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From Chapter 5 in Bill Sharpe's RISMAT:

Utility:

"...retirees are in fact human and need to be intimately involved in the choice of a retirement income

strategy..."

 

"The idea is that 'utility' is some measure of 'happiness' ...."

 

"The goal is to pick from feasible alternative scenarios the 'best' one that has the greatest expected utility."
 

ARC Comment:

 

We label the two main income strategies the "Probability Approach" and "Prevention Approach."

The Probability Approach, which offers higher possible returns and flexibility but has the risk of failure,

uses systematic withdrawals form a portfolio of risk assets.  A Target Date Fund is an example of a portfolio of risk assets,

and the 4% rule is another name for systematic withdrawal. 

The Prevention Approach, which trades liquidity and inheritances for lifetime guarantees (for either one or two lives),

includes consideration of guaranteed lifetime income annuities.

 

Retirees could consider mixing the two.

They may want to allocate assets to both, with specific roles for each matched to

their customized view of how important their various expense items are to them.

 

Economists call this "asset/liability matching" or liability-driven investing (or "LDI").This recognizes

the economic idea that not all expense items have the same level of urgency or need, matching the

different levels of risks to different types of expenses with different types of investments).

Our Case Study chapter is an example of how one couple used this concept.

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