No. of Recommendations: 4
I posted this on RELE, but there's obviously people here who don't go there, so here goes nothin':

Sharpe's concern seems (to me) to be that people using the 4% rule will experience market volatility and possibly run out of money.

Seems to me he's pushing people to have a financial advisor implement some extremely complicated "lockbox" strategy using the market portfolio and TIPS, plus a deferred annuity.

The market portfolio is about 55% stocks and 45% bonds. Including the TIPS he's advocating much more than 45% bonds, a very conservative asset allocation.

Backup:
Page 513: (Re: 4% rule)
Speaking for myself, and putting the subject in non-academic terms: it just seems silly to “finance a constant, non-volatile spending plan using a risky, volatile investment strategy.”

Not surprisingly, here we advocate different approaches...


Page 632: (Lock box & annuity)
Retirees who desire (or need) to use their savings primarily or entirely to provide income while they are alive, face a dilemma. Either run the risk of a long life with insufficient income in the latter years or spend less when they are likely to be alive in order to have money left for years in which they could well be gone. Adjusting planned incomes over time may help, but for those with modest savings, it maybe an insufficient solution.

In an ideal world, low-cost lockbox annuities of the type described in Chapter 16 would provide a solution to this problem. But at the time this is written no such instruments exist. There are two interesting alternatives. The first would combine lockbox spending for some number (n) of years in which one or both beneficiaries are highly likely to be alive with the immediate purchase of a deferred fixed income annuity that would provide income for the later years (n+1 and thereafter). The second alternative would also use a set of lockboxes to provide spending for n years but would add another lockbox, to be used in year n+1 to purchase a fixed annuity (or to pay the estate then or in an earlier year if both beneficiaries die beforehand).


Page 691: (Advisor)
If there is any conclusion to be reached after reading the prior twenty chapters it is this: comprehending the range of possible future scenarios from any retirement income strategy is very difficult indeed, and choosing one or more such strategies, along with the associated inputs, seems an almost impossible task. At the very least, retirees will need some help.

Enter the Financial Advisor.


It was an interesting read, and thanks for posting it. I'd heard of it on a podcast interview with Sharpe by Barry Ritholz a while ago and meant to look it up. Sharpe has some good stuff in there, but it's hard to find among all that MATLAB code and such.

I don't believe that his conclusion (last quote above) applies to me. I believe I can deal with portfolio volatility. I'll keep the 1% advisor fee for myself, and the high costs of an annuity, and take my chances with the 4% rule, just like Intercst has been preaching to us all these years :-)
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