How Can You Reduce Longevity Risk for Retirement Investors?

Fixed income tilt of target date funds

According to a recent Morningstar report, nearly $2 trillion in assets are invested in target date funds, strategies representing the common glidepath approach to retirement planning that was made popular by the continuous decline in bond yields over the last 40 years.   Would it surprise you to learn that the average fixed income allocation for target date funds with a 2020 retirement date is 70%? In today’s near-zero rate environment, this type of strategy is likely to expose retirees to tremendous longevity risk, or the risk that they’ll outlive their retirement savings.  

More equity exposure may be needed to reduce longevity risk

Historical data has shown that swapping a portion of that 70% fixed income exposure for equities can reduce longevity risk for most spending rates. In fact, even the famous 4% rule first popularized by Bill Bengen back in the mid-1990s recommended more equity than today’s 2020 target date funds hold. Specifically, according to the original paper, the historical performance of a 50/50 stock and bond portfolio was able to sustain a distribution rate of just over 4% for even the worst-case 30-year retirement scenario.*

The takeaway? To manage longevity risk, you may need to reconsider the fixed income tilt so prevalent in target date funds and, instead, consider swapping some of that bond exposure for more defensive equities or tactical fixed income exposure.

Are you looking for a better way to manage longevity risk for your retirement clients? Learn more about Horizon Investments’ retirement income strategy: Real Spend®.

*Bengen, William P. 1994. “Determining withdrawal rates using historical data”Journal of Financial Planning. Vol 7 Issue 4, p171-180.


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