Pre-Retirees Need More than Asset Protection

Market volatility, catalyzed by the coronavirus crisis, has dominated the conversation in 2020. In the target date fund space, the built-in diversification, adjusted by age, endeavors to balance retirement savers’ asset accumulation with risk exposure — and has proved reasonably effective during this disruptive period.

Those closest to retirement are the most vulnerable to market swings, having the shortest runway to recover loss. Here, we will explore how “to retirement” funds fared during the first quarter — not only through the lens of wealth preservation, but also wealth accumulation.

By comparing the performance of State Street’s 2020 Fund (where a 65-year-old participant would currently be invested) to the 2020 funds of three large “to retirement” managers, we found that a State Street investor starting at the same dollar amount in 2010 would have accumulated meaningfully higher levels of wealth than investors with the other managers, even after accounting for slightly larger drawdowns at age 65.

In short, asset preservation is an important but insufficient condition for savings success. There must also be ample accumulation. By connecting these concepts, State Street Global Advisors balances volatility, longevity and inflation risks in concert with the long-term objectives that participants seek to achieve.

Figure 1: Ten Years of Wealth Accumulation in 2020 Target Date Fund Vintage

Figure 2: 2020 Target Date Vintage Eases Equity Allocations Over Time

Complementing State Street’s accumulation strategy is our approach to de-risking. Figure 2 reflects State Street’s strategy to hold more risk through retirement to address under-savers, steeply de-risking before age 70 to align the glidepath’s most conservative point with expected withdrawal behavior.

Considering the Full Participant Portrait

Prioritizing market volatility for 65-year-old participants makes sense, but an outsized focus on the market understates the individual’s risk of running out of money in what could be a 25- to 30-year retirement. According to the Employee Benefit Research Institute, the average retirement balance for a full-career participant at age 65 is $280,000, and for many with segmented work histories, balances are considerably lower. To address low balances, many participants today are working longer. Late-career years are key for wealth accumulation, as wages and retirement balances are generally higher than at earlier points in participants’ careers.

Our recent Global Retirement Reality Report (GR3), fielded during May 2020 and capturing participant sentiment amid the COVID-19 crisis, highlights how age plays a meaningful role in retirement optimism and confidence, with those who are mid-career, primarily of the Generation X cohort, feeling the greatest strain. Whether driven by a more complex financial life, a more informed understanding of “what could go wrong” or a larger reconciliation of life’s expectations versus realities, the dip in optimism is noticeable for this group and presents an opportunity for both sponsors and retirement advisors to identify solutions specific to this group’s accumulation needs.

At State Street, we endeavor to solve for all angles of retirement readiness with a glide path that holds sufficient equity exposure through retirement to address longevity risk, while reaching its most conservative point at age 70 in order to align with expected participant withdrawal behavior and prepare for the onset of required minimum distributions. This approach focuses on delivering meaningful levels of real income replacement while mitigating the impact of market volatility on participants nearing retirement. The result is a balanced, broadly diversified set of funds — and the proof is in the performance. In the case of our collective investment trust series, State Street has outperformed 94% of our peers, while also experiencing lower volatility than 76% of the same peer group since inception in 2005, owing in large part to our broadly diversified set of underlying asset classes.ⁱ