Erin Botsford book, the Big Retirement Risk (2012)

[stephenson]

Been working through the book ...her positions seem to reflect a counter-position to mainstream that would generate discussion and more clients ...not to mention more book sales.

Anything in it worth more focus or just good background reading?

 

[stephenson]

Must not be a book others are reading.

 

[Meadbh]

I had never heard of her before but based on what I read on the Forum I decide to broaden my horizons. Basically her hypothesis is that equities are icing on the cake and your basic needs should be covered by predictable sources of income. She would have us invest in reits, etc, before equities. I found the analysis to be weak in data analysis and not very inspiring. But that's just me, the data nerd.

 

[LOL!]

Must not be a book others are reading.

Sorry, but you basically gave us no information to want to investigate further. Usually, a poster will write a book report of at least 2 paragraphs in length in order to stimulate the conversation.

Right now, your post reads like this: "I read a book, but cannot tell you what it was about."

 

[racy]

I found a book summary at: http://ezinearticles.com/?Book-Summ...f-Money---Written-by-Erin-Botsford&id=6791118

From that article

The Big Retirement Risk is packed with great information. For the sake of time, I will profile three main points.

1. Four Myths of Wall Street

2. Lifestyle Investing

3. Guaranteed Retirement Income

He concludes by saying the Big Retirement Risk shows you that survival of the fittest and nature dictate what happens in life. You need to prepare accordingly.

 

[David1961]

Thanks for the link, racy. I agree with her idea of separating needs, wants, likes, and wishes. But her statement that diversification and asset allocation are critical to retirement success is a MYTH? Not sure what she means there. I do agree that putting an inordinate amount of your portfolio only in stocks is not wise, but stocks need to be a part of your portfolio.

I'd also like to know when the last 30 year period that stocks were flat (maybe 1903 to 1933?). And it'd be nice to compare the historical returns of "guaranteed investment" vehicles versus equities. Maybe this is in her book. I don't know.

 

[Meadbh]

And it'd be nice to compare the historical returns of "guaranteed investment" vehicles versus equities. Maybe this is in her book. I don't know.

It isn't. As I said, short on data. I recommend that well read Forum members give this book a miss.

 

[Midpack]

I'd also like to know when the last 30 year period that stocks were flat (maybe 1903 to 1933?).

FIRECalc: A different kind of retirement calculator will readily show you that, just choose "and optionally provide data and formulas in a spreadsheet format" on the Investigate page, and click on the Excel spreadsheet link on the Results page "Open an (unformatted) Excel spreadsheet showing the inflation-adjusted end-of-year portfolio." You can easily dump the same data for any period of years with your selection on the first page, not just 30. See pic below

The "flattest" return 30 year periods were beginning 1962 and 1916. The best 30 year period was 1978 and the worst began 1969 (interesting considering the substantial overlap).

 

[David1961]

Midpack: Thanks. I tried to duplicate what you did. I actually got the best and worst 30 year starting 1975 and 1969, respectively. But I'm still learning FireCalc and will play around with it some more. One general question about Firecalc. On the results page, second paragraph, where it says "The lowest and highest portfolio balance throughout your retirement was XXX to YYY". It seems like XXX is always the amount I started with as long as the probability of success is 100%. Am I correct in assuming that this high and low balance is the highest for any time on the graph, NOT the highest and lowest you end up with in the final year? Seems like it is.

 

[Midpack]

Midpack: Thanks. I tried to duplicate what you did. I actually got the best and worst 30 year starting 1975 and 1969, respectively. But I'm still learning FireCalc and will play around with it some more.

Hmmm... I used the default entries on the first page, if you use something else the results may change slightly, IOW WR has some influence. Hadn't thought about it, but I suspect that may be the difference, but I'm not at my PC to check.

One general question about Firecalc. On the results page, second paragraph, where it says "The lowest and highest portfolio balance throughout your retirement was XXX to YYY". It seems like XXX is always the amount I started with as long as the probability of success is 100%. Am I correct in assuming that this high and low balance is the highest for any time on the graph, NOT the highest and lowest you end up with in the final year? Seems like it is.

I believe you're correct. The results page does say "The lowest and highest portfolio balance throughout your retirement was..." Comfortably above 100% would logically always return a low equal to starting balance. However, I suspect there's a (narrow) range of WRs that would result in 100% success with a low below your starting balance, as long as it never fell below zero.

With all that said, "You can try 1001 different combinations of investments and timings to see what happens, but don't fall into the trap of measuring something with a micrometer when you'll be cutting it with an axe" as even FIRECALC notes...

 

[67walkon]

There is a comment in there that net worth doesn't matter, it's income. I agree with that. You can have, or think you have, a $10,000,000 net worth, but if all of it is in vacant real estate, you have no cash flow. Cash flow is king!

 

[haha]

There is a comment in there that net worth doesn't matter, it's income. I agree with that. You can have, or think you have, a $10,000,000 net worth, but if all of it is in vacant real estate, you have no cash flow. Cash flow is king!

That is an interesting observation to make on this forum, in that the entire premise of Firecalc and almost all the discussion here is about the details of transforming net worth into income over one's remaining lifetime.

Excepting the 25% or so who are well pensioned, those few who do stocks for dividend income, and a few who operate real estate rental businesses, the rest of us are mainly trying to control the rate of liquidation of our net worths.

IMO this is inherently risky, but it is today's method of choice. And when there is a dividend thread, it is often naive and likely to lead anyone who takes direction from it into eventual trouble.

Ha

 

[Gone4Good]

She would have us invest in reits, etc, before equities. I found the analysis to be weak in data analysis and not very inspiring. But that's just me, the data nerd.

A REIT recommendation seems like something pulled off a very old shelf - possibly an indication of the weak analysis you point out. The Vanguard REIT Index is yielding just 2.15% (after adjusting for 1.2% return of principal). The S&P 500, meanwhile, is yielding 2.23% and gets more favorable tax treatment.

As an asset class, regular equities now beat REITs for income on average.

 

[67walkon]

Haha, what I meant to convey was that net worth is meaningless unless you can convert it to cash flow. I look at as determining, first of all, what part of your net worth can actually be transformed into income, and second, how much transformable net worth you need to last your life time.

For example, right now we have 2 homes and 1 piece of vacant commercial property. They don't generate income. I don't include them in any of the FireCalc or spreadsheets I look at. Although, I confess, I do sometimes put what I hope is a conservative number for a sale of the commercial property, but I don't include it in projecting cash flow. By the same token, I suspect that one day we will sell one or both homes, but I don't include that scenario either. I'm just trying to figure out how much we need in other assets that are transformable into income.

Do people here include their homes in the net worth number when calculating a SWR? I don't.

 

[Alan]

Do people here include their homes in the net worth number when calculating a SWR? I don't.

I never did. I always incuded the equity of the home in the net worth calculation, but in determining if we had enough to RE I only included those funds ear-marked for retirement savings in the SWR calculation.

 

[Meadbh]

A REIT recommendation seems like something pulled off a very old shelf - possibly an indication of the weak analysis you point out. The Vanguard REIT Index is yielding just 2.15% (after adjusting for 1.2% return of principal). The S&P 500, meanwhile, is yielding 2.23% and gets more favorable tax treatment.

As an asset class, regular equities now beat REITs for income on average.

She recommends non publicly traded REITs. You know, the ones with higher returns, low liquidity. I have looked at these and while I might consider them, I would not make them a fundamental tranche of my portfolio. And I was not impressed with her analysis. She just put it out there.

 

[haha]

Haha, what I meant to convey was that net worth is meaningless unless you can convert it to cash flow. I look at as determining, first of all, what part of your net worth can actually be transformed into income, and second, how much transformable net worth you need to last your life time.

I see. This whole topic appears to me to be more involved than what we normally assume.

This likely not the place for it, but there are subtle gradations in how easily various types of financial and real assets are monetized.

As far as homes being part of net worth, I figure that while a home is part of net worth, it is only modestly liquid, not earning unless you give up use, and not to be counted in SWR relevant assets.

Interesting to me is that a safe, serviceable $150,000 home may be better day to day than a $1,000,000 home, as it costs less to insure, is taxed less highly, etc. But the $1,000,000 home may worth more to sell, or to borrow against, and even as an asset in certain business or professional activities.

Ha

 

[teejayevans]

As an asset class, regular equities now beat REITs for income on average.

But tomorrow, who knows?

REITs are better suited to IRAs because of the income they put out.
TJ

 

[BLS53]

Midpack: Thanks. I tried to duplicate what you did. I actually got the best and worst 30 year starting 1975 and 1969, respectively. But I'm still learning FireCalc and will play around with it some more. One general question about Firecalc. On the results page, second paragraph, where it says "The lowest and highest portfolio balance throughout your retirement was XXX to YYY". It seems like XXX is always the amount I started with as long as the probability of success is 100%. Am I correct in assuming that this high and low balance is the highest for any time on the graph, NOT the highest and lowest you end up with in the final year? Seems like it is.

Interesting that the best 30 year period, beginning in 1975, roughly coincides with the start of 401k's and other DC retirement plans. So these things have worked for exactly one generation, yet many think these plans are more reliable in the future than government DB pensions.

 

[someguy]

Like Ha, I include our primary residence in total net worth calculations, but not in FI/RE calcs. I do include in both calculations equity and cash flow for rental properties, though. One of the complications in FIRE planning is if it makes more sense to keep investment real estate properties and the attendant cash flows, or to liquidate them.

As to your original example of 10mm of real estate generating no cashflow, unless that is your primary residence, something is out of whack. At a minimum, you should be able to sell that property(ies) for $10 million. If you can't, then they simply aren't worth $10 million. Most people, including almost all home owners (primary residences) and many new real estate investors overvalue their real estate, leading to an overestimated net worth on paper. This is especially a problem in down or flat markets, when people use price paid or price paid plus improvements as a baseline and always expect the present value to be some percentage above that. I'm not saying that's going on in your case, 67walkon, just that I see it over and over again.

Haha, what I meant to convey was that net worth is meaningless unless you can convert it to cash flow. I look at as determining, first of all, what part of your net worth can actually be transformed into income, and second, how much transformable net worth you need to last your life time.

For example, right now we have 2 homes and 1 piece of vacant commercial property. They don't generate income. I don't include them in any of the FireCalc or spreadsheets I look at. Although, I confess, I do sometimes put what I hope is a conservative number for a sale of the commercial property, but I don't include it in projecting cash flow. By the same token, I suspect that one day we will sell one or both homes, but I don't include that scenario either. I'm just trying to figure out how much we need in other assets that are transformable into income.

Do people here include their homes in the net worth number when calculating a SWR? I don't.

 

[67walkon]

Someguy, that was an example. If I had $10 million worth of vacant, non cash producing property, I would as quickly as possible have $0 worth of vacant, non cash producing property and somewhere between $0 and $10 million worth of something else. It was using an extreme to make an example.

The vacant, unimproved commercial property is supposed to be worth about $200,000 and it's listed--no offers in the more than a year since it's been listed. I view it as a current liability because of the taxes, but don't include it in any FI/RE calcs. I do hope it will sell for somewhere between $150,000 and $200,000 sometime in the next 10 years, but I don't include it in any calculations.

 

[someguy]

67walkon, I assumed the $10mm was an extreme example.

Your commercial property, though, probably isn't worth $200K if it's been on the market 12 months without any offer. Residential real estate is more my wheel house, but usually there is ultimately only one reason something isn't selling: it's priced too high. If you aren't even getting offers, that usually means it's priced way too high. I'm sure you've calculated the hold costs for up to 10 years versus how much of a price haircut it would take to sell it now and determined that it's better to wait... I only consider improved properties because they have cash flow opportunities but in your case at least this property doesn't have improvement and repair costs that would further increase your holding costs.

 

[67walkon]

Some, you're right. My wife inherited it and has an emotional attachment to it. We're working through it and I hope to get at least some kind of offer on it in the next year. It's a hard thing-been in the family for many years, etc.,

 

[someguy]

That is a tough position to be. I've not been in it myself, but have advised friends who have. I always tell them that if the person cared enough to leave you something of value, then they obviously cared for you a lot and would ultimately want the receiver to be happy, including selling it if holding onto it is a stress.

Condolences and best luck in having it work out.

Some, you're right. My wife inherited it and has an emotional attachment to it. We're working through it and I hope to get at least some kind of offer on it in the next year. It's a hard thing-been in the family for many years, etc.,

 

[rescueme]

My wife inherited it and has an emotional attachment to it.

Another white elephant.

I knew of a fellow who had the same situation. He/DW spent many years and most of their $$$ trying to make a go of the business that was left to them by DW's relatives.

In the end, the business closed, the building/equipment was sold for pennies on the dollar, and their plans for a good retirement were slashed. Rather than add to their retirement "stash", it actually emptied it.

Emotional "gifts" can cost one dearly...