Riding Past the Five Horsemen of the Retirement Apocalypse
The “Five Horsemen” in this reference symbolize the challenges that come to those facing retirement. If you’re a high-achieving professional nearing retirement, you’ve probably spent the last several decades diligently stashing away dollars for the day you finally get to exchange your briefcase for a beach towel.
But how retirement-ready are you, really? Not knowing can be nerve-wracking. Even if you’ve been preparing for retirement for years, have you factored in the latest financial challenges? If not, you may need to revisit your assumptions. To help you do that, we want to show you how to prepare for the retirement apocalypse.
In particular, we and our friend and BAM ALLIANCE Director of Research Larry Swedroe recently led a panel discussion on the Five Horsemen of the Retirement Apocalypse; riding roughshod across today’s retirement landscape.
While financial challenges abound, there’s no sense talking about them if we can’t also help you prepare for them and resolve them. In their new book, “Your Complete Guide to a Successful & Secure Retirement,” Larry Swedroe and co-author Kevin Grogan do just that.
Cogent Strategic Wealth’s Take on the Five Horseman of the Retirement Apocalypse
Horseman #1: Historically High Equity Valuations
The Challenge: The truth is, we’re in an “interesting” period for high-achieving professionals (and others) in or near retirement. Did you know we’ve been enjoying a 36-year bull run in the U.S.stock market? As a result, from 1926–2017, the S&P 500 returned an average of 10.2% annually. That’s great. However, we caution against simply extrapolating these same returns into your retirement assumptions.
Historically, some of the best stock returns have arrived after periods of declining equity risk premiums. Today, however, we’ve been enjoying increasing valuations for some time. This strongly suggests lower future returns moving forward. In other words, that 10.2% average annual return may persist over the very long run. However, the stellar returns contributing to it are less likely to occur during current time horizons.
The Solution: Use the science of investing to build more efficient portfolios, i.e., portfolios with similar expected returns, but less volatility and tail risk. We do this by employing a “low-beta/high-tilt” strategy. “High tilt” creates higher expected returns in the equity portion of your portfolio by increasing, or tilting, your exposure to small-cap and value stocks beyond their total-market weight. “Low beta” means lowering your portfolio’s overall exposure to equities (vs. fixed income). Because your high-tilt equity allocation is expected to generate higher returns, you don’t need as much of it, right?
If all this is too technical, here’s an easier take: To sail more swiftly and bravely toward your desired destination, batten down your investment portfolio’s hatches with extra fixed income, while fully harnessing equities’ powerful (if changeable!) trade winds.
Horseman #2: Historically Low Bond Yields
The Challenge: From 1926–2017, 5-year Treasury bonds returned an average 5.1% annually, and 20-year Treasuries returned about 5.5%. Current annual yields on those two Treasury securities are just 1.49% and 1.91%, respectively. Clearly, if you rely on historical returns for your upcoming retirement, you’re likely to be disappointed, since the best estimate we have of future returns comes from the current yield curve.
The Solution: We help investors employ a recent financial innovation known as interval funds. This new breed of funds provides limited liquidity (say, a minimum of 5% per quarter) instead of full, daily liquidity. Limited liquidity frees the funds to invest across longer time horizons. This positions them to capture a liquidity premium. It also lets them build exposure to additional sources of risk and expected return that were previously only accessible to institutional investors. Some of these “new” sources include the reinsurance market (with one-year quota share contracts), alternative lending (fully amortizing consumer, small business and student term loans), and the risk variance premium (selling volatility insurance across multiple asset classes).
In short, interval funds help us diversify away from the concentrated risks of a traditional 60/40 stock/bond portfolio.
Horseman #3: Increased Longevity
The Challenge: Let’s say you were born in 1954 and are now nearing retirement. At birth, your life expectancy as a baby girl was 73.7 years; 66.9 years if your blanket was blue. Things have changed! When thinking about longevity risk today, you can assume a healthy 65-year-old female/male has a 50% chance of living beyond age 88/85, respectively, and a 25% chance of exceeding age 94/92. For a healthy 65-year-old couple, there is a 50% chance one of you will reach age 92, and a 25% chance one of you will exceed age 97.
This means your investment portfolio should be built to last 30+ years if you’re in your mid-60s. Moreover, that’s assuming more medical innovations or your own favorable life odds don’t continue to extend your life expectancy even further.
Solution: To address longevity risk – or the “problem” of living longer than expected – we’ve got deferred-income annuities (DIAs), or longevity annuities.
- Deferred-Income Annuities are like traditional forms of insurance; you purchase it for protection, but may never need it. Providing a future specified cash flow, a DIA can be built into your financial plan, in case you need to rely on it to protect you or your spouse from outliving your other assets.
- Longevity Annuities- By covering your longevity risk, it can position you to either withdraw more in retirement without decreasing your odds of success or maintain the same withdrawal rate while increasing your odds of success.
Horseman #4: Long-Term Care Costs
The Challenge: In their book, Your Complete Guide to a Successful & Secure Retirement, Larry and Kevin write: “By 2020, nearly one of six Americans will be 65 or older. The scary truth is that the likelihood of developing Alzheimer’s doubles about every five years after 65. After age 85 it increases even faster, with one in three people 85 and older being diagnosed with the disease – with some estimates as high as 50 percent.”
And that’s just Alzheimer’s. According to the National Family Caregiver Alliance, there’s an almost 70% chance someone 65 or older will become cognitively impaired or unable to complete at least two activities of daily living (such as dressing, bathing, and eating).
None of us wants to imagine losing our independence. We’re usually even less keen on talking about it or planning for it. But to ignore this growing concern can impose severe financial burdens and/or diminished quality of life on ourselves or our family.
As a 65-year-old couple, expect average out-of-pocket medical expenses ranging from $250,000–$450,000. Or more.
The Solution: Your retirement plan should factor in long-term care costs – for both of you- if you’re a couple. Start planning early:
- Learn what the issues are, touched on above.
- Understand the levels of care and their costs: adult care, home care, retirement housing, assisted living, and nursing homes.
- Identify sources for paying for long-term care: personal assets, long-term care insurance, Medicare, Medicaid, IRAs, reverse mortgages, and life insurance.
So informed, you can decide whether your long-term care costs warrant adjusting other parts of your retirement plan, such as changing your asset allocation, reducing spending, increasing savings, or postponing retirement. With proper planning, you can better shape the costs and nature of any long-term care you may require.
Horseman #5: Social Security and Medicare Benefits
The Challenge: It’s no secret that our Social Security and Medicare programs are challenged by funding shortfalls, participant longevity, and declining birth rates. There is at least the risk that benefits will be cut, and/or taxes to fund the programs will grow.
Solution: While we can expect Congress to make adjustments before a full crisis occurs, we only have so much control over these and other outside factors affecting our wealth. As such, we suggest always having a detailed “Plan B" prepared – one you can live with if worse comes to worst.
For example, decide in advance:
- How much less could you live on if you need to?
- How much longer would you be willing to work if you have to?
- How much less are you willing to leave your heirs if you must tap into their legacy?
That’s your Plan B, ready and waiting to turn to as warranted. Hopefully, you’ll never need to, but it’s comforting to know it’s there, just in case.
How Cogent Strategic Wealth Helps You with Retirement Planning
Cogent is now in our 10th year of helping high-achieving professionals just like you make sense of your life’s challenges and opportunities when it comes to financial planning and investing. You’ve worked hard to get to where you are, and we know it’s hard to relax in retirement if your financial resources aren’t rock solid. We’ve seen how these “Five Horsemen of the Apocalypse” can leave families’ retirement goals in the dust. To set you on course – and keep you there – we work with you to build robust financial plans (including well-articulated “Plan B’s”), and effective, efficient investment portfolios- all tailored to you and your goals. We alsoguide you through the many, complex life challenges you will encounter along the way.
If you want to know more about how Cogent Strategic Wealth helps you realize your financial goals without having to tackle every detail on your own, contact our team today. We’ll listen to what success looks like for you, build a plan tailored to you, and help you execute that plan to and through your ideal retirement.
Don’t forget, tell us where you’d like us to send your complimentary copy of “Your Complete Guide to a Successful & Secure Retirement.” Please be sure to include your full name and address. US deliveries only.
Stop worrying about your future, and contact Cogent Strategic Wealth today.