Investing is critical as ‘retirement readiness’ is no longer the norm
Retirees have more anxiety with phaseout of DB plans, Jonathan Chevreau writes.
It’s ironic that despite the huge focus the financial industry places on retirement and so-called “retirement readiness,” in actual practice many would-be retirees go in and out of retirement more than once.
Since the U.S. financial crisis, the number of people aged 65 or more who are still working full-time has been on the rise, according to Drew Carrington, head of Institutional Defined Contribution for Franklin Templeton Investments. Speaking at Franklin Templeton’s third annual Retirement Innovation Summit in Toronto on Wednesday, Carrington said, “it turns out that retirement is messy, with fits and starts over time.”
Of those still working after 65, only one in five did so because they felt they had to because of shaky personal finances. For the other four in five, it’s “because they want to or truth to tell, their spouse wants them out of the house,” Carrington quipped.
Furthermore, among both fulland part-time workers in that age category, 40 per cent reported they had retired twice already: they had quit the working world, returned a few months or years later, then quit again and then returned to work again.”
In short, the notion of a retirement “cliff” and a onesize-fits-all end to the working world doesn’t really resonate, Carrington said. As someone who turns 65 next year myself, I’m well aware that the baby boomers — 10,000 American boomers retire every day — are unlikely to experience the kind of retirement their parents may have enjoyed. But I’ve also co-authored a book (see blurb at author bio below) that argues most of us shouldn’t go abruptly from a 100 per cent work mode to 100 per cent play at precisely age 65. A more gradual “glide path” makes sense between 65 and 75 in my view, perhaps moving into semi-retirement, going to 80-per-cent work mode, then 50-per-cent work mode etc.
If nothing else, this reduces the risk of outliving your money: It’s been said more people fear running out of money more than they do of dying! Apart from rising life expectancy and minuscule interest rates, the steady erosion of employer-sponsored Defined Benefit (DB) pension plans is one reason to take a more gradual approach to full retirement.
Franklin Templeton devoted a session to the Defined Contribution (DC) pension plans that continue to displace DB pensions and their worry-free guaranteedfor-life payouts. As Carrington said, DC assets first exceeded DB assets back in 2001 so the golden age of DB pensions has long been over.
A panel of Canadian pension plan administrators made it clear that DB plans continue to be eclipsed by DC plans in this country too, but there is much pensioner anxiety over insolvent plans like (most recently) Sears Canada’s. Derek Dobson, CEO and plan manager for the CATT (College of Applied Arts and Technology) Pension Plan, said Canadian unions are okay with employers moving from DC plans to target-benefit plans but they are not OK with moving DB plans to target-benefit plans.
One thing is clear: while the previous generation that enjoyed DB plans didn’t have to fret about investing, the move to DC means retirees or their advisers have to pay much more attention to financial markets and investing; that may explain why the summit spent as much time on investing and the markets as on retirement.
Franklin Templeton made the case for investors to start embracing value stocks over the hot “growth” FANG and friends stocks (Facebook, Amazon, Netflix, Google, Apple, Microsoft) that have driven the U.S. market to outperform other global markets. “Since 2009, the U.S. has left the rest of the world behind,” said Martin Cobb, vice president and research analyst for Templeton Global Equity Group.
Since mid 2009, the MSCI USA index is up 164 per cent, compared to 45 per cent for MSCI Europe, 43 per cent for MSCI Japan NS, 33 per cent for MSCI Emerging Markets.
Thus, “non-U.S. stock valuations (are) quite reasonable,” Cobb said, who made the case for investing more in “ugly” value stocks.
He acknowledged that the last 100 months have been a painful time to be a value investor, even though value has outperformed growth 85 per cent of the time historically. He quoted Dylan Grice that “value investing is buying at a price that protects you from your ignorance.”
Despite the relative tranquility of today’s markets, history tells us nasty things often happen when everything appears calm, Cobb said. Value investing can provide more downside protection in the event of a major downturn in equity markets, he said, citing Benjamin Graham’s “margin of safety.” Cobb is pessimistic about the U.K.’s fate under Brexit, although he owns several U.K. stocks that have less domestic exposure. He sees better opportunities in the Asia Pacific market.
In a presentation on Global Investing in Uncertain Times, Ed Perks, chief investment officer for San Mateo, Calif.-based Franklin Advisers, said we have been in a goldilocks story of not being too hot or cold but “the last few months we seem to be falling into more sync globally.” The firm is looking closely at the “path and pace” of interest rate normalization as the U.S. federal reserve unwinds its balance sheet: the firm will soon release a background paper with the Beatle-esque title “The Long and Unwinding Road.”
Perks is concerned about yield-oriented stocks that pay more than U.S. treasuries: “something we’ve never seen before.” These include high-yielding U.S. telecom and utility stocks, REITs and other bond substitutes.
In an interview, Perks said Europe, Japan and Emerging Markets are “underowned.” However, despite high valuations in the U.S. market, “we’re not ready to throw in the towel on U.S. equities … we think it’s too early for investors to underweight U.S. equities.”