Aberdeen Asset Management’s CEO Martin Gilbert offers an interesting remembrance of the past decade’s shabby treatment of savers. Rates have been puny and punishing, as he writes:
Ultra-low interest rates have reduced the income of those retirees dependent on savings. Much lower bond yields have also meant annuity rates are now a fraction of their previous levels.”
Indeed, investors have responded by dialing up risk, using dividend-paying stocks or junk bonds as their sources of yield, while spurning the paltry income provided by annuities. (The rejection has been mutual, with insurance companies frequently shutting down their various annuity offerings.)
At the same time that rates have declined, the need for income has gone up, as Gilbert also explains:
One in three of today's babies in the UK will live to 100 according to the Office for National Statistics. Retirement can now make up over a third of someone's life and the financing of this needs to be addressed amid a rising dependency ratio.”
Low yield, reduced offerings and a spike in the expected length of retirement (augmented by a spike in healthcare expenses during that time) is an ominous combination. The fact that interest rates are now starting to rise does not solve the problem if it turns out, as many financial observers expect, that inflation rises with it.
Gilbert thinks his industry needs to do more:
Asset managers need to pay greater attention to what people actually need. Investment companies need to listen and offer solutions that match those needs.”
That’s the right attitude. I’m sure we will see some innovative products in time to come. My bet is that someone (maybe Gilbert?) will find a way to commercialize Moshe Milevsky’s idea about reviving tontines, a method of annuitization dating to the period following the Glorious Revolution that brought William of Orange to the British throne. Tontines can pay more income because of their morbid efficiency – the pot of income they pay actually increases each time one of the members of the group co-investing in them dies.
Until the right combination of products are available to consumers, investors would do well to focus on the things they can control – like increasing their savings, lowering their expenditures and/or planning for longer periods in the workforce.
With this perspective in mind, I am hosting a new premium service on Seeking Alpha’s Marketplace called “Wealth Watchers,” designed for people who want something in between engaging a financial advisor and doing things completely on their own. The new forum will serve as a mutually supportive peer group with knowledge and perspective on the how-to’s of earning, saving and investing with the aim of achieving financial independence.
Please share your thoughts in our comments section. Meanwhile, here are a few advisor-related links for today:
- Aberdeen Asset Management: The past decade has been tough for savers.
- Jeff Miller’s Stock Exchange looks at buying in an “overbought” market.
- Neal Frankle: What should be done about the upcoming Trump correction?
- Zachary Karabell expects the Trump rally to continue.
- AllianceBernstein evaluates the Trump effect on global equities.
- Mark Harrison, CFA: Factor Investing 101.
- For more content geared to FAs, visit the Financial Advisor Center, sponsored by Franklin LibertyShares ETFs.