Fundamentals of cost and risk that matter to pension savers and life annuitants

Catherine Donnelly, Montserrat Guillen, Jens Perch Nielsen

Research output: Chapter in Book/Report/Conference proceedingChapter (peer-reviewed)

Abstract

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.
Original languageEnglish
Title of host publicationRetirement system risk management
Subtitle of host publicationImplications of the New Regulatory Order
EditorsOlivia S. Mitchell, Raimond Maurer, J. Michael Orszag
PublisherOxford University Press
Pages171-185
Number of pages15
Edition1
ISBN (Print)9780198787372
DOIs
Publication statusPublished - 2016

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    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