Otar: Unveiling the Retirement Myth

[LOL!]

Some of you don't get over to the bogleheads forum. There is (I think) a very important thread started about Jim C. Otar's new book "Unveiling the Retirement Myth" Bogleheads :: View topic - The Decumulation Phase which includes links to links to download the book in PDF format.

Anyways, the topic of designing a portfolio and exporting some risk to an insurance company is discussed here at EarlyRetirement all the time. You may enjoy reading the boglehead thread and Otar's ideas on how much is enough, CPI-indexed annuities, SWR, fluctuations in portfolio value, etc.

(I expect a full book report from Nords in a day or so. )

 

[freebird5825]

I just downloaded it. TY
I hold a fixed annuity, which once upon a time was my TSP account. This was an "only option" situation for my age at FIRE. I'm still happy with the choice and the results.
I will be very interested in seeing what Otar has to say.

 

[Dennis]

Thanks, but my Fixed Annuity is my Bond Portfolio...
and doing very well thank you..

8.2% last yr and already +14% this yr..

;>) Happy Camping!

 

[Nords]

Some of you don't get over to the bogleheads forum. There is (I think) a very important thread started about Jim C. Otar's new book "Unveiling the Retirement Myth" Bogleheads :: View topic - The Decumulation Phase which includes links to links to download the book in PDF format.
(I expect a full book report from Nords in a day or so. )

Hey, it's a weekend, it might take me two days.

I was surprised to see that "Nords" registered at the Bogleheads forum a couple years ago. I just tried logging in and asking for my password but the board doesn't recognize any of the the four e-mail addresses I entered.

I probably typo'ed my e-mail address when I signed up (or perhaps that Nords is not me). If any of you know a moderator over there who can either get me into the account or delete it so that I can start over, I'd appreciate the help.

 

[Notmuchlonger]

Its over 500 pages. Going to take me awhile to read it. Im one of those types who has difficulty reading things on a computer

 

[Midpack]

I just downloaded too, thanks. Decumulation is a topic that is not discussed near enough IMO, compared to the tons of info on accumulation...

 

[Nords]

OK, a poster has offered his help and I've sent an e-mail to the webmaster.

 

[donheff]

Unfortunately, there are no more free copies available. We will have to rely on the generosity of you fast acting readers to summarize.

 

[Stevewc]

Unfortunately, there are no more free copies available. We will have to rely on the generosity of you fast acting readers to summarize.

I understand that the book is somewhat expensive.
But you can down load it for, I think $3.99
Steve

 

[CuppaJoe]

Its over 500 pages. Going to take me awhile to read it. Im one of those types who has difficulty reading things on a computer

Me too, the glare gets to me very fast. I went over to Amazon and requested that they put it on "their e-book reader."

 

[mickeyd]

Thanks for the heads up. I just asked my library to order it and add it to their collection.

 

[Nords]

Unfortunately, there are no more free copies available. We will have to rely on the generosity of you fast acting readers to summarize.

The first chapter is an excellent review of the math behind present value <--> future value conversions and their assumptions. For those of us who didn't study this sort of financial analysis from a math text, it's worth the entire book.

Did the author put any limits on e-mailing 6 MB PDFs to discussion-board members? Or posting them to social groups?

Where's my reading glasses for this four-point font? Ah, here we go. Let me manually type an excerpted quote:

"No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the written permission of the publisher except in critical articles & reviews."

There'd certainly be a lot of critical reviewing around here...

 

[quietman]

Well, it's going to take a lot of reading to understand all this. As far as I've got so far, he seems to be making a case that asset allocation is not the overwhelming determinant of portfolio outcomes that Bogleheads claim it is, but rather how "lucky" you are in the timing of your accumulation and retirement relative to stock market trends is an even more powerful factor. Since you cannot know in advance what way future markets will trend, he suggests alternate ways to construct your portfolio and trigger points to warn you that things are not going according to plan. In some of the early examples, he mentions heeding certain warnings and annuitizing before irreversable damage is done. I'll need to read a lot more to understand if this is what he really means.

 

[LOL!]

As suggested at Bogleheads, I started reading at chapter 41. This tells one whether you are in the "green" zone which means you don't have to worry about retirement assets and their allocation because anything will work or if you are in the "red" zone where nothing will work short of cutting your expenses or if you are in the "gray" zone where you have some decisions to make which will affect the outcome.

No one should be surprised that the green zone is where the folks with a 3% sustained withdrawal rate live.

 

[walkinwood]

I've gone through about 200 pages so far. Great information, and his focus on portfolio performance during the distribution phase is really useful. Even if you don't agree with everything he says, its a worthwhile read (so far) and a good reference for an unbeatable $3.99 price!

He addresses the affects of dividends, asset allocation, equity sub-asset classes, rebalancing have on a distribution portfolio. His assessment:
- Asset allocation counts, but not as much as the financial industry says.
- Dividends don't have a cumulative effect (as they do in accumulation portfolios), since they're consumed;
- Diversification between equity sub-asset classes helps or hurts depending on your luck. He doesn't seem to discuss the effect on sequence of returns which he rightfully deems as one of the most important determinants of portfolio survival. In my own experience, this has helped - especially in the 2001-2003 downturn.

For those breezing through, pay attention to his assumptions. He sometimes assumes some rather severe constraints. Eg. on page 159, Examples 16.1
"Note: Equity history is based on S&P500 index, plus 2% dividends, less 2% management fees. ..."

 

[Zathras]

For those breezing through, pay attention to his assumptions. He sometimes assumes some rather severe constraints. Eg. on page 159, Examples 16.1
"Note: Equity history is based on S&P500 index, plus 2% dividends, less 2% management fees. ..."

Holy cow, that is rather severe.
It does sound like an interesting set of ideas. But if many of his assumptions are like this, there may be simpler methods. Such as not paying 2% management fees

 

[CyclingInvestor]

I read it. It seems like a reasonable explanation of the retirement process. My only disagreement is with the heavy use of annuities in the distribution phase.

 

[LOL!]

Don't forget that Otar is Canadian and that Canadians enjoy it when they can get their MERs in the 2% range.

 

[Zathras]

Aha, excellent point.
Is this less applicable then to areas other than Canada?
I may have to pick up a copy somewhere

 

[Gone4Good]

No one should be surprised that the green zone is where the folks with a 3% sustained withdrawal rate live.

That's all I need to know.

 

[LOL!]

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

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.

 

[samclem]

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.

 

[Alan]

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?

 

[LOL!]

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.

 

[Alan]

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.