The S&P Shift to Retirement Income and Decumulation (STRIDE) Index Series incorporates an innovative risk management framework focused on providing increasing levels of clarity and stability around sustainable annual consumption in retirement. This paper tests S&P STRIDE’s approach to consumption risk management and asset allocation over the period from 2003 to 2018 for a hypothetical cohort of 2010 retirees by comparing the S&P STRIDE Glide Path 2010 Index Total Return to the average 2010 target date fund (TDF). Our main findings are as follows.
- The risk management approach employed by S&P STRIDE would have helped reduce uncertainty about retirement income through a period of variable interest rates, inflation, and market returns. In particular, we show how the risk management component of the S&P STRIDE Index can provide clarity and stability around affordable future consumption prior to and into retirement. The approach aims to help retirement plan participants seamlessly transition from accumulation to retirement.
- The risk management strategy can be used to reduce the impact of market, inflation, interest rate, and sequencing risks on retirement consumption.
- In contrast, we find that an industry average of traditional 2010 TDFs exhibited high variability in terms of retirement consumption over the period. Estimates of affordable consumption from such a strategy were highly sensitive to market risk, interest rates, and inflation. As a result, these strategies demonstrated large fluctuations in the level of expected retirement consumption over the period.
Retirement can mean different things to different people. For some, retirement means a complete stop from working. For others, it means ending a professional career in pursuit of something new. Regardless of the definition, retirement normally marks the point when the primary source of income ends and savers begin to rely on their accumulated balances to maintain their standard of living. Therefore, in the context of retirement, a primary goal is often to be able to sustain an inflation-adjusted stream of income, or a level of consumption associated with a standard of living, throughout retirement and to have relevant and meaningful information about what that level of sustainable consumption stream is before and throughout retirement.