William Sharpe questions 4% WR...

[Gone4Good]

He references funding a 4.46% withdrawal by buying an annual series of TIPS strips, such that one matures each year for 30 years. It requires a 2% real yield on the TIPS, which is not available now but has been for much of the time since TIPS have been issued, and even most of the time during which TIPS have been debated on this board. It also requires a more liquid market for TIPS strips, which IMO would come rapidly if this idea were widely publicized. Many individuals might not be able to understand it, but advisors should be able to.

I think it could be done without strips. You know the coupons from day one so it shouldn't be much trouble to back into a maturity schedule that gives you the annual cash flow you need using both income and principal. Early year cash flow would be dominated by interest from a 30 year portfolio and later years would be dominated by maturities.

Longevity risk is a concern. But even that could be mostly overcome by allocating sufficient excess capital to the 25-30 year maturity tranches (for purposes of creating a new ladder at that time). This exposes the retiree to reinvestment risk for retirement plans longer than 30 years but that can be smoothed over almost as many years as you want.

Other risks include taxation of inflation compensation, inflation tracking error, and probably a lagging standard of living during retirement (which is also the case with a strict adherence to FIRECalc methodology too).

I can certainly see moving to something similar over time for at least part of the portfolio. And I can see doing it under two separate scenarios. 1) As I age and my investment time horizon becomes more certain. 2) If my portfolio outperforms visa vie my withdrawal expectations, lock in that outperformance by moving excess capital into long-dated TIPS.

 

[Independent]

My interpretation is that we are making this too hard and life is to be lived in ER, not fretted over. None of us will live forever and most of us can alter our paths if things get hairy and the 4% constant doesn't look sustainable.

Personally, I get the feeling that Prof. Sharpe is getting set to start collecting fees for promoting annuities, but I am a suspicious bastard.

If I'm reading the paper correctly, Sharpe doesn't address the risk generated by an uncertain date of death. Since the purpose of annuities is to insure that risk, I doubt that this paper is setting up some future annuity promotion.

 

[Nords]

If I'm reading the paper correctly, Sharpe doesn't address the risk generated by an uncertain date of death. Since the purpose of annuities is to insure that risk, I doubt that this paper is setting up some future annuity promotion.

The paper's actually been out for a couple years-- I remember that Bob Dylan concert analogy.

Like Brewer, I suspect Sharpe is talking his book. The whole FinancialEngines premise is based on a retirement annuity. The company went public last month and now has to think [-]short-term[/-] about its investors.

I've been a FE user for over a decade, and for the first couple years I had full run of the program. About 5-6 years ago they throttled back access to still allow parameters to be tweaked and forecasts to be obtained, but you had to pay to actually study asset allocations and compare funds. Now, however, you can't do anything in the program-- even changing your e-mail address or deleting your account-- without first coughing up $39.

So I find it very easy to believe that Sharpe is dusting off the old paperwork to find a way to monetize it...

 

[FIRE'd@51]

We actually discussed Sharpe's idea in some detail about a year ago in this thread

 

[Hamlet]

I just don't really see the possibility of leaving too much money behind as a problem. People can leave the money to their children or to the charities of their choice.

Since a lot of people plan to do that with a substantial portion of their money anyhow, I don't see this as a big problem needing academic study.

 

[haha]

I just don't really see the possibility of leaving too much money behind as a problem.

Leaving money per se is not the problem. The problem is having no way to create safety other than to underspend what one might otherwise be able to spend during life.

Ha

 

[youbet]

None of us will live forever

Uh Oooooh....... If that's the case, I need to make some changes to my spreadsheet!

 

[youbet]

Leaving money per se is not the problem. The problem is having no way to create safety other than to underspend what one might otherwise be able to spend during life.

Ha

Exactly Ha......

Even if you wait until some period of favorable market performance to increase spending, you may be spending money that would be needed to get you through an upcoming Great Depression II.

Not knowing what market performance will be tomorrow or how long I'll live makes this whole issue of FIRE planning one huge pita. I hate this uncertainty business.

Think I'll go down to the pub and watch the Blackhawks playoff game with the boys tonight. That'll keep my mind off this unpredictable future crap!

 

[BunsGettingFirm]

Of all the things I worry about, dieing with too much money ranks somewhere right above being too healthy and having too much fun.

LOL, I think you might want to rephrase that because God or Allah could grant your wish tomorrow.

As for the the original article, it's kind of worthless. So what spending rule does he advocate? Some endowment use the x% of average trailing 3 years of market value of portfolio. If he had said something to that effect, at least it would have been start. Otherwise, the article was a lot of words to say I don't know.

 

[RonBoyd]

because God or Allah could grant your wish tomorrow.

From the Department of Redundancy Department.

Turkish: Allah) is the standard Arabic word for God

 

[LARS]

Leaving money per se is not the problem. The problem is having no way to create safety other than to underspend what one might otherwise be able to spend during life.

Ha

My father decided that God screwed up on this very point: to wit, my father thought God should have designed the human brain so that a chip was planted at the base of the brain. The chip would be wired to your checking account and would allow you to go $5,000 into debt (my dad concluded this back when $5,000 was real money) and then kill you. That way you could have a little fun on the way out, but you would never find yourself out living your money!

 

[Gone4Good]

Well I agree with Sharpe that accumulating surpluses is wasteful. And I agree with Ha that we'd all enjoy a better standard of living if such surpluses could be avoided. But until someone derives a truly effective and reasonably low cost way of converting assets into an inflation adjusted annuity, I think I'll simply enjoy my surpluses knowing they provide me with restful nights while I'm alive and will ease the burdens of the less fortunate once I'm gone.

 

[youbet]

Think I'll go down to the pub and watch the Blackhawks playoff game with the boys tonight. That'll keep my mind off this unpredictable future crap!

OK.... In the hours since I posted the above, I've been to the pub, consumed several Guinness and the Blackhawks won their series with Nashville. More importantly, I'm still FIRE'd. Next I'll try getting through tomorrow without having my FIRE portfolio get too big or too small.....

Some of you folks are making this way too complicated.

 

[donheff]

OK.... In the hours since I posted the above, I've been to the pub, consumed several Guinness and the Blackhawks won their series with Nashville.

I'm looking forward to the Capitals against the Blackhawks - that way I can't lose.

 

[walkinwood]

First Index Investment Trust[/I] on December 31, 1975...

I think these articles, especially by people with his fame, serve a purpose. They prod the financial industry to create instruments that meet the need, and may even give the first creators the backup they need to sell the idea to management.

From wikipedia (Index fund - Wikipedia, the free encyclopedia)

John Bogle graduated from Princeton University in 1951, where his senior thesis was titled: "Mutual Funds can make no claims to superiority over the Market Averages." Bogle wrote that his inspiration for starting an index fund came from three sources, all of which confirmed his 1951 research: Paul Samuelson's 1974 paper, "Challenge to Judgment", Charles Ellis' 1975 study, "The Loser's Game," and Al Ehrbar's 1975 Fortune magazine article on indexing. Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in the United States as of 2009.

Bogle started the First Index Investment Trust on December 31, 1975...

 

[clifp]

The paper's actually been out for a couple years-- I remember that Bob Dylan concert analogy.

Like Brewer, I suspect Sharpe is talking his book. The whole FinancialEngines premise is based on a retirement annuity. The company went public last month and now has to think [-]short-term[/-] about its investors.
.

Thanks Nords, I remembered the paper when I got to the concert analogy, but I forget we already discussed us.

 

[kaudrey]

I'm looking forward to the Capitals against the Blackhawks - that way I can't lose.

I hope you are not jinxing the Caps! Here is one Caps fan who is VERY nervous about tonight's game.

 

[chinaco]

I think that paper points out some shortcomings in the 4% approach if your goal is to more safely maximize your spending throughout retirement (at a similar risk level... somewhat similar, or perhaps reduced a bit).

Of course, to make it work in an optimum way, a number of factors have to come together successfully. It is easy to make mistakes and just like any other planning/execution... and no one can predict the future.


IMO - SS should be the first consideration for this type of annuity application. Maximizing it (assuming one or a spouse anticipates a long life).


I am convinced that creating a base income (from dependable, nonvolatile income streams) is important. Especially as one ages. If interest rates become attractive when we are in our 60's and DW and/or I are healthy, I might consider an annuity to round out a base income (mainly as a hedge for longevity)... essentially investing in the pool. What I mean by base income is an income stream that will cover non-discretionary spending that would cover the bills and keep DW and I or the survivor out of poverty.

But... I must admit, I waffle back and forth on the idea. It is a complex decision with many variables.

 

[Independent]

I think that paper points out some shortcomings in the 4% approach if your goal is to more safely maximize your spending throughout retirement (at a similar risk level... somewhat similar, or perhaps reduced a bit).

Of course, to make it work in an optimum way, a number of factors have to come together successfully. It is easy to make mistakes and just like any other planning/execution... and no one can predict the future.


IMO - SS should be the first consideration for this type of annuity application. Maximizing it (assuming one or a spouse anticipates a long life).


I am convinced that creating a base income (from dependable, nonvolatile income streams) is important. Especially as one ages. If interest rates become attractive when we are in our 60's and DW and/or I are healthy, I might consider an annuity to round out a base income (mainly as a hedge for longevity)... essentially investing in the pool. What I mean by base income is an income stream that will cover non-discretionary spending that would cover the bills and keep DW and I or the survivor out of poverty.

But... I must admit, I waffle back and forth on the idea. It is a complex decision with many variables.

I really like the "base income first" strategy. In our case we can cover it by deferring SS. We have dedicated (very conservative) assets to fill the gap from retirement to SS start date.