I
just installed ORC2012. I tried to run it but I get an error message. Help!
You must add this folder to your trusted locations. Otherwise, the program will
not run. Follow instructions that came with the downloading instructions:
Make sure to add C:\ORC2012a (default installation folder) to trusted locations. (Excel / File / Options / Trust Center / Trust Center Settings / Trusted Locations / Add new location).
Where is the default folder for
the saved scenarios? I would like to
make a backup of these files but I can't locate the folder.
The scenarios are saved in folder C:\ORC2012a, in
file ScenarioData.xlsx. Other default info is saved in folder C:\ORC2012a, in
file VAData.xlsx. However, if you are making a backup, you might as well backup
the entire folder C:\ORC2012a that way you know for sure the data file goes with
the right version.
I
am an advisor. One of the fellow advisors in the office asked me run the Otar
Retirement Calculator for his clients. Does my license cover that?
No it does not. Each end-user license covers one desktop computer, one
laptop computer and one advisor. Each advisor needs to purchase one license to
cover his/her own client base.
I
am an individual investor. My neighbor, as well as my cousins want me to run the
Otar Retirement Calculator for their specific situation. Does my license cover
that?
As long as you don't receive a financial benefit for doing so and as long as
you run the programs in your computer, you can use it for your family. If your
neighbor needs to run it for his family, he needs to buy for his own.
I am a member of an investment club. Other members want me to run the Otar Retirement Calculator for their specific situation. Does my license cover that?
No it does not. An end-user license does not cover members of an organization. Each member needs to buy his/her own end-user license.
Will your software run on Macintosh versions of Excel?
If you have Excel 11 for the Mac, ORC2012 might run with that. However, some buttons (printer, exit) will not work.
Do I have to update yearly? Are
there any ongoing charges?
No. There are no annual fees or charges. Each year, I add another
year's market data. If you are happy with 110 years of market history, you don't
need to update it. One more year's data does not make a dent when you are
already working with such an extensive market history. However, most users
update for the new features that I add each year.
Please explain if I can use the
program to estimate better my chances of not running out of money from my asset
allocation? Also, how different is your program from, say, Sharpe's financial
engines?
You may be confusing the benefits of asset allocation with the luck
factor. Luck factor is the largest component of the success of a retirement
portfolio. This factor alone determines whether or not you will run out of money
during retirement. Please read my article on my website about that. Asset
allocation is just icing on the cake and not the cake itself. Yes, in my
program, with the click of a single button, you can optimize the asset
allocation that gives you: The highest dollar amount in the portfolio, the
lowest probability of depletion or the longest portfolio life, or any
combination of these three. The program will clearly indicate the optimum point.
This optimum asset mix is not based on statistics, standard deviations or other
academic jargon, or data manipulation; it is based on actual market history,
applied directly to your own personal cash flow picture. As nice as this sounds
(others would sell to you this feature alone as "the best thing since
sliced bread"), optimizing the asset mix is just one of the tools in
retirement planning in my program. My program will give you the combination of
other tools, such as any combination of investments, life annuities, variable
pay annuities and variable annuities with guaranteed pay - all in one package.
What
do you use as the fixed income return?
Nominal Bonds: The model takes the historic interest rate for 6-month
deposit and adds a premium (you can change this). It reflects
approximately a fixed income portfolio with an average duration of 5 years, held
to maturity.
Inflation-indexed bonds: The model uses historic inflation plus a percentage as real rate of return (you can change this).
What
difference does it make what my average MER is?
MER (Management Expense Ratio) is how much your mutual fund is charging you
to manage your money. It generally varies between 1% and 4%. All mutual funds
disclose this information. If you have a wrap account, add all costs, including
the WRAP fees and management fees to come up with a MER. If held for the long
term, MERs eat into your returns and shorten the portfolio life. Keep in
mind, there are several other factors, such as bad asset allocation, bad
investment selection, investor psychology to name a few, that can do a lot more
damage than MERs.
Why
do you ladder the life annuity?
Three reasons: 1. The older you are, the less money you need to buy an
annuity for the same periodic income, 2. The longer you delay buying the
annuity, the higher may be the estate value, 3. If you delay buying the annuity,
your investments may increase in value in the meantime. We use historic data to
calculate the probability of having less money in your investment portfolio in
the future, adjusted for inflation and your age. We then use this probability to
stagger purchasing annuities.
Why
should I have annuities in my portfolio?
Just like we like to diversify our "investment portfolios" to
reduce the volatility risk, we need to diversify the source of our cash flows to
reduce the risk of running out of money. A life annuity usually pays a
higher periodic income than the sustainable withdrawal income from an
investment portfolio. By placing some of your assets in an annuity, you are
reducing "the withdrawal stress" from your portfolio, which extents
its life.
What
is reverse-dollar-cost-averaging?
It is taking income from your investments on a periodic basis. You may have
heard of dollar-cost-averaging; investing periodically over time.
Dollar-cost-averaging reduces the average cost of your investments because it
takes advantage of price fluctuations.
The reverse-dollar-cost-averaging works against you. Because, once you sell part of your investment to provide you the periodic income, and if it is a bear market, then your losses are permanent. When the market comes back, you no longer have that part of your investment to participate in the rise.
My estimations show that whatever benefits dollar-cost averaging has through a bear market, the reverse- dollar-cost-averaging has about three times as much of a detriment to your portfolio for the same bear market. Therefore there are two things you have to be very careful of:
1. Always take your income from the least volatile investments, such as money market,
2. Do not rebalance more often than what is required for an optimum portfolio. For more info on this, read my award winning article.
If
I understand your software correctly, it gives us a representation of what might
of occurred if an investor had invested/withdrawn assets over a given period of
40 years, i.e. it starts at 1900 through 1940 and plots out the effect on
capital, then 1901 through 1941 , 1902 through 1942 etc. and gives us a sense of
how that portfolio performed during those historical periods through to the
present. How does it deal with recent periods, say 1994 to 2004, which is less
then the projected period?
The time period studied is the lesser of 40 years or -for retirement
years after 1966- it is the number of years up to and including 2006.
If one retires at the beginning 1995, there are only 12 years of history ( 1995,
1996,1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005,2006). To see the 1995
retirement line on the chart (see "Chart1"), move the mouse pointer to
one of the lines on the chart and a message box will pop up to indicate the
starting year of that particular line. Hint:
Look for a line that ends at around year 12 of retirement. Or you can just bring
the slider on the bottom of the chart to read 1995. This will give you all the
historic numbers starting in 1995.
In the instruction manual it
states inflation is not a needed input. How does the calculator handle the
affects of inflation? Are historical inflation rates used each year and the
amount needed to be withdrawn is increased accordingly? I guess I am asking in
the “Tables" tab on the schedule that states how much is withdrawn each
year, how does the program decided how much to increase the amount needed?
The program uses the historic inflation for each year since 1900.
Between 1900-1913, it uses the US Bureau of Labor Statistics wholesale price
index. After 1913, it uses the Consumer Price Index ( Note: The Consumer Price
Index did not exist prior to 1913). The program uses these for indexing the
periodic withdrawals/deposits for each age and for each year starting with the
current age and ending at the specified age of death.
In the Tables page, because of space limitations, we don't show these numbers (withdrawals/deposits, annuities etc) for each year of retirement / for each age / for each year since 1900. Doing so would take 106 extra pages which is probably not necessary for a routine retirement plan. So, only the averages for each age are indicated in the "Tables" page.
If you want to see the outcomes for inflation other than the historical rates, go to Comparison sheet. There you can enter your own "assumed" inflation and see the difference, available starting in the 2008 edition.
I have been reading The Misbehavior of Markets by Benoit Mandelbrot and some of his premises and conclusions seem similar to the premises and conclusions underlying your Retirement Optimizer software. Would you say that your software is an application of Mandelbrot's multi-fractal model of market behavior (chaos theory)? Do you know if his mathematical model has been incorporated into any retirement planning software?
I don't remember seeing any retirement calculator based on chaos theory. Mine is based on actual market data and I don't intent to curve fit it to anyone's model. I am uncomfortable taking historic data and try to fit it into some statistical equation. I rather use the actual data.
How
and where do you take account of taxation of investments and incomes?
Taxation is another expense. There is no separate tax entry. You must
include all tax expenses in addition the all retirement expenses in the
"Total Periodic Income Required after Retirement" box. In other words,
income required after retirement is pretax income.
I'm
planning to work on a case with one of my long distance clients. Will I be able to e-mail her pages out of the workbook as we
change scenarios. So far I haven't
had success trying this. Suggestions?
If you want to email pages
as a pdf file, then you need to have pdf file writer installed on your computer.
With that software installed, after you load the ORC, then set your default
printer as "pdf writer" (or something like that) then click on the
print entire worksheet button on the main page, and the entire workbook will be
saved as a pdf file. You can then send it to your client with your email.
I
load the program, but once I enter my figures, all of the probability of
depletions on the main page are 100%. Why?
In some language settings,
the decimal point in North American English way of writing is a comma. If this
applies to you, just set your numeric format to international.
The
lucky column on the optimization page changes depending on my inputs in the
asset mix column on main page. I am reading this table incorrectly?
The program may
choose a different age to calculate these values at depending on the asset mix
entered. If you use 100% equity, then the portfolio will run out of money
sooner, so the age at which the scenario tables show the asset values are at a
lower age. If you start with an asset mix that is closer to the optimum, that
will allow the optimization routine to calculate the asset values for an older
age.
I
have a concern with how we are computing the MRDs so that the client has
adequate funding for living until 100. As an example I have a client with his
only asset is an IRA at $3.3 mil and needs $170,000 per year to live. This
$170,000 needs to be adjusted for inflation. How do we explain the higher
withdrawals and taxes? I think I know but would like to know your thoughts.
You just need to
enter tax expenses as another line item in your estimation of retirement
expenses. The program does not increase withdrawals to account for the increased
tax burden for the MRD. There
are two situations when MRD kicks in: 1. When the withdrawal rate is less than
the sustainable withdrawal rate and 2. When the retiree gets lucky and catches a
secular bullish trend throughout his retirement.
In your
example, his withdrawal rate is over 5%, so the MRD will not kick in. That
leaves only the second situation; retiree getting lucky. This would happen in
15% of the cases. Otherwise, you don't need to worry about MRD.
Will you allow us the ability
to illustrate for a certain timeframe (i.e. S&P from periods 1995-2005, or
1970-1980) to give the client an idea of what certain periods could mean to
their portfolio.
The program shows the best, the worst and everything in between
during the last century. You cannot pick and choose the time frames to suit your
preferences. Allowing this may open the door to potential abuse of
selective-results-presentation to clients. If you want to know a performance in
a particular year, just go to the Chart1 page and move your mouse over the gray
lines.
I
am a financial advisor in the U.S. - found your website and have been
devouring your articles. I am ready
to buy the retirement calculator but I'm wondering if you have an explanation
for the following:
On
one of the fund sites, they have a calculator that claims to be based on actual
market history dating back to 1926. Simply
choose one of three asset allocations (Conservative, Moderate, Aggressive) and
the length of retirement, and the calculator spits back a Withdrawal
Rate. The withdrawal rates for the "conservative" portfolio (35%
stocks) are slightly higher (but pretty close) to the sustainable withdrawal
rates that you suggest in your teachings. However,
in every case their rates are substantially higher as you go to portfolios that
are more aggressive. Yet, in your
teaching, you indicate that equities above 40% will actually decrease the
chances of portfolio survival. They claim: “In this calculator, we
create 81 different simulated "time paths" for the evolution of
your portfolio by first assuming that you begin taking withdrawals at a specific
point in history (e.g., 1926, 1927, 1928). We then use the actual, historical
rates of return that occurred in each subsequent year from that point forward,
applying them in sequence to your portfolio as time rolls forward. If such a
path needs to go beyond the year 2006, we just loop back to the returns of 1926
and cycle forward from there until either your assets are depleted or the end of
your planning horizon is reached. Given the past historical data we use (returns
from 1926 through 2006), we end up with 81 different starting years
with 81 different time paths. The monthly withdrawal amount shown by the
tool is the highest level of spending in which 85% of these historical
paths would have left you with a positive balance at the end of your
chosen investment horizon.”
What
is the flaw in such a calculator? The
typical person who uses this is going to insist on a portfolio of 65% equities
and think they can withdraw 5.25%.
As
you suspected, statistically and mathematically, I believe that this
model is flawed. The loopback assumes that after 2006, we will experience
another secular bullish trend of 1926, meaning that the cyclical bullish trend
that started after the year 2000 crash (which is similar to the 1933-1937
cyclical bull market) will continue another three years (the loopback years of
1926-1929). Is it probable? Never in history a secular bull market lasted
over 20 years, and this flawed loopback simply makes the secular bull markets of
1982 to 1999 to turn into an unusually long secular trend of 1982 to 2010,
i.e. 28 years.
Next: Probability
of depletion used: It appears that they are using 15% probability of
depletion (POD). This is too high. I limit the POD at 10%. Using the actual
historic data, I find that once you cross over the 10% POD, then
irreversible events can happen. There is a big difference in the ability of
salvaging a portfolio to create a lifelong income, when one uses a probability
of depletion of 15% instead of 10%, if you are retired already.
However,
market risk only one of the three risks in retirement planning:
1.
Market risk : which is the probability of portfolio depletion by the age of
death. As stated above, 10% is my limit.
2.
Longevity Risk : which is the percentage of surviving clients at a given age: My
limit is 15%. Which means generally , use age 95 as age of death
3.
Inflation Risk - the withdrawals not keeping up with inflation. My limit is 15%,
i.e. the purchasing power must go below 85% of the requested amount in any
of the portfolios that are subject to rules one and two. (i.e. even if the
criteria for the market risk and longevity risks are met as per stated
thresholds in #1, and #2, the loss of purchasing power must not exceed 15%. This
becomes important when we talk about variable annuities or EIA.
You
are concerned that the typical person might insist on using
this seemingly flawed mathematical model. Please don't be concerned at all.
Because you don't want to have typical clients, you want smart clients who will
follow your advice. The fact that you even noticed and raised this concern
proves that your life, your energy, your time is too precious to waste on
clients from Mediocristan. The markets are designed in such a way that the
house usually wins at the expense of the clients from Mediocristan. If you
don't know what this means, please read the book "The Black Swan", by
Nassim Nicholas Taleb, cover to cover, several times if necessary. You'll know
what I mean. Regards, Jim
How or what do I do to place my information of the cover sheet? I seem to be getting along with the data pages, but that has me confused. Bob Smith keeps showing up?
On the "Cover" page, in the green areas, just enter whatever you like to enter.
Then fill in the “Bob Smith”
area ("Additional Advisor Type and Info").
Then click on “Fill this info
on the cover sheet” button.
Then save it as your template
(using the button “save this as my template )
In older versions, you needed to re-enter this information after each upgrade? With the 2011d version, it is updated automatically when you import older scenarios.
How do I change my page header information for the printouts on each page?
To change page headings:
1.
1.
Go to the Main page
2.
2.
Click on “Your Page-Heading Info” button (above “import scenario”
button)
3.
3.
Enter data as required and save
4.
Print the main page. If the printout comes out garbled then the
info entered is too long, go to step 2 and enter a shorter heading.
I have a question about inputs for the VA’s in
ORC 2012 and I was hoping you would be kind enough to help me. When
entering the purchase of a VA on the VA tab, I’m not clear whether I should
myself subtract that from the portfolio amount entered on the Main page, or is
that automatically adjusted by the program?
Case 1:
Let’s say you have $300,000
investment assets not including any Variable annuities
And on the Main Page
The VA amount will show in assets.
Case 2: You
don’t have existing VA but want to buy VA using money from your current
investments. Enter like this:
The VA amount will show in assets.
Case 3. You don’t have
existing VA but want to buy VA using money that is coming from elsewhere (not
from your current investments)
It will show this VA in your total
assets starting at the next age, 57 not at age 56.
Why can I not enter both my
data and my spouses data separately?
That would double the program size and the resource use. Just
calculate the numbers for the family and enter it under one (primary person).
When we "optimize" a
portfolio, the spreadsheet shows values and allocations at age 75. We are not
clear why that age appears and is apparently unchangeable? Also, when we
"optimize" a portfolio, we have input a certain initial allocation
(for example 85% equity, 10% FI, 5% IIB). Does the new optimum allocation start
then at age 75, or has that been reset to the very beginning or the
calculations?
When optimizing, the program will look for an age as close to age of
death as possible. If you entered age 95 as age of death, the program will start
there to optimize.
However, if there is no money left in the portfolio at age 95, then there is nothing there to optimize. Then the program will decrease the optimization age in 5-year steps until it finds some numbers it can work with. It is not something that can be changed by the user; behind the scenes, it is a complex linear-programming process at work.
When you run optimization for the first time for a specific case, the portfolio longevity will likely be improved from what you have initially entered. Then, this improvement will allow the program to work with an age of optimization closer to age of death. Therefore, after the first optimization, the age of optimization will likely be 5 or 10 years higher than the original "non-optimized" portfolio.
The optimum asset allocation always starts at the current age, not some time after retirement or some years from now. For calculation purposes, it stays constant for life, in theory anyways. But in practice, the optimum asset mix will likely change because of changing financial circumstances of the retiree, or after extreme market events that deviate from the market events that occurred last century. You should run the optimization and risk profile pages at each review.
If you start with a way-off asset mix and run the optimization, then the optimum asset mix will be in a range. Move the slider into the optimum (green) area within that range and click the optimize button again. The second time around, you will be much closer to the optimum. This is not much different than playing golf; if you are far away, first you have to get close to the hole!
I’m not quite sure I fully
understand the Annuity Ladder section under the “Annuity” sheet.
(a) When I press 1, 3, or 4 (or whatever number from 1-4), are you saying
that the amount of $ listed there is the amount of money to be “infused”
from an external source of fund to generate a Lifetime Income SPIA based on the
figures I input under age 60, 70, and 80? (b)
Or, is the amount of money listed there, the money that’s to be “extracted”
from the total portfolio I have listed in the “Main” sheet?
SPIA: (annuity page): Annuity ladder in the annuity page uses the
funds in the account stated on the Main page.
Variable Annuity: User selectable.
Why can’t I “optimize” a
portfolio for an 81+ year-old person? Program
keeps saying “not sufficient time horizon available"
Program needs a time horizon of 15 years or more for optimization to
run. Anything shorter, even the most optimum asset allocation will get cought in
short term events.
Just increase the age of death ("design until age") so that it is at least 15 years higher than the current age and it will work.
My equities' return is same as the index. However, my dividends amount to 3%. How do I handle that?
Set your alpha to 3%.
What if I don't know how my equities perform relative
to the index?
Use alpha of 0%.
I have a client with a tight picture.
She wants to buy a car 2
years before retirement.
If you enter any withdrawal under “Lump
Sum Withdrawals” or “Other Lump Sum Withdrawals” in the Cash Flow page,
then it will take out the money from the portfolio regardless of client being
retired or not. Enter only the amount that she needs to taken out from her
portfolio, not the full car cost. If she is not taking any money from the
portfolio, then don't enter any withdrawals (for this item) from the portfolio.
I
don't understand something happening with the ORC.
1) In a scenario I tried, I first entered a Total Periodic Income Required
of $174,000 and got an "Outcome: Inadequate" response. I
had the following boxes checked on top of the Cash Flow page:
2)
So I clicked "How Much can I Have?" button and got $155,000 as the
answer, with the popup saying for Green Zone Outcome: Excellent.
3) But when I put 155,000 in the green box for Total Periodic Income Required on
the Main page, the answer below the graph says Outcome: Inadequate.
Shouldn't it say excellent, as in step 2? Or am I misunderstanding
something?
When
you click on any smart button (i.e. “When can I retire?”, “How Much can I
have?”, “How Much Should I save?”, “Assets Required?”), the program
first unchecks these two boxes, calculates the answer, and then restores them to
their original setting. So, if you use any one these buttons and then decide to
enter the calculated number in the input box, don’t forget to uncheck all
these boxes (that reduce or limit withdrawals) to have the same results.
.