The financial advisor’s retirement planning challenge: Based on current life expectancies, a 65-year-old retiree faces the prospect of needing to fund a retirement period that is likely to last approximately 20 years. How will you—his or her advisor—help secure a source of income that can be relied on for decades?
Most retirement specialists, including Calamos, would argue that exposure to the stock market is essential to provide sufficient growth. Unfortunately, widely varying returns from the stock market can mean widely varying results for investors, depending on when they invest and in what.
Unlike younger investors, retirees can’t afford the time required to recover from major market drawdowns. As illustrated below, the larger the loss, the larger the subsequent gain that’s needed to recover lost ground and get back to the original value. Losing 10%, for example, is recovered from with a subsequent return of 11%. But a 40% drawdown? That requires a gain of 67% to break even.
For retirees, then, limiting losses can be just as important as maximizing gains. Advisors, consider Calamos Convertible Fund (CICVX) for a strategy that aims to buffer volatility and make returns more consistent—participating in equity market gains while limiting downside. Strategic use of convertible securities has helped the fund preserve capital and position for growth over time.
The hypothetical illustration below compares the path of the fund versus the S&P 500 over the last 20 years (10-1-98 to 9-30-18). Over time, the fund's difference was its ability to lose less during drawdowns and experience drops less frequently. Because an investment didn’t fall as steeply (early in the period in particular), the fund preserved more of its value and kept on growing.
The table below shows that the year-end value of the S&P 500 was lower than the previous year in 13 of the years included in the period measured (as opposed to the fund's nine), and the S&P needed time to recover from those losses. Retired investors who may have relied too heavily on equity allocations would have had many anxious moments.
This hypothetical illustration shows how a sum of $500,000 invested in either Class A Shares of the Calamos Convertible Fund or an investment that mirrored the S&P 500 Index would have funded a 20-year retirement. This would have enabled withdrawals starting with $30,000 (adjusted by 3% for inflation each year) for an identical total income amount of $806,109. But look at the difference in the ending values: $634,535 versus $61,253. The fund would have provided enough for retirement well beyond age 85.
Withdrawal Example: Calamos Convertible Fund vs. S&P 500 Index
$500,000 INITIAL INVESTMENT, $30,000 END-OF-YEAR WITHDRAWALS, 3% ANNUAL INFLATION
TOTAL INVESTMENT: $500,000
TOTAL WITHDRAWALS: $806,109
CALAMOS CONVERTIBLE FUND ENDING VALUE: $634,535
S&P 500 INDEX ENDING VALUE: $61,253
(10-1-98 to 9-30-18)
YEAR-END VALUE ($)
|S&P 500 INDEX YEAR-
END VALUE ($)
Past performance is not a guarantee of future results. The hypothetical illustration above shows how a $500,000 investment in the Calamos Convertible Fund would have compared to the performance of the S&P 500 Index over the 20-year period from 10/1/98 to 9/30/18. In both scenarios, withdrawals of $30,000 (adjusted by 3% for inflation) are made each year for an identical total income amount of $806,109. Unmanaged index returns assume reinvestment of any and all distributions and, unlike fund returns, do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.
We understand that these results are stunning and, advisors, you’ll want to see the underlying hypotheticals for yourselves. Please contact your Calamos Investment Consultant at 888-571-2567 or email firstname.lastname@example.org for more information about the Calamos Convertible Fund, whose I share is CICVX.
Of course, it’s impossible to know what the future will bring, and whether such a discrepancy would recur between our convertible fund and the S&P. This 20-year window shows that dramatically different results are possible, but it by no means guarantees similar performance across other time frames. While the timing and extent of drawdowns will always be impossible to predict, it’s not a stretch to say they can create conditions that warrant a long-term, diversified investment approach.
If nothing else, this illustration can be used to demonstrate—in dollars and cents—the value of protecting against the downside. This is why convertible securities investors are willing to exchange maximum possible upside—and, as this hypothetical historical illustration shows, why it may be to the investor’s benefit over the long term.