Introducing the EDHEC-Princeton Retirement Goal-Based Investing Index Series – an answer to the retirement problem

With the growing need to supplement public and private retirement benefits with voluntary contributions, individuals are becoming increasingly responsible for their own retirement savings and…
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3 May 2018

With the growing need to supplement public and private retirement benefits with voluntary contributions, individuals are becoming increasingly responsible for their own retirement savings and investment decisions. This global trend poses substantial challenges to individuals, who typically lack the expertise required to make such complex financial decisions. Unfortunately, current investment products such as target date funds that are often used as default options in retirement accounts, hardly provide a solution to investors’ and households’ replacement income needs in retirement.

In a new publication entitled “Applying Goal-Based Investing Principles to the Retirement Problem”, EDHEC-Risk Institute and Professor John Mulvey of the Operations Research & Financial Engineering Department at Princeton University outline the shortcomings of existing retirement products, and lay the academic foundations for a new generation of risk-controlled target date funds.

The research efforts towards the design of more meaningful retirement solutions, with the support of Bank of America’s Merrill Lynch Global Wealth Management group, have led to the design of the EDHEC-Princeton Retirement Goal-Based Investing Index Series, available at risk.edhec.edu/indices-investment-solutions.

The index series answers two important questions from a retirement investing standpoint:

  • How much replacement income can be acquired from a given level of retirement savings? Given that income, and not wealth, is what matters in retirement, the ability to translate wealth into replacement income is critically important in assessing individual portfolios' adequacy with respect to retirement needs. The Goal Price Index series has been introduced as the appropriate tool to measure the purchasing power of retirement savings in terms of replacement income.
  • How does one generate the kind of upside potential that is needed to achieve target levels of replacement income while securing minimum consumption levels in retirement? Dynamic allocation to two suitably designed “safe” and “risky” building blocks (namely the retirement goal-hedging portfolio and the performance-seeking portfolio), is required to achieve this dual objective. The Goal-Based Investing Index Series has been introduced to provide a benchmark for such dynamic retirement solutions, which can be regarded as improved, risk-managed forms of target-date funds.

Commenting on the research publication, John Mulvey, Professor of Operations Research and Financial Engineering in the ORFE Department at Princeton University, said “Applying Goal-Based Investing Principles to the Retirement Problem discusses important issues with developing the index series and its practical usage.  Many developed countries are moving to a society with greater personal responsibility for financial decisions.  This trend is evident with the shift from defined-benefit to defined-contribution pension plans. Unfortunately, most people do not have the tools nor the training to help themselves with the critical decisions about asset allocation, about savings, and about spending during retirement.  The EDHEC-Princeton index series is aimed at informing the decision process.  It provides superior information to the popular target date funds, which do not distinguish among investors within an age category.”

Addressing asset managers, Lionel Martellini, Professor of Finance at EDHEC Business School and Director of EDHEC-Risk Institute, added “Goal-based investment principles grounded on solid academic foundations can be used to design retirement investment strategies that meet the needs of individual investors preparing for retirement. To address the looming pension crisis, investment managers must focus on the launch of meaningful risk-managed retirement solutions with a focus on generating replacement income in retirement. This is a unique opportunity for the investment industry to make finance useful again by providing individuals with adequate answers to their retirement needs.”

Offering a perspective on the applicability of these indices, Anil Suri, Managing Director and Head of Portfolio Analytics & The Innovation Development Center in the Chief Investment Office of Bank of America’s Global Wealth & Investment Management group, said “the EDHEC-Princeton Goal-Based Investing Index Series are an important innovation that can help individuals, and the institutions they rely on, to achieve critical retirement goals in a more efficient and effective fashion.  Importantly, by using a very strong analytical foundation and demonstrating the practical feasibility of such an approach, the EDHEC-Princeton Retirement Goal-Based index series can help in the design and management of the next generation of retirement investment solutions that use liquid asset classes to generate income in retirement, while managing the effect of uncertainty on this very broadly applicable goal.”

EDHEC-Risk Institute                     
Maud Gauchon
Communication Manager
[email protected]
Tel: +33 (0)493 187 887

Princeton University
Operations Research & Financial Engineering
Steve Schultz
Director of Engineering Communications
[email protected]
Tel: 1-609-258-3617


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