Otar's book: "Unveiling the Retirement Myth"

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Lbill
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Otar's book: "Unveiling the Retirement Myth"

Post by Lbill »

I just finished a quick reading of Jim Otar's book "Unveiling the Retirement Myth," and found it to be an eye-opening read. Otar is an engineer turned financial advisor. His book is filled with a great amount of data analysis and detail based on his research using historical market returns. If you are near or in retirement, you owe it to yourself to check it out.

Otar points out that retirement distribution portfolios have critical differences from accumulation portfolios; e.g., they have a finite lifespan of 30 years or less and they are a "wasting asset" instead of a "growth asset" as money is being withdrawn. These differences result in many of the tools and concepts used in financial planning for accumulation portfolios being essentially useless for retirement distribution portfolios.

For example, here are some of his conclusions:

1) Asset allocation and diversification, particularly within asset classes (e.g. stocks) make little difference for portfolio longevity.

2) Portfolio rebalancing, no matter how it is implemented, has little effect on portfolio longevity.

3) Conventional Efficient Frontier analysis does NOT incorporate cash flow and is useless for distribution portfolios.

4) Conventional Monte Carlo analyzers do NOT incorporate negative fat tails of market returns and produce results for distribution portfolios that are far too optimistic.

5) You should NOT select the optimal asset mix (the one that produces the longest portfolio life); instead you should select the tolerable asset mix (the one that produces the maximum loss over a given timeframe that you can tolerate without panicking).

6) Portfolio longevity and appropriateness are overwhelmingly determined by (1) Luck and (2) Withdrawal Rate.

7) If your withdrawal rate is below the SWR (generally 4% real) there is not a meaningful impact on portfolio survivability from factors other than luck.

8 ) Luck is comprised primarily of two elements: (a) sequence of returns, and (b) inflation. These two factors overwhelmingly determine the likelihood of survivability of a distribution portfolio.

> Luck: If you are unlucky enough to experience significant losses in your portfolio, particularly in the first few years of retirement, nothing you can do will restore your portfolio to it's previous level during your lifetime. Unless you permanently reduce the level of your distributions your portfolio is very likely to run out too soon.

> Inflation: Significant inflation during your retirement will destroy the purchasing power of your income withdrawals. Stocks and nominal bonds provide poor protection from inflation; therefore you should incorporate meaningful allocations to real assets and TIPS.
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Post by dbr »

Thanks for a good summary of salient points.

Since first seeing this book, I have been recommending a read through to anyone who arrives on this forum with basic questions about investing in retirement.
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Post by bob90245 »

Nice List. Book is very pricey. So I'll look for it in my library.

In the meantime, I've seen numerous posters praise Otar's book and provide similar reviews. Perhaps there will be an effort to add it to the wiki:

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Post by chaz »

Thanks for the highlights. A good book for retirees and pre-retirees.
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Re: Otar's book: "Unveiling the Retirement Myth"

Post by CaptMidnight »

I also appreciated Otar's take on distribution portfolios, his skepticism on Monte Carlo simulations, and some of the other points the Lbill mentioned. However, I was also disappointed that Otar never seemed to express any caution about basing his recommendations and the retirement calculator that he offers solely on backtesting historical data. As we know, the problem with historical data is that there isn't enough of it. While Otar avoids the explicit claim that historical data is sufficient for future planning, both his book and his calculator would be meaningless without that assumption.
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Post by JasonR »

bob90245 wrote:Nice List. Book is very pricey. So I'll look for it in my library.
Otar's book is $6 for a PDF download from his site: http://www.retirementoptimizer.com/
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Post by MWCA »

I feel its all mostly luck. Even the best plans can be destroyed with one mistake.
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Post by SpringMan »

> Luck: If you are unlucky enough to experience significant losses in your portfolio, particularly in the first few years of retirement, nothing you can do will restore your portfolio to it's previous level during your lifetime. Unless you permanently reduce the level of your distributions your portfolio is very likely to run out too soon.
This describes many of us that recently retired with somewhat better nest eggs prior to the recent bear market. We are fortunate that the market has recovered as much as it has. The statement is not necessarily true if the market totally recovers. Of course, this still remains in question.
Best Wishes, SpringMan
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Re: Otar's book: "Unveiling the Retirement Myth"

Post by bob90245 »

I saw SpringMan quote this excerpt, so I read it more carefully:
Lbill wrote:> Luck: If you are unlucky enough to experience significant losses in your portfolio, particularly in the first few years of retirement, nothing you can do will restore your portfolio to it's previous level during your lifetime. Unless you permanently reduce the level of your distributions your portfolio is very likely to run out too soon.
History has shown that many retirement portfolios experienced significant losses particularly in the first few years of retirement [1]:

Image
Source: http://bobsfiles.home.att.net/SaferPlan1.html

Granted, it never felt pleasant especially if the retiree's goal was to restore his portfolio to it's previous level during his lifetime. On the other hand, if a retiree's goal is to maintain principal intact, then a very different withdrawal strategy is required.


[1] Meant to last 30 years
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Post by metalman »

The elephant in the room: He's saying that the riskiest strategy is to retire with a high equity allocation and no TIPS, something that an awful lot of posters here seem to do.
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Post by Riprap »

One thing that I found interesting is that if the withdrawal rate is lower than the safe withdrawal rate, there is no need for TIPS.
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Post by Levett »

Nice summary, Lbill, of an essential study. Bob U.
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Post by snowman9000 »

MWCA wrote:I feel its all mostly luck. Even the best plans can be destroyed with one mistake.
I feel that bad luck should be insured against.
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so it's all luck?

Post by hollowcave2 »

So, it's basically an expensive book saying that it's all luck and there's hardly anything you can do about it?

So asset allocation and diversification are meaningless?

Sorry, I'd rather spend my money at the self-help shelf. At least I can be positive while my retirement money flounders.

I'd rather have a positive attitude and a sense that I have some control over my investments, whether that's true or not. A positive attitude goes a long way when managing a portfolio.

JMHO

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Re: so it's all luck?

Post by livesoft »

hollowcave2 wrote:So, it's basically an expensive book saying that it's all luck and there's hardly anything you can do about it?
No, you can transfer the risk to somebody else.
So asset allocation and diversification are meaningless?
No, but they are not as meaningful as you might have been led to believe.
Sorry, I'd rather spend my money at the self-help shelf. At least I can be positive while my retirement money flounders.

I'd rather have a positive attitude and a sense that I have some control over my investments, whether that's true or not. A positive attitude goes a long way when managing a portfolio.
I'd rather have a positive attitude knowing that I have controlled for risk that my portfolio cannot absorb by dumping some of that risk on somebody else.
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Post by metalman »

There seem to be some interesting and provocative ideas there, but can someone elaborate on #7?
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Post by Lbill »

So, it's basically an expensive book saying that it's all luck and there's hardly anything you can do about it?

So asset allocation and diversification are meaningless?
hollowcave - I don't think he's quite saying this. A summary such as the one I gave runs the risk of being oversimplistic. You should really read his book to get a complete picture.

That said, I think it's fair to say that he's saying that asset allocation and diversification may be a lot less important than many investors (and their financial advisors) think they are in determining the survival of a retirement portfolio, but are not completely insignificant.

For example, they do affect how volatile portfolio returns are, which in turn affects the investor's emotional willingness to "stay the course" with his/her allocation. Also, the importance of allocation and diversification are somewhat conditional on withdrawal rate. Disregarding inflation, if your withdrawal rate is quite modest (generally 4% or less for a 30-year time horizon), then your portfolio probably has a decent chance of survival no matter what your allocation or diversification strategy is (unless it's completely off-the-wall of course). But if your WR is high, your portfolio has a good chance of failing; however, allocation and diversification strategies might make a difference of a few years one way or the other.

By far, the survival of one's retirement portfolio is most critically dependent on sequence-of-return risk and by inflation risk. These are the things that cannot be offset by allocation/diversification strategies, no matter how sophisticated they are. They can only be offset by having a low withdrawal rate and by having inflation hedges, such as TIPS, life annuities, and the like. Hope this does justice to his viewpoint - as I said, it is well worth reading the book for yourself before drawing your conclusions.
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risk

Post by hollowcave2 »

Livesoft wrote:
No, you can transfer the risk to somebody else
I'm just trying to understand this. Two questions:

1) To whom do you transfer risk?
2) How?
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Post by livesoft »

The short answer is: Read the book. It is well worth the read.

The long answer is a ladder of SPIAs and perhaps TIPS. See also: http://www.bogleheads.org/forum/viewtopic.php?p=628957
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Post by Opponent Process »

you're basically transferring the risk to an entity that will outlive you and can therefore take the risk. you can always pass risk on to future generations.
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Post by richard »

metalman wrote:There seem to be some interesting and provocative ideas there, but can someone elaborate on #7?
7) If your withdrawal rate is below the SWR (generally 4% real) there is not a meaningful impact on portfolio survivability from factors other than luck.
When I've run simulations, I've found that at low withdrawal rates (usually much lower than 4%) asset allocation is not very important. Therefore, luck becomes very important.
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Post by CABob »

Otar's book is $6 for a PDF download from his site: http://www.retirementoptimizer.com/
I see that the sample chapter is 30 pages long. How many pages in the entire book? I'm not sure my printer can take it. :shock:
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Post by Levett »

Hollowcave--

So that the idea of transfering risk doesn't seem too abstract, let me say (as a mere example of one) that I transfered a fair amount of risk to TIAA when I retired in July of 2000 (not the best of times for equities :( ) and that one move has made a heckuva difference, in any number of ways, for nearly the last ten years.

The decision was both rational and lucky because I had no idea that a) the equity market(s) would be so volatile nor did I (b) know that inflation would be so moderate.

Clearly, there are many investment strategies available to retirees, but my own experience as a retiree makes me quite sympathetic to Otar's analysis. Bob U.
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Post by nisiprius »

Here's a really really obvious point that escaped me until a couple of days ago, although other posters have touched on it.

4% of what? How do you put a suitable value on your retirement portfolio at the start of retirement?

The usual way is to take the market value of the portfolio at the start of retirement, the number printed on your brokerage statement. But that's wrong.

Or let me put it this way: the risk of exhausting the portfolio has two components:

1) The effect of fluctuations in portfolio value during the withdrawal period--which, problematical as it is, is somewhat spread out in time and partially smoothed and averaged. A bull market later in retirement may not fully balance the effect of a bear market early in retirement, but it certainly helps.

2) The effect of the instantaneous snapshot of your portfolio value that you use to gauge the size of your withdrawals forever after.

Well, the effect of #2 is awful, and it's huge, and it's completely concentrated at one instant in time, a single data point, no averaging.

Think of it this way. Suppose your retirement portfolio were worth $1 million, but on the day you retired you received an erroneous brokerage statement with a computer glitch that said your portfolio was worth $1.5 million, and on the strength of that you decided to withdraw $60,000 the first year, then COLAed, believing that was following the 4% rule. A month later you receive a corrected statement, but you ignore it and continue withdrawing what you think is 4%, but which we know is really 6%. Obviously disaster will result.

And it's not fair to attribute this disaster to the vagaries of the market during retirement. The disaster should be attributed to using an erroneous starting value. It's not fair to blame the "4% rule" when you're really withdrawing 6%.

Well, I think most of us will conceded that the stock market as a whole can be very significantly mispriced, even if you can only see it in hindsight. I say the market was overpriced in mid-2007, S&P 1600, and underpriced in early 2009, S&P 800. Accept that for the sake of argument.

I think you'll agree that someone following the 4% rule who retired in mid-2007 is likely in trouble, and someone following the 4% rule who retired in early 2009 is likely in good shape... and that the difference in outcomes depends almost entirely on the single choice of the day on which the initial 4% was calculated.

The person retiring in mid-2007 and using the brokerage statement is in a very similar situation to the person with the erroneous statement. The number he's using to gauge his withdrawals is wrong in both cases--it's too high. And in both cases, the essence of the problem is not so much what the market did in the future, it's what the brokerage statement said in the present.

If you follow the 4% rule, a bull market immediately before retirement is just as bad as a bear market just after retirement, because a bull market immediately before retirement tricks you into withdrawing too much!

I don't see how all the Monte Carlo simulations of thirty years of retirement can help you deal with the intense concentrated risk of the accidental moment when you value your portfolio.

Now of course I'm being a little overwrought here. But it seems odd to me that I haven't seen any suggestions that the 4% should not be calculated on the brokerage-statement portfolilo value at retirement, but on some weighted average of the portfolio's past history preceding retirement... a history over a considerable period of time, at least twenty years.

It is an operationally meaningless statement, but what you really want is not 4% of what Mr. Market thinks your portfolio is worth, but 4% of what your portfolio is truly worth.

This resonates with something else I've been groping toward: the risk of a high stock allocation is not merely the risk that it will be down when you need to draw on it, or the risk that it may not yield as much over 20 years as you planned. There is also the risk of being unable to judge your progress toward your goal, and thinking you're in good shape when you're really just riding a temporary and evanescent peak.
Last edited by nisiprius on Mon Jan 25, 2010 4:51 pm, edited 2 times in total.
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Post by bob90245 »

richard wrote:
metalman wrote:There seem to be some interesting and provocative ideas there, but can someone elaborate on #7?
7) If your withdrawal rate is below the SWR (generally 4% real) there is not a meaningful impact on portfolio survivability from factors other than luck.
When I've run simulations, I've found that at low withdrawal rates (usually much lower than 4%) asset allocation is not very important. Therefore, luck becomes very important.
Are you sure about this? If your withdrawal rate is very much lower than 4%, then yeah, it would take extremely bad luck to meaningfully impact portfolio survivability. Is that what Otar is saying?
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Post by richard »

bob90245 wrote:
richard wrote:When I've run simulations, I've found that at low withdrawal rates (usually much lower than 4%) asset allocation is not very important. Therefore, luck becomes very important.
Are you sure about this? If your withdrawal rate is very much lower than 4%, then yeah, it would take extremely bad luck to meaningfully impact portfolio survivability. Is that what Otar is saying?
Am I sure that at rates very much lower than 4% asset allocation is not very important? Based on the simulations I've run, yes. You appear to agree, don't you?

Am I sure that's what Otar is saying? That's what he seems to be saying. Do you have another interpretation?
Last edited by richard on Mon Jan 25, 2010 4:47 pm, edited 1 time in total.
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Post by gkaplan »

I think it's 500+ pages. At least, that's what my Adobe Reader showed when I clicked on the link to download.
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Post by Lbill »

I see that the sample chapter is 30 pages long. How many pages in the entire book? I'm not sure my printer can take it
Hint: download a little piece of software called CutePDF. It creates a new "printer" that simply allows you to print a document to a PDF file that you can save to your computer. There are others such as PDF995 that Taxcut installs so that you can save PDF copies of your tax return. Saves a lotta paper. :thumbsup
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Post by Levett »

Since it hasn't been mentioned in this thread, here's Otar in a nutshell.

http://books.google.com/books?id=7ITaIv ... ck&f=false
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Post by musbane »

Nisiprious, I think your 'erroneous statement' analogy is interesting and has value, but is still not quite right. Can't it be argued that if a person experiences a market crash just after retirement he would be more likely to see decent returns going forward than another who caught a bull early on? Sort of a reversion to mean thing.
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Post by Lbill »

Nisiprius wrote:
I think you'll agree that someone following the 4% rule who retired in mid-2007 is likely in trouble, and someone following the 4% rule who retired in early 2009 is likely in good shape... and that the difference in outcomes depends almost entirely on the single choice of the day on which the initial 4% was calculated.
Yes. Otar covers this (and I've seen it covered by Scott Burns in one of his columns as well). The concern here is that there are "good times" and "bad times" to set out on your journey of portfolio distributions.

If you start at a "bad time" your probability of portfolio survival is likely to be a lot lower than otherwise. Otar and Burns suggest that market P/E is one indicator of this. If you retire when P/Es are high (stocks are over-valued), portfolio depletion is a greater risk than when P/Es are low (stocks are under-valued). For one brief fleeting moment in late 2008 and early 2009, P/E was below historical averages, but now they are once again in the thinner air.

Otar (pp. 226) summarizes the following findings:
> If your withdrawal rate is 6% or more, you don't need any formulas; you will likely run out of money.
> If your withdrawal rate is 4% or less, you don't need any formulas either; you'll likely have lifelong income.
> Warning signals such as the P/E rule will probably be most meaningful between WR of 4% to 6%.

If the warning signal is flashing red, or your panties are in a bunch, then you should consider off-loading at least some of the higher risk of portfolio depletion by purchasing annuities, TIPS, or the like.
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Post by speedbump101 »

There was a thread about this book back in Aug., and Jim Otar contributed personally...

http://www.bogleheads.org/forum/viewtop ... 1251030588

For the lucky few early birds we got the book for free, however it's still available for download (read only) for a very reasonable $5.99

http://www.retirementoptimizer.com/ BTW Otar links to the BH thread on his web page...

SB...
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Post by unclemick »

metalman wrote:The elephant in the room: He's saying that the riskiest strategy is to retire with a high equity allocation and no TIPS, something that an awful lot of posters here seem to do.
Right. Plus I try to avoid reading books. Struggle to keep portfolio SEC at 3% yield(ie what I can live on in actual $) - ignore inflation - as a minimum take what the portfolio cranks out in dividends/interest - which is almost as good as real money.

16 years of dinking around in retirement - 90's were fun (market watching wise) 2000's not near as much.

heh heh heh - tap dancing in and around some version of the ole 60/40 policy portfolio since 1980. My impression that was the traditional pension fund benchmark.
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Post by dbr »

Kitces also takes a whack at the retirement timing "paradox."

http://www.kitces.com/assets/pdfs/Kitce ... y_2008.pdf

A primary lesson of this book by Otar is that you really do want to read the 500+ pages because the nuances of how retirement withdrawal actually works are not that simple.

Otar does suggest that readers not interested in a chapter in detail can read the intro and end of each chapter for an overview.
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Post by bob90245 »

richard wrote:
bob90245 wrote:
richard wrote:When I've run simulations, I've found that at low withdrawal rates (usually much lower than 4%) asset allocation is not very important. Therefore, luck becomes very important.
Are you sure about this? If your withdrawal rate is very much lower than 4%, then yeah, it would take extremely bad luck to meaningfully impact portfolio survivability. Is that what Otar is saying?
Am I sure that at rates very much lower than 4% asset allocation is not very important? Based on the simulations I've run, yes. You appear to agree, don't you?

Am I sure that's what Otar is saying? That's what he seems to be saying. Do you have another interpretation?
You didn't address my question. You stated (or you are speaking for Otar) that "luck becomes very important" when your withdrawal rate is very much lower than 4%. This is strange and I interpret "luck" (that you wrote) as being bad luck and can meaningfully impact portfolio survivability at a withdrawal rate very much lower than 4%. Are we talking about a very rare black swan event never experienced before? I'm still trying to understand what message you and Otar are trying put forward from the post excerpt I quoted.
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Post by dbr »

Bob, my understanding of luck is that it is exactly what is illustrated in the curves you published in your excellent graphic above. The difference among all those curves was due to the specific returns experience for persons retiring in various starting years. Some starting years produce "barely scraping by at 4% and failing at 5%" while other starting years produce massive end point wealth even at 5% or 6% withdrawal rates. Even worse, the bad years and the good years may not be very far apart and are impossible to identify in advance.

In the Dynamic Financial Planning Tool at Analyze Now, those outcomes can be seen, as they can in data you have. 1948, for example, was a good year to retire, 1968 was bad, 1976 was good, and so on.
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Post by Robert Hoolko »

nisiprius wrote:Here's a really really obvious point that escaped me until a couple of days ago, although other posters have touched on it.

4% of what? How do you put a suitable value on your retirement portfolio at the start of retirement?

The usual way is to take the market value of the portfolio at the start of retirement, the number printed on your brokerage statement. But that's wrong.
This is a view of a short period of history that address your question. I picked this period because it contains a sharp drop in portfolio balances and because it was more than 30 years ago so we can calculate what withdrawal rates would have succeeded.

This data is for a portfolio of 50% large US stocks and 50% intermediate term US government bonds rebalanced annually. The withdrawal is in constant real dollars for 30 years.

Image

Assume that you decide to start withdrawals somewhere between 1970 and 1976.

The blue line shows what the portfolio balance would have been at the beginning of each year in real dollars for each dollar you had in 1970 up until you start withdrawing. Read these values on the left scale. This line does not include any withdrawals or additions. Between 1973 and 1975 the portfolio declines about 30%.

The red line is the maximum withdrawal rate that would have worked for exactly 30 years. The balance remaining after 30 years is zero. We can calculate this because we know what the returns were for the following 30 years. Read these values on the right scale.

Once you pick a year to begin withdrawals, multiply the withdrawal rate for that year by the portfolio balance at the beginning of that year. This gives the green points which are the dollar amount of the withdrawal for each dollar you had in 1970. Read these on the right scale. The green dots are only for the starting year. Once you start withdrawing the amount withdrawn each year is constant.

The important thing to notice is that the green line does not decline between 1973 and 1975. In other words the withdrawal in dollars that worked if you started in '73 also worked if you started in '75 in spite if the 30% decline in the balance.

This was not just some quirk of the '70s. If you look at all the 30 year time periods since 1926 for which we can calculate successful withdrawal rates for a 50/50 portfolio there has never been a decline in that green line.

Robert
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Post by Lbill »

There was a thread about this book back in Aug., and Jim Otar contributed personally...

http://www.bogleheads.org/foru....1251030588
Speedbump - thanks for the link. Very informative. I was one of the lucky few who got the free download, but it's been sitting on my computer for awhile, until another post elbowed me to finally read it. Wish I had done it sooner, but it's not too late yet.
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Post by dbr »

What Robert Hoolko illustrates is the kind of thing I have also been mentioning.

Thanks
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Post by grayfox »

nisiprius wrote: If you follow the 4% rule, a bull market immediately before retirement is just as bad as a bear market just after retirement, because a bull market immediately before retirement tricks you into withdrawing too much!
Now you tell me. Why didn't you or anyone else mention this in 1999?
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Post by MWCA »

grayfox wrote:
nisiprius wrote: If you follow the 4% rule, a bull market immediately before retirement is just as bad as a bear market just after retirement, because a bull market immediately before retirement tricks you into withdrawing too much!
Now you tell me. Why didn't you or anyone else mention this in 1999?
Because no one wrote a new book.
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Post by richard »

bob90245 wrote:You didn't address my question. You stated (or you are speaking for Otar) that "luck becomes very important" when your withdrawal rate is very much lower than 4%. This is strange and I interpret "luck" (that you wrote) as being bad luck and can meaningfully impact portfolio survivability at a withdrawal rate very much lower than 4%. Are we talking about a very rare black swan event never experienced before? I'm still trying to understand what message you and Otar are trying put forward from the post excerpt I quoted.
If you eliminate asset allocation and the other usual determinants of portfolio return the can be controlled by investors, you're left with luck as the driver of outcomes.

Luck doesn't necessarily mean bad luck or black swans, it means chance happenings.

If asset allocation, etc. does not affect outcomes, and not all outcomes are the same, luck is what determines outcomes.

At least, that's my interpretation. Otar may have meant something else entirely.
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Post by bob90245 »

richard wrote:If you eliminate asset allocation and the other usual determinants of portfolio return the can be controlled by investors, you're left with luck as the driver of outcomes.

Luck doesn't necessarily mean bad luck or black swans, it means chance happenings.

If asset allocation, etc. does not affect outcomes, and not all outcomes are the same, luck is what determines outcomes.
Oh, but I disagree. As a general rule, retirees are only concerned about experiencing bad luck. Why would good luck be a worry?

And if "luck becomes very important" when your withdrawal rate is very much lower than 4%, then there must be a very nasty black swan never seen before that may make its appearance. I just don't see it any other way.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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Post by richard »

bob90245 wrote:Oh, but I disagree. As a general rule, retirees are only concerned about experiencing bad luck. Why would good luck be a worry?
Who said it was a worry?
And if "luck becomes very important" when your withdrawal rate is very much lower than 4%, then there must be a very nasty black swan never seen before that may make its appearance. I just don't see it any other way.
If you're saying retirees ignore excess money and only become concerned if withdrawal rates are not sustainable, and that the only thing that causes withdrawals not to be sustainable is unusually bad luck, I'd agree.

This was all an exercise in interpreting "If your withdrawal rate is below the SWR (generally 4% real) there is not a meaningful impact on portfolio survivability from factors other than luck."

Put yet another way, don't worry about asset allocation if you only need a low withdrawal rate.

Do you have another interpretation?
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Post by bob90245 »

richard wrote:
And if "luck becomes very important" when your withdrawal rate is very much lower than 4%, then there must be a very nasty black swan never seen before that may make its appearance. I just don't see it any other way.
If you're saying retirees ignore excess money and only become concerned if withdrawal rates are not sustainable, and that the only thing that causes withdrawals not to be sustainable is unusually bad luck, I'd agree.

This was all an exercise in interpreting "If your withdrawal rate is below the SWR (generally 4% real) there is not a meaningful impact on portfolio survivability from factors other than luck."

Put yet another way, don't worry about asset allocation if you only need a low withdrawal rate.

Do you have another interpretation?
Only what I wrote. My interpretation is to substitute "luck" with bad luck as in a black swan.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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Post by Lbill »

Put yet another way, don't worry about asset allocation if you only need a low withdrawal rate
Actually, what Otar seems to be saying is that when your WR is low enough (generally < 4%) there isn't much that can cause you to run out of money during your lifetime. Set it and forget it. Even the "start time" contingency theorists seem to be saying that you'll survive at 4% even if you retire at an inauspicious time, such as now, when PE/10 is once again atmospheric. While allocation and diversification probably won't make much difference in survivability, it might affect the smoothness of returns and other such things. Otar says a low WR gives you the freedom to tinker with such things - it even might have some positive results such as leaving a few more shekels for your shiftless heirs, make you feel good, and it is unlikely to completely screw things up and derail your retirement completely - unless of course you start buying into ideas such as 25% in commodity funds, and the like.
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Post by tiochfaidh_ar_la »

A positive attitude goes a long way when managing a portfolio.
Oh, dear.
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Is this carrying the "set and forget" to an extrem

Post by Hexdump »

Lbill wrote:
Put yet another way, don't worry about asset allocation if you only need a low withdrawal rate
Actually, what Otar seems to be saying is that when your WR is low enough (generally < 4%) there isn't much that can cause you to run out of money during your lifetime. Set it and forget it.
I am trying to construct a portfolio that my DW can manage yet assure her of not running out of money and providing enough income to meet necessary expenses.

My DW has no interest in reading investment literature and is only comfortable in rolling over CDs.

Taking Mr. Otar's and others rule-of-thumb literally that asset allocation and other worries are pretty much irrelevent if you keep the WR below 4%,

So, take her $1,000,000.00 and in my simple and possibly silly portfolios,
How would the rule-of-thumb perform if the portfolio was 100% in a money market ?
How would the rule-of-thumb perform if the portfolio was in a ladder oc CDs ?

Those are the 2 simplest portfolios I can imagine other than perhaps a single mutual fund like Wellington or the Fidelity equivalent.

What do you think ?

and thanks,
hex
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Otar's Book

Post by traumamoma »

After reading Otar's book I came away with the following conclusions. The liklihood that your retirement savings will sustain you for your entire retirement depends on 5 things:
1) How many dollars you start with
2) How many of those dollars are invested in stocks and how many in bonds. You can slice/dice/tilt all you like and it doesnt really matter.
3) what is your actual withdrawl rate in relation to your safe or sustainable withdrawl rate
4)Are you lucky enough to retire into a flat/moderate inflation, rising stock market environment
5) How many years you live
This pretty much sums it up for me. Best Regards, Peter
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Re: Is this carrying the "set and forget" to an ex

Post by livesoft »

Hexdump wrote:...
So, take her $1,000,000.00 and in my simple and possibly silly portfolios,
How would the rule-of-thumb perform if the portfolio was 100% in a money market ?
How would the rule-of-thumb perform if the portfolio was in a ladder oc CDs ?

Those are the 2 simplest portfolios I can imagine other than perhaps a single mutual fund like Wellington or the Fidelity equivalent.

What do you think ?

and thanks,
hex
Would not a simpler portfolio be to purchase an inflation-linked single premium immediate annuity that would cover her expenses every year until she dies? There are some caveats discussed by bob90245 and Otar. You should probably limit any one SPIA to under your state's guarantee limit, so you will need perhaps a ladder of SPIAs from different companies.

The money leftover could be used for Wellington or VIPSX if you like. I don't think a money market / CDs is going to cut it.
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