Adding Legacy to the personal glidepath

CIO Global Blog

03 May 2019

In my last two posts I showed how investors can improve outcomes by acting like private pensions and derisking as they get closer to fully funding their retirement goals. However, one major difference between pensions and individuals has to do with the impact of overfunding (i.e. saving too much) relative to goals and objectives. If a pension is fully funded, substantial derisking of the portfolio should be an obvious and foregone conclusion. It is difficult to remove excess capital from a pension plan, and additional investment returns and/or additional contributions of capital won't further improve the outcome. In fact, surplus pension plan assets sometimes face a tax penalty, which incentives plan sponsors to err on the side of generally underfunding instead of overfunding plans.

Individuals and families face no such issues. Surplus capital can be used in a number of ways. First and foremost, the family can use it to increase their retirement spending objectives. Many families also use surplus capital for Legacy purposes as gifts to family and charity. However, there's a clear tradeoff. Additional investment returns have potential benefits, but that's only assuming the pursuit of those returns doesn't result in the family no longer being fully funded for their own personal goals.

We can use the example from my last post to see how separating personal vassets (Liquidity and Longevity) and Legacy assets enables an investor to balance both of these considerations in an optimal manner.

In the case study, the investor derisks her portfolio and becomes fully funded eight years before retirement. By doing so she has effectively "locked in," as feasibly as possible based on her specific situation, her Longevity assets. Using a 100% equity portfolio allowed her to accept equity risk and take advantage of higher equity returns for a long time, but once she had accumulated enough assets to fund her retirement the derisking schedule enabled her to "save her progress (PDF, 272 KB)" based on how well funded she was against her future liabilities. Most importantly, a bear market just prior to her retirement shouldn’t force her to postpone or change her plans.

Even so, if she keeps saving as planned and doesn't increase her retirement spending objectives she's going to have more than she needs. Increasing her funded status also has diminishing returns. Those surplus assets can be managed separately, and many investors are comfortable taking more risk with their Legacy assets since they have multi-decade and sometimes multigenerational time horizons associated with them.

The glidepath effect is that her total wealth glidepath (Liquidity, Longevity, and Legacy) could trough eight years before retirement, but then start to move up again as her Legacy assets increase as an overall percentage of her balance sheet. At the same time, her personal wealth glidepath (Liquidity and Longevity) remains consistent as determined based on the derisking schedule. Her surplus provides risk capacity that scales with the size of the surplus, but only to the extent that it is taken with Legacy assets.

Fig. 1: A sample glidepath leading to retirement for an investor with Legacy assets

Source: Morningstar, UBS

Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.


Michael Crook, Head Americas Investment Strategy, UBS Financial Services Inc. (UBS FS)

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