Thursday, February 18, 2010

G

When I began attending UNC baseball games in 2006, Garrett Gore was a freshman with a good glove at second, no offense, and no nickname. Pitchers Daniel Bard and Andrew Miller would soon play in the major leagues, Chad Flack would become Mr. Clutch and a host of other players on the team seemed destined for the big leagues. Carolina would make its first of four straight appearances in the College World Series in Omaha, with Garrett as a role player.


Photo by Joe Bray

Garrett
took over the starting second base role at the end of his freshman year and ended the season batting .227 and committing four errors. He finished that year at the College World Series in Omaha, one game short of a national championship. I thought Garrett would be an outstanding second baseman, but I didn't expect a lot from his bat.



Garrett owned second base his sophomore year. Paired with shortstop Josh Horton, the Tar Heel's middle infield was formidable. Much to my surprise, he also increased his batting average nearly 100 points to .324 and won an award for being the Tar Heel's Most Improved Player. He committed only six errors and made a second trip to Omaha, again falling just short of the championship, but he was becoming a recognized key to the Tar Heel's success. In his spare time, a scarce commodity for college athletes, he made the Dean's List.


At the end of his junior year's regular season, the wheels came off. With the departure of Josh Horton to the majors, Coach Fox moved Garrett to shortstop, a very different position than second base. He came into the last few series of the season with a handful of errors, but his throws to first base began to sail on him and frequently ended up in the visitor's dugout. He would commit a whopping 21 errors before being demoted to designated hitter. Leaving the field after yet another throwing error, I watched Coach Fox meet him at the third baseline and gently tap his fingers on Garrett's temple. "It's all right up here now."


As Garrett's troubles at shortstop grew, I found myself becoming a bigger fan. Ryan Graepel took over his shortstop position and Garrett was relegated to just a hitting role, but I noticed that every time we really needed a hit from him, he delivered. I cheered for his every plate appearance. My friends gave me puzzled looks, but that made me support him even more. "Shortstop isn't his natural position", I'd tell them. "The team just needed him to replace Horton. Don't give up on him." Garrett made his third trip to Omaha as the DH.


Opening day of the 2009 season was also the debut of the renovated Boshamer Stadium. We had a sellout crowd and my group of friends, about a dozen retirees and spouses, had bought season tickets together. We're perhaps an unlikely bunch, retirees ranging in age from mid-fifties to nearing eighty, a few diehard Yankee fans sitting next to a few died-in-the-wool Red Sox fans. I, myself am a Kentucky Wildcat fan to the core, who loves college baseball and happened to retire in the town where the Tar Heels play their home games. Some of us went to UNC, but others are alumni of UNC Charlotte, Boston College and other fine schools. Somehow, we come together every spring to share a common love-- college baseball-- and to support a team many of us "adopted".


We huddled under blankets on a cold but sunny February 20th and were surprised to find that Garrett Gore had moved to right field. Suddenly, the arm that had overthrown first base so often was throwing 330-foot strikes from right field. He threw out base runners at the plate, until they learned not to try to score on him. He picked up singles in right field and gunned down runners at first who made the turn to second a little too aggressively. He ran down everything catchable. Then he caught the uncatchable.


Photo by Joe Bray


The first weekend in March, during a tight ACC series with Clemson, the Tiger's batter smashed a pitch over the right field wall with a runner on first. Garrett ran and leaped above the fence for the ball, crashing into the padded wall, and fell to the ground. The batter began his home run strut to first. Clemson fans cheered, Tar Heel fans were silent, and the Tiger's other base runner was nearly to third when Garrett jumped up off the ground, pulled the ball out of his glove and threw to first base to double off the runner. What had appeared to be a two-run homer became a double play. Adam Warren, who would later be picked up in the 4th round of the draft by the New York Yankees said in his NCAA blog, "Garrett Gore's robbing catch on Saturday was most likely the best play I have seen in my baseball career."


Garrett had also caught a nickname, "G", the ultimate sign of respect. We yelled it when he came to the plate and we watched with great anticipation when a ball was hit to right field because we knew we might see something spectacular.


His batting improved, too. Going into the 2009 College World Series, he was hitting .307 on the year and had committed just three errors. In the NCAA Regional series, Kansas' coach decided to change pitchers when Garrett came to bat with the bases loaded. With only three homers through the season, Garrett drove the reliever's first pitch, a fast ball, over the wall in dead center field for the first grand slam of his career at any level. His next plate appearance, facing the same reliever, Garrett slammed a first pitch fastball over the wall in left center. A Jayhawk fan sitting behind me deadpanned, "I don't believe I'd throw him another fastball."


The following weekend in the NCAA Super Regional series against East Carolina, Garrett crushed yet another homer to dead center, hitting the wall high above the 405-feet mark.


If the big leagues drafted "heart", Garrett Gore would go in the first round. He wasn't drafted and I'm sure he didn't expect to be, though seven Tar Heels were. (My Wildcats had four players drafted by the MLB in 2009 themselves, thank you.) Fittingly, with all the major league talent the Tar Heels have fielded for the past four years, Garrett Gore, who wears number 4 on his jersey, is one of only four Tar Heels who have been to Omaha four times. His twenty-first College World Series appearance against Arizona State in his last college game gave Garrett the CWS record for most games played. He has been a major contributor to UNC's baseball success since he arrived on campus. He's a good student and a great kid with an infectious smile. A sports photographer commented in the caption of a photo of one of Garrett's heroics that he was one of the finest young men that the photographer had ever met, and he meets a lot of them.


I met Garrett and his parents at the Boshamer Stadium dedication. I told him I was his biggest fan and that my friend's had even jokingly asked if I had adopted him. He smiled and said, "I didn't know I had any fans after last year. These are my parents. They're probably ready to get rid of me." Hardly. Every parent's dream is to raise a kid who can hit a rough patch in the road and come back stronger than ever.


Garrett went to college to get an education and not just as a stop along the way to professional baseball. He didn't play to get a scholarship, either. Most college baseball players get a small fraction of a scholarship, at best. He played for a national championship and realized every ounce of his potential along the way.




December 2009


Post  (from the internet is always right: intrepid media 2009)


Sometimes, I pour my heart into a piece and work on it for months or even years. These are the pieces that I love and want people to read. Sometimes, a piece spills out onto the page in half an hour and it turns out to be one that people want to read. “G” is a bit of both. It flowed easily onto the page and it was heartfelt. I have written pieces that I love more, but I am usually writing about events that have impacted my life. This time, writing something was the event that impacted my life.


“G” is about a college athlete I hardly knew at the time. I wrote it in less than an hour one evening after watching a kid who had struggled mightily the year before hit two home runs off consecutive pitches in a playoff game, one of them a grand slam.


I say, ”hardly knew at the time”, because Garrett Gore and I have become friends since the column. He emailed me after reading it, we met to talk, and soon Sunday afternoons became the time we meet at Fosters Market to chat about baseball over an iced tea. We also chat about his career plans, to become a color commentator for sports broadcasts, and his final semester of college. I'm helping him with the job search and a paper he's writing on social networking. I have a son Garrett's age and two children a few years younger and it's striking how much easier it is to mentor someone else's son.


Garrett wrote me that what struck him about my column was how I seemed to have seen from a bleacher seat exactly what was going on in his career. He complained that he usually reads columns by sportswriters with direct access to the players and wonders if they have ever gone to a baseball game. I suspect that's because I was writing about what was going on in his life and not about his batting stance or his on-base percentage.


Garrett confided that after his last college baseball game, having been eliminated from his fourth College World Series by Arizona State, he felt a strange sense of relief. The pressure was off for the first time in a long while. He was packing his suitcase in his hotel room after that game when a sports announcer stopped by to suggest he read the column I had written. He walked into his parents' room to find his mother reading the column and crying, a revelation that I absorbed with mixed emotions. Making his mother cry was the last thing I intended. Garrett says he told her to stop crying or he would start.


“G” isn't about baseball, though Garrett's amazing talent and tenacity certainly provided a great backdrop. It's about an overachieving, personable kid from Wilmington, NC with great parents and a great work ethic who hit a rough patch in the road and grew because of it. Writing his resume has been a snap.

Thursday, February 11, 2010

The Fallacies of Safe Withdrawal Rates in Retirement

If you've given any thought to funding your retirement, chances are you've heard about a strategy for investing in stocks and bonds and spending about 4.5% of your savings “safely” throughout a long retirement. Perhaps you've used an online retirement income calculator that is based on this strategy.

The sustainable withdrawal rate (SWR) strategy is usually stated something like this quote from CNNMoney.com:

Advisers typically recommend that 65-year-old retirees limit themselves to an initial draw of 4% of their portfolio, and then adjust that dollar amount for inflation each year. By doing that, they have roughly an 80% to 90% chance that their savings will last at least 30 years.

Interestingly, before the 2007 crash, SWR advocates said that a 4.5% withdrawal would provide a 95% chance of funding thirty years of retirement. Either way, let's look at what is missing from this statement.

First, an 80% to 90% chance of your savings lasting at least 30 years is another way of saying a 10% to 20% chance that they will not that the retiree will find herself flat broke before retirement ends.

A 90% chance of avoiding ruin may sound safe to some, but not when you compare it to the overall rate of bankruptcies for retirees. According to a study done by Elizabeth Warren at Harvard Law School, the overall bankruptcy rate for American households over the age of 65 was recently only about 0.5%. About 99.5% of all retirement-aged families manage to avoid bankruptcy, with or without a spending strategy. The SWR strategy promises that only 80% to 90% of retirees who use it will be as fortunate.

In other words, if you choose the 95% safe withdrawal rate, you can apparently improve your odds of avoiding bankruptcy from 95% to 99.5% just by abandoning the SWR strategy.

It is also important to note that successfully avoiding ruin in the SWR studies means dying with at least a dollar in the retiree's portfolio. Some retirees might consider this success; some would not.

Second, the strategy cannot deliver its most highly-touted benefit, that of providing a constant annual withdrawal amount with constant risk. The amount that a retiree can withdraw annually with a 95% a priori probability of not outliving his savings is a percentage of the remaining portfolio balance at that time. Furthermore, like the portfolio balance itself, the “safe withdrawal percentage” varies over time. The studies show that safe withdrawal rates for expected retirements of ten years approaches 10%, for example.

The SWR probability of success is an a priori estimate. A priori knowledge is knowledge about a process or event (like retirement), that is available before the event occurs, rather than that estimated by recent observation. It roughly translates to “at first”, or “at the start”. If a bag contains two black marbles and two white marbles and we remove one marble without looking, then before we draw there is, a priori, a 50% probability that we will remove a white marble. Once we do, the conditional probability of removing another white marble is reduced from one in two to one in three. After the first marble is removed, the fact that we used to have a 50% probability of removing a white marble is irrelevant to our future chances of drawing another.

A retiree may have a 95% probability of funding thirty years of retirement on the day she retires, but if her portfolio value drops substantially due to a market crash, her probability of successfully funding the remainder of retirement also declines dramatically. The fact that she used to have a lot more money is no longer relevant to her future success.

Here's another example. Let's say you board a plane in Los Angeles bound for Hawaii and historically, 99% of similar flights have had adequate fuel to reach the islands. Soon after takeoff, the plane's fuel tank develops a very large leak and the pilot has to decide whether to turn back. You really want him to base his decision upon conditional probabilities that take into consideration this new information and not upon historical results. The long-term success rate for similar flights may remain about 99% no matter which decision your pilot makes, but that shouldn't bring you much comfort. Suggesting that retirees can safely withdraw the same amount after a market crash is like telling you that you still have a 99% chance of reaching Hawaii after the fuel tank begins to leak.

At this point, we could dismiss the strategy as unworkable without considering the accuracy of the probabilities. After all, if a priori probabilities on the date of retirement are largely irrelevant after retirement begins, then the exact measure of that irrelevant probability is, well. . . irrelevant. Some may consider it useful that, while a constant amount cannot be withdrawn annually with constant risk, it might be safe to withdraw an annually varying 4.5% of remaining portfolio value each year. In other words, abandon the goal of constant annual income, but hold the risk constant at say, 95%.

Unfortunately, the probabilities calculated by the study are also highly suspect because they are based on a model of irrational retiree behavior.

If we gather observations about the accuracy of blindfolded dart throwers, we cannot then correctly infer that these observed results should be expected for all dart throwers, blindfolded or not. The observed sample has to be believed to be representative of the larger population before we can make that inference, and we can reasonably expect that dart throwers will perform better without a blindfold.

The models used to calculate probabilities for the sustainable withdrawal rate studies simulate a retiree who withdraws the same amount from his portfolio every year, even in the face of near-certain impending financial ruin. No rational retiree would do this, of course. When it appears that continuing one's spending pattern will soon lead to bankruptcy, rational retirees would reduce their withdrawals to avoid ruin, living on less being the preferred strategy to living on nothing. So, the percentage of rational retirees who would wind up broke using the 4% Rule strategy is likely far smaller than the 5% calculated by SWR studies, but the number who would underfund their retirement plans would almost certainly be much higher.

We can't infer the rate of ruin for rational retirees from a model of irrational retiree behavior any more than we can infer the accuracy of all dart throwers from observations of blindfolded dart throwers. Metaphorically, the retirees simulated in the sustainable withdrawal rate studies have blindfolded themselves to the reality of market risk. The SWR models simply don't represent expected retiree behavior.

In summary, the SWR strategy would be extremely risky, compared to observed bankruptcy rates for retirement-aged families, even if it were logically sound. But it isn't, and neither are the online retirement income calculators based on it. To summarize the logical flaws:
  1. A 95% probability of avoiding ruin is not “safe”; it is an order of magnitude higher than the currently-observed rate of bankruptcies among retirement-aged families,
  2. The calculated probabilities are a priori estimates. After a significant decline in a retiree's portfolio value, the retiree must either reduce spending, perhaps significantly, or accept greater risk of financial ruin, possibly much greater risk. The retiree who continues withdrawing the same amount after a major decline in portfolio value has a new probability of success that may be far less than 95%. The strategy cannot provide both constant withdrawal amounts and constant risk throughout retirement, and
  3. Rates of ruin for retirees who would reduce spending to avoid bankruptcy cannot be inferred from a model of retirees who would not.

What is the correct probability that a retiree will deplete his savings if he withdraws a fixed amount annually equal to 4.5% of his initial portfolio value? That depends entirely upon how he would behave. It's probably around 4% to 5%, as the studies indicate, if he would continue spending at the same rate right up until he was completely broke. But, that behavior seems extremely unlikely.

If he would abandon the strategy and spend less when facing potential financial ruin, a quite rational thing to do, then the probability of failure would depend on how much he reduced spending and how quickly. Unfortunately, the potential number of those scenarios is infinite and the problem is probably not solvable in a useful way. The best estimate we can make without specifying how much and at what point the retiree would reduce spending is the overall bankruptcy rate for families in this age group, which was recently about 0.5%.

SWR is not a prudent strategy for developing an individual retirement plan, nor is it a strategy built on sound logic. Withdrawing a fixed amount annually from a volatile portfolio of stocks and bonds while holding the probability of bankruptcy constant throughout retirement is not achievable.
One reliable way to estimate the amount of income a retiree might generate with a given amount of savings is to shop for fixed annuities on the web. Although most retirees seem to shy away from purchasing these insurance contracts, they tend to generate more income than the SWR strategies promise and they are the only safe way to ensure a steady income for a lifetime. Even if the retiree considers fixed annuities undesirable for other reasons, they offer a baseline from which to evaluate other strategies that promise benefits that fixed annuities can't deliver, but with greater risk.

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Dirk Cotton is a retired executive of a Fortune 500 technology company. Since retiring in 2005, he has researched and published papers on retirement finance, spoken at retirement industry conferences and events, and regularly posted on retirement finance issues at his blog, The Retirement Cafe. He is currently a Thought Leader at APViewpoint, Advisor Perspectives' online community of  investment advisors and financial planners. He provides retirement planning advice as a fee-only financial planner.

Mr. Cotton holds an undergraduate degree in computer science from the University of Kentucky, an MBA from Marymount University, and a certificate in financial planning from Boston University.

He and his family currently reside in Chapel Hill, North Carolina. He loves to spend time with his family, fly fish, shoot sporting clays, attend college baseball games, sail, follow the Wildcats, and write.

Dirk holds a bachelor's degree in computer science from the University of Kentucky, an MBA from Marymount University, and a certificate in financial planning from Boston University.  He attended high school in Elizabethtown, Kentucky.

email: JDCPlanning@gmail.com