Benefit Strategies

Liability-driven investing, a popular strategy in the world of pension-fund management, could be the next big trend in retirement planning for individuals.

LDI, as it is known, calls for matching your future expenses when designing a portfolio, rather than focusing on asset growth alone. The idea is to assemble investments that will generate enough gains, and at the right times, to cover your distributions throughout retirement.

LDI certainly has caught on with the largest pension funds. The liabilities of these funds - the future payments to retirees - resemble long-term bonds and are very sensitive to changes in interest rates. If interest rates fall, it is harder for a fund to earn the return on investments needed to make future pension payments. Therefore, the basic LDI strategy is to take this interest-rate risk off the table, so that assets and liabilities move in lock step when interest rates change.

This can mean something as simple as investing the fund in bonds with the same interest rate sensitivities as the liabilities. But LDI investing also has more sophisticated variants. For instance, a pension fund may run two separate portfolios - one focused on hedging interest rate risk, and one aiming to grow assets through exposure to stocks and other growth-oriented investments. Combined, the two portfolios remove the unwanted risk of an interest-rate mismatch but still provide the possibility of growth.

For years, our retirement projections for have addressed the basic questions of how much will you need in retirement to maintain your accustomed standard of living, and when will you need it, and how long should it last. We have been incorporating Monte Carlo simulations into our analysis for the past ten years. But recently, we have attempted to lessen the time-horizon risk by building separate investment components into  retirement portfolios that address the distributions required over the the next three years, the next seven to ten years, and then beyond. Current income from these separate investment buckets replenish the monies taken for distributions. Having three years of distributions in cash and CDs provides a cushion from potential market gyrations that could potentially destroy the long-term payout capacity of the retirement portfolio.

Knowing your “retirement number”  is a very useful first step in planning your retirement. But even more important is a number crunching strategy to project the income that you will need throughout your retirement years. Armed with these critical pieces of information, you can build a retirement portfolio starting today with your future retirement goals in mind.

Investing for retirement is not just a matter of understanding your risk tolerance and selecting the most appropriate risk-based portfolio or fund. Nor is it just about time horizon and selecting the closest target-date retirement fund. Both of these ingredients must be incorporated into an investment strategy designed with your end- game in mind.

If you are closing in on your final 10 years  before retirement, you owe it to yourself to take your retirement portfolio off auto-pilot, and put it into the hands of an expert in retirement planning. Give Donald Potter a call at (540) 989-2020, to schedule a time to review where you are, where you want to go, and what it will take to get you there. Benefit Strategies  offers you the benefit of more than thirty years of  hands-on experience, the best research, and state-of-the-art technologies to help you realize the retirement lifestyle you have spent your career building.

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