tag:blogger.com,1999:blog-5621914599310831423.post7497867043471867679..comments2024-03-28T09:15:32.976-07:00Comments on The Retirement Café: When “Probably” Isn't Good EnoughDirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-5621914599310831423.post-41085391481594263232014-04-23T16:19:09.819-07:002014-04-23T16:19:09.819-07:00Your discussion about the 10 percent expected annu...Your discussion about the 10 percent expected annual return, but with a standard deviation of plus or minus 20 percent, reminds me [don't worry, I'm not going to get into standard deviation type geek stuff here]:<br /><br />As an example, let's just simply say we have a 20 percent return this year but a 20 percent loss the subsequent year. Let's say we start with $100K, and let's say we're doing year-over-year losses, which is what annual expected returns generally amount to. We have first a 20 percent gain, bringing us to $120K, and then a loss of 20 percent times $120K, which is a loss of $24K, leaving us with only $96K.<br /><br />A 20 percent loss to start, followed by a 20 percent gain, has us traveling from $100K to $80K, then to the same $96K. It's sobering to contemplate that to break even after a 20 percent loss, one has to experience a 25 percent gain over the subsequent time period ($20K compared with $80K).<br /><br />My mathematical point is that an expected annual return, calculated over many time periods, appears to understate the actual return it it's considered on a year-over-year basis instead of on a starting point basis. That 10 percent expected annual return isn't as good as it appears -- especially if the standard deviation is plus or minus 20 percent [but I said I wasn't going to go there!], which suggests there'll be negatives of greater magnitude than just 20 percent.<br /><br />Mr. Cotton, you may well have pointed out this sort of thing in earlier blog posts, in which case, do feel free to delete my comment. I am a brand new reader here (and I'm very impressed by the soundness and simplicity [a good and desirable term, not at all a demeaning one] of your writing.<br />M J Rnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-86729981031943255502014-04-18T12:00:59.731-07:002014-04-18T12:00:59.731-07:00One of the things (of several) that statistics ass...One of the things (of several) that statistics assumes is that results of the sample are a reasonable approximation of the results of the population to which one wishes to generalize. I certainly am attuned to statistics (one of my favorite subjects in grad school), but I also learned in those classes that sometimes paying attention to individual cases can teach us a lot, as long as the "paying attention" is done systematically. So, JNEW, what really worked for me as I approached retirement was to record my personal, month-over-month expenses. Once I did that, and had an adequate sample of my own expenses (a couple of years, minimum), I then could generalize (predict) from MY history of past spending to MY probability of future spending. <br /><br />While I have some things in common with some populations, I also have some uniqueness that is best revealed in my personal financial data. You might give this strategy a try. It's certainly a cheap methodology!Francishttps://www.blogger.com/profile/18147039767761041234noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-3700952599784833582014-04-18T11:53:17.948-07:002014-04-18T11:53:17.948-07:00Steve, we paid off our mortgage shortly before we ...Steve, we paid off our mortgage shortly before we retired for the reasons Dirk refers to in his article. At your age, you're doing great! You might find this article at FatWallet particularly interesting: "What Does an Extreme Early Retirement REALLY Require To Work?" Here's the URL: http://www.fatwallet.com/forums/finance/1357506/Francishttps://www.blogger.com/profile/18147039767761041234noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-84933296378890351492014-04-18T09:51:17.185-07:002014-04-18T09:51:17.185-07:00I'm not better off.
As you say, if someone ha...I'm not better off.<br /><br />As you say, if someone has 7-10+ years before needing some of their money, the best place to keep that money is in stocks, in my opinion. But the situation is different once you retire and you are spending from that stash.<br /><br />I wrote about this in a blog post entitled "Even Your Portfolio Heals More Slowly as You Get Older". The "market" recovers much faster than does the portfolio of someone who is spending from their portfolio, as common sense would tell you. At 52, your portfolio probably recovered much faster than even the market because you weren't spending, but were, I assume, actually adding more savings.<br /><br />Because I am spending, and in fact spending more than I planned with kids still in college and med school, my portfolio has not yet recovered. It might never recover. Unplanned expenses happen.<br /><br />To exacerbate the market losses that I have not recovered, I subjected myself to foreclosure risk unnecessarily. I didn't need that extra leverage.<br /><br />Your question allows me to reiterate an important point about retirement: important things change after you retire. Many strategies that made sense before you retired don't make as much sense after.<br /><br />Thanks for writing! Your question is greatly appreciated. Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-10076574548094869982014-04-18T09:30:13.803-07:002014-04-18T09:30:13.803-07:00Hi Dirk, great blog. Like JNEW, I have also recen...Hi Dirk, great blog. Like JNEW, I have also recently stated thinking about this stuff at age 52. If I'm understanding this post, your point is that you shouldn't have financed the home because the money you left in the market suffered significant losses in 2007-2009. But haven't you more than made up for it from 2009-2013? And today, aren't you in fact better off? I'm not sure if I'm missing something or what, but it seems that if someone has 7-10+ years before needing some portion of their money, the best place to keep that money is in stocks.JDhttps://www.blogger.com/profile/11378137064717152145noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-65527206391815506352014-04-16T08:36:29.527-07:002014-04-16T08:36:29.527-07:00If predicting the financial future from the past w...If predicting the financial future from the past worked, it would be a lot easier, wouldn't it? Humans are incredibly bad at predicting the future, even a few years in advance. As people like Wade Pfau and Michael Kitces have shown, there is plenty of reason to believe the financial future won't look like the past and that "safe" withdrawal rates may be closer to 3% than 4%.<br /><br />I think there is a better way. I prefer scenario planning where you look at several possible futures, develop a plan that considers them all, and then consider the probabilities of each scenario developing.<br /><br />Glad to have you as a reader!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-28421553933457880242014-04-16T06:33:34.914-07:002014-04-16T06:33:34.914-07:00Well, I am a new reader to this blog. I am 50 year...Well, I am a new reader to this blog. I am 50 years old, a lawyer and starting to think about all of this stuff. What I am learning is that the thought process, the strategies and the risks are critically different between the "accumulation stage" and the "draw down".<br /><br />Mr Cotton, I think you bring up an important issue, and I whole heartedly agree. I always felt uncomfortable with planners telling me that statistically speaking, I should get X return with this or that allocation and that the Monte Carlo "simulation" gives me a 95% probability of success.<br /><br />Financial planning often looks backwards to foresee the future. Maybe that is because there is not another option. But it DOES NOT mean that (I) the particular statistic will be accurate or (ii) that, with a 95% success probability, you will not fall into the painful position of being in the unlucky 5%.<br /><br />So I fall into the safety first camp too. I like the retirement scenario that includes a guaranteed income "floor" (annuities, social security, cash) to cover all critical living costs plus a contingency. <br /><br />If you have net worth over and above that--- in my book, you can then consider investing in the market and playing the odds.JNEWnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-4720543748810049592014-04-15T13:55:54.038-07:002014-04-15T13:55:54.038-07:00I don't think it's the same scenario when ...I don't think it's the same scenario when you're still working.<br /><br />Before we retire, we take out a mortgage because most people can't afford to pay cash for a home. We are borrowing against future income (salary) we expect to earn. That makes perfect sense.<br /><br />After we retire, a mortgage is in part, and perhaps largely, borrowing against future expected stock market returns. Working longer is usually not an option. That's much riskier.<br /><br />At your age, it should be good enough. It changes pretty dramatically after you retire. Thanks for reading!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-65937583113328264682014-04-15T13:37:10.861-07:002014-04-15T13:37:10.861-07:00English is a second language for me, as well -- I ...English is a second language for me, as well -- I was born and raised in the South.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-67118787877621757442014-04-15T13:33:39.962-07:002014-04-15T13:33:39.962-07:00Dirk,
Your made me smile.
Yes, I wrote that in ...Dirk,<br /><br />Your made me smile. <br /><br />Yes, I wrote that in the Preface of the RMA Curriculum Book and, indeed, my Franglish can be weird. <br /><br />On the other hand, Precisely Stilted and Accurately Wise, what's not to love? <br /><br />This was the beginning of the articulation of Probability First vs. Safety First which is indeed a great literary improvement in the expression of it.<br /><br />Cheers,<br /><br />FrancoisFrancois Gadennehttp://www.riia-usa.orgnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-91034965823063543272014-04-15T12:48:49.606-07:002014-04-15T12:48:49.606-07:00This comment has been removed by the author.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-39194518850059454572014-04-15T11:43:31.944-07:002014-04-15T11:43:31.944-07:00I don't plan to have a mortgage in retirement....I don't plan to have a mortgage in retirement. My wife and I do have a mortgage now even though we could sell investment assets and pay it off. However, I am not retired. "Probably won't" is good enough when a failure means that I simply have to keep working. (I am 37, nowhere near standard retirement age.)SteveDhttps://www.blogger.com/profile/07950549965321368566noreply@blogger.com