Sam Payne, RICP, VP Sales, Business Consultant
In the midst of the battle to quell the spread of the COVID-19 virus, and the resulting economic fallout, we are beginning to hear warnings of the longer-term impact to our financial markets. Articles like the ones referenced below clearly point to more subdued equity returns over the next decade:
Opinion: Bulls just won’t believe what interest rates are saying about U.S. stock and bond returns for the next 5 years
Expected Equity Market Returns For The Next 10 Years (Part 2)
This is without a doubt problematic. Retirees are in a predicament. Stocks are trading at high levels and interest rates are low, so savings accounts aren’t producing income. Meanwhile, Americans are living longer, without pensions, and many will need some form of long-term care. After a tremendous run, Wall Street has tempered expectations for stock and bond market returns for the next decade.
These muted returns being forecast are not something new. Even before the effects of COVID, lower returns were being forecast. Over the last several years I have referred to the Morningstar Long-Term Economic outlook for guidance. This annual article polls a number of asset managers to get a sense of what the industry’s stalwarts are planning for and forecasting. As you can imagine, each year there is a wide variance in the expected returns. If you are to take an average of the 6 -7 prognostications each year you will see that the current article points to about a 2.7% average annual rate of return (if we assume a 2% inflation rate to convert nominal to real and vice versa).
Annexus has recently created a very well done video and white paper with their research. These pieces point to returns that are closer to 4% over the next decade. Take a moment to watch this video:
You can get a copy of the whitepaper by reaching out to your Business Consultant.
The point is, there’s plenty of evidence that we could be in for a dramatically lower return scenario for the next decade.
So we come to the new retirement reality. As part of our long successful seminar series describes, one of the five major risks all retirees face is market or sequence of returns risk. The real risk is that prior to and during retirement years the financial markets will behave in a fashion detrimental to maintaining and sustaining an income to support the retiree’s lifestyle. Our goal is to identify and help individuals manage these risks, and when it comes to risk there are only four ways to manage it.
- Reduction (or mitigation)
So how can we, as Financial Professionals, help? Well each one of you appointed with Asset Marketing Systems, by virtue of the fact that you have an insurance license, has one of the best risk management tools there is available to you. Insurance – Risk transfer! What if you were to highlight the models and provide a solution that transfers the risk by getting a better than anticipated or even a guaranteed growth for income producing destined assets?
As an example, you can propose an FIA income rider with a guaranteed roll up of 9% -10% simple, or 7% compounding, contrasted with a 3.5% – 4% equity market return over the next ten years. For someone ten years from retirement, knowing their “income base” is growing at a guaranteed rate takes a lot of pressure off, and when you couple this strategy with a diversified, managed portfolio, you start to incorporate all four aspects of risk management in a single financial plan.
The bottom line is there’s a real risk that market/sequence of returns over the next ten years could have a detrimental effect on retirees, and you have the tools to help manage this risk. It’s up to you to educate yourself and communicate with your clients and prospects about how you can help.
Watch Sam Payne’s webinar for a deeper dive into this specific conversation.