Episode summary
Stefan Sharkansky: The Retirement Spending Plan That Adapts as Markets Change
The Long View
· · 40 min · Hosts: Ben Johnson, Christine Benz, Amy Arnott · Guests: Stefan Sharkansky
Summary
Stefan Sharkansky argues that the classic 4% withdrawal framework can leave retirees spending too little, because a fixed real withdrawal rate often produces large leftover balances even in ordinary market outcomes. He says his work is meant to help people convert accumulated wealth into a retirement spending plan that balances secure income with flexibility, rather than treating retirement as a one-size-fits-all drawdown problem.
His preferred structure, inspired by ARVA, combines a ladder of individual TIPS for a secure base of inflation-protected income with a stock portfolio for the rest of the spending plan. Sharkansky favors individual TIPS held to maturity over TIPS funds, because the ladder lets retirees know more precisely what income they will receive over time. He also argues that a 100% stock allocation for the risky sleeve is not necessarily more dangerous than a blended stock-bond mix, since the bond exposure already sits inside the TIPS ladder.
He bases the spending formula on historical market returns rather than Monte Carlo simulations, saying market behavior is too poorly modeled by standard assumptions and that history better captures mean reversion and other real-world patterns. He also says the framework can be adapted for bequests, early retirees, and tax-aware asset location, while still allowing retirees to spend more in strong markets and less in weak ones.
Key takeaways
- Stefan Sharkansky says the 4% rule often causes underspending, with retirees potentially ending 30 years with much more wealth than they started with, adjusted for inflation.
- He prefers a ladder of individual TIPS for the secure-income sleeve because holding bonds to maturity gives more certainty than TIPS ETFs or mutual funds.
- Sharkansky argues that the risky sleeve can be 100% stocks because the bond allocation already exists in the TIPS ladder, and adding bonds there does not improve the tradeoff.
- He uses historical returns instead of Monte Carlo simulations, saying standard IID normal assumptions miss mean reversion and exaggerate downside risk for stocks relative to history.
- The framework can incorporate a bequest motive, with a legacy reserve or end-of-life reserve drawn from the stock portion or added to the TIPS ladder.
Notable quotes
“in a median market scenario, if you follow the 4% rule, you would end up your 30-year retirement plan with half again as much wealth as you started with adjusted for inflation”
“there's no benefit and a cost to including bonds in that portion of the portfolio”
“I agree with your guest point and just to clarify the yield on your TIPS ladder is ephemeral but it is locked in at the outset”
How the episode opens
Please stay tuned for important disclosure information at the conclusion of this episode. Hi and welcome to The Long View.
I'm Christine Benz, director of personal finance and retirement planning for Morningstar. Our guest on the podcast today is Stefan Sharkansky. Stefan is a PhD statistician who specializes in finance.
He wrote a provocatively titled paper, The Only Other Spending Rule Article You Will Ever Need, which was published in the Financial Analysts Journal. Stefan has also developed a related website called The Best Third, designed to help people with their retirement spending plans and portfolio structures. In addition, he developed and operates the website personalfund.com, which provides proprietary cost analysis of mutual funds to financial advisors.
Stefan has a BA in mathematics from the University of Wisconsin-Madison, an MS in computer science from Stanford University, and an MS and a PhD in statistics from the University of Washington. Stefan, welcome to The Long View.
Thank you very much. I'm delighted to be here. — Well, we're delighted to have you here and we do want to delve into your work on retirement planning, but before we do that, I wanted to spend a little bit of time talking about your background. So, you have your doctorate in statistics. What got you interested in investing and especially retirement planning?
Well, I've been interested in investing for a long time and my doctorate in statistics is with a focus on financial econometrics. So, I have the domain knowledge about finance and investing and the retirement planning specifically came from a very personal experience. A few years ago, my wife asked me how much could we spend in retirement and I said, well, gosh, I have no idea, but let me research that and that got me into this rabbit hole figuring out what is the best methodology for retirement planning and that is planning for the actual spending part of the retirement as opposed to the pre-retirement planning.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- 4% rule underspending
- retirement spending rules
- tips vs tip funds
- ladder vs annuities
- global diversification
Companies and tickers mentioned
- VTI
- VXUS
- BND
- AGG
- VIG
- VOO
- SPY
- SCHB
- VGT
- VB
- IJH
- ITOT
- IWM
- QQQ
- MORN
- Vanguard
- Morningstar
- The Best Third
- PersonalFund.com
- Financial Analyst Journal
- CFA Institute
Watch the episode
Watch “Stefan Sharkansky: The Retirement Spending Plan That Adapts as Markets Change” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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The Long View, this episode and its artwork belong to Morningstar, Christine Benz - Director of Personal Finance and Retirement Planning, Ben Johnson - Head of Client Solutions, Amy Arnott - Portfolio Strategist. Octagon is not affiliated with the show; this page is an independent summary.
