Monday, December 28, 2015

What I Learned in 2015: Old Guys Rule

My blog posts are largely a mechanism for me to think aloud about retirement finance and to receive helpful feedback from my readers. I’m learning, not teaching, and I learned a lot in 2015.

I published 44 posts on this blog over the past year averaging about 958 words per post, or a little more than 42,000 words. I also co-authored a paper on portfolio ruin with my son and daughter, which I expect to publish early in 2016, that adds another 4,000 words (many of which I didn’t know before we wrote the paper), plus a few posts at Advisor Perspectives. I don’t even want to estimate the number of lines of R code and Mathematica code I wrote this year and there were a few presentations at conferences. Let's just ballpark it at 50,000 words.

(A classic novel is typically 80 to 100 thousand words; Fahrenheit 451 is a little over 46,000.)

That’s a lot of words for a hobby, a lot of lattes and a lot of learning.

My audience is diverse and knowledgeable and teaches me a lot, often by simply asking the right questions. Nearly 86% of them log on from the US, 4% log on in the UK and 1.8% from Canada. The surprise, however, is that 3% of my readers log on from Ukraine and nearly 2% from Russia. I extend a heartfelt Дякую! to the former and Спасибо! to the latter.

(I really hope I got that right. A Russian-speaking friend confirmed one, but my only Ukrainian friend moved to South Carolina last summer.)

Here are a few of the important things I learned in 2015.

There is no dispute between Jeremy Siegel and Zvi Bodie about stocks becoming safer the longer you hold them. They don’t.

I also learned that people have a difficult time giving up beliefs about finance. I still have planners argue that stocks become safer. Spending only dividends is not a valuable retirement income strategy and risk of ruin is primarily useful only as a research tool. A bond ladder held to maturity and a bond fund are not the same thing. A ladder of TIPS bonds held to maturity is essentially cash.

My son’s potato casserole is outstanding, but should be baked in a disposable dish. (I wash the dishes at our house.)

I learned that time segmentation (“bucket”) strategies can’t be depended upon to avoid a bad sequence of returns. They might, but it isn’t a sure thing.

I received an award for a paper in Indianapolis this summer. I had not visited the city for decades and I learned that it is still incredibly flat. I also learned that a small replica of Rodin’s “The Thinker” in your carry-on looks like a bunny rabbit on the x-ray screen of a TSA employee. ("Are you sure it's not a bunny rabbit? It really looks like a bunny rabbit.")

Game theory can be a useful way to think about retirement strategies.

I learned that even decaffeinated coffee after 3 pm can impact my evening’s sleep. My wife insisted that I test this theory and, much to my chagrin, she was proven correct. This dramatically altered my afternoon writing strategy at Caffe Driade.

Retirement income systems may be chaotic and virtually impossible to predict except in equilibrium, so chaos theory is another useful way to view retirement finance.

I learned that co-authoring a research paper with a son you taught to play basketball and who taught you how to play Super Mario World, and a daughter you taught to fish and who danced with you at her wedding is one of the coolest things that you will ever do.

Even with a basic assumption that our portfolio will return 5% with a standard deviation of 12%, the range of reasonable likely outcomes is too broad to effectively choose among spending rates and asset allocations.

Retirement income models probably involve a lot more uncertainty than most people assume.

I learned that academic papers on retirement finance are often misinterpreted, not just by retirees, but by financial planners, as well. Examples include "retirement spending looks like a smile" (the rate of annual spending change looks like a smile, but actual spending typically declines throughout retirement) and “retirees should increase their asset allocation as they age” (it depends – a custom asset allocation plan is always preferable).

I took the GMAT 30 years ago to get my MBA and again this past year. Perhaps most fun of all, I learned in 2015 that I can still outperform 4 out of 5 young whippersnappers taking the exam.

Old guys rule.

Here’s to an educational 2016.

In my next post, I'll explain Why Retirees Go Broke.


  1. Dirk, thanks for the education during 2015 looking forward to 2016. IMHO you're not old. Retirement Cafe readers rock. Brad

  2. "I learned that co-authoring a research paper with a ... daughter you taught to fish ... coolest things that you will ever do." It's not much use to you in the US but I can tell you that playing cricket against your daughter is hard to beat. I bowl; she bats, and makes the venomous allegation "Daddy, you're spinning it!" Who, me? And then she gives it a crack. Broad grins all round.

    Happy New Year, Dirk.

  3. "Spending only dividends is not a valuable retirement income strategy"

    Can you please elaborate? To my lay-person eye it looks like dividends grow faster than inflation.


    1. You bet. That's a good question.

      There are several reasons, but let's start with how dividends work. It would be awesome if dividends worked like bond interest and you got paid the interest but didn't lose any principal. But that isn't how dividends work.

      If you own a stock worth $1.00 and the company's board declares a 2% dividend (which probably isn't the amount you personally need to spend, by the way), the company is worth two cents per share less on the ex-dividend date because it gave you two cents. The stock price will drop to 98 cents per share on the ex-dividend date as a result.

      In other words, you owned a dollar's worth of stock, the company took two cents from that dollar and left you with a stock worth $0.98 and two pennies. If you owned a hundred shares of a $1.00 growth stock, you could do that yourself without the company limiting you to precisely two cents. You gained nothing in this transaction (some dividends are actually taxed) and the company decided how much you can spend.

      The daily fluctuations of the stock price sometimes hide this small amount, so the stock can lose more than two cents, or gain more. I think this column explains it pretty well.

      Another problem with the strategy is that it can force you to under-diversify if you invest too much in dividend-generating stocks. You should also own growth stocks.

      Since dividends are declared by the company's board, the fact that they keep up with inflation can be artificial. You want earnings, not dividends, to keep up with inflation.

      This is a widely held view of the "spend dividends only strategy". In fact, my statement in the post is a quote from Wade Pfau.

      Good question! Thanks for writing.

    2. A minor correction. I said some dividends are taxable and I meant to say that some are taxable as ordinary income. If they are taxed, the company decided that you would have a taxable event.