Wealth Odyssey: The Essential Road Map For Your Financial Journey Where Is It You Are Really Trying To Go With Money?
Dr Milevsky does an excellent job discussing the dual uncertainties of retirement planning: uncertainty of longevity, and uncertainty of portfolio duration. Both deal with trying to determine how long you or your money may last, while recognizing that both time periods need to overlap - in fact one might argue that the portfolio time period needs to be nanoseconds (ideally with perfect knowledge) longer than your longevity. The human capital approach is excellent since it relates the long term economic value of a person's labor, as a total dollar value; to the total dollar value that person needs to sustain their living standard throughout retirement.
There is controversy in the profession concerning the allocation of assets considering the nature of a person's source and nature of their income along with those assets. However, putting concepts out there for discussion is how incremental improvements occur. Another controversial approach has been forwarded in Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire by Laurence J. Kotlikoff and Scott Burns. Their approach is to smooth your spending over your entire lifetime. Dr Milevsky's approach is to determine how to sustain it. The theme of both works is how to evaluate your standard of living and then how to sustain it in the long run.
Dr Milevsky's formula and excel use if very useful for most people. In practice though, most people would have a hard time determining an expected return and standard deviation for their portfolio especially considering this is a value they expect for the rest of their life. Median remaining lifespan (MRL) also means there's a 50/50 chance of living beyond the period evaluated. A person would reduce the chance of outliving their assets if they used a lifespan factor than had a lesser chance of being outlived. He acknowledges the fact that the older you get, the older you are likely to get in Chapter 7. However, he does not provide the mathematical means in his discussion (even as an appendix) to adjust for this factor should one want to plan more conservatively. One may argue that you would adjust the MRL as you age. However, that would mean that a person is overspending early and would need to retrench their spending as they age, because they would need to stretch the spending farther than what the plan called for originally - once retired there is no replenishment of assets that are already spent.
His book The Calculus of Retirement Income: Financial Models for Pension Annuities and Life Insurance goes into greater detail about the calculus that supports this book.
A final note: the use of variable annuities with their riders is, as yet, untested as to whether the companies selling them can withstand the test of time for both markets and demographic forces. Demographic changes are an important consideration since variable annuity riders are structured where people need to pay in more for the benefits than the benefits that are paid out (the theme sounds much like the Social Security or the pension phenomena he describes in his introduction).
Putting the nit noy of these aside, this is an excellent primer for most people about the issues they face for retirement. Using the concepts here will do more good than harm for most do it yourselfers.
Click Here to see more reviews about:
Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future (Hardcover)
Although not smooth reading, "Global Securitisation and CDOs" by Mr. John Deacon, provides a comprehensive lay of the Collateralized Debt Obligation (CDO) landscape - certainly the sexiest area of securitization and one of the most exciting areas of modern finance.I have worked with CDOs for over two years and find the ever evolving nature of both sides of the CDO world very exciting; their shifting asset structures and their evolving liability configurations make each deal unique from the next.
