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FCMS Investment Team

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Too Much of Nothing

What tools can investors use to fight longevity risk in retirement?

 

Many retirees today probably remember the 1976 disco hit “Right Back Where We Started From.” Unfortunately, that same sentiment might accurately describe those retirees’ investment returns over the past two-plus years. 

Case in point: Investors in either a globally diversified portfolio with a traditional mix of 60% stocks/40% fixed-income or a similarly allocated U.S.-only portfolio today likely find themselves back where they were at the end of 2020 (see the chart). Indeed, the return of those two portfolios averages out to 0% during that period. 

Source: Bloomberg as of 04/17/23. The Global 60/40 is represented by the Bloomberg Global Equity Fixed Income 60:40 Index. The US 60/40 is represented by the Bloomberg US Equity Fixed Income 60:40 Index

 

Results like these could give retirees reasons to consider having a reserve of liquid assets from which to take distributions and fund current expenses. Given the returns highlighted in the chart on the prior page, it’s likely that investors without such a reserve needed to sell some stocks or other assets during the past two years to meet their income needs—thereby realizing losses that would otherwise have been losses only “on paper.” 

Being forced to sell assets in a down market boosts a significant risk that retirees face: longevity risk–or, more specifically, sequence of return risk. Locking in losses can make it more likely that a retirement portfolio won’t generate the growth needed to ensure retirees can maintain their standard of living over what could be a very long retirement.  

In our view, effectively fighting this risk requires portfolios that are designed to match a spending reserve allocation of liquid assets with an investment growth portfolio structured to fund retirees’ income needs of the future.  

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Securities and Investment Advisory Services offered through Founders Financial Securities, LLC. Member FINRA, SIPC and Registered Investment Advisor. This material contains the opinions of the author(s) but not necessarily those of Founders Financial Securities, LLC and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Investors should consult their financial, tax, and legal advisors before making investment decisions. Past performance does not guarantee future results. Materials above are produced by Horizon Investments, LLC, which is not affiliated with the advisory firm identified on the front page. © 2023 Horizon Investments, LLC. 

FCMS Investment Team
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