How a New Bond Can Improve Retirement Security

17 Pages Posted: 20 May 2019

See all articles by Adam Kobor

Adam Kobor

New York University (NYU)

Arun Muralidhar

AlphaEngine Global Investment Solutions; George Washington University

Date Written: October 1, 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, and find it difficult to choose from a wide range of retirement investment products. However, the bigger issue might be that the assets and 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 many products are risky from a retirement-income perspective. All else equal, with respect to retirement income, individuals retiring a few years apart can have vastly different outcomes (making retirement outcomes a function of one’s conception or retirement date), and this impacts policymakers (and potentially individuals worried about retirement security). A new bond has been proposed to improve retirement security; it includes a forward-start (tied to date of retirement), income-only (because individuals need steady income), real cash-flow stream (linked to appropriate indexes), for a fixed period (tied to average life expectancy). This paper examines standard portfolio choices (e.g., 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 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 for reasonable future equity, interest rate, and inflation scenarios.

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

JEL Classification: G10, G11

Suggested Citation

Kóbor, Ádám and Muralidhar, Arun, How a New Bond Can Improve Retirement Security (October 1, 2018). Retirement Management Journal, Vol. 7, No. 1, 2018, pp. 16-30. Available at SSRN: https://ssrn.com/abstract=3391319

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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