In response to wild market swings caused by inflation and Russia’s attack on Ukraine, most investment advisors are publishing articles on how to stay the course during volatile times. I’ve found a problem with these suggestions, particularly when it comes to upcoming or retired investors: the advice focuses on the allocation of your investment, when your own focus will likely be on your income, now and in the future. You don’t want a small, or worse, large, market correction to kill your income plans along with what you want to spend it on.
So my question is: How much of your current and future retirement income should be dependent in the stock market, regardless of whether it is going up or down at any given time?
Answer: Design a retirement income plan and you’ll find your safe harbor.
How to think about market volatility in a retirement income plan
People like you who think a lot about retirement generally fall into three stages:
- You plan to retire in five to 10 years and wonder if and how to reposition your savings during the home stretch.
- Nearing retirement and ready to implement the final pieces of a plan that has looked pretty good over the years.
- He’s already retired with a plan that has worked well for the past few years, but nervous about the effects of the latest market volatility.
When you create your own retirement income plan, you want your income to: (a) meet your current needs, (b) grow over time, and (c) last a lifetime. And you may want to leave a specific legacy upon your passing. Finally, though not often discussed, he wants a plan with a long-term view that also reduces the anxiety that comes with stomach-churning dips in the market.
When you retire, your main concern is running out of money, so while you want to take advantage of the market’s upside potential, you also want to avoid big bets. The result should be a plan that includes equities, while relying on income from sure sources to offset market downturns.
A strategy to weather market downturns
The goal is simple: You don’t want to be forced to change your lifestyle because of a downturn in the market, or even because of a large, unexpected expense. Cutting back in retirement feels like when you were employed: rotten. So here’s our recommended approach to creating a retirement income plan that can weather the storms:
- Create a plan that is based on income. Understand what happens to income when market volatility strikes.
- Make sure that a large percentage of that income is safe and not affected by the swings of the market.
- Soften the impact of market gyrations by ensuring that any income based on an investment withdrawal/sale comes from a balanced portfolio of stocks and bonds
- Actively manage your plan so that if that market correction occurs, you can make minor adjustments to your planning goals in the future.
What about that secure income?
Secure income includes:
- Social security and pensions. You can count on both for the rest of your life. Social Security is adjusted for inflation, as are some, but not all, pensions.
- Dividends from a portfolio of high-dividend companies. No company is immune to market shocks, but you or your portfolio managers can select stocks that have shown consistent and growing dividends.
- Iinterest on a portfolio of high-quality bonds. Look for a diversified portfolio of corporate and municipal bonds.
- Annuity payments from annuity contracts. Choose from contracts that begin payments immediately as the basis for your plan with deferred income annuity contracts used to create a ladder of growing income.
While “safe” income doesn’t include managed IRA withdrawals as part of your overall income stream, a balanced portfolio of stocks and bonds smoothes out the wild swings of market corrections.
Let’s look at a retirement income plan designed for a 70-year-old woman who has $2 million in savings. You can see from the chart below that annuity payments are the basis of her plan. Dividends and interest provide additional income, and IRA withdrawals are also an important part of your income. (This particular strategy is designed to enhance your after-tax income and legacy.)
Revenue Allocation by Source
Now compare your income projections with and without immediate or deferred annuity payments (DIA/QLAC), and before and after a 20% market correction.
As you can see, before the market correction, our investor has an initial income of about $100,000 for a plan that includes annuity payments and about $94,000 a year for a plan with no annuity payments. Both plans are designed to produce a $2 million legacy when she passes away at age 95.
What happens if we squeeze in a 20% market correction on the day you implement each of these new plans? (Fixes of this magnitude have been made, but they often take weeks, if not months.)
- The plan with no annuity payments feels the impact of the market correction much more dramatically, and while income falls in both plans, the advantage for the plan with annuity payments is now $92,000 in annual income versus $79,000 for the traditional plan.
- In addition, the plan with annuity payments can return to the original income through a replanning process by assuming a higher yield as part of a market recovery or lower rate of inflation.
- While not always correlated with stock market corrections, higher interest rates would make any small incremental purchase of annuity payments more attractive and further close the income gap.
- And despite the higher income, the plan with annuity payments would have a lower taxable income due to the favorable tax treatment of annuity payments. (Learn more about how annuity payments lower your taxable income by reading How to Lower Your Retirement Tax Rate to Less Than 10%.)
Today we face inflation and uncertainties caused by the war in Europe. Tomorrow will be another storm. No matter what questions you have about the future, a good income plan provides peace of mind while guiding you through rough waters.
If you’re ready to start creating a retirement income plan for your specific circumstances, visit Income Allocation Planning at Go2Income. We’ll ask you a few easy questions so you can design a plan that meets your goals. Whether you’ve been completely convinced about the value of annuity payments or not, why not do some research on your own? Click annuity information to compare your annuity payment and tax benefits with our investor’s results in the article.
President, Golden Retirement Advisors Inc.
Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income they can’t live without. He learns more at Go2income.com, where consumers can explore all kinds of annuity options, anonymously and at no cost.