You’ve been diligent about saving throughout your career and you feel confident your portfolio will produce enough lifetime income to fund a rewarding retirement.
But, will it really be that easy? Before you can celebrate your savings prowess, it’s important to consider what an unexpected market downturn could do to derail your plans.
As the bear market of 2008 to 2009 showed, a market downturn may deliver a nasty blow to your savings when you are just beginning retirement—a blow that might have life-changing implications. In fact, 57% of workers over 60 plan to seek additional employment after retiring from their present company, due to financial concerns. In addition, 11% of workers in this age bracket don’t think they will ever be able to retire.
What can possibly go wrong? Let’s take a look –
We are all exposed to sequence-of returns risk –
This risk involves the actual order in which investment returns occur. Typically, negative returns earlier in retirement have a more severe impact on your portfolio than negative returns later in retirement. That’s because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. This means a smaller amount is left behind to experience any potential future growth. A sharp market downturn in the years leading up to retirement can have a similar impact and dramatically reduce the value of your investment portfolio and, thus, its ability to generate future income.
In the chart below, two hypothetical portfolios, A and B, each begin with $100,000. Each investor aims to withdraw $7,000 per year and it is assumed that both portfolios experience exactly the same returns over a 21-year period, only in inverse order or “sequence.” Portfolio A has the bad luck of having a sequence of negative returns in its early years and is completely depleted by year 13. Portfolio B, in stark contrast, scores a few positive returns in its early years and ends up 21 years later with more than triple the amount of assets it started with.
A Fixed Indexed Annuity with a Lifetime Income Benefit rider provides these benefits:
An income stream you can’t outlive – Guaranteed income for the life of the annuity contract owner as well as the life of his/her spouse (if chosen), even if the annuity’s account balance is exhausted due to a combination of market performance and income withdrawals.
A set level of guaranteed income – The income produced by this investment won’t go down if the market performs poorly. This feature helps protect against sequence-of-returns risk.
Upside growth potential – While you’re increasing income will be guaranteed in any future years, your principal grows when the market goes up. This growth is also protected against future market declines.
We don’t have to “HOPE” our income lasts during our retirement –
We can “GUARANTEE” it will last during our retirement!