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Executive Summary
The retirement landscape has changed. Defined benefit plans have given way to defined contribution (DC) plans, and Target date funds are rapidly becoming the workhorse for DC plans.
By and large, current target date funds resemble the old investment advisor adage that stock weight should be about 110 minus a person’s age. While this satisfies the common-sense intuition that, all things being equal, weight in stocks should go down as a person ages, there are a number of problems with this approach.
In this paper we focus on two in particular. First, the standard solution is inflexible: all things are rarely equal. To address this shortcoming, we introduce a framework based on a common-sense definition of risk: not having enough wealth in retirement. The goal is not to put investors into yachts, but rather to increase the odds that they have the appropriate level of resources in retirement. Second, the standard solutions do not recognize that expected returns vary over time. We show that dynamic asset allocation – moving your assets – is an essential part of achieving retirement goals.
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