When people run the calculations to support their long-term retirement plans, two factors emerge among their many concerns: the impact of runaway inflation over time and the potential for a substantial market decline.
Those concerns are already playing out in the U.S. First, stubborn inflation remains at 40-year highs with no signs of returning to its previous levels. This is unknown territory for today’s future retirees and pushes them outside their comfort zone to where decision-making is a challenge. And second, despite outward signs that consumer spending is showing resilience, several below-the-surface signals point to an upcoming potential recession.
As a result, clients seek answers from their advisors regarding the best strategies to bridge the period of uncertainty.
The traditional response is to revisit the equity/bond split of portfolios – typically 60/40 before adjusting for age – to reduce portfolio risk and limit losses in times of market distress. Indeed, the returns from equities and bonds have been negatively correlated for some time: one goes up, the other goes down, and vice versa. This adjustment has performed well historically, as recessions have seen a flight to safety in the form of Treasuries.
But today’s macroeconomic picture – and the reactive policy measures – raise more questions than answers about whether this behavior will continue – or whether returns will become positively correlated. In short, with inflation and interest rates rising, equities and bonds are both vulnerable, creating a significant risk to client portfolios. In fact, the traditional 60/40 portfolio lost more in 2022 than in any year since The Great Depression.
The result is a search for safer assets. And one of those could be Savvly.
What is Savvly?
Pre-retirees and retirees will tell you that their greatest fear is outliving their money. Because they don’t know how long they will live, that fear – also called longevity risk – is magnified.
Savvly offers a fresh investing approach to help seniors cover expenses and maintain a lifestyle during retirement, regardless of lifespan. The basis is private risk pooling – or sharing the common financial risk among many people.
With Savvly, multiple investors can purchase shares in a risk-pooled retirement plan with a recognized stock market index fund as its underlying investment. Each investor selects a payout date in their mid-70s or later when they receive their part of the pool’s value on that date.
Investors agree in advance that, should they die before their payout date, their beneficiaries will receive part of their investment’s value, and the balance stays in the pool to enhance the payout of those who reach their payout date. These increases in the pool through redistribution are called longevity credits.
For the equivalent of 5-10% of one’s retirement assets—allocated to a risk pool in their 50s or 60s – a retiree can have longevity protection by their chosen target date in their mid-70s or 80s.
What role can Savvly play?
Does Savvly resolve what to do with the remaining 90-95% of one’s retirement assets in the face of today’s uncertainty? No, it doesn’t. But it does put a “bookend” on the period those assets must cover.
In a situation where retirement assets are scarce, it’s essential to be as efficient as possible in how they’re distributed relative to how much people need. Savvly allows people to optimize this allocation by joining a fund that covers those who live the longest and thus have higher expenses.
Additionally, Savvly is the one asset in the portfolio that can be up when everything else is down. Because the Savvly longevity multiplier is applied to principal rather than gains, someone with a 2x multiplier can still be 40% up on their investment when the market is down 30%.
At a time when central banks confuse national economies with push-pull stimulus policies – and markets respond to unexpected political and economic events worldwide – at least the later years of a retiree can be less uncertain.