Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

4th Quarter | 2023

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By David Wismer

Have you ever thought about running a family-friendly farm featuring llamas, alpacas, sheep, goats, and more? Starting a charter boat business in the Florida Keys or opening a bed-and-breakfast in the Pacific Northwest? Or leading church youth groups on missionary trips abroad?

Perhaps you want to join the growing ranks of RV enthusiasts, living on the road full- or part-time? Or return to school to earn a degree in culinary arts, creative writing, or computer programming? Or have the ambitious goal of touring (though not necessarily climbing) the highest peaks on each continent?

While you may not be contemplating any of these objectives in your future, these are just a few of the thousands of activities today’s retirees are seriously considering.

The retirement stereotype of a quiet life of “family, friends, and free time,” while still attractive to many people in one form or another, is being turned on its head by another large retirement cohort interested in exploring any number of other avenues for personal fulfillment.

According to recent research from Lincoln Financial Group, for many people, “Retirement is seen as a ‘new chapter’ to pursue passions and pastimes people didn’t have time for during their working years.”

However, one of the issues facing this group is that their ultimate retirement objective or lifestyle may not be apparent to them as pre-retirees or even several years into retirement. And, associated with this, while many people over the age of 50 may have an adequate financial and investment plan for basic lifestyle needs in retirement, they have not planned for the expenses involved in pursuing all of their retirement aspirations. Lincoln’s research notes, “Despite the desire to plan for exactly what they want to do in retirement, only 11% of pre-retirees say they have done a lot of planning for pastimes in retirement.”

The research further shows the following:

“87% of individuals in their 50s and 60s who work with a financial professional have discussed an investment strategy for retirement, but only 53% have discussed a budget for their favorite activities.

“‘Those approaching retirement today have no plans to slow down, and that’s what so many are overlooking in the planning process,” said John Kennedy, EVP, Chief Distribution and Brand Officer at Lincoln Financial. Kennedy added in a recent interview, “Advisors owe it to their clients to help them create a real lifestyle—complete with time and funds to explore these passions and pastimes—and to ensure that loved ones can be part of this plan.”

The impact of longevity on retirement planning

Adding to the potential budget shortfalls for funding aspirational activities, the issue of growing longevity for the U.S. population will also have an increased financial impact on retirees in the future.

A 2020 Wall Street Journal headline asked, “Is 100 the New Life Expectancy for People Born in the 21st Century?” According to Professor Steven N. Austad, a biologist at the University of Alabama at Birmingham, advances in biomedical science and cellular-function-enhancing drugs “would make living to 100 routine, with a few people reaching the age of 150 years—somewhat like people routinely live to age 80 today with a few people living to 110.”

Of course, there has also been enhanced longevity for those born last century.

According to the Wall Street Journal piece, “During the 20th century, life expectancy in the U.S. surged some 63%, to 77 years from 48.” More recent data pegs U.S. life expectancies now at just over 79 years—despite the significant impact of the COVID pandemic.

Wealth accumulation vs. wealth harvesting

A recent article in Proactive Advisor Magazine addressed the issues of more active (and costly) retirements and longevity, asking Will 20th-century investment strategies meet 21st-century longevity needs?”

The author, who has decades of experience developing and managing active investment strategies, writes,

“Not only will we be living longer on average, but we will also experience better health. This will give us more time and ability to travel, enjoy hobbies, fulfill bucket-list wishes, and visit children and grandchildren (and even great-grandchildren). All of this accentuates the need for larger retirement nest eggs.

“The bad news is that the ratio between the years spent accumulating wealth and those spent harvesting it is shrinking. Not that long ago, individuals and couples typically had around 40 years (ages 25 to 65) for wealth accumulation, followed by 10 to 15 years for wealth harvesting, a ratio of about 4-to-1.

“With significant increases in life expectancy, the traditional 40-plus years of wealth accumulation remains the same, but people now face a potential 15 to 40-plus years of wealth harvesting. That 4-to-1 ratio might decrease to a 1-to-1 ratio during this century.”

In analyzing data from secular and cyclical bull and bear markets, and comparing fixed passive strategies that are exposed to the full market risk to portfolio allocations incorporating active and risk-managed strategies, the author draws several conclusions:

•  “As life spans extend, investment time horizons will start to stretch into multiple decades. A 30-year-old investor could experience over 21 market cycles with conceivably a 70-year investment time horizon. And for a 50-year-old investor, 15 market cycles might be the norm.”

•  “Investors no longer have the luxury of ‘wasting’ time. They need to focus on maximizing returns during their wealth-accumulation years and minimizing time spent recovering from portfolio drawdowns.

•  “The reality of market cycles, coupled with the decreasing ratio of years spent accumulating wealth to those harvesting it, makes it evident that traditional [passive] 20th-century investment allocations for retirement planning will not work for the longevity needs of the 21st century.”

The author believes financial advisers and their clients would benefit from the use of portfolio strategies that have strong risk-mitigation “rules” that can help minimize drawdowns, a focus on sector and asset-class rotational strategies that can respond to changing market conditions, and the judicious use of leverage to enhance performance during favorable markets.

An experienced adviser recently interviewed for Proactive Advisor Magazine provided a similar take on investment planning:

“Retirees today face a number of risk factors, including market risk, withdrawal rate and sequence-of-returns risk, longevity risk, tax exposure risk, and the financial risks associated with health care and long-term-care costs as they age. … For most retirement-planning clients with a need for income, I believe that seeking risk-managed portfolio growth can help protect them against the possibility of running out of money during their retirement. A wealth-management strategy that manages risk first—focusing on preserving wealth and minimizing losses—is the key to our clients achieving their objectives over the long term.”

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