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Milevsky et al.: Retirement Income Sustainability
Old 10-04-2009, 06:36 PM   #1
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Milevsky et al.: Retirement Income Sustainability

Some of you are fans of Milevsky, so here's a link to a paper by him and colleagues in the J. of Financial Planning: Retirement Income Sustainability: How to Measure the Tail of a Black Swan

These links are usually good for only a month.
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This paper describes a new methodology for measuring the overall risk embedded within a retirement income plan, motivated by the existence of "black swans," an idea introduced by Nassim Taleb in his best-selling book The Black Swan: The Impact of the Highly Improbable.
They propose a SORDEX ratio which is based on two runs of a retirement sustainability software (I guess such as FIREcalc). One run of your current situation and another run with a hypothetical situation of you 3 years later after your portfolio has been hit with a 1-in-100 black swan event.
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Old 10-05-2009, 07:17 AM   #2
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Originally Posted by LOL! View Post
They propose a SORDEX ratio which is based on two runs of a retirement sustainability software (I guess such as FIREcalc). One run of your current situation and another run with a hypothetical situation of you 3 years later after your portfolio has been hit with a 1-in-100 black swan event.
I haven't read the article yet but they do reference another article which includes an "Analysis of Six Monte Carlo Retirement Calculators" that includes FIRECalc.
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Old 10-06-2009, 11:28 AM   #3
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Originally Posted by LOL! View Post
Some of you are fans of Milevsky, so here's a link to a paper by him and colleagues in the J. of Financial Planning: Retirement Income Sustainability: How to Measure the Tail of a Black Swan

These links are usually good for only a month.

They propose a SORDEX ratio which is based on two runs of a retirement sustainability software (I guess such as FIREcalc). One run of your current situation and another run with a hypothetical situation of you 3 years later after your portfolio has been hit with a 1-in-100 black swan event.
The article is aimed at financial advisers, I don't know if it has much to say to do-it-yourselfers. For advisers, Milevsky is providing an index that answers "Which of my clients are taking the most investment risk?". The idea is that these are the people the adviser should call first if the market goes south. For DIY, I'll guess that most of us review our position periodically anyway, our client list has only one name.

OTOH, looking at the worst case near-term (three years out) numbers can be a good gut-check when you are planning retirement. It's one thing to say that you've got a 5% chance of running out of money many years from now, and another to try to figure out what you're going to say to your spouse in a few years if the market does nothing but go down.

I often notice the disconnect between the investment risk and the mortality risk in these articles. Milvesky's first example is Robert vs. Sandra. Robert is 95% equities and Sandra is 75% cash. Needless to say, Robert is carrying a lot more investment risk. But, Sandra is spending at a current rate of 7.8% of assets, and investing to yield 3.25%. Her plan only works if she dies on schedule. Milevsky doesn't point out that she is taking a lot of mortality risk, and the adviser should be talking to her if she is alive and in excellent health three years from now.
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