CONCORD, MA — (Marketwire) — 03/15/12 — What-s the lowest-risk retirement strategy for an individual? Is it possible to engineer a strategy that people can and will invest in? Is there a behavioral block that prevents investors from acting in their own best interest? Can anything be done to encourage investors to adopt retirement strategies that insure against longevity risk?
In their article just published in the Financial Analysts Journal, “Making Retirement Income Last a Lifetime,” Stephen C. Sexauer, Michael W. Peskin and Daniel Cassidy CFA address these retirement income challenges. To enable investors to spend down the assets in their defined contribution accounts more safely and predictably, the authors propose a “decumulation benchmark” comprising a laddered portfolio of TIPS for the first 20 years (about 88% of the portfolio) and a deferred life annuity, purchased with the remaining balance.
This portfolio structure can be used directly by the investor, akin to indexing. Alternatively, it can be used as a yardstick, helping the investor judge the potential gain from adopting other strategies, including those with higher risk-but higher expected returns-or with income guarantees.
The authors show that “during certain phases of the life cycle or given certain asset return or inflation realizations, a strategy of putting 100 percent in either real (inflation-indexed) or nominal immediate annuities may provide a higher annual income than the defined contribution decumulation benchmark, or DCDB.” The authors argue, however, that based on investors- behavior, an immediate annuity-based solution is hard for most investors to swallow, because they lose liquidity and flexibility when contractually turning their portfolio over to an insurance company.
The authors conclude that for investors seeking to minimize the most important risks, “the best option today is the combination of a 20-year self-amortizing TIPS portfolio and a deferred annuity represented by the DCDB(tm) benchmark. This portfolio does the best job of meeting our criteria by using the tools that are available today for lifetime income generation and, just as importantly, provides the basis for a benchmark that uses market pricing and that can be made publicly available over the long term.”
Sexauer, Peskin and Cassidy caution that because there is no riskless retirement income solution, the DCDB(tm) benchmark seeks a solution close to the minimum risk, where risk is longevity risk, investment risk (including inflation), counterparty risk, and liquidity risk. They predict that as the demand for reliable retirement income grows, the benchmark will evolve over time, noting: “In the future, we fully expect capital markets to provide additional solutions to manage these risks.”
The DCDB(tm) benchmark can be found at . The Financial Analysts Journal article can be found at
Stephen C. Sexauer is chief investment officer at Allianz Global Investors Solutions, Michael W. Peskin is CEO at Hudson Pilot, Inc. and Daniel Cassidy, CFA, is Managing Director of P-Solve Cassidy.
Ken Lizotte
P-Solve PR Director
978-371-0442