I use a lot of my time in these blogs to encourage folks to hold tight to their plan during times of economic upheaval. I stand by that sentiment just as strongly now as I did before the mid term elections. However, I also understand that while it is particularly pertinent to remind our younger clients of this, it is equally, perhaps even more, important to remind our clients who are approaching retirement. Those who are in their “pre-retiree” years (think 50-60 years old) have a lot to consider especially given the volatile swings in the market that we have since in the past few years. With that in mind, now is the time, not to ditch the plan and head for the exits but rather search for gaps that threaten to put your goals out of reach.
Loss of Income
It probably goes without saying that most people’s biggest concern in retirement is paying their expenses without a consistent monthly income. Unless you are a government employee or public school teacher, it is probably pretty unlikely that you have access to a pension. That leaves you with only one income that you can be (relatively) assured of, that is social security. So, what if your social security income is not sufficient to cover your monthly expenses? Well, that will leave you to begin withdrawing from your investments to pay for things like your mortgage, utility bills, or vacations. There is absolutely nothing inherently wrong about this! I mean, that’s why you invested in the first place right? However, you should meet with an advisor in order to make sure that you have enough stashed away to cover your necessary expenditures (and some unexpected ones) in retirement. This is especially the case when you consider our next point: volatility.
While you are in the saving phase of your life, the ups and downs in the market matter very little to you. In fact, you should welcome the opportunities that they present! However, once you begin withdrawing from your accounts to fund your retirement, this becomes a bigger issue. When you are on a fixed income you have no choice but to withdraw the amount necessary to pay your expenses regardless of what the market is doing. This means that you will likely be forced to withdraw from your accounts when the markets are down. Again, it would be a good idea to ask your advisor to run a “stress test” of your portfolio to show how it would perform in various market conditions while you are withdrawing from it for income. While you are speaking with your advisor, it may also be a good idea to ask them about the possibility of purchasing an income producing annuity. Annuity contracts that include an income rider can produce a steady stream of income in retirement regardless of how the market is doing. It is important to note that these riders can be confusing, expensive, and should only be considered for long-term income planning and certainly require a skilled financial advisor as a guide to review your investment profile and objectives before jumping into anything. This solution isn’t for everyone, but it is worth asking about!
Additionally, your advisor should also work with you to begin lowering the risk in your portfolio. A financial advisor should be able to help you construct an investment portfolio with the goal of pursuing the necessary returns while also limiting the volatility in your portfolio. This will help you towards your retirement goals while also making it less likely that your accounts will take a serious drop right as you begin withdrawing from them.
As I mentioned before, most people do not have a pension anymore which means that they also do not have access to the types of health insurance that used to be offered alongside pension plans. When you turn 65 you can begin applying for Medicare (which offers several different types of coverage and comes with its own costs). However, if you intend to retire before 65, you are going to need to purchase private insurance coverage for the turn from when you retire and lose your employer coverage until you reach age 65. Private insurance is often more expensive than coverage offered through an employer so it would be prudent to include this cost in your planning if it is applicable to you. Of course, this is another area where an advisor could assist you in estimating how much this coverage may cost you and how much to save for it.
Times like these are enough to make even the most seasoned investing veteran uneasy. However, by doing some early planning and making changes now, you increase your likelihood of getting where you want to go in the future!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Variable annuities are long term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They have fees and charges, including mortality and expense risk charges, administrative fees, and contract fees. They are sold only by prospectus. Guarantees are based on the claims paying ability of the issuer. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.