Diving Into Retirement

Back in 2008, my how the years have flown, I wrote a post titled Kelly Criterion in which I concluded that:

Most gamblers are probably best served by using a flat 2% of their bank per bet, since figuring edges in sports is, as mentioned earlier, very difficult.

It's a number that I have stuck pretty close to over the years and which has served me well. While I also suggested that "Increasing this to 3%, or occasionally 4% on an especially good play, is reasonable", a naturally conservative person such as myself gets a little uncomfortable with 1/25th of the bank at risk on any one bet!

And now thirteen years on, a similar, but more important calculation is when to retire and how lavishly do I spend in those early years of retirement before old age replaces living with "existing" and ultimately "existing" with "death." 

Hopefully the "existing" period, if it occurs at all, will be brief, because it doesn't seem to offer too much in the "things to look forward to" category. [At 94, my Dad has this week moved out of the house he has lived in since 1955, close to 66 years, into a care home so excuse the depressing tone of this post so far.] 

Anyway, back to those early years of retirement and the risk is that if you spend too much, you can be left with a shortfall in later years, but if you spend too little, you're not going to enjoy that retirement too much.

One frequently used rule of thumb for retirement spending is known as the 4% rule, or eponymously the Bengen Rule" after William P. Bengen, the retired financial adviser who first articulated the idea.

It’s relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the amount you withdraw to account for inflation. By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement according to the rule.

Another way of putting it is that your portfolio should be at least 25 times your annual expenses (plus taxes) in retirement. 

Thirty years should be more enough for me. I've not led quite such a healthy lifestyle as my father, but these calculations really would be a lot simpler if one knew their date of death. I just depressed myself still further by using this stupid web site to calculate it, the result being:

I've made a note in my diary with a reminder. It appears that another ten years is added on by going from drinking "twice a week" to "never" but that's not really "enjoying" retirement, and while another ten years would be nice, that's a high price to pay. 

If I were to step up the drinking to daily, which doesn't seem unreasonable, and start smoking a pack a day (which would be idiotic), I can be done here in fewer than eight years! 

However my wife will be returning from abroad next week, and the Cassini tradition of "Sober October" will be in full force (extra tough this year since it encompasses five weekends), and with "Dry January" also a thing and just around the corner, I shall have to recheck the predicted date of my passing next year.

Anyway, 10-K Diver is one of the accounts I follow on Twitter and they had a very interesting thread on the 4% Rule, the basics for which are:

Suppose your retirement portfolio is a well-diversified basket of stocks, like the S&P 500.

Historically, such a basket of stocks has returned ~7% per year, plus ~2% in dividends. This is a total return of ~9%. 

Assuming your annual expenses grow at ~2% per year (roughly the rate of inflation), your portfolio -- which is growing much faster at ~9% per year -- should have no trouble financing your expenses in perpetuity.

This means you'll never run out of money.

Here's the chart over 30 years with those numbers:

Which is all well and good, but as most readers will be aware, that 7% increase each year in the stock portfolio is about as consistent as our betting returns. Of course over the long-term they are profitable but profits are not consistent from season to season, and edges can disappear over time or overnight. 

The chart to the left shows the annual percentage increases and declines over the last 29 years with the average and median actually above the 7% mark which goes back to 1871, before the Football League was formed and just 10 years after Crystal Palace FC was formed. If you know, you know. 

Anyway, I encourage you to read the thread in full for yourself, but 10-K Diver back-tested the 4% Rule going all the way back to 1871 and did a "what if Joe had retired in year...". The result was that Joe would have run out of money 13 times, most recently if he had retired in 1972 and lived to 2008, which is 36 years of retirement and not a duration I'm likely to experience. 

The shortest period before going bust was 23 years, when a 1968 retiree would have gone bust in 1991. 

Back to Bengen, and "based on his early research of actual stock returns and retirement scenarios over the past 75 years, Bengen found that retirees who draw down no more than 4.2 percent of their portfolio in the initial year, and adjust that amount every subsequent year for inflation, stand a great chance that their money will outlive them."

"A great chance" isn't certainty though, and unlike blowing a betting bank, it's a little harder to start again when you're in your 90s! 

Given that the 4% rule fails sometimes, what's the solution?

10-K Diver then applied a 3% rule, i.e. the portfolio was 33.3 times that of the annual withdrawal. This time there were no failures, not one instance where this rate of spending would have ended in disaster. 

So 10-K Diver took the idea a step further, and did some stress testing, a term some of you working in IT will be familiar with, and no, it doesn't refer to the weekly one-on-one with your manager. 

What this entailed was looking at the worst periods in history, so the worst one year period was 1930-31, the worst two years from 1929-31 and so on. 

For our stress test, we'll assume that in our first year of retirement, stocks will deliver the worst 1-year return in history.

And in our first 2 years of retirement, they'll deliver the worst 2-year return in history.

And so on, for the first 20 years.

After that, he assumes the average 7% growth and allows for inflation to be at 4% rather than the original 2%. His findings:

How well do our rules serve us in this stress test?

Well, the 4% rule runs out of money in 10 years.

The 3% rule runs out in 13 years.

The 2% rule runs out in 20 years.

The 1% rule never runs out.

Once again in life, the 2% rule looks likely to suit me perfectly. As 10-K Diver said in a reply "The 4% Rule will likely work most of the time. But it’s a bit too aggressive for me personally." 

After all, 

But when it comes to retirement, it's far better to overshoot than undershoot.

You do not want to run out of money in old age.

And even if it turns out you've been too conservative, that's not so bad. You get to do more charity, leave more money to your kids, etc.

The thread and replies also contain some interesting ideas, for example one was about maintaining a separate cash float to use instead of withdrawing from the portfolio after a bad year, which I like. 

The bad news as I get ready to post this, is that I don't have a huge amount of time left, but the upside of that is that I do have more than enough to last me, and fewer years to spend it in than I thought, although my wife, kids and grandkids would probably prefer I leave at least something behind.

Killer Update

If the emails in my Inbox are to be believed, and I have no reason to think they shouldn't be, then there is some good news to report: 

Killer Sports is under new management as of September 1st. Rest assured, Killer Sports and Killer Cappers will not discontinue despite what the banners on the sites communicated this summer.

Some loss of functionality during the transition is a small inconvenience in the whole scheme of things, and I hope things progress smoothly. 

Coincidentally since the new management took over, the baseball betting has taken a turn for the worse, with the Hot Favourites system down 7.7% for the month with lefties mostly to blame! 

More to come when the regular season ends, but these are atypical results for the final month of the season, and I include the three or four days of October that sometimes conclude the regular season. 

Unusually there are no really close division races to make the post-season. The National League West is the closest with the San Francisco Giants just two games ahead of the Los Angeles Dodgers, with my poor wife's San Diego Padres fading badly in the stretch. Both the Giants and Dodgers are guaranteed a play-off spot, even if the runner-up has to navigate a one-off elimination game versus the other Wild Card team, likely St Louis Cardinals. 

The American League is a little more interesting for the Wild Card, with five teams separated by fewer than six games and if the season were to end today, the AL Wild Card game would be between big AL East rivals Boston Red Sox and the New York Yankees. Despite playing all their games before the end of July away from their home stadium due to Canada's COVID rules, the Toronto Blue Jays are also still in contention in the AL East. 

The regular season ends on October 3rd.  

At least the NFL season has stated positively with the Small Road Dogs winning seven out of eight games, the sole loss being the New York Jets in Week One who fell short by two points. Seven more potential selections this weekend including the Monday Night game.  

Capping Losses

Courtesy of @PremiumCharged, my attention was brought to the announcement in the Sunday Times that PaddyPowerBetfair plan to introduce a £500 monthly cap on losses for younger customers between the ages of 18 and 25.

While details remain unclear, there are a few issues with this approach. 

First of all, the age and amounts are both completely arbitrary. Someone's age is irrelevant and coming up with a one amount fits all approach is ridiculous.

Many young people have larger disposable incomes than older people, and £500 to one person may be a lot of money, while to others, regardless of their age, it means very little. 

The approach appears to make no differentiation between types of bettor either. There's a world of difference between someone who has slowly and steadily built a bank up from a small initial deposit to five or six figures over a few years on sports betting and is paying the Premium Charge (yes, it can be done) and someone depositing £500 each month on pay day and losing the lot over the weekend after playing the Betfair Casino. 

Apparently this £500 limit applies to all under-25s and for traders, would necessarily mean their exposure would be limited to £500. Once you are down by that amount, your trading stops for the month, even if your balance is several times that amount. If you're 24 with a bank of £50,000, that seems rather silly and not close to addressing the real issue they are trying to solve, which is problem gambling, defined as...

an urge to gamble continuously despite negative consequences or a desire to stop. Problem gambling is often defined by whether harm is experienced by the gambler or others, rather than by the gambler's behaviour.

I never knew this was only an issue for under 25s, or that the harm can be determined as being at the £500 a month level.

Nut and sledgehammer anyone? 

Never mind that it's not the business of the sportsbook to tell someone how much they can spend, and in what period. A Big Brother world where my credit card is declined because I've spent more than a certain amount of money on beer or fast-food in a month isn't one I'd imagine many of us would want to live in (although it might be beneficial to my waistline and bank balance).

Fortunately, or unfortunately, depending on how I look at this, my advanced age means that I am not going to be affected, but I imagine more than a few people will find this initiative rather annoying if it is actually implemented as the article says. A more nuanced approach would seem far more sensible.     

August 2021 Review

August is behind us, and as I hinted at in this recent post, the month was a good one for baseball. Excluding the one-off pandemic season last year, Hot Favourites haven't had a losing August since 2010 and the "heart-of-the-season" months of May thru August are also extremely reliable with just two losing months from the last seven seasons:

September is the final full month of the regular season which includes three days in October, and the two months combined are usually profitable with just one losing year (2016) since 2011. 

The Totals systems are currently showing an ROI of 8.5% and a healthy profit with Unders now contributing about two-thirds of the profits from 267 selections versus Overs with 171: 

And while it's early days, the Draw is back in the English Premier League. For those following the 'close matches' system, the results so far are:

Overall it was another good month for the Cassini portfolio, with sports investments up close to 5%. 

Bitcoin continued its recovery, but Boeing and Lloyds Bank lost money for the second consecutive month, joined in the losers column by Berkshire Hathaway which was down nearly 13%. And still CMG hasn't split, although its price continues upward! 

It would be churlish to complain after ten consecutive months of gains though, and as long as the winners amount to more than the losers, I'm good. 

Individual stocks make up a small percentage (~8.5%) of my total investments so the 2.3% gain under 'Pension' is far more important in real terms, but it's so boring to be invested in Index funds. My (and hopefully your) preferred S&P 500 index is up over 20% already this year, while the FTSE 100 is up about half of that.

For most investors: 99% of good investing is doing nothing, the other 1% is how you behave when the world is going crazy. - Morgan Housel

Good luck to you all in September.

An Overrated Variable

The 2021 NFL season is a little over a week away, with a Thursday night opening game on September 9th, a couple of timely articles by ESPN's David Purdum and Kevin Seifer on the decline of home field advantage. 

If you've been following this blog for any length of time, you will know that taking advantage of the market's over-valuing of home advantage has been a nice earner in certain matches in this sport for many years. Since the league expanded to 32 games in 2002, the record is:

In Divisional games, the ROI increases to 6.8% which over a 19 season period is quite remarkable. Of course last season was unique with limited attendance due to the pandemic, but this decline in home advantage isn't new.

Home teams had a .498 winning percentage in 2020, their lowest since the NFL's 1970 merger with the AFL. But even with full attendance in 2019, they had produced the lowest such mark (.518) since 1972, as well as the lowest cover percentage against the spread (.437) since 1967.

According to ESPN Stats & Information research, in fact, home teams have had a losing record against the spread in 14 of the past 17 seasons. That has happened even as the average spread for home teams dropped 18% in 2015-19 (-2.03) compared to the previous five seasons (-2.47 in 2010-14).

The ESPN article in full: 

With stadium crowds limited last season during the coronavirus pandemic, home-field advantage dropped to an all-time low, based on the point spreads. ESPN's Kevin Seifert examined how the return of crowds could impact this season in a piece sports bettors should read.

Home teams were favored by an average of 1.10 points last season, by far the lowest average spread for home teams in the Super Bowl era.

Home-field advantage had been declining for years, even prior to the pandemic. From 2015 to '19, the average home spread was -2.03. In the previous 15 seasons, the average home spread was -2.47.

Home teams are struggling to cover even the smaller spreads. Home teams have had a losing record against the spread in 14 of the last 17 seasons, including six of the last seven, and three straight.

"I think it's the market catching up to home field being an overrated variable," Murray of the SuperBook said. "Look how many NFL teams have little if any home field advantage at all. Washington doesn't have a home field advantage. The Chargers don't. I feel like when I watch a Chargers game there's more fans of the opposing team in the stadium. I'm not sure what kind of advantage teams like the Jaguars, Dolphins, Rams, have either. There are a few teams we would say have a real home field advantage like the Chiefs, the Packers, the Seahawks. But there's just as many teams out there that it doesn't seem to make much difference for."

Although articles such as these draw attention to the market's inefficiency, they seem to have little to no actual impact so let's hope for another winning season, even if the four yearly cycle of losing seasons suggests 2021 is due a loss. There may actually be a reason for this, given that the NFL schedule does rotate on a four-yearly basis. 

Although we no longer have the Killer Sports database which made producing a verifiable record of results so easy, I'm hoping to be able to find the time to keep these numbers coming.  

"True investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public." - Benjamin Graham