Episode Summary
Executive Summary: Christine Benz interviews statistician Stefan Sharkansky about his retirement-spending framework, The Best Third. He argues fixed withdrawal rules like the 4% rule often cause retirees to underspend and leave too much wealth behind. His preferred solution combines a TIPS ladder for secure inflation-protected income with a 100% equity “risky bucket” whose withdrawals vary by market performance, using historical data rather than Monte Carlo models.
Main Topics: Why Sharkansky entered retirement research (Priority: 5/5): His interest in investing led to retirement-spending research after his wife asked how much they could safely spend in retirement, prompting him to study the spending phase rather than just accumulation. Critique of fixed withdrawal rules (Priority: 5/5): He argues the 4% rule and similar fixed-rate systems are too rigid, create mismatch with real spending patterns, and can leave retirees with far more wealth than needed, reducing retirement quality and lifetime giving opportunities. ARVA and TIPS ladder framework (Priority: 5/5): He explains ARVA as a retirement-income approach combining a TIPS ladder for secure real income and a stock portfolio with amortized withdrawals, designed to prevent running out of money while preserving inflation protection. TIPS versus annuities (Priority: 4/5): Sharkansky compares TIPS ladders with lifetime annuities, noting annuities provide mortality credits and longevity guarantees but usually lack inflation protection, making TIPS preferable for many retirees. Why individual TIPS bonds are preferred (Priority: 4/5): He favors holding individual TIPS to maturity over TIPS funds or ETFs because maturity creates more certain cash flows and avoids interest-rate volatility in bond funds. 100% equity risky bucket and sequence risk (Priority: 5/5): For the residual portfolio, he favors 100% stocks over balanced mixes because his analysis found no downside advantage to adding bonds, while stocks provide more upside; withdrawals adjust with market outcomes, helping manage sequence risk. Historical returns versus Monte Carlo (Priority: 5/5): He prefers historical analysis to Monte Carlo simulations, arguing common statistical assumptions do not match market behavior well and miss features like long-term mean reversion and actual downside patterns.
Key Arguments: Fixed withdrawal rules like the 4% rule often produce large leftover balances, meaning retirees could have spent more in retirement or given more away while alive. A TIPS ladder can provide a stable, inflation-adjusted base of spending that is more reliable than annuities because annuities usually lose purchasing power over time. Using individual TIPS bonds held to maturity gives much more certainty than TIPS funds, which fluctuate with interest rates and do not lock in spending power. The equity sleeve should be 100% stocks rather than a stock-bond mix because adding bonds to the risky bucket reduced upside without improving downside protection in his analysis. Annual stock withdrawals can be calculated with an amortization formula so retirees never run out of money; the dollar amount varies with market performance, but the withdrawal percentage is predetermined. Historical market data are more useful than Monte Carlo because standard simulation assumptions, such as IID bivariate normal returns, do not reflect real market dynamics or mean reversion. TIPS yield is locked in when purchased, so current high real yields make laddering particularly attractive today, even though future retirees may face different opportunities. The framework can incorporate bequest motives by reserving assets in the stock portfolio or laddering additional TIPS for a guaranteed legacy amount.
Data Points: 4% rule outcome: Half as much wealth as started with, inflation-adjusted - Sharkansky says that in a median market scenario, following the 4% rule leaves a 30-year retiree with about 50% of original wealth remaining. Long-term TIPS real yield: About 2.8% - He says current long-term TIPS real yields are historically high and favorable for building a TIPS ladder. Retirement horizon used in paper: 30 years - He discusses a 30-year retirement plan when evaluating withdrawal outcomes. Historical data set span: 150 years - He uses roughly 150 years of U.S. historical returns to judge plausible future outcomes. Jeopardy appearance: 1994 - He mentions appearing on Jeopardy in 1994. Education: BA, MS, and PhD in quantitative fields - He lists a BA in mathematics, an MS in computer science, and an MS/PhD in statistics. Social Security timing reference: 59.5 - He discusses early retirees who cannot yet tap retirement accounts before age 59½. Bequest planning: Legacy reserve can be added - The Best Third platform allows users to specify a legacy reserve or end-of-life reserve.
Pivotal Quotes: "the best third of your life" — Stefan Sharkansky: He explains the meaning of his website name as the retirement phase of life. "you are not spending as much as you could, and you are leaving so much on the table for your heirs" — Stefan Sharkansky: He describes the downside of fixed-rate withdrawal systems and the underspending problem. "give with a warm hand" — Stefan Sharkansky: He advocates giving to family and charity during life rather than only at death.
Implications: The interview suggests retirees may benefit from spending more deliberately, using inflation-protected income floors and flexible stock withdrawals rather than rigid rules. It also highlights growing interest in TIPS ladders, tax-aware asset location, and tools that optimize decumulation, not just accumulation.
About The Long View
Expand your investing horizons and look to the long term. Join hosts Christine Benz, Dan Lefkovitz, and Amy C. Arnott as they talk to influential leaders in investing, advice, and personal finance about a wide-range of topics, such as asset allocation and balancing risk and return.