Preface xiii
Acknowledgments xxi
PART ONE Framing the Problem
CHAPTER 1 Portfolio Focus and Stage of Life 3
A "Balanced" Portfolio Approach May Not Last Through Retirement 4
Retirement Saving versus Retirement Income: An Illustration 10
Products versus Solutions 11
Summary 12
CHAPTER 2 The Top-Down View
A Short Primer on Economic Models of Retirement Income 13
An Overview of Economic Models of Retirement Income 14
Reconciling Retirement Income Portfolio Construction with Accumulation 15
The Dynamics of Risk Aversion 19
Separation between Flooring and Upside 21
Fully Funded versus Underfunded Flooring 22
Monetizing Mortality 23
Taking Market Risk 23
Risk Is Risk, Is It Not? 24
Risk, Uncertainty, and Risk Aversion 25
Summary 25
CHAPTER 3 The Importance of Lifestyle Flooring 27
Amount of Flooring: A Balance Sheet View 28
Retirement Requires Outcomes, Not Just Expectations 30
Consumption Needs 32
Yes/No Planning 33
The Window for Maintaining Lifestyle 34
The Bedrock Floor 36
The Aspirational Floor 37
The Finished Floor 38
Nominal versus Real Flooring 38
Types of Flooring 42
Choosing a Flooring Type 45
Summary 48
CHAPTER 4 Monetizing Mortality Annuities and Longevity Insurance 49
Risk Pooling 50
Pure Longevity Insurance 50
Annuities 52
Complex Annuities 54
Credit Risk and Insurance 55
Summary 57
CHAPTER 5 Flooring with Capital Markets Products 59
Government-Issued Securities 60
Creating a Floor of Strips 61
TIPS 63
Municipal Securities 65
Corporate Securities and Other Financial Products 66
Summary 67
PART TWO Adapting Portfolios for Retirement Income
CHAPTER 6 Building Retirement Income Portfolios 71
Portfolio Sleeves for Retirement Income 72
Portfolio Intuition 76
Basic Portfolio Constructs 77
General Accumulation Plans for Retirement Income 81
Taxes and Retirement Income Portfolios 81
Summary 85
CHAPTER 7 Creating Allocations for Constructing Practical Portfolios by Age and Lifestyle Needs 87
Flooring Allocations 88
Longevity Allocations 93
Precautionary Allocations 96
Discretionary Equity Allocations: Assets with Risk 97
Summary of Allocations 99
Summary 103
PART THREE Managing Portfolios for Retirement Income
CHAPTER 8 Rebalancing Retirement Income Portfolios 107
Rebalancing the Discretionary Wealth Subportfolio 108
Rebalancing the Functional Components 109
Raising the Floor 111
Summary 112
CHAPTER 9 Active Risk Management for Retirement Income Portfolios 115
Static Example 118
The View from the Capital Markets Line 121
Risk Management and Expected Returns 122
Simple Rules: For Passive and Active Risk Management 122
An Inelegant but Simple Plan 124
High-Water Mark Flooring 125
The Cushion 126
Risk Rules: Periodic Rebalancing 128
Risk Rules: More Active Rebalancing 130
CPPI and Volatility 132
Taxation and Active Management 133
Locking in Flooring: Long End versus Short End 134
A Quick Note on Usability, Scalability, and Approaches Other Than Liability Matching 135
Playing with Fire in a Retirement Income Portfolio 135
Summary 138
PART FOUR Making It Happen
CHAPTER 10 The Transition Phase 141
What the Transition Is About 142
The Order of Transition 144
A Diffi cult Transition 146
When to Transition 148
Making the Transition Seamless 150
Creating a Business Model that Includes a Natural Transition 152
Sudden Transitions 153
Summary 153
CHAPTER 11 Putting Together the Proposal 155
Laying Out Client's Assets to Show Current Status 156
Minimally Invasive Surgery: Reconfi guration Proposal 158
Lifestyle and Flooring Types 160
Accumulation Plan Types 160
Allocations 161
Passive Versus Active Risk Management 163
Summary 165
CHAPTER 12 Market Segmentation 167
Segmentation for Traditional Portfolios 168
Segmentation for Retirement Income Portfolios 169
Summary 175
CHAPTER 13 Products and Example Portfolios 177
Overview of Products Offered 177
Managing Expectations around Outcomes 184
Example Portfolios 185
Summary 202
CHAPTER 14 Preparing Your Client for a Retirement Income Portfolio 203
Know Your Resources 207
Lifestyle and Life Cycle 210
Risks to Your Retirement Lifestyle 212
Lifestyle and Flooring Types 214
What the Adviser Needs from the Client 221
Summary 221
CHAPTER 15 Salvage Operations, Mistakes, and Fallacies 223
Mistakes and Fallacies 224
How to Dig Out of a Hole 228
Summary 233
APPENDIX A
History of Theoretical Developments in Life-Cycle Planning 235
The Model 235
Rising Lifestyles and Habit Formation 238
Empirical Studies of Life-Cycle Behavior 241
APPENDIX B
How Professionals Can Maximize the Usefulness of this Book 243
Transaction-Oriented Salespeople 243
Asset Gatherers 245
Insurance Planners 246
Financial Planners 247
Portfolio Managers 248
Notes 251
Glossary 265
References 271
Index 275
