Retirement Ready - Financial Planning Association...2018/06/29 · Source: SBBI Ibbotson data dating back from 1926 - 2017 measured quarterly, calculations by Horizon Investments

Retirement ReadyPreparing for the Challenges of Retirement Income

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Preparing for Retirement Income Challenges

Preservationof wealth

Distributionof wealth

Accumulation of wealth

wealth curve

lifespan

Investment journey stages



Objectives and risks in each stage

ACCUMULATIONACCUMULATION

PRESERVATION

ACCUMULATION

PRESERVATION

DISTRIBUTION

PRESERVATION

ACCUMULATION

DOMINANT RISK VOLATILITY LOSS LONGEVITY

ACCUMULATION



Rules of Thumb:

1. Define your goal, know your risk.

2. Avoid over-investing in bonds.

3. Optimize your equity/debt allocation to match cash flow needs.

4. Keep a reserve, but don’t overdo it.

5. Have a plan for catastrophic loss to minimize behavioral mistakes.

6. Minimize selling at losses, rebalance intelligently.



INVESTMENT PORTIONAn investment portfolio designed to generate returns sufficient to intelligently replenish the withdrawals from the spending reserve.

RISK MITIGATION Includes an active risk management strategy to help preserve retirement capital during sudden and severe market downturns.

SPENDING RESERVEA multi-year reserve of liquid assets for spending on current and short-term needs and goals.



Longevity Life expectancy has dramatically risen – plan for 30+ years

Inflation Costs for things like health care have skyrocketed

Interest Rates Rising rates could highly impact bond prices

Liquidity Access to your capital when needed – without huge penalties

4 Major Retirement Risks



Age85Age65...now, expect 5 or more years to live.

...saved enough for 20 years.

for illustration purposes only

Longevity risk example



Source: Estimates determined by Horizon Investments using an annual annuity cash flow model.

4034

23

32

1923

1619

1416

Annual Return

40 40

How long would your $1 million account last?

– Spend $50K per year– 3% a year inflation– 20% tax rate

For non-qualified savings, a 6% annual return can double an investor’s expected spending years compared to keeping savings in cash.

Expected Spending Years

Before taxes After taxes

0% 2% 4% 6% 8% 10%

45

40

35

30

25

20

15

10

5

0

Spen

din

g Y

ears



Need for retirees to be more weighted towards equities than fixed income to account for longer life expectancies.— Larry Fink, CEO of Black Rock

Source: Ibbotson SBBI database, Stocks are the S&P 500, Bonds are Intermediate-term government bonds, and inflation is the change in CPI. "Bad" is equal to the first quartile

(25th percentile) of 20 year rolling returns, "Normal" is the median of 20 year rolling returns, and "Good" is the 3rd quartile (75th percentile). Taxes assumed to be 20%.

Average annualized returns for stocks, bonds, and a 50/50 mix after taxes and inflation since 1926.

Expected Spending Years

5.9%

3.3%

Stocks Bonds 50/50 Mix

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

-1%

NormalBad Good

7.8%

2.9% 2.7%

4.0%4.7%

1.1%

-0.1%



Source: SBBI Ibbotson data dating back from 1926 - 2017 measured quarterly, calculations by Horizon Investments. Stocks is the S&P 500 total return index and bonds

bonds is the intermediate term government bonds index from the SBBI Ibbotson database..

Percentage of Rolling Periods that Stocks beat Bonds from 1926 - 2017



$1,000 $1,000

2000 2018

$1,000 $672

SAVINGS SAVINGS

SPENDING POWERSPENDING POWER

for illustration purposes only

This calculation uses actual realized CPI from the end of 1999 through Q2 2018. Over this period average inflation was only 2.3%.

Source: Consumer Price Index published monthly by the Bureau of Labor Statistics (BLS) average annual inflation.

beginning of beginning of

Inflation risk example



Growth of pricesMedical Trends Healthcare Housing Transportation Food

Inflation Rate 6.5% 5.2% 4.2% 3.7% 3.2%

Current Monthly Cost $490 $490 $1,309 $569 $472

In 10 Years it costs... $919 $811 $1,983 $815 $649

In 20 Years it costs... $1,726 $1,342 $3,004 $1,168 $892

In 30 Years it costs... $3,239 $2,222 $4,550 $1,673 $1,227

Source: Inflation rates come from the Federal Reserve Bank of St. Louis Consumer Price Index for All Urban Consumers Components All available years. Medical Trends is forecasted healthcare inflation from PwC Health Research Institute medical cost trends 2007-2017. Current monthly costs come from the Consumer Expenditure Survey from the Bureau of Labor Statistics 2015-2016, Age 65 and Older.

Inflation is real!



InterestRates

BondValue

Then Now

Source: Bloomberg L.P. as of 06/29/2018 as of the end of Q2 2018. US government 10 year yield as of year end.

U.S. Government Yields

US

Gov

t 10y

Yie

ld



Interest Rates

Source: Bloomberg L.P., as of December 29, 2017. Fed Target is the Federal Funds Target Rate – Upper Bound; AGG is the Bloomberg Barclays US AGG Total Return Value; SPX is the S&P 500 Total Return Index.

20%

15%

10%

5%

0%

-5%

-10%

-15%

Fed Target UP

Fed Target SAME

Fed Target DOWN

Bond Excess Agg SPX

Average Annual Stock and Bond Returns Since 1991, Grouped by the Annual Change in the Federal Funds Target Rate

Historically, when rates moved up, bonds underperformed.



Liquidity risk example

Penalties & Fees



A History of Stock Market Losses

Source: Bloomberg L.P. through Q1 2018 using price index data for the SPX Index measured daily, calculations by Horizon Investments. Bloomberg L.P. through Q1 2018 using price index data for the SPX Index measured daily, all drawdows reset after a 50% recovery, calculations by Horizon Investments.by Horizon Investments.

DeclineApproximate

FrequencyAverage Length

(Days)

-5% or more 4 times per year 24

-10% or more 1 time per year 65

-15% or more Every 2 years 114

-20% or more Every 6 years 520

Top 20 Losses Frequency of Losses



Two things to consider:• Access to funds• Sequence of Return Risk

Number of Quarters Until New High Return

Source: Stocks is the S&P 500 total return index and bonds is the intermediate term government bonds index

from the SBBI Ibbotson database.. The time periods included at least one quarter from 2008, 1987, or 1973.

1313

21

2008 Crash

30

25

20

15

10

5

01987 Crash2000 Crash

80/20100% Stocks

# o

f Q

uart

ers

50/50

1973 Crash

17

26

1011

65

4

12

9



Two Different Sequences, Two Different Results

Source: Calculations by Horizon Investments assuming a 5% initial withdrawal from the beginning of the period that grows at a 3% inflation rate and a 5% annualized return.

Assumes a gross return with no fees or costs.



Number of Successive Down Quarters

SBBI Ibbotson data dating back to 1926-2017 of the S&P 500 Total Return Index.

A dynamic rebalance provides potential to minimize selling into down markets



Chasing yield

U.S. Treasuries: S&P U.S. Treasury Bill Total Index; U.S. Aggregate: Bloomberg Barclays US Agg Index; Long U.S. Treasury: Bloomberg Barclays US Long Treasury Index; U.S. Corporate Bond: Bloomberg Barclays US Corporate Index; U.S. High Yield: S&P 500 High Yield Corporate Bond Index; Emerging Bonds: BofA Merrill Lynch Emerging Market Debt Index; High Yield Muni Bonds: S&P Municipal Bond High Yield Index; Global High Yield: Bloomberg Bar-clays Global High Yield; International Divideds: S-Network International Dividend Index; MLPs: Alerian MLP Index; Mortgage Reits: FTSE Nariet Mortgage REIT Index.

0.0

0.0

.1

1.0

-2.5

2.6

-12.9

2.8

-13.8

3.2

-24.4-19.7

-28 -31.9

-58.4

-40.0

4.2 4.3 4.7 5.1 5.57.4

Worst12-MonthReturn (Jan 2001-Oct 2017)

CURRENT YIELD + DOWNSIDE RISKU.S. TreasuriesAggregate BondsLong U.S. TreasuryU.S. Corporate BondU.S. High YieldEmerging BondsHigh Yield Muni BondsGlobal High YieldInternational DividendsMLPsMortgage REITs

Yield (Oct 2017)

-52.4

9.8



Catastrophic Loss Risk Mitigation is Key

Source: calculations by Horizon Investments

40

30

20

10

0

15

10

5

0

Num

ber o

f yea

rs

Num

ber o

f yea

rs

Rate of ReturnRate of Return

Years to Recover a 50% Loss Years to Recover a 20% Loss2% 3% 4% 5% 6% 2% 3% 4% 5% 6%



Equity-based portfolio

SUCCESS % LEGACY WEALTH %

Target date fund

Source: Ibbotson Data 1926-2016Not representative of account performance. Slide presents comparison of two strategies, and shows average success (i.e., getting to the end of a period with any money left) and remaining wealth when strategy allocations are applied to successive periods of market data from the SBBI database from Ibbotson. Data begins in 1926 and ends in 2016. The research assumes a 65 year old retiree and a 25 year spending period. The equity-biased portfolio assumes a 1.65% management fee and the use of a three year spending reserve equal to 15% of the investment, with the remaining 85% invested and allocated 80/20 to equities and fixed income securities, respectively. The Target Date concept assumes a 1.00% management fee and a linear glidepath, where the starting allocation is 35% equities and 65% fixed income securities, with a 1% increase in fixed income each year. See additional disclosures following this presentation.

Retirement Strategy Research70%

60%

50%

40%

30%

20%

10%

0%



Retirement Strategy Research

Source: A withdrawal strategy with 5% initial distribution rate, adjusted for inflation, for a spending horizon of 20 years. Assumes a 2% annual fee. Each simulation was conducted with 10,000 block bootstrapped samples from SBBI Ibbotson data dating back from 1926 - 2017 measured quarterly. Stocks is the S&P 500 Total Return Index and bonds is the intermediate term government bonds index from the SBBI Ibbotson database. Average markets included all data points while poor markets only included samples where stock market performance was below the 25th percentile of all 10,000 draws. Definitions for terms used on this page can be found in the disclosure.

Key findings:• Success rates increase with equity

allocation up to a point

• Poor stocks markets increase this sensitivity

• Legacy wealth increases strictly with equity allocations

• There exists an optimal allocation to balance legacy wealth and success rates

Average MktPoor Mkt



INVESTMENT PORTIONAn investment portfolio designed to generate returns sufficient to intelligently replenish the withdrawals from the spending reserve.

RISK MITIGATION An active risk management strategy designed to help preserve retirement capital during sudden and severe market downturns.

SPENDING RESERVEA multi-year reserve of liquid assets for spending on current and short-term needs and goals.

3 components of a modern effective distribution strategy



What this data tells us—Rules of Thumb:

1. Define your goal, know your risk.

2. Avoid over-investing in bonds.

3. Optimize your equity/debt allocation to match cash flow needs.

4. Keep a reserve, but don’t overdo it.

5. Have a plan for catastrophic loss to minimize behavioral mistakes.

6. Minimize selling at losses, rebalance intelligently.



DisclosuresHorizon Investments’ strategies are subject to general market risk and risks related to currency fluctuations and economic conditions. Each strategy’s underlying investments fluctuate in price and may be sold at a price lower than the purchase price resulting in a loss of principal. Investors may lose money. The underlying investments are neither FDIC insured nor guaranteed by the U.S. Government. There may be economic times where all investments are unfavorable and depreciate in value. Please evaluate your clients’ circumstances and risk tolerance to understand if these investments are right for them. Tax considerations are not taken into account.

Data and research herein has been used by Horizon in connection with its Real Spend Strategy. The Real Spend® retirement income strategy is NOT A GUARANTEE against market loss and there is no guarantee that the Real Spend® strategy chosen by an investor will be successful for the entirety of an investor’s retirement. Clients may lose money. Real Spend® is an asset allocation strategy that uses an investment model to (i) plan savings amounts and overall asset allocation during the distribution phase of retirement planning, (ii) compute target retirement wealth, assuming a retirement budget and a spending-investment strategy after retirement, (iii) compute the transition from the accumulation phase to the retirement phase, and (iv) generate the spending-investment strategy after retirement. Our retirement spending-investment strategy uses an allocation model that replenishes cash needed for withdrawals. Before investing, consider the investment objectives, risks, charges, and expenses of the strategy. Keep in mind investing involves risk. This strategy is not an insurance product with payments guaranteed. It is a strategy that invests in marketable securities, any of which may fluctuate in value. There is a possibility of outliving the assets if market performance is lower than forecasts used in planning, or if longevity is longer than anticipated. Calculations used with investors are estimates based on historical market behaviors, and there is no assurance that these behaviors will be repeated in the future. Investors should note that historical data suggests that higher Spend Rates will have a lower likelihood of success for the entirety of the retirement period than a lower Spend Rate would. Past performance and market data are no guarantee of future results and investor experiences will vary.



Research presented on the equity-biased portfolio on the slide captioned “Retirement Strategy Research” was instrumental in developing Horizon’s Real Spend 5 strategy (a retirement distribution strategy designed for a 5% annual distribution rate). However, note that the SBBI database described on that slide provides data on limited asset classes and types of securities, and Real Spend accounts, while comprised of similar asset class proportions as used in research, are not designed to and will not precisely replicate the SBBI allocations used in research. Brokerage, custodial and other fees are not taken into account in this research. Contact us for information on the performance of Real Spend accounts, or for more information on assumptions and our research, which was undertaken with the benefit of hindsight.

Definitions:

Probability of Success The percentage rolling investment windows where the account maintains a positive total portfolio value throughout the full spending horizon.

Legacy: The ratio of remaining portfolio value to the beginning portfolio value.

Graphics presented herein are for illustrative purposes only. Contact us for information about the performance of accounts using Real Spend ®.

Horizon Investments, the Horizon H, Gain Protect Spend and Real Spend are all registered trademarks of Horizon Investments, LLC.

© 2018 Horizon Investments, LLC. 13024 Ballantyne Corporate Place, Suite 225, Charlotte NC 28277 HIM072018

Disclosures



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Documents

Retirement Ready - Financial Planning Association...2018/06/29 · Source: SBBI Ibbotson data dating back from 1926 - 2017 measured quarterly, calculations by Horizon Investments