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Do you know what the Fujiwhara effect is?

In short, the Fujiwhara effect is a meteorological term describing the rare occurrence when two tropical cyclones come close enough to each other, resulting in the formation of a single, massive hurricane.

See, most of the time, when one storm is stronger than the other, it often results in the weaker storm being gobbled up and fading away.

But sometimes, if the storms have comparable strength – and go at just the right speed - they may occasionally merge, using their combined force to create a feedback loop into one huge hurricane.

The storms then begin an intense dance around their common center, feeding off each other and laying waste to anything in their path.

This is the Fujiwhara effect.

Now, you may be thinking, “What does this have to do with anything for me as a financial advisor?”

Good question.

I believe there is a Fujiwhara effect building right now in the financial world that financial advisors must be aware of – how these two minor storms have the potential to merge into one perfect storm for retirees.

What are these two storms? Well.

1.     The Baby Boomer generation (born 1946-64) retiring en masse over the next few years.

2.     The threat of ever-more volatile markets increasing potential sequence risk

Together, these may make it more important to have a financial advisor than in previous generations.

So, let’s break these down. . .

First Storm: Baby Boomers Are Hitting Peak 65 – What It Means for Retirement Planning

To give you some context, the baby boom generation came at the time of the largest increase in fertility rates for the U.S. – immediately after World War II.

In fact – according to Statista¹ – in over 220 years of data, the U.S. fertility rate only had one prolonged uptick – which was the baby boom years (1940-60s).

Figure 1: Statista, U.S. Fertility Rates (2020)

This surge in newborns helped carry growth in the U.S. – since more people equals more demand.

But, as always, it’s a double-edged sword. . .

What was once a boon for the economy is now becoming a burden as there’s a tidal wave of retirees coming at a time when the U.S. fertility rate hit new lows.

·         Remember, retirees generally spend less and require safety nets like Social Security. This requires both increased economic growth and fertility from the younger generations to subsidize the retirees – but neither is relatively happening.

To show the magnitude of this retirement wave, take a look at the following chart from the U.S. Census Bureau².

The U.S. population aged 65 and over grew nearly five times faster than the total population over the 100 years from 1920 to 2020. And there are roughly 10,000 baby boomers hitting retirement age per day until 2030³. . ..

To put this into perspective, in 2020, about 1 in 6 people in the United States were age 65 and over. In 1920, this proportion was less than 1 in 20. 

The older population reached 55.8 million or 16.8% of the population of the United States in 2020 – and is expected to be 20% by 2030 (that’s one-fifth).

But most startling is that between 2010-2020, we saw the largest-ever 10-year numeric gain in retirees — an increase of 15.5 million people. For context, the next largest 10-year numeric increase was between 1980-1990 and it was less than half that size (just 5.7 million).

Now, since the pandemic occurred in 2020, the retirement wave has amplified significantly as many decided to retire earlier and leave the workforce.

According to the St. Louis Federal Reserve⁴, estimates show that there are 3.3 million - or 7% more - retirees as of October 2021 than in January 2020 – a substantial rise in those 22 months.

This truly is a once-in-a-century retirement wave.

And as more individuals retire, having a financial advisor to protect their assets is potentially more critical than before.

And that brings us to the second storm. . .

Second Storm: Increased Market Volatility Creating Potential “Sequence Risk” For Retirees

So, in a time when more people are retiring, living longer, and markets growing potentially more volatile, it's crucial to grasp this concept of sequence risk on assets because it directly impacts the security and sustainability of your retirement.

Now, what exactly is "sequence risk”?

We wrote an in-depth piece on it last week (you can read it here⁵ if you missed it). But basically, it means your investments might not do well, especially in the early years of retirement, and may make you think twice about whether you can even afford your original retirement plans.

•      For example, did you know that if your portfolio declines 50%, it will need to increase 100% just to get back to breakeven? This is why declining portfolios can be so destructive for retirees.

Imagine planning for retirement right at the peak of the dot-com bubble in the late 1990s. Or right at the peak of the housing bubble in the mid-2000s.

A retiree would’ve been making calculations on their expenses and income needed and how the assets would sustain them.

And any retirees after those economic bubbles burst were likely forced to rethink their retirement plans as 401(k)s, pensions, portfolios, and housing values suffered.

Thus, with markets seemingly going higher and higher, sequence risk is becoming a greater potential threat for such a large wave of retirees. It may only take a single bear market to prove destructive.

Put simply, the elderly just can’t afford to suffer large losses if they wish to enjoy their retirement plans accordingly.

The Perfect Storm? Still, There’s Hope

Thus, the convergence of the Baby Boomer retirement wave and the escalating threat of market volatility resembles a brewing Fujiwhara effect in the financial world.

Like the merging storms in meteorology, these two forces have the potential to combine into a formidable perfect storm for retirees.

But this also creates an opportunity for steadfast financial advisors.

Think of them as the captains of the ship – navigating safely through the storms and potentially safeguarding retirees' assets.

And - us at Dunham - like the lighthouse, guiding them.  

Here’s to happy sailing. . .

Click here or call us at (858) 964 – 0500 to see how our DunhamDC
program may potentially mitigate sequence risk and enhance recovery time for
clients.

DunhamDC - Buying Fear and Selling Greed.

Sources:

1.      https://www.statista.com/statistics/1033027/fertility-rate-us-1800-2020/

2.      https://www.census.gov/library/stories/2023/05/2020-census-united-states-older-population-grew.html

3.      https://smartasset.com/retirement/baby-boomers-retiring

4.      https://www.stlouisfed.org/on-the-economy/2022/january/great-retirement-who-are-retirees

5.      https://www.dunham.com/FA/Blog/Posts/sequence-risk-for-retirees

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This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

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DunhamDC (“DunhamDC”) is a proprietary algorithm of Dunham & Associates Investment Counsel, Inc. (“Dunham”) that seeks to mitigate sequence risk, which poses a threat to an investor's returns due to the timing of withdrawals. The algorithm employs what Dunham considers to be a pragmatic strategy, generally making incremental increases to the equity allocation when global stock market prices decrease and decreasing it when global stock prices increase. This approach is objective, unemotional, and systematic. Rebalancing is initiated based on the investment criteria set forth in the investors application and is further influenced by the DunhamDC algorithm.

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