50+ Lifestyles

How would another drop in the market affect your retirement assests, especially during this Holiday Season?

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

Today there is a longer life expectancy for both women and men, and that is a lot to be grateful for during this Holiday Season. But longer life expectancy brings in a need for us to plan on more years in retirement. Longer life expectancy is a good thing, but longer life expectancy does increase our risk of losing assets due to market volatility. During these holidays, let’s continue to get our affairs in order for greater life expectancies. The good news is that, during the accumulation phase of retirement planning, we often have more time to weather volatile markets. Despite the ups and downs, over time, your assets can grow appreciably.

The bad news is, once we start withdrawing income from those valued retirement assets to generate retirement income, we are much more vulnerable to market volatility. Once we begin withdrawing retirement income, the sequence of returns really matters. More years in retirement increases the need for an increased rate of return. During this distribution phase of retirement, the annual sequence of returns assets earn have a huge impact on how long into our retirement money will last.
Recall when we withdraw assets for income during down markets, losses on those assets are “locked-in” – unlike during the accumulation phase. During this distribution phase, money no longer has the potential to increase when the market rises. That loss will diminish the total value of our remaining assets. Over time, this chipping away of retirement assets will cause our money to run out more quickly than anticipated.

Allow me to cite an example. Assume you are retiring with a $1,000,000 nest egg and plan to withdraw 5 percent per year adjusted 3.5 percent annually for inflation AND assume today’s volatile markets continue. Now, let’s add both senarios – withdrawing your retirement income in an ‘up market’ versus withdrawing retirement income in a ‘down market.’ In the first scenario with a respectable 6 percent annual earnings and consistent withdraws, asset balance at the end of 37 years will be zero. In scenario 2 – withdrawing retirement income with down market, using the same annual return as in scenario 1 – zero balance is reached in 24 years. Starting retirement income during down markets you could lose 10 years of income. That in a nutshell is the risk that comes with your sequence of returns.

Most often though we don’t have a choice where the market will be on the day of retirement – it just happens. Consequently much is at risk. For this reason I recommend using annuities linked to the performance of the market. It is important to understand index annuities are linked to the performance of the market – not invested in the market – but linked to market performance. If market grows annuity owners will share in the growth of the market. But if markets decline annuity values never decline. Annuity values will either remain the same from year to year or increase.
Using more than one annuity – split annuities allow for terrific flexibility for retirement income. Encourage you to call us for details on the wonderful split annity arrangement and determine appropriateness for you.