You’ve worked hard all your life, played by the rules, only to have a majority of your nest egg wiped out due to something you could NEVER have controlled. For most of us, this would be devastating and possibly life-changing!
For most pre-retires and retirees, the #1 concern they have is fear of running out of money in retirement! What options do we have as we wonder whether social security will be around and the days of pensions being gone?
There are three common methods people use when it comes to securing income in retirement. It’s important to note that we are focusing on our “retirement years, because we may still have time to make up for any losses in our younger working years. When we are older and our health may be compromised, working longer may no longer be an option.
Here is the retirement strategy most people take:
1. Invest their principal in a fixed interest rate vehicle, such as a bond or CD, and then attempt to live off the interest without touching the principal.
2. Purchase an annuity that offers a lifetime income stream.
3. Make systematic withdrawals from a non-guaranteed, “market-driven” portfolio that also contains the possible risk of loss.
Let’s focus on #3, because options #1 & #2 provide guaranteed results.
The problem with making systematic withdrawals from a non-guaranteed portfolio containing the possible risk of loss is that you can never rely on that income! Your income will fluctuate because it is based on a performance-based asset.
Here is the most important thing to consider, which most people overlook. For example, if you are using a 5% withdrawal rate from a “market-driven” account and that account (portfolio) goes down in any given year, let’s say 10%…you just reduced your account value by 15%! That’s not even taking a modest 2-3% inflation rate into consideration. In that case, you may have reduced the account balance by 17-18%! Now, most would say you need 17-18% to recover those losses. That’s the wrong strategy. It would be best if you actually had more because you are starting with a lower value.
Proper comprehensive financial planning needs to provide an appropriate mix of market-driven investments for growth and protected types of investment vehicles like annuities and CDs, to name a few. One should never solely rely on market-driven accounts to generate consistent, reliable income in retirement because it’s not possible, and it will always be dependent upon “performance.”
When the stock market starts tumbling, daily injections of bad news can spark anxiety, fuel uncertainty, and trigger radical decisions in even the most seasoned investors. Panic isn’t a strategy! It’s essential to keep focused when markets volatile.
Here are five strategies to consider when volatility strike:
- Stay true to your goals, and don’t abandon your strategy for something that will be temporary
- Stay invested, as most of us do the opposite and panic sell at the lowest point
- Always stay diversified, and the old saying “never put all your eggs in one basket” still holds true
- Pay close attention to risk management as it is always a good idea to determine if you could get similar results by taking on less risk
- Stay on top of what your financial professional is doing, and remember it’s YOUR money that plays an active role in managing it.
SD, LC
