The Four Horsemen of the Retirement Apocalypse – Part I

Five Things You Should Know

1. Equity Markets – rose this week with U.S. stocks (S&P 500) up 0.64% while international stocks (EAFE) rose 2.13%.
2. Fixed Income Markets – finished mixed with investment grade bonds (AGG) down -0.01% and high yield bonds (JNK) up 0.08%.
3. China Makes Full Court Press – This week saw China hold true to their commitment to try whatever it takes to restore their struggling economy, introducing a series of unprecedented stimulus measures that saw the Shanghai stock exchange experience its best week since 2008. Among the major moves were a reduction to banking reserve requirements to boost lending, lowered its interest rate on 1-year policy loans by the most on record, and issue $284 billion in special sovereign bonds as part of a fresh round of fiscal stimulus.
4. Euro Concern – The Euro area’s private-sector economy contracted for the first time since March in signs that France’s Olympics boost has worn off and an overall manufacturing downturn for the region finally weighing down the economy. Traders expectations rose that the ECB may need to take a more aggressive rate cut path than previously outlined in order to keep pace with their developed world counterparts.
5. Key Insight – [VIDEO & ARTICLE] Markets love to surprise people, while retirees dislike, and often cannot afford surprises. Such a dynamic gives rise to the Four Horsemen of the Retirement Apocalypse. The next two weeks we’ll discuss the dangers and their potential impact on your plan, and then of course, offer up some solutions to help protect you and your family.

Insights for Investors

By Tim Mitrovich

The Four Horsemen of the Retirement Apocalypse – Part I 

Having been in and around the industry since the late 90’s, I’ve had the opportunity to see many markets, many different periods and types of investment sentiment, and of course the honor of helping many clients into retirement.  

There are many lessons that have been learned from all of that, but perhaps the two most critical to keep in mind for this two-part series are that 1) markets are prone to surprise, and 2) retirees do not like, nor can they often afford surprises. 

What types of “surprises” and/or dangers should retirees make sure they are solving for, and what exactly are those solutions? 

This week we’ll touch on three of the Four Horseman that threaten retirees in retirement, and it is worth noting that in truth none of these “surprises” are really surprises at all, or at least shouldn’t be. Rather the “surprise” comes from retirees’ focus being drawn elsewhere by other forces, which we’ll call out too. 

1. Volatility/Sequence of Returns 

Market volatility is a fact of life, and yet time and time again when it rears its head, investors act surprised. This can come from a number of places such as a true lack of historical knowledge, the simple hope that their time in the market will be the exception, or as if most often the case in our experience a loss of focus due to some form of greed.  

While “hope is not a strategy,” even more dangerous is presence of greed, which is a fatal danger to one’s plan. 

You’ve heard forever that one cannot time markets, which is true. And yet, time and time again we are asked to evaluate plans and portfolios that by all accounts are built on the hope that one’s retirement is “timed up” well with future market returns. 

What do I mean? 

Look at the graphic below, where both investors achieve a 10% average and take out 2% less as a distribution, but depending on the sequence of market returns (which they CANNOT control), they end up in very different places – with Client B likely having to unretire or risk running out of money. The simple reason for this is the cannibalization of one’s holdings at an increased amount during volatility due to their reduced value. Those shares of course never have the chance to rebound or create future income to add to your plan. 

For Illustrative Purposes Only Source: TEN Capital, 9/19/2024

While many investors are focused on tech stocks and chasing dreams of outrageous returns, they are looking past the very real threat to the longevity of their account. 

What might bring the next bout of volatility? No one of course really knows, but it’s not like there is a lack of viable issues that shouldn’t give pause to investors who find themselves in overly aggressive allocations. 

For example, recent data from S&P Global indicated a potential slowing of growth with their services reading dropping slightly to 55.4 from 55.7, and more importantly their manufacturing reading dropping to 47 – a reading synonymous with contraction. ¹ 

Another big one that shockingly continues to be underappreciated is the mounting geopolitical risk. One person not looking past it is JPMorgan CEO, Jamie Dimon, who (as reported by CNBC) recently stated, “My caution is all geopolitics, which may determine the state of the economy,” Dimon said in an interview with CNBC TV18 while attending a JPMorgan conference in Mumbai, India. ² 

He also cited geopolitics as one of the reasons the danger of renewed inflation may not yet be past.  

On that note, our second threat… 

2. Inflation 

People know about inflation, particularly in recent years which saw historic levels of price increases, but they often fail to take it into proper account. 

Unlike “greed” which causes many investors to look past the threat of “volatility” to their portfolio as we just discussed, the reason many investors fail to properly take “inflation” into account is due to “fear.”  

They live in fear of volatility, unaware of how to navigate it or unwilling to persevere through it, and in so doing bring genuine “risk” in the form of permanent reduced purchasing power into their financial picture. These investors often avoid the market or investing altogether, or keep excessive amount of cash sitting around unrealizing that such a plan may avoid volatility but actually increase their risk. 

Consider the chart below highlighting the impact of inflation over time carefully… 

As you can see, a mere 3% inflation rate, in line with historical averages, after 10-years would have reduced your purchasing power by over 25%!! Not only is that as bad as a typical bear market, even worse is that fact that unlike a market that can rebound, such a loss in purchasing power is permanent! 

The good news which we’ll cover next week is there are solutions to both reduce one’s volatility, while also protecting one’s purchasing power thus not only making the “ride” more bearable, but also extending the longevity of one’s money. 

Speaking of longevity… 

3. Longevity 

The next “surprise” to many people is how long they and/or their spouse is likely to live. As you can see from the graphic below, courtesy of JPMorgan, a married couple in their 60’s and in good health has almost a 75% that one or both of them live to be 90 years of age, and almost a 50% chance that one of them lives to be 95. 

Source: JPMorgan, January 2024

The obvious takeaway is that you need your money to last a long time! 

Of course, the longer the time frame one has, the more the dangers above (volatility and inflation) pose a threat to eroding one’s purchasing power on either an absolute basis (see sequence of return risk) or on a relative basis (see the erosive impact of inflation). 

Stay tuned for next week, where we’ll recap some of these threats while addressing the risk of “bad planning” as well as outline some simple solutions to help improve the longevity of your hard earned money and put your mind at ease. 

Have a wonderful weekend! 

Tim and the team at TEN Capital 

Data, Just the Data

• U.S. Initial Jobless Claims – dropped by 4,000 from the previous week to 218,000 on the period ending September 21st. This was below market expectations of 225,000 and reaching a new 4-month low.  

• U.S. MBA Mortgage Applications – soared by 11% from the previous week in the period ending September 20th. This extended the surge of 14.2% in the previous week, to lift mortgage application volumes to their highest since June of 2022.  

• U.S. Durable Goods Orders – were loosely unchanged from the prior month in August of 2024. Compared to the revised 9.8% surge in July, this was the highest in four years, and contrasted sharply with market expectations of a -2.6% drop.  

• U.K. Composite PMI – fell to 52.9 in September of 2024 from 53.8 in the previous month. This missed market expectations of 53.5, however, extended the growth momentum for private economic activity for the 11th consecutive month.  

• Eurozone Composite PMI – fell for a fourth consecutive month to 48.9 in September of 2024. This was the lowest since January 2024, compared to a reading of 51 in August and forecasted 50.6. It is the first fall in private sector activity in seven months.