Target-date funds help hedge financial market risk, but these funds don't lessen the risk of outliving your savings.
Summary
Target-date funds, which offer age-dependent combinations of equity and bonds, can be introduced into annuitized investing to cover a larger spectrum of risk. An investor who owns a variable annuity whose notional value adjusts with market movements can hedge financial market risk while also fully insuring idiosyncratic mortality risk. In this study exploring the interplay between target-date funds and annuitization, the author examines the optimal location of annuitized investing and where to locate equity and bonds within such contexts.
Key Insights
- Financial/portfolio risks and mortality risks are independent and separable, so holdings including annuities can capture both completely.
- The target-date funds framework without annuities does not allow someone with a limited bequest motive to insure idiosyncratic mortality risk.
- The study's results support the use of target-date fund products within annuitized vehicles.
