How a New Bond Can Greatly Improve Retirement Security

Forthcoming, The Retirement Management Journal, Investments and Wealth Institute

32 Pages Posted: 26 Mar 2018 Last revised: 2 Sep 2018

See all articles by Adam Kobor

Adam Kobor

New York University (NYU)

Arun Muralidhar

AlphaEngine Global Investment Solutions; George Washington University

Date Written: March 23, 2018

Abstract

There is a growing retirement crisis and most of the focus has been on the fact that individuals are not saving enough for retirement, may not have access to pension schemes, or are financially illiterate. However, the bigger issue might be that the assets/financial products available to investors, including those that offer legal protection to plan sponsors, may not be appropriate for the typical individual saving for retirement. As Merton (2014) notes, the model adopted to plan for retirement for the majority of the population focuses on wealth at retirement as opposed to the level of retirement income that an individual can earn. As a result, current assets and products are risky from a retirement income perspective. All else equal, individuals retiring a few years apart can have vastly different retirement income outcomes (making retirement outcome a function of one’s conception date). A new bond has been proposed to improve retirement security – with a forward-start (tied to date of retirement), income-only (as individuals need steady income), real cash flow stream (linked to appropriate indices), for a fixed period (tied to average life expectancy). This paper examines standard portfolio choices (60/40, target date funds), along with holding this new bond in isolation, from a retirement income perspective to demonstrate how this new bond, either individually or when used in standard portfolio choices could greatly improve retirement outcomes. The paper concludes with a Monte-Carlo simulation that further validates the value of this new bond given the potential risks to all investment choices given future equity, interest rate and inflation scenarios.

Keywords: Retirement Bond, BFFS, SeLFIES, Retirement Security, Retirement Income, Annuity Pricing, Monte Carlo Simulation, Historical Simulation

Suggested Citation

Kóbor, Ádám and Muralidhar, Arun, How a New Bond Can Greatly Improve Retirement Security (March 23, 2018). Forthcoming, The Retirement Management Journal, Investments and Wealth Institute, Available at SSRN: https://ssrn.com/abstract=3148747 or http://dx.doi.org/10.2139/ssrn.3148747

Ádám Kóbor

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Arun Muralidhar (Contact Author)

AlphaEngine Global Investment Solutions ( email )

Great Falls, VA
United States

HOME PAGE: http://www.mcubeit.com

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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