Existing retirement investment solutions are not meeting the needs of future retirees and mass-customised solutions will perform better than traditional balanced or target-date funds for investors in the retirement space, according to EDHEC-Risk Institute.
In a paper on investment management, EDHEC-Risk Institute analysed the “tough engineering problem” in retirement investing of designing scalable strategies customised for individuals, and forwarded the view that goal-based investing principles should be used to design solutions tailored to investor needs.
EDHEC-Risk Institute director, Professor Lionel Martellini said a strong solution would combine safety and performance to meet the dual objectives of meeting investors’ essential goals as well as their aspirational goals for investing.
Essential goals for investors had a focus on safety and included meeting minimum levels of replacement income, while aspirational goals were a focus on performance and reaching target levels.
Martellini said the challenge in the space was to address the needs of many investors through limited fund options and investors should instead make use of a goal-hedging portfolio intended to replicate the value of a deferred annuity, and a performance-seeking portfolio for long-term performance.
“Dynamic goals-based investing principles can be used to design a parsimonious set of retirement investment strategies that meet the needs of individual investors preparing for retirement,” he said.
“They secure an essential level of replacement income and also have good probabilities of generating much more replacement income than what they would have obtained by investing in annuities.
“This is possible in a cost-efficient and reversible format.”