Huaxiong Huang

A Glide Path for Target Date Fund Annuitization

We describe a recursive algorithm that computes the timing and quantity of purchase of deferred income annuities (DIAs) within target-date funds (TDF) in defined contribution (DC) plans, although the algorithm could also be applied within any retirement account. We map a relatively small number of statistical parameters into a rule that conveys the dollar amount of DIAs to be purchased at any given age and time. Our model is of particular relevance given the recent announcement by the U.S. Treasury Department approving the inclusion of life annuities in 401(k) plans and in TDFs in particular. Note that to qualify as a TDF requires a methodology based on “generally accepted investment theories using a consistent investment strategy.” This article offers one possible such theory in the context of DIAs.

Strategic Financial Planning over the Lifecycle: Investment and Diversification

Learning Objectives People invest their savings in order to attain some specific objectives. The objectives can be short term (such as for education or for a down payment on a house) or long term (such as for retirement). The goal of an investment decision is to choose a portfolio that is optimal for the investors objective and risk preference. In this chapter and the next, you will learn about investment decisions – how you should invest your savings and what factors you have to take into consideration when making an investment decision. Because investment is now a very large topic, it is not possible to cover every aspect of it in detail in this book. We concentrate on the most important issues and also on how investment decisions are related to the concept of consumption smoothing. This chapter discusses the basic principles of investment. It starts by identifying the investment choices that are available to you. We classify these choices into five categories (or asset classes), and examine the risk and return of each asset class. Finally, you learn the concept of asset allocation and diversification. Investment Decisions and Consumption Saving and investing for retirement is what most people have to do. Recall from Chapter 4 that under the consumption-smoothing framework, you choose a consumption pattern that maximizes your total standard of living over your lifetime. One factor that determines the pattern of your optimal discretionary consumption is the rate of return that you can get on your savings.