Pavonia LDI Consultants offers asset management and advisory services to small firms with defined benefit plans and to individuals planning for retirement.

At the beginning of 2019, Whitney Adams, senior adviser, meets with her new client, Donald Berendsen, in order to review the fixed-income portion of his retirement portfolio. Berendsen, who plans to retire in four years, intends to use this part of the portfolio to supplement income he will be receiving from Social Security, a US government retirement income program.

Berendsen explains to Adams, "I plan to continue saving for retirement, regularly adding funds to the portfolio until I retire, and I would like a low-risk solution to provide additional retirement income."

Adams replies to Berendsen, "We focus on the ability of the portfolio to meet future cash flow needs and seek to immunize the liabilities as an objective in the management of the portfolio. If the fixed-income portfolio achieves an average annual investment return of at least 4% for the next four years, the proceeds of its liquidation will be enough to purchase an annuity sufficient to provide the funds needed to supplement your Social Security benefits. Until then, we will observe the following principles for managing the portfolio:

Principle I. Our investment strategy is structured to address a Type I liability.

Principle II. The strategy should begin by analyzing the size and timing of liabilities.

Principle III. The solution will require an asset-driven liability framework as opposed to a liability-driven investing one.