How to fund your 100-year life Alastair Baillie Strong Head of Investment Solutions Design Fidelity international
What a longer life means for you and your retirement investments
Some simplifying assumptions: Inflation: 2.5% Real wage growth: 2% Replacement rate: 50% Start saving from 25 years Retirement age: 65
The impact of a longer life on your investment objective Required IRR by planning age and savings rate Expected returns (20 year) 12% Contribution rate: 5% 10% 15% 20% EUR USD 10% 8% Required IRR 6% 4% 2% 0% 70 75 80 85 90 95 100 105 Government Global IG DM equity EM Equity Planning age (years) Source: Fidelity International 2019. Expected returns are a simulated exercise, based on our proprietary modelling, for illustrative purposes only. Eur/USD values are denominated in local currency. Figures are future expected returns which are derived from proprietary models and analysis from Fidelity International’s research analysts. Government refers to hypothetical 10 year German and US Treasury bonds. Credit indices are ER00 (Euro) and C0A0 (USD). Equity indices are MSCI World and MSCI EM.5
A 100-year working life?
Some further assumptions: Continue working post 65 with a lower level of income This income covers living expenses but doesn’t allow additional pension saving Pension savings, however, are not used over these additional working years
The impact of working longer IRR assuming later retirement (contribution rate 10%) Expected returns (20 year) 12.0% Planning age: 100 95 85 75 EUR USD 10.0% 8.0% Required IRR 6.0% 4.0% 2.0% 0.0% 60 65 70 75 80 85 90 95 Government Global IG DM equity EM Equity Retirement age Source: Fidelity International 2019. Expected returns are a simulated exercise, based on our proprietary modelling, for illustrative purposes only. Eur/USD values are denominated in local currency. Figures are future expected returns which are derived from proprietary models and analysis from Fidelity International’s research analysts. Government refers to hypothetical 10 year German and US Treasury bonds. Credit indices are ER00 (Euro) and C0A0 (USD). Equity indices are MSCI World and MSCI EM.
Investment approaches include Term funds Balanced Income Fixed with Annuities fund funds term funds protection Source: Fidelity International 2019
Income investing
Sustainable income Using an income investing approach can provide stable income, even in times of market stress Value of $100k invested through the crisis Natural income from $100k invested on Dec. 2017 $110,000 $800 Value of $100k US investment made in 2017-12 Monthly income from $100k US invested 2007-12 $700 $100,000 $600 $90,000 income not reinvested $500 $80,000 $400 $70,000 $300 $60,000 $200 $50,000 $100 $40,000 $0 2007-12 2008-07 2009-02 2009-08 2010-03 2007-12 2008-07 2009-02 2009-08 2010-03 US IG US HY S&P 500 IG HY Equity Source: ICE Data indices 2019, Bloomberg 2019, Fidelity International 2019 Source: ICE Data Indices 2019, Bloomberg 2019, Fidelity International 2019
Unsustainable income However higher levels of income can lead to severe capital erosion in stressed markets Value of $100k invested through the crisis with $10k withdrawn each year in monthly payments $110,000 Value of $100k US investment made in Dec 2017 withdrawing $833 per month ($10k annually) $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 2007-12 2008-04 2008-07 2008-10 2009-02 2009-05 2009-08 2009-11 2010-03 US IG US HY S&P 500 Source: ICE Data indices 2019, Bloomberg 2019, Fidelity International 2019
Creating a smooth journey to retirement
Nobody wants to play the birthday lottery Retirement wealth 400,000 350,000 300,000 Anna: Born September 1942 250,000 200,000 150,000 Betty: Born March 1944 100,000 50,000 - Sep-92 Jun-95 Mar-98 Dec-00 Sep-03 Jun-06 Mar-09 Source: Fidelity International, December 2017. Performance uses monthly equity returns of the MSCI World Total Return Index in USD, translated into Singapore Dollars using end of month exchange rate. Performance presented gross of fees.
A customized approach to designing the right glide path Glide paths depend on inputs that are country-specific Accumulation Decumulation Investment Wage growth rate Income replacement rate Choice of asset universe Contribution rate Inflation rate Returns, risks, correlations of asset returns Age of commencement of Number of years in retirement saving Investor risk aversion Bequest – if any Size of savings portfolio at start Age of retirement Source: Fidelity International 2019
Outline of approach Determine investment risk level throughout life so that in expectation, the individual can meet their withdrawal and bequest needs in retirement, and probability of failing to do so is minimised Apply a backwards-induction optimisation method to solve this objective Investment risk and minimum fund values are both optimised together through this process, and are the principal outputs Investment return volatility Minimum pension fund value through time 18% 16% 14% Fund Value 12% Volatility 10% 8% 6% 4% 2% 0% Start Start of de-risking Retirement Start Start of de-risking Retirement Source: Fidelity International 2019.
Glide path Example glide path 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 25 30 35 40 45 50 55 60 65 Age Global AC Equities Diversified growth strategy Local Aggregate Bonds Cash Source: Fidelity International 2019
Comparing the glide path to diversified growth strategies Wealth at retirement: median, quartiles, top 10% and bottom 10% outcomes Age 25 today Age 43 today Age 65 today Years to retirement: 3 Years to retirement: 43 Years to retirement: 25 Current salary: £50,000 Current salary: £25,000 Current salary: £35,000 Current retirement savings: £285,000 Current retirement savings: £0 Current retirement savings: £70,000 Diversified Glide Diversified Glide Glide Diversified growth growth path path path growth strategy strategy strategy Source: Fidelity International 2018
Behavioral issues also need addressing
UK investment pathways Creating good quality investment solutions at a competitive price for undecided investors A set of new requirements introduced by the FCA to help non-advised customers “who struggle to make investment decisions” Ready-made investment solutions to help customers select suitable retirement products Each pathway will comprise a customer journey and an investment solution, and must have equal prominence to non-pathway propositions Provide appropriate protections for those least able to engage when reviewing and making investment decisions Source: Fidelity International. For illustrative purposes only.
UK investment pathways Design principals Investment pathways • Low cost and simple to explain solutions Pathway 1 (No plans to touch money within 5 years) • Single fund for each pathway A low cost multi asset solution • Attractive risk-adjusted returns over the long term Pathway 2 • Consideration of ESG (Plan to buy an annuity) • Make the journey(s) as efficient as possible Solution designed to preserve the investor’s annuity- purchasing power • Tax efficient wrappers Pathway 3 (Long term drawdown income) A low cost conservatively managed multi asset solution which provides cashflow Pathway 4 (Take all as cash within 5 years) Cash or cash + Source: Fidelity International. For Illustrative purposes only.
Conclusions • Demographics have changed the retirement problem • There are investment solutions that can help • However behavioral issues need addressing and one size does not fit all investors • A robust advice structure around retirement planning is needed to ensure that investors make the choices that suit their needs Asset managers and distributors have a collective responsibility to design appropriate solutions for investors changing needs Source: Fidelity International 2019
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