Researching Retirement: The Impact of Inflation, Interest Rates, and Market Risks
How can retirees allocate assets to support their consumption, even in challenging times? A previous post, based on our recent research paper, discussed how an income focused asset allocation can generate similar retirement income to a wealth-focused allocation while offering better risk management. Those results were based on simulations including both good and bad scenarios.1 We now focus on performance in three bad scenarios: poor stock market returns, increases in inflation, and decreases in interest rates.
We consider an investor who starts making regular contributions to a retirement account at age 25 and who retires at age 65. At 65, the investor plans for a 30-year retirement and spends the same amount (adjusted for inflation) every year. We look at two allocations: a wealth-focused allocation with a high equity landing point (50%) and an income-focused allocation with a moderate equity landing point (25%).2 Exhibit 1 shows the equity percentage for the allocations at different ages. The wealth-focused allocation invests the remaining assets in short-term, nominal bonds, while the income-focused strategy invests in a liability-driven investment (LDI) portfolio of inflation-indexed bonds.
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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) with its primary place of business in the state of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. References to registration with the SEC do not imply any endorsement or approval of the qualifications of the firm, nor do they imply that the firm’s representatives have attained a particular level of skill or training. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.
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