Conventional wisdom holds that when approaching retirement, investors should change their approach. With paychecks ceasing or shrinking, many see retirement as a time to shift away from growth-oriented investments, like stocks, and toward income-generating assets with lower short-term volatility, like bonds. But in Fisher Investments’ view, retirees should approach such decisions cautiously. In reducing short-term volatility risk associated with stocks, those who rely too heavily on bonds and cash may unwittingly increase the risk they run out of money too soon, defeating the general purpose of retirement investing. Understanding these trade-offs is critical, in our view.

In our experience, many investors view their pre-retirement years as the time to grow their portfolio, and their post-retirement days as the time to live off the income that portfolio can provide. That creates the mindset that their investment time horizon ends at retirement, necessitating a shift from stocks toward bonds and other income-producing assets. According to the conventional wisdom, this secures a reliable stream of payouts—and reduces the risk of sharp stock market declines denting their nest egg. One often-cited—and, in our view, misguided—rule of thumb: Subtracting your age from 100 dictates what percentage of your portfolio to put in stocks. For example, a 30-year-old would put 70% of their portfolio in stocks and 30% in bonds. By age 70, that ratio would have shifted to 30% in stocks and 70% in bonds.

Such thinking involves a major flaw, in our view: Today’s retirees live longer than ever—and many need their portfolios to generate solid growth so they don’t run out of money. Consider: The US Social Security Administration projects today’s 65-year-old American males will live an average of 18.1 more years; for females, the figure is 20.7.[1]That is merely the average—meaning many likely live even longer. Lifespans should only rise going forward, too, as medical advances continue. By 2050, the Social Security Administration projects US male 65-year-olds will live another 20.1 years on average, with females living another 22.4 years.

Hence, in Fisher Investments’ view, new retirees must consider whether a portfolio focused on income-oriented assets like bonds can last them two decades—and perhaps much longer, depending on personal (or spousal) longevity and potential desire to leave an inheritance. Historically, bond returns greatly lag those of stocks—US stocks have returned 10.2% annualized since 1925, compared to corporate bonds’ 6.1% and Treasurys’ 5.2%.[2] At today’s rock-bottom interest rates, it is exceedingly difficult for most individual investors to get sufficient income from bond interest alone.

Consider, too, that US inflation averages 2.9% per year since 1925—eroding about half of bonds’ return.[3] And inflation does not impact all groups equally—it can hit seniors particularly hard. Over the past 30 years, the US Consumer Price Index has risen a total of 98.1%, but medical care costs have climbed nearly twice as much—193.1%.[4] Costs for hospitals and related services have soared 417.5%, while prescription drug costs are up 192.9%. [5] These expenses can leave retirees experiencing above-average inflation, eating away much of bonds’ returns. Stocks, however, have far outpaced inflation over the long term. They may not provide regular income payouts like bonds do, but investors can sell stocks periodically to generate cash flow—and stocks’ typically higher returns may mean a larger pool to draw from.

Still, many fear stocks’ volatility makes them too risky to play a major role in retirees’ portfolios. But while individual situations vary, Fisher Investments thinks many retirees have time today to reap stocks’ long-term returns while still drawing cash flow from their portfolios. Yes, over short-term periods, stocks can and do swing sharply. Using five-year rolling returns from 1926’s start through May 2020, US stocks returned 10.0% annualized with a standard deviation—a measure of volatility—of 8.6%.[6] Treasurys returned 5.2% annualized, but with less than half the standard deviation—4.0%.[7]

Today, however, recent retirees may have two to three decades or more left on their investment time horizons—hardly short term, in our view. And over longer stretches, bonds’ lower-volatility edge evaporates. Over 15-year rolling periods, stocks have still nearly doubled bonds’ returns, 10.5% to 5.4%, but the standard deviation gap narrows markedly—4.5% for stocks versus 3.2% for bonds.[8] Extending to 25-year rolling periods, stocks return 11.1% annualized versus bonds’ 5.5% with less volatility—a standard deviation of 2.3% for stocks versus 2.9% for bonds.[9] Hence, despite short-term swings, stocks’ higher long-term returns usually reward investors for their patience. That can easily help investors’ retirement savings last their lifetimes—and beyond, if desired—in our view.

Retirement conjures strong emotions, particularly when it comes to finances. But in Fisher Investments’ view, investors who let those emotions dictate portfolio decisions do themselves a great disservice. We think focusing on facts—not preconceptions or fears—gives investors the best chance to enjoy the long retirement they have earned.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[1] Source: Social Security Administration, as of 03/11/2021. Period life expectancy, as stated in “The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.”
[2] Source: Global Financial Data, as of 12/31/2020. S&P 500 Total Return Index in USD and Global Financial Data’s US Corporate Bond Index and USA 10-Year Government Bond Index, all in USD, 12/31/1925–12/31/2020. [3] Source: FactSet, as of 03/11/2021. Statement based on US Consumer Price Index, All Items, 12/31/1925–12/31/2020.
[4] Source: FactSet, as of 03/11/2021. Statement based on US Consumer Price Index data, 12/31/1990–12/31/2020.
[5] Ibid.
[6] Source: Global Financial Data, as of 06/25/2020. Five-year rolling returns from 12/31/1925–05/31/2020. Stock return based on the S&P 500 Total Return Index in USD.
[7] Ibid. Five-year rolling returns from 12/31/1925–05/31/2020. Bond return based on Global Financial Data’s USA 10-Year Government Bond Index in USD.
[8] Ibid. Fifteen-year rolling returns from 12/31/1925–05/31/2020. Stock return based on the S&P 500 Total Return Index in USD. Bond return based on Global Financial Data’s USA 10-Year Government Bond Index in USD.
[9] Ibid. Twenty-five-year rolling returns from 12/31/1925–05/31/2020. Stock return based on the S&P 500 Total Return Index. Bond return based on Global Financial Data’s USA 10-Year Government Bond Index.

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