Don’t Drop the Baton in Retirement: Managing the “Handoff” From Saving to Spending

PIMCO’s “Income to Outcome” framework offers strategies to navigate retirement’s stumbling blocks.

A smooth exchange in a relay race is a thing of beauty – the baton passing from hand to hand, runner to runner, in liquid motion. Such a “changeover” represents an enviable model for managing the transition from working and saving (accumulation) to retirement and spending (decumulation). Recent market volatility and rash selling by some investors are evidence of the challenge involved in creating that smooth transition to retirement – and it’s a critical moment in a retiree’s investment journey.

Among the most difficult and consequential changes is the cessation of one’s regular salary. This utterly transforms the vulnerability of the portfolio: income stops; spending continues; recovery from a market decline is harder. It’s no wonder that new retirees experience “hyper risk aversion,” fearing the pain of market losses 10 times more heavily than they had as savers.

Dangers of an untimely retirement: false starts and sequence risk

Risk aversion for many individuals peaks just prior to the start of retirement, and for good reason. Arguably the first and greatest danger for near-retirees is a bad beginning (just ask a runner). Timing also matters for the onset of retirement. Even one year can make or break success. For instance, identical investors (with identical portfolios), retiring 12 months apart (January 1972 and January 1973), would have had starkly different experiences in retirement – one nearly doubling portfolio assets over a 30-year period, the other exhausting assets just 23 years in (see Figure 1). An unfortunate sequence of returns, especially when a new retiree is coming out of the blocks, can severely hamstring portfolio performance. In some cases it can end the race well before it’s finished.

Figure 1 is a line graph that shows how the sequence of market returns can have a dramatic impact on how long a retirement portfolio lasts. For instance, identical investors (with identical portfolios), retiring 12 months apart (January 1972 and January 1973), would have had starkly different experiences in retirement over 30 years. The bottom line shows that an investor who began in 1972 would have exhausted their assets after just 23 years. In contrast, an investor who started in 1973 (the top line) nearly doubled their assets over 30 years and had a balance in excess of $1 million after 30 years. Sources are Bloomberg, Global Financial Data and PIMCO.

Dropping the baton: misbehaviors crystalize losses

Clearly a lot rides on avoiding a bad market sequence in the first years of retirement. But investor behavior may matter more. For instance, a rush to “safe haven” assets in the midst of a downturn can cause irredeemable damage. Market losses may put portfolios in a deep hole early in retirement; persistent spending from those assets may slow or stunt recovery. But an errant move to de-risk, or a rush to cash, typically at the worst point in the market’s decline, can crystallize losses, threatening the success of the retirement journey altogether. It’s the equivalent of fumbling the baton outright. Although staying in the race doesn’t guarantee success in down markets, losing precious time leaves little chance to catch up – even over a long retirement journey.

This time was no different: stay the course

Unfortunately, the dash to cash is an investor behavior that seems nearly unavoidable. From the mid-February 2020 high water mark in equities through 27 March, the S&P 500 dropped almost 30%; during the same period, flows to money market funds hit records for three consecutive weeks (increasing cumulatively by over $800 billion) as investors rushed to exit stocks for a presumed “safe haven”. This herd-like rush to cash is nothing new, but for those on the cusp of the retirement “changeover,” its timing and the resulting drag on the portfolio could have long-reaching consequences (see Figure 2).

Figure 2 illustrates how many investors react in the face of dramatic equity declines, as happened in mid-February 2020 through 27 March. One line shows that the S&P 500 dropped almost 30% during this period, while the other shows that flows to money market funds hit records for three consecutive weeks, by a cumulative total of over $800 billion. The data is from PIMCO and Morningstar Direct as of 30 June 2020.

Managing the changeover

PIMCO’s Income to Outcome retirement framework was developed to help advisors and clients better navigate the handoff from accumulation to decumulation. The framework hinges on a dedicated bond portfolio whose potential benefits include the following:

  • “Paycheck replacement” – from target date to target maturity: Many savers have been “defaulted” to target date funds to help manage their savings to an optimal target retirement year. We suggest applying a similar target for the decumulation side. Before retirement, investors would earmark a portion of their current bond allocation to bond ladders (or low volatility bond portfolios) as a buffer to support spending in the first five to 10 years of retirement. These targeted spending vehicles, maturing annually at par in an amount tied to one’s spending for that year, essentially replace the lost paycheck, providing a dedicated and consistent source of retirement cash flows absent default.
  • Reduce the drag from spending: By cordoning off and concentrating spending in these bonds designated for “paycheck replacement,” retirees remove some of the spending drag that would otherwise weigh on their equity-oriented growth portfolio, allowing this critical source of long-horizon capital to fully participate in the long arc of the market’s rising tide.
  • Diversify and shift your risk tolerance: Research shows that retirees who have high confidence of meeting their goal of consistent near-term cash flows tend to be less vulnerable to periodic market declines and resulting fear-driven behaviors. This level of comfort in having achieved their proximate spending goals may provide a kind of “risk buffer”—allowing retirees to better stay the course on their plan, tolerate higher equity allocations in their growth portfolio, and harvest liquidity premiums from longer-horizon investments.

For imminent retirees, getting out of the blocks smoothly is critical. Having an intuitive plan that first solves for spending, and then allows for more long-term risk-taking, may provide the means to finish the race with confidence.

1 Taylor, Todd, Nick Halen and Dylan Huang. “The Decumulation Paradox: Why Are Retirees Not Spending More”? Investments & Wealth Monitor, July/August 2018.
2 Refinitiv Lipper
3 Investment products contain risk and may lose value. There is no guarantee that an investment product will be successful in producing income. Investors should consult their investment professional prior to making an investment decision.
4 Blanchett David and Michael S. Finke, “Annuitized Income and Optimal Asset Allocation.” Academic Research Colloquium for Financial Planning and Related Disciplines, available at SSRN:
The Author

Rene Martel

Head of Retirement

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A “safe haven” is an investment that is perceived to be able to retain or increase in value during times of market volatility. Investors seek safe havens to limit their exposure to losses in the event of market turbulence. All investments contain risk and may lose value.

A “targeted maturity” bond portfolio is only one potential income strategy and may not be the best solution or suitable for all investors. Income replacement needs may vary by household. An investor should consider and discuss how best to address their income needs with their financial and tax professionals.

The retirement allocation framework presented here is based on what PIMCO believes to be generally accepted investment theory. It is for illustrative purposes only and may not be suitable for all investors. The retirement allocation framework is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other strategy, product or service. Individuals should consult with their own financial and tax advisors to determine the most appropriate allocations for their financial and tax situation, including their investment objectives, time frame, risk tolerance, savings and other investments. Fixed income is only one possible portion of an investor's portfolio, which can also include equities and other products. Investors should speak to their financial advisors regarding the investment mix that may be right for them based on their financial situation and investment objectives.

Past performance is not a guarantee or a reliable indicator of future results.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.

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