Is it Time for a Paradigm Shift to Life-Cycle Investing?

Life-cycle investing has been around for many years.

Zvi Bodie is one of the most articulate and visible advocates.  His book "Worry Free Investing" lays-out the fundamentals and makes a case for the life-cycle approach to investing.

In a nutshell, life-cycle investing focuses on smoothing consumption over the course of one's lifetime.  This stands in contrast to conventional approaches to financial planning which seek to accumulate assets and maximize terminal wealth:

Instead of managing risk through diversified securities and asset classes, life-cycle investing transfers some risk to third parties such as insurance companies, which market guaranteed products like annuities, segregated funds and a new hybrid of both, called Guaranteed Minimum Withdrawal Benefits (GMWBs).

The approach takes into account not just current financial wealth, but also human capital. That's one's future earning potential, which can be disrupted by still other risks, such as death or disability. These can be managed with life or disability insurance.

Thus, life-cycle investing adds hedging and insurance strategies to traditional saving and diversification. The point is not to accumulate wealth just for the sake of it, but to ensure that consumption can be maintained for a lifetime.

Life-cycle investing involves hedging and the use of insurance--including annuities--to both manage risk and smooth consumption over the course of both working years and retirement. 

While life-cycle theory has received limited coverage on a relative basis in the financial media, the investing approach may very well prove to be the ideal foundation for financial planning in a post-financial crisis world. 

It is an important topic that will receive continued coverage at Annuity Digest. 

Source: Financial Post

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