Does Micheal Kitces Rising Retirement Glidepath Still have legs

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Cody
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Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Cody » Wed Feb 08, 2017 10:13 am

Edited: The article was authored by Wade D. Pfau, Ph.D., CFA; and Michael E. Kitces

In my quest to decide between Target Funds and Lifestragy funds (both Vanguard) I am wondering if the article by Kitches (Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better?) gained much traction? https://www.kitces.com/blog/should-equi ... ly-better/

The article was writtten in 2013 and my anecdotal evidence that is has not gained my tranction is there are not "Increasing equity" fund of funds at Vanguard. There are Target Dated Funds that decrease equity in retirement and Lifestragy Funds that remain at a static AA but not funds that increase equity.

So what is the status of the increasing equity glidepath idea of Micheal Kitches?

Thanks,
Cody
Last edited by Cody on Wed Feb 08, 2017 1:52 pm, edited 1 time in total.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by nisiprius » Wed Feb 08, 2017 10:28 am

For what it's worth, he seems to be calling it a "bond tent" now.
...Using a Bond Tent to Navigate the Retirement Danger Zone.

That is, he is de-emphasizing the importance of the reverse glide path and "more stocks," and emphasizing a point that was often missed when the paper was published, which was that he was advocating glide paths should dip lower during the danger zone than traditional glide paths so. It only "goes higher" because it "dips lower."
Last edited by nisiprius on Wed Feb 08, 2017 10:54 am, edited 1 time in total.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Snowjob » Wed Feb 08, 2017 10:39 am

My allocation will become more equity heavy as I age -- probably to the 90/10 level at the upper end.

However, the important side note to this is that I will be trading bonds for Social Security and Annuities in my 70's.

Absent the safety nets of SS and Annuities, I don't think an increased allocation to equity would be a wise idea.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by DaftInvestor » Wed Feb 08, 2017 10:42 am

Based upon his misguided negative attitude against Back-Door Roths (and being the only one in this camp) I don't read anything Kitces writes.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by The Wizard » Wed Feb 08, 2017 10:45 am

I thought this concept came from Wade Pfau, not Kitces...
Attempted new signature...

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by dbr » Wed Feb 08, 2017 10:45 am

I doubt any investment company is going to take a public position that elderly investors should be shifting more and more into stocks no matter what nuance suggests possible advantages in certain circumstances.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by RetiredinKaty » Wed Feb 08, 2017 12:56 pm

We are living in an era of muted expected stock returns. I think this fact pretty much kills in-retirement glide paths, up or down.

Historically that stocks have done really well but occasionally not so much. So, if you started retirement with just 20% in stocks, you can expect to be protected from a number of early bad years in series and still do well enough (with a gradually rising glide path) over your retirement life. But if stock returns overall are muted relative to history, 20% initially may not provide adequate growth.

I have chosen a fixed 40% stock allocation for "active retirement". I will consider a lower allocation in mature retirement if I make it that far.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by David Jay » Wed Feb 08, 2017 1:31 pm

Cody wrote:In my quest to decide between Target Funds and Lifestragy funds (both Vanguard) I am wondering if the article by Kitches (Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better?) gained much traction? https://www.kitces.com/blog/should-equi ... ly-better/

The article was writtten in 2013 and my anecdotal evidence that is has not gained my tranction is there are not "Increasing equity" fund of funds at Vanguard. There are Target Dated Funds that decrease equity in retirement and Lifestragy Funds that remain at a static AA but not funds that increase equity.

So what is the status of the increasing equity glidepath idea of Micheal Kitches?

Thanks,
Cody
I think the countervailing issue is behavioral - people tend to become more risk averse as they age. So even if the math says to increase your AA after you get through the early retirement years, I think financial firms will be hesitant to market increasing equity allocations for the elderly.

For me, my "bridge" funds (funds to get me from early retirement to SS benefit) are fully covered by short term and intermediate bonds, the remainder will be in a 60/40 portfolio indefinitely (that is, until I can't stand the risk :happy ).
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by nisiprius » Wed Feb 08, 2017 1:40 pm

The Wizard wrote:I thought this concept came from Wade Pfau, not Kitces...
They coauthored the 2013 paper, Pfau, Wade D., and Michael E. Kitces. “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning 27 (1): 38–45.,
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Snowjob » Wed Feb 08, 2017 1:42 pm

DaftInvestor wrote:Based upon his misguided negative attitude against Back-Door Roths (and being the only one in this camp) I don't read anything Kitces writes.
Not to deviate to much but I enjoy listening to dissent, please elaborate =)

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by nisiprius » Wed Feb 08, 2017 1:44 pm

Oddly enough, speaking solely for myself, I found that my personal risk tolerance did decline as I approached the "danger zone" years, and now that I am in retirement I find myself relaxing a bit. This is all 100% subjective. Most glide paths would call for continuing to reduce stock allocation, albeit at a low rate, in retirement. I'm not increasing my stock allocation, but I personally feel no urge to reduce it any further.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Snowjob » Wed Feb 08, 2017 1:58 pm

nisiprius wrote:Oddly enough, speaking solely for myself, I found that my personal risk tolerance did decline as I approached the "danger zone" years, and now that I am in retirement I find myself relaxing a bit. This is all 100% subjective. Most glide paths would call for continuing to reduce stock allocation, albeit at a low rate, in retirement. I'm not increasing my stock allocation, but I personally feel no urge to reduce it any further.
I'm sure this has more to do with just being nervous about retiring than anything else.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Devil's Advocate » Wed Feb 08, 2017 2:08 pm

Sure
Nervous he'll encounter a bear market right before he retires and have too much in equities. That's pretty much the point of increasing bonds closer to retirement.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Wed Feb 08, 2017 7:28 pm

as I have explained before that study never had legs. We analyzed the data and found that the benefit of improved monte carlo came simply from a low equity allocation at the start, not from a rising allocation of equity. Now you have to add that in my experience is that there is almost no way most older investors could handle a high equity allocation as they age.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Wed Feb 08, 2017 7:28 pm

as I have explained before that study never had legs. We analyzed the data and found that the benefit of improved monte carlo came simply from a low equity allocation at the start, not from a rising allocation of equity. Now you have to add that in my experience is that there is almost no way most older investors could handle a high equity allocation as they age.
Best wishes
Larry

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by FIREchief » Wed Feb 08, 2017 8:46 pm

larryswedroe wrote:as I have explained before that study never had legs. We analyzed the data and found that the benefit of improved monte carlo came simply from a low equity allocation at the start, not from a rising allocation of equity. Now you have to add that in my experience is that there is almost no way most older investors could handle a high equity allocation as they age.
Best wishes
Larry
Larry - I do remember those discussions. With all due respect, I know that you offered a contrary opinion, but I don't believe that you ever supported your position to the satisfaction of many on the forum. Just to say that "Kitces' theory was bad" doesn't prove that it is not valid. Sure, analysis and simulations using historical data can support just about anything somebody wants to support, but it doesn't prove anything. In many situations, people are willing to entertain the idea that risk can be increased as future liabilities decrease.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Northern Flicker » Wed Feb 08, 2017 9:25 pm

The basic idea is to mitigate sequence of return risk in the early stage of retirement when it is most impactful, not to increase equity percentage throughout retirement.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Peter Foley » Wed Feb 08, 2017 10:42 pm

Like many investment theories, I think the Rising Equity Glidepath makes sense for some retirees.

Which ones depends on their portfolio, their ability and willingness to moderate their expenses/modify their lifestyle, and their risk tolerance.

Let's face it, if you have saved enough to be very comfortable in retirement, a few years of low returns around the time you retire because you are being cautious is not going to impact your lifestyle. For many folks, I just don't see a downside - for their heirs perhaps.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by dreamrrr » Wed Feb 08, 2017 11:47 pm

I am planning on an increasing equity glide path.

I do not recommend this for anyone else. This approach only applies to my own situation.

I retired in 2014. 6 months before retirement, I was 60% in a stable value fund and 40% in cash. No equities. Since I was planning to retire in 6 months and I wanted to have some equity allocation, I started to slowly buy some ETF equites from my cash accounts. Now 3 years later, I am 32% in equities, 59% in stable value, and 9% in cash. I'm comfortable with this allocation for now. But I currently have annual income that is more than double my annual expenses. So I take the excess income and invest that in equities and more stable value shares. I never anticipate needing to draw down any of my investments. I could double my annual spending now and still not need to draw money from my investments.

My investment horizon is infinite. The equities I'm buying will never be sold and will be passed on to my heirs.

So I will keep reinvesting my excess income and when I turn 70, I will take RMDs from the stable value account and reinvest the after tax portion in equities in my brokerage account. Each year I will own more equities and after the RMDs start, the stable value portion will begin to gradually decrease. I don't know when I will pass but I expect to live a very long life and my final AA could very well be 80% to 90% equities.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Thu Feb 09, 2017 9:13 am

Firechief
I explained that we reviewed the work and discussed it with Michael himself that the benefits came from the low starting equity and not from the rising glidepath. And I believe even in his piece he said the benefit was small while totally ignoring the psychological issues.
Larry

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by flyingaway » Thu Feb 09, 2017 9:22 am

Peter Foley wrote:Like many investment theories, I think the Rising Equity Glidepath makes sense for some retirees.

Which ones depends on their portfolio, their ability and willingness to moderate their expenses/modify their lifestyle, and their risk tolerance.

Let's face it, if you have saved enough to be very comfortable in retirement, a few years of low returns around the time you retire because you are being cautious is not going to impact your lifestyle. For many folks, I just don't see a downside - for their heirs perhaps.
It might be a good idea when someone is retiring at the market high.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by CyclingDuo » Thu Feb 09, 2017 9:49 am

dreamrrr wrote:I am planning on an increasing equity glide path.

I do not recommend this for anyone else. This approach only applies to my own situation.

I retired in 2014. 6 months before retirement, I was 60% in a stable value fund and 40% in cash. No equities. Since I was planning to retire in 6 months and I wanted to have some equity allocation, I started to slowly buy some ETF equites from my cash accounts. Now 3 years later, I am 32% in equities, 59% in stable value, and 9% in cash. I'm comfortable with this allocation for now. But I currently have annual income that is more than double my annual expenses. So I take the excess income and invest that in equities and more stable value shares. I never anticipate needing to draw down any of my investments. I could double my annual spending now and still not need to draw money from my investments.

My investment horizon is infinite. The equities I'm buying will never be sold and will be passed on to my heirs.

So I will keep reinvesting my excess income and when I turn 70, I will take RMDs from the stable value account and reinvest the after tax portion in equities in my brokerage account. Each year I will own more equities and after the RMDs start, the stable value portion will begin to gradually decrease. I don't know when I will pass but I expect to live a very long life and my final AA could very well be 80% to 90% equities.
Excellent post!

Yes, it does apply to certain retirees - especially those who have plans to pass on assets to their heirs. That is one of our financial goals beyond funding our own retirement. We are beginning to move some things in the "money we will never need" portion of our retirement portfolios (using ROTH accounts for that). This is the model (equities) used by a parent who recently passed at 91 with an all equity diversified portfolio that was passed to his heirs. Based on our current age, there is a good chance the money we intend to "never need" in retirement will benefit from a good 30-35 years of growth before it is passed on to heirs which should meander through many bear-bull economic cycles.

At least that is the plan.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Miriam2 » Thu Feb 09, 2017 12:06 pm

Snowjob wrote:
DaftInvestor wrote:Based upon his misguided negative attitude against Back-Door Roths (and being the only one in this camp) I don't read anything Kitces writes.
Not to deviate to much but I enjoy listening to dissent, please elaborate =)
DaftInvestor is probably referring to these, among others:

viewtopic.php?f=10&t=186298 - Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's
viewtopic.php?f=10&t=185430
viewtopic.php?f=2&t=207300

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by DaftInvestor » Thu Feb 09, 2017 3:16 pm

Miriam2 wrote:
Snowjob wrote:
DaftInvestor wrote:Based upon his misguided negative attitude against Back-Door Roths (and being the only one in this camp) I don't read anything Kitces writes.
Not to deviate to much but I enjoy listening to dissent, please elaborate =)
DaftInvestor is probably referring to these, among others:

viewtopic.php?f=10&t=186298 - Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's
viewtopic.php?f=10&t=185430
viewtopic.php?f=2&t=207300
Yup - that's what I'm referring to. Statements like this:
Kitces wrote: as a rule of thumb with clients: If you want to do this, put the dollars in now, wait 12 months, and 12 months from now you can do your Roth conversion as a separate transaction. Once you have done that, a couple of weeks or months later you might then do a new Roth contribution to repeat the process the following year so we can move along over time. Basically, let the dollars season in the IRA for a year just so that if the IRS ever does come and ask the question, "Why shouldn't we just tax this as an excess Roth contribution?" You can say in good faith, "I made a stand-alone IRA contribution. I let it invest for a while, and I just decided of my own free will a year later in a separate decision to do a Roth conversion, and I shouldn't be punished for that."
If my intention is to do the backdoor - and if the IRS were to decide its a no-no - why would they care if I waited a day or "pretended" to change my minds or something by waiting a year each time. Strategy is obvious in either case so what he is telling his clients seems a bit silly. In one article he alludes to it being questionable and yet every other expert seems to say its okay (In addition to mainstream publications like Money and Kiplingers). He quotes a couple of generic IRS rules to try to make a case against backdooring when there really isn't one.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by galeno » Thu Feb 09, 2017 3:39 pm

https://www.wsj.com/articles/how-to-thi ... 1417408070

Why not use both glidepaths? Or none?

We're a 6o years old retired couple living from a current 2.7% AWR using a conservative 40/60 port.

We plan to let our equities slide to 30/70 over the next 10 years. At age 70 we will then let our equities go up until we die.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by BigJohn » Thu Feb 09, 2017 7:16 pm

Kitces bond tent and Bernstein's LMP approaches are somewhat similar ways to manage sequence of return risk in early retirement. I think these approaches are a prudent way to manage that risk and realize that I may get a lower return as a result. No surprise there as lower risk and lower return go hand in hand. I plan to let my stock allocation move up during the first ten years of retirement and then hold that allocation for the duration.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Fri Feb 10, 2017 11:03 am

FWIW, these "glide paths" IMO make no sense at all. Investors should be reevaluating their AA based on changing assumptions, which includes investment horizon (which is changing) and also market returns (if they are greater than expected your need to take risk now might be a lot less, and thus one might choose to lower equity allocation). Obviously changing bond yields can also impact need to take risks.
Larry

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Snowjob » Fri Feb 10, 2017 11:19 am

DaftInvestor wrote:
Miriam2 wrote:
Snowjob wrote:
DaftInvestor wrote:Based upon his misguided negative attitude against Back-Door Roths (and being the only one in this camp) I don't read anything Kitces writes.
Not to deviate to much but I enjoy listening to dissent, please elaborate =)
DaftInvestor is probably referring to these, among others:

viewtopic.php?f=10&t=186298 - Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's
viewtopic.php?f=10&t=185430
viewtopic.php?f=2&t=207300
Yup - that's what I'm referring to. Statements like this:
Kitces wrote: as a rule of thumb with clients: If you want to do this, put the dollars in now, wait 12 months, and 12 months from now you can do your Roth conversion as a separate transaction. Once you have done that, a couple of weeks or months later you might then do a new Roth contribution to repeat the process the following year so we can move along over time. Basically, let the dollars season in the IRA for a year just so that if the IRS ever does come and ask the question, "Why shouldn't we just tax this as an excess Roth contribution?" You can say in good faith, "I made a stand-alone IRA contribution. I let it invest for a while, and I just decided of my own free will a year later in a separate decision to do a Roth conversion, and I shouldn't be punished for that."
If my intention is to do the backdoor - and if the IRS were to decide its a no-no - why would they care if I waited a day or "pretended" to change my minds or something by waiting a year each time. Strategy is obvious in either case so what he is telling his clients seems a bit silly. In one article he alludes to it being questionable and yet every other expert seems to say its okay (In addition to mainstream publications like Money and Kiplingers). He quotes a couple of generic IRS rules to try to make a case against backdooring when there really isn't one.
I just hope if ever / whenever it happens there will be some sort of grandfathering heh

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by BigJohn » Fri Feb 10, 2017 1:08 pm

larryswedroe wrote:FWIW, these "glide paths" IMO make no sense at all. Investors should be reevaluating their AA based on changing assumptions, which includes investment horizon (which is changing) and also market returns (if they are greater than expected your need to take risk now might be a lot less, and thus one might choose to lower equity allocation).
Larry, not sure what you mean by "glide paths" that make no sense. If you mean a by rote formula like age in bonds that should be applied to everyone regardless of circumstances, then we're on the same page. However, what I described as my glide path above was based on just the factors you mentioned. As a result, I assume you are not opposed to a changing allocation based on market conditions and personal needs. Or am I misreading your comment and do you advocate a static allocation throughout? Just need to be careful that we don't get twisted around by the word glide path as it may have a different basis depending on the reader.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by randomguy » Fri Feb 10, 2017 1:44 pm

RetiredinKaty wrote:We are living in an era of muted expected stock returns. I think this fact pretty much kills in-retirement glide paths, up or down.

Historically that stocks have done really well but occasionally not so much. So, if you started retirement with just 20% in stocks, you can expect to be protected from a number of early bad years in series and still do well enough (with a gradually rising glide path) over your retirement life. But if stock returns overall are muted relative to history, 20% initially may not provide adequate growth.

I have chosen a fixed 40% stock allocation for "active retirement". I will consider a lower allocation in mature retirement if I make it that far.
I don't think this follows. Muted stock returns are caused by down markets (2000-2,2007, 1973-74) as much as the good years being bad. The expectation of bad returns going forward is based on us being overdue for a correction (5+ years since the last one) in the near future as stock growth has outpaced earnings growth.

Everything I have looked at suggests that for people with 20+ year time frames, things in the 40/60 to 60/40 range is the sweet spot. Exceptions for people with large pensions/other income sources and low SWR. What to pick really doesn't matter much. Lower bonds lets you sleep at night but the odds are you end up with less cash. That handles the 65 year old. What AA should that person hold in 15-20 years? Depends on what happened. Things like a portfolio doubling in real value, spouses dying, developing health issues, and a zillion other factors will change what is right. Your time frame has shrunk (say from 30 years to 15) and you have a ton more knowledge about what will happen over your 30 year retirement given it is half over.

There is a pretty narrow range of AA that make sense for most people (say 60/40 to 40/60) when the portfolio dominates retirement income (yeah if pensions/ss cover 80% of your expenses you can well outside of this range). It doesn't matter what you pick between them. The more aggressive portfolios are likely to leave you with more money in 30 years but the ride along the way might be bumpier.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by Peter Foley » Fri Feb 10, 2017 2:01 pm

larryswedroe wrote:
FWIW, these "glide paths" IMO make no sense at all.
Pascal's Wager, only the stakes aren't as high.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Fri Feb 10, 2017 3:40 pm

Big John

I didn't read your post and by glide path I meant like Kitces suggested, starting at one AA and moving over time to either a more or less risky portfolio (like with most TDF). IMO that makes no sense for the very reasons you suggest. It has to be tailored over time, or should be, to changing personal situations and market valuations--hence expected returns.
Larry

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by BrandonBogle » Fri Feb 10, 2017 4:05 pm

The Wizard wrote:I thought this concept came from Wade Pfau, not Kitces...
I do remember being in the conference room when Dr. Pfau discussed this as Bogleheads 2014. I got the impression it was originally his concept, but I did miss the beginning of the meeting.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by bertilak » Fri Feb 10, 2017 7:18 pm

nisiprius wrote:Oddly enough, speaking solely for myself, I found that my personal risk tolerance did decline as I approached the "danger zone" years, and now that I am in retirement I find myself relaxing a bit. This is all 100% subjective. Most glide paths would call for continuing to reduce stock allocation, albeit at a low rate, in retirement. I'm not increasing my stock allocation, but I personally feel no urge to reduce it any further.
My risk tolerance also went UP in retirement. This explains my AA change from 50/50 to 60/40. But that is not a glide path. It is a reaction to circumstances.

This was not a subjective feeling of confidence, but the result of paying of my mortgage. I felt I had a lot more leeway because my income needs went down dramatically. It is also because my income needs, even before paying of the mortgage, were met 100% by SS and a pension. Now it is more than 100%.

That mortgage scenario might not apply to everyone, but the general principle of reduced expenses may hold true for other reasons.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Fri Feb 10, 2017 8:13 pm

bertilak
Remember, a mortgage should be treated as negative exposure to your fixed income allocation, thus when it is gone you no longer have that negative.
Larry

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bertilak
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by bertilak » Fri Feb 10, 2017 8:57 pm

larryswedroe wrote:bertilak
Remember, a mortgage should be treated as negative exposure to your fixed income allocation, thus when it is gone you no longer have that negative.
Larry
If I look at it that way, my previous bond(-like) exposure was only 30%, not 50%. That mortgage sucked away a lot of the bond allocation. From that point of view, I went from 70/30 to 60/40. Perhaps my nominal move from 50/50 to 60/40 was not far enough. Hmm. Something to think about.

Well, thinking a little, I wonder if the uncertainty about how appropriate my original 50/50 really was does not justify such mathematically precise calculations to get from there to 70/30. Perhaps a baby step (like I took) is still the right thing. It keeps me further from an extreme position where missteps have bigger consequences.
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siamond
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by siamond » Fri Feb 10, 2017 11:00 pm

I have a lot of respect for Wade Pfau and Michael Kitces, they are great hard-working researchers with impeccable integrity, but I have to agree with Larry. I am afraid that this rising glide path never had legs to speak with.

The part that seemed to work was a case of starting retirement with high valuations, hence low expected returns, hence better have more bonds. Then a bear market occurs, and the AA slowly increases towards more equities, and lucky, they are cheap by then! Well, this is essentially what tactical asset allocation (TAA) tries to do, adjust one's AA based on current valuations, except that you'd play the game blindly and only once, at the beginning of your retirement, which is inconsistent at best. A rising equity path is essentially a clunky TAA scheme, and one which only works in rather specific circumstances.

The authors ended up indirectly acknowledging the point, and wrote a follow-up paper, calling such approach "valuation based asset allocation" (a fancy name for TAA). One can debate if TAA algorithms can work in real life. I personally looked at it for a while with an open mind, but ended up being thoroughly unconvinced as whatever small bonus I could find in backtesting was always explained by a higher average exposure to stocks. While taking a significant risk that my way of quantifying valuations would hold in the future, and that would be a remarkably flimsy assumption. I do believe there is a kernel of truth about valuations, but man, it is buried in quite some shifting smoke.

So... if you want a higher or lower exposure to stocks, then choose a FIXED AA, and just stick to it (unless your life circumstances change rather dramatically). Plain, simple, and much more effective than any glide path, rising or decreasing. LifeStrategy funds are an excellent choice, by the way.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by RetiredinKaty » Fri Feb 10, 2017 11:31 pm

randomguy wrote:
RetiredinKaty wrote:
I don't think this follows..
Maybe not, I won't argue. Truth is I never liked the downward glide path after retirement. It is based on people getting into the target date series early on in their accumulation, so that by mid-60s their funded ratio on average is so frigging high that it doesn't matter if they get hit with a bad sequence as their fund is rapidly dumping stocks. But, for someone who meanders over their accumulation phase and is only marginally funded at 65, that downward glide path could permanently impair their retirement. Vanguard has stated that the success rates suggested for their target date funds are based on simulations of people who held such funds for a lifetime.

I think Pfau and Kitces did a service by suggesting a rising glide path might be better, in that it caused a lot of folks to question the downward glide.

Ultimately I agree with Larry Swedroe and others who suggest one needs to make a judgement based on need, current funding, and the environment.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by siamond » Sat Feb 11, 2017 12:26 pm

RetiredinKaty wrote:I think Pfau and Kitces did a service by suggesting a rising glide path might be better, in that it caused a lot of folks to question the downward glide.
That is a very fair point.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by DaftInvestor » Wed Feb 15, 2017 7:33 am

Snowjob wrote:
DaftInvestor wrote:
Miriam2 wrote:
Snowjob wrote:
DaftInvestor wrote:Based upon his misguided negative attitude against Back-Door Roths (and being the only one in this camp) I don't read anything Kitces writes.
Not to deviate to much but I enjoy listening to dissent, please elaborate =)
DaftInvestor is probably referring to these, among others:

viewtopic.php?f=10&t=186298 - Michael Kitces says IRS auditors disapprove of Backdoor Roth IRA's
viewtopic.php?f=10&t=185430
viewtopic.php?f=2&t=207300
Yup - that's what I'm referring to. Statements like this:
Kitces wrote: as a rule of thumb with clients: If you want to do this, put the dollars in now, wait 12 months, and 12 months from now you can do your Roth conversion as a separate transaction. Once you have done that, a couple of weeks or months later you might then do a new Roth contribution to repeat the process the following year so we can move along over time. Basically, let the dollars season in the IRA for a year just so that if the IRS ever does come and ask the question, "Why shouldn't we just tax this as an excess Roth contribution?" You can say in good faith, "I made a stand-alone IRA contribution. I let it invest for a while, and I just decided of my own free will a year later in a separate decision to do a Roth conversion, and I shouldn't be punished for that."
If my intention is to do the backdoor - and if the IRS were to decide its a no-no - why would they care if I waited a day or "pretended" to change my minds or something by waiting a year each time. Strategy is obvious in either case so what he is telling his clients seems a bit silly. In one article he alludes to it being questionable and yet every other expert seems to say its okay (In addition to mainstream publications like Money and Kiplingers). He quotes a couple of generic IRS rules to try to make a case against backdooring when there really isn't one.
I just hope if ever / whenever it happens there will be some sort of grandfathering heh
The law never applies backward to prior actions so I think we are all safe.
The other thing that REALLY annoys me about Kitces in the above quote I provided is that he is openly stating that he tells his clients to lie. Saying you can "Say in good faith" that "a year later you made a separate decision" when in actuality this is what you planned.... lying to the IRS is never a good idea - if I ever were to be questioned I would just explain what my intentions were (all the magazines and website advice this as common practice - didn't know I was doing something wrong) versus making up some lie as Kitces advises his clients to do. Sorry for the rant but this guy really annoys me.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Wed Feb 15, 2017 8:45 am

Again, I'll repeat, Kitces and Pfau's conclusion is NOT justified by the data. Nor IMO is it justified in almost all cases by behavior, as we age we become less tolerant of risk, less able to stand the stress. Now there might be some investors who could handle that and if they are investing for the next generation it could make sense, but as general rule it is not correct.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by letsgobobby » Wed Feb 15, 2017 11:06 am

larryswedroe wrote:Again, I'll repeat, Kitces and Pfau's conclusion is NOT justified by the data. Nor IMO is it justified in almost all cases by behavior, as we age we become less tolerant of risk, less able to stand the stress. Now there might be some investors who could handle that and if they are investing for the next generation it could make sense, but as general rule it is not correct.
Larry
I always appreciate Larry's ability to integrate both data and the more nebulous but no less critical aspects of human behavior. A perfect example is my dad. He is in his 80s and terminally ill. There is no question he should be close to 100% stocks: he has about 5 times more money than he will ever need, and he could tolerate a decline of 80% with no impact to his standard of living. But as he's gotten older, his desire to take risk has not increased commensurate with his ability to take risk. If anything, it has decreased. If he were to go 100% stocks and see a 30-50% decline, he might react 'irrationally', which would nevertheless be completely forseesably. He would sell stocks, locking in huge losses, and never get into stocks again.

However for a few INTJs/automatons with iron stomachs and pretty spreadsheets, a rising glidepath could work.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by bertilak » Wed Feb 15, 2017 1:04 pm

letsgobobby wrote:
larryswedroe wrote:Again, I'll repeat, Kitces and Pfau's conclusion is NOT justified by the data. Nor IMO is it justified in almost all cases by behavior, as we age we become less tolerant of risk, less able to stand the stress. Now there might be some investors who could handle that and if they are investing for the next generation it could make sense, but as general rule it is not correct.
Larry
I always appreciate Larry's ability to integrate both data and the more nebulous but no less critical aspects of human behavior. A perfect example is my dad. He is in his 80s and terminally ill. There is no question he should be close to 100% stocks: he has about 5 times more money than he will ever need, and he could tolerate a decline of 80% with no impact to his standard of living.
Could it be he is not investing entirely for himself?
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by SeeMoe » Wed Feb 15, 2017 2:02 pm

Despite generous pensions that are more than enough for our lifestyle, plus the fact we can/do reinvest our end of year RMD's; we have lowered our Glidepath from a conservative 60/40 to the current 40/60 AA model. (Which is considered a bit high in stocks for our ages, mid 70's, but feels ok for us because we can absorb some market losses.) will not consider more than that amount of stock either, and in five years will do a final AA adjustment to about 35/65..

SeeMoe.. :shock:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by letsgobobby » Wed Feb 15, 2017 2:35 pm

bertilak wrote:
letsgobobby wrote:
larryswedroe wrote:Again, I'll repeat, Kitces and Pfau's conclusion is NOT justified by the data. Nor IMO is it justified in almost all cases by behavior, as we age we become less tolerant of risk, less able to stand the stress. Now there might be some investors who could handle that and if they are investing for the next generation it could make sense, but as general rule it is not correct.
Larry
I always appreciate Larry's ability to integrate both data and the more nebulous but no less critical aspects of human behavior. A perfect example is my dad. He is in his 80s and terminally ill. There is no question he should be close to 100% stocks: he has about 5 times more money than he will ever need, and he could tolerate a decline of 80% with no impact to his standard of living.
Could it be he is not investing entirely for himself?
rationally you would be correct. He has 25% invested in stocks and that is the most he is comfortable with; rationally he has reduced the future size of his estate by a factor of ten due to his investing conservatism in his 60s and 70s. But that is the point: even smart people can be irrational about risk.

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by dkturner » Wed Feb 15, 2017 3:46 pm

SeeMoe wrote:Despite generous pensions that are more than enough for our lifestyle, plus the fact we can/do reinvest our end of year RMD's; we have lowered our Glidepath from a conservative 60/40 to the current 40/60 AA model. (Which is considered a bit high in stocks for our ages, mid 70's, but feels ok for us because we can absorb some market losses.) will not consider more than that amount of stock either, and in five years will do a final AA adjustment to about 35/65..

SeeMoe.. :shock:
Gee, we're in the same boat as you and had a 50/50 AA in March of 2009, down from 60/40 in early 2008 (we don't rebalance INTO equities). Since then our equities have worked their way back up to a 55/45 AA. You're making me feel like a riverboat gambler! :oops:

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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by larryswedroe » Wed Feb 15, 2017 4:08 pm

Letsgobobby
But that is the point: even smart people can be irrational about risk.
That is certainly true, but mainly due to overconfidence (the opposite of what was implied).
Also it is not irrational to be highly risk averse if one has very low marginal utility of wealth.
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Re: Does Micheal Kitces Rising Retirement Glidepath Still have legs

Post by willthrill81 » Wed Feb 15, 2017 4:41 pm

siamond wrote:The authors ended up indirectly acknowledging the point, and wrote a follow-up paper, calling such approach "valuation based asset allocation" (a fancy name for TAA). One can debate if TAA algorithms can work in real life. I personally looked at it for a while with an open mind, but ended up being thoroughly unconvinced as whatever small bonus I could find in backtesting was always explained by a higher average exposure to stocks. While taking a significant risk that my way of quantifying valuations would hold in the future, and that would be a remarkably flimsy assumption. I do believe there is a kernel of truth about valuations, but man, it is buried in quite some shifting smoke.
I agree that valuations are not the 'magic bullet' that some people think they are. And even if we are going to use metrics like CAPE, I think that Siegel has a very strong argument that we should be using NIPA data rather than GAAP data (like Schiller uses) as this makes more sense and fits the data better to boot.

That being said, metrics like CAPE have shown themselves to be far more useful as a tool for predicting SWRs than market returns. Kitces himself has done straightforward analysis that clearly shows this. CAPE explains an incredible 83% of the variation in the success of a SWR strategy.

https://www.kitces.com/may-2008-issue-o ... es-report/

Basically, Kitces has demonstrated that during periods of high CAPE valuations upon retirement, retirees with a 60/40 AA can safely use a 4.5% WR, whereas a higher WR can be used when CAPE valuations are lower (under 20).
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