Market participants of all stripes are feeling the effects of elevated turbulence this year as unprecedented U.S. trade policy roils risk assets.
So chaotic have things been that low volatility investing is great again. Seriously, it’s one of the best-performing factors since the start of the year and with good reason. The bumpy road investors have encountered isn’t sparing retirees. It’s actually a reminder of several retirement-related issues, including the point that advisors remain essential.
As advisors know, clients that are nearing retirement and those that are already there don’t have time on their side. That’s not as ominous as it sounds, but it is reality and part of that reality is that a 35-year-old can endure a bear market or recession much easier than a retiree can. Fortunately, there are actionable, easy-to-implement strategies advisors and investors can deploy to get through the current wave of volatility.
Some Basics of Volatility Reduction
At the asset class level, income-generating assets, including dividend-paying equities and high-quality bonds, are always relevant to retirees and that pertinence is enhanced when markets turn calamitous. Another benefit is that those are not abstract, exotic or opaque investments. Investment-grade corporate debt and dividend stocks are assets all clients can wrap their heads around.
Annuities are also highly relevant against the current backdrop. These products check the income box while unburdening clients of being beholden to day-to-day market gyrations.
“Annuities are another way to provide a reliable stream of income that may reduce or even eliminate the need to sell portfolio assets with high return potential during moments of market stress,” notes Daniel Hunt of Morgan Stanley Wealth Management. “What’s more, annuities with guaranteed income-protection benefits provide a set amount of income for life, which means you don’t run the risk of ever outliving your savings.”
Additionally, some annuities offer higher yields than are found on some fixed income assets, but clients should know that there is no potential for capital appreciation with annuities.
Answering the Spending Question
One of the biggest issues nearly all retirees deal with is how much money they should be spending now that they’re out of the workforce or working significantly less than they were. There’s not a uniform answer, but Hunt says one idea is using market performance as a guide.
Simply put, if risk assets are performing well, a retiree may be comfortable spending a little more and vice-versa. Much like a public pension plan, the issue to focus on is the funding ratio. Hunt discussed a hypothetical scenario for a client with a $1 million 60/40 portfolio.
“In this case, when our retiree’s funding ratio dipped below 90% – meaning their assets are equal to just 90% of their planned expenses – she would decrease her spending by 10%. In the event her ratio continued to fall beneath 75%, she would cut her spending another 15%,” concludes the Morgan Stanley strategist. “Our analysis showed that, by varying her spending according to portfolio performance, this investor had a 25% higher portfolio value by the age of 90, than it would be otherwise, implying a similar improvement in her retirement income risk.”
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