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.

Results like these could give retirees reason to consider having a reserve of liquid assets from which to take distributions and fund current expenses. Given the returns shown above, 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.

This commentary is written by Horizon Investments’ asset management team.

Past performance is not indicative of future results.

Bloomberg US Equity Fixed Income 60:40 Index and the Bloomberg Global Equity Fixed Income 60:40 are designed to measure cross-asset market performance in the US and Globally. The indexed rebalances monthly to 60% equities and 40% fixed income. You cannot invest directly in an index.

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