Portal Forums Links Register FAQ Members List Social Groups Calendar Search Today's Posts Mark Forums Read

Re: New SWR estimation methodology: little help?
01-03-2006, 11:45 AM   #21
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...

Join Date: Mar 2003
Posts: 15,910
Re: New SWR estimation methodology: little help?

Quote:
 Originally Posted by ((^+^)) SG Hi Brewer, We got caught up talking about distribution assumptions and monte carlo vs historical and it occurs to me that we probably didn't answer your real question. * What I think Milevsky wanted to examine was the effectiveness of using annuities as part of a retirement portfolio. *The problem with using either historical or monte carlo simulators is that they do not include longevity probability. *In order to include that effect, you would have to run dozens of simulations with different retirement periods, then combine the results with longevity tables. *This process would have to be done for every assect allocation (including annuity amount) of interest. * The solution he came up with is interesting (in a nerdy math geek kinda way). *By writing analytic expressions for all of the return and longevity data, he is able to write a set of partial differential equations that describe investment and life performance in a probabilistic manner. *This allows him to run optimization runs and examine the effectiveness of using annuities. *But he has to make a lot of approximations along the way. *For example, if I remember his article correctly, he assumes a no fee annuity (try and find that). *I also don't recall him including any social security benefits or pensions (which should be considered as an annuity portion of a portfolio). *I don't know how much time he spent trying to fit his distribution curves to real data. *I don't recall him discussing that. *I would say his results are qualitatively interesting. * If you use his simulator with appropriate return distribution curves, the results should be very similar to basic monte carlo simulation results, but because the simulator includes longevity tables, it will also examine length of retirement variations. *
SG, I think you are looking at the wrong article. The one I referenced specifically mentioned in the title that it was an effort to work out the problem WITHOUT simulation. The article I read had nothing to do with annuities (actually the possible solution Milevsky mentioned was to put on zero cost collars on equity positions).
__________________

__________________
"Neither my companion or I carry firearms on our persons. We depend on the goodwill of our fellow man and the forbearance of reptiles."

- English Bob

 Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free! Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE! You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more! Join Early-Retirment.org For Free - Click Here
Re: New SWR estimation methodology: little help?
01-03-2006, 12:16 PM   #22
Thinks s/he gets paid by the post

Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: New SWR estimation methodology: little help?

Quote:
 Originally Posted by brewer12345 SG, I think you are looking at the wrong article.* The one I referenced specifically mentioned in the title that it was an effort to work out the problem WITHOUT simulation.* The article I read had nothing to do with annuities (actually the possible solution Milevsky mentioned was to put on zero cost collars on equity positions).
I don't think so, Brewer. I believe this is the same methodology he developed for the Society of Actuaries but applied to a more academic problem. There may be modifications or augmentations to the technique, but the description sounds the same. He says it is without simulation because he arrives at a solution without having to simulate a whole bunch of retirement scenarios year by year then evaluate the statistics of hundreds or thousands of scenarios. Instead, he simply solves one set of PDEs that give him resulting statistics. I think he is justified in drawing a distinction between his approach and traditional monte carlo or historical simulators by saying he does it without simulation. But he still has to solve the PDEs and that's what I referred to as "simulation". I should use the word "calculation" and avoid the inconsistency with his title.
__________________

__________________

Re: New SWR estimation methodology: little help?
 01-03-2006, 03:21 PM #23 Thinks s/he gets paid by the post   Join Date: Jul 2004 Posts: 1,072 Re: New SWR estimation methodology: little help? Oh man, PDEs, HOTs and DEs - reminds me too much of my summer-have-to-do-this-to-graduate-on-time class my sophomore year in engineering college. I yawned a lot and copied a lot of greek symbols. Personally I like the 4% rule with ESRBob's 95% withdrawal backup in times of distress. PDEs - Partial differential equations HOTs - higher order terms DE - differential equations If I understand fractals, it allows a nonlinear approach to looking at things - biological formations seem to follow the fractal approach more so that linear approximations. Oh, I do remember that PDEs and DEs could only be answered for linear equations..... :-) Long time ago - way too long ago...... Bridget aka Deserat __________________ Deserat aka Bridget “We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.” - George Orwell/Winston Churchill
Re: New SWR estimation methodology: little help?
 01-03-2006, 09:19 PM #24 Full time employment: Posting here.   Join Date: Jan 2006 Posts: 899 Re: New SWR estimation methodology: little help? SG, I agree that there could be significant model error in a Monte Carlo simulation if the distribution functions for different asset classes are not realistically correlated.* I haven't seen to many cases where R2 with say the SP500 is zero.* However, I don't think that it would be that hard to do it. MB* __________________
Re: New SWR estimation methodology: little help?
01-03-2006, 10:52 PM   #25
Thinks s/he gets paid by the post

Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: New SWR estimation methodology: little help?

Quote:
 Originally Posted by mb SG, I agree that there could be significant model error in a Monte Carlo simulation if the distribution functions for different asset classes are not realistically correlated.* I haven't seen to many cases where R2 with say the SP500 is zero.* However, I don't think that it would be that hard to do it. MB*
I think it wouldn't be that hard to include some of the correlations (eventhough most monte carlo simulators don't do it). But it would be impossible to include them all since they are so complex that we can't quantify them -- or even identify them. It would be pretty straight forward to approximate correlations between equity returns, bond returns, and inflation for example. But annual returns and inflation are also correlated (in some fashion) to performance experienced in previous years. Several irrational exuberance years in a row are likely to be followed by less stellar performance. Recessions tend to be followed by booms. etc. These kinds of correlations are nearly impossible to capture and approximate.
__________________

Re: New SWR estimation methodology: little help?
Re: New SWR estimation methodology: little help?
 01-09-2006, 02:50 PM #27 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: May 2005 Location: Lawn chair in Texas Posts: 12,549 Re: New SWR estimation methodology: little help? Reminds me of an Operations Research class I once had in kollidge. Real brain twister, learning how to solve matrices and such. But the irony, to me at least, was that they pulled most, if not all, of the input for the equations - utility functions, mostly - out of their a\$\$es... Made a B though, and was happy to run like hell and never look back!! :P __________________ Have Funds, Will Retire ...not doing anything of true substance...
Re: New SWR estimation methodology: little help?
 01-09-2006, 03:52 PM #28 Thinks s/he gets paid by the post   Join Date: Feb 2003 Location: Mesa Posts: 3,588 Re: New SWR estimation methodology: little help? Thanks, bongo. In retirement I've become too lazy to read this kinda stuff unless I am really interested. __________________
Re: New SWR estimation methodology: little help?
 01-09-2006, 09:43 PM #29 Full time employment: Posting here.   Join Date: Jan 2006 Posts: 899 Re: New SWR estimation methodology: little help? I'm confused? (Not necessarily an abnormal situation ) The original topic was a Mikevsky and Robinson paper.* Where did (Burton?) Malkiel's paper come in?* I didn't see it mentioned until your post, Bongo?* Did I miss something?* Are they the same? MB __________________
Re: New SWR estimation methodology: little help?
 01-10-2006, 09:07 AM #30 Recycles dryer sheets   Join Date: May 2005 Posts: 436 Re: New SWR estimation methodology: little help? I've tried to read Mandelbrots book. Basically argues that there are more market crashes than normal distributions imply, typically making planning based on that distribution too optimistic. I think Henry Hebeler is one of the few retirement planning writers with a good grasp of how investor and portfolio behavior interact. I suspect the typical 60/40 stock and bond, past high return at index fund costs, 25 year retirement, 3% inflation = 4% (more or less) falls apart if retirees really hold 40/60 (seen it here!), we use past higher costs with past high returns, and use the IRS life expectancy data (example. married couple at 62 = 29 yr life expectancy). __________________
Re: New SWR estimation methodology: little help?
 01-10-2006, 09:39 AM #31 Recycles dryer sheets   Join Date: Aug 2003 Posts: 470 Re: New SWR estimation methodology: little help? "Where did (Burton?) Malkiel's paper come in?" Whoops! He wrote the previous article in the magazine! I've edited my post. __________________ __________________

 Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)