Efficient Retirement Financial Strategies

30 Pages Posted: 13 Aug 2007

See all articles by William F. Sharpe

William F. Sharpe

Stanford University - Graduate School of Business

Jason S. Scott

Financial Engines, Inc.

John G. Watson

Financial Engines, Inc.; Stanford Graduate School of Business

Date Written: July 2007

Abstract

Today's retirees face the daunting task of determining appropriate investment and spending strategies for their accumulated savings. Financial economists have addressed their problem using an expected utility framework. In contrast, many financial advisors rely instead on rules of thumb. We show that some of the popular rules are inconsistent with expected utility maximization, since they subject retirees to avoidable, non-market risk. We also highlight the importance of earmarking - the existence of a one-to-one correspondence between investments and future spending - and show that a natural way to implement earmarking is to create a lockbox strategy.

Keywords: Retirement, Drawdown, Planning, Lockbox

JEL Classification: D1, D9, E21, G11, G23, H31, J26

Suggested Citation

Sharpe, William F. and Scott, Jason S. and Watson, John G., Efficient Retirement Financial Strategies (July 2007). Pension Research Council Working Paper Series. Available at SSRN: https://ssrn.com/abstract=1005652 or http://dx.doi.org/10.2139/ssrn.1005652

William F. Sharpe

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-4876 (Phone)
650-725-7979 (Fax)

HOME PAGE: http://www.wsharpe.com

Jason S. Scott (Contact Author)

Financial Engines, Inc. ( email )

1050 Enterprise Way, 3rd Floor
Sunnyvale, CA 94089
United States

John G. Watson

Financial Engines, Inc. ( email )

1050 Enterprise Way
Sunnyvale, CA 94089
United States

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States

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