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Old 08-30-2009, 12:31 PM   #21
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Since this had dropped from the first page of threads, I thought I would bump it back up with a little review.

Have you ever wanted to run FIRECalc under a bunch of different scenarios including
(a) Different Asset Allocations
(b) Different Rebalancing strategies
(c) Different Management Expenses
(d) Borrowing to Invest
(e) Owning different kinds of annuities in different amounts
(f) plus many other scenarios
??

Have you been suspicious of MonteCarlo simulators? Do you not trust data mining by the financial folks that try to sell you investments?

Then Otar's Unveiling the Retirement Myth is for you. Otar has developed his own retirement software (free trial at otar retirement calculator ) which uses historical "annual percent change" values for interest rates, inflation rates, and 6 stock exchange indexes to create something called an "aftcast" to show whether a retirement portfolio would have run out of money. He is shooting for a 90% success rate over a 30 to 40 year retirement span.

Folks who are familiar with FIRECalc will recognize this algorithm right away. They were never trapped into the false Gaussian thinking of smooth bell-shaped curves that is common with many online retirement calculators that use an average rate of return or an average rate inflation. Otar makes a compelling case that the time value of fluctuations can sink many retirement plans and these fluctuations are not smooth.

The book is full of equations which are helpful to technical types who want to revel (i.e. get stuck in) the details, but these can be skipped over in one's first reading of the book with the thought "Yeah, yeah, so this equation is gonna help me when I need to know more, but for now I'll just assume it's OK." So don't be intimidated by the equations at all, but read quickly through them unless you like equations.

Each very short chapter (there are 45 chapters) covers a narrow subject. While it may be helpful to read the chapters in order, this is not really necessary. One can jump around quite a bit and still get the ideas presented. Even Otar has a preface on "How to Read this Book" which has the following advice

Quote:
If you don't like math, then just read the beginning of the chapter until the first bold subheader. ... Then skip to the end of the chapter and read the "Conclusion"
A main theme throughout the book is that quite a bit of retirement success can come from being "lucky". Lucky with your sequence of returns, lucky with your sequence of withdrawals, lucky in the year you retire, and so on. A successful full-term retirement of 30 years cannot be predicted ahead of time because not everyone lives at the median results. In order to overcome "bad luck", one must have a larger starting portfolio than many people (but not FIRECalc users) expect and/or a lower sustainable withdrawal rate (SWR) that goes with that.

If one's projected SWR is too large (in the RED zone), Otar states categorically that there is no hope. If one's SWR is in the GREEN zone, then you are gonna be OK pretty much no matter what. However, if your desired SWR is in the GRAY zone, then you need "to export the risk to insurance companies by way of a life annuity." Readers of this forum should be familiar with single-premium immediate annuities (SPIA), but Otar brings a new perspective to the subject with formulas to help decide how much risk should be exported, how large your SPIA should be and when it should be purchased.

The strength of this book is that it is clearly different from many main stream financial books which are about the accumulation stage. Otar writes about is going to happen when one retires and making your portfolio survivable. He writes about what hasn't worked, what probably won't work and what does work. This book should be on every early retiree's bookshelf.
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Old 08-30-2009, 12:48 PM   #22
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However, if your desired SWR is in the GRAY zone, then you need "to export the risk to insurance companies by way of a life annuity." Readers of this forum should be familiar with single-premium immediate annuities (SPIA), but Otar brings a new perspective to the subject with formulas to help decide how much risk should be exported, how large your SPIA should be and when it should be purchased.
I haven't read the book yet, and am eager to see Otar's techniques for assuring the risk I "exported" to the insurance company when I bought the SPIA doesn't get re-sent back to me COD when the company can't keep its promises. There may be a lot of that going around in the future.
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Old 08-30-2009, 01:36 PM   #23
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LOL, Thanks for keeping the thread 'alive'. I have been reading his book and think it is an excellent read. Your summary is pretty good.

I don't expect to be considering buying a SPIA as I will already have 2/3 of my RE income dependent on the annuity pension from my employer, but I think he makes a valid argument for 'exporting some of the risk' to an insurance company. While there have been multiple examples of company pensions going under, what is the history of SPIA's defaulting?
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Old 08-30-2009, 01:56 PM   #24
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I don't know about SPIA issuers defaulting, so I can't answer that. That is a concern that he discusses. He also talks about laddering SPIAs which is not something that I have seen before.

But I will say that perhaps because Otar is Canadian that he does not factor Social Security into the book at all. I think that one can consider Social Security a CPI-indexed annuity, so in some sense many US workers have some risk exported to the US government already. One would not include SS benefits into your assets, but if they provide a floor that covers most of your essential expenses, then your portfolio can probably have some fluctuation and still you would survive.
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Old 08-30-2009, 02:06 PM   #25
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But I will say that perhaps because Otar is Canadian that he does not factor Social Security into the book at all. I think that one can consider Social Security a CPI-indexed annuity, so in some sense many US workers have some risk exported to the US government already. One would not include SS benefits into your assets, but if they provide a floor that covers most of your essential expenses, then your portfolio can probably have some fluctuation and still you would survive.
Good point, he doesn't mention SS at all. I don't include SS into our assets either but when I use calculators like FIRECALC I do put them in the mixer and yes, it certainly positively affects the withdrawal rate needed when they kick in.
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Old 08-30-2009, 02:07 PM   #26
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I think this defaulting issue is well discussed on the Bogleheads thread. One poster points out:
Quote:
On the comment about the risk of the insurance company going under:

Depending how deep you are in the red zone, the probability of running out of money holding an investment portfolio generally -at reasonable withdrawal rates- is 40% and higher. (about 45% at 5% initial withdrawal rate, 80% at 6% even with a balanced portfolio)

The risk of an insurance company going under is significantly less than 50%. Furthermore, there is a guaranteed amount ($2,000/month in Canada) which is continued to be paid even if the insurer goes under. So, if the person needs $3000/month to meet his basic shortfall, I buy it from two different insurers
Bogleheads :: View topic - The Decumulation Phase

I mean basically we're talking about relative risks here. And you can spread the risk somewhat.

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Old 08-30-2009, 04:24 PM   #27
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I'm glad to have found this book through the Forum; thank you to whoever posted the link first! I found it very easy to read and finished it in two days. I second everything LOL! said. It's refreshing to have the modelling perspective and the math skills of an engineer brought to bear on the distribution phase, and it's very easy to read. Otar points out that the term "decumulation" assumes that the portfolio will go down, which it won't necessarily do if you are safely in the "green zone". His emphasis on market, inflation and longevity risks is quite consistent with Milevsky's recent work, which increases its credibility, and he shows the numbers to back it up. Most of the financial advisers I have dealt with are still modelling fantasies based on stable returns and medians. These two authors certainly have given me a lot to think about. Based on my current numbers, I am in the green zone, but only just. I am going to look into allocating some funds to a term annunity that pays out for the first five years of ER, to dampen market risk during the vulnerable period.
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Old 08-30-2009, 05:04 PM   #28
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I am 3/4 of the way through the book . I find the graphs interesting but a little tedious . I did get a few great ideas from it so all in all it was well worth the $3.99.
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Old 08-30-2009, 05:06 PM   #29
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Haven't read the book yet, but did read a few articles at the web site mentioned. If you have time, read a few, and see if you agree. His writing is very accessible.

I suspect that the book is a refined tome consisting of many of the articles' concepts. Nothing wrong with that. Four dollars for a book that covers so many areas is a bargain.

FWIW, the idea of exporting the risk to an insurance company is not new, and several of the FA's who've treated me to dinner mention this. That concerns me.
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Old 08-30-2009, 09:47 PM   #30
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Quote:
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While there have been multiple examples of company pensions going under, what is the history of SPIA's defaulting?
That's easy.
ANNUITIES: A NEW LIFE AFTER BALDWIN-UNITED'S FALL - Free Preview - The New York Times

And also Reading and Bates ("...an insignificant member of the S&P 500...."), who converted their pension obligations into SPIA's with the cheapest provider they could find...and said annuities lost about 1/3 of their value when the insurance company's investments went bad. This includes already retired R&B people.

and
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Good point, he doesn't mention SS at all.
In his spreadsheet he does. See the second tab, "Cash Flow", where he has a place to enter "Government Benefits" and "Indexed? Y/N" [to inflation].

I am much happier making my own annuity--if I can get Vanguard to set up withdrawals on autopilot so when I get loopy the checks come in all by themselves.
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Old 08-30-2009, 09:53 PM   #31
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Originally Posted by Ed_The_Gypsy View Post

I am much happier making my own annuity--if I can get Vanguard to set up withdrawals on autopilot so when I get loopy the checks come in all by themselves.
That works for me!
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Old 08-30-2009, 09:58 PM   #32
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I am much happier making my own annuity--if I can get Vanguard to set up withdrawals on autopilot so when I get loopy the checks come in all by themselves.
Checked out the Managed Payout Funds?

From their web site:

Quote:
Vanguard Managed Payout Growth and Distribution Fund seeks to make monthly distributions of cash while providing inflation protection and capital preservation over the long term.
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Old 08-31-2009, 01:13 AM   #33
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Checked out the Managed Payout Funds?
Yes, I know about them. Will they be there when I need them? Inshalla.
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Old 08-31-2009, 08:22 AM   #34
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Yeah, they sure had a rocky start! Just in time for a horrible bear market which forced return of capital as the payout at the same time the assets crashed. Yuck.

Isn't it funny how new financial innovations seem to herald the peak of the asset class or the stock market in general?

I remember how a huge REIT company sold itself to other investors right at peak of the REIT market in early 2007. It was all downhill for REITs from there.

Feb 2007 - a Hedge Fund goes public - a first. This was really a shocking idea. Why would a hedge fund ever go public? Doesn't make sense.

I remember how summer of 2007 a huge private equity firm went public, and another giant filed to go public. This was pretty was just a few months before the general market all time highs. Private equity has never been the same.

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Old 08-31-2009, 08:35 AM   #35
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Referring to Managed Payout funds:
Quote:
Yes, I know about them. Will they be there when I need them?
Quote:
Yeah, they sure had a rocky start! Just in time for a horrible bear market which forced return of capital as the payout at the same time the assets crashed. Yuck.
I'm a "SPIA agnostic" for now, but it's interesting how they are shunned for poor return and carrier risk, yet the do-it-yourself alternatives like the Managed Payout funds elicit (appropriately, IMHO) the very same reactions above.

I am taking the coward's way out: I'll wait 4 or 5 years and reassess.
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Old 08-31-2009, 08:38 AM   #36
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Old 08-31-2009, 08:40 AM   #37
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I guess buying either - SPIA or Managed Payout Fund - is a timing decision.

Interest rates low - SPIA not nearly as "good" of a deal - however buying one at a market top is a lucky timing event.

Market Top - Managed Payout Fund - bad timing. But other times may be just fine.

Hey, they don't correlate - maybe we have something here!

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Old 08-31-2009, 07:27 PM   #38
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I have finally finished the Otar book (OK, about 90%) and I think it's great. I'm an Engineer, so I want the data. It's the most thorough review of distribution and some accumulation that I can remember.

But I stumbled on this (http://spwfe.fpanet.org:10005/public...ging%20Ret.pdf) about 2 years ago and posted the same link on this forum. It is essentially the same approach (add your own gray zone) --- explained concisely and convincingly IMO in 12 very well written pages for those who don't want all the background information Otar offers. This approach will always be in the back of my mind and it's in my keeper files.
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Old 09-01-2009, 12:26 AM   #39
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Hey midpack,

Nice article. Thanks.
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Old 09-01-2009, 04:43 PM   #40
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OK, LOL, I finally finished the book. Secure the monitor watch...

I appreciate his ability to explain complicated concepts using simple words and short sentences, otherwise no one would be able to maintain the will to live attention span necessary to let him finish destroying so many myths of financial planning.

I also appreciate the way that he shows how luck the sequence of returns plays such a big factor in portfolio drawdown. This is not what customers want to hear, but it's better to learn about this concept when you're 30 than when you're 60.

Best of all is the red/green/gray zone concept. Very straightforward for starting with a budget and a balance sheet. I think it makes far more sense than the all-too-human tendency to ignore the 5-20% "adverse results" of a historic-returns or a Monte Carlo projection.

I'm going to spend more time with the buy/sell signal concepts. I'm probably too lazy to devote enough effort to tactical asset allocation, and I noticed that it doesn't get such great press later on. I'd much rather work with an occasional big-picture "mean reversion" market analysis and not try to time things to the microsecond.

I'm guessing Otar doesn't get much of a welcome at his local financial planning association chapter's happy hours...
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