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

Catherine Donnelly; Montserrat Guillen; Jens Perch Nielsen

doi:10.1093/acprof:oso/9780198787372.003.0009

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 proceeding › Chapter (peer-reviewed) › peer-review

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 language	English
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
Pages	171-185
Number of pages	15
Edition	1
ISBN (Print)	9780198787372
DOIs	https://doi.org/10.1093/acprof:oso/9780198787372.003.0009
Publication status	Published - 2016

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10.1093/acprof:oso/9780198787372.003.0009

Cite this

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title = "Fundamentals of cost and risk that matter to pension savers and life annuitants",

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{\textquoteright}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.",

author = "Catherine Donnelly and Montserrat Guillen and Nielsen, \{Jens Perch\}",

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publisher = "Oxford University Press",

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Fundamentals of cost and risk that matter to pension savers and life annuitants. / Donnelly, Catherine; Guillen, Montserrat; Nielsen, Jens Perch.
Retirement system risk management: Implications of the New Regulatory Order. ed. / Olivia S. Mitchell; Raimond Maurer; J. Michael Orszag. 1. ed. Oxford University Press, 2016. p. 171-185.

Research output: Chapter in Book/Report/Conference proceeding › Chapter (peer-reviewed) › peer-review

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AB - 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.

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

Abstract

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