Unraveling Retirement Strategies: Floor-and-Upside

Dick Cotton updated his earlier post on The Retirement Cafe on Floor-and-Upside strategies.

The floor-and-upside strategy for financing retirement is sometimes referred to as “safety first” and derives from The Theory of Life-Cycle Saving and Investing. The basic idea behind floor-and-upside is that a retiree devotes some of her retirement funding assets to building a lifetime stream of income and the remainder to an investment portfolio to provide liquidity and the possibility of increasing wealth over time.

Floor-and-upside is a compromise between using all our savings to buy annuities and investing it all in the stock market. We buy enough annuities to provide a safety net and invest the rest.

Using an annuity for the floor enables the upside portfolio to be invested more aggressively and lowers the retiree’s sequence of return risk by reducing the periodic amount spent from savings. This will often lead to a larger estate than a portfolio-spending strategy alone.

Read the full article.

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