Retirement Mini-Series

[00:00:00] Stephanie Linker: Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Stephanie Linker, head of Marketing for BlackRock’s Retirement Group

For the next three episodes of The Bid, we're exploring the state of the retirement investing landscape in a new market regime in this three-part retirement mini. We'll examine the need to retire old outlooks inequities in the retirement system, and how long-term investors might think about navigating the next market cycle today. In part one. I am pleased to welcome Ann Ackerley, Head of BlackRock's Retirement Group. We'll discuss why we're retiring old outlooks and look ahead to the next two episodes that Anne will host featuring recorded conversations from our recent Retirement Forum. 

 Anne, welcome. 

[00:01:13] Anne Ackerley: Thanks so much Stephanie. I'm delighted to be here and excited to be talking about retirement.

[00:01:18] Stephanie Linker: Anne, I'd love to have you start by outlining the economic landscape as it pertains to for retirement. This year's results from BlackRock's own Retirement drop in confidence for the first time since the start of the pandemic as we enter a new market regime, what does all mean the future of retirement? 

Anne Ackerley: Thanks, Stephanie, These are really uncertain times for people and there's so much market volatility, inflation, the war in the Ukraine, supply shocks. It's really unprecedented actually to have the stock market and the bond market both down in a year. In fact, it hasn't happened in the last 40 years. So, it's not surprising that people are feeling more uncertain. And in fact, we, did our seventh annual Read On Retirement Survey where we go out and we polled, about 3,000 savers, investors, retirees, and companies. And in fact, it showed that retirement confidence is down and it's down for the first time in a few years. 

The number one concern among people was inflation. Again, not surprising given what's happened in the market. but all of this uncertainty causes people to be concerned. And so, when we think about investing for retirement, we need to think about the fact that this often happens over decades and short-term market volatility while painful isn't going to be the whole story. We know the markets are going to recover. And so, when we look at people who are invested in their 401k, often they're defaulted into a target date. Now, a Target Date Fund is an age-based asset allocated fund, right? That changes as you get closer to retirement. We pioneered it at BlackRock back in 1993, but it keeps people in the right investments. 

[00:03:12] And what I would say to people if you’re in a target date fund, stay the course, as best you can. Now, not everybody can do that, but if you can, that's probably the right thing. There's an old adage, It's not about trying to time the markets, it's about time in the markets.

Stephanie Linker: We just concluded our 2022 Retirement Forum. The retirement group's first in-person event since before the pandemic. The next Bid episode will take an in-depth look at one of the key conversations we held there. Why do you think it was so important to bring people together and what were some of the issues that you wanted to address there? 

Anne Ackerley: You know, At BlackRock we believe every American should be able to retire with dignity on their own terms, and yet that has become really challenging for people. You think about the move from defined benefit to defined contribution, right? 

[00:04:00] People no longer have forms of guaranteed income. They're more on their own. We know people are living longer. Their money has to last longer, and even if they do everything right and they get to retirement, they have to figure out how to spend without outliving their savings. So, it's quite challenging, and then you throw in these markets. And so we wanted to bring people together to really, tackle some of these challenges.

I loved that it was in person after a few years of Zoom, and obviously Zoom was good during the pandemic, but getting people in a room, we really wanted to encourage conversation and encourage the generation of ideas. And it was fantastic to be back. And I believe when people from all different parts of the ecosystem come together, we can tackle the challenges that people are facing in retirement. 

[00:04:52] Stephanie Linker: You really can't replace that in-person energy.

Anne Ackerley: You can't.

[00:04:55] Stephanie Linker: The event sessions ranged in topic from longevity to policy and market outlook, to financial wellness, DEI and active investing. Were there any questions or comments that stood out or surprised you throughout the day? From the panelists or from the audience? 

[00:05:10] Anne Ackerley: So, I wouldn't say these surprised me, but maybe I would talk about two things.

The first was the issue of trust came up a lot. And our colleague Peter Fisher talks a lot about trust and mistrust and how it impacts what people do with their savings. And what we wanted to point out to, particularly the employer in the room is that while, trust in Government and some institutions are pretty low in the United States. Trust in employers is actually really high, and so we wanted to encourage the employers in the room to use that trust to provide more solutions for their employees and to provide more education. and to build upon that as a way to get people better prepared for retirement.

The second issue, which I think we're going to talk more about, was I wanted to focus on, diversity, equity, and inclusion. And I know we talk a lot about that in, in our company and in the world at large, what we wanted to do was focus on how does that impact the retirement system, and we wanted to take a look at who does the system work for, who isn't it working for, and maybe how do we start to address the gender and racial wealth gaps that we see. 

[00:06:28] Stephanie Linker: Looking ahead to the session, you moderated. And we'll listen to it in the next episode. It was titled An Equitable Approach to Retirement can you tell us more about what we mean by an equitable approach to retirement and how employers in particular should be thinking about it?

[00:06:42] Anne Ackerley: Sure, I have major passion for this. And again, I think we need to look at who the system works for and maybe who is left out of the system. And so, when you think about women, right? We know that when women get to retirement in the United States, their balances are often 30% less than men's. There are systemic reasons for right for that. There's the gender pay gap. Women often have gaps in employment for caregiving and yet their money has to last longer. When we look at people of color, we know that savings rates and savings differ. White Americans has seven times the savings of black Americans and it's five times for Latinx. 

And there's systemic issues, but there are, what we really wanted to do was say, if we look within the 401K system where people, we know people have access, are there differences within that system? And so, we wanted to call attention to the fact that how you design the plan may impact your employees differently. 

And this is sort of a new thing that we want to really encourage employers to look at. And I'll give you one example. And we have this great panel with so many people who are much more knowledgeable about this than I am, but how you design the match, right? the standard wisdom is stretch the match, get people to save more by saying, you don't get all the match until you're saving, let's say 8%. 

But really when you look at who's impacted by a change like that, it's often women and people of color because they can't quite meet those savings levels. And so, you think you're doing something good, and yet you're hurting the populations that maybe you don't want to hurt. And so, what we were trying to do on the panel is call attention to, even within 401k plans, you need to pay attention to your different populations and really think about how you're impacting people who may save and invest differently.

Stephanie Linker: The forum is filled with discussions like this that are critical about complex challenges that savers and retirees are facing today. These are not easy conversations. If you could sum up how you felt coming out of the forum in one or two words, what would you say?

[00:08:58] Anne Ackerley: Energized, Optimistic. I felt there was such great energy in the room and to bring people from all different parts of the ecosystem, right? No. No one company. Or institution is going to solve the retirement challenges that we face, right?

We need everybody working together to make it a better system. And I felt we had employers, advisors, consultants, nonprofits, people from the government, people from private industry, you all coming together to take on these challenges. And I know that we will make a difference.

Stephanie Linker: Anne, you mentioned we pioneered the target date fund 30 years ago, and since then the industry has had a huge focus on helping people save for retirement. But once they get to retirement, they still need to manage their spending throughout. How are we thinking about helping people with this complex problem? 

[00:09:53] Anne Ackerley: So, it is a complex problem, right? How to spend in retirement. The industry calls it de cumulation, but we really, it's just about, how do you spend so you don't outlive your money. 

Now, Bill Sharpe, the Nobel Laureate has called this the nastiest, toughest problem in finance and the reason why is there's so many unknowns, right? You don't know how long you're going to live. You don't know what your expenses might be, and you don't know what the market's going to do, and yet you retire, you've got a sum of money and you're on your own really to figure out how you would spend that down, and again, not outlive your money. So, it's complex.

So, the industry is turning its focus to that, to spending and trying to come up with strategies and solutions to help people you know, it used to be that many people had defined benefit plans. They got guaranteed income and they didn't have to worry about it. And so, a lot of people in the industry are trying to think, are there parts of the defined benefit that we can bring over to defined contribution? 

[00:10:54] And the notion is there some way to build in some guaranteed income within defined contribution so that people have more, certainty and one of the strategies or solutions that the industry is looking at, is trying to figure out, can you take the target date, which people know they're invested in, and somehow add a form of guaranteed income, maybe an annuity into it, in a way that's affordable, simple, and easy to use. And I think it's actually really exciting to watch the industry, innovate and try to make progress on making spending easier.

[00:11:31] Stephanie Linker: And we've learned, creating this sense of predictability is increasingly important, especially coming out of the pandemic. 

[00:11:37] Anne Ackerley: Oh my gosh, now everybody would love having some form of more certainty. And in fact, when we looked at the Read On Retirement Survey, we know that over 90% of employees and over 90% of employers want to find a way to bring guaranteed income into the 401k. 

Stephanie Linker: Absolutely. and maybe shifting gears a bit, but related, we've heard from employers that there's been increasing focus on financial wellness, especially over the last few years. What are we hearing from employers on the topic and how are we working with them?

[00:12:13] Anne Ackerley: I would say there were two main areas of focus. we talk a lot about retirement savings, but really what we know is that people can't save for the long. If they're not saving for the short term. And so really talking about how can we help people set up emergency savings, rainy day funds or sunny day funds, whatever you want to call it. 

The notion of people being able to have access to their money for emergencies. And then, once people get comfortable they have some amount for those emergencies. They can start thinking about the long term. And again, lots of participants in the industry are thinking, how to structure that. We had someone on the panel talk about making it part of payroll, right? Could be pretty easy. Put some money in your long-term, put some money in your short-term or having it be part of a sidecar to the 401k. You're making an investment. Some goes into short-term, some goes into long-term. So, I think that's a super exciting, evolution for the industry to people to be able to think about that.

The other focus was on student debt. We know just how many people, many Americans have large student debt, particularly our younger employees. The notion that they've got to pay off that student debt while still saving for retirement is quite daunting to them. And so again, there have been some solutions that have been suggested. Abbott Labs was the first to actually, get a ruling that said if somebody's paying off their student debt, the company can still contribute to the 401k. And I just absolutely love that as a solution to really help people who are burdened by student debt. So emergency savings, student debt education, all of that I think comes together to really try to help people have a lot more financial wellness. 

[00:14:04] Stephanie Linker: Absolutely. Anne, thank you for joining me today, and I'm looking forward to the next episodes in our retirement miniseries. 

[00:14:10] Anne Ackerley: Thanks so much, Stephanie.

[00:14:11] Stephanie Linker: On the next episode of The Bid, Anne will be in the hosting chair introducing a panel event she moderated from the Retirement Forum, featuring three leaders at the forefront of evolving the retirement space to one that is more inclusive, aiming to bridge gender and racial wealth gaps.

Make sure you subscribe to the bid wherever you get your podcasts.

Anne Ackerley: Welcome to The Bid where we break down what’s happening in the markets and explore the forces changing the economy and finance. I’m your host Anne Ackerley Head of BlackRock’s Retirement Group.

In this final episode of our retirement mini-series and Gargi Chaudhuri Head of iShares Investment Strategy and Markets Coverage sits down at the Retirement Savings Summit with BlackRock’s Matt Soifer, Head of Distribution for BlackRock’s Retirement Group, to discuss what’s happening in markets, the road ahead, and the impact on retirement investors.

Matt Soifer: My name’s Matt Soifer. I lead distribution for Black Rock Retirement Group and I’m thrilled to be joined here with Gargi. Gargi is one of our, absolute leading experts in the firm on capital markets. So, look, Gargi, I’ve got a couple, main objectives for this session, one want to talk about markets, where we’re headed. But would love to talk about, the kind of tie together between markets and the impact on the end investor. But at the end of the day, the portfolio, it’s owned by people. And those people, they’re all in different places when it comes to this retirement journey. So, let’s start with the macro environment, because 2022 couldn’t be more different than 2021. Economically very different, geopolitically very different. And look, for me personally, I feel the undertone of uncertainty was there in 2021.

But it was super easy to just look the other way because markets were doing incredibly well. Fast forward a little bit, we’re not where we were before. So why don’t we just start with your thoughts on just the current market regime and then I think we can peel this back a little bit more from there.

Gargi Chaudhuri: Hi everyone. It’s good to be here. Matt, to your point, this hasn’t happened since the 1970s, so it’s a new regime for many people. The one thing that we are very thoughtful about is what opportunities are being created right now, and we’ll talk a little bit more about that. But first of all, let’s talk about this regime.

So, number one, we have inflation globally that has not been at these levels for 40 years in the US but in Europe, in the UK we haven’t seen these levels. On the back of that, we have central banks that will do what it takes to wipe out or at least try to wipe out that inflation.

As a result of that, and perhaps purposefully, what the central banks want is to bring down demand, because that’s the only way that these rising prices that we are all experiencing, whether you’re signing a

new lease or whether you’re getting a latte, you’re experiencing that price inflation in a way to wipe that out what the central bank wants to do is bring down demand. That’s really what they’re telling us and what they’ve been telling us for this entire year, and that leads to lower growth outcomes.

And lastly, the geopolitics are interesting. So, it’s not only about, Europe and Russia and Ukraine, of course, but it’s also about China and Taiwan So, all of that means that we’re in this new regime where perhaps what we’ve thought about in the past where every single dip in the equity market needs to be bought doesn’t apply anymore. But I will also say, because I’m a pretty glass half full kind of person, that it’s creating some incredible opportunities, especially in the bond markets. I actually think there might be some more pain ahead because of the macro regime that we are in but it’s getting us to a place where a lot of the excesses are being taken out.

The fact that we lived in a world where high yield bonds were trading 4% was not normal. The fact that European Central Bank had rates at minus 40 basis points for a decade was not normal. I think this normalcy is good and it creates opportunity.

Matt Soifer: Excellent. If we’re going to talk about end investors, I feel like we have to talk about inflation Now this is something that probably hasn’t been, so acute. People haven’t had to really address it in my lifetime, average inflation, 2.2%. but we know how problematic inflation could be. And if you’re in a situation, let’s say someone has a $500,000 portfolio, 2% inflation, low returns, boom, a third of the portfolio’s gone in 20 years quite easily.

And so now we’re staring at 8%, much higher hurdle. And if you’re someone who’s approaching retirement or in retirement, you’re living off of a fixed income. inflation is massively corrosive. There was a recent survey by Schwab. They found that 79% of participants reported changing their savings and their spending habits due to inflation’s pretty high number. And then on our own read on retirement survey, 87% of workers are worried about inflation. What I found really interesting was 40% of them said they had a strong understanding of the impact inflation has on their ability to save and to spend. So, 40% to me though, that’s a pretty good number. So, I want to get your take on what’s driving inflation, how that might be changing, and maybe get your candid impression of is this going to be a little bit more bumpy?

Gargi Chaudhuri: Ok, so, every single aspect of your life is impacted by inflation. end investors may not know the ins and outs of inflation, but they’re definitely feeling it. No matter what you’re doing. When you wake up in the morning, okay, you’re going to the subway that’s gone up, you’re getting coffee, that’s gone up, if you’re going for a movie that’s gone up. And I think it is important to think about, okay, so what’s the future? Not just inflation till the end of this year, but really over18 months and then five years after that.

So, let’s talk about why inflation moved so significantly higher and why it became so concerning to the central banks this year as opposed to last year, where obviously they called it transitory, , which was not right.

It’s very easy to say that inflation was entirely driven by the war and the impact on food and energy, but that’s not really true, right? So, we look at the headline inflation, which is a basket that all of us have which is everything that we spend, but that includes things that we can touch and feel -goods- and things that we consume - services. This is a mainly service based economy. So, services are a broader part of the basket. When we think about our own lives, we spend more on things like rent and housing than we spend perhaps on clothes. So similarly, the basket for a consumer, for the economy as a whole is more on things that you spend more money on.

Gargi Chaudhuri: And then there’s this concept of core inflation, which takes out the impact of the more volatile like food prices, energy, price- things of that nature. So, core inflation has actually been moving higher and in 2021 we could say that it was these one-off things. The economy reopened, all of us rushed to go on holidays, hotel prices went up, airline prices went up. If you tried to rent a car last year for summer holidays, it was insane, right? So, you could blame it on one off things last year. But this

year you really can’t. So, this is really the crux of the problem for the Fed, where for the sake of their own credibility, bring it back down closer to that 2% level, which is their target.

Now, this is something I want to stress on. The Fed targets 2%. Why is it this random number? Why is it 2%? Because at zero, which is where Japan has been historically, and Europe used to be, you get used to prices going down, so you don’t spend, and we never want to be in an economy where people don’t spend, that’s bad for growth. And 3% or 4%, it’s too corrosive for your take home pay. So, 2% seems to be that number that the Fed and other central banks could live with. Unfortunately, now we’re nowhere near 2%.

The Fed will have some tools such as raising interest rates that forces demand lower. So already we are seeing that we are seeing house prices and housing demand coming lower because of mortgage prices. But they don’t have the tools to control the supply side. If people are not able to participate in the labor market, if food and energy prices remain high, if there is a chip shortage a lack of availability to get components that you need to make a car, all of those things are not what the Fed can help with.

And this idea that they can bring the inflation back to 2% feels unlikely. I think inflation will come down, but I don’t think no matter how high the Fed takes their funds rate to, I don’t think they’re going to be able to bring it back below 2%. The trade off, of course, will be that we’ll go into a deep and crushing recession, which also they won’t want to tolerate. So, it, it does put them in a hard place, and I think they’ll eventually realize that there’s two sides of their mandate. There is the inflation side, but there’s also growth in the labor market. And they’ll be willing to perhaps live with, 2.5% not 5.5%.

Matt Soifer: So, can we talk a little bit about housing? When we were considering people are going into retirement, their biggest expenditure is going to be housing unless people actually own their homes and a lot of them won’t. So, whether you have a mortgage or whether you’re renting, you’ve got the Fed raising rates, it’s certainly hurting the real estate market. Do we get in this cycle though, where people start to rent more because they can’t afford to buy a home, rental prices really start to move up quickly. And then, I think people would like to be able to access the home equity. if you own your home and that’s an important piece of potential cash flow for people that are approaching retirement. So maybe just some views on what you think is going to happen in the housing market?

Gargi Chaudhuri: This is important, not just because of what the housing market represents to all of us in terms of our ability to live somewhere because we all have to live somewhere. But what it means for wealth generation, but also because of the role that it plays in inflation.

I talked about how inflation, is broken down into goods and services, a huge part of inflation. So, if housing continues to go up, the Fed has to perversely continue to raise rates. So, let’s talk about how this housing market different from, and similar to our most recent housing experience, and I think this is a bias that we all have, right? When we think about an experience, we anchor to recency bias. So right now, when we think housing, we’re thinking 2007 and crisis. So, the one thing I’ll say is that if you look at the number of floating rates, so number of people that own their homes, but have a 30-year mortgage versus interest rate that will float higher that are going to be impacted by higher mortgage rates. It’s a much lower number. It’s about 10% of outstanding mortgages. So, while housing is going to slow down and has slowed down already, it won’t have the same impact on the broad US economy that we saw in 2007 because it’s such fewer people, at least in the US, where a 30-year mortgage fixed rate is a concept. A lot of people have fixed mortgages. About 90% of the mortgages are fixed. So that’s one.

I think you bring up a very important point about renting. Obviously housing affordability has become really challenged because interest rates have gone up but housing prices haven’t declined yet -as much as we expect to see them decline. Year over year housing is still actually increasing. And part of that is because of the, just the demographics. A lot of people are moving to that, 30 to 35 age bracket, and that is where you form your own household. Perhaps used to live with roommates and now you’re going to get your own place. So, there’s a demand. And because housing has remained so unaffordable, people have not been able to, or will continue to not be able to own housing, which does put pressure, you’re right, it does make rental the only option.

So, when we look at what’s happening to rental prices in some of the forward-looking indicators, they are beginning to fall. They haven’t fallen as much as you would have normally expected in a slowing economy because of this dynamic where people have to live somewhere, and homes are not as affordable as they used to be, just buying a home is not as affordable. The demand doesn’t go away. If you’re forming your own household, you have to go somewhere.

Housing market slowdown is coming, but think about, a single digit growth in housing prices or just flat growth. We’re not talking about a 40% declining housing prices because the organic demand is quite high, but it is not going to permeate to the US economy because of the makeup of the housing market, which is very different, and standards are much more stringent.

Matt Soifer: So, I want to go back to something I said in the beginning, people, they’re all in different places on this retirement journey, so when you’re young, you’re going for growth, you’re investing in risk assets, namely stocks, and then when you get ready to retire, you’re starting to de-risk, obviously more into bonds. So, let’s start with bonds first, Bonds have been phenomenal ballast for portfolios. this year, like you said, putting up double digit losses close to stocks but there’s some potential silver lining in this, yields are up. There’s actual yield to talk about. What’s your take on what’s happening in the bond markets, and do you think, bonds are going to be able to deliver on retirement income in a meaningful way?

Gargi Chaudhuri: Yeah, I think there has never been a more exciting time, or at least in my lifetime, to talk about bonds. Yes, the experience has been horrible, and I recognize how hard it has been to have your portfolio in stocks and bonds, expect bonds to be that diversifier and not have that experience. But also, what we are getting now is if you’re in one-to-three-year investment grade credit, the highest quality credit out there, where again, default rates are not going to pick up meaningfully because this isn’t going to be a 2008 type recession. This is going to be a very Fed led recession, not a balance sheet recession., I think earning about 6% in investment grade in the front end, taking no interest rate risk whatsoever, very little interest rate risk, about two years of interest rate, risk, and earning close to 6% coupon that you can clip the fixed part of fixed income and actually even the income part are both very attractive right now. Ability to earn that coupon, clip that 6%, I don’t even think you have to be thinking about retirement.

So, whether or not you are close to retirement, or just starting your investment journey if you’re out of college or your children are out of college, looking at bonds is absolutely essential. That’s one of the best things that’s happened, there’s been a lot of horrible things this year, but the opportunity set that it has led to, especially in fixed income is absolutely wonderful for every generation, certainly for retirees, but I would say even someone that’s not thinking about retirement yet.

Matt Soifer: Want to get your take on stocks?

Gargi Chaudhuri: So, I was looking at the number of, over 5% rallies that we’ve had on the S&P 500 this year there’s been about five of those, and three of them have been over 7%. And if you look back at the last 20, 30 years, the average return on the S&P was 7%, so if you’re feeling older and more tired, it’s because the markets have made you feel that way. Honestly with what I have said so far in terms of, the Fed, I think we could still see some trouble periods ahead; I think earnings need to still come down a little bit. we’re probably going to have some delayed impacts from the rising dollar on earnings. So, there are a couple of things that I think can still push equities lower. However, if you are thinking about the next, 5, 10, 20 years, if you look at S&P earnings and a PE ratio, that was 22 and now we’ve re-rated down to about 16.5. Still not cheap, but very fair. I think this has created an opportunity for those that are a little bit longer term investors, and especially when you look at some of the growthier parts of the market anything that’s more interest sensitive. If you look at growth sectors, which have obviously been hit much more this year possibly can continue for another few quarters. But again, finding value in some of those pockets if you are a longer term investor, I feel very optimistic about the opportunity set that we are getting as a result of some of the repricing that had to be forced by the Fed to take place.

Matt Soifer: So I probably lean a little bit half empty, so can we talk a little bit about the big R, recession, not retirement. There are huge portions of our population that have never experienced a recession before it’s like a unicorn, they’ve never seen it. if you graduated in 2009, you’re starting to roll towards 35 years old, you felt maybe some turbulence, but you haven’t felt a full-blown recession, but if you’re approaching retirement or you’re in retirement, you’ve seen a lot of them, what do you think it’s going to be like or feel like this time?

Gargi Chaudhuri: Yeah, the beauty about this recession, if I can say that, given my half full status, glass wise, the beauty of this recession it is foretold. This one is very Fed driven.

I’m going to give it a 90% chance that It’s not going to be as protracted and deep. It’s probably likely to be a little bit shallower because again, this is forced by the Fed. I also think that it’s going to be shallower, and I think that some of the tools that we’ve had in the past where we were at zero Fed funds rate, and then we had to do quantitative easing, or we were very close to zero and had to move to zero and then do QE. Some of those tools might be there, but we’re also at a much better starting point. So, if, and when, we move to 5% on Fed funds, which is where I think we’re going to get to, they need not even get back to zero. I think the number of tools that they have in their toolkit is amazing.

Last time they only got to about that level before they had to cut to zero in the previous cycle 2017 to 2020. I don’t think that we should fear it as much as we feared other recessions. We’ve already seen much of the damage, not all of the damage, in the equity markets, and I think that bonds or fixed income will come back as a ballast when you do find yourself in recession.

Matt Soifer: Okay, we will wrap it here. Thank you, Gargi. Thank you.

Anne Ackerley: Thanks for listening to this episode of The Bid and this retirement mini-series. On the next episode of The Bid. Tom Donilon, a Bid guest favorite, will give us his views on the year ahead with a geopolitical outlook.

Make sure you subscribe to The Bid wherever you get your podcasts.