Matching strategy

From Bogleheads
Jump to: navigation, search

The process of matching strategies allows an investor planning for retirement to meet specific financial targets with near certainty. Matching strategies only work with fixed income and insurance products. There must be a known maturity date for the asset so the timing of the asset and liability can be matched. For this reason, stocks and mutual funds cannot be used in matching strategies. For the money you ‘must’ have, use matching strategies and for the money you would ‘like’ to have, use diversification and risky assets.

Matching strategies are very safe, but offer little or no upside potential. Diversification strategies are risky, but offer relatively high expected returns and upside potential.

An important reason that matching strategies are safer is because typically they use hedging to mitigate risk. By hedging risk you are protected against both non-market and market (systemic) risk. Portfolio strategies mitigate risk through diversification. By definition diversification can only protect you against non-market risk. A well-diversified portfolio of risky assets provides no protection against market risk.

Matching strategy examples

An example of a matching strategy is purchasing a zero coupon nominal Treasury to pay off your mortgage balance in your targeted retirement year. A higher return would likely be obtained by simply paying down the mortgage, but this must be weighed against the liquidity provided by the maturing bond.

There are several matching strategies to meet college costs.

A bequest matching strategy is whole life insurance with the heir as beneficiary. For someone who actually lives 25 years or more in retirement a combination of a life annuity and whole life may provide both a higher living standard to the retiree and a larger bequest to the heir than a diversification strategy based on SWR (Safe Withdrawal Rate) rules. In any event such a strategy greatly decreases the uncertainty of outcomes to both compared to a diversification strategy.

Matching strategies for retirement planning

There are many retirement matching strategies. Here is a list of some major ones.

It is important to think in terms of product diversification and allocation. Instead of just focusing on investment diversification (stocks and bonds), manage retirement living standard risk by hedging, insuring, and diversifying. For example:[1]

Matching Strategies for Retirement Planning
Category Matching Strategy
Social Security benefits (When to take) Hedging
Defined benefit pension benefit (When to take) Hedging
Cash balance pension benefit (When to take) Hedging
Private life annuities (How much & at what times) Hedging
TIPS ladders and I-bonds (How much & how long) Insuring
Medigap coverage (How much) Insuring
Long-term care insurance (How much) Insuring
Portfolio of diversified risky and safe investment assets (How much risk) Diversifying
Housing assets (Sell & rent, reverse mortgage, sell & buy down, etc.) Hedging or Insuring

Diversification of an investment portfolio cannot diversify away market risk, which leaves you with considerable risk exposure in the form of market risk.[1]

Hedging and insuring have greater risk reduction. But, unlike portfolio diversification, hedging offers no upside potential. Also, there is less upside potential with insuring than there is with diversification. Hedging and insuring locks you into part of your retirement income; while portfolio diversification does not.[1]

Matching strategies as related to economic principles

Below is a link to a (very short) paper that puts matching strategies in context with the fundamental principles of economics.[2]

A Note on Economic Principles and Financial Literacy (enable browser cookies to download)

Abstract: Finance is a branch of economics that deals with budgeting, saving, investing, borrowing, lending, insuring, diversifying, and matching. In setting standards of financial literacy we ought to make sure they are consistent with the basic principles taught in economics courses.


  1. 1.0 1.1 1.2 Re: It’s the income, stupid!, forum discussion by bobcat2, direct link to post.
  2. Bodie, Zvi, A Note on Economic Principles and Financial Literacy(April 2006). Networks Financial Institute Policy Brief No. 2006-PB-07. Last revised November 18, 2008