Dynamic Lifecycle Strategies for Target Date Retirement Funds

Abstract

In this paper, we extend this alternative approach by proposing a dynamic lifecycle strategy which is flexible in adjusting its allocation between growth and conservative assets as the retirement date approaches depending on the extent that the plan member?s wealth accumulation objective has been achieved at that time. In other words, this strategy is responsive to past performance of the portfolio relative to the investor?s target return in determining the mix of assets in future periods. While initially it invests heavily in equities just as any other lifecycle strategy, the switching to fixed income is not automatic. It only takes place if the investor has accumulated wealth in excess of the target accumulation at the point of switch. Also, after switching to conservative assets, if the accumulation falls below the target in any period, the direction of switch is reversed by moving away from fixed income and towards stocks. We compare and contrast the outcomes of this dynamic strategy with those achieved by following a regular deterministic lifecycle strategy