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Article

A Glide Path for Target Date Fund Annuitization

Moshe A. Milevsky, Huaxiong Huang and Virginia R. Young
The Journal of Retirement Summer 2015, 3 (1) 27-37; DOI: https://doi.org/10.3905/jor.2015.3.1.027
Moshe A. Milevsky
is an associate professor of finance at the Schulich School of Business, York University and Executive Director of the IFID Centre in Toronto, Canada.
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  • For correspondence: milevsky@yorku.ca
Huaxiong Huang
is an associate director of the Fields Institute and a professor of mathematics at York University in Toronto, Canada.
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  • For correspondence: hhuang@yorku.ca
Virginia R. Young
is a professor of mathematics at the University of Michigan in Ann Arbor, MI.
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  • For correspondence: vryoung@umich.edu
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Abstract

We describe a recursive algorithm that computes the timing and quantity of purchase of deferred income annuities (DIAs) within target-date funds (TDF) in defined contribution (DC) plans, although the algorithm could also be applied within any retirement account. We map a relatively small number of statistical parameters into a rule that conveys the dollar amount of DIAs to be purchased at any given age and time. Our model is of particular relevance given the recent announcement by the U.S. Treasury Department approving the inclusion of life annuities in 401(k) plans and in TDFs in particular. Note that to qualify as a TDF requires a methodology based on “generally accepted investment theories using a consistent investment strategy.” This article offers one possible such theory in the context of DIAs.

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The Journal of Retirement: 3 (1)
The Journal of Retirement
Vol. 3, Issue 1
Summer 2015
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A Glide Path for Target Date Fund Annuitization
Moshe A. Milevsky, Huaxiong Huang, Virginia R. Young
The Journal of Retirement Jun 2015, 3 (1) 27-37; DOI: 10.3905/jor.2015.3.1.027

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A Glide Path for Target Date Fund Annuitization
Moshe A. Milevsky, Huaxiong Huang, Virginia R. Young
The Journal of Retirement Jun 2015, 3 (1) 27-37; DOI: 10.3905/jor.2015.3.1.027
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  • Article
    • Abstract
    • MODEL INPUTS
    • ECONOMICS OF THE MODEL INPUTS
    • GLIDE-PATH ALGORITHM
    • EFFECT OF THE MODEL INPUTS ON PURCHASING DIAS
    • THE LAST WORD: WHAT IS MISSING?
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • Editor’s Letter
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  • Editor’s Letter
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