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Retirement Planning > Spending in Retirement

Retirees Need to 'Get Comfortable' Holding Less Cash, Fixed Income: Michael Crook

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“Safety first is the first step” for retirees with a large chunk of fixed income and cash in their portfolios today, Michael Crook, chief investment officer of Mill Creek Capital Advisors, tells ThinkAdvisor in an interview.

“It’s a reasonable expectation that [such investors] are going to lose purchasing power on their cash and fixed income position over at least the next five years, if not the next 10. 

“Hold less in fixed income because it’s not going to produce much from a return standpoint,” recommends Crook, newly promoted from deputy CIO, effective Dec. 31, 2021.

Mill Creek, an RIA based in Conshohocken, Pennsylvania, manages assets of $9 billion for individual and institutional investors.

Portfolios heavy with fixed income “aren’t going to grow in value on an inflation-adjusted basis since inflation is somewhat high, but interest rates are very low,” says Crook, who has built an impressive career as an investment strategist.

He strongly recommends that retirees hold some “safe assets to provide stability they can count on when they need to spend. 

“They need to see if they can get comfortable holding less than 40% in cash and fixed income,” says Crook, who joined Mill Creek in 2020 from UBS Wealth Management, where he was head of the investment strategy team.

In the interview, he reveals his strategy of using “a buffer,” based on how much fixed income retirees calculate they’ll need to spend each year, against a potential market decline and recession. 

Crook, earlier an investment strategist with Lehman Brothers and Barclays, then discusses portfolio reallocation and the critical importance of a globally diversified equity portfolio to “help smooth the stream of return over time,” he stresses.

He also talks about the private debt portfolio that Mill Creek opened this year to counter inflation and bond yields, which he calls “extraordinarily low.”

Private debt portfolios, aka private credit portfolios, “seem to be a kind of increasing trend,” he notes.

ThinkAdvisor recently interviewed Crook, speaking by phone from Conshohocken.

In proposing “custom glide paths” for target-date fund investors, he argues that wealthier retirees with a surplus of assets should start taking more risk in a separate “legacy portfolio” once they’ve passed the “danger period.” 

That’s about 10 years in retirement without experiencing a “disastrous outcome from a market standpoint,” he explains.

Here are excerpts from our interview:

THINKADVISOR: What are your thoughts about rising inflation?

MICHAEL CROOK: We’re not in anything that could be viewed as a wage-price spiral. Overall, the U.S. economy is basically operating at full capacity. 

So all of that excess demand has to show up as inflation since there’s no place else for it to go. But over time, it will work itself out.

When do you anticipate that it will start decreasing?

We expect it to probably come down over the next two to three years. If we look out five years, inflation will be much closer to what the Fed expects longer term.

What does that mean to retirement planning now?

For most individuals, it means that they need to really think about the right amount of cash and fixed income they’re holding and make sure they’re not holding too much.

It’s a reasonable expectation that they’re going to have negative inflation-adjusted returns — they’re going to lose money. 

They’ll lose purchasing power on their cash and fixed income position over, at least, the next five years, if not the next 10.

So it’s a struggle for retirees because for many of them, a large portion of their portfolios are simply not going to grow in value on an inflation-adjusted basis since inflation is somewhat high but interest rates are very low.

How should they position themselves, then?

Safety first is the first step. Retirees need to hold some safe assets, something in their portfolio that provides stability that they can count on when they need to spend. 

They need to see if they can get comfortable holding less than 40% in cash and fixed income.

Can you be more specific about how they can offset potentially negative inflation-adjusted returns?

Take time to think how much money — fixed income — they’re going to spend each year. That is, figure out how much fixed income they have to hold.

In my view, should be about five years times how much money they spend in a year.

That way, they’ll have a buffer if the market declines and we go through a recession. They’ll know they’ll have five years of spending they can count on.

This creates a buffer that’s necessary to offset some of the headwinds — to have that margin of safety built in and know they might have to spend it down if we go through a recession.

Please provide a hypothetical scenario.

If someone is spending 5% of their portfolio per year, they might hold 25% — a reasonable number. If they’re a bit cautious, it could be more than that.

But that’s the right starting point.

This will be the most important thing they do: Simply hold less in fixed income because it’s not going to produce much from a return standpoint.

What’s the next step?

Reallocate assets. For most investors, that’s going to be an equity portfolio of public equities.

I’m reinforcing the importance of having a globally diversified equity portfolio because it’s a risk consideration.

With this portfolio, retirees can reduce the risk of [investing in] individual countries and markets that [can] go through a decadeslong period of not producing any returns.

It doesn’t have to be half U.S. and half international. But having, say, 25% or 30% of their equity portfolio outside the U.S. will go a long way in helping to smooth the stream of return over time.

So the reallocation is essentially having less money in fixed income and more in equities? Any “side effects” to that prescription?

By shifting some out of fixed income and into equities, they’re going to have a portfolio that’s more volatile but at the same time one that has a higher chance of meeting return [needs] over the course of retirement.

Is a globally diversified portfolio a hedge?

It’s a hedge against country-specific risk. We’re trying to prevent that. So, from that perspective, it’s a hedge.

What new investment strategies have you provided clients in view of rising inflation?

Because our expectation was that inflation was going to be higher [even] than what was anticipated and we also expected high growth along with that, one of the big things we did was create a private debt portfolio. We opened it at the beginning of 2021.

This seems to be a kind of increasing trend and area of interest. Some people call it private credit.

It [solves for]: What do you do about inflation and bond yields being extraordinarily low?

So we’ve complemented part of our clients’ bond portfolios with this strategy. About 10% of their portfolios are in that type of strategy now.

These are eight different asset-backed private debt strategies; for example, farmlands, commercial real estate that’s leased to government agencies. 

Please explain that in more detail.

Basically, it’s private debt using real assets as collateral to produce a yield.

It’s a way to get returns with high-quality, highly collateralized debt strategies that are much more attractive in terms of total return than you see in the public debt markets now.

We thought that the real assets themselves would do very well because of the high growth-inflationary environment, but also that it would be a good way to produce some yield and income.

What have the returns been?

Typically, total returns are somewhere between 6% and 9% per year.

How different are the eight strategies from one another?

Each one is idiosyncratic, which is part of the idea behind this: to not have strategies that are highly correlated with each other in the portfolio. 

But they’re all similar in the sense that the [third-party managers] are lending money against real assets.

You’ve written a paper about “improving target-date glidepath construction through liability-adaptive asset allocation.” What does that entail?

One of the most important things a financial advisor can do for their clients is to recognize that, from an investment standpoint, in addition to assets, retirees have liabilities, like mortgages, that have to be paid off.

Retirement is a debt that we owe ourselves, and we have to save enough money before we get to retirement to pay it off.

Typically, problems in retirement happen because the liability of retirement is larger than the asset pool that’s there to fund it.

What are the challenges in modeling the liability of retirement?

One is that we don’t know how long we’re going to live; also, we don’t know exactly how much we’re going to spend and what our [future] desires will be during retirement.

It’s worthwhile to think about how much you have, how much do you want to spend, and how much is the gap?

Suppose a client doesn’t have a gap.

There are a lot of retirees who are in the fortunate position of having saved more than they’ll need.

I like to [put that] excess [into] a “legacy portfolio.” It’s essentially surplus money that they’re not going to spend during the course of their retirement.

But they can use it to impact the lives of others. So typically, a legacy portfolio will be used for philanthropic purposes or for children’s or grandchildren’s education, or maybe for entrepreneurial endeavors.

Does a legacy portfolio consist of equities only?

For a lot of investors, it’s only equites. We work with many high-net-worth families, so legacy, in a lot of cases, would also be private equity.

But these portfolios could include collectibles, like an art collection. I’ve seen business interests as part of a legacy portfolio and real estate, like the family’s summer home.

Do the investors create a separate legacy portfolio right away?

Some retirees I’ve worked with segregate [these assets] immediately; others will set up foundations or donor-advised funds as a giving vehicle.

Others don’t segregate it but like to know on a year-by-year basis what the number is.

Where does the target-date component come in?

With target-date funds, typically people glide-path down to a fairly low equity allocation in retirement. But this glide path isn’t optimal from a wealth perspective for a couple of reasons.

One is that if you expect negative inflation-adjusted returns in fixed income — as we do now — the assumptions behind those [target-date] models are pretty far off.

Secondly, if someone has a surplus in retirement — a legacy portfolio — their glide path should probably start [going] back up once the [investor] has gone through the danger period in retirement — after they’ve been retired, say, 10 years and haven’t had a disastrous outcome from a market standpoint.

Therefore, they could start taking more risk again. And the right place to take that risk usually is their legacy portfolio, because it has a long time horizon and is growing.

How exactly does that work?

Usually, retirees will be spending down their retirement assets somewhat, but that legacy portfolio that’s not being gifted away is actually growing over time. 

So the optimal glide path, when you add both these components together, tends to be one that’s more of a U-shape.

The actual shape is specific to every investor based on how large their legacy portfolio is versus their lifetime assets.

With today’s technology, we all don’t need to have the same glide path. We should have very specific, custom glide paths based on our situation and goals in retirement.

Which is to say …

Once we’re in retirement, we shouldn’t expect to just flatline in bonds.


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