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Managing Longer Lifespans and Longevity Risk with Siegel-WisdomTree Model Portfolios
Key Takeaways
- Investors with longer time horizons should consider a higher allocation to equities within their retirement portfolios
- While the short-term standard deviation of stocks is certainly greater than bonds, they are actually less risky than bonds or t-bills if you consider a holding period beyond 15–20 years
- Many investors may underestimate longevity risk, or the risk of outliving their investments and sources of retirement income
- A bias toward equities can actually make for a safer long-term portfolio, as stocks have historically been far more effective at protecting the purchasing power of a portfolio through retirement
This article is relevant to financial professionals who are considering offering model portfolios to their clients. If you are an individual investor interested in WisdomTree ETF Model Portfolios, please inquire with your financial professional. Not all financial professionals have access to these Model Portfolios.
Many individuals approaching retirement age share common goals as it pertains to their retirement investments:
- First and foremost, not running out of money
- Second, generating sufficient income and investment returns to support their lifestyle/level of consumption, and
- Lastly, leaving behind a legacy or meeting philanthropic goals beyond their lifetime.
When it comes to managing these critical objectives, perhaps the most imperative decision investors will make is how they structure their retirement portfolio from a top-down asset class allocation perspective.
Traditionally, many advisors and investors have used the “60/40” approach, meaning having 60% of their portfolio in equities and 40% in fixed income.
One of the key takeaways from Stocks for Long Run regarding portfolio construction is that, for investors with longer time horizons, a larger percentage of their portfolio should be in equities. This is one of the key philosophical views that went into the design of the Siegel-WisdomTree Longevity Model Portfolio, which has a 75% strategic allocation to equities.
While the short-term standard deviation of stocks is certainly greater than bonds, they are actually less risky than bonds or t-bills if you consider a holding period beyond 15–20 years.
Maximum and minimum returns for stocks, bonds and t-bills under various holding periods
Furthermore, a bias toward equities can actually make for a safer long-term portfolio, as stocks have historically been far more effective at protecting the purchasing power of a portfolio through retirement.
The simulation below depicts the probability of a portfolio running out of money using both 4% and 5% real annual withdrawal rates. The allocation to stocks in each portfolio ranges from 0% to 100%, increasing from left to right.
Probability of running out of money after 30 years under various allocations to equities vs. bonds
In this analysis, increasing a portfolio’s allocation to equities beyond 60% does not have a significant impact on shortfall risk. Therefore, for investors balancing shortfall risk with the realities of longer lifespans and the desire to leave a legacy, a higher allocation to stocks may be justified.
Research suggests that many investors may not have a realistic appreciation for longevity risk, or the risk of outliving their investments and sources of retirement income.
The chart below from the 2022 study by the Center for Retirement Research at Boston College shows that less than 60% of men and only 64% of women aged 65–69 expected that they would live to age 80. However, empirical evidence suggests that probability is much higher—closer to 70% for men and 80% for women.
Probability of living to age 80 for individuals aged 65–90, 65 and 69
Furthermore, experts anticipate that the historical trend of longer human lifespans will continue over the next several decades.
Historical and Projected Life Expectancy for the Total U.S. Population at Birth 1960–2060
As advances in science and medicine are constantly improving healthcare, there is always a chance for further breakthroughs in human longevity.
In Stocks for the Long Run, Professor Jeremy Siegel writes that, “investors with longer investment horizons should hold a higher percentage of stocks compared to those with shorter horizons.” We believe that many investors might have a longer time horizon than even they realize.
Therefore, we encourage investors and their advisors to think long term when setting the strategic asset allocation of their retirement portfolios.
For investors seeking a model portfolio that blends the need for current income generation and improved longevity profiles of traditional allocations, we believe the Siegel-WisdomTree Longevity Model Portfolio may be worth further exploration on our Model Portfolio Adoption Center.
Watch this video for more information on the Siegel Model Portfolios.
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Important Risks Related to this Article
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For retail investors: WisdomTree’s Model Portfolios are not intended to constitute investment advice or investment recommendations from WisdomTree. Your investment advisor may or may not implement WisdomTree’s Model Portfolios in your account. The performance of your account may differ from the performance shown for a variety of reasons, including but not limited to: your investment advisor, and not WisdomTree, is responsible for implementing trades in the accounts; differences in market conditions; client-imposed investment restrictions; the timing of client investments and withdrawals; fees payable; and/or other factors. WisdomTree is not responsible for determining the suitability or appropriateness of a strategy based on WisdomTree’s Model Portfolios. WisdomTree does not have investment discretion and does not place trade orders for your account. This material has been created by WisdomTree, and the information included herein has not been verified by your investment advisor and may differ from information provided by your investment advisor. WisdomTree does not undertake to provide impartial investment advice or give advice in a fiduciary capacity. Further, WisdomTree receives revenue in the form of advisory fees for our exchange-traded Funds and management fees for our collective investment trusts.
Jeremy Siegel serves as Senior Economist to WisdomTree, Inc., and its subsidiary, WisdomTree Asset Management, Inc. (“WTAM” or “WisdomTree”). He serves on the Model Portfolio Investment Committee for the Siegel WisdomTree Model Portfolios of WisdomTree, which develops and rebalances WisdomTree's Model Portfolios. In serving as an advisor to WisdomTree in such roles, Mr. Siegel is not attempting to meet the objectives of any person, does not express opinions as to the investment merits of any particular securities and is not undertaking to provide and does not provide any individualized or personalized advice attuned or tailored to the concerns of any person.
