The Wealth Manager’s Perfect Storm of Risk, Part 1

The bull market marked its 8th anniversary this year. But as the Wall Street Journal reported March 8th, “Stocks Have Tripled Since Crisis, but Low Rates Are Still Squeezing Savers.”

Retirees have reacted to low interest rates by opting for higher-risk investment strategies, exposing themselves to volatility and sequence risk in an effort to make sure they don’t outlive their assets.

This week the Fed began to ratchet up rates. This might mark the end of the bull market in bonds. The Fed’s actions expose those retirees’ remaining fixed allocations to risks associated with rising rates.

And on top of sequence and interest rate risks, longevity risk may be the most difficult to communicate and manage.

“The volatility of your longevity is on the same magnitude as the stock market,” Dr. Moshe Milevsky said while speaking at the IMCA Advanced Wealth Management Conference. “You don’t see the longevity because you don’t get a NAV (net-asset value) statement at the end of the year. You need a risk management strategy for both.”¹

The average standard deviation on the stock market’s performance during any decade since 1940 is 55 percent, according to Moshe Milevsky, associate professor of finance at the Schulich School of Business at York University in Toronto. He shared research he conducted looking at obituaries and applying the average retirement age of 65. The average longevity after retirement is about 19 years. However, average standard deviation of how long a person will live after retiring at 65 is the same as stock market: about 55 percent.

People can easily see stock market volatility and the impact on their portfolios, but it’s much harder for them to look at their longevity with the same view. That’s why it’s important for portfolio managers to educate their clients on the risk that they may outlive their assets before they talk about a risk-management strategy, he said.

How are forward-thinking wealth managers addressing these risks?

Retirement Alpha.

Milevsky said portfolio managers should consider the role of using annuities as part of a clients’ total retirement wealth and protecting against longevity.

“We’ll never get past longevity risk,” he said, “which is why annuities can help to guard against this.”Ultimately, the most important thing portfolio managers need to remember for retirees is that the objective is to maximize the sustainability of income, which he said is best done by a mix of insurance and assets.