Floor and Upside Investing in Retirement with Real Instruments

17 Pages Posted: 25 Jan 2015

Date Written: January 23, 2015


I investigate optimal asset allocation, gradual SPIA purchase decisions, and consumption decisions in retirement using various combinations of stocks, nominal bonds, real bonds, nominal SPIAs, and real SPIAs. I use a utility function that is intended to be representative of a retired individual's need for an income floor and desire for upside potential. I find a small advantage for the addition of real bonds to a stocks/nominal bonds portfolio. I find real SPIAs offer a performance advantage over nominal SPIAs at all but advanced ages. Real SPIAs are also easier to use than nominal SPIAs. The addition of real bonds to a portfolio that includes SPIAs offers little advantage.

Keywords: single premium immediate annuity, SPIA, inflation indexed SPIA, inflation protected security, TIPS, gradual annuitization, asset allocation, consumption, stochastic dynamic programming

Suggested Citation

Irlam, Gordon, Floor and Upside Investing in Retirement with Real Instruments (January 23, 2015). Available at SSRN: https://ssrn.com/abstract=2554752 or http://dx.doi.org/10.2139/ssrn.2554752

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