Data & Research May 31, 2013

Even More Retirees Coming After Baby Boomers

The number of Americans reaching age 65 each year will continue to grow beyond the Baby Boomers, according to a trend analysis from LIMRA.
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For years, LIMRA said, researchers have suggested that as Baby Boomers begin to retire, they will create a large statistical bump, which will subside as members of the generation pass. However, this theory is not proving to be true.

LIMRA pointed to figures from the Census Bureau, which show the number of Americans reaching 65 years old each year will continue to grow beyond the Baby Boomer generation. “In fact, even when the last Baby Boomer reaches 65, there is no noticeable decline in the numbers,” said LIMRA in its analysis.

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Specifically, 3.4 million individuals are projected to reach age 65 in 2013. By 2023, 4.1 million Americans will reach 65 and then 4.2 million by 2050.

Immediately following the Boomers are 78.4 million members of Generation X and Generation Y (age 30 to 48). After them, those ages 11 to 29 represent another 82 million individuals who will be heading toward retirement in the next 35 to 55 years.

“This means that financial services firms should be looking at the retirement market not just for the immediate opportunity offered by Boomers but preparing for the possibility of long-term, sustained growth as Gen X and Y consumers prepare for retirement,” said LIMRA in the analysis.

LIMRA estimates there will be nearly $22 trillion in investable assets from Americans ages 55 and older available for retirement income solutions by 2020. Younger generations, who probably will not have a pension and will likely be solely responsible for their retirement savings, will have more investable assets by the time they reach age 55, according to the analysis.

The Markets May 31, 2013

Constructing a ‘Thoughtful’ Glide Path

When constructing a glide path for target-date funds (TDFs), the main objective should not just be about choosing the proper mix of equities and fixed income.
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It’s also crucial to think about liquidity and interest rate risk in a TDF’s glide path, Omar Aguilar, CIO of equities and asset allocation for Charles Schwab Investment Management (CSIM), told PLANADVISER. This was particularly important during the 2008 financial crisis when liquidity dried up quickly, he added.

CSIM has developed an approach to managing TDFs that includes a “thoughtful” glide path approach, as the company calls it. Beginning 10 years before retirement, and carrying through the decumulation phase, it’s about more than just shifting allocations from equity to fixed income – it’s time to reduce active management, protect liquidity, and factor in variables such as inflation and interest rate risk, according to Schwab. Embedded into the glide path of Schwab’s actively managed target-date strategies is an increase in short-duration bonds and cash, and strategies to offset inflation with increasing TIPS exposure and decreasing global real estate and commodities exposures.

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Consider the Baby Boomers invested in TDFs who are increasing fixed-income allocations directly in advance of a rising interest rate environment. (See “Storm Clouds Gathering on Fixed Income Front.”) The approach to increasing fixed income among funds varies widely, and the risk involved in taking larger positions in bonds could have a negative impact on those in or near retirement. The bottom line is that TDFs are not created equal, so it is critical – whether you’re a plan sponsor, retail investor or adviser – to understand the approach you’re investing in, according to Schwab. 

 

CSIM's approach to managing its TDFs also includes:  

  • Asset class granularity – TDFs should be diversified at the asset class level, as well as the sub-asset class level.
  • Open-architecture, blended approach – In contrast to using all actively managed proprietary funds, Schwab believes a combination of active and passive strategies creates a more efficient portfolio due to the unique attributes of each investment style. In conjunction with a reduction in active management as retirement nears, this approach has produced strong results, Schwab contends.

 “Our philosophy has always been about managing risk,” Aguilar said.

Aguilar cautions that simplicity is not always better when it comes to glide paths; while simplicity makes education about the glide path easier, a simple approach may lack diversification.

Providers should look at risk from different dimensions and from the perspective of employees, he concluded.

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