1. The search for yield will continue.
Today’s low expected returns, especially for fixed income investments, can have a pronounced negative effect on portfolio outcomes. While retirement research has largely focused on equity-related sequence risk, earning a negative real rate of return after fees, inflation and taxes for an extended period in early retirement can have similar negative effects on retirement outcomes. While some advisors are increasing risk to try and juice portfolios, this is perhaps even riskier, since it has the potential to make outcomes even worse if we experience a pronounced correction. New products, such as
fixed rate annuities
, might be worth considering as part of a retiree portfolio allocation to pick up some yield for the fixed part of a portfolio.
2. The robos will keep rising. How comfortable were Americans with conducting their business online pre-COVID, especially older Americans? I would say “kind of” would be a little generous. Now, though, many Americans have had to adapt to an environment of online interaction. This could have interesting long-term implications for the financial planning profession. While robos are often thought to be geared more toward younger investors (like those pesky millennials), as retirees become more comfortable using online tools, they may be more willing to try robo-like advice models, especially if they are priced well below traditional advisors. By no means am I suggesting that the traditional advisor model is dead. This could be a good thing for some (traditional) advisors that have a strong online presence around retirement planning options.
3. People will likely have to work longer, even if they don’t want to. While stock markets have been doing relatively well recently, retiring into an environment where real bond yields are expected to be negative for the foreseeable future has important long-term implications (see No. 1). While the percentage of older Americans staying in the workforce has been on the rise for the past few decades, any type of updated financial projection incorporating the possibility of lower returns is likely to be a little scary for retirees. I understand that lots of people don’t want to work longer, but most Americans aren’t exactly well prepared for retirement, and delaying retirement is one of the best ways to improve retirement readiness.
4. An increased focus on liabilities. More retirees are retiring with debt, and therefore managing liabilities is going to become more important. Many advisors focus too much time on the “asset” part of the client balance sheet and not enough time ensuring the liabilities are equally efficient. Considering nontraditional products to fund retirement, such as reverse mortgages, may also become more important if expected returns remain low well into the future.
5. The search for an "easy button" will continue, despite the fact that there isn’t one. Don’t get me wrong, I actually like rules of thumb (like the 4% rule!) because they simplify topics that the public is not going to be able to grasp in their entirety. But rules of thumb tend to apply to relatively narrow domains and aren’t perfect by definition. From my perspective, rules of thumb serve as the beginning of a conversation about a topic that is further personalized based on that client’s situation. While I’d like to think there’s an easy button out there for retirement, I don’t think there is one. People need help and I think there’s no replacing the advice you can get from an experienced advisor.
6. Annuities, especially those focused on guaranteed income, will continue to suffer. More accumulation-focused annuities, such as fixed rate annuities, might do well given an increased level of risk aversion and desire for safe return, but when you ask academics about annuities, the focus is usually the more traditional benefit: guaranteed income. Interest in annuities appears to be on the rise, especially given the uptick of fee-only options out there, but low interest rates mean low payouts, and that makes the annuity decision a difficult one. This is one I hope I get wrong.
It’s that time of the year again. Yes, it’s the holidays, but more importantly, it’s time for people to guess what’s going to happen in the new year other than failed resolutions.
I’ve decided to join in on the fun and take a stab at six predictions for 2021.
To be fair, many of these “predictions” are already trends that were emerging in the latter parts of 2020, but with everything going on some of these could be part of a “new normal” that persists beyond 2021.
The year 2020 has been a bit of a doozy. I hope things get back to some resemblance or normalcy in 2021.
But whatever that new normal is, I think it’s going to look at least a little different than how things were pre-COVID. We’ll see 2021 goes, though, and I’ll check back this time next year to grade my forecasts!
— More by David Blanchett on ThinkAdvisor:
David Blanchett is head of retirement research for Morningstar Investment Management LLC.
Views expressed are his own and do not necessary reflect the views of Morningstar Investment Management LLC. This blog is provided for informational purposes only and should not be construed by any person as a solicitation to effect, or attempt to effect transactions in securities or the rendering of investment advice.