Sharpe/Stanford retirement advice

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Wannaretireearly
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Sharpe/Stanford retirement advice

Post by Wannaretireearly » Sat Nov 16, 2019 3:02 pm

https://web.stanford.edu/~wfsharpe/

Let me know if there are other threads on this.

Found this link thru Barrons this week.
Thoughts? I cannot understand the guidance in layman's terms.

Seems to say instead of implementing a glide path, have a 'lockbox' for each retirement year/period?

What does this really mean?
I have not delved deep into Sharpes link above.

Just looking for the cliff notes ;)

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JAZZISCOOL
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Re: Sharpe/Stanford retirement advice

Post by JAZZISCOOL » Sat Nov 16, 2019 5:50 pm

Although I didn't read Sharpe's e-book, I did review a layperson's view of it. It seems to be a version of the "bucketing" approach that I sometimes see mentioned on BH.

The allocations in each year of the standard 20-year retirement (@ age 65) are a mix of TIPS and the market portfolio (probably something like a 50/50 stock/bond low cost version); e.g. ~64% of your assets would be assigned to this 20-year period in "lockboxes" that you would open each year. Then, if you are still alive at age 85, for example, you would use the balance of your assets to buy an income annuity for longevity risk. Various assumptions are made about inflation, growth, vol, mortality, etc. and the model uses Monte Carlo simulations.

I'm sure it is much more complex than this given Sharpe is a Nobel prize winner and professor but that is a quick summary of an article I read about it.

Interesting to think about vs. 3.5%-4% or variable withdrawal rates.

Some retirement podcasts I've listened to discuss the low take-rate of annuities in general due, in part, to the psychological aspect of parting with a huge chuck of money to turn into a stream of future cash flows. I do see how this can be a hurdle, IMO.

It would be interesting to hear other opinions re: this model. The VPW makes a lot of intuitive sense to me but it's good to hear about and research new ideas.
Last edited by JAZZISCOOL on Sat Nov 16, 2019 9:18 pm, edited 1 time in total.

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Wannaretireearly
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Re: Sharpe/Stanford retirement advice

Post by Wannaretireearly » Sat Nov 16, 2019 6:04 pm

Thanks Jazz!
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JAZZISCOOL
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Re: Sharpe/Stanford retirement advice

Post by JAZZISCOOL » Sat Nov 16, 2019 7:35 pm

On a related topic, I found this interesting BH thread on bucket strategies from earlier this year, FYI. It mentions one academic study that shows bucket strategies having a higher failure rate vs. a more standard 60/40 portfolio with rebalancing. :happy

"Bucket strategy fails according to study"

viewtopic.php?t=273208#p4386625

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WoodSpinner
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Re: Sharpe/Stanford retirement advice

Post by WoodSpinner » Sat Nov 16, 2019 7:39 pm

JAZZISCOOL wrote:
Sat Nov 16, 2019 7:35 pm
On a related topic, I found this interesting BH thread on bucket strategies from earlier this year, FYI. It mentions one academic study that shows bucket strategies having a high failure rate vs. a more standard 60/40 portfolio with rebalancing. :happy

Bucket strategy fails according to study

viewtopic.php?t=273208#p4386625
Part of the problem is that there is NO ONE bucket strategy. Lot’s of variations out there that are being used effectively. The referenced study was pretty worthless IMHO.

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Re: Sharpe/Stanford retirement advice

Post by SJIRon » Sat Nov 16, 2019 7:44 pm

If you search BH for "lockbox" you will find some previous discussions.

My wife and I retired this year (ages 58/57) with an implementation of this strategy we're comfortable with. So far, so good :wink:

Our implementation.
1) Determine strategy for claiming social security benefits.
2) Buy TIPS ladder that, combined with SS, will cover essentials for 30 year retirement. In IRA.
3) Add risk assets to each lockbox by scheduling withdrawl percentages from total world (VT) holding. RMDs, extended to younger ages, works well.
4) Have another investment bucket in case you outlive the lockboxes. We're putting that 100% into VT also, since it won't be touched for 30 years, using a Roth IRA. That fund can be used to purchase an annuity or another TIPS ladder to cover old age.

The advantages of this approach are that it eliminates sequence of returns risk and, once setup, it's dead simple to execute each year.

Disadvantages are that you'll likely give up investment upside due to having a high percentage in TIPS instead of stocks. And your annual income will fluctuate based on stock market performance.

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Re: Sharpe/Stanford retirement advice

Post by JAZZISCOOL » Sat Nov 16, 2019 8:07 pm

SJIRon wrote:
Sat Nov 16, 2019 7:44 pm
If you search BH for "lockbox" you will find some previous discussions.

My wife and I retired this year (ages 58/57) with an implementation of this strategy we're comfortable with. So far, so good :wink:

Our implementation.
1) Determine strategy for claiming social security benefits.
2) Buy TIPS ladder that, combined with SS, will cover essentials for 30 year retirement. In IRA.
3) Add risk assets to each lockbox by scheduling withdrawl percentages from total world (VT) holding. RMDs, extended to younger ages, works well.
4) Have another investment bucket in case you outlive the lockboxes. We're putting that 100% into VT also, since it won't be touched for 30 years, using a Roth IRA. That fund can be used to purchase an annuity or another TIPS ladder to cover old age.

The advantages of this approach are that it eliminates sequence of returns risk and, once setup, it's dead simple to execute each year.

Disadvantages are that you'll likely give up investment upside due to having a high percentage in TIPS instead of stocks. And your annual income will fluctuate based on stock market performance.
Interesting, thanks. I will have to read some other threads on this.

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Re: Sharpe/Stanford retirement advice

Post by SJIRon » Sat Nov 16, 2019 8:37 pm

BTW, there is another Stanford publication that defines an optimum strategy for combining social security with a risky portfolio. It's discussed here.
viewtopic.php?t=239258

The two approaches, however, are actually very similar. The strategy in the above study would be lockboxes that contained only risky assets, no TIPS.

The SS/TIPS/risky asset mix one chooses for each lockbox will be a matter of individual preference. That's much like SWR and portfolio stock/bond mix are a matter of preference in other retirement spending methods.

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Re: Sharpe/Stanford retirement advice

Post by JAZZISCOOL » Sat Nov 16, 2019 9:02 pm

SJIRon wrote:
Sat Nov 16, 2019 8:37 pm
BTW, there is another Stanford publication that defines an optimum strategy for combining social security with a risky portfolio. It's discussed here.
viewtopic.php?t=239258

The two approaches, however, are actually very similar. The strategy in the above study would be lockboxes that contained only risky assets, no TIPS.

The SS/TIPS/risky asset mix one chooses for each lockbox will be a matter of individual preference. That's much like SWR and portfolio stock/bond mix are a matter of preference in other retirement spending methods.
Thanks! This looks like an interesting thread - bookmarked it.

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Re: Sharpe/Stanford retirement advice

Post by livesoft » Mon Nov 18, 2019 9:05 am

Whenever I see something like this I am reminded of what TIAA-CREF has been doing for over 60 years for educators with their 403(b) plans. Yet, TIAA-CREF never comes up in these articles.
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Re: Sharpe/Stanford retirement advice

Post by Horton » Mon Nov 18, 2019 10:51 am

It’s only a “tough, tough problem” if you are trying to maximize. If you are content with “good enough”, then the problem gets much simpler. You’ll probably be fine if you (a) delay Social Security and (b) use an annuity, RMDs, a liability matching portfolio, or VPW.

The “bad news” is that some may have to work longer and/or spend less. No pain, no gain.
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Re: Sharpe/Stanford retirement advice

Post by jaj2276 » Tue Nov 19, 2019 8:16 pm

I read the Baron's article and read (or attempted to) the eBook. With the current investment options available to individuals, I imagine it's a bit too difficult and/or cumbersome to do this on your own. However it might be a product that certain investors might buy with their retirement portfolio.

Discussing the lockbox a bit more, from the eBook (chapter 15), an N-year lockbox will contain some or all of 3-types of investments:

Zero-coupon TIPS maturing in N years.
World Bond/Stock Mutual Fund to be sold in N years.
M-shares to be sold in N years.

The M-shares are a theoretical investment but can be thought of simply as buying the market, selling an option to someone who can call your market shares at a higher price, and purchasing an option to be able to sell the market for some lower price. You will effectively know the min and max values of this portion of the lockbox.

The problem I see from an individual perspective beyond whether products exist (i.e. there won't be TIPS maturing in some years, m-shares are theoretical) is simply the frictional costs (both monetary and time) of creating and managing X lockboxes. Assume you want 20 lockboxes, having to buy 20 different zero coupon TIPS bonds with differing maturities, buying the correct amount of the world bond/stock mutual fund to allocate to the 20 different lockboxes, etc., would be near impossible for most individuals.

Anyways, I appreciate Mr. Sharpe providing the book for free and adding to the discussion on how best to handle a retirement portfolio once retired.

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