Targeting Retirement Security with a Dynamic Asset Allocation Strategy

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. More critically, assets/financial products available to investors, may not be appropriate for the typical individual saving for retirement. The goal of retirement is to try to guarantee a target level of income ideally from retirement till death. Current glide path products shift from stocks to bonds based on one’s age, and this is unlikely to achieve the goal of a secure retirement income for two reasons: traditional bonds are not safe and the glide path is goal-independent. A new bond (SeLFIES) has been proposed as the safe asset for the goal of retirement income. This paper (i) addresses the second issue of glide-path products and tests a simple rule we call GLIDeS: Goal-based, Lifetime Income-focused, Dynamic Strategy that allocates between Equities and SeLFIES based on a retirement income goal; (ii) shows how GLIDeS could dominate standard portfolio choices (60/40, TDFs etc.), along with holding SeLFIES in isolation; (iii) introduces a new way to think about intermediate retirement targets to ensure one is on a safe path to retirement; and (iv) explores implications for level of savings required to achieve a retirement goal. The paper uses historical and Monte-Carlo simulation for reasonable future equity, interest rate and inflation scenarios, and concludes with how the choice of dynamic strategy is influenced by one’s savings rate, replacement rate, risk aversion and outlook on interest rate and risky assets.

Keywords: Intermediate Retirement Target, BFFS, SeLFIES, Retirement Security, Retirement Income, Monte Carlo Simulation, Historical Simulation, Dynamic Allocation, GLIDeS, Goals-based Investing, Lifetime Income strategy, Savings Implications

JEL Classification: G10, G11