Retirement Planning: Solving for the Major Risks in Retirement
Whitepaper from REAP Strategist, Horizon Investments
ABSTRACT
Generating income throughout retirement is increasingly the focus of financial advisors and institutions. The shift in focus is due to an aging population and a three-decade-long bull market for bonds that is expected to end. This paper examines different potential asset allocation strategies in the context of retirement spending. Specifically, we want to understand how longevity risk (outliving one’s money), sequence of return risk, inflation, and a potential desire for legacy (remaining wealth) might be affected by an individual’s choice of retirement spending strategies.
We examine the concept of “risk” as it pertains to an individual in the retirement (spending) phase of their investment life cycles versus “risk” as it pertains to individuals in the accumulation phase of their investment life cycles and the implications that these separate concepts have on investment strategy selection. We find that traditional methods of adding fixed income exposure to aging investor portfolios might not be the most appropriate way to generate durable income. On the contrary, we believe strategies that maintain broad exposure to risky assets tend to provide higher likelihoods of maintaining real spending levels while increasing expected legacy values. Finally, we introduce the Real Spend strategy that combines a risky asset pool (working pool) with a safer asset pool (spending pool) and overlays income sweep logic to minimize negative investor behavior. The result is a robust income-generating engine.
