PT  - JOURNAL ARTICLE
AU  - W. Cris Lewis
TI  - Measuring the Cost of Risk Reduction in Tax-Deferred Investing
AID  - 10.3905/jwm.11.2.78
DP  - 2008 Jul 31
TA  - The Journal of Wealth Management
PG  - 78--81
VI  - 11
IP  - 2
4099  - https://pm-research.com/content/11/2/78.short
4100  - https://pm-research.com/content/11/2/78.full
AB  - This article uses a deterministic approach to quantitatively measure the cost of risk reduction associated with the periodic rebalancing of a tax-deferred portfolio between higher risk assets (equities) and lower-risk assets (bonds). The cost of risk is defined as the difference in annuity income at retirement between a non-rebalanced portfolio and an annually rebalanced portfolio. The author finds that the cost of risk reduction is 22-24% of annuitized retirement income. The author also shows that the gain from using a Roth-type account (with after-tax contributions and tax-free distributions) varies between 9.5% and 16.3% of retirement income compared to the level of retirement income generated by the more typical tax-deferred plan.TOPICS: Portfolio construction, risk management, legal/regulatory/public policy