Investors can reduce “living standard risk” by using a life-cycle financial planning framework to develop better spending, saving and investment decisions. All investors face risks but the ability to spend at a desired level in retirement should be the ultimate concern. Spending too aggressively can be as risky, or riskier, as investing aggressively when determining one's future standard of living.
Financial planning and portfolio management tools tend to focus on the tradeoff between expected returns and risk. We demonstrate that more holistic life-cycle planning can help decision-making and reduce living standard risk. Our research was based on Canadians who must decide whether to invest globally and, importantly, whether to hedge the associated exchange rate risk. A life-cycle planning tool can support investors in making spending and investment decisions to manage risks to their living standards.
Authors: Alain Bergeron, MSc, CFA, Mackenzie Investments; Laurence Kotlikoff, PdD, William Fairfield Warren Professor of Economics at Boston University; Todd Mattina, PhD, Mackenzie Investments; Allan Seychuk, CFA Mackenzie Investmentsview more white papers
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