Otar: Unveiling the Retirement Myth

[audreyh1]

I think this defaulting issue is well discussed on the Bogleheads thread. One poster points out:

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.

Audrey

 

[Meadbh]

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.

 

[Moemg]

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.

 

[target2019]

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.

 

[Ed_The_Gypsy]

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

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.

 

[REWahoo]

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!

 

[Rich_by_the_Bay]

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:

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.

 

[Ed_The_Gypsy]

Checked out the Managed Payout Funds?

Yes, I know about them. Will they be there when I need them? Inshalla.

 

[audreyh1]

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.

Audrey

 

[Rich_by_the_Bay]

Referring to Managed Payout funds:

Yes, I know about them. Will they be there when I need them?

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.

 

[REWahoo]

Que Unclemick...

 

[audreyh1]

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!

Audrey

 

[Midpack]

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/publi...mulation_ A New Strategy for Managing Ret.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.

 

[Ed_The_Gypsy]

Hey midpack,

Nice article. Thanks.

 

[Nords]

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...

 

[Moemg]

I thought the longer time between re balancing was interesting and I could see how that could work !

 

[kumquat]

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.

While he may be Canadian, he may have other reasons for ignoring SS.

Canada has CPP (which is a pension based on contributions), OAS (paid to all) and GIS (paid to the poor and old) which are similar to SS but probably smaller payouts. The last is means tested and the second partly depends on other income. Up here, there has been some question as to whether the govt will be [-]fiscally[/-] politically able to continue these payments although CPP has been shown to be actuarily sound until about 2050?

Is SS really guarenteed? He may simply be taking a very conservative stance.

 

[bosco]

This book sounds really interesting. I tried to download it. Not to hijack the thread but.....

I've always been suspicious of PayPal. Upon trying the download (after entering all my credit card and personal information), PayPal sent me a message saying my transaction could not go through, then proceeded to post $1.09 to the account. Mr. Otar had no record of my order (in any event $1.09 is not $3.99 and it didn't go to him), and was unwilling to be involved any further (can't really blame him for $3.99).

I'm not about to try again until the erroneous paypal temp authorization disappears from the account. Hopefully, I won't have to go to the bother of contesting it. Given PayPal's past record of security breaches, this doesn't give me a lot of confidence. At least it's a credit card and not a bank account.

As for why Otar may or may not include SS, CPP maxes out at about $10,000/year (contributions max out at around $40,000/year income), and OAS is around $6,000/year, but a "clawback" starts at about $65,000 annual income. It's my understanding that the system is on a much more solid footing than the US SS system.

So even if you are maxing both, you are receiving somewhat less than someone maxing US SS. If you qualify for the GIS, you probably aren't having a comfortable retirement anyway....

 

[cardude]

When I run some numbers through Otar's calculator it only allows a 2.6% SWR, where Firecalc allows 3.1% for a 50/50 portfolio for 50 years.

Wonder what the difference is?

 

[REWahoo]

When I run some numbers through Otar's calculator it only allows a 2.6% SWR, where Firecalc allows 3.1% for a 50/50 portfolio for 50 years.

Wonder what the difference is?

0.5%

Kidding aside, it has to be in the assumptions Otar makes in his calculations. FIRECalc is based on history, Otar's calculator is based on

 

[Rich_by_the_Bay]

0.5%

Kidding aside, it has to be in the assumptions Otar makes in his calculations. FIRECalc is based on history, Otar's calculator is based on

Otar claims his is based on history, too.

Cardude: Without seeing both completed forms it is hard to say, but what duration of retirement do you have on each?

 

[ERD50]

When I run some numbers through Otar's calculator it only allows a 2.6% SWR, where Firecalc allows 3.1% for a 50/50 portfolio for 50 years.

Wonder what the difference is?

Recall that FIRECALC can't complete a 50 year sequence with data after 1958 (it wont have 50 years in it). Maybe Otar filled in those years with ? ... something?

-ERD50

 

[Rich_by_the_Bay]

I am about half way through this tome, and I like it.

His insights into the differences in behavior between a growing pool of assets and a drawn-upon pool (distribution) are very revealing. I thought I understood this but he points out a lot of misinterpretaitons (on my part).

 

[brewer12345]

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.

Amongst all the fun and games over the past two years, I think that it is worth noting that there really has not been a life insurer failure where the policyholders were impaired. Contrast that to the number of other types of financial firms that fell over. Not to say we won't see insurers blow up, but if they did not do so through what we just experienced, I cannot help but feel some confidence that the bigger and stronger firms (especially the mutuals) are a pretty good risk. So I would not put all my eggs in one basket, but I could get comfy with a chunk of assets at one or more well-chosen insurers.

 

[bosco]

I'm sure the book is interesting, but I will not be reading it. After attempting to go through PayPal twice, with 2 different credit cards, it bombed both times. It could be my ISP, but I've had no problems with other online orders or downloads. I emailed Mr. Otar a couple of times in order to verify where the break in the link was, since PayPal had placed temporary authorizations on both accounts. After receiving his arrogant and insulting response, I wouldn't give him a nickel.

A portion of my last response from him (and I wasn't badgering him or abusive in any way, rather polite and just trying to figure out what the problem was) is quoted below:

"I just want to point out that my book is heavy in math, charts and tables.
It has complicated formulas and strategies. It is meant for advisors and
people accustomed to financial planning. It may not be suitable for you. I
will not be able to answer any questions or provide any type of consulting.
What I am trying to say -as politely as I can- if making a $3.99 payment is
so complicated for you and for me, perhaps it is better that you borrow the
book from the local library when it becomes available, before you waste more
of your time and money, and mine too."

I was pretty astounded at what I consider to be a very rude response under the circumstances. After thinking it over most of the day (and, yes, fuming), here was my final communication to him:

"Your condescending implication that somehow the problem here is related
to my intellectual capacity, however 'politely' you may feel you phrased
it, is not appreciated. I have been conducting my business online,
successfully, for at least 10 years. I have B.S. and M.S. degrees in
structural engineering, a B.A. in philosophy, and a long and successful
career as a structural engineer. Although not a professional financial
planner, I am well-versed in the subject and am pretty sure I can
comprehend any 'higher mathematics' you may have included in your book.

My communications to you were to enlist your help in solving a vexing
problem, and to determine whether the problem was with your website, my
ISP, or that of PayPal (your payment processor). Your last response,
which can only be characterized as 'arrogant' does not speak well of
you. I have no further need to communicate with you.

Finally, if you feel that providing customer service for your product is
a waste of your time, even if only $3.99 is at stake, then perhaps
you should look somewhere besides the service sector for your
profession. Hire someone else to handle your sales, or go back to
engineering."