Investors see information about retirement almost every day. From TV commercials advertising advice to mail and even social media posts, the spectre of retirement is almost inescapable. The reality of it, however, is much more complicated. The recent VettaFi webcast “A Modern Approach to Retirement Cash Flow” not only explored conveying those realities to investors and clients, but also the tools available to meet their goals while in retirement.
Key Takeaways:
- With retirement lasting longer than ever, retirees have a lot of work to do to navigate paying for their needs.
- Decumulation requires a plan to overcome retirees’ behavioral tendencies.
- Laddered ETFs consistently provide income within a steady, structured approach.
VettaFi Head of Research Todd Rosenbluth hosted the webcast, and Northern Trust Asset Management sponsored it. It explored the behavioral tendencies of retirees and the ETFs available to deliver for them in retirement. The segment included insight from SVP and Director of ETF & Funds Strategy Northern Trust Asset Management Chris Huemmer, who offered his thoughts on preparing clients for retirement as a reality.
Huemmer framed the conversation with an important statistical shift. Simply put, retirees are living for longer periods, complicating planning. Now, with more time to pay for, retirees’ behavioral habits are magnified.
“You’ll notice that a lot of people are very conservative. A lot of people get to the retirement phase and instead of just spending and spending down their assets, they tend to still be hesitant,” he said. “A lot of times you run into the situation where 10, 15, 20 years into retirement, retirees still have a significant portion of their assets.”
That, Huemmer said, creates three phases in retirement: busy, “go-go” years full of travel, “slow-go” years as that tapers off, and “no-go” years where funds focus on medical costs.
Understanding that then asks investors and retirees to have a plan of attack. Part of having a plan is the confidence it offers. That impacts decisions that may seem like questions of math, revealing them instead as questions about behavior.
“One of the things that we found in our research is that retirees are often more comfortable spending money framed as income than framed as savings,” Huemmer said.
“So we all are taught and ingrained to have that emergency fund, to build our retirement account and not to touch it, because of the penalties,” he added. “But then when you get later on and...actually, there's no penalties there, you tend to see that behaviorally, people will still have trouble spending that savings.”
That happens amid challenges like inflation, particularly for medical costs. Timing and liquidity, too, loom as challenges. Huemmer explained that a key solution to address investor behaivor amid that set of challenges falls into a simple statement: “The structure is the strategy.”
The Structure Is the Strategy
According to Huemmer, when a spending plan is well structured, retirees are more likely to stick to it. It can guide spending and habits at times when stress rises and decisions are coming thick and fast.
“When retirement is left too open-ended, investors are repeatedly asked to make decisions under stress,” he said. “Structure helps counter behavioral pressure, predictability reduces decision fatigue, and really the goal is to optimize lifetime cash flow.”
Building a Strategic Retirement Plan With ETFs
What tools do investors have, then, to help create that structure? ETFs, the ever popular, flexible fund space, offer powerful tools. Distributing ladder ETFs provide the cash flow that can steadily deliver for retirees. Traditional bond ladders have equal par values distributed across multiple maturities, then reinvested into the next “rung” of the ladder. Distributing bond ladders, on the other hand, return the principal to the investor.
That provides a steady rhythm of cash for investors paying for retirement. With the ETF wrapper, investors can get the benefits of that relatively complicated bond ladder approach with ETF advantages, like liquidity and flexibility. This helps address issues for retirees like liquidity risk, interest rate risk, and default and credit risk.
“So it's really taking that traditional ladder and adding to that," Huemmer said. "We're taking a great investment strategy and turning it into a cashflow management tool that gets all the benefits of a traditional ladder with some added benefits for retirees, or anybody who wants to immunize their spending over time."
See more: Earnings Calendar ETFs: Why Active Has the Edge
Northern Trust Asset Management offers a variety of those distributing ladders ETFs. That includes tax-exempt ETFs and inflation-linked ETFs. With funds available for multiple looming periods, those funds could intrigue to help investors navigate longer and longer retirements.
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