[FeeOnly.ca]

Jon, thanks for doing the article & video. I'm a big fan Jim Otar's: "Zone Strategy".

I'll try to keep the link above up-to-date with any videos and articles for easy access.

Below is Jim Otar's post in the Bogleheads Forum today:

http://www.bogleheads.org/forum/viewtopic.php?t=42110&mrr=1251030588


Wow, I did not think I would get this much response. I am very pleased. Thank you for all your comments.

Yes, the hosting server is congested somewhat due to the overwhelming response. I apologize for that, but there is not much I can do about it. Here are some hints:

-Please download only once and save it on your computer. Then you can read it at anytime at your convenience.

-Please enter your correct name and address and e mail, in case I have to contact you. Once the book is printed, I will purge all this information. I just need it in case of errata.

-For those who are concerned about my business model: I truly appreciate your concern. However, you don't need to worry about me. I am very deep in the green zone, and the existence of these posts indicate that my "business" plan is working well. The only person who gets upset about these free downloads is my wife, but we have been together for 32 years and she is used to me by now (I hope).

- I have gotten an overwhelming download response, so I changed the rules slightly: The green download is free until end of August 31st, or for the first 5,000 (OK maybe a little more than that) successful downloads. After that it will be for a great sum of $3.99.

-It took me on and off 6 years to complete this book, I hope you all enjoy it.

Over and out,
Jim Otar

 

[FeeOnly.ca]

Hey Jim, just wanted to welcome you to the forum! I look forward to reading more of your postings.

Hi Jim, thanks for posting.

The ratio method is a very helpful and quick indicator of your Zone.

The notion of matching an essential-income shortfall with a CPI indexed life annuity (pension) and nonessential-income needs with products/investments that provide more flexibility (and potential upside) is a safe and inherently sensible approach.

IMO, this is even a great approach for Green Zone clients if they are unsure about their ability to invest according to strict mechanical rules.

"Fear" and/or "Greed" can impact the way people behave at critical moments thus User-error is also a risk. From what I've seen, many people should export this risk as well.

 

[FeeOnly.ca]

Leslie above said: Instead ask yourself "how did people save, invest, and retire for the hundred's of years BEFORE the terms 'financial planning' was invented.

Up until the late 1980's people saved using Savings Bonds & GICs and retired using life annuities or a Defined Benefit Pension Plan (aka: a Life Annuity). Investing as we know it today simply was not available to the masses until very recently.

In fact I don't know of anyone and who has sucessfuly proven you can accumulated assets using a diversified portfolio and retire with a inflation adjusted 4% income for 30 or 35 years.

Leslie, do you know even a single person you can hold up as an example that proves it would be sucessful startegy?

In the distribution phase any amount of loss might become a permanent loss.
The efficient frontier, asset allocation, frequent rebalancing, asset dedication, diversification, the concept of "long-term" and Monte Carlo don't and can't work in a distribution portfolio as you might want to believe.

In a distribution portfolio you will be Lucky or Unlucky in the early years of retirement. The sequence of those returns is what matters and will determine the longevity of the portfolio. People need to hedge the risk of being Unlucky.


http://www.yourwealthadvisor.ca/zonestrategy.htm

 

[FeeOnly.ca]

Leslie says above: But you are missing the point. There is no need to plan anything in order to save. There is no need to plan anything in order to invest. There is no need to plan anything in order to draw down funds.

Really! IMO, “Failing to plan is planning to fail”

 

[FeeOnly.ca]

Below are two a clips from pages 454 & 456 of Jim's new book.

Quote:

"The zone strategy tells you exactly whether your portfolio will be accumulating or decumulating during the distribution stage.

• If you are in the green zone, your portfolio will be accumulating. If you are lucky, it will accumulate at a steeper rate, otherwise it will accumulate at a slower rate.
• If you are in the red zone, your portfolio will be decumulating. If you are lucky, it will last a little longer, otherwise it will deplete sooner.
• If you are in the gray zone, your portfolio may be accumulating or decumulating, depending on your luck.


Export or Retain the Risk:

There are three financial risks of retirement: longevity risk, market risk, and inflation risk. When you buy a life annuity with payments indexed to CPI, you are in effect exporting these risks to the insurance company. Keep in mind that the insurance company is a for–profit organization; transferring risk to them costs you money. For example, if you are buying a life annuity, you have to part with your capital permanently.
By definition, if you are in the green zone, then your portfolio has sufficient reserves to cover the longevity, market and inflation risks. For you, the volatility of returns is the deciding factor, which can be handled with proper asset allocation and diversification. You do not need to export these risks to an insurance company. Only if you want to feel extra safe, you can export risks partially or fully, and you will still have money left to invest.

However, in the gray and red zones you have no choice. Your investment portfolio does not have sufficient reserves to cover longevity, market and inflation risks. For you, the sequence of returns is the deciding factor and that cannot be fixed within the investment portfolio. In the gray zone, you need to allot part of your assets to annuities. In the red zone, your entire assets are used to purchase annuities"

End Quote

 

[FeeOnly.ca]

leslie replied: "Regarding whether you are "lucky or unlucky in the early years of retirement ... will determine the longevity of the portfolio". There is an assumption behind that position - that withdrawals are a set dollar value (or inflation adjusted set $). As a result you get the same, but reversed, effect as Dollar-Cost-Averaging. A set $$ taken from a portfolio after it has lost value hurts more (as a percent of it) than the same $$ withdrawn when its value was higher.

But that assumption is not true in the common sense behavior I exampled above (that does not need any planning or advisor or modelling). Your withdrawal is relative to the portfolio's gains - it reduces the net % return."

end quote.

Nonsense. Withdrawals during retirement are based on actual need, not market returns.
If you depend on that income to pay bills you can't defer withdrawals until you get better returns or decrease withdrawals to some arbitrary amount in keeping with the returns of the past year. What do you do if the market falls by 40 or 50% all at once, or goes sideways for 10 years?

Distribution income planning is about planning & designing a safe and reliable inflaton adjusted income for life. If you are in the Red or Grey Zones you cannot afford to finance the time-value of fluctuations. Your only relaible and safe option is to export risk to an insurance company.

http://www.yourwealthadvisor.ca/app...772426-offloading-risk-to-insurance-companies

http://www.yourwealthadvisor.ca/apps/links/