Individuals Approaching Retirement Have Options (Literally) To Secure a Comfortable Retirement

Document Type

Article

Publication Date

2015

Publication Title

Journal of Retirement

First Page

38

Last Page

53

DOI

http://dx.doi.org/10.3905/jor.2015.2.4.038

Abstract

This article examines the critical final five-year period leading up to retirement and analyzes whether traditional asset-allocation strategies effectively and consistently assist individuals in reaching their retirement income goals as they approach retirement. These traditional strategies are evaluated against alternative, option-based investment strategies that assure a certain amount of retirement income, after adjusting for inflation, while maximizing stock participation with the remaining funds in the portfolio through the use of options. In this simulation, we find higher overall expected yields in the traditional investment strategies over the evaluated five-year period. However, after applying a constant relative risk aversion (CRRA) coefficient, the leveraged option-based investment strategies, offering a more right-skewed payoff profile, quickly become the preferred strategies compared to the traditional asset-allocation methods. As most individuals approaching retirement possess high levels of risk aversion, these alternative strategies should be seriously considered in this important asset-allocation decision and its implications should not be overlooked by practitioners.

Rights

Version of record can be found through Institutional Investors Group Journals.

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