Friday, October 31, 2014

Webinar on Sequence of Returns Risk, November 5, 2014

I will be hosting a webinar on Sequence of Returns Risk on November 5 for the Retirement Income Industry Association (RIIA). Although the primary audience is financial advisers, the content will be accessible to most do-it-yourselfers and I hope you will join me.

You do need to register in advance, which you can do by clicking here.

Please post any questions you might have in the comments section below.

I previously wrote a series of blog posts on this topic beginning with Clarifying Sequence of Returns Risk, but I hope you will join me for the webinar, too, where I will cover some new ground.

Hope to see you on November 5!


  1. In William Sharpe's interview cited by Wade Pfau,, he mentions SoR risk (calls it "path dependency"). The part I find confusing, and would like you to clarify, is his statement that "You can, in principle, get the same ex ante probability distribution of income 10 years hence with a strategy that doesn’t have any path-dependency risk, but it will cost you less." I would think a non-path-dependent strategy would cost more, not less. Can you explain this in your presentation?

  2. William Sharpe, Jason Scott and John Watson wrote a paper in 2008 entitled The 4% Rule - At What Price?, that I have referenced in several posts. Despite its humorous reference to Eric Clapton and Mick Jaggers, it's a bit of dense read.

    A major point of that paper is that SWR ("path-dependent") strategies are grossly cost-inefficient due to the cost of maintaining surpluses of capital to survive poor sequences of returns. Said differently, those large terminal portfolios remaining at the end of life in many SWR scenarios represent money that could have been spent to maintain a higher standard of living using a different strategy, such as life annuities or TIPS bond ladders.

    Annuity strategies also have the cost advantage of a mortality premium from a shared risk pool that neither the SWR strategy nor a TIPS ladder can provide.

    So, Sharpe believes (and he has absolutely convinced me) that the SWR, or "path-dependent" strategy, is the most expensive of the three.

    Thanks for writing, and I hope you enjoy the webinar tomorrow.

  3. (I tried using Google ID last time, and it came out saying Anonymous. I just figured out how to get my name on the comment; I don't like being an anonymous commenter)

    Thanks for the pointer to Sharpe's article. It certainly is dense, but explains his perspective very well. But I still disagree; you can't remove the risk at less cost.

    He assumes TIPS will have a real yield of 2%, where currently they are significantly lower. Using the yield curve as of today, $1 of real income for 30 years costs $29.87 (withdrawal rate of 3.35%). Current quotes for inflation-adjusted SPIAs currently run just under 3%. You can argue (and Wade certainly has) that 4% is not a safe withdrawal rate in today's environment; we'll know whether that is true in 20-30 years. But for now, SWR (with both SOR risk and longevity risk) costs $25, TIPS (with longevity risk) cost $30, and SPIA (neither risk) costs $33. As would be expected, it costs more to remove the risk.

    Sharpe argues that if SWR was cheaper than the risk-free approach, there would be an arbitrage opportunity. Perhaps that is further indication that 4% is not a safe rate today. And perhaps there are arbitrage opportunities there, but there isn't enough liquidity in leaps options for execution prices to closely match the Black-Scholes model.

    1. Bill, you raise interesting points. Sharpe assumes a long-term return of 2% for TIPS, because that has been about their long-term historical average, and I'm sure he assumes that today's rates will eventually revert to the mean. If we assume, instead, that rates will hover near zero for the next three decades, or if we lock them in by buying a 30-year ladder today, does his argument still hold?

      Maybe not. Though he might reply that of course it's a bad idea if you lock in historically low rates. But yours seems like a different argument. Bill argues that you can remove the risk with less cost when you assume the long-term average yield for TIPS and you seem to be arguing that you can't when you assume historically low yields. You could both be right.

      Perhaps a better question is, if we believe rates will be this low throughout retirement, why buy TIPS at all?

      I don't know the correct response to your argument, but Bill Sharpe is a Nobel Laureate and I am not going to presume to argue with him without a great deal of studying the topic, which, in all honesty, I probably won't do.

      But I think you should!

      Bill has a blog at Retirement Income Scenarios. Please post your question there and get back to us, if you don't mind. Trust me, finding out what Bill Sharpe thinks is far more valuable than finding out what I think Bill Sharpe thinks.

      Thanks for writing, Bill!

    2. Bill, one last thought. If you're going to assume that TIPS rates will remain low, then you should also believe Wade's argument that withdrawal rates will be 3%. The fair comparison would be a SWR cost of $33.33, not $25.