How Equities Can Reduce Longevity Risk
Will You Outlive Your Savings?
The desire to live longer — and outrun death — is ingrained in the human spirit. The first emperor of China, Qin Shi Huang, may have even drank mercury in his quest for immortality.
Over time, advice for living longer has become more practical: eat well, get regular exercise, seek medical advice. However, as life expectancies increase, many individuals will struggle to save enough for their lengthy retirement years.
Today’s infographic comes from New York Life Investments, and it uncovers how holding a stronger equity weighting in your portfolio may help you save enough funds for your lifespan.
Longer Life Expectancies
Around the world, more people are living longer.
|Year||Life Expectancy at Birth, World|
Despite this, many people underestimate how long they’ll live. Why?
- They compare to older relatives.
Approximately 25% of variation in lifespan is a product of ancestry, but it’s not the only factor that matters. Gender, lifestyle, exercise, diet, and even socioeconomic status also have a large impact. Even more importantly, breakthroughs in healthcare and technology have contributed to longer life expectancies over the last century.
- They refer to life expectancy at birth.
This is the most commonly quoted statistic. However, life expectancies rise as individuals age. This is because they have survived many potential causes of untimely death — including higher mortality risks often associated with childhood.
Amid the longer lifespans and inaccurate predictions, a problem is brewing.
Currently, 35% of U.S. households do not participate in any retirement savings plan. Among those who do, the median household only has $1,100 in its retirement account.
Enter longevity risk: many investors are facing the possibility that they will outlive their retirement savings.
So, what’s the solution? One strategy lies in the composition of an investor’s portfolio.
The Case for a Stronger Equity Weighting
One of the most important decisions an investor will make is their asset allocation.
As a guide, many individuals have referred to the “100-age” rule. For example, a 40-year-old would hold 60% in stocks while an 80-year-old would hold 20% in stocks.
As life expectancies rise and time horizons lengthen, a more aggressive portfolio has become increasingly important. Today, professionals suggest a rule closer to 110-age or 120-age.
There are many reasons why investors should consider holding a strong equity weighting.
- Equities Have Strong Long-Term Performance
Equities deliver much higher returns than other asset classes over time. Not only do they outpace inflation by a wide margin, many also pay dividends that boost performance when reinvested.
- Small Yearly Withdrawals Limit Risk
Upon retirement, an investor usually withdraws only a small percentage of their portfolio each year. This limits the downside risk of equities, even in bear markets.
- Earning Potential Can Balance Portfolio Risk
Some healthy seniors are choosing to work in retirement to stay active. This means they have more earning potential, and are better equipped to recoup any losses their portfolio may experience.
- Time Horizons Extend Beyond Lifespan
Many individuals, particularly affluent investors, want to pass on their wealth to their loved ones upon their death. Given the longer time horizon, the portfolio is better equipped to ride out risk and maximize returns through equities.
Higher Risk, Higher Potential Reward
Holding equities can be an exercise in psychological discipline. An investor must be able to ride out the ups and downs in the stock market.
If they can, there’s a good chance they will be rewarded. By allocating more of their portfolio to equities, investors greatly increase the odds of retiring whenever they want — with funds that will last their entire lifetime.
Which Countries Hold the Most U.S. Debt?
Foreign investors hold $7.3 trillion of the national U.S. debt. These holdings declined 6% in 2022 amid a strong U.S. dollar and rising rates.
Which Countries Hold the Most U.S. Debt in 2022?
Today, America owes foreign investors of its national debt $7.3 trillion.
These are in the form of Treasury securities, some of the most liquid assets worldwide. Central banks use them for foreign exchange reserves and private investors flock to them during flights to safety thanks to their perceived low default risk.
Beyond these reasons, foreign investors may buy Treasuries as a store of value. They are often used as collateral during certain international trade transactions, or countries can use them to help manage exchange rate policy. For example, countries may buy Treasuries to protect their currency’s exchange rate from speculation.
In the above graphic, we show the foreign holders of the U.S. national debt using data from the U.S. Department of the Treasury.
Top Foreign Holders of U.S. Debt
With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt.
Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years.
This bond offloading by China is the one way the country can manage the yuan’s exchange rate. This is because if it sells dollars, it can buy the yuan when the currency falls. At the same time, China doesn’t solely use the dollar to manage its currency—it now uses a basket of currencies.
Here are the countries that hold the most U.S. debt:
|Rank||Country||U.S. Treasury Holdings||Share of Total|
|3||🇬🇧 United Kingdom||$655B||8.9%|
|6||🇰🇾 Cayman Islands||$284B||3.9%|
|11||🇭🇰 Hong Kong||$221B||3.0%|
|16||🇸🇦 Saudi Arabia||$120B||1.6%|
|17||🇰🇷 South Korea||$103B||1.4%|
As the above table shows, the United Kingdom is the third highest holder, at over $655 billion in Treasuries. Across Europe, 13 countries are notable holders of these securities, the highest in any region, followed by Asia-Pacific at 11 different holders.
A handful of small nations own a surprising amount of U.S. debt. With a population of 70,000, the Cayman Islands own a towering amount of Treasury bonds to the tune of $284 billion. There are more hedge funds domiciled in the Cayman Islands per capita than any other nation worldwide.
In fact, the four smallest nations in the visualization above—Cayman Islands, Bermuda, Bahamas, and Luxembourg—have a combined population of just 1.2 million people, but own a staggering $741 billion in Treasuries.
Interest Rates and Treasury Market Dynamics
Over 2022, foreign demand for Treasuries sank 6% as higher interest rates and a strong U.S. dollar made owning these bonds less profitable.
This is because rising interest rates on U.S. debt makes the present value of their future income payments lower. Meanwhile, their prices also fall.
As the chart below shows, this drop in demand is a sharp reversal from 2018-2020, when demand jumped as interest rates hovered at historic lows. A similar trend took place in the decade after the 2008-09 financial crisis when U.S. debt holdings effectively tripled from $2 to $6 trillion.
Driving this trend was China’s rapid purchase of Treasuries, which ballooned from $100 billion in 2002 to a peak of $1.3 trillion in 2013. As the country’s exports and output expanded, it sold yuan and bought dollars to help alleviate exchange rate pressure on its currency.
Fast-forward to today, and global interest-rate uncertainty—which in turn can impact national currency valuations and therefore demand for Treasuries—continues to be a factor impacting the future direction of foreign U.S. debt holdings.
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