DC Design

Benchmarking Target‑Date Funds to the PRICE of Retirement

Introducing a straightforward and market-driven way to calculate the cost of retirement.

How much money do I need to retire?

It’s perhaps the most basic question in retirement planning. Yet there is no simple answer except “it depends.” One’s “number” depends largely on the interest rate that will prevail at the time of retirement. The retirement cost can be defined as what an individual must pay to buy an income stream sufficient to maintain their lifestyle in retirement—and interest rates will largely determine that cost.

Nearly a decade ago, PIMCO developed a framework for an outcome-oriented approach that defines retirement liability in real terms. It embodies a view that has since been broadly adopted by the consultant community – namely, that the goal of retirement investing should be to maximize asset returns while minimizing volatility relative to the retirement liability. A central challenge, though, has been calculating a liability that might be decades away.

The PIMCO retirement income cost estimate (PRICE) offers a straightforward and market-driven methodology for calculating the retirement liability. PRICE uses a synthetic ladder of 20-year zero-coupon TIPS1 (Treasury Inflation-Protected Securities) as a proxy for historical and future retirement cost. It’s an outcome-oriented approach that provides a powerful framework for both plan sponsors and participants:

Defining the target: How much will it cost to retire?
Often, the retirement cost is defined as what an individual must pay to buy an annuity that provides lifetime income sufficient to maintain her lifestyle in retirement. Generally, this would be a CPI-adjusted single-premium immediate annuity (i.e., a real annuity); its cost would reflect the present value of the stream of cash flows that stretches from retirement to the date of expected mortality. PRICE can estimate the cost of the retirement liability 2, both historically and prospectively. For more information on the rationale behind our approach, please see the 2007 Viewpoint, “Stacy Schaus Discusses Defined Contribution Trends and Concerns with Target Date Investment Defaults,” PIMCO’s May 2015 DC Design, “Align the Design: Considering and Evaluating Target-Date Glide Paths,” and the June 2014 In Depth article, “Using a Real Liability to Assess Retirement Readiness and Inform Investment Decisions,” by Bransby Whitton and Klaus Thuerbach.

Historical retirement cost: How has the target moved?
Over the last decade, near-retirees have faced an escalating retirement price tag. Figure 1 shows the change for a typical participant with final pay of $75,000 and a 30% real retirement income replacement goal (i.e., $22,500 CPI-adjusted annual income). From a 2008 low to a peak in 2013, the near-retiree saw her retirement cost jump by about $150,000 – twice her final pay.

Because the retirement cost is calculated as the discounted present value of future cash flows, it is not surprising to see that it is inversely correlated with interest rates.

Future retirement cost: How may the target move?
While understanding historical retirement costs is useful, workers and plan fiduciaries likely care more about
future costs.

This is where PRICE can help. Figure 2 shows this cost based on a participant’s age, assumed retirement at age 65 and desired annual income stream, as of June 2015. For a 25-year-old to buy an annual CPI-adjusted income stream of $50,000, for instance, the cost would have been $572,685. For participants age 45 or 65, buying the same real annual income would have cost $720,201 and $935,387, respectively. The discount rate differs depending on the years to retirement, and given the current forward TIPS yield curve, the closer a participant is to retirement, the higher the retirement cost.

To consider the cost of different annual income streams, readers may use the PRICE multiplier shown in Figure 2. The PRICE multiplier is the cost of one dollar of annual retirement income. It is calculated as the discounted present value of the 20-year zero-coupon TIPS ladder. It shows, for example, that for a 25-year-old seeking $100,000 of real annual income, the purchase price was simply the annual retirement income times the multiplier, or approximately $1.15 million.

Figure 3 shows the historical multiplier for retirement income cost for participants at 25, 45 and 65 years old (with an assumed retirement at age 65). Since inception in February 2004, the annualized change in the PRICE multiplier is highest for the 40 years to retirement vintage at 4.54% and lowest for the at-retirement vintage at 1.16%. This change is largely a function of the longer duration of PRICE and the declining rate environment. Over this period, the PRICE multiplier had annualized volatility of 7.4% at retirement (i.e., age 65). PRICE multiplier volatility is much higher 20 and 40 years prior to retirement at 20.8% and 35.3%, respectively.    

Some participants may flip the “What’s my number?” question and ask, “How much income can I buy given my current savings?” Similarly, plan fiduciaries may consider what percentage of income can be replaced based on the median balance in their DC plan.

The multiplier can help give insight to these questions as well. Figure 4 shows how much income (and what replacement rate) various levels of savings could confer as of June 2015. For a 65-year-old with $500,000, the multiplier is 18.71, leading to a projected annual income of $26,727, or a 36% income replacement rate, assuming her final pay is $75,000. If her accumulated balance increases to $700,000, the income replacement rate increases to roughly 50%.

Suggested approach for target-date benchmarking: the information ratio
Understanding both past and future retirement costs opens the door to benchmarking the plan’s investments. As the most prevalent DC investment default, target-date funds rise to the top in requiring scrutiny and benchmarking. Given an objective of income replacement, we suggest DC plan sponsors examine whether investments are on track to help participants meet their retirement income needs.

Consider two glide paths: the Market Average Glide Path3 and the Objective-Aligned Glide Path as shown in Figure 5. For both glide paths, we can calculate and compare the excess return and tracking error relative to the PRICE.

Figure 6 illustrates that across all vintages the Objective-Aligned Glide Path has a higher excess return, lower tracking error and higher information ratio. The at-retirement vintage shows a 0.79 information ratio for the Objective-Aligned compared with 0.57 for the Market Average Glide Path. This assessment tells fiduciaries whether participants have been compensated for taking on the added risk, or tracking error, as measured by the information ratio (which is the ratio of excess return to tracking error, both relative to PRICE). The downward slope in Figure 6 is explained primarily by the lower excess return over PRICE of the farther-dated vintages (i.e., 20 or more years to retirement).The slope will change over time based on asset returns and the interest rate environment.

Tracking DC account balance growth relative to PRICE    
Plan sponsors may also want to evaluate how the default investment strategy performs relative to PRICE by taking into account the impact of savings.    

Here’s how it works. Assume a participant at age 55 has accumulated $350,000 in retirement savings. Her personal savings rate and the employer match from age 55 through 65 are 12% and 3.5% per year, respectively. Her salary at age 55 is $67,000 and the real annual wage growth rate is 1% per year. We can calculate and compare the DC account balance that would have accumulated by investing in the Objective-Aligned Glide Path and the Market Average Glide Path relative to PRICE.

Figure 7 illustrates that the average deviation from PRICE in the accumulated balance is positive for the Objective-Aligned Glide Path and negative for the Market Average Glide Path between January 2004 and June 2015. Although both glide paths outpaced PRICE - they ended ahead of the retirement cost - from the perspective of relative risk, the Objective-Aligned Glide Path had significantly lower tracking error in its accumulated balance4 than the Market Average Glide Path. Thus, the Objective-Aligned Glide Path had a positive information ratio of 0.64 in its accumulated balance, 5 whereas the corresponding ratio for the Market Average Glide Path was -0.26.


Another important consideration is the projected income replacement rate for the Objective-Aligned Glide Path and the Market Average Glide Path. In the DC Design article “Align the Design: Considering and Evaluating Target-Date Glide Paths,” our model projected that the probability of achieving at least a 30% income replacement rate increases by almost 5 percentage points for the Objective-Aligned Glide Path compared with the Market Average Glide Path.


As with reaching any goal, a concrete objective – knowing one’s number – can be helpful. PRICE can help in this regard. It can translate accumulated account balances into future retirement income potential. And it can help plan sponsors benchmark target-date strategies.

Plan fiduciaries, especially those in the U.S., will want to keep a close eye on how their target-date funds have performed – and how likely they are to deliver the retirement income plan participants need. PRICE is a simple yet powerful methodology to address this most fundamental of retirement planning questions. We believe that by helping to keep track of – and projecting – one’s progress in real terms, it can be an invaluable aide for individuals and plan sponsors alike.

We wish to thank Steve Sapra, Jim Moore and Bransby Whitton for their contributions to this article.


1 Zero-coupon U.S. TIPS do not exist but Haver Analytics created a zero-coupon U.S. TIPS yield curve based on Federal Reserve data and calculation methodologies.

2 To evaluate retirement cost we calculated the present value of a 20-year zero-coupon TIPS ladder using the TIPS yield curve provided by Haver Analytics. For example, if an individual needs $50,000 annually, the cost
to buy that income stream was $902,094 in 2013 and $936,051 in 2014.

3 The Market Average Glide Path is constructed by MarketGlide and is an average of the 40 largest target-date strategies in the market.

4 Tracking error in accumulated balances is calculated as the standard deviation of the dollar difference between the accumulated account balance of the glide paths (Market Average and Objective-Aligned) and the accumulated account balance of PRICE.

5 The information ratio in accumulated balance is calculated as the average difference between the accumulated account balance of the glide paths and the accumulated account balance of PRICE divided by tracking error in accumulated balance.

Glidepath Allocations

The Author

Stacy Schaus

Head of Defined Contribution Practice

Ying Gao


PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features. Annuities are insurance products and are not insured by the FDIC, the NCUSIF or any other government agency, nor are they guaranteed by, or the obligation of, the financial institution that sells them. All product guarantees are made solely by the issuing insurance company. Income payments under an annuity, therefore, depend solely on the issuing insurance company’s claims paying ability and financial strength. This material is not intended to provide, and should not be relied on for accounting, investment, legal or tax advice. You should consult your accountant, investment, tax or legal advisor regarding such matters.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

PRICE is for illustrative purposes only and is not a prediction or a projection of return. Plan fiduciaries use PRICE at their discretion and are solely responsible for any investment decisions made in result of their evaluation of PRICE data. PIMCO makes no representation that any investment product will achieve similar results as that implied by PRICE. Actual returns may be higher or lower than those implied and may vary substantially over shorter time periods.

Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) that adjusts over time as the participant’s age increases and their time horizon to retirement shortens. The basis of the Glide Path is to reduce the portfolio risk as the participant’s time horizon decreases. Typically, younger participants with a longer time horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and they are able to make larger contributions (depending on various factors such as salary, savings, account balance, etc.). Generally, older participants and eligible retirees have shorter time horizons to retirement and their investment risk level declines as preserving income wealth becomes more important. The glide paths shown herein are for illustrative purposes only and do not represent actual portfolio investments. The Glide Path data is derived from assigning an index proxy to each asset class of the underlying glide path. Participants are not invested and may not invest directly in any glide path. It is not possible to directly invest in an unmanaged index.

No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results and the actual results subsequently achieved by any particular account, product or strategy. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results.

This material contains the opinions of the author but not necessarily those of PIMCO 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 and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2015, PIMCO.