The Investor’s Survival Guide to a Long Life

22 August 2019
2 min read
Sammy Suzuki, CFA| Head—Emerging Markets Equities
Aditya Monappa, CFA| Global Head—Multi-Asset Business Development
Kent Hargis, PhD| Chief Investment Officer—Strategic Core Equities; Portfolio Manager—Global Low Carbon Strategy

Rejoice—people around the world are living longer! But pause the festivities—that means they need more retirement money. To ensure they don’t run out of cash, savers need to adjust their investment strategies as their needs change, both before and after retiring.

The gap between what people save for retirement and what they need for a longer life is widening. According to a study by the World Economic Forum (WEF), that gap is likely to increase from $70 trillion in 2015 to $400 trillion by 2050 in eight countries—Australia, Canada, China, India, Japan, the Netherlands, the US and the United Kingdom.

In human terms, this means the average Japanese woman will outlive her savings by about 20 years, and the average British woman by nearly 13, the WEF reports. Average American men and women can expect to outlast their retirement funds by eight and 11 years, respectively (Display).

People Around the World Are Poised to Outlive Their Savings
People Around the World Are Poised to Outlive Their Savings

Source: World Economic Forum, Investing in (and for) Our Future, June 2019

Reducing Risk Too Early

Retirement doctrine dictates that people should invest aggressively when they’re young and more conservatively as they get older. But pumping the brakes too soon is a huge risk. The WEF study, Investing in (and for) Our Future, found that reducing exposure too early to “return-seeking assets,” such as equities, real estate investment trusts (REITs), high-yield debt and emerging-market debt, dramatically reduced retirement savings.

The report modeled outcomes for common default options of defined contribution retirement plans in each country. Those with longer exposure to return-seeking assets built larger nest eggs.

The most extreme example is Japan, where savers invest mostly in defensive assets, including cash, for most of their lives. The top 5% can expect to save only 4.4 times their salary at retirement. In the US, even the bottom 5% of savers can expect to pile up 3.9 times their ending salary by the time they stop working. The difference? The typical US target-date fund invests more than 50% of assets in equities until retirement.

Premature risk aversion needn’t last a lifetime to have consequences. The model portfolios in the US and the Netherlands both start out with about 90% of retirement funds in return-seeking assets. However, typical Dutch retirement plans shift almost entirely into defensive assets between ages 55 and 65, while American plans do not.

Market Volatility Is a Risk to All Preretirement Investors…but for Different Reasons

Unfortunately, human psychology doesn’t make it easy to stay invested in hard times. Research shows that investors fear losing money more than they value making it, which can lead them to flock to defensive assets during market downturns and reallocate to riskier assets only when those assets have become expensive again. The results can be devastating: the annualized returns of the average US stock investor were 50% lower than the average returns of the market over a 25-year period (Display).

Fear of Loss Can Be Very Costly

The Tendency to Chase Returns—Sell Low and Buy High—Can Destroy Returns

People Around the World Are Poised to Outlive Their Savings

Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized.
Through December 31, 2018
The results for the average US-stock-fund investor are in the Dalbar study “Quantitative Analysis of Investor Behavior” (QAIB), 2019. QAIB calculates investor returns as the change in mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs, annualized over the period. US stocks is represented by the S&P 500. The average US-stock-fund investor captures investors in US-registered stock funds, which may include funds that invest in whole or in part in non-US stocks.
Source: Dalbar, S&P and AB

Different investors always have different needs. Generally, however, the greatest investment risk faced by investors between the ages of 25 and 45 is that their investments won’t earn an adequate return during their prime working years. Investing heavily in equities and avoiding the temptation to time the market is a key investment priority for most people in this age group. Savers closer to retirement must balance growth risk with the risk of a severe market crash just before retirement, when they may not have time to make up their lost savings—as their focus increasingly shifts from accumulation to decumulation.

Low-volatility equity strategies can smooth returns, helping young savers stay invested during market downturns, and take some market risk off the table for those approaching retirement. Active strategies based on solid fundamental research that choose stable, high-quality companies have a better chance of generating earnings growth even in difficult market environments, in our view. Examples include companies with high barriers to meaningful competition (such as patents or network effects) or pathways to consistent, predictable revenues (such as licensing agreements). We believe combining disciplined quantitative research with fundamental research insights in a stock-picking process can help investors identify quality companies that are reasonably priced.

By investing in companies like these, a low-volatility strategy can aim to participate as much as possible in broad stock market gains while limiting losses when the market falls.

Incorporating Income into the Mix

As retirement approaches and then commences, many investors will need to shift their attention toward generating income and preserving their existing assets. Dynamic multi-asset strategies that balance between equities and income-producing assets are a good way to do that, in our view.

By doing so, an investor can avoid the retirement sin of shunning risk too early, while a strategy that offers a regular distribution replaces some of the lost income retirees face. This is particularly useful at the beginning of retirement, when research shows that spending tends to be heaviest and people’s natural inclination is to live on some of the income produced by their savings rather than to start to diminish their capital value.

We think that multi-asset plans should invest in a wide array of assets, including nontraditional income-producing assets, such as real estate and certain options strategies. Such assets and strategies are less correlated to equity and bond markets, which can lend stability to a portfolio in rocky times.

In the late stages of retirement, preserving capital becomes an investor’s most important objective as there is an increasing tendency to live off not only the income earned from savings but also the invested capital. At that point, allocating almost exclusively to bonds—with special attention to inflation protection—can help savers ensure they don’t run out of funds, in our view.

Stages, Not Ages

Although age is a helpful way of figuring out what strategy might suit an investor best, the choice must ultimately be based on individual needs. For example, someone who inherits a sizable pile of money might shift his or her focus from growing assets to preserving them much earlier than most prior to retirement. But this saver also enjoys the luxury of being able to pursue a more aggressive strategy for longer in retirement because the need to access capital is diminished.

Generally speaking, however, the key to investing effectively for retirement is to stay nimble. This means maintaining an exposure to growth assets for as long as possible, which will involve incorporating strategies that smooth volatility—and calm nervous trigger fingers. At some point, it likely will be important to incorporate income-producing strategies, and later shift focus almost exclusively to asset preservation. Standing still with one strategy may be easier, but actively engaging in retirement savings is increasingly essential to help people meet their spending needs for much longer lives and a prolonged retirement.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.


About the Authors

Sammy Suzuki is Head of Emerging Markets Equities, responsible for overseeing AB’s emerging-markets equity business and instrumental in the formation and shaping of AB’s Emerging Markets Equity platform. He was also a key architect of the Strategic Core platform and has managed the Emerging Markets Portfolio since its inception in 2012, and the Global, International and US portfolios from 2015 to 2023. Suzuki has managed portfolios since 2004. From 2010 to 2012, he also held the role of director of Fundamental Value Research, where he managed 50 fundamental analysts globally. Prior to managing portfolios, Suzuki spent a decade as a research analyst. He joined AB in 1994 as a research associate, first covering the capital equipment industry, followed by the technology and global automotive industries. Before joining the firm, Suzuki was a consultant at Bain & Company. He holds both a BSE (magna cum laude)  in materials engineering from the School of Engineering and Applied Science, and a BS (magna cum laude) in finance from the Wharton School at the University of Pennsylvania. Suzuki is a CFA charterholder and was previously a member of the Board of the CFA Society New York. He currently serves on the Board of the Association of Asian American Investment Managers. Location: New York

Aditya Monappa is Global Head of the Multi-Asset Business Development team. In this role, he leads a team of investment and product strategists who engage with clients to represent market views and investment strategies for AB’s Multi-Asset Solutions (MAS) business. Monappa is also involved in setting the strategic priorities and goals for the global MAS business. Prior to joining the firm in 2018, he was head of Asset Allocation & Portfolio Solutions for Standard Chartered Bank. As part of that role, Monappa was responsible for the design of global asset-allocation models and multi-asset-class portfolio solutions for both the private and priority segments. He was a key member of the bank’s Global Investment Council and also acted as an advisor to the Discretionary Portfolio Management division. Previously, Monappa was head of Wealth Management Analytics for RiskMetrics Group, responsible for its asset allocation and portfolio construction offering. Prior to RiskMetrics, he worked with J.P. Morgan, first in the Investment Management division, followed by three years with J.P. Morgan Advisory Services, a division of J.P. Morgan Private Bank. Monappa holds an MBA from INSEAD and an MS in financial engineering from Columbia University. He is a CFA charterholder. Location: Singapore

Kent Hargis is the Chief Investment Officer of Strategic Core Equities. He created the Strategic Core platform and has been managing the Global, International and US Strategic Core portfolios since their inception in 2011. Hargis has also been Portfolio Manager for the Global Low Carbon Strategy Portfolio since 2022. Previously, he managed the Emerging Portfolio from 2015 through 2023. Hargis was global head of quantitative research for Equities from 2009 through 2014, with responsibility for directing research and the application of risk and return models across the firm’s equity portfolios. He joined AB in 2003 as a senior quantitative strategist. Prior to that, Hargis was chief portfolio strategist for global emerging markets at Goldman Sachs. From 1995 through 1998, he was assistant professor of international finance in the graduate program at the University of South Carolina, where he published extensively on various international investment topics. Hargis holds a PhD in economics from the University of Illinois, where his research focused on international finance, econometrics and emerging financial markets. Location: New York