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Asset Allocation for Retirement: Simple Heuristics and Target-Date Funds
Steven D. Dolvin
Butler University,

William K. Templeton
Butler University,

William Rieber
Butler University,

Recommended Citation
Steven Dolvin, William Templeton, and William Rieber. "Asset Allocation for Retirement: Simple Heuristics and Target-Date Funds" Journal of Financial Planning 23.3 (2010): 60-71.

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D. Templeton. Working under Templeton. Ph. His research fius focused on retirement investíngand mortgage selection.D. for example. law. The risk-return trade-off is particularly important in the immediate years leading up to retirement. We suggest that financial planners consider a 100 percent equity allocation for their clients until approximately 10 years prior to a client's retirement at which point a more conservative allocation should be employed.. Yet the eagerness to achieve larger portfolio values must be balanced against the volatility of returns. Although much attention is paid to the security or fund selection process. is a professor of economics and chair of the department of economics.age equity allocation. 60 Journal of Financial Planning | M»flCH 2010 regret may be a primary reason for the popularity of investment heuristics that suggest decreasing the risk of portfolios as the target retirement date nears. especially if the individual planned to convert the retirement portfolio into a guaranteed annuity of some sort at that point. losing 25 percent (or more) of the value of an allequity retirement portfolio in the year prior to retirement. Examples of asset classes include large capitalization domestic equities. considering both static and dynamic approaches. Dolvin. Executive Summary We examine common asset allocation strategies for retirement investing. which commits hinds to different classes of assets according to some weighting scheme (see Ihbotson and . Ph. Rieber. ¡ndiana. 2000).. Meyaard developed a portion of ihe framework presented here as part of an honors thesis at Butler University.. is a professar ofßnance at Butler Vnivenity in Indianapolis. or the inherent difficulties of a large shift from 100 percent equity to 45 percent equity because of tax or other issues. CFA. international equities. Then we applied the simulation method to review potential future results. using actual annual returns starting in 192.D.This flexibility suggests that financial planners can play a valuable role by helping investors determine the optimal reallocation time and ppDcess. Ph. Steven D.D. however. We studied the average performance of each strategy over historical roiling periods (that is.D. is an associate pmfessorof finance at Butler University in Indianapolis. CFA. bootstrapping). Avoiding this potential I Acki)owle<^meiits: Parts of this paper draw heavily on Meyaard and Tempieton (2002). Over the years. Ph. as well as those allocation policies used by leading target-date fund providers.Contributions DíJLVtN 1 Î E M P L E t O N I R1E8ER Asset Allocation for Retirement: Simple Heuristics and Target-Date Funds by Steven D. in addition to encouraging a larger equity exposure early on to capture the benefits thereof WiJiiuin K. among others. ¡ndiana. He is a CFA charterholder and is active in both academic and practitioner circles. PhJ). financial advisers have long recognized that the more important decision is asset allocation. and high quality fixed income securities. and ßnance at Butler University in Indianapolis. A more moderate réallocation over a few years may be nsasonable. One would regret.: and William J. Rieber. certain static approaches are essentially equivalent to dynamic strategies that reduce equity exposure through time. Further: we find that most target-date fund providers appear to target a dynamic 120 . Jndiatia. real estate. WiUam ¡.FPAjournal. We find that over time. as well as to provide additional insight into the structure and characteristics of each approach. The present authors are indebted to Meyaard's earlier efforts. the most fundamental asset allocation decision is the one that identifies overall equity versus fixed income.6.. Dolvin. William K. ndividuals investing for retirement face the task of selecting securities or funds that will provide the return necessary to afford the chosen retirement lifestyle. Although the average outcome for this approach is technically "betten" there is still significant risk associated v ^ h this strategy Consider the outcome should Ihe year prior to reallocation be lite 2008. Ph. Templeton. advisers and pundits have offered some basic heuristics to deal www.

we examine these various investment strategies using two approaches: (1) we review tbe hypothetical performance of these asset allocation strategies using actual historical returns and (2) we simulate future performance results using characteristics derived from tbe historical examination. we suggest that planners may want to propose a simple target-date fund or equivalent allocation.D O U I K I Î E H P L E t O H I RlEBER Contributions with this most fundamental of retirement investing decisions. one that shifts the allocation awayfiromequity as the retirement date approaches. Furthermore. compared to the 100 . reallocating to a less volatile portfolio as the retirement target date neared. we suggest that much of the value added by a financial planner will be helping clients recognize the optimal time to make the switch from a pure equity portfolio to a more conservative approach. would have reduced the equity holdings to 35 percent ofthe retirement portfolio. whicb implies that an investor's contributions vary significantly fi'om one year to the next. In tbis paper. in contrast to Viceira (2007). Scbleef and Eisinger (2007) suggest that more than half of investors fail to achieve their targeted real value portfolios. Their Monte Carlo simulation model assumes that investors annually determine the real contribution to equity and fixed income investments that is needed to reach the target portfolio value. Recognizing the importance of this decision. a 25-year-old investor should construct a portfolio consisting of 75 percent equity and 25 percent fixed income. For example. 50 percent allocation to equity in terms of ending portfolio value or risk-return characteristics. In addition. rather than a true inability of investors to properly plan for retirement. They find. Thus. We attempt to identify the underlying asset allocation guidelines for these funds over time and evaluate tbeir risk-return performance relative to the simple heuristics www.' Based on their results. Schleef and Eisinger (2007) also examine a dynamic allocation strategy. they conclude. Rauh. However. However. tbe allocation to equities should decline such that a 65-year-old investor. tbat the 100 . First. at whicb point the 100 . these are hypothetical and are not representative of any actual TDFs. we note that the 10year cutoff is somewhat subjective.^ Nevertheless.age.age strategy is nearly equivalent to a constant . they conclude tbat investors will generally fail to achieve a target portfolio value using any of the constant allocation strategies they tested. the aggressive approach results in a target portfolio value being achieved more frequently at the expense of only a slightly increased possibility of extremely poor results. Meyaard and Templeton (2002) compare the 100 . Second. However.age formula. particularly in the context of such potentially extreme events. for example.age rule. Second. This approach is so popular in the financial press that it has been the subjea of a policy brief sponsored by the Office of Policy of the Social Security Administration (Kintzel. For each analysis. Investors choosing a product of this sort would be relieved of managing this shifting allocation over time. Tbis strategy captures tbe positive upside volatility associated vflth equity. we find that over time. one guideline suggests allocating a percentage of ones portfolio to equity that equals 100 minus one's age. The fund mani^ers would handle that on their behalf.sions in the context of specific retirement target dates. they present a reasonable argument for investors to prefer the more agressive 100 percent equity approach.FPAiournal. Further. and Venti (2006). 2007). only one seems to be a better choice: 100 percent equity until 10 years prior to retirement. while reducing the potentially negative consequence associated witb a large loss immediately prior to retirement. using a fairly primitive simulation approach. Fortunately. these dire results appear to be influenced by a bias in their investment return simulation technique (a bias acknowledged by the authors). Schleef and Eisinger (2007) focus on an investor's ability to hit a predetermined target-date portfolio value in real (inflation-adjusted) terms. According to tbis rule. particularly considering what might happen if the year prior to reallocation were one like 2008. Of the other strategies we examine. Given these findings. that such funds provide no improvement in increasing the Ukelibood of achieving the target portfolio value by MARCH ZOIO Journal of Financial Planning 61 Background Two recent works serve as tbe primary motivation for the present and fixed allocations to determine if these particular funds are value-enhancing. which is intended to represent a generic target-date mutual fund.age heuristic to constant equity' allocations of either 50 percent or 100 percent. we evaluate the risk-return efficiency of some of the well-known targetdate retirement portfolio funds.age approach. noting that much of the uncertainty in the value of the target-date portfolio reflects the upside potential that is favorable to the investor. A common variation on this guideline uses 120 . numerous mutual fund families have developed a series of fund offerings that make investment deci. we suggest that financial planners encourage their clients (provided they can emotionally tolerate market volatility) to stay fiilly invested in equit)' until approximately 10 years prior to retirement. Our results suggest that most target-date funds (TDFs) employ an asset allocation strategy that follows tbe 120 . This. this approach also mimics the outcomes from a static 70 percent equity/30 percent debt allocation. Wise. for those clients who are less sophisticated and therefore likely to exhibit behavioral biases that prevent maintaining composure in down markets. is not an approach most investors are likely to follow. similar to Poterba. we first review tbe risk and return characteristics of portfolios constructed using either fixed allocations or dynamic heuristics such as the 100 .age approach is used. in reality. As tbe investor ages. Based on the results from this analysis. which results in a 20 percent greater allocation to equity at every age level.

the mean return Minimum -43. real ual begins making regular contributions to We do so with a simulation method that estate and cash. We then judge results based on between overall equity and fixed income.choose to employ both approaches to influenced by the same economic forces ment investing heuristics. Rxed) 0. to be used in our simulation. because both asset classes may be and we also consider some common retire. as in our study. we the allocation strategies of five of the leadwhich we estimate as 0. constant 70 data period. large cap and small cap stocks. following Chen and Estes (2008). returns.^ Summary Statistics 52 Journal of Financial Planning HABÍH 2010 www. we also examine between the returns of stocks and bonds. etc. as well as for their estimated relationship.age rules.49% and we report these in Table 1.21% original data.10% of the common stock series (12. (for example. This assumption is meant to Hethodologv data observations. clusions across approaches that have previ. In percent equity. The first ting a particular target portfolio value. Most critiinflation).s sion an investor must make.19 return for the bond series (6.36% 5. we examine thereby implying contributions will rise in provide us with 43 rolling periods of 40 the average performance of each strategy direct proportion to wages.d equiscenario.21 percent).org .000. so may leave contribution percentages we therefore assume a typical 40-year portfolio asset allocation over time. while owrTo facilitate a test of the various investsome combination static/dynamic stratelooking others.^ This overall rettim and risk characteristics. Although the existing studies."* We ^ ^ » d Incomi calculate various statistics related to these Mean Return 12. This conclusion ignores the over historical rolling periods (that is. Hubbard. example.FPAjournal. 100 percent equity until between domestic and internation. Nonetheless. we also calculate the serial correlaically.30% -8. results. Returns come from Ibbotson (2008) and cover the period 1926-2007. and Makarov (2004)).03 0. grade fixed income securities from Ibbotcontribution is $5. Thus. using actual armual returns common stock series exhibits much more on the return aspect of the (fictitious) TDFs starting in 1926.92% return and standard deviation of returns. concentrate on the most important deciing TDF mutual fund providers. as well as to provide additional series (19.49 percent.23 percent) One Period Serial Correlation 0.' Specif. changes in interest rates or 100 . we nonetheless static allocation (for example. practice through her 65'^' birthday.97% 8. we examine the efficacy of multiple and Walz (2003) find that these two tion of returns for the equity (0.06) series. as well a. enabling us to make conwhich they attribute to the overweighting values of these correlations are quite low.97 percent and 8.tics of each approach. as reflected by the larger standard and ignoring the potential benefits associulation method to review potential future deviation of returns compared to the bond ated with a structured asset allocation plan. which results in 82 years of return percent. we analyze the basic approach of the study period is short relative to the Lo. and each subseson (2008) for the years 1926 through quent yearly contribution increases by 4 2007.00% 43. Cooley. control for them in our simulation. ties. investment horizon. the data series employ two approaches. 1926-1965. characteristics of equity and fixed income respectively. 100 percent equity. Instead we equity and fixed income investments in a closely matches actual investor saving reduce the issue to the general allocation retirement portfolio and continues this behavior. there is some correlation To keep the study manageable and to cal to our contribution.of mid-sample returns in the overlapping which is consistent with the findings of ously been examined in isolation. and so on. Rrst. We concentrate on an reflect the faa that individual investors To examine the issue of optimal retirement investor who is planning for retirement. The present study is an improvement insight into the structure and characterisrespectively). more closely follow previous literature. In line with the higher returns. Second. On her 25''' birthday. We do not distinguish ment strategies. retirement. including mean annual Geometric Average Return 10. tion. we apply the sim. we addition.Contributions Table 1 : D"íLVIN I T E M P U I O N I RiEBER years each for our historical analysis (that is. we unchanged as their incomes increase.80% As would be expected.1927-1966.age and 120 .19. This effect may be reduced if previous studies (for example. Maximum 54.06 is substantially higher than the mean Correlation (Equity.03) and investment approaches that span these approaches may produce different results. a5 proxied by large capitalization equity and investment grade corporate bonds. fixed income (0. an individsome designated year prior to retirement).risk. We begin by collecting annual return results in 41 annual contributions and an rather than simply the probability of hitdata on large cap equities and investment investment period of 40 years. For methodology.). For purposes of the simularelative to these two earlier efforts.).23% 6. These two data series also serve as our proxies for the The following table presents basic summary statistics for the returns of equity and fixed income. Standard Deviation 19. etc. such as the ensure our results are robust. we consider the following gies (for example. the broader question of value by focusing purely bootstrapping). Getmansky.

Each annual contribution is allocated such that the portfolio's overall asset allocation meets the designated strategy even if the contribution to one asset class is negative. there is some variation in the aggressiveness among firms. the development is straightforward. the investor observes the previous year's return performance on equity andfixedincome positions of the portfolio. While we examine the 10-year time h-ame. For our analysis. the standard deviation tends to increase with the allocation to equit)'." Results Historical Periods. determining the actual transition point) is possibly one of the most value-enhancing services that afinancialplanner can provide. Table 4 provides the series of TDFs offered by each of these firms and the associated asset allocations. however. If.^ MARCH 2010 Journal of Financial Planning 63 . the first year's contribution would be allocated $3.250 tofixedincome (25 percent). the investor effects a rebalancing of the portfolio by allocating returns and new contributions into equity andfixedincome at a percentage dictated by the strategy being simulated. a simulation program that integrates with Microsoft Excel. In short. The return characteristics employed in the simulation correspond to those reported in Table 1. They note that such a strategy would maximize the advantage of higher equity returns for a longer period leading up to retirement.age approach. which is very similar to the historical analysis. then there is a benefit. At the time of each subsequent contribution. from which we can construct distributions for the terminal values of the portfolio and the IRRs for each strategy.* The full simulation for each strategy involves 1. etc. the simulation software draws each year's simulated returns for the equit)^ and fixed income components from distributions with the indicated parameters. as represented by higher allocations to equities at similar retirement investment horizons. We also examine the broad asset allocation strategies for five of the most popular target-date fund As a reference. We conduct our analysis on multiple basic static allocation strategies. assuming that the labor of réallocation cannot be subcontracted for Uttle-to-no cost.1927-1966. median. Thus. We present the results of this investigation in Table 5 (on page 66). as the average difference across target-date fund equity allocations relative to the 120 . target-date fund managers were willing to conduct the réallocation for little or no incremental cost (other than the underlying fees of the mutual funds held. From this analysis. the larger the allocation to equity. Analyzing the dynamic strategies also reveals some interesting results. as well as the correlation between the returns series.000 runs (conducted multiple times for robustness). Further.age approach. the increase in deviation is small. except simulated rather than actual returns are used. we calculate the ending portfolio value and IRR associated with each investment approach.000 in our example). The last strategy described in Table 3 is based on a suggestion in Meyaard and Templeton (2002). the characteristics of the 100 .age strategy. For example. making this decision (that is. as well as the distribution of the series. are very similar to a static 50/50 allocation. it appears that most target-date fund providers follow an approximate 120 . For example. Thus. As would be expected.age approach. Nonetheless.750 to equity (75 percent) and $1. we derive 43 sample terminal values and IRRs for each investment strategy. Losses during that period cannot be easily recovered in a shorter investment horizon.age approach. as the minimum value of the portfolio over the period increases with an allocation to equity. the higher the average portfolio terminal value. which we assume is normal. For the historical analysis. For the simulation.TEMPLEION I RIE6E(Î Contributions As an example. we consider the strategies outlined in Table 3.FPAjournal. relative to the effect on the terminal value. in addition to dynamic allocation methods such as the 100 . the user can indicate the serial correlation of each returns series. as each approach is analyzed using actual returns over subsequent rolling periods. Similarly. parameters must be identified. is the added effort associated with dynamic allocation offset by any additional value? For the 100 . 1926-1965.age simulation. standard deviation. we recognize that this cutoff is somewhat subjective.' Specifically. 4 percent) over the 40-year horizon. the model is similar. The models for all retirement investment approaches under examination were constructed in Crystal Ball®. for example).). on average. as previous studies report. over this long time horizon. the simulation software enables the user to indicate the mean annual return and standard deviation of returns for the equity and fixed income asset classes. and maximum for the terminal values. We commence by examining each strategy's performance over historical periods. the deviation seems to affect upside "risk" more. We begin by reporting the mean. which we can then examine using basic statistical analysis. www. Table 2 provides a sample of a single run for the 100 . minimum. the question arises.^° Reviewing the allocations presented in Table 4. however. each with a stated asset allocation goal. ÉDr the 100 . as well as the growth in the annual contributions (for example. the answer may be no. in contrast to what many investors may expect. we assume that allocations remain stable throughout each five-year period. while reducing the risk of significant losses in the years immediately leading up to retirement. TDFs are offered in increments offiveyears (target retirement date of 2035 or 2040. which an investor would be paying anyway). Thus. Once the model is created. The spreadsheet approach enables us to indicate the size of the orignal annual contribution ($5. The primary output of the aniilysis is a terminal value at the end of the 40-year investment horizon and an internal rate of return (IRR) earned on the invested amounts.' Finally. however. For each 40-year period (that is. the added volatility does not appear to negatively affect the investor.age criterion is only an absolute 2 percent. In practice.

593 $881. Fixed Balanc« $1.438 $307.479 5286.0258 0.134 $37.711 $16.917 $347.791 $21.229 $121.098 $1.585 $190.71 0.792 $681.75 0.475 $373.053 5261.0771 0.66 0.425 Sl.536 $226.461.38 0.697 End Fixed Balance $1.841 $1.391.49 0.57 0.546 $51.269.162 $1.04 0.680 $244.2724 0.324 $12.287 $530.55 0.541 $234.401 $7.896.974 $27.329 $132.662 $12.066 $2.624 $5.558 5560.329 $13.0294 0.1595 Beg.642 5694.46 0.199 $111.830 $321.867 $34.37 0.23 -0.64 0.408 $5.005 2 3 4 5 6 7 8 9 10 0.759 $57.184.740 510.0046 0.083 56.623 $940.839 51.252.679 51.309 $819.217 $16.26 -0.02 0.803 $36.730 $20. $6.457 $74.177 $2.429.553 $551.0473 0.462 $U&4.223 $380.471 $17.532 $572.936 $416.327 56. Value $3.13 0.45 0.09 0.851 $411.818 $236.866 $17.851 $428.0122 0.69 0.493 $37.079 $1.142 $333.0257 0.629 5925.68 0.322 $256.469 $65.0830 -0.056 $843.476 $1.487 $434.134 $592.059.194 $777.006 $145.366 5597.40 0.367 0 1 55.250 $3.523 51.72 0.249.538 $663.903 5143.591 $472.10 0.47 0.668 $987.56 0.520 521.25 0.32 0.53 0.658 $9.925 5559.373 $826.850 $12.0997 0.42 0.750 $8.792 $1.VH I TEHPUIOH RlEBER Table 2: Sample Output for a Single Run of the 100 ~ Age Simulation End 1 1 Year Age 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 Equity 0.12 0.44 0.827 $333.59 0.813 $69.077 $965.094 $2.93} $398.195 $366.359 S339.281 $Z077.0846 0.340 $22.67 0.855 $140.58 0.348 $672.927 $474.758 $146.41 S $365.641 $885.0438 n 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 -OM 0.618 Portfolio Before Contrrb.46 0.357 $159. Contríb .528 5820.50 0.540 $18.0862 0.409.1112 0.170 $71.008 $3.582 $457.1834 -0.000 $547.306 $1.992 $395.710 $89.136.397 5196.772 522.986 51.860 $316.417 $14.746 $150.280 $60.1695 0.06 036 0.288 596.489 5303.961 $89.16 -0.070 $981.00 0.37 036 0.023 $229.52 0.117 $7.346 5419.831 $145.862 514.256.212 $199.994 $15.0286 0.772 $1.061 $5.574 $238.796 $508.242 $18.327.858 $125.0700 -0.695 528.084.773 $344.387 $833.2145 -0.907 $463.744 $1.15 0.50 0.819 $30.452 $12.10 0.082 $24.247 $817.07 -0.08 39 40 Term.372 $2.04 0.741 $513.74 0.260 5110.135 $24.843 $ .490 $Z115.194 $23.580 $6.410.182 $1.0700 -0.697 $Z991.39 0.674 $101.172.1181 0.06 Equity Balance S3.817 $13.064.142 Equity Balance $5.1586 0.361 $273.0550 0.277 5104.46 -0.479.716 576.581 $346.546 $7.062 $245.381 $1.365 59.533 $874.539 $70.534 510.62 0.399 5186.140.830 $1.106 $607.004 556.317 $2.759 $43.1323 0.951 $215.910 $163.61 0.73 0.15 0.702 5840.481 $447.690 $595.129 $10.152 $995.698 $192.062 $434.148 $20.681 528.24 0.2173 0.0269 0.358 $3.0896 -0.205 $338.499 $204.590 $407.757 $3.306 $30.968 $9.633 $594.376 551.974 5510.20 0.70 0.593 $16.1259 -0.648 $223.533 $39.394.941.487 $251.382 $196.200 $99.63 0.68% 64 Journal of Financial Planning 2010 www.54 0.545 $344.547 $573.925 $55.39 0.891 5763.05 0.260 $201.456 $3.0222 0.60 0.429.667 53.028 $1.796 $77.214 $13.524 $261.222.1998 0.0009 0.453 $447.972 $636.325 $8.697 58.65 0.735 $583.409 $416.894 $131.405.010 $464.160 $9.59 0.839 $3.27 0.032 $208.806 $973.268 $584.35 equity Return 0.057 $83.3100 0.965 $348.154 $50.0058 0.814 $312.558.215 $776.0333 0.103 52.167.793 $82.471 $1.040 $25.51 0.081.391 5548.16 -0.371.778 580.956 511.888 $979.0845 -0.806.535 $330.0364 -0.123.854 $359.262 $3.744 •P Rxed Return 0.005 59.783 $451.362 Total Ending Portfolio $11.FPAjournal.14 0.877.969.782 $354.229 $42.681 $103.344 $833.333 5453.996 $188.859 $249.118.41 0.981 5515.02 0.985 $520.39 0.1781 0.0611 0.837 $1.854.515 $1.583 $1.139 $1.278 $656.488 $356300 $360.40 0.799 583.212 $910.590 $530.481 5995.48 0.005 $8.951 $232.572 $16.250.849 $6.567 $490.03 0.367 IRR 9.884 5805.375.972 $19.200 $5.43 0.1924 0.Contributions .760 $593.394 $11.29 0.02 0.955 5660.238 $399.103 $33.

age does technically dominate the 50/50 approach if there are no other indirect costs.D O I V I N I T i M P l E Î O N I RiEBES Contributions Specifically. at which point the investor follows the 100-age rule.1OO Avg. we conclude that these providers do appear to add some value relative to the traditional static approach of 50/50 or 70/30. our approach would suggest taking funds from equity and allocating into fixed income. the rankings using the return-to-risk ratio cluster around the TDFs. As an example. in that they generally mimic a common heuristic without requiring effort on the part of the investor. thereby optimizii^ potential return without adding indirect cost. when the equity markets were down approximately 40 percent.age and 120 . as well as an average holding for all target date funds (TDFs).age approach is followed. although almost identical. Further. the mean. Equity allocation in all years is equal to a static 100 percent until 10 years prior to retirement. The final coiumns list the difference in holding between the average TDF and the age-based heuristics.FPAiournal. as well as a ratio that Table 3: Static Allocation Strategies Considered Description Equity allocation in all years is equal to a static 0 percent Equity allocation in all years is equal to a static 30 percent Equity allocation in all years is equal to a static 50 percent Equity aiiocation in all years is equal to a static 70 percent Equity allocation in all years is equal to a static 100 percent Percentage equity allocation in any given year is equal to 100 minus the investor's Retire 100-Age 120-Age 0 5 10 15 20 25 30 35 40 35 40 45 50 55 Ô0 65 70 75 55 60 65 70 75 80 85 90 95 Vanguard 55 65 70 80 85 90 90 90 90 T. while the dovmside risk of a severely low return immediately prior to retirement is controlled. Yrs. and maximum values are all slightly higher for the dynamic approach." there is still significant risk associated with this strategy. The table also provides comparable allocations to equity for the 100 . at which point the 100 . So. at which time downside equity risk is more pronounced. Thus. In Table 5. the estimated asset allocation to equity is given.age strategy relative to the static 70/30 allocation. Using this ratio. This allocation is based on underlying investments held in the fund as reported in each fund's prospect us. Obviously this approach is counter Table 4: Target-Date Fund Providers—Percentage Equity The following table lists five primary providers of target-date retirement funds. we also provide the mean IRR for each approach. while the deviation is slightly lower. consider the outcome should the year prior to reallocation he something like 2008.age strategies.12O -21 -25 -26 -28 -28 -23 -18 -14 -22 1 5 6 8 8 3 -2 -6 55 60 70 75 85 90 90 90 90 61 70 76 83 88 88 88 89 Average: ÏOIO Journal of Financial Planning 65 . as these funds earn ranks 2-7. H Percentage equity allocation in any given year is equal to 120 minus the investor's age. with one being the best performing strategy. The same conclusion and relationship exist for the 120 . Even though the average outcome for the 100/0 (until 10+) approach is technically "better. various types of equity) may be beneficial for the investor. For each provider. This result is intuitive in that the higher average return (and upside volatility) associated with equity is maximized for a longer period. the mean values of the TDFs are all higher than the 120 . As mentioned previously.age approach. Taken strictly. Rowe Price 55 65 75 80 85 90 90 90 90 Fidelity 50 55 65 70 80 85 85 85 90 TIAA-CREF American 53 60 70 75 80 85 85 85 85 Avg. minimum. 100 .TDF 54 Avg. The only better performing approach is the strategy of investing 100 percent in equity until 10 years prior to retirement. Much of this benefit is likely driven hy the decline in equity as retirement nears. which is apparent in Table 5 given the proximity of the terminal value characteristics. Consistent with our previous discussion. Allocation Strategy! 0/100 30/70 50/50 70/30 100/0 100-age 120-age 100/0 (until 10+) measures average return relative Thus. which suggests the added diversification within sector (that is. median.age strategy.vs. a higher reported ratio is indicative of more favorable risk-adjusted performance. the TDFs appear to closely follow the 120 . we rank order the strategies from highest to lowest.vs.

717.60 5.448 $3.86 4.810. she may still consider a reallocation at that point to further minimize risk.19 3.826 $1.718 $6.O99.23% 10.129.330.910. Specifically.871.789 $1.839 $2. Rowe Price Fidelity TIAA-CREF American Average TDF n 9 1 3 4 6 2 7 5 to what a rational investor would likely do.FPAjournal. Figures 1-5 provide the distributiojis for terminal portfolio values for some of our basic investor scenarios as defined above.658 $3.485. Fidelity.79% 8.05 Rankk ^ l an 14 13 12 10 8 50/50 70/30 100/0 100-Age 120-Age 100/0 ( u n t i l ! 0-^) Vanguard T.03 3.920 $4. it is not a purely objective method. The next two reflect the strategies of 100 age and a combination strategy that employs a 100 percent equity strategy for thefirst30 years and then switches to the 100 .17 2.041 $1. it is doubtful that such a provider would 66 Journal of Financial Planning MUCH 2010 invest assets 100 percent into equity at any point in the lifecycle.094.613 $4.Dev.867 $2.389 Terminal Value Std.67ü.838 $2.646 $5.31% 10. This flexibility suggests that financial planners can play a valuable role by helping investors determine the optimal reallocation time and process.760 $6. etc. Simulated Results. Strategy Û.270 $3.17% n. For example.497 $4.255. Although the historical analysis provides a rather concrete pic- ture ofthe relative benefits and disadvantages of the investment strategies.248 $4.733. we extend our analysis by conducting a simulation study of all the investment strategies using the characteristics from our historical analysis as defined above.27% 9.874.446.372. with one being highest {highest return to risk ratio).251 . Thus. hands-off approach using TDFs.225. we standardize allfiguresto a center value of $3 www.652 $1.432.043.933.796 Mean IRR 6.774 $1. Mínimum $^J2Xö2U $1.113. While it appears the TDFs are value enhancing.070.79 3.579 $4.476 $4.84% 10.320.289 $5.583 52.371 $4.096 $7.276. Vanguard.215. Figure 6 provides similar information for the average of all tai^et retirement funds offered hy leading investment firms (for example.52% 10.280 $6^57. previous studies (for example.a ^ approach for the last 10 years leading up to the target retirement date.176 $5. 43 observations is a comparatively small sample from which to draw conclusions.87 4.153.76% 10.081 $3.671 $2.62% Ratio 1. the lOO/O until 10+ strategy) may be one that target-date fund providers are unlikely to take.597.929 $780. so a more moderate reallocation over a few years may be reasonable.66% 10.196.008.Contributions ItMPlirOt) I RlFBEi Table 5: Summary Statistics for Historical Strategies The following table provides summary statistics for our investment strategies applied over historical 40-yedr rolling periods. For retirement portfolios.896 $4.078.132 $2. and maximum.912 $1.119 $4.976. beginning in 1926.129. Data are from Ibbotson (2008).731.777. while the 100/0 (until 10+) approach is likely to provide the hest outcome.43% 10.617 $2. For example. median. Finally. this would imply that the benefit of having 100 percent equity would be lost.89 4. minimum.336 $3.237.ÍH4 $2.788 $6. if an investor has experienced a large equity return. there may also be practical reasons to avoid such an approach. a large shift from 100 percent equity to 45 percent equity may be difficult for some investors because of tax or other issues.13 3.688.332.096. hut has 11 years (rather than 10) prior to retirement.043 $1. Further.019.475. we rank the approaches via this ratio. while investors with less discipline or knowle«^ (such as afinancialplanner would provide) should undertake a basic. which implies investors m i ^ t be prone to liquidate an investment subsequent to a poorly performing year. For comparability.582. The first three strategies employ a constant allocation for the entire 40-year period.354 $3. Thus.795. Further. From a legal and fiduciary standpoint. Thus.923 $6. the practical implication is that financial planners should consider a strategy of 100 percent equity until their clients are close to retirement. rangingfromzero to 100 percent equities.415 $4.905 $6.650 $4.666 $3.538 $4.72% 10.766. we provide the following metrics for the distribution of terminal values: mean.692 Medían i¡.583 $1.893 $5.323. we report the mean internal rate of return.121.588.829 $3.375.009.142. In addition.224 $1.461.76 2.094. in addition to encouraging a larger equity exposure early on to capture the benefits we have discussed.335 $1.). since these funds may be best suited for less sophisticated investors (or those without the benefit of advicefromfinancialplanners).314 $2.721 $1. as investors do not capture the higher potential returns associated with the volatility if they liquidate in down markets.496.842 $4.599.100.170.382 $3.211 $2.070. which is calculated as the mean return level relative to standard deviation of return.090. We also report a return-to-risk ratio {Ratio).15 4.008 $1.55% 9J4% 10.660.063.52 3.-100 30/70 InSoh $1.957 $4.419 $ $2.847 $1.682 $ Maximum Í3.87 2. standard deviation.762 $7. which provides the compounded return earned on the dollar investment over the life ofthe account relative to the average terminal value.040 $3. Sapp and Tiwari (2006)) s u ^ s t that individuals may "chase" returns. the optimal approach (that is.188 5625.804.432. We begin by examining the terminal values for each approach.

Among the TDFs.O0O.000 e. Fortunately for an equity investor. the results suggest.OOO 12. seems to affect the upside of the distribution to a larger degree (that is. implying that choice www. much of the standard deviation value for the 100 percent equity strategy comesfiroma few extreme values. which is the value an investor would earn in the 100 .000. thefi"equencydistribution for the 100 . In a straight meanvariance comparison. achieving both a higher mean terminal portfolio value and a lower standard deviation of results.00O 12000. The upside volatility is of little concern to the investor.¿ige approach is virtually identical to a static 50/50 allocation to debt and equity.000.000. however. As suggested above.000.23 percent and 6. the 100/0 strategy reports only 920 of the 1. that the majority of TDFs seem to follow a similar broad allocation approach. FPAj o u mal . Considering only the mean and the standard deviation of the terminal portfolio value over the 1. A review of thefiguressuggests that some approaches clearly outperform others with respect to the likelihood of achieving a higher ending portfolio value. The figures give some idea of the probability of achieving or exceeding that goal.000 Displayed Í »'S 00 3.000. as suggested previously. It is only the downside risk that is problematic. Table 6 (on page 70) MARCH Z I OO Journal of Financial Planning 67 . there are few instances of clear domination of one strategy over another. Most results surest a necessary weighing by the investor of additional potential return compared to increased risk. Thus. more than anything else. However. For example.000 simulated portfolio vidues.OOC Teals Distribution of Simulated Terminal Values Across Investment Strategies: 0/100 Viev.000 |lnfpnty 16.000 of such funds should primarily be based on fee structure and the nature of the underlying investments used in the fiind.0O0. it may be important to consider the results from another perspective.000 CartanSy 9. For example.21 percent. For example. We also note.o 120 Œ 1.OOIVIN I T E H P I E I O N i RlEBER Contributions million. however. similar to our earlier conclusions. whether this domination would hold in practice is dependent on many factors beyond the control of the simulation.000 1S.000 ¡-Wmily 6. Vanguard dominates American.000.000 Tri ats TV 100 20 3. the performance of underlying funds and the particular within-sector allocation of the general equity and debt pieces would affect tbe overall result. we have assembled some of that information in a table of values for numerical comparison horn this perspective.000 Figure 2: Distribution of Simulated Terminal Values Across Investment Strategies: 50/50 1.age strategy does dominate the constant 50 percent equity strategy. respectively) over the investment period. and TIAA-CREF dominates Fidelity by the same standard. positive skewness).TV 240 210 180 150 S . A mean-variance comparison would be sufficient evidence if the resulting terminal portfolio values were normally distributed. Because there is significant skewness to the simulation resxilts. both low and high. an investor might reasonably attempt to target a nominal terminal portfolio value of $3 million. that is not the case. the 100 .age approach should the equity and debt allocations earn their average returns (12. as stated in the figure. however. Ulis volatility.o rg Figure 1 : " ^ ^ ^ ^ l. indicating that 80 ending portfolio values are above $15 We note that some figures do not capture portfolios with extreme upside potential. with the various investment strategies or TDFs. to further the analysis. with this benefit comes a wider range of possible outcomes.000 run simulations.ox Cerlaint>r 9.000 Dia^ayed 1.

000 6. a higher allocation to equity.000.20 O 3. the strategies that seemed aggressive now appear more attractive. however. However. which we identified as a better strategy for financial planners to recommend to their clients.000 1S.000 Figure 4: Distribution of Simulated Terminal Values Across Investment ~ ^ ^ ^ ^ ^ Strategies: 100 . and the results appear to be more in line with the conclusions from our historical analysis in the prior section. Conclusion When planning for their clients' retirements. respectively.age and 120 .0OO. All this assumes. The major difference we find using the simulation method is with respect to the attractiveness of the average target-date fimd relative to the approach we suggested of employing 100 percent equit)' until close to retirement. For example. Hov/ever.000 run simulations that each strategy achieves or exceeds some minimum portfolio value.OOO Ortainty.OQOTnsIs Distribution of Simulated Terminal Values Across Investment Strategies: 100/0 Freouency View TV . while reducing the effort associated with such strategies. while only slightly increasing the likelihood of an extremely low ending value.000. So. from a risk return trade-off perspective. significantly increases upside potential. we again find that the 100 . this would definitely be a criterion to use in determining the preferred target-date fund provider. which is consistent even with many investment textbook examples. consider the column headed by the portfolio value of $3 million.Age 1. With simulation.00O 12. which most in our sample do not.000 16.age approaches are very similar to static 50/50 and 70/30 allocations. The column then shows the portion of the simulated runs that each of the individual 68 Joumai of Financial Planning \ H*>tH 2010 strategies achieved that result or better. financial planners must pay particular vyww. consistent with all prior results.OQ0.000 ¡lOC-OO 9.000.''* Further.FPAjournal.000 12. So. our results suggest that the TDFs may be just as attractive. the potential probability of all stated investment targets (beginning at $1 million) is lower than all other approaches. that the funds are not reducing the net return by adding an additional layer of management fees. as one might expect. [TÖÖOÖ X piuvides the percentage of the times (that is.0OO S.O0O. the risk of shortfall is higher. in both historical and simulated results.000 -Infinity 6000.0«). To interpret the table. whereas a pure debt approach (0 percent equity) [educes volatility and may appear to represent a good risk-retum tradeoff using the simulated returns. With this perspective. This perspective places less importance on overall return and more on achieving a targeted retirement standard of living.000. it appears that equity is "less risky" in the long term. So. Examining the other approaches reveals that all strategies have comparable probabilities of achieving at least $1 million.000.000 Trials Frequency \iew 999 Dispiayed TV 80 . it appears that TDFs do add significant value in that they provide returns that are similar to alternative approaches.Contributions D O L V I N I TEHPLEFON I RitBtii Figure 3: —-^^^^ l. whereas there is less volatility in returns. cumulative probability) in the 1.

particularly for investors who do not have the benefit of afinancialplanner www. The resulting allocation is therefore dependent on the underlying nature of the funds offered. including ones commonly ernployed hy major providers of so-called target-date. Benartzi and Thaler (2007) document that participants in sponsored retirement plans. Thus.000. The results of our analysis of these varying approaches provide some interesting comparisons.000.030 Tn»t* TV 3.000. This result would suggest that the added effort involved in reducing equity exposure over time may not be worthwhile.000 8. consistent with the case we examine. retirement hinds. as well as some applications for different categories of individual investors.DoLviN I TEHPLEION I RiEBEi attention to determining target asset allocations and especially to the split between overall equity and debt Wbile many financial planners may choose a static allocation.age and 120 .000 Certanty: JIOCOC 9. often employ a naïve "lin" strategy. allocating equally to all availahle choices. Sapp and Tiwari (2006) find that investors often chase returns. Second. these lifecycle funds may further enhance value. which su^ests a declining allocation to equity as their clients age. unless there is a financial intermediary willing to provide this service at tittle incremental cost—that is.000. 1.000 12 000. we find that the dynamic approaches of 100 .000 12.000 to guide such decisions. we note that only one approach seems to dominate the TDFs. Figure 5: ^^"^^~ x Trials Distribution of Simulated Terminal Values Across Investment Strategies: 100/0 (until 10+) TV 70 60 SO I 20 10 •n 3. First. or lifecycle. sucb as 50 percent equity/50 percent debt. it seems that the most logical basis for choosing a provider is the fee structure and underlying fund choice.000 Cartairty: 9.000.000. respectively. may be an outcome of underlying security choice.0OO. using a simple lifecycle fund would reduce the possibihty of these behavioral biases negatively affecting portfolio value. Beyond reducing the effort of investors. as these would be the critical differences among most funds in this category.FPAjournal. at which point a more conservative allocation is used. primarily in historical analysis: 100 percent equity until a few years (10 in our case) before retirement. Twofinalpoints are worth noting. but rather. For example. other planners may decide to employ commonly accepted heuri.000 6. We examine various allocation approaches. For example. which implies that asset allocation may not necessarily follow a planned strategy. clœely resemhling a 120 .age approach.000. a lifecycle fund provider. In either case.stics sucb as the 100 age approach. particularly if one considers the potential behavioral biases that many unsophisticated investors are prone to exhibit. this strategy has potential risks associated MARCH 2010 Journal of Financial Planning 69 .O0O Figure 6: Distribution of Simulated Terminal Values Across Investment Strategies: Average TDF f r«i)uency \^«v Sñi Oisplay«. we find that most TDFs seem to employ very similar allocation strategies. However.age are virtually equivalent to the static approaches of 50 percent equity/50 percent debt and 70 percent equity/30 percent debt.000 16.000.000 |lnfint/ i" 1S.

0 87. 3. 233) calculate the required contribution each year based on the historical mean returns on equity and fixed income assets over an 80-year period. which has properties that may be more representative of empirical financial data (for example. Thus. when saving. etc. so we view this as a cost of being less financially sophisticated. which may otherwise offset a smaller risk premium going forward. Shiller (2005) chooses to simulate returns using a lower mean return than the historical average.7 38. 2. etc. 4. For example.6 96.3 93.1 95. Unfortunately.1 $2M 19.) and reallocation process.) will highlight the most significant differences in the risk-return profile across targetdate fund providers.7 8. While we believe our findings contribute to the discussion on retirement planning. Other studies that focus on the post-retirement years (that is.1 68.2 49. but the same results would occur. 6.8 59. assuming the 40-year period remained constant.8 40.0 59.6 80.9 68. Spitzer and Singh (2008) also examine the efficacy of TDFs. 5. they do so with respect to the post-retire ment years.3 percent.6 49.8 94. the personal saving (and consumption) models of Friedman (1957) and Modigliani (1986) suggKt that investors take a iong-term view 70 Jourryal of Financial Planning 2010 . or accumulation phase. of the investment lifecycle. should not have a significant effect on saving during that year. Thus. less sophisticated investors simply use TDFs. the values are within reason of the stated distribution characteristics. the larger return values may actually make our estimates more (rather than less) conservative.2 94. small cap.6 48.1 In simulating returns.3 85. since we consolidate all equity into a single category. investors determine the amount they save in a given year not so much on their income for that particular year. while we suggest impatient. The same might be said for the international equity component as well. addressing underlying equity exposure (large cap. an initial period of 100 percent equity) hecause of legal and behavioral issues. Endnotes For example. we could "skew" the analysis one year. Thus.8 79.4 with significant down years just prior to réallocation. 7. Further.7 95.9 28. The distrihution of returns is approximately normal. they draw from a distribution in which the expected value is less than this historical me.6 78. Accordingly. this approach requires subjective assumptions of future return expectations. Further.0 $3M 7.8 87. and Pye (2009). the spending or distribution phase of the investment lifecycle) are Fullmer (2007). Thus. target-date fund providers are unlikely to implement such an approach (that is.2 18.3 87. to the extent it does not change the investor's perception of his or her expected lifetinae income.0 20. so the increased volatility will actually result in a lower ending value for the portfolio because increased volatility reduces the compounded return. our final suggestion is for more sophisticated. a given change in their portfolio's return for a particular year. year 9 v^.FPAjournal. According to data in the Economic Report of the President 2009. the investor contributions are insufficient to achieve the desired portfolio value more often than not.8 29. H iStrategy ^^M 0/100 30/70 50/50 70/30 100/0 100-Age 120-Age 100/0 (untino+) Average TDF Ht ^^ ^ ' 89. Schleef and Eisinger (2007.Contributions T E M P L E I O N I RiEBER Table 6: Cumulative Probabifity of Achieving Stated Terminal Value The following table provides the likelihood (in percent) of achieving a stated ending portfolio value.] 6.8 38. the average return over each simulated run remains consistent with the historical analysis. we conduct a robustness test using the student's models. which may seem unreasonable. year 10.0 68. However. Table B-47. however.1 29. S. Given that Social Security hegins around the 66"' Hi. patient investors (or for financial planners working with such clients)^^ to stay fully invested in equity until a few years prior to retirement.0 58.2 49.1 18.0 94.9 29. Our results from this analysis are qualitatively similar to those reported. p. There are some very large returns in Table 2. we recognize that future extensions may shed further light on this issue.0 $5N <0. however.3 S4M 2. the historically larger returns of smaller stocks are not captured. nonetheless. According to the.8 49^ 68. Weigand and Irons (2008). with potentially more extreme observations in either end of the distribution). www.3 94. larger occurrence around the mean value. the average aimual increase in weekly earnings in private nonagricultural industries from 1964 to 2007 was 4. hut more on their expected average annual income over their lifetime. Our study complements these works by examining the use of such funds in the pre-retirement period. which we feel incapable of making due to the inherent volatility of returns.financialplanners can add significant value by helping to determine the exact time (for example.

Thaler." Correlation and iUiquidity in Hedge Accessed online: www. This is a reflection of a geometrically 100 Percent of Performance. 2000. S." The American for debt. Corporate Finance. Lo. 2004." Financial compounded return. Tiwari. 1957. et al. 2007. ment 4: 73-85." Proceedings of the tion-proof waiver. "Portfolio Theory. Makarov. J." Behavior. however. M. and P Kaplan. 2008. R. P. "The Ufe-Cyde Personal ment Office. "Stock Return Momentum and Investor Fund tice (Fall).. and J. "A Comparative Analysis of Retirement Schleef. For most funds. Washington. even tliough it is often considered debt-like. we review the listing of investments held in each fund and designate any stock position as equity. Singh. 2007. "DiversificaRetrench? Reducing the Need with Parttion. Pye. Individual Thrift and the Wealth of Nations. lersey: Princeton University Press. New York: Fullmer. for most providers. 2007. G. Thus. We note that the average return for equity in Table 1 is 12.C: U. 17: 143-153.. S. Templeton.. This has changed. plus the fees of the underlying funds. Gitman (2004) illustrate that the deviaSocial Security Administration).S.. and S. 2004. "Shortfall Risk of Target-Date Funds During Planning 20: 40-51.. Ibbotson. we classify real estate as equity. T. 2007. tives 21: 81-104. Table Financial Services Review 16: 229-243. Expenses. Princeton." AmerReferences ican Economic Review 76: 297-313." Einancial paring Contribution and Asset AllocaServices Review 12: 115-128. Poterba. it is a good idea to have the standard malprac. we consider two additional approaches where we assume the equity allocation each year is equal to either the investor's age or age plus 20. "Hitting Portfolio Success Rates: Simulation or Missing the Retirement Target: ComVersus Overlapping Periods. Accounts Proposal for Social Security: Friedman. Both of these approaches are dominated by all but two of those strategies presented in our primary analysis. small cap. 2008. and R.. Stocks. GovernShiller. For our purposes. Many funds use multiple investment categories (for example. and Income. 2006. Vanguard's 2045 target-date fund charges a comprehensive fee of Fund Returns. For example. I. which is actually lower than the average of the underlying funds held.23 percent.). and A. "Life-Cycle Funds. nomics 74: 529-609. 10. tion Schemes of Simulated Portfolios. and Retirement 14." Financial Services iîevieiv Getmansky. most TDFs charged a fee to manage the structure. Bonds. Lifevolatihty exists. Bills and Weigand.. Journal of Financial Planning 21: 66-77. the Blended Six Index Funds Approach. and L. C. 2007-02 (U. For robustness. and D. Hubbard. We thank an anonyAcademy of Financial Services.. R. A Theory ofthe ConAn Evaluation. and R.. 2006. however. M. Eisinger. mulation: A New Strategy for Managing Retirement Income.Age Asset tice insurance or have clients sign a litigaAllocation Strategy. D. the assumption of no other fees seems valid in the current environment. Ibbotson AssoSequence Extend Portfolio Longevity?" ciates. www. R. Some positions are difficult to classify due to the underlying nature of investments. At creation." Journal of Financial Eco(#988362). and I." Journal of Economic PerspecNBER Working Paper. su^esting they are less than optimal. 11. 2005.Sapp. "The Effectiveness ofthe lOO-. B. 13. 2003. R." Journal 401(k) Plans: A Monte Carlo Study of of Financial Planning 22: 48-55." Journal of Financial and Economic Prac. however. "An Econometric Model of Serial Viceira. "HeurisAllocation Strategies and the Distributics and Biases in Retirement Savings tion of 401(k) Retirement Wealth. international. D. R. 2008. B-47. Irons. Megginson. For example. mous reviewer for niaking this point. Merton (2006) examines Paul Samuelson's numerous contributions to lifecycle investing. allocations to these investments are small (or nonexistent). Modigliani. Retirement. 2006. L. 1986. less than an arithmetic average when Kintzel. sumption Function. 'When Does a Bonds-First Withdrawal Inßation: 2008 Yearbook.Contributions 9. the optimal approach may actually be to increase exfMDSure to equity over time. Asset Allocation Poiicy Explain 40. etc. and R. So. including the possibility that." Economic Report ofthe Presidenl 2009. 2002. Economist 50: 9-31. "Lifecycle Asset Benartzi.FPAjournal. "Paul Samuelson and Financial Economics. "Does HASCH 2010 Journal of Financial Planning 71 .. 12. but it does create an added criterion for seiecting a fund provider. from an economic standpoint. Gitman. 90. New Smart. Cycle Investing. Given the potential risks of volatility. and W. Estes." Journal of Financial Spitzer. F. and Performance for Time Work and Annuitization. R." Policy Brief No. "Life Cycle.S." Journal of Investment ManageCooley. Smart. 2007.ssm. Thus. Megginson. For example. we also examine allocations tbat adjust linearly between each five-year breakpoint. Ibbotson. 15.55 percent." Yale ICF Working Paper. our primary conclusions are generally robust to reasonable modifications in our treatment of fund structure.. whereas the mean IRR for the all-equity portfolio in Table 4 is 11. as public outcry led to the elimination of the second layer of fees. H. "Modem Portfolio DecuSouthwestern. 2008. "When Should Retirees Chen. H. tion of returns over 30-year rolling periods is actually lower for equity than it is Merton.18 percent. Walz. our results are generally unchanged.. 2009. W.Meyaard. A. which is always Analysts Journal 56: 26-33. in unreported results.

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