In a small corner of the internet, my recent article about sequence of returns risk generated some heated debate. Keep calm – no punches were thrown and in fact the civilized disagreement was modest by the standards of polarity we’ve come to expect from public life in recent months. As a side-note, if you’re going into a real fight its probably best not to have the actuary in your corner, but if you want a good-natured reasoned debate then Team Actuary might have your back.
There is no doubt that reasonable people can come to perfectly reasonable and different conclusions. But there is a serious point here.
If you are among the current batch of early retirees, you are doing something that has never been done in the history of humanity, and nobody knows definitively how best to approach this.
You are the first generation of 401k accumulators crossing the threshold to spendown phase. In addition you have a good chance of being a centenarian, and so are planning financial solvency on an extreme timescale. To give you a comparison, one of the longest financial planning horizons is a Nuclear Decommissioning Trust, setup to cover the costs of dismantling a power plant at the end of its life. Even this fund might “only” be investing for around 40 years.
This is therefore a big deal. This is your moon shot. It’s cracking the DNA code. it’s your Manhattan Project. You have to get this right, and there is no margin for error. We need the best and brightest working from all angles, crossing all the i’s and dotting all the t’s. We need peer review, cross-checking and re-calculation.
Above all, we need to Think the Unthinkable
I can help you with the known unknowns. I can help you ride out another global financial crisis. I can help you with inflation, longevity risk and currency devaluations. These are easy; I know what these scenarios look like and can provide the most effective mitigating actions.
But I can’t help you with the unknown unknowns.
The future will be stranger than we can possibly imagine and this applies to financial markets. History has taught us repeatedly that some paradigms we hold as axioms are not always what we expect.
For example over most of the last century and before, investors thought the dividend yield on stocks could not fall below interest rates. This was a truism held as self-evident with any contrary view ridiculed. But in the 1950’s these rates flipped over and stayed stable until the current time where they have flipped again. Similarly, when I took my finance exams I was taught that swaps could not yield less than Government bonds. I was told there was no way a rational market would ever permit that kind of crazy behavior. Guess what? Swaps have traded lower than Treasuries consistently since the global financial crisis and that does not look like it will change any time soon.
After the event we can explain this behavior and rationalize what we previously thought impossible, but in advance we are blinkered to the possibilities.
So I’m not particularly interested in the status quo or mainstream thinking. I’ll acknowledge it has value and I’m reading all I can on topics relevant to early retirement to aid my knowledge. But show me the wacky. Show me the edge of the cliff, break away from the herd and tell me what I’ve never heard before.
I work in the investment industry and I can tell you there is little incentive to be different or radical. You want enough difference to be distinguishable from the next guy, but the money does not follow wacky. You may therefore not get the best advice from institutions.
This therefore makes your job extremely hard. You are sifting through an avalanche of information, trying to establish the veracity and credibility of potentially conflicting advice. You may be getting advice from a hired adviser, receiving some education from your employer, talking to friends and colleagues, or reading strange stuff by an actuary online. Some of it may be good advice but some might be mis-guided. Some of it may be relevant to your situation, but some of it might not be.
However, I can tell you that if anyone tells you they have the solution then walk away.