This chapter analyzes two types of investment strategies for an investor with a retirement savings plan. In the first, the investor sets an upper target which his wealth should not exceed. In the second, the investor adds a lower target which his wealth should not fall below. We evaluate the two approaches using a Black-Scholes model, with one risky stock and one risk-free bond, with the restriction that the investor cannot invest more than his current wealth in the risky stock. Results are illustrated using a 30-year time horizon, and we show outcomes using quantiles of the saver’s terminal wealth distribution. This refers to the level of accumulated wealth obtained by a given percentage of investors who follow the recommended strategy. We also draw out the connections between expected returns, affordable risk, and transparent fees for fund management.
|Title of host publication||Retirement system risk management|
|Subtitle of host publication||Implications of the New Regulatory Order|
|Editors||Olivia S. Mitchell, Raimond Maurer, J. Michael Orszag|
|Publisher||Oxford University Press|
|Number of pages||15|
|Publication status||Published - 2016|
Donnelly, C., Guillen, M., & Nielsen, J. P. (2016). Fundamentals of cost and risk that matter to pension savers and life annuitants. In O. S. Mitchell, R. Maurer, & J. M. Orszag (Eds.), Retirement system risk management: Implications of the New Regulatory Order (1 ed., pp. 171-185). Oxford University Press. https://doi.org/10.1093/acprof:oso/9780198787372.003.0009