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MBAs may recognize him as the creator of the Sharpe ratio, but Professor Sharpe has now turned his attention to helping middle-class workers with their retirement income.

Nobel Prize-Winning Economist on How to Solve the ‘Nastiest, Hardest Problem’ in Retirement
https://www.barrons.com/articles/william-sharpe-how-to-secur...

So, there are lots and lots of possible future scenarios. You can cut down the investment uncertainty by just basically having Social Security…and an inflation-indexed-based annuity. But, even then, you’ve got to make choices about whether it will be a joint annuity, for how much, and when you’ll buy it. It’s a tough, tough, tough problem.

Is this something people can do on their own?

I don’t think so. Maybe if you were a physicist, but most people have a really hard time internalizing uncertainty.

</snip>


Sharpe has a free e-book you can download with all the details.
https://web.stanford.edu/~wfsharpe/RISMAT/

intercst
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Where does he mention SWR?
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Thank you for posting this. I’ve only read the intro and chapter 1, but it has me hooked.

AW
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Having only read the interview and starting the ebook.

He presents the idea of a "financial lock box" one box for each year of retirement. At the beginning of each year that year's box is opened and money spent.

The lock box idea seems a lot like the two-bucket approach, where instead of one 4 to 5 year sized bucket, multiple one-year buckets are used. I would expect as most people don't have sufficient funds at retirement to fund each year's spending, so boxes further in the future would contain investments with higher risk than near term boxes.
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JonathanRoth writes,


He presents the idea of a "financial lock box" one box for each year of retirement. At the beginning of each year that year's box is opened and money spent.

</snip>


Yeah. I guess that's a technique to make it explainable to the masses. But money is fungible -- it doesn't know from your "lock boxes". What matters is the total amount and how it's allocated.

Kitces recommends that retirees hold enough money in a "bond tent" [another form of "lock box"] to get them through the first 10 or 15 years of retirement, then increase your stock allocation after that. But the standard 60% stock/40% bond portfolio already gives the retiree a 10 year "bond tent", so what's the difference?

https://www.investmentnews.com/article/20190516/FREE/1905199...

intercst
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But the standard 60% stock/40% bond portfolio already gives the retiree a 10 year "bond tent", so what's the difference?

I don't know all the details of what Kitces is selling but might the difference be the standard 60/40 implies/requires rebalancing while the "Bond Tent" is just front money that you spend till it's gone then just keep spending the leftovers?
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Pfft. It's silly. Every year is the first year of the rest of your life.

People talk about a bucket for the first 5 years or whatever. So....when 5 years have passed, what then? How is the 5th year any different than the 1st year?
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How is the 5th year any different than the 1st year?

Well, you are 4 years closer to death.
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Kitces recommends that retirees hold enough money in a "bond tent" [another form of "lock box"] to get them through the first 10 or 15 years of retirement, then increase your stock allocation after that. But the standard 60% stock/40% bond portfolio already gives the retiree a 10 year "bond tent", so what's the difference?

https://www.investmentnews.com/article/20190516/FREE/1905199...




In the last two or so years, I've gotten more actionable ideas from Kitces than from any other source. By actionable, I mean:
-Things I can do something about
-That have some benefit to me (especially future me)
-Things I didn't know how to accomplish another way (or hadn't considered at all)
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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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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,

That's a good point, which maybe bears amplifying: The 1% fee shouldn't be compared to the 10% you imagine you're going to get long term in stocks, or the 6% you might really be getting on your stock/bond portfolio. It's a giant haircut off the 4% we believe we can safely take from that portfolio.

HOWEVER, it might be that some advisor could manage a portfolio skillfully enough during the withdrawal phase that the lack of volatility allowed a higher withdrawal rate. Could it increase it more than 25% to justify taking 1% out of the 4%? That's hard to imagine. I also don't think someone could assure that, unless he put you in an annuity which has its own downsides.
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But the standard 60% stock/40% bond portfolio already gives the retiree a 10 year "bond tent", so what's the difference?

Perhaps they're all at the core the same. Maintain cash on hand or low risk for several years of living expenses, invest the rest.
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How is the 5th year any different than the 1st year?

Well, you are 4 years closer to death.


On the bright side, you're one less day (or 4 x 365) from dying young.

https://www.youtube.com/watch?v=gaSoq9FELF8

JLC
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