Formulating retirement targets and the impact of time horizon on asset allocation
DOI:
https://doi.org/10.61190/fsr.v13i1.4779Keywords:
Asset allocation, Financial planning;, RetirementAbstract
This paper looks at standard retirement targets such as "70@65," meaning 70% income replace ment at age 65, and reconsiders them in a probabilistic setting. The paper uses a chance constrained programming model, supplemented with Monte Carlo simulation, to extend the target to "70%1 or 70@65" meaning a 70% chance of meeting the target. One implication of the paper is that asset mix is a function or the investment horizon. This conflicts with the constant portfolio result of Samuelson et al. but supports the standard "your age in bonds" rule of thumb of financial planning professionals.
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Copyright (c) 2004 Academy of Financial Services
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