Animal Spirits Podcast - Talk Your Book: Longevity Income

Episode Date: November 4, 2024

On today's show, we are joined by Nate Conrad, Head of LifeX at Stone Ridge Asset Management to discuss how longevity income ETFs work, what LifeX is actually investing in, why matching spending with investment products is important, understanding the inflation adjustment for inflation protected income funds, declining LifeX fees over time, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ For full disclosures on Stone Ridge Longevity ETFs, please visit lifexfunds.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Lifex. Go to LifexFunds.com to learn about their whole suite of longevity income ETFs. That's lifexfunds.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, I've been slowly but surely like building up my thoughts on this over the years and just about the fact that there's so many baby boomers retiring and there's so much money. 10,000 a day, I hear. That's right. We've mentioned that once or twice. Is it still 10,000? Are we?

All the way through 2030 something. No, no, no, hang on. It can't be 10,000 every day. Are you telling me that's an average? Of course that's an average. They're not handed out 10,000 gold watches every day. And if you're 10,000 and one, you don't get one. No, but I'm sorry, but it's been 10,000 every day for the last eight years.

Or how long we mentioned that sad? It hasn't, it's not 9,000 or 11,000. It's still 10? Come on. It's probably been more than that because people are. Who's checking the data? People are so rich. They're retiring early.

And that cohort is living longer. And we hear all the time from people being like, I don't know what to do about taking my money out. What's the right withdrawal percentage, 4% rule? Should I do this? What about three? This is a very stressful topic for a lot of retirees. That are like, listen, I have a pile of money.

Now, what do I do with it? And so I think marrying the portfolio with the financial planning is something a lot of, especially DIY investors didn't really think about. But I think a lot of advisors are going to be bumping up against two. it's much easier to help someone in the saving phase and in the accumulation phase than in the distribution phase. You know, America has a lot of first world problems, don't we? Yes, it's so difficult.

So many people that have just piles of money, they're not sure exactly. All right, but all kidding aside, it is clearly a very important topic in retirement because it's stressful, life is unpredictable. And so the discussion that we have today gets into how to create a stream of predictable income over the course of your lifetime. So on today's show, we have Nate Conrad. Nate is the head of Lifex at Stone Ridge Asset Management to talk about longevity income. Yeah, and I think it's cool that we're starting to, we're going to see more of these, but we're seeing products, especially in the ETF space, that are trying to solve some of these problems. You mentioned it like certainty is the one thing

most people want. And so here's our talk with Nate Conrad from Lifex and Stone Ridge Asset Management. All right, Nate Conrad, welcome to the show. Thanks for having me today. Explain to us for the people who don't know, what is Lifex? So Lifex is our version of what should a bond fund really look like for somebody once they're in retirement, and in that mindset of living off of the money they spent their life savings. A lot of people are in the mode of wealth accumulation. How do I invest and grow?

and, you know, that's normally when you're working, you're getting a paycheck. Lifex is a bond ETF meant for when you're spending the money that you've saved. And when you own bonds, you want to get not just interest, but you want to get principal out to. So we created a suite of ETF designed to help you invest in bonds, but in a way that's friendly to cash flow over the course of your financial plan. All right. So maybe let's start with what problem were you trying to solve out in the marketplace. So, okay, you've retired. You've spent all this time accumulating assets, and now your strategy is shifting, your life is shifting, your spending is shifting.

What's wrong with the traditional bond fund? So the way we think about it, you know, imagine the prototypical 65-year-old, 7-year-old. You know, let's say, you know, over the course of, you know, 40 years in the workforce, you save a million dollars. And you retire, a million dollars is what you're going to live on now. And if you invest that in a diversified portfolio and in the fixed income bucket, you're using high grade bonds, you're probably getting a yield in the market today, you know, 4%, 4 and a half percent on those bonds. And when you own a bond fund that distributes interest and not principal, that makes it your

problem to figure out how do I get my principal out? I'm going to sell. Am I selling once a month? Am I selling once a quarter? What if the prices of bonds are down? Am I putting my financial plan in danger? how much principle can I take out at what cadence without, you know, putting myself in harm's way for down the line? This is a huge psychological problem for a lot of retirees.

We hear from a lot of people who say, okay, it's great. I saved enough money, and now I'm terrified of what to do with it because I'm not working anymore. I don't know about the timing. I think the principal thing that you're talking about as well is another psychological hurdle of a lot of people don't want to touch the principle. Or they don't want to come up with a plan. It's like I'm going to live off of the income. and the whole point of saving the money in the first place is you have to spend some of it. And so I think that is a huge problem for a lot of retirees in terms of what's the plan here?

When am I going to take it? What's my withdrawal strategy? How am I going to do to that? You got it exactly right. I want to highlight one thing you pointed out in there, which is there is this tendency of people when they're scared of touching the principal, own bonds, keep the principle intact and only spend the coupons. And that's this, you know, instinctive reaction to the risk people's sense of selling principle. And that's suboptimal in two big ways. The first is you worked really hard to build

that nest egg. You should get to enjoy it. And second of all, when you think about the tax lens, the best deal is spending your own principle, because if you get that principle out, that's tax-free. And so when you look at, you know, what advisors to do to confront this, one of the common solutions is a bond ladder instead of a bond fund. You know, let's go out and build, you know, maybe annual rungs going out three, five, ten years and get you interest and principal out tax efficiently. But the thing is, a bond ladder approach like that doesn't scale very easily to the full client base. So often a bond ladder strategies available with maybe a $250,000 minimum or $500,000 minimum, there's a lot of work there. And when you think about what a retiree really wants,

they have a 20-year horizon or a 30-year horizon, and they want to spend money every month. So if you build a bond ladder going out 30 years with monthly rungs, you're talking about 360 different bond QSips in the account. And if you want to make a change, if you want to rebalance because the market's down and you want to sell bonds and buy equities, you're trading 360 QSips, right? Not ideal. Not scalable. And so a simple mental model for what we built in Lifex is we took that 30-year bond ladder

360 QSips and we packaged it into one ETF ticker. So you get that interest in principle decumulation over time in a reliable monthly cadence. And you know, because we say this is the 2054 ETF, there's the 20505 ETF, how to easily program by picking the right ticker, what kind of bond ladder you're buying and what cash flow cadence you get out of that. So sorry, explain to us what the numbers mean. Is that when you retire? Is that supposed to be the or when this like the end of your retirement? What does the year imply? That's right. So that is the end year. So we have a 2054 ETF out in the market today. That's 30 years from today. If you buy the 2054 ETF, you're buying a product that's designed to give you a reliable monthly distribution between now and 254 every month along the way. And we're distributing interest and principle. And the idea is that instead of getting coupons only and then all of your principal being at the end, we're distributing all the principle along the way. And there's kind of nothing.

left at the end in 2054. So what happens after 2054? You die? The fund shuts down. We give whatever's left back to whoever's there. But if you put in $100 in day one, you're not getting $100 at the end. It should be, you know, not literally zero. Hopefully, you know, it could be, but, you know, small, small positive. All right. So how do you do this? What's, what's actually inside of the ETF? So we're investing in government bonds, U.S. government bonds, treasury money market fund we're not investing in other asset classes like corporate bonds or equities it's not about reaching for yields and taking different forms of risk it's about trying to build a reliable monthly cash flow stream using u.s government bonds into that process where

you're starting with this really unknown future of your financial plan you don't know what stocks are going to do you don't know about inflation but how about you have a little bit of kind of treasury based monthly cash flow coming in for people that are in retirement that need to figure out a solution to spending, you say, okay, I put $100,000 into this product. And every month until 2054 for this particular series, I have a reliable stream of income. Is it the same amount of income evenly distributed over the however many months that is? How does that work? So when you look at the way people spend, people typically spend a little bit more in their 60s and 70s than their 80s and 90s, according to the research.

we've seen. And so what we did was we tailored these to front load some of that decumulation. So we give principle back at a little bit faster of a rate in the early years of the ETF and a little bit slower in the last 20 years, just solving for the shape of how quickly we give you the money back instead of a completely level pace over time. It's a little bit front loaded. And so let's use the 20504 one as an example. There's one distribution per share number that's designed to happen kind of now through 2034 in that first decade of that ETF. And in in 2034, it'll change

and it'll be a little bit different in the last 20 years. Let's say you bought 100,000 shares of that ETF. The goal is $1 per share in the first decade, so $100,000 in distributions a year. And then, you know, the prospectus would probably say something on the order of about maybe $75,000 a year in the back 20 years. to reflect the shape of how people like to spend.

But investors up front, they know exactly what they're getting when they enter the ETF, or is it not exactly clear? Yeah, I was curious by that, too. Does the changing yields on government bond yields change how much is distributed from this fund? So the goal is that it does not change them, that they know what they're getting in terms of distributions per share. Now, you know, this is an investment product. It's not a guaranteed product.

so there is investment risk around these things, but we're trying to do our best to create reliability in the numbers through how we manage the Treasury portfolio so that you're getting a dollar per share per year in those early years, whether interest rates go up or down, that's what we're trying to do. And in the kind of back 20 years, it's meant to be more on the order of about 75 cents a share. Again, you know, trying to do our best to make that stable regardless of how interest rates change. So, but Nate, you didn't answer my question because Ben very unprofessionally asked a question on top of my question. So my question was, it was the same question. No, it was a fair, it was a fair follow-on question. But my question was

before somebody presses by, can they see what their distributions are going to be going out, I don't know, 12 months, 100 months? Like, do they know what they're getting? The short answer is yes. They know exactly what the goal of that fund is supposed to produce for them in cash flow. Okay. And they know what a process. approximately that's going to cost them. So if you go to our website, lifexfunds.com, is an easy way to go find it. For any of the kind of horizons you might pick, whether that be 2054, 2060, 2048, you can see what's the distribution per share and what is the cost per share. Obviously, you're going to buy at whatever price you buy in the market, but you plug in that current

market price, the distribution per share, and that's going to tell you what's my distribution yield. Does the money go back to their state? How does that work? Yeah, so this is really just an ETF. You know, it's not an annuity, it's not an insurance product, not a guarantee product. It's an ETF that invests in treasuries, and it's yours, it trades like an ETF, it passes to your estate like an ETF. You know, the simplest way to think about it, you know, going back to the beginning of the call, think about a treasury bond fund, and you've just kind of wrapped it up in an ETF to change the experience around it. But, you know, that's the investment underneath.

That's the source of reliability. It's just a really scalable way of putting treasury bond ladders into your client portfolios without minimums and lots of QSips and, you know, filling up that account statement. But the NAV is, I'm sorry for cutting you off. The NAV is designed to trend towards zero over time, right? Correct. As we return capital, those kind of capital distributions come out of the NAV per share. But if someone decided, I'm going to live longer, I'm going to, there's liquid,

there should be liquidity in these where you can say, like, well, geez, I'm going to go out to the one that's five years longer now. I don't need this one that's shorter. You could change it if you theoretically wanted to five years down the line. Exactly. And that's really what we love about it. You know, there's a theme in the market right now of, you know, advisors wanting to personalize the way they deliver these financial plans.

And your financial plan journey is dynamic. You know, what you believe about yourself at 65, it's all going to change is, you know, you get different information about how's the market done, how's my portfolio, what's my spending, how's my health. And exactly as you said, you're going to change your whole. horizon at some point. And if you have a bond ladder with 360 QSips, it's a lot of work to change what that looks like. If you own a 2054 term ETF and you want to change that to a 2059 to extend five years because your health is better than you thought, that's pretty easy. And so we want that

simplicity of how can people align the way they spend from their bond portfolio. Can we make it really easy to align bond-based spending with the financial plan as it changes and help people understand what the spending rate should be based on their new horizon. So advisors and certainly their investors love predictability, right? We live in an unpredictable world. You have no idea what the market is going to do, stocks or bonds. So with this, I get the story. My question is, there's a lot happening underneath the hood and there's a lot of different

lumpy cash flows distributions. How would an investor go about comparing, say, the cash distributions on this versus an equivalent bond ladder that they might otherwise put together? Like, how much are they paying for this? How do they really get to the bottom of it? A simple way to think about it is that a Lifex ETF is really just a different way to invest in U.S. government bonds. So if you're invested in U.S. government bonds today and you're thinking about Lifex, you know,

the first order impact on your returns is really what are the yields of U.S. government bonds, right? We're giving you the income from the bond and then principle two. We're not saying, you know, we're trying to generate alpha or we're buying corporate bonds. It's the same underlying government bond mechanism with a different cash flow profile because we're distributing that principle. The rates you'll find on our website are all published net of expense to make it really easy for people to think about it. So if you go to our website and you look at an ETF and it says, you know, 6% distribution yield, that means if you invest a million, that's going to spit out, we think, $60,000 of cash flow in the next 12 months. So try

and make that comparison really easy. The expenses we deduct in calculating that, it's a 50 basis point expense ratio initially. And that expense ratio gets cut in half to 25 basis points for the last 20 years of the term. So the management of these funds within the ETF, is there a decent amount of turnover to create the distribution each month, or is it the fact that like you're effectively building a ladder? There is some rebalancing happening inside of these ETF. You know, the beauty in an ETF, you know, through the create, redeem mechanism within kind activity, there are a lot of efficiencies you can pursue about doing that in a way that's good for both transaction costs and tax. And so we try and be really thoughtful about how we manage that over time.

time. You know, the kind of idealistic imagination of what our portfolio would be would be, you know, you buy a bond that matures every month for the next 30 years. We do a little bit differently and we tilt towards the most liquid benchmark securities because that's what really helps the market makers who provide the on exchange liquidity. And we want to create really good liquidity for people to kind of buy the shares, sell the shares, treat them in a broader portfolio for rebalancing and, you know, customization over time. just straight up plain vanilla nominal treasury bonds? We offer it in two flavors.

So one is straight up plain vanilla nominal treasury bonds. We're not doing agencies or anything else. The other flavor is inflation protected. And we're buying tips instead of nominal. And instead of saying, you know, our goal is to give you, you know, a dollar per share per year. We're saying our goal is to give you a dollar per share adjusted each year based on changes in CPI, kind of passing through that underlying.

benefit of the protection that U.S. government offers on tips. Why would somebody not choose that? Is that because they have a view of like break-evens or something that embedded inflation expectations are above where inflation is actually going to be? Like, why would somebody not choose tips, the inflation protected version? It's a really interesting conversation. I have some conversations with financial advisors who say, why would anybody ever buy that fixed rate version? The tips one is the only one for me, and I have some people who feel the opposite way. The key considerations for people, some people really focus in on, you know, over the course of 30 years, even a two or three percent

inflation rate, you know, accumulatively, it kind of cuts your nominal spending power in half. And so, you know, that's the argument for the tips version, kind of protecting the long-term spending power. The argument for the fixed rate version is it's more money now, instead of more money later, which people tend to like. And the allocations in people's portfolio today, typically tips are, you know, 10% allocation, give or take, you know, not 30, 40, 50%, percent, whereas most of the bonds people own in their portfolio are typically more nominal. And so it's a little bit easier of a swap, you know, in kind of what people own today to go into the fixed rate version. Whereas going into tips, you know, other than replacing your existing

tips allocation is a bit of a change in what you own. Do you see these as more of an advisor tool, or do you have some tools or experts on staff that kind of work with investors to figure out which product, which year, which type is best for them? So we make a lot of tools available on our website to try and help people think about what's right for them. Ultimately, our business at Stone Ridge, you know, from day one has really been about empowering financial advisors with tool. You know, we think people benefit from having people to help them on the job. journey. So we kind of market through and educate through financial advisors and really want to help them do it. And the most common approach that we've been hearing about from financial

advisors is when they look at their client base, they're going to pick one ticker that they think is representative of their kind of baseline financial plan length. And maybe, you know, normally they start a retirement plan around age 65 and they plan for a horizon through 95. That's a 30-year length. And they're going to pick an ETF that goes for 30 years, which today would be through 2054. They'll plug that ticker into the model. And that's the way that they can deploy this scalably to their whole community of clients

in retirement. But then they still retain all the flexibility to personalize it over time so that when that client comes in with a comment on how they feel about their horizon, is it too long, is it too short? Are they worried about inflation and seeing it in their grocery bill? there's always things that the clients and the advisor can do together to personalize that allocation over time. These are monthly distributions?

Monthly. All right. So the story, as I understand it, is the investor is paying 50 basis points to have something done that let's be real, they're not going to do themselves, right? It's just, it's too much work. And to me, that's the trade off in question. And there's like an argument online where people say, oh, dividends are tax inefficient and I understand it. And you could just create your own dividend, right?

Just sell some of your principle. But if we've learned anything or if we've learned nothing, I don't know what the right phrase is here. It's that people don't do that. It's a pain in the butt. Like, why don't they just because they don't because it's annoying because they've, they've other things to do with their life. And so people would rather do something and pay a fee for. service that they're not going to do themselves. I think that's right. You know, I read an article the other day about, you know, the financial journalist talking about, you know, building a tips ladder

in retirement. And I think he said it took him something like 10 hours to do it than somebody who, you know, writes about finance for a living. And that was to build, you know, an annual rung tips ladder. And there's six years where there's no maturity. So there's a big gap. And, you know, boys are going to be complicated to adjust that ladder down the line if he wants to change the horizon. I think when you create that kind of friction for people in the system, it's pretty tough. And, you know, I mentioned earlier, you know, the fee here starts at 50 and it declines to 25 for the last 20 years. And you pay the fee on the current balance. And you asked the question earlier, you know, how does that nav work? The nav declines. So, you know, if you put in $100 today, the nav in year 20 isn't going to be $100.

there's going to be a lot less. Right. And you're paying fees on that lower amount. I like that. So after 10 years the fee drops, is that, am I getting that right? It differs by ETF. The rule is the last 20 years of the ETF are when it's 25 basis points. Okay.

Just reflecting, it's simpler to manage, you know, the last 20 years and the first 20 years if you have a 40-year ETF and we've got to manage as the government is issuing new bonds. So I'm curious the risks here involved for people who are in this. Are the risks kind of backloaded then since you have the ability to pay? pay down principle and kind of cover yourself from the distributions? Is that the problem that maybe the interest from the bonds or the yield in the bonds is not covering the distributions? Is that the biggest risk for people? So I think you're effectively asking about could the fund kind of run out of money if things get done right? That's correct. This isn't a guaranteed product. We're trying to

build a treasury investment portfolio that we believe is going to run all the way through the end here. There are no guarantees around that. And if, you know, the U.S. government defaults or whatever it is that causes a loss in that bond portfolio, that would manifest as the fund running out of money ahead of time. We're not going to cut the distributions along the way as long as there's money in the fund. We want to keep meeting those planned distributions. So if, you know, if something goes wrong, it's that instead of 2054, it, you know, ends sometime before that, not that, you know, next month, we're going to reduce your payment to keep it going. So that's kind of a nice way to align things because a lot of people, you know,

don't live all the way to the financial planning horizon. Have you guys, I'm sure you've done a lot of brainstorming about this, is there a category name that you've come up with to define what we're trying to do here, what you guys are trying to do here? And if not, that and I are idea guys, so let us cook. But to you first. Withdraw LETF, distribution ETFs, I keep going. It does to us feel like a new category, you know, kind of a new way to build bond funds

that, you know, is a decumulating bond fund. we've come up with, call it two category names, you know, kind of related. So the ETFs we have that are live in the market are called longevity income funds. Okay. And, you know, we use that to reflect the fact that we're, you know, it's an income fund that's focused on investing in income producing bonds, but it's built for longevity planning and, you know, how do we give you that principle back in the shape of kind of giving you more principal back up front to fit the way retirees spend, you know, longevity income.

was what we thought was a good category name there. And we have a new fund type coming out in January that we're calling term income, where it's totally leveled the whole time as the goal. So we have a 2035 term income product where the goal is run for a decade and try and pay the exact same distribution every single month for the whole decade, level term.

And you can think of that as maybe a more kind of standard bond ladder, but monthly rung, not annual. run and a nice way to think about how do I kind of own my bonds for high cash flow as a, you know, kind of a spending bucket or a raining day fund for the next decade. And to me, that's a use case not just for longevity, but just in case you change jobs and paychecks not there, you're going to buy a house, what have you. So speaking of longevity, Peter Attia, who people know from his podcast and his book, he's one of those guys that has jumped into like even my normie friends who don't consume a lot of content like this or like, hey, have you read Peter

his book Outlive, really into it. So he's on the board with you guys. Is that correct? That's correct. He's on the board of advisor for LIFX. Okay. And so just to, what is his role? Is he trying to just help with figuring out ways to help people who are going to live

a long time and manage their money, basically? Yeah, so we have this wonderful board, Peter, Laura Carstinson, Ted Mathis, Ross Stevens. The role of the board is really in helping us think about how to educate. and position the product in the market. You know, we live in this wonderful time period of increasing longevity. You know, that's a big part of what Peter's mission is about helping people live longer

and helping people enjoy longer lives in terms of that quality of their health and their health span over the course of that. Laura Carston's really about helping people kind of enjoy those lives, you know, and kind of planning their life. And, you know, to be able to enjoy your life, you know, health is a component,

financial security is a component. and these kind of all baked together, you know, there's a wonderful purpose for financial advisors and helping their retirees live better lives. And so we really want to kind of think broadly about how we can make a real impact, you know, in America with this product when we have, you know, such an aging population. And so Peter and Laura and Ted kind of all together help us think about that and positioning the product around it. Very good. Nate, if people want to learn more about the Leifax suite of ETFs, where do we send them? So you can send them to LifexFunds.com, L-I-F-E-X-Funds.com.

There's contact us there. There's information about all the different ETFs, fact sheets, pricing. I'm happy to help people get up to speed. I appreciate you coming on. Thank you. Thanks for having me. Okay, thank you to Nate. Remember, check out LifexFunds.com.

Thanks to Stonergy Asset Management. Email us, Animal Spirits, at a compound news.com. Thank you.