Retirement Portfolios: Theory, Construction and Management BY Michael J. Zwecher

Retirement Portfolios: Theory, Construction and Management BY Michael J. Zwecher
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Retirement Portfolios:

Theory, Construction and Management

BY Michael J. Zwecher

Wiley Finance

Adobe E-Book 320 pages January 2010


Retirement portfolio guidance for finance professionals

Retirement is one of the most important parts of the financial planning process. Yet only two percent of financial advisors describe themselves as competent in retirement planning.

Constructing a retirement portfolio is viewed as a difficult endeavor, and the demands facing financial advisors responsible for this task continue to grow. The pressures are particularly intense due to events such as the financial crisis and oncoming rush of retiring baby boomers. It is imperative that financial advisors be equipped and ready to create appropriate retirement portfolios. That's why Michael Zwecher-a leading expert on retirement income-has created Retirement Portfolios.

Examines how portfolios should be prepped in advance so that the transition from "working" portfolio to retirement portfolio is smooth and seamless

Outlines how to create a portfolio that will provide income, continue to generate growth, and protect assets from disaster

Details the differences in managing a retirement portfolio versus managing portfolios during asset accumulation years

The ability to create retirement portfolios and manage their risks are skills you must possess to be an effective financial advisor. Retirement Portfolios will help you develop these essential skills and gain a better understanding of the entire process.


MICHAEL J. ZWECHER is a leading expert on retirement income. He has created guidance, designed products, tools, and portfolio constructions that appeal to the financial advisor community and their clients. Zwecher co-chairs the curriculum committee of the Retirement Income Industry Association. He spent over ten years at Merrill Lynch, holding senior roles in risk management and wealth management, where he ran the Investment Management Strategic Solutions team in the Financial Products Group. Prior to Merrill, he was a consultant with Deloitte, an assistant professor at the Graduate School of Business Administration at Fordham University, and a visiting associate professor at the University of Wisconsin¨CMadison. Zwecher holds a PhD in finance from the University of Wisconsin¨CMadison.


Preface. Acknowledgments.

PART ONE Framing the Problem.

CHAPTER 1 Portfolio Focus and Stage of Life.

A "Balanced" Portfolio Approach May Not Last Through Retirement.

Retirement Saving versus Retirement Income: An Illustration.

Products versus Solutions.


CHAPTER 2 The Top-Down View.

A Short Primer on Economic Models of Retirement Income.

An Overview of Economic Models of Retirement Income.

Reconciling Retirement Income Portfolio Construction with Accumulation.

The Dynamics of Risk Aversion.

Separation between Flooring and Upside.

Fully Funded versus Underfunded Flooring.

Monetizing Mortality.

Taking Market Risk.

Risk Is Risk, Is It Not?

Risk, Uncertainty, and Risk Aversion.


CHAPTER 3 The Importance of Lifestyle Flooring.

Amount of Flooring: A Balance Sheet View.

Retirement Requires Outcomes, Not Just Expectations.

Consumption Needs.

Yes/No Planning.

The Window for Maintaining Lifestyle.

The Bedrock Floor.

The Aspirational Floor.

The Finished Floor.

Nominal versus Real Flooring.

Types of Flooring.

Choosing a Flooring Type.


CHAPTER 4 Monetizing Mortality.

Annuities and Longevity Insurance.

Risk Pooling.

Pure Longevity Insurance.


Complex Annuities.

Credit Risk and Insurance.


CHAPTER 5 Flooring with Capital Markets Products.

Government-Issued Securities.

Creating a Floor of Strips.


Municipal Securities.

Corporate Securities and Other Financial Products.


PART TWO Adapting Portfolios for Retirement Income.

CHAPTER 6 Building Retirement Income Portfolios.

Portfolio Sleeves for Retirement Income.

Portfolio Intuition.

Basic Portfolio Constructs.

General Accumulation Plans for Retirement Income.

Taxes and Retirement Income Portfolios.


CHAPTER 7 Creating Allocations for Constructing Practical Portfolios by Age and Lifestyle Needs.

Flooring Allocations.

Longevity Allocations.

Precautionary Allocations.

Discretionary Equity Allocations: Assets with Risk.

Summary of Allocations.


PART THREE Managing Portfolios for Retirement Income.

CHAPTER 8 Rebalancing Retirement Income Portfolios.

Rebalancing the Discretionary Wealth Subportfolio.

Rebalancing the Functional Components.

Raising the Floor.


CHAPTER 9 Active Risk Management for Retirement Income Portfolios.

Static Example.

The View from the Capital Markets Line.

Risk Management and Expected Returns.

Simple Rules: For Passive and Active Risk Management.

An Inelegant but Simple Plan.

High-Water Mark Flooring.

The Cushion.

Risk Rules: Periodic Rebalancing.

Risk Rules: More Active Rebalancing.

CPPI and Volatility.

Taxation and Active Management.

Locking in Flooring: Long End versus Short End.

A Quick Note on Usability, Scalability, and Approaches Other Than Liability Matching.

Playing with Fire in a Retirement Income Portfolio.


PART FOUR Making It Happen.

CHAPTER 10 The Transition Phase.

What the Transition Is About.

The Order of Transition.

A Difficult Transition.

When to Transition.

Making the Transition Seamless.

Creating a Business Model that Includes a Natural Transition.

Sudden Transitions.


CHAPTER 11 Putting Together the Proposal.

Laying Out Client's Assets to Show Current Status.

Minimally Invasive Surgery: Reconfiguration Proposal.

Lifestyle and Flooring Types.

Accumulation Plan Types.


Passive Versus Active Risk Management.


CHAPTER 12 Market Segmentation.

Segmentation for Traditional Portfolios.

Segmentation for Retirement Income Portfolios.


CHAPTER 13 Products and Example Portfolios.

Overview of Products Offered.

Managing Expectations around Outcomes.

Example Portfolios.


CHAPTER 14 Preparing Your Client for a Retirement Income Portfolio.

Know Your Resources.

Lifestyle and Life Cycle.

Risks to Your Retirement Lifestyle.

Lifestyle and Flooring Types.

What the Adviser Needs from the Client.


CHAPTER 15 Salvage Operations, Mistakes, and Fallacies.

Mistakes and Fallacies.

How to Dig Out of a Hole.


Appendix A: History of Theoretical Developments in Life-Cycle Planning.

The Model.

Rising Lifestyles and Habit Formation.

Empirical Studies of Life-Cycle Behavior.

Appendix B: How Professionals Can Maximize the Usefulness of this Book.

Transaction-Oriented Salespeople.

Asset Gatherers.

Insurance Planners.

Financial Planners.

Portfolio Managers.