The Wellness Divide

The Sword Or The Shield?

Post-pandemic planning & the new longevity

by Kevin Mechtley

Mr. Mechtley is vice president of business development and chief innovation officer at Sammons Financial Group. Visit www.sammonsfinancialgroup.com.

Throughout history the “irresistible force paradox” has remained a classic question without an answer. It originates from a story from Han Feizi, a philosophical book written in 3rd century B.C., in which a man tries to sell to a buyer both a spear and a shield. The seller explains to the buyer that this spear could pierce any shield, and the shield, in turn, could block any spear. When asked what would happen if the all-piercing spear were to strike the impenetrable shield, the seller was left speechless. This classic tale has been applied in a number of contexts over time – I’m sure you can think of a few.

So what of the answer? The laws of physics tell us there isn’t one – there is no such thing as an immovable object because everything is relative to the observer. And an unstoppable force? That would require infinite energy. Smarter people than me have looked at this question over time and landed one answer – it’s a false dilemma.

But back to our Han Feizi story, if I was the buyer, I’d probably ask the same question he did. Logic requires it. But my story wouldn’t end there. I’d break the seller’s silence with a follow-up question.

“How much for both?”

And so to those pondering how to tackle “the new longevity,” I also say arm yourself with as much power as possible. Today’s world calls for both sword and shield.

The idea of a balanced portfolio isn’t new, or even controversial. Traditionally, in simplified terms, it’s about getting a clear understanding of a person’s risk tolerance and then carefully selecting a complementary mix of financial instruments like stocks and bonds that match up, leveraging and sometimes hedging within the portfolio to achieve performance in different economic environments. The hope is that eventually, retirement income can be generated from the portfolio to supplement other sources of income, such as Social Security. Growing that portfolio using traditional financial instruments represents the spear – you’re on offense.

But I’d posit that the recent pandemic and all its effects have turned traditional thinking on its head. The unprecedented volatility in the market over the past few years has highlighted the need to carve out a piece of that portfolio with more resilient and dependable income planning strategies. Investors need to be able to rely on a defensive measure too. They need a shield.

Why The Shield Now?

There are three reasons:

1.) The noise is at epic levels

When it comes to a consistent stream of income in retirement, there are so many disrupters impacting the ability to put a lasting plan into action. It may at times feel like an income plan is pinned right in the middle of a magician’s wheel, with knives being flung directly at it. Will the balloons pop or keep spinning? One of those knives could represent inflation, which could continue to increase to unmanageable levels. Another could be the whirlwind rise and fall of interest rates. And even bonds, traditionally favored by investors to offset some volatility, are coming off their worst year ever, showing they are not impervious to distress.

Couple all of this with a possibly ill-timed sequence of returns risk during a retiree’s most fragile decade (five years before and after retirement), and that could equate to investors and advisors alike wishing they had a shield to slow down the offensive.

Even the gift of luck and good genes leading to extended longevity, while a blessing in a million ways, could also lead to stress in retirement planning. Imagine creating a portfolio that could include a stream of income for a 50+ year retirement, like in the case of Maria Branyas Morera at a spry 115 years old.[1] Would traditional thinking around portfolio design be able to deliver?

2.) Income expectations are falling short

We’re understanding more every day about pre-retirees expectations as they head into retirement. Today’s retirees increasingly do not have the same retirement protections as their parents, and the next generation may have even fewer. As traditional pension plans are supplanted by individual savings plans, both expectations and planning must adjust. In many cases, pre-retirees are underestimating the amount they’ll spend in retirement, with recent survey results indicating they expect to spend just over half of their current household income. Only half! However, as one may expect, similar survey responses from actual retirees have painted a picture of spending more than planned, with the majority spending well over that amount.[2]

The idea of a balanced portfolio isn’t new, or even controversial. Traditionally, in simplified terms, it’s about getting a clear understanding of a person’s risk tolerance and then carefully selecting a complementary mix of financial instruments...

3.) Post-pandemic job movement

Whether investors took part in what is now known as the “great resignation,” “great reevaluation,” or took that opportunity to bow out and retire early, now may be an ideal time to sit down and review portfolio allocations. Couple that with the recent influx of market volatility, and there’s never been a better opportunity to look for innovative solutions.

Annuities: The Strength Of Insurance

One often overlooked solution is to incorporate an annuity as the conservative portion of a client’s overall portfolio and retirement income strategy. The insurance industry has made strides in recent years to help meet the evolving needs of consumers in these volatile times, and is uniquely positioned to provide guaranteed income in a way that no other financial services sector can compare. Many financial professionals who previously relied on traditional portfolio design incorporating (once-reliable) safe money strategies and the “4% Rule” are now looking to annuity products to help ensure additional protection, especially for those nearing retirement.

During the accumulation years, annuities can be the sheath to the portfolio’s sword:

Fixed Index Annuities can help create a foundation of conservative growth potential that an overall portfolio can rely on to supplement other investments in the portfolio’s “sword years.” With both downside protection and index crediting strategies from top financial brands, they can give the sword years some added protection. Stressing this metaphor, accumulation-focused annuities can be the sheath to the sword in accumulation planning. Moreover, these are not your grandfather’s annuity products. Insurance companies have continued to innovate, resulting in products that help solve for a number of retirement risks, while still maintaining the traditional protections annuities provide. Utilizing a financial vehicle like a fixed indexed annuity that is impervious to market loss can help an overall portfolio withstand more risky allocations during higher levels of volatility.

During the decumulation years, annuities can be the portfolio’s shield:

Much like insuring a home, car, or even your life, shielding your retirement income from loss should be top of mind. Annuities can offer many features that can help combat against income hurdles, such as providing inflation protection or triggering additional benefits for an unexpected health event. With rising health care costs being a concern for many (almost three-quarters of consumers in a recent survey[2]), having the ability to access additional funds when you need them could be crucial. But even beyond that, just knowing that your annuity product can help provide income through the ups and downs of life can give peace of mind and defense against the unknown. Annuities focused on income also continue to innovate, with more and more income solutions designed to fill very specific needs for individual retirement savers. Whether you need to turn on income now, turn it on in the near future, or don’t plan to draw income for many years (or even a mix of multiple or laddered income streams), annuity products and annuity-focused strategies may be the answer.

So, back to the irresistible force paradox. The sword or the shield? I say arm yourself with both. Incorporating an annuity strategy as that conservative portion of a portfolio could not only provide it with the power to withstand even the greatest levels of volatility (including of pandemic proportions), but also the assurance that there’s a protected income stream for whatever life has in store.

 

 

 

[1] Guinness World Records, sourced March 10, 2023, https://www.guinnessworldrecords.com/world-records/84549-oldest-person-living
[2] The Wild Cards of Retirement, Wealth Management IQ, 2023

 

4 responses to “The Sword Or The Shield?”

  1. John R Boyer says:

    Great analogy! I will use it Monday, Tuesday and Wednesday this week.
    John Boyer

  2. Billy Snyder says:

    Very well explained and illustrated. Protecting from both market loss in the growth “spear” stage and longevity risk during the “shield” stage, are the best benefits of FIA’s.

  3. Stan Thims says:

    Great way to help clients relate, great way to compare!

  4. JAMES RIDDELL says:

    That is a good explanation looking forward to more of your thoughts. Helpful to me.