7 important retirement equations

“The 7 Most Important Equations for Your Retirement,” by Moshe A. Milevsky (Wiley 2012).

I was fortunate enough — courtesy of Dan Slater and the Foley brothers of Core Income Advisors, a national FMO based in the Minneapolis area — to hear Milevsky speak in Oklahoma City in August. His talk and book dovetail beautifully.

You may have seen Moshe Milevsky over the past five or 10 years. He has traveled a great deal to cities across the United States and Canada on speaking engagements and written a number of articles, some wondering about whether or not insurance companies are equipped to handle long-term obligations given the rider prices charged. Sometimes he makes a good case for certain guaranteed lifetime-income riders, attached to variable and fixed indexed annuities. His arguments are based on math more than opinion, and they are always interesting and thoughtful. Milevsky, more often than not, hits the mark.

There are heroes in this book — maybe not the kind that dash to rescue damsels in distress, yet heroes all the same. These exemplary individuals are math whizzes, and Moshe Milevsky is all about mathematics.

Yes, there are math formulas in “7 Equations.” However, you may enjoy the book immensely without deconstructing a single one, even though the author is a great teacher. Above all, this is a book of stories about fascinating people. One of the good guys, for example — maybe the good guy of the book — is Irving Fisher. Milevsky writes, “Irving Fisher the economist was the first to properly formulate how rational consumers should adjust their consumption spending over time. This is the intertemporal aspect of economic tradeoffs. He was the first to tell us how to properly accumulate and spend our nest egg.”

This is the essence of “7 Equations,” the central question: How long will the money last in retirement and how should it be managed? In these pages, you’ll meet Solomon Huebner — the Wharton professor who founded The American College and who created the human life value concept (incidentally, he’s one of my heroes; here he’s the point person for the subject of financial legacies and more); Paul Samuelson (the legendary economist on how much should be invested in risky stocks vs. safe cash); the aforementioned Irving Fisher (retirement spending rates); Edmond Halley (on whether a pension annuity is worth it; and, yes, it’s the celestial Halley; it turns out he wasn’t just about the comet); Benjamin Gompertz (on how long retirement spending will last); Leonardo Fibonacci (on how long his friend’s money will last, which may have been the question that started the whole financial planning ballgame); and Andrei N. Kolmogorov, a Russian math genius (on whether the current plan is going to last).

William Bengen appears in “7 Equations.” You’ve seen Bill in this column a number of times — he’s the CFP in California who wrote “Conserving Client Portfolios During Retirement” (FPA Press, 2005) and also authored a number of papers that look at what I might call logical expectations. These expectations have been used by the financial services industry in many ways — often not in ways that may have ever been intended by Bill Bengen.

Milevsky does not necessarily agree with Bengen’s resulting 4 percent plus inflation 30-year rule, and he argues intelligently that economists may be dissenters too. I have demonstrated in recent blogs and columns that, from a practical historical real-number approach, at least two easily designed portfolios with a 4.2 percent-plus-inflation rate would have survived admirably during the difficult and volatile period from Jan. 1, 2000, through March 31, 2013. However, a 12.25-year run is not a 30-year timeframe.

Even so, I suspect there is divergence between math formulas and intelligent portfolio design. This possible difference is an interesting thought to pursue in later columns. My digression is really a compliment to Milevsky — his book is so good and so challenging that it gets one’s financial planning and portfolio design neurons firing at warp speed.

It’s not just Bengen that gets negative attention. Solomon Huebner gets some for his suggested appreciation of whole life insurance. But Huebner is redeemed! In 1929, noting that as Warren Buffett famously now opines, when others were fearful, Huebner got greedy. In other words, he made a bundle by buying stocks — not whole life insurance — on the cheap when the market was on the brink of disaster. (I wonder — did Benjamin Graham teach Buffett about Huebner at Columbia?)