Maximizing Personal Surplus: Liability-Driven Investment for Individuals

19 Pages Posted: 30 Oct 2010

Date Written: October 28, 2010


To date, the financial literature has focused on very simple algorithms designed to improve the solution to the two-part challenge of determining the optimal portfolio asset allocation strategy and determining the maximum sustainable withdrawal rate for retirees. Most research, for example the well-known "Trinity Study" of Cooley, Hubbard, and Walz, pursues the asset-allocation problem by maximizing long-run asset growth subject to a withdrawal rule and a given acceptable probability of remorse (a.k.a. shortfall). However, the Liability-Driven Investing (LDI) thought process improves the approach by seeking instead to maximize return for a given level of volatility of the portfolio surplus, rather than optimizing on the basis of the volatility the assets themselves; by more closely matching assets and liabilities, the sensitivity of the strategy to unexpected returns, risks, and correlations is greatly decreased. I update the Trinity Study to incorporate inflation-indexed bonds and then illustrate how the LDI thought process may be applied to individual investors.

Keywords: Trinity study, retirement, retirement investing, TIPS, LDI

Suggested Citation

Ashton, Michael, Maximizing Personal Surplus: Liability-Driven Investment for Individuals (October 28, 2010). Available at SSRN: or

Michael Ashton (Contact Author)

Enduring Investments LLC ( email )

United States


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