Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I would add that positioning these "equity investments" inside a Roth IRA eliminates future income tax on distributions avoiding "portfolio losses" due to RMD (@70.5). Required Minimum Taxable Distributions at the wrong time are just the same as taking any other distributions at the wrong time. With a Roth you decide when to take a distribution, not the IRS.
Here are three retirement Calculators that might be helpful to readers (may require certain plugin such as java):
Before I retired I spent a number of years determining my basic retirement budget needs. Bare bones living...food, shelter, taxes, utilities, healthcare, entertainment, etc. I starting living within these means which happened to be much lower than my current income. I saved the difference and experienced what life would be like on a smaller income. If this happened to be too uncomfortable I still had my job to fall back on.
Also, prior to retirement, I ran a bunch of number related to where my retirement income would be derived...social security, pension, immediate annuity, rental income or part time work. I now had an idea of my income needs and I better understood the sources of my the retirement income. Beyond all of these decisions are are some bigger questions to answer.
Each of us have to give some serious thought to retirment lifestyle decisions...all the things you put on hold or did sparingly because time was limited. The biggest gift of retirement is the gift of time. How will you spend the most valuable resource of all...time.
For MFO reader comments on the underlying paper, along with those of John Rekenthaler and M* readers, see this thread ("Do Retirees Have It Backward"):
You surely contributed an excellent and useful post.
I am very pleased to read your endorsements of the various Monte Carlo simulation products. I have been a long advocate for these workhorse financial tools, and have been surprised at the reluctance of an MFO minority who persistently resist application of these proven tools. Thank you for referencing these noteworthy Monte Carlo simulation programs.
The referenced research paper and its recommendations are themselves the outcomes from a series of Monte Carlo calculations. The WSJ article exclaims that 10,000 cases were completed in the analyses. That may appear to be a large number, but not so when making randomly selected investment returns trials. To assure small methodology errors, Monte Carlo studies usually do large multiples of 10,000 cases.
We are definitely on the same page, and likely even within the same paragraph, when you astutely observed that “The biggest gift of retirement is the gift of time”. Yes it is.
I consider “time” is my most precious resource. That acknowledgement was one significant factor in my decision to cutback on the time I committed to my investments. Index products fit snuggly into that framework.
There is a very positive aspect with the passage of time at my advanced age. The price continues to decrease. According to Longevity Tables, I pay only about one-half year in expected lifespan for each year that I survive. That’s not a bad tradeoff.
Reply to @bee: Pretty much what we did also. Years prior to retirement divided our expenses into a number of categories so that we could see what was going where; what was essential, and what was discretionary. (Wine consumption was a pretty big number under "discretionary".)
Then ran the same types of numbers you did re potential income sources.
Then plugged in a whole lot of variables, including many "worst case at worst time" scenarios (foreseeing 2008, as it so happened). This may not be pure "Monte Carlo", but it worked pretty well for us. Couldn't have done it without a spreadsheet, though.
So far so good- our income, exclusive of any investment gains, still exceeds the outgo. No complaints at all, and now we are able to use good investment income years (like last year) for major projects such as housing maintenance and remodeling.
I'm probably still too conservative on the investment exposure side, but we do sleep well.
Right on with "The biggest gift of retirement is the gift of time." Absolutely true!
Reply to @Old_Joe: What you did is called stress testing that is gaining interest in the RIA community because of new vendor tools as an alternative or complement to Monte Carlo Simulations. The latter was an improvement over previous method of assuming some average returns but it has serious problems in inputs and interpretation.
A serious problem for an investor is not calculating the probability for success/failure but understanding what a failure might imply for their life. If you are just told you have a 80% chance that you will not outlive your assets, it is very different from being told you will probably do OK with 80% chance but there is a 20% chance that you may have to sell your house and move to a cheaper town if there was a recession like the previous one. People may make very different decisions and not feel betrayed when the very low probability event happens and can be prepared for it. There are vendors who have created platforms to stress test for various combination of events and variables and test a financial plan for it. Not sure what is available for retail investor use. This is a much more comprehensive test than the spreadsheet calculation you did but similar in intent. While stress testing tools have been around for a while, their use became more obvious after the last financial meltdown where the use of MC to price/test anything from CDOs to portfolios was shown to be useless because it didn't prepare people on how to manage low probability events if they were to happen. We don't build bridges and aircraft that way.
I have a strong suspicion that these "increase equity with age" will not fare so well in stress testing scenarios and the implications in some of those scenarios.
I am sure over time these stress testing tools will become as common as these retirement planners. However, they are all dangerous for DIYers to interpret in the same way medical lab tests are dangerous for non medically trained people to interpret and so primarily for entertainment than making any serious decisions. Self-diagnosis of medical health is as bad as self-diagnosis of financial health except in the case of plentiful health with sufficient margins to survive when the self diagnosis was bad!
Practically, the goal should be to overcompensate as much as possible or arrange the circumstances so that the available resources overcompensate in the same way bridges and aircraft are over-engineered much above and beyond what tests and simulations suggest.
Reply to @bee: Never been able to get the middle one to work worth spit, but the first and third are excellent, thanks. Had not seen this new (?) Vanguard one.
Reply to @cman: Yessir. I was always prone to overbuilding. I agree with your observation regarding the inherent weakness in the "Monte Carlo" approach, but it certainly seems to be a useful tool as far as it goes. The various spreadsheet disasters that I introduced included inflation, assuming at best a break-even on bond income/at worst negative 3%; and an equity market crash at various times, with various crash percentages (and in fact my worst-case was pretty close to what happened in 2008). Using my home-brew "Murphy Emulator" I engineered the retirement situation to be able to survive those scenarios and (optimistically) ran it out to age 100.
Until the bond markets fell totally apart a year or so ago our portfolio distribution was set up to reflect those possibilities, but now I'm pretty much winging it with a much higher equity and cash exposure than I would have thought probable at this point. As I mentioned, we don't depend upon the investment income for day-to-day expenses, so there's not too much pressure there. Because of the bond situation, and to offset the potential for another equity fiasco, we now have much more in various cash accounts than I ever would have imagined, which for that portion of the portfolio actually results in something pretty much like the 3% inflation loss that I had anticipated as a possibility. Hopefully that will sort itself out in the not-too-distant future.
Crystal balls are hard to come by and prone to erratic behavior at best.
Reply to @MJG: >>>> I have been a long advocate for these workhorse financial tools, and have been surprised at the reluctance of an MFO minority who persistently resist application of these proven tools. Thank you for referencing these noteworthy Monte Carlo simulation programs.<<<<
I am in a great mood tonight. Found several old historical cemeteries on my off trail hike today. So, this is not meant in a mean spirited tone, albeit it may sound like such. We have been through this before. But what you don't and never will get (can you say inflexible) is some of us have no need whatsoever for Monte Carlo mumbo jumbo. That's because instead of obsessing about retirement probabilities/tools/statistics, etc., we were obsessing with an *insane focus* on the markets and compounding our trading/investment capital to such an extent that all that stuff would be meaningless.
Very interesting article and discussion. My thanks to all.
What concerns me about the article's advise is that the probability for seriously adverse outcomes increases as we age during retirement...our bodies to tend to require more repair work as the years pass....with the increases skewed heavily upward during the last years of our lives! In my mind, that counterbalances the shorter time horizon we (my wife and myself) have as each year passes during retirement. So, increasing equity exposure just because we are another year older doesn't make sense to me (our wealth is not extensive enough that we are only considering the size of the inheritance we may be passing on to our heirs).
My "simple minded" approach has been limit our spending during retirement enough that we can increase the real (inflation adjusted) account balance in our investment accounts during our "healthy" retirement years....to set-aside our "real principal" for emergencies. Our 2014 household budget tells me that during 2014 our investment pot will provide 33% of the household funds we will spend based on 4 predetermined quarterly withdrawals from that pot (the rest coming from pensions and social security). During the decade since I "retired", this strategy has worked comfortably based on an annual withdrawal rate of 3.5 to 4% of the annual beginning balance in our investment accounts.
I do not have a temperament suited for placing "insane focus" on individual investments. So, I pay a group of managers of actively managed mutual funds to provide that "insane focus" for me. Those investments currently include 27% domestic stock, 23% foreign stock, 25% bonds, 20% short term, and 5% other based on output from a portfolio X-ray tool. Several managers currently have high cash positions (including ARIVX at the high end of the cash position list for the stock fund investment sleeve). The portfolio includes a set-aside available to be tapped for portfolio rebalancing if the overall portfolio decreases in value by more than 10%. That pot was tapped more than once in 2008 when the overall portfolio experienced a 16% loss.
Every person with investable assets has to find his or her own way through the investment maze based on their individual circumstances and temperamants. Fortunately, it can be an interesting and rewarding way to "spend" some of our time!
Reply to @cman: Perhaps an "insane focus" on the markets will allow us all to overcompensate in the best manner possible by "compounding our investment capital to such an extent that all this stuff becomes meaningless". Or, we can all calmly reflect on our frailties as investors and remind ourselves that the markets giveth and taketh away and to prepare for those times as well, as you have suggested.
BTW, I am wary of this notion of increasing equity as one ages in retirement as well.
Comments
I would add that positioning these "equity investments" inside a Roth IRA eliminates future income tax on distributions avoiding "portfolio losses" due to RMD (@70.5). Required Minimum Taxable Distributions at the wrong time are just the same as taking any other distributions at the wrong time. With a Roth you decide when to take a distribution, not the IRS.
Here are three retirement Calculators that might be helpful to readers (may require certain plugin such as java):
Vanguard's Nest Egg Calculator:
NestEggCalc
The Ultimate Retirement Planning Calculator:
best-retirement-calculator
Flexible Retirement Planner:
flexibleretirementplanner
On a separate note related to retirement:
Before I retired I spent a number of years determining my basic retirement budget needs. Bare bones living...food, shelter, taxes, utilities, healthcare, entertainment, etc. I starting living within these means which happened to be much lower than my current income. I saved the difference and experienced what life would be like on a smaller income. If this happened to be too uncomfortable I still had my job to fall back on.
Also, prior to retirement, I ran a bunch of number related to where my retirement income would be derived...social security, pension, immediate annuity, rental income or part time work. I now had an idea of my income needs and I better understood the sources of my the retirement income. Beyond all of these decisions are are some bigger questions to answer.
Each of us have to give some serious thought to retirment lifestyle decisions...all the things you put on hold or did sparingly because time was limited. The biggest gift of retirement is the gift of time. How will you spend the most valuable resource of all...time.
Regards,
Ted
http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/9453/do-retirees-have-it-backward-/p1
Hi Bee,
You surely contributed an excellent and useful post.
I am very pleased to read your endorsements of the various Monte Carlo simulation products. I have been a long advocate for these workhorse financial tools, and have been surprised at the reluctance of an MFO minority who persistently resist application of these proven tools. Thank you for referencing these noteworthy Monte Carlo simulation programs.
The referenced research paper and its recommendations are themselves the outcomes from a series of Monte Carlo calculations. The WSJ article exclaims that 10,000 cases were completed in the analyses. That may appear to be a large number, but not so when making randomly selected investment returns trials. To assure small methodology errors, Monte Carlo studies usually do large multiples of 10,000 cases.
We are definitely on the same page, and likely even within the same paragraph, when you astutely observed that “The biggest gift of retirement is the gift of time”. Yes it is.
I consider “time” is my most precious resource. That acknowledgement was one significant factor in my decision to cutback on the time I committed to my investments. Index products fit snuggly into that framework.
There is a very positive aspect with the passage of time at my advanced age. The price continues to decrease. According to Longevity Tables, I pay only about one-half year in expected lifespan for each year that I survive. That’s not a bad tradeoff.
I really enjoy these brief exchanges.
Do well and stay healthy.
Best Wishes.
Then ran the same types of numbers you did re potential income sources.
Then plugged in a whole lot of variables, including many "worst case at worst time" scenarios (foreseeing 2008, as it so happened). This may not be pure "Monte Carlo", but it worked pretty well for us. Couldn't have done it without a spreadsheet, though.
So far so good- our income, exclusive of any investment gains, still exceeds the outgo. No complaints at all, and now we are able to use good investment income years (like last year) for major projects such as housing maintenance and remodeling.
I'm probably still too conservative on the investment exposure side, but we do sleep well.
Right on with "The biggest gift of retirement is the gift of time." Absolutely true!
A serious problem for an investor is not calculating the probability for success/failure but understanding what a failure might imply for their life. If you are just told you have a 80% chance that you will not outlive your assets, it is very different from being told you will probably do OK with 80% chance but there is a 20% chance that you may have to sell your house and move to a cheaper town if there was a recession like the previous one. People may make very different decisions and not feel betrayed when the very low probability event happens and can be prepared for it. There are vendors who have created platforms to stress test for various combination of events and variables and test a financial plan for it. Not sure what is available for retail investor use. This is a much more comprehensive test than the spreadsheet calculation you did but similar in intent. While stress testing tools have been around for a while, their use became more obvious after the last financial meltdown where the use of MC to price/test anything from CDOs to portfolios was shown to be useless because it didn't prepare people on how to manage low probability events if they were to happen. We don't build bridges and aircraft that way.
I have a strong suspicion that these "increase equity with age" will not fare so well in stress testing scenarios and the implications in some of those scenarios.
I am sure over time these stress testing tools will become as common as these retirement planners. However, they are all dangerous for DIYers to interpret in the same way medical lab tests are dangerous for non medically trained people to interpret and so primarily for entertainment than making any serious decisions. Self-diagnosis of medical health is as bad as self-diagnosis of financial health except in the case of plentiful health with sufficient margins to survive when the self diagnosis was bad!
Practically, the goal should be to overcompensate as much as possible or arrange the circumstances so that the available resources overcompensate in the same way bridges and aircraft are over-engineered much above and beyond what tests and simulations suggest.
Until the bond markets fell totally apart a year or so ago our portfolio distribution was set up to reflect those possibilities, but now I'm pretty much winging it with a much higher equity and cash exposure than I would have thought probable at this point. As I mentioned, we don't depend upon the investment income for day-to-day expenses, so there's not too much pressure there. Because of the bond situation, and to offset the potential for another equity fiasco, we now have much more in various cash accounts than I ever would have imagined, which for that portion of the portfolio actually results in something pretty much like the 3% inflation loss that I had anticipated as a possibility. Hopefully that will sort itself out in the not-too-distant future.
Crystal balls are hard to come by and prone to erratic behavior at best.
I am in a great mood tonight. Found several old historical cemeteries on my off trail hike today. So, this is not meant in a mean spirited tone, albeit it may sound like such. We have been through this before. But what you don't and never will get (can you say inflexible) is some of us have no need whatsoever for Monte Carlo mumbo jumbo. That's because instead of obsessing about retirement probabilities/tools/statistics, etc., we were obsessing with an *insane focus* on the markets and compounding our trading/investment capital to such an extent that all that stuff would be meaningless.
What concerns me about the article's advise is that the probability for seriously adverse outcomes increases as we age during retirement...our bodies to tend to require more repair work as the years pass....with the increases skewed heavily upward during the last years of our lives! In my mind, that counterbalances the shorter time horizon we (my wife and myself) have as each year passes during retirement. So, increasing equity exposure just because we are another year older doesn't make sense to me (our wealth is not extensive enough that we are only considering the size of the inheritance we may be passing on to our heirs).
My "simple minded" approach has been limit our spending during retirement enough that we can increase the real (inflation adjusted) account balance in our investment accounts during our "healthy" retirement years....to set-aside our "real principal" for emergencies. Our 2014 household budget tells me that during 2014 our investment pot will provide 33% of the household funds we will spend based on 4 predetermined quarterly withdrawals from that pot (the rest coming from pensions and social security). During the decade since I "retired", this strategy has worked comfortably based on an annual withdrawal rate of 3.5 to 4% of the annual beginning balance in our investment accounts.
I do not have a temperament suited for placing "insane focus" on individual investments. So, I pay a group of managers of actively managed mutual funds to provide that "insane focus" for me. Those investments currently include 27% domestic stock, 23% foreign stock, 25% bonds, 20% short term, and 5% other based on output from a portfolio X-ray tool. Several managers currently have high cash positions (including ARIVX at the high end of the cash position list for the stock fund investment sleeve). The portfolio includes a set-aside available to be tapped for portfolio rebalancing if the overall portfolio decreases in value by more than 10%. That pot was tapped more than once in 2008 when the overall portfolio experienced a 16% loss.
Every person with investable assets has to find his or her own way through the investment maze based on their individual circumstances and temperamants. Fortunately, it can be an interesting and rewarding way to "spend" some of our time!
BTW, I am wary of this notion of increasing equity as one ages in retirement as well.
Best regards,