Individuals Approaching Retirement Have Options (Literally) to Secure a Comfortable Retirement
Journal of Retirement, 2(4), 38-53.
Posted: 28 Jan 2015 Last revised: 5 May 2015
Date Written: January 20, 2015
This paper examines the critical final five year period leading up to retirement and analyzes whether traditional asset allocation strategies effectively and consistently assist individuals in reaching their retirement income goals as they approach retirement. These traditional strategies are evaluated against alternative, option based investment strategies that assure a certain amount of retirement income, after adjusting for inflation, while maximizing stock participation with the remaining funds in the portfolio through the use of options. In this simulation, we find higher overall expected yields in the traditional investment strategies over the evaluated five year period. However, after applying a constant relative risk aversion (CRRA) coefficient, the leveraged option based investment strategies, offering a more right-skewed payoff profile, quickly become the preferred strategies compared to the traditional asset allocation methods. As most individuals approaching retirement possess high levels of risk aversion, these alternative strategies should be seriously considered in this important asset allocation decision and its implications should not be overlooked by practitioners.
Keywords: Retirement Planning, Portfolio Choice, Alternative Trading Strategies, Retirement Income, Investment Decisions
JEL Classification: J26, G11
Suggested Citation: Suggested Citation