How to fund your 100-year life Alastair Baillie Strong Head of - - PowerPoint PPT Presentation

How to fund your 100-year life

Alastair Baillie Strong

Head of Investment Solutions Design Fidelity international

What a longer life means for you and your retirement investments

Some simplifying assumptions:

• Inflation: 2.5%
• Real wage growth: 2%
• Replacement rate: 50%
• Start saving from 25 years
• Retirement age: 65

The impact of a longer life on your investment objective

Source: Fidelity International 2019. Expected returns are a simulated exercise, based on our proprietary modelling, for illustrative purposes only. Eur/USD values are denominated in local currency. Figures are future expected returns which are derived from proprietary models and analysis from Fidelity International’s research analysts. Government refers to hypothetical 10 year German and US Treasury bonds. Credit indices are ER00 (Euro) and C0A0 (USD). Equity indices are MSCI World and MSCI EM.5

Required IRR by planning age and savings rate

0% 2% 4% 6% 8% 10% 12% 70 75 80 85 90 95 100 105

Required IRR Planning age (years)

5% 10% 15% 20%

Contribution rate:

Expected returns (20 year)

Government Global IG DM equity EM Equity EUR USD

A 100-year working life?

Some further assumptions:

• Continue working post 65 with

a lower level of income

• This income covers living

expenses but doesn’t allow additional pension saving

• Pension savings, however, are

not used over these additional working years

The impact of working longer

IRR assuming later retirement (contribution rate 10%)

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 60 65 70 75 80 85 90 95 Required IRR Retirement age 100 95 85 75

Planning age:

Source: Fidelity International 2019. Expected returns are a simulated exercise, based on our proprietary modelling, for illustrative purposes only. Eur/USD values are denominated in local currency. Figures are future expected returns which are derived from proprietary models and analysis from Fidelity International’s research analysts. Government refers to hypothetical 10 year German and US Treasury bonds. Credit indices are ER00 (Euro) and C0A0 (USD). Equity indices are MSCI World and MSCI EM.

Expected returns (20 year)

Government Global IG DM equity EM Equity EUR USD

Balanced fund Income funds Fixed term funds Term funds with protection Annuities

Investment approaches include

Source: Fidelity International 2019

Income investing

Source: ICE Data Indices 2019, Bloomberg 2019, Fidelity International 2019

Value of $100k invested through the crisis Natural income from $100k invested on Dec. 2017

Sustainable income

Using an income investing approach can provide stable income, even in times of market stress

Source: ICE Data indices 2019, Bloomberg 2019, Fidelity International 2019 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $110,000 2007-12 2008-07 2009-02 2009-08 2010-03 Value of $100k US investment made in 2017-12 income not reinvested US IG US HY S&P 500 $0 $100 $200 $300 $400 $500 $600 $700 $800 2007-12 2008-07 2009-02 2009-08 2010-03 Monthly income from $100k US invested 2007-12 IG HY Equity

Source: ICE Data indices 2019, Bloomberg 2019, Fidelity International 2019

However higher levels of income can lead to severe capital erosion in stressed markets

Value of $100k invested through the crisis with $10k withdrawn each year in monthly payments

Unsustainable income

$40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $110,000 2007-12 2008-04 2008-07 2008-10 2009-02 2009-05 2009-08 2009-11 2010-03 Value of $100k US investment made in Dec 2017 withdrawing $833 per month ($10k annually) US IG US HY S&P 500

Creating a smooth journey to retirement

Source: Fidelity International, December 2017. Performance uses monthly equity returns of the MSCI World Total Return Index in USD, translated into Singapore Dollars using end of month exchange rate. Performance presented gross of fees.

Retirement wealth

Nobody wants to play the birthday lottery

• 50,000

100,000 150,000 200,000 250,000 300,000 350,000 400,000 Sep-92 Jun-95 Mar-98 Dec-00 Sep-03 Jun-06 Mar-09

Anna: Born September 1942 Betty: Born March 1944

A customized approach to designing the right glide path

Source: Fidelity International 2019

Glide paths depend on inputs that are country-specific

Accumulation

• Wage growth rate
• Contribution rate
• Age of commencement of

saving

• Size of savings portfolio at

start

• Age of retirement

Decumulation

• Income replacement rate
• Inflation rate
• Number of years in retirement
• Bequest – if any

Investment

• Choice of asset universe
• Returns, risks, correlations of

asset returns

• Investor risk aversion

Outline of approach

Source: Fidelity International 2019.

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Volatility

Start Start of de-risking Retirement

Fund Value

Start Start of de-risking Retirement

Investment return volatility Minimum pension fund value through time

• Determine investment risk level throughout life so that in expectation, the individual can meet their

withdrawal and bequest needs in retirement, and probability of failing to do so is minimised

• Apply a backwards-induction optimisation method to solve this objective
• Investment risk and minimum fund values are both optimised together through this process, and

are the principal outputs

Source: Fidelity International 2019

Example glide path

Glide path

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 25 30 35 40 45 50 55 60 65 Age Global AC Equities Diversified growth strategy Local Aggregate Bonds Cash

Source: Fidelity International 2018

Wealth at retirement: median, quartiles, top 10% and bottom 10% outcomes

Comparing the glide path to diversified growth strategies

• Years to retirement: 43
• Current salary: £25,000
• Current retirement savings: £0
• Years to retirement: 25
• Current salary: £35,000
• Current retirement savings: £70,000
• Years to retirement: 3
• Current salary: £50,000
• Current retirement savings: £285,000

Age 25 today Age 43 today Age 65 today

Glide path Diversified growth strategy Glide path Diversified growth strategy Glide path Diversified growth strategy

Behavioral issues also need addressing

UK investment pathways

Source: Fidelity International. For illustrative purposes only.

Creating good quality investment solutions at a competitive price for undecided investors

• A set of new requirements introduced by the FCA to help non-advised customers “who struggle to

make investment decisions”

• Ready-made investment solutions to help customers select suitable retirement products
• Each pathway will comprise a customer journey and an investment solution, and must have equal

prominence to non-pathway propositions

• Provide appropriate protections for those least able to engage when reviewing and making

investment decisions

UK investment pathways

Source: Fidelity International. For Illustrative purposes only.

Design principals

• Low cost and simple to explain solutions
• Single fund for each pathway
• Attractive risk-adjusted returns over the long term
• Consideration of ESG
• Make the journey(s) as efficient as possible
• Tax efficient wrappers

Pathway 1 (No plans to touch money within 5 years) A low cost multi asset solution Pathway 2 (Plan to buy an annuity) Solution designed to preserve the investor’s annuity- purchasing power Pathway 4 (Take all as cash within 5 years) Cash or cash + Pathway 3 (Long term drawdown income) A low cost conservatively managed multi asset solution which provides cashflow

Investment pathways

Conclusions

Source: Fidelity International 2019

• Demographics have changed the retirement problem
• There are investment solutions that can help
• However behavioral issues need addressing and one size does not fit all

investors

• A robust advice structure around retirement planning is needed to ensure

that investors make the choices that suit their needs Asset managers and distributors have a collective responsibility to design appropriate solutions for investors changing needs

Important information

This document is for intermediaries only and not for external distribution. All external distribution requires prior written approval from Fidelity. FIL Limited and its subsidiaries are commonly referred to as Fidelity or Fidelity International. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. The information contained in this material is only accurate on the date such information is published on this material. Opinions or forecasts contained herein are subject to change without prior notice. Reference to specific securities mentioned within this material (if any) is for illustrative purpose only and should not be construed as a recommendation to the investor to buy or sell the same. Investment involves risks. Past performance is not indicative of future performance. Please refer to the relevant offering documents for further information including the risk factors. If Investment returns are not denominated in HKD/ USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. This material may contain materials from third parties which are supplied by companies that are not affiliated with any Fidelity entity ("Third Party Content"). Fidelity has not been involved in the preparation, adoption or editing of such third party materials and does not explicitly or implicitly endorse or approve such content. Any opinions or recommendations expressed on third party materials are solely those of the independent providers, not of Fidelity. Third Party Content is provided for informational purposes only. The material is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Futures Commission (“SFC”).