Research

Financing an Uncertain Retirement Part II: Portfolio Construction

Executive Summary

  • The risk of having insufficient savings or even running out of money in retirement is not accounted for in typical economic models even though it cannot be hedged in financial markets and may affect retirees’ consumption and investment behavior.
  • In this paper, we augment the traditional retirement model to account for unknown required future expenses that reflect actual retiree spending and investment behavior more closely.
  • Our model predicts that retiree spending will exhibit some volatility as individuals seek to preserve their wealth and their optimal asset allocation should slowly de-risk over time.
  • Instead, when future consumption is unknown and has increasing uncertainty over time, rolling shorter-term investment strategies, such as a bond ladder, may be more suited to a retiree’s needs.
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Sean Klein

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Past performance is not a guarantee or a reliable indicator of future results.
The “risk-free rate” can be considered the return on an investment that, in theory, carries no risk. Therefore, it is implied that any additional risk should be rewarded with additional return. All investments contain risk and may lose value.

The models, scenarios and decisions included here are not based on any particular financial situation, or need, and are not intended to be, and should not be construed as a forecast, research, investment advice or a recommendation for any specific PIMCO or other strategy, product or service. Individuals should consult with their own financial advisors to determine the most appropriate allocations for their financial situation, including their investment objectives, time frame, risk tolerance, savings and other investments.

The analysis contained in this paper is based on hypothetical modeling. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program or strategy.

One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading or modeling does not involve financial risk, and no hypothetical example can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses, are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

Return assumptions are for illustrative purposes only and are not a prediction or a projection of return. Return assumption is an estimate of what investments may earn on average over the long term. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. These figures are not indicative of the past or future performance of any PIMCO product.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

Asset allocation is the process of distributing investments among various classes of investments (e.g., stocks and bonds). It does not guarantee future results, ensure a profit or protect against loss. A bond ladder portfolio is only one potential income strategy and may not be the best solution or appropriate for all investors. Income needs will vary by household. Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. PIMCO is not a licensed insurance provider and, as such, does not offer insurance-guaranteed products or products that offer investments containing both securities and insurance features.

There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Prior to making an investment decision, investors should speak to their financial advisors regarding the investment mix that may be right for them based on their financial situation, risk tolerance, time horizon and investment objectives.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2020, PIMCO.

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