Commentary eLetter 3/31/2023 — What if a Traditional Retirement no Longer Exists?
OK, good. It seems that headline was successful in that it caught your eye. If it is true that the ‘traditional retirement’ is a thing of the past, that would be an important thing to know and something we would want to make you aware of. Accordingly, in the past week I’ve heard several presentations and spent a bit of time on the web looking for more data or substantive arguments both for and against the premise. What I’ve found is fascinating, and terrifying at the same time.
My parents’ generation lived a life built on the ‘New York’ model of a lifetime. One was born and, when the appropriate times came, went to school, then college, then on to a job (which may have lasted 25-40 years at ONE employer), then retired and lived on a pension, and finally died. For those of you in your 60’s and older that might have been your paradigm. For the younger group, especially those under age 45 or so, this model is being phased out, or perhaps disappearing entirely. It is being replaced by what some demographers are terming the ‘Hollywood’ model of a life.
In the Hollywood model, a group of people are brought together for a project. This group might include script writers, art designers, actors, stage and costume designers, promoters, and a host of other ‘skill-workers’. From the start, they will likely agree that this project is NOT a long-term project. And chances are pretty good that NO ONE in that group expects to be working on the same project for 25-40 years. As a matter of fact, many (perhaps most) of the members of the group may well be working on 3 or more projects at the same time. If that sounds like a strange paradigm, let me suggest that you run it by your kids or grandkids and see if it makes sense to them.
This model is now beyond the theoretical stage: it is finding its way into retirement planning. Once upon a time (about the time that social security was created in 1935) there were about 150 workers for each person drawing social security retirement benefits. And life expectancy ran to about age 65. (stats from DOL).
The logistics worked. People worked and paid into the retirement system for 25 or more years, then retired and collected for 3 to 5 years, and then died. But the basic plan has not been updated. Today, as you’re probably aware, there are about THREE people working for each one collecting retirement benefits. As they say, ‘Do the math’. The answer is not pretty. The trend line sort of says that a one-to-one ratio lies somewhere in the not-too-distant future. Is that a future that we are stuck with? Well, not necessarily, but it’s something that politicians are unlikely to change until (unless) they have tried everything else they can think of.
When I started working with retirement planning in the 1980’s it was difficult to convince people that they should consider that they might live to age 90. Today it’s not overly difficult to have people consider that they COULD make it to age 100 or beyond. (A demographics chart suggests that my 8-year-old granddaughter could make it to an average life expectancy of age 105!)
And so, today’s picture of a work life might look like this: after high school and perhaps college or a trade school, one goes to work on a project. That might last up to 3 or 4 years. Then it’s back to school for retraining to replace jobs that are being phased out, and back to work at another project. Then perhaps it’s time for family- one might stay home with young children for a few years. Then back to a project, then more re-training, and then maybe time for a couple of years of travel. Rinse and repeat. In the future the concept of a ‘retirement’ — as was known by our parents — might possibly become just some relic from an outdated past.
In our practice we are finding more and more retirees who are just bored. Advances in technology are making it possible for them to start new ventures, new charitable endeavors, or new projects. If nothing else, the technology is certainly enabling them (and us) to find new ways to entertain ourselves. (Over 20% of all available apps for smart phones are games of some sort!) The days of a rocking chair retirement are also gone. And one of the main questions retirees are asking us is no longer about finances- but rather what they can do to find meaning in the rest of their days.
As Yogi Berra used to say, ‘Making predictions, especially about the future, is difficult.’ That’s certainly true, but there’s still a lot of food for thought. If it’s not already here, perhaps your kids will be asking, not when they can retire, but what will their next project be?
Ron’s Market Minute — Why We’re Continuing to Look for Strength in Non-US Markets
Historically, over long periods of time, the returns on non-US stocks and US stocks are not that much different. However, in shorter time periods it is not unusual for either US or Non-US markets to outperform the others by 10% or more. From 2002 through 2009 non-US markets averaged about 10% more per year return than US, but for the most recent decade it’s been the US that has been the strong performer-with about a 10% per year greater return than NON-US markets.* I think there’s a decent possibility that the numbers may be flipping again in favor of the non-US countries. One of the main reasons is that the market composition is quite different outside of the US. *Source: AB Advisors March 2023 newsletter https://www.rbadvisors.com/insights/a-sea-change-in-international-markets/
In particular, while tech stocks make up a big chunk the US major market (S&P 500 Index*), technology is much less emphasized outside of the US.
The AB Advisors March 2023 newsletter says that US markets concentration in technology and tech-related sectors plus other high-priced growth stock (totaling about 43%) are pretty much the foundation of our markets. Ex-US countries have about a third less exposure to tech overall than the US. (See the chart below.)
Historically, tech sectors have performed quite well during times of lower interest rates, high liquidity, and strong growth. Today’s economic environment is quite different, and many people (including me) think there’s a good chance that higher interest rates and less liquidity (and accompanying weak growth) may be on the table for the next handful of years, at least. And so, international markets with their lower exposure to these weak sectors are looking attractive.
Chart courtesy AB Advisors
Again, looking at history, it is rather rare for cycle leadership to repeat. And the last economic cycle’s strength is rarely the next cycle’s strength. If we are correct in assuming that both inflation and interest rates are likely to stay higher for longer periods, the differences in markets composition could bump international performance vs. the US. Materials and Energy usually benefit from higher commodity price inflation. Also, after being hammered for years by low and even negative interest rates, Financials may see improved profits. Would that include Banks? Well, maybe — and we have some concern there — but it appears that political leaders seem to be committed to preventing further negative issues with that sub-sector.
Finally, International markets, at the moment, are trading at large discounts to US markets. It may not be unusual to see negative sentiment to internationals (with the Ukraine war, geopolitical issues with China, and uncertainties in emerging markets. But although we are seeing lower valuations outside of the US, our markets are still priced high, from a historical standpoint. Valuations may not be an effective timing mechanism, but they do give us some insight on the balance of risk vs. rewards- which has much relevance for longer returns.
The tide that gave us great returns over the past decade may now be turning. International market emphasis on non techs, lower valuations, and more accommodative liquidity suggest that advisors and portfolio designers may benefit from turning their focus to the growing potential opportunities outside of our country.
It’s time to say, “Watch this space”.
Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com
LFS-5601725-033123
*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.
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Past performance is not a guarantee of future returns – LFS-5390884-123022
