Products like annuities offer secure sources of income with little flexibility. Other products like bonds and target-date funds offer flexibility with little security.

“There’s no absolute meaning for the concept of a safe asset; it’s very investor and goal specific,” says Martellini. “If I need $100 in 10 years, I should buy a 10-year discounted bond. If I need $10 a year for 20 years, 10 years from now, the safe asset is not the 10-year pure discount bond. It’s a retirement bond-matching portfolio.”

Retirement bonds would act like a normal bond through the first 20 years of retirement to cover the income needs of most retirees. If a retiree died during this 20-year period, the capital would pass to his or her heirs.

The retirement bond would not pay back the principal; instead, after 20 years, it would become more like a deferred annuity paying a stable, secure income—but investors would get more bang for their buck. Martellini says the retirement bonds could be offered as transparent, low-cost products that are easier to get out of than a typical income annuity.

“These bonds are very different,” he says. “They would be efficient at protecting not capital, but the power of capital at the retirement date in terms of replacement income.”

Someone five years from retirement today, a 61-year-old, would be buying 2023 retirement bonds. The bonds would start paying cash in 2023, and continue paying for 20 years.

Retirement bonds would be available in denominations producing a set amount of income, acting as an easy building block for savers most interested in creating an income strategy for their later years. In other words, if our 2023 retiree needed to replicate $100,000 in income and a retirement bond paid $10 annually, he or she would eventually need to buy 10,000 2023 retirement bonds to cover income needs for 20 years.

Asset managers and investment banks already have the tools to make sure retirement bonds are priced fairly, Martellini says. “For 2028 bonds, you would take the present value of cash flows and discount them to 30 years out,” he says. “What I would call a fair value for a retirement bond portfolio would be a value consistent with the price of a traditional bond. If you go to an investment bank and ask them for a price quote for manufacturing this product and doing the work for you, they’ll be able to give you quotes because it’s a straightforward thing to replicate those cash flows.”

If launched, the new retirement bonds could be offered in lieu of bonds or annuities to investors. A retirement planning client could potentially have two portfolios, one built from retirement bonds that would act more like a deferred annuity, and another built from traditional and alternative assets focused on long-term performance.

The retirement bonds could also be incorporated into defined contribution plans as part of a target-date like product—as participants near their retirement, a larger portion of their contributions would be invested in retirement bonds. “They can also improve dynamic asset allocation strategies like absolute return funds,” Martellini says. “Retirement bonds allow us to switch absolute return risk protection in a manner customized to the needs of the individuals. This turns products into solutions.”