With markets expected to exhibit more volatility, clients near retirement might be extra concerned about potential losses—and such concerns might be warranted based on market history.
In 2008 the S&P 500 lost 37% of its value; the TSX, 35%.
In the U.S., by the time the market bottomed out, an estimated US$2.7 trillion had been wiped out of Americans’ retirement accounts, according to the Urban Institute. Older Americans, in particular, have had a tough time recovering their losses. The Pew Research Center estimates the net worth of the median baby boomer household in 2016 was nearly 18% shy of where it sat in 2007.
The problem of losses is exasperated for those who are withdrawing or about to withdraw from their portfolios. In a March 2017 blog post by 361 Capital, an alternative asset manager headquartered in Denver, Colo., this challenge is highlighted.
Sequence of return risk refers to the potential for a portfolio’s value to decrease just as clients are withdrawing assets for day-to-day living expenses—assets that are then unavailable to participate in the market rebound that follows.
One way to avoid that risk is to use alternative strategies, says the firm. As an example, long-short equity can limit portfolio volatility, stabilize sequence-of-returns and narrow the possible outcomes to help investors and advisors better plan.
Long-short equity strategies lost about 20%, on average, during the financial crisis, it adds. “Yes, it was painful, but nowhere near the losses of 50% or more experienced by many equity indexes,” says the blog post.
While long-short equity is traditionally reserved for the satellite portion of the portfolio, its ability to participate in equity markets and simultaneously manage downside risk is fuelling an argument for using the strategy as a core position, says the firm.
For more details, read the full 361 Capital blog post.
Costs of long-term care
As retirees focus on portfolio value, one potential expense to reconsider is long-term care—which might cost more or less than a particular client thinks.
For example, a Vanguard blog post outlines two extreme scenarios: a senior requiring round-the-clock care starting at age 72, and a senior who lives an active, healthy life to age 96, never needing care. Which will your client be?
Vanguard’s research finds that half of Americans will never need paid long-term care, and just 15% are likely to incur costs of US$250,000 or more. The rest will fall somewhere in between.
In Canada the chances of requiring long-term care are one in 10 by age 55, three in 10 by age 65 and five in 10 by age 75, says a 2014 report by the Canadian Life and Health Insurance Association, citing StatsCan.
For those who need care, costs won’t necessarily be covered by government healthcare.
“Many Canadians continue to have the mistaken belief that all of their long-term care needs will be met by governments,” says the CLHIA report. “While there are government programs aimed at assisting Canadians with long-term care needs, these programs vary by jurisdiction and typically are income-based.”
As of 2010, only about 385,000 Canadians had long-term care coverage, says the CLHIA report, which highlights the need to discuss long-term care with clients in the context of their individual risk.
Says Vanguard in its blog post: “We want to frame the costs of long-term care in a model that can help people take action, not scare the heck out of them.”
To help estimate long-term care costs, the Globe and Mail offers a worksheet, which estimates the average stay of 18 months in a long-term care facility in Ontario at about $32,000.