Risk can have different meanings as you plan for retirement – depending on where you are along the retirement “saving-protecting-spending” journey.
Risk and your retirement planning journey
During the accumulation – or saving – phase, with decades ahead of you before retiring, you can take more significant risks because you know you have the time to rebuild should there be a market downturn. Your risk concerns will more likely focus on not making poor investment choices, getting low returns on your investments, or allocating your assets poorly.
As you approach retirement, you enter into a more protective phase because you know you have less time to recuperate from losses. Growth is still essential, but you typically become less of a risk-taker.
Lastly, once in the spending phase post-retirement, a new risk takes priority: longevity risk or the fear of running out of money. Two unknowns feed that fear: (1) not knowing how many years you will have to finance, and (2) not knowing if medical or long-term care expenses could become overwhelming towards the end of life, precisely when funds may be scarce.
A vital part of the solution to longevity risk could be an investment product called Savvly to supplement available retirement products such as annuities, 401(k) plans, and IRAs.
What is Savvly?
Savvly is a retirement product that uses private risk pooling to help people cover expenses and maintain a lifestyle during retirement, regardless of lifespan. Multiple individuals can purchase shares in the plan with a recognized stock market fund as the underlying investment. Each investor selects a payout date starting in their mid-70s or later to receive their share of the pool’s value at that time.
Should an investor die before the selected payout date, a portion of the investment’s value goes to beneficiaries, and the remainder stays in the pool. But participants who live to reach their payout date will receive their full share of the pool based on the value of their original index investment and their share of the total amount in the risk pool.
What is Savvly’s effect on risk?
Savvly only invests in market ETFs, so market risk is the same as normal investing. Savvly is structured as a limited partnership where investors have personal allocation of shares through their investment interest, so there is no counterparty risk from Savvly. (The shares are held by a qualified custodian.)
As a result, the primary risk that must be considered is the risk of early death. But early death is the same risk as with annuities – another tool used to deal with longevity concerns. However, there are two key differences:
- Less capital is tied up with Savvly: clients should put 5-10% of their funds set aside for retirement into Savvly. With the multiplier gained from the pooling effect, that should provide the longevity protection needed. In case of early death, clients may only leave only 3.75%-7.5% of their portfolio in the pool.
- Forfeitures - early withdrawal fees - can positively impact investors. In fact, forfeitures go to enhance the returns of the pool thereby increasing Savvly returns for investors living to payout age.
It’s also important to note that this risk does not exist in a vacuum. Clients are already facing a much more significant longevity risk because life expectancy is increasing – so Savvly is trading a big risk (running out of money, becoming a financial burden to your family) for a small risk (leaving a portion of your investment in the pool in case of early death or withdrawal).
Conversely, the estate of a client who dies young will have significantly less decumulation by not financing decades of retirement. This will offset the forfeitures from Savvly.
The point is to offset risks, the same as when designing your portfolio all along your retirement journey.