Retirement Portfolio Planning in Unprecedented Timesicrjc/AAIIPHX/1-21Slides.pdfAAII Phoenix Chapter...
Transcript of Retirement Portfolio Planning in Unprecedented Timesicrjc/AAIIPHX/1-21Slides.pdfAAII Phoenix Chapter...
Christine Benz, Director of Personal Finance
January 9, 2021
AAII Phoenix Chapter
Retirement Portfolio Planning in Unprecedented Times
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“The four most expensive words in the English language are, ‘This time it’s different.’”
Sir John Templeton
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What’s not new
• A global pandemic
• 1918 (Spanish flu)
• 1957 (Asian flu)
• 1981 (HIV AIDS)
• High equity valuations
• Low bond yields
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What is new
• A global pandemic
• High equity valuations
• Low bond yields
• Occurring all at once…
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What are the implications for retirement planning?
• Pre- and in-retirement asset allocations
• Withdrawal rates
• Withdrawal method
• Role of non-portfolio assets
• Social Security
• Annuities
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Equity valuations (Shiller CAPE): We’ve seen worse (but not too much)
Source: https://www.multpl.com/shiller-pe
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M*’s equity analysts’ bottom-up view: Market not terribly expensive, but not cheap
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Valuations by sector: Largely overpriced
Economically Sensitive Communications Svc. P/FV: 1.06
Energy P/FV: 0.75
Industrials: 1.19
Technology: 1.19
Cyclical
Basic Materials: 1.16
Consumer Cyclical P/FV: 1.18
Financial Services P/FV: 1.10
Real Estate 1.03
Defensive
Consumer Defensive P/FV: 1.08
Utilities P/FV: 1.02
Health P/FV: 1.10
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Style box: A 2-track market
Source: Morningstar Markets Observer
9/30/2020
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Foreign stocks to outperform? 10-yr valuation-implied return (9/30/2020)
Source: Morningstar Markets Observer
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Other firms see better value overseas, too
BlackRock Investments Institute (September 2020)
➢5% nominal returns for U.S. large caps over next 10 years
➢6.4% nominal returns for emerging markets large caps over next 10 years
➢7% nominal returns for European large caps over next 10 years
Research Affiliates (December 2020)
➢-0.2% real returns for U.S. large caps over next 10 years
➢4.1% real returns for MSCI EAFE index over next 10 years
➢5.7% real returns for emerging markets equity over next 10 years
Vanguard (December 2020)
➢3.7%-5.7% nominal returns for U.S. equities over next 10 years
➢7%-9% nominal returns for non-U.S. equities over next 10 years
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Largest stocks expensive overseas
Source: Morningstar Markets Observer
9/30/2020
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Prospects for fixed income more settled
Source: “Low Bond Yields and Safe Withdrawal
Rates,” Blanchett, Finke, Pfau.
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High-quality bond and cash returns look shrimpy
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And not just to us
BlackRock Investments Institute (September 2020)
➢0.8% nominal returns for U.S. aggregate bond index over next 10 years
➢0.3% nominal returns for government bonds over next 10 years
Research Affiliates (August 2020)
➢-1.1% real returns for U.S. aggregate bond index over next 10 years
➢-.0.6% real returns for intermediate Treasuries over next 10 years
Vanguard (August 2020)
➢0.75%-1.75% nominal returns for U.S. bonds over next 10 years
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Lower-quality bond yields have declined—by a lot
Source: fred.stlouisfed.org
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Return prospects look better, with more risk
BlackRock Investments Institute (September 2020)
➢4.3% nominal returns for U.S. high-yield bonds over next 10 years
➢3.6% nominal returns for USD emerg. mkts debt over next 10 years
Research Affiliates (December 2020)
➢3.9% real returns for USD emerg. mkts bonds (local currency) over next 10 years
Vanguard (December 2020)
➢2.75%-3.75% nominal returns for U.S. high-yield bonds over next 10 years
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What are the implications for pre-retirement and in-retirement asset allocations?
• Retirees balancing competing issues
• They need equities for growth, to support withdrawals and beat inflation
• But too much in equities leaves the portfolio vulnerable to sequence risk
• Sequence risk = the chance of encountering a bad market environment early in retirement
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Does the rising-equity glidepath merit another look?
• In contrast with static or declining-equity glidepaths, rising-equity glidepath starts retirement
conservatively
• Gives retiree protection against sequencing risk by
enabling them to “spend through” safe assets
• “Reducing Risk with a Rising Equity Glidepath”
(Kitces & Pfau, 2013)
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Bucket approach gets at the same idea
Bucket 1
For: Years 1 and 2
Holds: Cash
Goal: Fund Near-
Term Living Expenses
Bucket 2
For: Years 3-10
Holds: Bonds, Balanced
Funds
Goal: Income production,
stability, inflation
protection
Bucket 3
For: Years 11 and
beyond
Holds: Stock
Goal: Growth
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But buckets 1 & 2 carry a substantial opportunity cost
• Other “buffer” assets could reduce need to maintain ongoing stake in low-returning assets (Wade Pfau)
• Standby reverse mortgage
• Life insurance cash value• Alternatively, “bucketed” retiree could simply not
fully replenish buckets 1 and 2 once depleted
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What are the implications for withdrawals?
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Today’s low yields reduce probability of success for 4% guideline
Source: “Low Bond Yields and Safe Withdrawal
Rates,” Blanchett, Finke, Pfau.
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Best practices for withdrawal rates in ultra-low-yield world
• Flexibility is key: Base withdrawals on portfolio balance
• Guyton’s “guardrails”
• RMD method• Factor in the following:
• Asset allocation
• Age
• Portfolio performance/balance
• Actual expenses
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What are the implications for pre- and in-retirement withdrawal methods?
• Income-centric approaches have become untenable
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Equity dividend yields look better but with substantial volatility
• Vanguard High Dividend Yield Index (VYM)
• Current (SEC) yield: 3.17%
• Return 2/19/20-3/23/20: -34%• Vanguard Int’l High Dividend Yield Index (VYMI)
• Current (SEC) yield: 3.06%
• Return 2/19/20-3/23/20: -36%
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Constrained yields should push all retirees into total return camp
• Two possible strategies
• Pure total return
• Reinvest income
• Harvest withdrawals via rebalancing
• Hybrid
• Spend income distributions
• Use rebalancing for additional income needs
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What does this mean for non-portfolio income sources?
• Lower yields make delayed Social Security filing even smarter
• Increase benefits by 76%-77% by delaying from 62-70
• 7.4% annual increase• Impossible to beat that GUARANTEED rate of return
by investing in the market
• Open Social Security: Terrific free tool for testing various Social Security strategies
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Annuities affected by low yields, but still have benefits
• Annuity payouts affected by interest-rate climate
• BUT benefit from longevity-risk pooling unchanged
• Along with Social Security, can be an effective way
to supply fixed expenses, reduce portfolio withdrawals
• Reduces withdrawal rate
• Reduces need for safe investment assets
• Reduces longevity risk
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Other retirement stuff that worries me
• State and local finances troubled
• Social Security Trust fund getting closer to depletion (implications for younger clients)
• Long-term care market still troubled