 (instead of a simulation), the probability of failure is much higher than 5% to 9% professed their article; it is somewhere between 50% and 70% depending which index (DJIA, S&P500, TSX) you pick.
The only reason I started researching the topic of sustainability of retirement income 12 years ago, was to ignore all similar junk science and to find my own truth for my own retirement. Along the way, I found great research, like William Bengen's writings on sustainable withdrawal rates and Bernstein's "Retirement Calculator from Hell". There were no more than a handful of visionaries on this topic. All the rest, especially the academic papers at that time, qualified as "real junk" for me. Throw in a Monte Carlo simulator, a few partial differential equations, and voila, you have a new article. Unfortunately, most of the academic stuff is still junk, but perhaps not as much as 10 years ago, and thankfully many investors and advisors are now better informed.
I am glad my research took me where it took me over the last decade, I am glad I was able to share all my articles freely with others, I am glad that I was able to influence others positively, and I am glad many others have learned from me. Last decade was well worth using my engineering skills to help others on this subject. And finally, I am glad to know that I am in the green zone.
Your book "Unveiling the Retirement Myth" has been very informative and helpful in planning my withdrawals now that I am retired and am in the distribution phase. I purchased the actual book and also downloaded your free .pdf. I've been reading some of it online and whenever I find something that is particularly interesting, I pick up the book and mark it with pen and highlighter for future use. Thanks very much for taking so much time to put together so many examples as it has really given me a much better idea of the many variables involved in making sure my money lasts as long as I do.cotar@rogers.com wrote: I am glad my research took me where it took me over the last decade, I am glad I was able to share all my articles freely with others, I am glad that I was able to influence others positively, and I am glad many others have learned from me. Last decade was well worth using my engineering skills to help others on this subject. And finally, I am glad to know that I am in the green zone.
You should acknowledge that in calculating the probability of retirement ruin you cannot simply assume that all retirees are still alive after 29 years 364 days and then promptly keel over the next day.cotar@rogers.com wrote:In real life, when you do an aftcast of all retirement years since 1900 (instead of a simulation), the probability of failure is much higher than 5% to 9% professed their article; it is somewhere between 50% and 70% depending which index (DJIA, S&P500, TSX) you pick.
When you say the failure rate is 50 to 70% you only consider one of the stochastic processes involved – the variability of returns. You ignore the variability of life expectancy. Milevsky incorporates both in his formula – leading to a much more intelligent answer.
Note I refer to an intelligent answer, not an accurate answer. The uncertainty surrounding the assumptions made about future returns (regardless of whether historical data or parametric methods are used) and life expectancies are such that the accuracy of the prediction cannot be known.
We can only comment on the theoretical superiority of one method vs. another.
- Steve Thorpe
- Posts: 243
- Joined: Mon Oct 15, 2007 1:26 pm
- Location: Durham, NC
Re: The Decumulation Phase
Verde wrote:
"You ignore the variability of life expectancy. Milevsky incorporates both in his formula – leading to a much more intelligent answer. "
Yes, I agree,it is a much more intelligent answer, only if the retiree dies at the age of average life expectancy. How would a financial plan work if one were to live 30 years plus one day, according to this logic?
It is exactly for that reason, i.e. because I do not ignore the variability of life expectancy, I design my plans to last until the age where the survival rate of 10% or lower (= age 95 or higher). If I were to ignore the variability of life expectancy, then I would have used the life expectancy in my formula too.
Large pools of people create "averages", not the other way around; i.e. averages do not apply individuals. I had smoker clients who lived till age 100 and I have many health food/distilled water/exercise-obsessed clients, one of whom died had a heart attack and died at age 52.
If I knew the exact date of expiry of a client, I'd be happy to design the most intelligent plan, still, no guarantees that it will work.
"You ignore the variability of life expectancy. Milevsky incorporates both in his formula – leading to a much more intelligent answer. "
Yes, I agree,it is a much more intelligent answer, only if the retiree dies at the age of average life expectancy. How would a financial plan work if one were to live 30 years plus one day, according to this logic?
It is exactly for that reason, i.e. because I do not ignore the variability of life expectancy, I design my plans to last until the age where the survival rate of 10% or lower (= age 95 or higher). If I were to ignore the variability of life expectancy, then I would have used the life expectancy in my formula too.
Large pools of people create "averages", not the other way around; i.e. averages do not apply individuals. I had smoker clients who lived till age 100 and I have many health food/distilled water/exercise-obsessed clients, one of whom died had a heart attack and died at age 52.
If I knew the exact date of expiry of a client, I'd be happy to design the most intelligent plan, still, no guarantees that it will work.
- speedbump101
- Posts: 999
- Joined: Thu Oct 18, 2007 10:54 pm
- Location: Alberta Canada
Re: The Decumulation Phase
Jim,
As OP here I see you've opened a 4 yr old thread with the last post being 2 1/2 years ago.
Regardless, I'd like to reiterate my appreciation of your book, Unveiling the Retirement Myth, which together with the works of Milevsky, Zwecher, and the Lifecycle crowd (Paula Hogan et al) eminently explained here by poster Bobcat2, have been the guiding light of my now five and a half year old retirement.
Some day I hope you'll find time to attend a Boglehead convention where those of us whose lives have been positively affected by you would have a chance to meet and thank you personally. Wouldn't Philadelphia, Oct 2014 would look nice on your calendar?
SB...
As OP here I see you've opened a 4 yr old thread with the last post being 2 1/2 years ago.
Regardless, I'd like to reiterate my appreciation of your book, Unveiling the Retirement Myth, which together with the works of Milevsky, Zwecher, and the Lifecycle crowd (Paula Hogan et al) eminently explained here by poster Bobcat2, have been the guiding light of my now five and a half year old retirement.
Some day I hope you'll find time to attend a Boglehead convention where those of us whose lives have been positively affected by you would have a chance to meet and thank you personally. Wouldn't Philadelphia, Oct 2014 would look nice on your calendar?
SB...
"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein
Re: The Decumulation Phase
I would love to come to Philadelphia in Oct 2014 and meet everyone.
Last edited by JOtar on Tue Oct 29, 2013 6:24 pm, edited 1 time in total.
- nisiprius
- Advisory Board
- Posts: 52217
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re:
It is an intelligent answer if you are a pension manager with a single large pool of assets, supporting retirement payments a large pool of people. It is not an intelligent answer for an individual funding his own retirement from a small pool of assets. Having to plan for the maximum length of retirement rather than the average length of retirement is the unavoidable inefficiency of going it alone.Verde wrote:When you say the failure rate is 50 to 70% you only consider one of the stochastic processes involved – the variability of returns. You ignore the variability of life expectancy. Milevsky incorporates both in his formula – leading to a much more intelligent answer.
To say "a 10% failure rate isn't really a 10% failure rate because your body might fail before the portfolio does" doesn't inspire much confidence. But in any case, you want to work up some kind of methodology for deciding what planned failure rate is acceptable, and why. In the real world, I suspect that real failure rates are all but certain to be much higher than planned rates.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: The Decumulation Phase
It seems to me that quoting the joint probability that I will be alive and that I will be out of money is a reasonable thing to do. It is certainly less arbitrary than quoting the probability that I will be out of money after Y years. There is an option to make Y ridiculously long, such as 50 years from retirement (not ridiculous for the early retiree, but there's the idea). I think SWR tends to an asymptote with years such that one effectively estimates permanent survival by the time one is at 50 years.
The result, if the criterion is x% failure, is a higher SWR for the first method and a lower one for the last method.
Some of this is just deciding what question one wants answered.
The result, if the criterion is x% failure, is a higher SWR for the first method and a lower one for the last method.
Some of this is just deciding what question one wants answered.
Re: The Decumulation Phase
If you promise to come to Philly, Jim, I may have to schedule a trip.
Besides, it may make my in-laws happy.
Lev
Besides, it may make my in-laws happy.
Lev
Re: The Decumulation Phase
I'd not only like to meet Mr. Otar but I'd be interested in hearing his views, either in a presentation or as part of an expert's panel.JOtar wrote:I would love to come to Philadelphia in Oct 2014 and meet everyone.