Tag: financial math

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Presentation to over 1,800 financial advisors on retirement drawdown strategies

A webinar attended by over 1,800 financial advisors recently featured ETFMathGuy to discuss retirement drawdown strategies. Subsequently, the Retirement Income Journal wrote about this event. In this posting, we will discuss some of the highlights of this webinar. Please click the image below to view the 60-minute webcast. Or, you can browse the slides.

Webcast recording: A Deep Dive Into Retirement Drawdown Strategies.

Webinar highlights

As the title of the webinar indicated, its emphasis was on retirement drawdown strategies. Our host, Steve Parrish discussed some of the recent changes to Required Minimum Distributions (RMDs) that resulted from the SECURE Act, as well as where tax law may go in the future. Steve also wrote a really nice article recently in Forbes entitled “Three Reasons to Take Your RMDs Now“. Joe Elsasser, Founder and President of Covisum, a FinTech company specializing in retirement drawdown strategies, also presented. Joe showed how his firm’s software can identify the so-called “tax torpedo“, and assist retirees on how to plan accordingly.

After that, I discussed two research articles on retirement drawdown strategies. To begin, I quantified the impact of eliminating the stretch IRA for non-spouse heirs, which I highlighted in a previous ETFMathGuy posting. The key takeaway from this peer-reviewed article was that there is still a benefit to an heir to stretch their IRA drawdowns over the 10-years permitted by the SECURE Act. Doing so can increase the heir’s inherited assets by 11-17%, depending on their specific situation.

Emerging Research

I also spent a portion of my presentation to this large group of financial advisors discussing some of my latest research. This recent work builds upon some of my previous publications with Dr. Dan Ostrov at Santa Clara University. In this latest research, I identified the use of the Common Rule as a diagnostic for the next stage of optimal decision making for retirement income. The image below summarizes the preliminary findings for three categories of retirees.

The sensitivity of optimal drawdown strategies for three categories of retirees. Forthcoming research by DiLellio and Simon (2021)

Thank you for your feedback

I would like to thank the many financial advisors who recently tried out my retirement calculator. So, I am logging all these helpful suggestions for improvements. I hope to have this free calculator updated shortly that begins to incorporate many of these suggestions. I will discuss some of the calculator enhancements in a future post.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETF efficient portfolios.

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Market Volatility is Back?

Market volatility returned in September 2020. In this post, we discuss this recent surge in the context of long-term historical volatility. We also show how our ETFMathGuy portfolio performed, and elaborate on a source of that performance.

Market Volatility returned, but will it persist?

Earlier this year, we developed an app to automatically measure stock market volatility. This app updates daily, and the figure below shows the latest result.

Stock Market Volatility was 19.7% on Friday, slightly above its long-term historical norm.
Stock Market Volatility was 19.7% on Friday, slightly above its long-term historical norm.

We also provided a table showing the distribution of long-term historical volatility, as observed over more than 20 years. Current volatility is 19.7% as of October 2nd, which corresponds to the upper limit of the third-quartile. So, while market volatility returned, it is still well below the volatility seen in early 2020.

Market Performance through the 3rd Quarter

The higher volatility occurring in September did indeed correspond to a loss in the stock and bond markets. The stock market lost 3.7% and the bond market lost 0.1%, based on the ETFs with ticker symbols IVV and AGG. The year to date return of these stock and bond index ETFs were 5.5% and 6.7%, respectively, including dividends. The year to date return of the ETFMathGuy Aggressive Risk Portfolio was 20.8%. This return is the result of trades conducted in a brokerage account at Fidelity Investments, and so includes the bid-ask spread.

Stock and Bond Market YTD Returns compared to the ETFMathGuy Aggressive Risk Portfolio
Stock and Bond Market YTD Returns compared to the ETFMathGuy Aggressive Risk Portfolio

Premium subscribers now have access to the October 2020 premium portfolios, as well as a handy rebalancing calculator. Free subscribers are welcome to log in to review older premium portfolios through May 2020, or upgrade their account to enable premium access.

Sources of Excess Performance

One ETF that our portfolios have consistently included throughout this year is the Aberdeen Standard Physical Palladium Shares ETF (ticker: PALL). Its 12 month return and volatility appear below next to the S&P 500 ETF (ticker IVV).

The Palladium ETF has higher volatility than the S&P 500, but also has a higher return over the last 12 months. Source: www.ETFreplay.com
The Palladium ETF has higher volatility than the S&P 500, but also has a higher return over the last 12 months. Source: www.ETFreplay.com

Examining these results for PALL confirms the expectation that higher risk can lead to a higher return. Our optimal portfolio construction process creates a portfolio that, along with PALL, finds other ETFs that maximize expected return. This process also keeps the portfolio’s expected risk between the stock and bond markets. Additionally, we backtested this process over a full market cycle. We hope you will consider upgrading your subscription to gain insights into a wider variety of ETFs that appear in our efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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The SECURE act and Your Retirement

On December 20, 2019, the SECURE act (Setting Every Community Up for Retirement Enhancement act) was signed into law. This new law made a number of changes that could effect your plans for retirement. We discuss a few highlights of this new law in this post.

New age for Required Minimum Distributions (RMDs)

The SECURE act recognizes that more individuals are delaying retirement. So, the new law changes the age to take initial RMDs from tax-deferred accounts, like 401(k)s, 403(b)s and traditional IRAs. Previously, initial RMDs were triggered in the year you turned 70 1/2.

Required Minimum Distributions (RMDs) are changing.
Tax laws for retirement are changing. source: Getty Images

The new age under the SECURE act is 72 for individuals who reach 70 1/2 in 2020. Using a handy online age calculator or performing a little mental math, that means anyone born after June 30, 1949 can wait until the year they turn 72 to take RMDs.

How will this new RMD age affect your retirement plan?

In late 2019, we developed a retirement calculator that included income and capital gains tax forecasts. It also included RMDs under the old law. We are happy to announce we have updated our calculator to include this new law. Please check it out! We also added a tool tip for each input in the calculator, to help you better understand how the model works.

We updated our retirement calculator to include the age change of RMDs from 70 1/2/ to 72.

Bad news with the SECURE act

Unfortunately, there is also some bad news for retirees coming from the SECURE act. The so-called “Stretch IRAs” are now not nearly as valuable as they were prior to this law. Previously, IRAs that are passed to nonspouse heirs could be withdrawn over their life time. This feature made inherited IRAs very appealing to younger heirs, who could stretch their payments, limit their income taxes, and stretch pre-tax gains over a longer time. The new law limits this time to 10 years. In a bit of good news, this law does not affect existing inherited accounts.

Conclusions

Tax law will continue to change. We shouldn’t expect congress to continue to keep the taxes status quo. Instead, current and future retirees should consider diversifying their retirement income sources to accommodate possible future changes.

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Your Retirement Nest Egg

In a recent issue of the Wall Street Journal, there was an excellent retirement article. In it, the author responded to a reader’s question “How much does my nest egg need to be?”. Your retirement nest egg is very important! So, we prepared a summary and some additional insights to consider. Our perspective is drawn, in part, from our award-winning research on retirement income planning.

retirement nest egg

Article summary by ETFMathGuy

The article starts with predicting your expenses. This is arguably a difficult task, and where many people stop. But, without this information, there is really no way to estimate the “right size” of a retirement nest egg.

In summary, the article suggests the following calculation.

  1. Start with an estimate of your expenses. A common approach to this is to assume a percent between 60-80% of expenses pre-retirement. This approach assumes that your expenses go down in retirement. That may be true for many retirees, as they no longer have mortgage payments or dependent expenses. Of course, a more precise estimate can be done.
  2. Subtract from this any guaranteed income, such as social security and after-tax pension benefits or annuities.
  3. Take this difference and multiply it by 25. In this article, they assume that a 65-year old lives until 90. This age is a conservative estimate, based on information from the Social Security Administration.

What isn’t stated in the article about your retirement nest egg

While I enjoyed this article, it made some assumptions about your retirement nest egg. For instance, the suggested value doesn’t include uncertain investment returns or inflation. The net effect of including both of these would typically give a retiree more years of retirement income. The extra income would come from a conservative investment in retirement, less inflation. Using a 4% conservative after-tax average return and 3% average inflation, this net effect would provide a 1% gain (on average) each year.

We hope you enjoyed our commentary! If you would like to see more like these, please send us a message.