ROBERT C. MERTON | Distinguished Professor of Finance, Nobel Laureate – Economics 1997, MIT Sloan School of Management
ARUN S. MURALIDHAR | Co-founder and Client Portfolio Manager, AlphaEngine Global Investment Solutions LLC

There is a looming retirement crisis, as individuals are increasingly being asked to take responsibility for their own retirement planning and a majority of these individuals are financially unsophisticated. They cannot perform basic compounding calculations and do not understand the impact of inflation, both critical aspects of retirement planning. Yet, these individuals are being tasked with the responsibility for three complex, interconnected decisions: 

- How much to save

- How to invest (with many additional decisions), and

- How to decumulate one’s portfolio at retirement.

Compounding these challenges, current financial instruments and products (e.g. T-Bills, TIPs, or Target Date Funds) are risky because they focus on the wrong goal – wealth at retirement, as opposed to how much retirement income can be guaranteed to support pre-retirement standard-of-living. Moreover, annuities are complex, costly, and illiquid and seldom used. Without financial innovation and a change in the metric for measuring retirement success, many individuals will retire poor – a financially and socially undesirable outcome for any country. 

This paper presents an easy, quick and efficient solution for countries to address all these challenges and improve retirement security by creating and issuing an innovative new bond – SeLFIES (Standard-of-Living indexed, Forward-starting, Income-only Securities). 

- The SeLFIES bond is a single, liquid, low-cost, low-risk instrument, easy-to-understand for even the most financially unsophisticated individual, because it embeds accumulation, decumulation,compounding and inflation-adjustments. 

- SeLFIES is good for governments too, as the bond lowers the risk of individuals retiring poor, improves balance sheet management, and funds infrastructure. 

- SeLFIES can ensure longevity risk protection and hedge standard-of-living risk, a key unmanaged risk globally today, and has the potential to become the “currency of retirement”.