Managing to Target: Dynamic Adjustments for Accumulation Strategies

Abstract

Planning for retirement, particularly during the accumulation period, largely consists of setting a target value for the retirement portfolio and implementing a policy aimed at hitting that target. Financial plans are inevitably based on expected returns, which are likely to be different from those an individual experiences during the accumulation period. Thus, when the portfolio deviates from the path outlined in the plan, the individual can choose between a static policy of sticking to his plan and simply hope to hit the target, or dynamic policies designed to keep the portfolio close to its path. This article evaluates three types of such dynamic policies, broadly referred to as ‘managing to target’ (M2T), that adjust the periodic contributions or the portfolio’s asset allocation. The results reported show that some of the dynamic policies outlined outperform a static policy, and adjusting contributions is far superior to adjusting the asset allocation.

Keywords: retirement planning; accumulation strategies

JEL Classification: G11