Improving Retirement Coverage Durability with Target Volatility Strategy for Changing Interest Rate Environment

Abstract

Motivated by the recent market turbulence triggered by the COVID‐19 pandemic and the changing interest rate environment, we propose an improved investment strategy for extending retirement coverage in the pension decumulation stage. The newly proposed strategy with interest rate dependent volatility targets can significantly improve the durability of conventional retirement portfolios with constant risky and risk‐free asset allocations. This conclusion follows from our analysis in the simulated financial market with stochastic interest rate and stochastic volatility, based on the Hybrid Heston‐Vasicek model. Consequently, the proposed target volatility strategy could be a suitable option for more reliable retirement coverage after retirement.