Research Affiliates: Retirement Planning: Millennials vs. Boomers

November 10, 2014

Who owns an equity-centric portfolio in the morning, a balanced portfolio at noon and a fixed-income portfolio in the evening?

The most famous brainteaser in history is the riddle of the Sphinx: What goes on four feet in the morning, two feet at noon, and three feet in the evening? Oedipus answers correctly: Man—who crawls on all fours as a baby, walks on two feet as an adult, and needs a walking stick in old age. If modern life were similarly compressed into one day, today's millennial generation would be headed off to work—grabbing that cup of coffee, booting up the computer, and setting their priorities for the day. Their parents, the baby boomers, are getting ready to clock out—writing some last-minute emails, gathering their belongings, and looking forward to a pleasant, restful evening at home. The two generations are at the opposite ends of their working lives, with the millennials building their careers and the boomers on the doorstep of retirement and with Gen X somewhere in the middle.

Naturally, one would expect their retirement portfolios to look very different. The baby boomers ought to have the bulk of their portfolio in fixed income securities, while the millennials should be invested more aggressively—almost exclusively in stocks. Right?

Maybe not.

Conventional wisdom tells us to put retirement investments on a glidepath, with decreasing equity risk as our retirement date draws near. We've garnered considerable attention (and ruffled a lot of industry feathers) by showing that this conventional view is seriously flawed.1 Even so, two-thirds of a trillion dollars in assets are now invested on the untested premise that young people can and should take more risk than their middle-aged colleagues, in glidepath products known as target-date funds (TDFs). TDFs are typically offered as a one-size-fits-all investment vehicle that employees can select in their defined contribution (DC) retirement plans. In many cases they are the default option. TDFs typically start out with a heavy concentration in equities but progressively transition into predominantly fixed income securities over the years leading up to the plan participant's expected retirement date.

There are plenty of problems with target-date funds; I'll only address one of them here. TDFs operate under the tacit assumption that they are the only asset in an employee's retirement kitty. That assumption is almost always false.

The Big Picture
Even if a TDF is the only pension that one owns, income from that pension portfolio makes up only a small portion of total income for people over 65. The majority comes from social security, defined benefit pensions, income earned on other assets, and wages, which together already act as the glidepath that the conventional wisdom advocates. Figure 1 shows the breakdown for the current retirement age population according to the U.S. Social Security Administration.

For a larger view, please click on the image above.



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