Retirement Update – September 2018
- Rising US equities offset falling international stocks and modestly falling discount rates to leave funding ratios mostly unchanged in August.
- US stocks break bull market record.
- International equities dragged down by trade tensions and emerging market turmoil.
August 2018 Summary
US stocks jumped in August, returning +3.5%, bringing their year-to-date return to +10.4%. Conversely, international equities fell 2.1% in August and are down 1.6% year-to-date.
The current “bull” market, which began in March of 2009 (9.5 years ago!), is now the longest ever according to most measures, exceeding the old record of 3,453 days (from 1990 to 2000). The average bull market has lasted just over 5 years, and the average bear about 1.7 years (Source: The Economist).
US equity valuations, already high, rose further as the Cyclically Adjusted Price to Earnings Ratio for the S&P 500 index rose to about 32.3 by month end, the highest level reached during the current market cycle, and up from 26.9 two years ago. The long-term, historical average is roughly 16.8. (Source: Econ.Yale.edu.)
Meanwhile discount rates declined slightly; the FTSE Pension Liability Index finished the month at 4.06%; down about 3 basis points from the prior month. The index is up about 0.46 percentage points year-to-date from 3.60% at 2017 year-end.
We estimate that strong US equity performance was offset by the small pullback in discount rates during the month, leaving funding ratios largely unchanged in August.
Discount Rates & Asset Returns
Discount rates continued their slight decline, now down 0.07% over the past two months. However, rates remain higher than rates at this time last year and are still up nearly 0.50% since the end of 2017.
U.S. equities saw positive returns in August, led by strong 2nd quarter GDP while most global markets saw negative returns, amplified by a strong U.S. Dollar. Trade tensions and a strong dollar hurt emerging markets. The broad bond market saw small but positive returns as rates decreased this month and credit spreads widened slightly.
What’s New at R&M?
River and Mercantile crosses $1B in annuity placement and DOL IB 95-1 Independent Expert projects
Over the past three years, R&M has provided DOL IB 95-1 “safest available annuity” opinions for over 50 annuity placements, ranging in size from $1M to $300M. This summer, the transfer premiums of all these projects surpassed the $1B mark. With nearly a dozen additional placements already scheduled for the rest of 2018, this total will continue to increase quickly.
Q: How can I make my DC plan work better for older employees?
A: DC plans have served long-term savers and investors – the “accumulators” – well historically. However these plans provide challenges for near retirees and retirees (the “decumulators”). Those planning for or in decumulation status need three things.
First, they need high quality principal protection choices, including inflation-protected bonds. Real, i.e., inflation-adjusted, principal preservation is as important to those in retirement as are equities for younger investors.
Second, decumulators need retiree-friendly distribution options. Plans should offer both installments and partial withdrawals. Installments provide convenience, while partial withdrawals offer the flexibility retirees may need for unanticipated expenses.
Third, decumulators need unbiased distribution counseling, as well as objective investment advice. A distribution specialist provided by your recordkeeper will review plan rules and tax consequences with participants in an unbiased and consultative way, while an in-plan investment advisor can assist retirees and near retirees with adapting their asset allocation to their changing needs.
With 10,000 baby boomers turning 65 every day, what has worked well historically in DC plans needs to evolve to meet the needs of aging plan populations.
Have a question for R&M? Please submit it to firstname.lastname@example.org and look for a possible answer in next month’s update!
SECURITY INDICES: This presentation includes data related to the performance of various securities indices. The performance of securities indices is not subject to fees and expenses associated. Investments cannot be made directly in the indices. The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.
CONFIDENTIAL: For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC. Past performance cannot be relied upon to predict future results. River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.
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