Robert C. Merton (School of Management Distinguished Professor of Finance at MIT Sloan School of Management, 1997 Nobel Prize in Economics and GCFP co-director) has long advocated for better ways to save for retirement. Merton teamed up with Arun Muralidhar, co-founder of AlphaEngine Global Investment Solutions, to put the concept of Retirement Security Bonds (RSBs) into the market in Brazil. RSBs allow savers to largely guarantee a level of consumption in retirement (Merton and Maralidhar have written in detail about these innovative bonds, previously named standard-of-living-indexed, forward-starting, income-only securities, or SeLFIES).
The idea is simple and elegant, and government inflation-indexed bonds have become quite common in the US and abroad. These bonds return a fixed yield plus the rate of inflation and can be used as the basis for guaranteeing an income (inflation-adjusted) in retirement. For example, a $100,000 investment today might allow a saver to collect $8,000 a year (in today’s dollars) for 20 years starting in the year 2035. No matter the level of inflation, the retiree gets $8,000 of purchasing power. The actual consumption level on a $100,000 investment ($8,000 in this example) would depend on the yield from a government inflation-indexed bond, the number of years of the payment (20 years in this example), and the start date of the payments (2035 in this example). The yield is known upfront and those saving for retirement could tailor the start date and years of payment to their retirement needs. Rather than trying to accumulate a certain size portfolio of financial assets and wondering whether it will be enough, this approach allows for easier consumption planning for retirement.
A product is now launching in Brazil, a country that has grappled with high inflation in the past, that uses these ideas. The National Treasury Program in Brazil has launched RendA+ Treasury: a new bond to serve investors who want to complement their retirement. Savers can choose their expected retirement date and will receive a known payment (inflation-adjusted) for 20 years. For some retirees, there is an added benefit that the income is tax-free. This is an exciting development based on the work of Professor Merton and MIT Sloan alumnus Arun Muralidhar.