Bill sharpe seeks a better retirement income solution thinkadvisor electricity distribution companies

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In the 1960s, Sharpe rocked the world of finance by bringing order and logic to a business that continues to be driven by emotion and stories. After being invited to sit on a local charitable foundation board, Sharpe listened to a pitch by an investment manager describing the various complex investment strategies the (unfortunate) manager employed in creating the portfolio.

As we sit in front of Sharpe’s computer, he shows me a new program he’s been working on to simulate 7 cases movie variable-annuity income streams. Using a random return generator and programming based on the annuity contract features, he simulates what happens to income when market returns rise and fall during retirement. The computer program spits out a series of squiggly lines that represent possible income paths.

The lines are all over the place. Some spike early in retirement and result in a high income that decreases gradually over time with inflation. Some fall flat early in retirement, presumably leaving the simulated retirees with a disappointing lifestyle with fewer vacations and fancy dinners. Each line is a hand that the retiree is dealt when they accept investment risk within the rules of a financial product.

To Sharpe, the role of a financial advisor is to understand the range electricity office near me of options all clients face in order to build an income that efficiently balances risk and return. The advisor needs to understand these tradeoffs, and he or she needs to be able to explain them to a client. He’s even written a book that’s available on his Stanford website to help advisors “focus more on communicating possible outcomes and helping the clients understand the options.” (To read “Retirement Income Analysis with Scenario Matrices,” go to http://web.stanford.edu/~wfsharpe.)

Sharpe’s critique of the 4% rule is that the methodology is supposed to safely provide a straight line of after-inflation income using a portfolio of random returns over an unknown lifetime. But when you don’t know what asset returns will look like and how long you’ll live, a retiree has two lifestyle choices: (1) live well and risk running out of money, or (2) be conservative and risk giving too much to your heirs.

Running hundreds of simulated retirements with tgas advisors company profile random longevity and asset returns allows Sharpe to calculate the present value of where the money goes. Using a 3% withdrawal rule means that more than 30% of the initial portfolio doesn’t get spent. A 30% portfolio efficiency loss means that a retiree will need to save significantly more money to create a lifestyle. Even a 4% strategy leaves one-sixth of the nest egg unspent.

Why not increase spending to 5%? Raising gas 0095 the income line from 4% to 5% of initial wealth means that a significantly larger percentage of simulations will lead to the client running out of money before they die. Unlike the variable-annuity simulation in which the worst-case scenario is a low lifetime income and real purchasing power that decreases with inflation, an unlucky retiree using a fixed withdrawal rate will see their income line starting high, remaining flat in real terms and ending in complete ruin.

The tradeoff that an advisor needs to help a client understand when deciding on a fixed withdrawal strategy is between running out of money too early and leaving too locate a gas station near me much on that table. The sudden loss of lifestyle if markets don’t cooperate will lead many to choose a lower withdrawal rate, but the consequence is a loss of efficiency. Fees and Flexibility

Sharpe doesn’t shy away from the controversial topic of investment management fees. A DIY investor who pays only 10 basis points on index funds will pay the present value equivalent of just 1.3% of their nest egg in fees. At a still modest 100 basis points of total investment expenses, the present value share of a retiree’s nest egg consumed by fees is a whopping 11.3%.

The good news for the investments-only retirement income approach is that being more flexible about adjusting lifestyle over time in response to market risk can significantly improve efficiency. This makes far more sense than creating a strategy at the beginning of retirement gas after eating meat with a 90% probability of success, and then failing to adjust lifestyle downward when the probability of success falls after a bear market.

The math gets even more compelling when Sue wants to fund spending in 30 years. Instead of setting aside $7,000 today, she can pool $2,400 with other retirees who collectively have a 34% chance of being alive. It’s a lot cheaper to fund the same income by pooling savings with other retirees and doling it out to whoever is still around in old age.

Despite their theoretical efficiency, Sharpe doesn’t let income annuities off the hook as an ideal source of safe electricity word search answer key retirement income. While they protect against longevity risk, annuities that provide a fixed nominal income are particularly susceptible to erosion in purchasing power late in retirement. The risk of annuities that are not inflation-protected is the drop in real spending from living too long and/or experiencing an inflationary period such as the late 1970s.

Sharpe notes that annuities that provide inflation protection are rare (outside of Social Security), and retirees may balk at the reduction in initial lifestyle required when an annuity pays a rising nominal gas x user reviews income. Another caveat is that this decline in purchasing power may not be such a big deal if, as consumer spending data suggest, retiree spending needs decline in retirement.

This the promise of the variable annuity with a somewhat unusual structure that provides a unique range of income paths in retirement. But how efficient is a variable annuity with a guaranteed lifetime withdrawal benefit rider? Sharpe uses a variable product available through Vanguard in his simulations, but the general results translate to other similar products.

For example, a VA policy with a GLWB rider will have fees roughly equal to the total present value of fees on a managed investment portfolio chapter 7 electricity note taking worksheet (about 11%) if a couple buys the product at age 79. However, if the same couple bought the product at 65, the youngest age of the 4.5% rate guarantee, the net present value of the rider fees would be negative 3%.

In the worst scenario, markets fall early in retirement, and the couple simply lives on the $4,500 per year. In another scenario, income rises from $4,500 to $5,000 at year 8 and remains at this amount. In yet another scenario, markets rise slightly early in retirement, providing a ratchet up to about $6,000 in year 3 and never rises again. In one lucky scenario, the couple experiences a bull market early in retirement, and the income rises to $13,000 per year after 14 years.

Of course, the 4.5% income guarantee is not like the 4% rule, since it does not provide a stable after-inflation income throughout retirement. As an example, one simulated retiree got somewhat lucky as their income grew to just over $5,000 by year 5, but they also lived long enough to see the real value of their gas hydrates india after-inflation income fall below $3,000. GLWB riders provide some random upside to lucky retirees and guaranteed income for life, but they don’t take away purchasing power risk for a long-lived retiree.

On average, the present value of fees on GLWB VAs is only 3.3% of the initial value invested. And only 5.5% goes unspent to the couple’s estate, meaning that more of the initial nest egg ends up being spent. Unfortunately, the downside of the product structure is that the range of income paths might not provide the highest expected welfare to the couple who aren’t willing to accept the wide range of lifestyles offered by the GLWB. Maximizing Retirement Efficiency

One approach is to place the majority of retirement savings in an income floor. The floor should optimally be constructed by purchasing emitra electricity bill payment an inflation-protected annuity (a rare beast) or through a ladder of Treasury inflation-protected securities, known as TIPS, in which a portion of value at maturity can be spent and the remainder can be used to purchase a ladder of annuitized nominal income. For example, a retiree can invest in 20-year TIPS that will grow by 1% above inflation at today’s rates that at maturity are used to purchase an annuity whose value will not have been eroded by inflation over time.

The remainder could be invested in a leveraged equity ETF electricity formulas physics. If the leveraged equity portfolio rises beyond the initial allocation to risky assets (say 15%), then the surplus can be used to add income to the riskless floor. If the leveraged strategy fails, the retiree will simply live on the income floor. An unleveraged portfolio would allocate a higher percentage to equities but follow the same approach of gradually building the guaranteed income floor over time.