Market ups and downs can keep retirees nervous, worried about potentially large losses they may never be able to recover from.
And these worries are not necessarily wrong. From 1928 to March 2022, there have been 26 “bear markets”. A bear market is a market decline of more than 20% that lasts at least two months. The average bear market decline since 1928 has been 35.62%, so the potential for big losses is real.
The good news, however, is that there are ways to protect against those inevitable market downturns. After all, your retirement shouldn’t be an endless series of sleepless nights. And, with careful income planning that covers your lifestyle needs, allows for emergencies, and includes an appropriate amount for investment and growth, it doesn’t have to be.
For me, this approach to retirement can be summed up in this sentence: Your income should not depend on the market. It should depend on the math.
How could this math play out?
Let’s say a couple is nearing retirement, their savings plan has gone well, and they have $1 million to spare. That’s a nice sum, but in an era where retirement can last 20 years, 30 years or more, it’s still important to plan wisely so that the money spreads out over the rest of their life. And as you probably know, people are living longer these days, which means it’s even more important to make the right financial decisions.
This is where the math comes in – and we start to split that money into buckets.
Unforeseen emergencies arise in life – both in retirement and out of retirement – so it is good to have some money in reserve which is allocated just for this purpose, to help with a smoother ride during retirement. retirement. We always ask our customers how much they need in that bucket to feel comfortable, just in case the car needs new tires, the roof leaks or some other crisis, big or small, happens. As you can imagine, the amounts they donate vary, but let’s say the couple in our example settles on $50,000 as the number they want in the safe bucket. This gives us a good starting point to then explore how to manage the rest of their savings.
It’s by thinking about the contents of this bucket that retirees must decide how much money they will need each month to pay for their lifestyle. Of course, they need money to buy groceries and pay the electricity bill, water bill and other necessary expenses. But they also want free time.
Let’s say our couple sets an income goal of $6,000 a month and they expect to receive $2,000 a month each from Social Security, for a total of $4,000. That means there’s a $2,000 gap they need to bridge between what Social Security provides and their income goal.*
One possibility to bridge this gap would be to use at least a portion of their retirement savings to purchase an annuity, which functions much like a personal retirement plan, with the potential to provide a guaranteed monthly income that will not outlive you. There are different types of annuities, but I lean towards fixed index annuities because they don’t allow you to lose money, which means you have the potential for a more predictable stream of income, regardless of market evolution.**
Now that their monthly expenses are taken care of, our couple can move on to the next part of this math problem – figuring out what they have left over for long-term investment purposes.
bucket of growth
Sure, retirees have to be careful with their money, but that’s the bucket where you can be somewhat aggressive with investments because your income needs are taken care of, and you have that safety bucket that provides protection in case of emergency. The growth bracket allows you to keep up with – and hopefully outrun – inflation.
Of course, it’s also a bucket that can drop in value if the market goes down, so it shouldn’t be money you expect to dip into anytime soon. The last thing you want in retirement is to have to withdraw money from your savings when the market crashes. The account balance would begin to decline rapidly as market forces, combined with your withdrawals, would deplete it. This is a scenario that could send retirees back to the labor market.
Many people think that retirees should be careful with their money, but that may not be true with all your money. As long as your lifestyle is taken care of and the emergency fund is established, you can find ways to make your money grow. That doesn’t mean you should be overly aggressive. There’s no need for Las Vegas gambling. But you can create a portfolio that’s a little heavier on stocks and a little lighter on bonds than the 60/40 split that so many people recommend. Unfortunately, it’s common in the financial world to see people being given advice that deals with generalities like the 60/40 split, but when you retire, you shouldn’t rely on cookie-cutter approaches. You need to get advice tailored to your needs.
One of the benefits of this three-pronged approach is the ability to take advantage of market growth without having your entire retirement fortune tied to it.
Certainly, your workforce – and your needs – will be different from those of this example couple. Maybe your comfort level requires more or less money in this emergency fund. Maybe you expect to travel a lot in retirement and want enough money in the income bracket to cover those desires.
That’s why, as you approach retirement, it’s important to sit down with a financial professional who can help you find the answers to your own math problem. That way, those market ups and downs won’t have as much power over you — and you can instead focus on the joy that retirement brings you.
* The hypothetical example provided is for illustrative purposes only; it does not represent an actual scenario and should not be construed as advice designed to meet the particular needs of an individual’s situation.
**Fixed indexed annuities are designed to offer guarantees of principal and credited interest, and a death benefit for beneficiaries. The interest credited to your contract may be affected by the performance of an external index. However, your contract does not directly participate in the index or any equity or fixed interest investments. You are not buying shares of an index. They are subject to redemption fees and may have applicable fees. The guarantees are backed by the financial strength of the issuing company.
Ronnie Blair contributed to this article.
Insurance services are offered by Capital A Insurance. Securities offered by Madison Avenue Securities, LLC (MAS), Member FINRA/SIPC. Investment advisory services offered only by persons duly registered through AE Wealth Management, LLC (AEWM). Neither MAS nor AEWM are affiliated with Capital A Insurance or Capital A Wealth Management. 1126032 – 4/22
All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in times of falling values. Any reference to guarantees or lifetime income generally refers to fixed insurance products, never to securities or investment products. Guarantees for insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.
Managing Partner, Capital A Wealth Management
Brandon Domenick is a managing partner at Capital A Wealth Management in Cranberry Township, Pennsylvania. Domenick began his career in the financial industry after earning a Bachelor of Science in Business Administration from Westminster College. It maintains its FINRA Series 65 securities registration through AE Wealth Management and is also licensed in life, accident and health insurance.
The appearances in Kiplinger were obtained through a public relations program. The columnist received help from a public relations firm to prepare this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.