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–Madison. Zwecher holds a PhD in finance from the University of Wisconsin–Madison.

"A very practical and well argued philosophy for retirement funding that will make sense to practitioners." (Journal of Pensions, Economics and Finance, July 2011)

• Preface xiiiAcknowledgments xxiPART ONE Framing the ProblemCHAPTER 1 Portfolio Focus and Stage of Life 3A “Balanced” Portfolio Approach May Not Last Through Retirement 4Retirement Saving versus Retirement Income: An Illustration 10Products versus Solutions 11Summary 12CHAPTER 2 The Top-Down ViewA Short Primer on Economic Models of Retirement Income 13An Overview of Economic Models of Retirement Income 14Reconciling Retirement Income Portfolio Construction with Accumulation 15The Dynamics of Risk Aversion 19Separation between Flooring and Upside 21Fully Funded versus Underfunded Flooring 22Monetizing Mortality 23Taking Market Risk 23Risk Is Risk, Is It Not? 24Risk, Uncertainty, and Risk Aversion 25Summary 25CHAPTER 3 The Importance of Lifestyle Flooring 27Amount of Flooring: A Balance Sheet View 28Retirement Requires Outcomes, Not Just Expectations 30Consumption Needs 32Yes/No Planning 33The Window for Maintaining Lifestyle 34The Bedrock Floor 36The Aspirational Floor 37The Finished Floor 38Nominal versus Real Flooring 38Types of Flooring 42Choosing a Flooring Type 45Summary 48CHAPTER 4 Monetizing Mortality Annuities and Longevity Insurance 49Risk Pooling 50Pure Longevity Insurance 50Annuities 52Complex Annuities 54Credit Risk and Insurance 55Summary 57CHAPTER 5 Flooring with Capital Markets Products 59Government-Issued Securities 60Creating a Floor of Strips 61TIPS 63Municipal Securities 65Corporate Securities and Other Financial Products 66Summary 67PART TWO Adapting Portfolios for Retirement IncomeCHAPTER 6 Building Retirement Income Portfolios 71Portfolio Sleeves for Retirement Income 72Portfolio Intuition 76Basic Portfolio Constructs 77General Accumulation Plans for Retirement Income 81Taxes and Retirement Income Portfolios 81Summary 85CHAPTER 7 Creating Allocations for Constructing Practical Portfolios by Age and Lifestyle Needs 87Flooring Allocations 88Longevity Allocations 93Precautionary Allocations 96Discretionary Equity Allocations: Assets with Risk 97Summary of Allocations 99Summary 103PART THREE Managing Portfolios for Retirement IncomeCHAPTER 8 Rebalancing Retirement Income Portfolios 107Rebalancing the Discretionary Wealth Subportfolio 108Rebalancing the Functional Components 109Raising the Floor 111Summary 112CHAPTER 9 Active Risk Management for Retirement Income Portfolios 115Static Example 118The View from the Capital Markets Line 121Risk Management and Expected Returns 122Simple Rules: For Passive and Active Risk Management 122An Inelegant but Simple Plan 124High-Water Mark Flooring 125The Cushion 126Risk Rules: Periodic Rebalancing 128Risk Rules: More Active Rebalancing 130CPPI and Volatility 132Taxation and Active Management 133Locking in Flooring: Long End versus Short End 134A Quick Note on Usability, Scalability, and Approaches Other Than Liability Matching 135Playing with Fire in a Retirement Income Portfolio 135Summary 138PART FOUR Making It HappenCHAPTER 10 The Transition Phase 141What the Transition Is About 142The Order of Transition 144A Diffi cult Transition 146When to Transition 148Making the Transition Seamless 150Creating a Business Model that Includes a Natural Transition 152Sudden Transitions 153Summary 153CHAPTER 11 Putting Together the Proposal 155Laying Out Client’s Assets to Show Current Status 156Minimally Invasive Surgery: Reconfi guration Proposal 158Lifestyle and Flooring Types 160Accumulation Plan Types 160Allocations 161Passive Versus Active Risk Management 163Summary 165CHAPTER 12 Market Segmentation 167Segmentation for Traditional Portfolios 168Segmentation for Retirement Income Portfolios 169Summary 175CHAPTER 13 Products and Example Portfolios 177 Overview of Products Offered 177Managing Expectations around Outcomes 184Example Portfolios 185Summary 202CHAPTER 14 Preparing Your Client for a Retirement Income Portfolio 203Know Your Resources 207Lifestyle and Life Cycle 210Risks to Your Retirement Lifestyle 212Lifestyle and Flooring Types 214What the Adviser Needs from the Client 221Summary 221CHAPTER 15 Salvage Operations, Mistakes, and Fallacies 223Mistakes and Fallacies 224How to Dig Out of a Hole 228Summary 233APPENDIX AHistory of Theoretical Developments in Life-Cycle Planning 235The Model 235Rising Lifestyles and Habit Formation 238Empirical Studies of Life-Cycle Behavior 241APPENDIX BHow Professionals Can Maximize the Usefulness of this Book 243Transaction-Oriented Salespeople 243Asset Gatherers 245Insurance Planners 246Financial Planners 247Portfolio Managers 248Notes 251Glossary 265References 271Index 275

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–Madison. Zwecher holds a PhD in finance from the University of Wisconsin–Madison.

"A very practical and well argued philosophy for retirement funding that will make sense to practitioners." (Journal of Pensions, Economics and Finance, July 2011)

• Preface xiiiAcknowledgments xxiPART ONE Framing the ProblemCHAPTER 1 Portfolio Focus and Stage of Life 3A “Balanced” Portfolio Approach May Not Last Through Retirement 4Retirement Saving versus Retirement Income: An Illustration 10Products versus Solutions 11Summary 12CHAPTER 2 The Top-Down ViewA Short Primer on Economic Models of Retirement Income 13An Overview of Economic Models of Retirement Income 14Reconciling Retirement Income Portfolio Construction with Accumulation 15The Dynamics of Risk Aversion 19Separation between Flooring and Upside 21Fully Funded versus Underfunded Flooring 22Monetizing Mortality 23Taking Market Risk 23Risk Is Risk, Is It Not? 24Risk, Uncertainty, and Risk Aversion 25Summary 25CHAPTER 3 The Importance of Lifestyle Flooring 27Amount of Flooring: A Balance Sheet View 28Retirement Requires Outcomes, Not Just Expectations 30Consumption Needs 32Yes/No Planning 33The Window for Maintaining Lifestyle 34The Bedrock Floor 36The Aspirational Floor 37The Finished Floor 38Nominal versus Real Flooring 38Types of Flooring 42Choosing a Flooring Type 45Summary 48CHAPTER 4 Monetizing Mortality Annuities and Longevity Insurance 49Risk Pooling 50Pure Longevity Insurance 50Annuities 52Complex Annuities 54Credit Risk and Insurance 55Summary 57CHAPTER 5 Flooring with Capital Markets Products 59Government-Issued Securities 60Creating a Floor of Strips 61TIPS 63Municipal Securities 65Corporate Securities and Other Financial Products 66Summary 67PART TWO Adapting Portfolios for Retirement IncomeCHAPTER 6 Building Retirement Income Portfolios 71Portfolio Sleeves for Retirement Income 72Portfolio Intuition 76Basic Portfolio Constructs 77General Accumulation Plans for Retirement Income 81Taxes and Retirement Income Portfolios 81Summary 85CHAPTER 7 Creating Allocations for Constructing Practical Portfolios by Age and Lifestyle Needs 87Flooring Allocations 88Longevity Allocations 93Precautionary Allocations 96Discretionary Equity Allocations: Assets with Risk 97Summary of Allocations 99Summary 103PART THREE Managing Portfolios for Retirement IncomeCHAPTER 8 Rebalancing Retirement Income Portfolios 107Rebalancing the Discretionary Wealth Subportfolio 108Rebalancing the Functional Components 109Raising the Floor 111Summary 112CHAPTER 9 Active Risk Management for Retirement Income Portfolios 115Static Example 118The View from the Capital Markets Line 121Risk Management and Expected Returns 122Simple Rules: For Passive and Active Risk Management 122An Inelegant but Simple Plan 124High-Water Mark Flooring 125The Cushion 126Risk Rules: Periodic Rebalancing 128Risk Rules: More Active Rebalancing 130CPPI and Volatility 132Taxation and Active Management 133Locking in Flooring: Long End versus Short End 134A Quick Note on Usability, Scalability, and Approaches Other Than Liability Matching 135Playing with Fire in a Retirement Income Portfolio 135Summary 138PART FOUR Making It HappenCHAPTER 10 The Transition Phase 141What the Transition Is About 142The Order of Transition 144A Diffi cult Transition 146When to Transition 148Making the Transition Seamless 150Creating a Business Model that Includes a Natural Transition 152Sudden Transitions 153Summary 153CHAPTER 11 Putting Together the Proposal 155Laying Out Client’s Assets to Show Current Status 156Minimally Invasive Surgery: Reconfi guration Proposal 158Lifestyle and Flooring Types 160Accumulation Plan Types 160Allocations 161Passive Versus Active Risk Management 163Summary 165CHAPTER 12 Market Segmentation 167Segmentation for Traditional Portfolios 168Segmentation for Retirement Income Portfolios 169Summary 175CHAPTER 13 Products and Example Portfolios 177 Overview of Products Offered 177Managing Expectations around Outcomes 184Example Portfolios 185Summary 202CHAPTER 14 Preparing Your Client for a Retirement Income Portfolio 203Know Your Resources 207Lifestyle and Life Cycle 210Risks to Your Retirement Lifestyle 212Lifestyle and Flooring Types 214What the Adviser Needs from the Client 221Summary 221CHAPTER 15 Salvage Operations, Mistakes, and Fallacies 223Mistakes and Fallacies 224How to Dig Out of a Hole 228Summary 233APPENDIX AHistory of Theoretical Developments in Life-Cycle Planning 235The Model 235Rising Lifestyles and Habit Formation 238Empirical Studies of Life-Cycle Behavior 241APPENDIX BHow Professionals Can Maximize the Usefulness of this Book 243Transaction-Oriented Salespeople 243Asset Gatherers 245Insurance Planners 246Financial Planners 247Portfolio Managers 248Notes 251Glossary 265References 271Index 275