Journal of Risk

Mean–variance optimality of a retirement lump sum conversion strategy: implementation in Australia

Roger Gay


Portfolios that are more efficient than those on the capital market line can be constructed by investing at the risk-free rate to purchase payouts that occur prior to the end of the single-term investment horizon. These hyperefficient portfolios provide the mean–variance solution to an outstanding problem in finance, namely how optimally to convert an employment termination lump sum into a retirement income stream. The mean–variance optimality can be used to investigate risk to the retiree under other criteria. The new results have profound implications for all stakeholders in retirement income provision industries and associated service industries. Implementation of the strategy is demonstrated in the Australian context.

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