The savings and investment plan that one follows over the course of one’s working and retirement life is among the most critical decisions an individual can make. The balance between consumption and savings determines one’s overall quality of life, not just in the “golden years” but throughout one’s career as well. The most common academic framework for evaluating lifetime consumption and savings decisions is the life-cycle hypothesis, first developed by Nobel laureate Franco Modigliani in the early 1950s. In Modigliani’s framework, risk-averse households seek to smooth consumption across their working and retirement years by saving a portion of wage income and spending from accumulated savings in retirement. Critically, Modigliani’s work predicts that individuals prefer a smooth consumption stream to a volatile one. One of the key implications of consumption-smoothing is that investors wish to maintain their quality of lifestyle when they stop working. Hence, the savings and asset allocation plan should be calibrated such that the likelihood of an abrupt change in one’s consumption is minimized as one approaches retirement. This is the guiding philosophy in PIMCO’s glide path construction.

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The Author

James Moore

Product Manager, Head of Investment Solutions

Steve Sapra

Head of Client Analytics, North America

Niels K. Pedersen

Quantitative Research Analyst, Asset Allocation Research

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Disclosures

This paper contains hypothetical analysis. Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

Return assumptions are for illustrative purposes only and are not a prediction or a projection of return. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods.

Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) that adjusts over time as the participant’s age increases and their time horizon to retirement shortens. The basis of the Glide Path is to reduce the portfolio risk as the participant’s time horizon decreases. Typically, younger participants with a longer time horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and they are able to make larger contributions (depending on various factors such as salary, savings, account balance, etc.). Generally, older participants and eligible retirees have shorter time horizons to retirement and their investment risk level declines as preserving income wealth becomes more important.

Charts are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product. It is not possible to invest directly in an unmanaged index.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government.  Equities may decline in value due to both real and perceived general market, economic and industry conditions. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.

There is no guarantee that the PIMCO glide path will work under all market conditions or is suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the current opinions of the manager and such opinions are subject to change without notice.  This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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