In Depth

Using a Real Liability to Assess Retirement Readiness and Inform Investment Decisions

We propose using Treasury Inflation-Protected Securities (TIPS) to approximate an individual’s retirement readiness.

Over the last decade, liability-driven investing has gone mainstream. The vast majority of defined benefit (DB) pension plans have embraced its more comprehensive approach to assessing performance – one that measures not only the absolute value of assets but the relationship of assets to liabilities. Individuals also have long-term liabilities, but there’s been no equivalent of a DB plan’s funded status (the ratio of assets to liabilities) as an assessment of retirement readiness. As a guide, we propose using Treasury Inflation-Protected Securities (TIPS) to approximate an individual’s retirement readiness at any moment in time. This estimation frames readiness in real, inflation-adjusted terms and provides insight into structuring retirement portfolios.

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The Authors

Bransby Whitton

Product Manager, Real Return

Klaus Thuerbach

Product Manager, Real Return


Past performance is not a guarantee or a reliable indicator of future results.
All investments contain risk and may lose value. Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. The value of most bond strategies and fixed income securities are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. A “risk-free” asset refers to an asset which in theory has a certain future return. U.S. Treasuries are typically perceived to be the “risk-free” asset because they are backed by the U.S. government. PIMCO does not offer insurance products or products that offer investments containing both securities and insurance features. Annuity products are available only from an authorized insurance producer.

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Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. Barclays U.S. TIPS Index is an unmanaged market index comprised of all U.S. Treasury Inflation Protected Securities rated investment grade (Baa3 or better), have at least one year to final maturity, and at least $250 million par amount outstanding. Performance data for this index prior to 10/97 represents returns of the Barclays Inflation Notes Index. Barclays U.S. Treasury Inflation Notes: 10+ Year is an unmanaged index market comprised of U.S. Treasury Inflation Protected securities with maturities of over 10 years. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest in an unmanaged index.

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