Saturday, September 27, 2014

Part IV: Puttin’ It In; Takin’ It Out – Jim’s Judaic Personal Financial Planning Distribution Strategy

Part IV: Puttin’ It In; Takin’ It Out –
Jim’s Judaic Personal Financial Planning Distribution Strategy or
Yada, Yada, Yada – So What Are You Doing for Yourself, Einstein?

A little song; a little dance; a little seltzer down the pants
Mary Tyler Moore Show’s Chuckles The Clown

  1. This is my own strategy (‘The Full Schwartzie’ or for some ‘The Full Of It Schwartzie’) . It shouldn’t be regarded as a recommendation for anyone else.
  2. Context is everything per the objective
  3. Income Preservation supersedes Capital Preservation & Growth per #1 above even at the expense of Capital Preservation & Growth even my perPETuation© legacy if it comes to that (other than my own dogs’ welfare provision being intact should I predecease).
  4. The IRS’ RMD (required minimum distribution) override: at age 69 per the requirement of RMD that amount must be withdrawn from all my retirement accounts (by age 70 ½ rules)– regardless if it would overfund the objective and the preference of drawing down taxable accounts prior to tax deferred accounts (retirement accounts)

With the above in mind, see below what it takes to recover capital and why therefore income preservation at the expense of capital growth overrides in my own personal approach in what follows. (see chart)

If You Lose:
Gain Required to Break Even:
Again, with the caveat per Professor Thomas Sowell (regardless of personal financial gurus) “there are no solutions only tradeoffs’ and as an old flame (Flash, Class & Sass) once stated to me, ‘there is no security. We can only learn to live with our ‘insecuriorities’ – my cascade/mayimfall approach to distribution for me:

#1 The Buffers

Then Pharaoh had a dream. Hew was standing near the Nile, when suddenly seven handsome, healthy-looking cows emerged from the Nile, and grazed in the mash grass. Then another seven ugly lean cows emerged from the Nile, and stood next to the cows already on the river bank. The ugly, lean cows ate up the seven handsome, fat cows..
Genesis 41:1-4

            (The seven fatted cows were consumed by the seven lean cows – the first evidence for The Adkins diet?)
            So Joseph wisely counseled to put away grain during the seven good years for the seven lean years and the Pharaoh (okay at the expense of Egypt but that’s another story) would survive, benefit and thrive.
            #1 (A) Joseph’s Buffer
First, recognizing that money is just a medium of exchange for goods and services and the medium can be devalued and discarded, still having 2++ years (even at the expense of the rate of return required to meet the goal) is my #1 set aside.
            Yes, money markets, cash, cd’s lower the rate of return and may jeopardize the goal – yet I question the impact of that assumption. First, one can take higher deductibles in their insurance coverage be it home, auto, long term care etc – which is an indirect rate of return potential. More importantly, regardless of the cavalier assertion of one’s ability to withstand down markets (which are inevitable), volatility (in particular fear on the downside) kills rate of return (again see table above). While there is FOMO (fear of opportunity loss) there is also loss due to the response to volatility that effects the required rate of return and a buffer can limit that whipsaw downside to the rest of the portfolio allowing one to endure a little better knowing their ‘grain’ put away – even if having put away two plus years of ‘cash’ goes against one’s cavalier grain. (It’s better than getting the chaff (shaft) from volatility.)

            #1 (B) Contingency Buffer - The Standby Reverse Mortgage Credit Line

            To add to Joseph’s Buffer, I anticipate as Standby Reverse Mortgage Credit Lines become more available and less costly, to eventually add this to the buffer (which may actually allow release of part of the Joseph’s buffer for higher yield) unless The MUZZLeum@Bet Kelev (my home) is declared a Hysterical K9 Judaic ‘Muse’um.

#2 The Matching – Gotta Oughts Nicetas with Phases (Go Go, Slow Go, No Go)

Who is rich? One who is happy with what one has, as it is said, 'When you eat what your hands have provided, you shall be happy and good will be yours.' [Psalms 128:2]
Rabbi Ben Zoma in Ethics of The Fathers

Don’t sacrifice what you need for what you don’t need as things not worth doing are not worth doing well
            The budgeting of gottas (fixed must requirements), oughtas (flexible but shoulds), and nicetas (luxuries – not required, additional levels per category in the oughtas,) is done for each of three phases (go go, slow go, and no go) to determine the amount of each objective phase to fund.
            (As a charter member of Hermits ‘R Us and restricted in travel due to ear challenges, I’ve been in slow go since my 30’s.)

#3 Sequencing Distribution Between Taxable & Tax Deferred Accounts

            Taxable accounts (overridden by the RMD requirement at age 70 ½ though I’ll start at age 69) will be exhausted first though limited by to Obama’s 2.3% surtax once thresholds on investment income are reached. The withdrawal amount from taxable accounts is offset by the fact that tax deferred account distributions are not subject to the 2.3% surcharge but these tax deferred distributions from retirements plans still go into the base for the threshold for the surcharge on investment income (pushing taxable account withdrawals into the 2.3% surcharge).

#4 Running The Numbers

            Per retirement phase, I shall annually rerun the numbers both deterministically (average rate of return) and by Monte Carlo on amount of goal, duration and most importantly longevity using Given both my parents passed on (graduated before 61), gut wise, I’m reducing the resultant longevity number probably much to the delight of the small animal veterinarian community as well as the so called personal financial planning business and its personal financial planning pornography cheerleading media. That said the reduction in longevity is countered by an increase in my longevity given ‘the good die young.’
            Given the aforementioned, the critical other number is the after tax rate of return, therefore, required at the 85%, 90% and 95% probability of funding levels.

#5 Rules For My Distribution

  • All distributions (be it taxable or tax deferred accounts) will be sweep into money markets for either distribution, replenishing (see Joseph’s buffer), and or rebalancing
  • Given an increase in the stock markets, the distribution will be bumped up by inflation (maxed at 4%) if needed.
  • Given a decrease in the market – there will be no inflation bump to distribution

#6 Allocation (What You Have All Been Impatient For)

            Again subject to the above cascade #1 thru #5 above and three different calculations (yes, I’ll still do a go go (which means I’m in no go denial) phase and the intersecting gotta, oughta, nicetas levels   (save the Joseph’s buffer and or inclusion of a future reverse mortgage standby credit line in the gotta level) – here are the funding generic tools I’m using:

Gottas (includes social security to offset if still available):
  • Income funds or income etfs
  • REIT etf
  • Oil & Gas MLP’s (if not castrated by future government actions)
  • Balanced funds and or increasing dividend etfs
  • Go anywhere bond fund – ok here goes there is only one I’ll use Loomis Bond Fund as long as Dan Fuss is running it. No Fuss no bother with Loomis thereafter.
  • If reverse mortgage standby not utilized and if there is a shortfall in this category – then utilization of reverse mortgage annuity.
  • And ‘surprise surprise’ (as Gomer Pyle would say) with a gigantic IF attached– no load fixed and or variable annuities

These annuities must have no load or very low loads – no commissions etc. (On might call Low Load Insurance for available no load annuities) Secondly, the companies must be strong and S&P ratings etc don’t mean bubkes (look it up) to me. Better to have a low risky asset to surplus ratio and very high risk based capital ratio. In addition, the annuities would be laddered to minimize interest rate risk – buying them equally over at least a 3 year period. An alternative if one has a large gain in a low volatility mutual fund traded as a stock like Berkshire Hathaway or Markel – is over time, if the stock continues to rise by a new 10%+ - take 10%+ sale proceeds and place them into income or balanced funds essentially creating one’s own variable annuity – of course, without the guarantee. (Note considering these insurance actuarial “”geniuses”” history with long term care pricing, disability insurance debacles, and the 80’s crash value life insurance and insurers – that is why diversifying insurers and laddering is my personal approach).


  • Health mutual funds or ETFs
  • Energy mutual funds or ETFs
  • Minimum 3 Focused Value Mutual Funds which ironically creates a certain diversification


            I am not funding to this level in my distribution planning. Why? – I have nicetas – vacations  every day 365 days a year given being in company of my black standard male poodle Simcha and yes, even Her Royal Highness my black standard female poodle Goodie (who lately has become a more benign ruler to her subject me, her Duke of Dog.

            In any event, each year annually, I shall rebalance

#7 Withdrawal Rate

            Rather than 2.5%, 4%, “Omaha Omaha” (as Peyton Manning would bark) or ‘Moses, Moses’ (as Torah would state), if all the above funds the goal per all the overrides and criteria given the required probability of success I’ve previously stated being accomplished– then the percentage question is a moot point.
            Prepare the ground, context is everything, and hopefully the percentage withdrawal question is necessary.
            If additional withdrawal is needed, at that point I’ll determine whether it is 4%, 4.5%, 5% using the PE10 rules though it is all contingent, per Ecclesiates ‘all is ephemeral,’ and subject to change --- especially if I’m wearing Depends™ due to ‘seltzer down the pants.’

Friday, September 19, 2014

Part III: Puttin’ It In; Takin’ It Out – Methods

Part III: Puttin’ It In; Takin’ It Out – Methods

You know the phrase ‘theory is one thing but the reality quite another.’ Well, in personal financial planning for decumulation (distribution) reality and inevitable change, regardless of theoretical back testing of a proposed method or methods, decimate both theory & reality. Furthermore, before presenting the different methods/approaches to distribution/de-cumulation, here are further qualified stipulations:

  1. There is no SET IT FORGET IT ANSWER let alone THE ANSWER (book of said title or otherwise). THERE IS NO ‘SECRET’ LET ALONE ‘SECRET SAUCE.’ There are only tradeoffs (and ‘objecting ‘Yes, Butts,’ are only for fine tuchasses)
  2. Things not worth doing are not worth doing well
  3. Preservation of Income takes priority over Preservation of Wealth. Yes, Preservation of Income takes priority even at the expense of Preservation of Wealth – as you don’t sacrifice what you need for what you don’t need
  4. The unquestioned premise that annuities (issued by insurers) are rock solid ‘safe’ is a dubious problematic assumption (remember Mutual Benefit Life rated AAA+, New England Life, Confederation Life, and Executive Life collapses and or camouflaged mergers?) to queried not blindly accepted. Safe better answered by ‘relative to what?’
  5. Given the underlying fear/concern of ‘outliving one’s money,’ your longevity estimate is an overarching factor – go to or other similar calculators to get a better probability of your life span rather just ‘grandpa and grandma’ lived to 90.
  6. There is a great deal of self dealing twaddle, confirmation bias (especially by so called phds – back testing back scratching) not only in advocating method but also in misnomer naming of their advocated method in terms of  false choices and unquestioned titling premise.
  7. There are most likely at least 3 phrases during retirement (go go, slow go, no go) which require different funding amount assumptions
  8. In the end remember: Context is Everything (revisit Part II again)

Again, as Professor Thomas Sowell so eloquently stated: ‘there are tradeoffs not solutions.’
            Essentially there are but three methods (with variations) for decumulation / distribution (other than the consequence of doing nothing or ‘eliminating it’ away) for ‘takin’ it out.’

  1. Matching (no note, Gene Rayburn & The Match Game©)
  2. Systematic Withdrawal (‘SW’ usually with rules and or probability assumptions)
  3. A combo of #1 & #2


“The acquisition of investments whose payouts will coincide with an individual’s or firm’s liabilities. Under a matching strategy, each investment is chosen based on the investor’s risk profile and cash flow requirements.”
Investopedia Definition Matching Strategy
            There are two basic ‘matching’ approaches to distribution
·         Buckets
·         The Gottas (Required Often Fixed Expenses) & The Discretionary

The Bucket Match Method
1.      Bucket#1 – 2-5 years of anticipated expenses in cash (cds, money markets etc) and near cash (i.e like bonds that matured in a year or two)
2.      Bucket#2 – 5-10 years of anticipated expenses in laddered bonds at mature within the time frame sequentially and income annuities – for income)
3.      Bucket#3 – 10 years plus period – stocks, mutual funds for growth
In general, the buckets are ‘rebalanced annually’ from the distributions (capital gains, dividends, interest etc.) to replenish the bucket to the desired level of years.

            The Gotta Required & Discretionary Match Approach

One American College of Chartered Life Underwriters ‘Professor’ deems this ‘The Safety First’ (with emphasis – surprise on annuities for what would be the essential portion (i.e. the required income)) with the other portion termed ‘discretionary.’ Naming  the essential portion as safe is dubious (without caveats) given the above mentioned history (even with limited state annuity guarantee funds) of the highest rated insurers going into the tank and annuities and or surrender values delayed and or reduced – not that ‘where one chair sits is where they stand.’
The required element is invested in annuities for the floor of income required while the remainder – the discretionary – is devoted to stocks, mutual funds etc. Furthermore, it is suggested to take no more than 2.5%-2.8% out of the discretionary + yearly inflation adjustment of no more than 3% based to recent history extrapolated.
A couple additional words of caution: first, given interest rate risk, annuities should be purchased spread the purchase over several years – to minimize the impact of fluctuation of your annuity income. In the current environment of low interest rates, should interest rates spike up and you bought all your annuities at once, your payout could be significantly less than had you dollar cost averaged in. Secondly, looking at credit ratings quite frankly isn’t enough as the rater still gets paid by the rated (the insurer). Ask the agent for the risky asset to surplus ratio as well as risk based capital and liquidity ratios of the insurer. Third, don’t buy all your annuities from just one insurer. Remember it is the life and health insurers that brought us long term care and quickly exited the market or curtailed benefits offered in new policies due to their genius actuaries using lapse supported policies for pricing (though their big bang geniuses will argue it was all the fault of low interest rates on bonds). As one insurance wonk said to this writer, actuaries are cpa’s without a personality – some of their actuarial are responsible for further understating the undervaluation of your state’s person liability forgetting the concept of sequence of risk of returns (another story) which will wind up in either new taxes, displacement of social programs by issuing new bonds lowering credit ratings and increasing interest costs for the state’s general funds.
Annuities - safety? Safe is a question of relative to what: Inflation risk? Issuer Risk?  Safety First my tushie !  A characterization of Safety First is a mischaracterization at best misleading at worst. A better characterization given a low risky asset ratio, excellent risk based capital as well as outstanding liquidity of the issuing insurer would be to say – those annuities have a lower probability of volatility (in the sense of failure  and nominal principle value than many other instruments.)
One can only wonder if for the ‘discretionary’ element in this approach equity indexed variable annuities with their high acquisition costs (front end and or back surrender charges) are suggested.

Systematic Withdrawal Method (and variations)

Though not exhaustive, below are 5 popular variations of systematic withdrawal method (Note: the rhythm method is not an investment systematic withdrawal method ):

  1. 4% rule & 4.5% rule
  2. PE10
  3. The Glidepath
  4. Triple Leverage
  5. RMD (Required Minimum Distribution by The IRS)

4% Rule & 4.5% Rule

            Essentially, given a 60% in stocks and 40% in bonds one could take out 4% a year plus up to 3% increase for inflation rebalancing annually. The increase to a 4.5% distribution was due to a reallocation: 42.5% in large stocks, 17.5% in small stocks and 40% in bonds rebalancing annually. This approach was the gold standard of distribution rules for years until the recent artificial low interest rate environment. Some would now argue this withdrawal rate should be 2.8% plus the yearly maximum 3% increase for inflation.


            The PE10 approach is an adaptation of Prof. ‘Irrational Exuberance’ Shiller’s PE10 asset allocation concept to improve long term returns and lower the risk of large portfolio drawdowns.
            The rules for the percentage withdrawal under this method where the Standard & Poors overall Price to Earnings Ratio (P/E) are :

  • The P/E is over 20x then 4.5% withdrawal rate
  • The P/E is 12-20x then 5.0%-5.5% withdrawal rate
  • The P/E is below 12 then a 5.5% withdrawal rate

The Glidepath

            To minimize sequence of return risk (revisit part II), at the beginning of retirement distribution have an allocation of 30% stocks and 70% treasury bills and or short term bonds increasing the stock allocation 2% every year until stocks/mutual funds reach 60% of the allocation. Thereafter hold at that allocation. such that the withdrawal rate can be  4% to 4.3% with inflation (3% max). In effect, historically, this method through backtesting gives up much of the upside (capital preservation) to lower downside risk to the income preservation (which aligns with ‘don’t sacrifice with what you need for what you don’t need’ or your need probability takes precedence over your luck sperm club progeny’s inheritance if push comes to shove.

Triple Leverage – Floor Leverage Rule

One man’s (raised) floor is another’s ceiling
(or de-basement?)

            In back testing by Jason Scott of Financial Engines (as counter intuitive as this may seem) indicates by putting 85% in TIPS (Treasures that are inflation protected) and or annuities and 15% into triple leveraged exchange traded funds (meaning if the market goes up 1 this triple leverage ETF will go up 3 but if the market goes down 1, the triple leverage ETF goes down three) that if ‘you want a substantial upside but want to be confident that spending won’t run out, then this is a strategy that makes a lot of sense.”
            One should note, that per Standard & Poors rating service – there are several corporations with AAA+ ratings while under the Obama Administration (which is suing S&P but not the other rating agencies), US government debt was downgraded from the highest rating. (Note coincidentally, the other rating agencies have maintained giving the US government their highest rating and these rating agencies, coincidentally, are not being sued by the Obama Administration). The aforementioned notes S&P (nor the other rating agencies paid by whom they are rated) have a dubious rating track record from the rating of Mutual Benefit Life etc previously noted, to Whoops bonds, and of course the housing meltdown giving high ratings to crapola. One can only wonder akin to the enemy of my enemy is my friend if the rater of my rater is my credible rater. (Note the world rate is in rater.)
            One other note, ETFs do not always parallel their intended purpose dollar for dollar as ETF’s (irrespective of the underlying holdings) are subject to the supply and demand of buyers and sells. Thus, ETF’s can and may be align as planned and actually be out of synch with their intended purpose at times – thus, one cannot anticipate 100% synchronized correlation of the triple leverage ETF in unusual markets.
            Scott’s Liquid Fool’s Gold?

            RMD (Required Minimum Distribution Method) by IRS

A required minimum distribution is the amount the federal government requires you to withdraw each year – usually after you reach age 70½ – from retirement accounts, including traditional IRAs, simplified employee pension (SEP) IRAs and SIMPLE IRAs, as well as many employer-sponsored retirement plans.

            Utilizing the tables from the IRS Required Minimum Distribution Publication 590 Uniform Lifetime Tables (there is a calculator at, one can also start taking distributions prior to age 70 ½. Dividing one’s total retirement accounts value (less any Roth retirement plans as well as the amount of after tax contributions to plans) by the number corresponding to one’s age or the combined age for calculation of both spouses, the IRS essentially is projecting your and or yours and your spouse’s longevity in effect requiring an annuitized amount and payout of your account (of course without so called insurance company“guarantees.” It appears that their calculation is conservative relative to longevity lowering otherwise the amount required to be distributed per increasing longevity.
            However, in any event, at least at 70 ½, the required minimum distribution amount per this RMD, should be calculated whatever method you choose (systemic withdrawal and or matching method) and distributed least you incur a substantial penalty.

Combo Method

            This eclectic approach is like going to a Chinese Restaurant – one from column A (matching) and one from column B (systematic withdrawal) and hoping you are neither hungry a half an hour later or outlive your resources.
            One application is to have a fixed portion that is to last 40 years (which most likely assumes annuities and long lived parents and grandparents) for your required expenses drawing down the other side (the discretionary side) as needed or until it is exhausted.

As you know, there are known knowns; there are things that we know that we know. We also know thee are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the one we don’t know we don’t know
Former Sec’t of Defense Donald Rumsfeld

            Friends there are no guarantees, no set it forget it answer – no secret sauce (except at McDonalds – which is really mayo and ketchup). And even with probabilistic approaches, there is the concern not of risk but increasing uncertainties ‘Black Swans’ and unknown unknowns.
As for myself, after now 40 years involved with personal finances (starting with being my 3nd grade PFFS (a then Philadelphia bank) weekly banker in Ms. Gottfied’s class thru 20 years of fee only financial planning practice, and 30 plus years of writing in the field including this blog – I can only give this one assurance: like women, and my Judaism, the more I know it seems the less I know so I’ve got to go with probabilities tempered by common sense, and Judaic thought. So with the aforementioned in mind, part IV will examine – not what I am suggesting for you – but what I’m doing for myself and my Crown JEWels (my standard poodles Simcha & Her Royal Highness Goodie).

Good Shabbas,
Yaakov ben Elisha (Jim son of Ellis)

Tuesday, September 9, 2014

Putting It In; Taking It Out- Part II: Context is Everything

Putting It In; Taking It Out- 
Part II: Context is Everything

I’ve cut so much hair, I’ve lost my concept
Warren Beatty in Shampoo

            “Okay, okay.
            Yada, yada, yada.
            Enough already, Mr. Enough!
            What is the best method for withdrawal (decumulation – takin’ out) for income that I won’t outlive???”

            ‘Tough cookies!’ as we would say at West End Drive while playing boxball in the street in Overbrook Park, Philly with the likes of Marvin ‘Dog Food’ Dash, Alan ‘Wonderwoman’ Winderman, and Rickie ‘Rosenbag’ Rosenberg. You’ll just have to get through Part II first as: things not worth doing are not worth doing well or as Mae West would say, ‘things worth doing are worth doing slowly’ if Part III will be of any value.

            Context is everything.
            “The Answer” isn’t an answer as there are only tradeoffs. The appropriate tradeoff is framing the correct question, specifications and criteria.

            There are two overarching contextual questions to determine:

1.      The Goal/Objective Parameters (from a deterministic and as well as stochastic perspective ((Monte Carlo probability simulation)
2.      The Boundaries (specifications and criteria)

The Goal Objective Parameters
(the following assumes the objective is interrelated with other personal financial objectives – not in being dealt with in isolation- otherwise you solve /tradeoff one problem and create two others)

            Typically a deterministic (1) personal financial objective should address the following elements:

1.      Amount (Expected Outcome)
2.      Start Date (2)
3.      Duration (Time Horizon)
4.      After Tax Rate of Return (remember it is not what you make, it is what you keep)
5.      Inflation Rate
6.      Funding Required per the aforementioned (before offsetting accumulated resources)
7.      Annual Payment Required to Fund Risk Adjusted (3)

A faulty premise in retirement funding and distribution is that the amount required even after meeting the required rate of return – risk adjusted – and increased for inflation (or decreased for inflation) will be the same required amounts throughout all of retirement.
Typically, not always, there are three phases to retirement (not including the slow down transition period prior to retirement):

1.      Go go
2.      Slow go
3.      No go

Each of these ‘sub’ retirement objectives typically requires different funding amounts as well as  distinctive assumed inflation rates (especially considering increased non covered medical expenses – as ‘everyone wants to go to heaven,’ as comedian Timmie Rogers would state, ‘but nobody wants to die’ ((even if Medicare won’t cover the expense))). Thus, there is really at least three ‘retirement objectives’ regardless of deterministic or stochastic approaches to ‘what the number is’ and how much can be withdrawn.

There are other criteria, factors and specifications (rational and emotional) to consider including but not limited to:

1.      Risk Capacity (as opposed to risk tolerance)
2.      Withdrawal sequence taxable accounts versus tax deferred accounts (pension, profit sharing, IRAs, 401ks etc) and, for example, the sequences’ impact on the Obamacare 2.3% surcharge threshold
3.      Inheritance desires for your lucky sperm and ovarian club progeny
4.      Volatility buffers

Risk Capacity

            I’d love to play center for the Denver Nuggets. But at 5’5” tall, regardless of skill set, but I don’t have the required height capacity.
            Planners throw around ‘risk tolerance’ like it was Oprah telling the audience everyone gets a new car today. The risk tolerance measures are typically global and qualitative NOT IN CONTEXT OF THE OBJECTIVE. Therefore, I find them worthless. If all one requires is a 5% after tax rate of return – even if the S&P is up 20% who cares – you manage the goal with the least risk – rather than managing the asset as the vast vast majority of so called personal financial planners (commission, fee and commission, and yes even fee only especially the a little bit pregnant percentage of assets under management supposedly fee only planners as well as personal financial planning pornography journalists) assert.
            Risk capacity is 1) at what point a decline impairs the objective versus the percentage decline (capacity) in the resources in hand the objective can absorb.
            Period – end of sentence (and not an Obama ‘period’)

Withdrawal Sequence Taxable & Non Taxable Accounts

            While technically your ‘tax deferred’ withdrawals are not subject to the Obamacare surtax, the withdrawals ADD to the base for calculation and imposition of the Obama Doesn’t Care surtax.
            All things being equal, however, the longer withdrawals can be delayed from the tax deferred account up to the required age of 70 ½ for required minimum distribution (RMD) the better. (That said, a discussion of Roth IRA’s in this regard is outside the scope of this discussion)

Inheritance desires

            Stipulating my opinion for a hand up not a hand out per the negative principle upon which America was founded (against hereditary privilege ()aka The Lucky Sperm Club)), too many work free retirements have been deferred, delayed etc due to the personal financial ebola of higher education costs incurred for offspring who have subsequently boomeranged back with resentment rather than gratitude to top it off.
            The above stated, here is the question, ‘will you jeopardize the retirement objective (income preservation) through requiring riskier higher rates of return and delaying retirement and its duration for wealth preservation (inheritance for your lucky sperm club?).
            If so, the legacy funding should be figured into your overall financial plan and its consequences on the retirement objectives (go go, slow go, and no go).

Volatility Buffers

            Volatility kills investment. We confuse volatility with risk (the risk of not making the goal – outliving the money) but still volatility is risky killing objectives because of fear of the moment – managing assets instead of managing goals.
            You know the story of Joseph and 7 good years and 7 leans years per the dream of the fatted cows and the emaciated cows.
            (Note per the dream after the 7 prosperous years represented by the fatted cows, the emaciated cows ate the fatted cows and gained no weight. This was the first instance of the Adkins Diet).
            In any event, under Joseph’s viceroy tenure, Egypt not only withstood the 7 lean years but Pharaoh (not the Egyptians per se) prospered by having prepared during the fatted years.
            Joseph had created a buffer from the volatility by storing during the fatted years.

            In several studies of mutual funds, there has been a curious finding: the mutual fund’s rate of return is much higher than it’s average shareholder’s because of fear during downturns and resulting turnover (volatility).
            To buffer the natural human tendency to retrench during volatility, a 2 year or more buffer of cash and cash equivalents is suggested.
            Yes, this will lower the overall rate of return though often not as much as one would think if as a result of the buffer one increases their deductibles on home, auto, blanket insurance as well as increasing the waiting period in their long term care insurance lowering premiums per year.
            An alternative for those over 62 who can’t afford this large a buffer given their retirement goals – a standby reverse annuity line of credit – can buffer and help one withstand the inevitable volatility swings that can destroy investment.
The above said – there is a major flaw in deterministic (average rate of return) personal financial planning – The Flaw of Averages

(Oy vay iz mir (oh, woe is me)!!! You had me slough through all above to state this???
Yes, because as useful the probabilistic method (Monte Carlo simulation) is, it too has problems ((not the least of which is keeping, sometimes unnecessarily assets from distribution, which, increases the basis for assets under management fees for ‘personal financial planners)) )

The Flaw of Averages in Deterministic Planning

            Given all the boundaries, criteria, and assumptions above, the major problem with the ‘deterministic’ approach – is ‘The Flaw of Averages.’ Per author Sam Savage’s book by the same title, The Flaw of Averages he describes the fallacies that arise when single numbers (usually deterministic averages) are used to represent uncertain outcomes.
            An example:
            The Platte River averages say 4’ in depth. Being 5’5” (compact, not vertically challenged) on a good day, I should be able to slough across it.
            I’ll drown because at some points the Platte is 4” high and at other points 20’ deep.
            So using an average after tax rate of return, the average desired amount needed for the objective per year, average inflation rate etc – exposes one to what is called ‘sequence (of returns) risk.’
            For example per Savage’s book
            Let’s say you had $200,000 to invest in 1973 and expected it to last 20 years throwing off $32,000 (given a 14% rate of return – the average of the S&P Index from 1952-2001 - in the deferred IRA). Well the market was off over 38% in 1973 and the account would have tanked in 8 years. However per Savage, starting in 1974, the account would have made all 20 years distributions would some left over, versus starting in 1976, the fund would have tanked in 10 years thru 1974 and your little nest egg might last 7 years at that.
            Thus there is a sequence risk to average rates of return.

Monte Carlo Simulation per Objective

            The deterministic model does not address sequence risk, stochastic (Monte Carlo simulation) methods do. The result should be after going through thousands of iterations, the probability of meeting the goal and or at 80% thru 95% what it would take additionally to make the goals.
I prefer a baseline Monte Carlo step – what if I change nothing and precede as is – what is the probability of failure stipulating bad data in bad data out. Critical and typically overlooked – is running different longevity scenarios.
More often than not, the results of Monte Carlo analysis are so bad – clients go ‘here, I thought I was doing great’ or worse, ‘what the ((well you….))’….
That is why both the deterministic and the monte carlo simulation should be run with the three retirement phase portfolios (go go, no go and slow go) as well as differing longevity assumptions – to see the probability of failure which sets up the discussion for next Part III – Methods of Distribution for Income Preservation.

·         Context Is Everything
·         Manage Goals Not Assets
·         & Mae West
(1) Deterministic Model – a mathematic model in which outcomes are precisely determined through known relationships without any room for random variation. In comparison, stochastic models (i.e. Monte Carlo simulation) uses ranges of values for variables iin the form of probability distributions. In personal financial planning, the deterministic model, for example would yield, the average payment necessary to fund a goal, the average distribution available during the duration, etc. The Monte Carlo method would yield given the criteria inputted – the probability of reaching the goal.
(2).- One study indicates that retirement date explains 53% of the fluctuation in withdrawal rate.
(3).- Some use ‘beta,’ return on beta, downside risk measurements, standard deviation etc as the proxy for risk. Risk, not a game by Parker Brothers, when all is said and done, is making or not making the objective.