What Can You Do to Keep Your Retirement Plan from Failing?
If you really think about it, there is risk in almost everything we do. As journalist and economist Allison Schrager has noted, people often manage risk in their lives and careers in surprising ways.
The description of a book that she wrote on risk management says it well: “Whether we realize it or not, we all take risks large and small every day. Even the most cautious among us cannot opt out–the question is always which risks to take, not whether to take them at all.”
Now, for retirees, one of the major risks to financial security is sequence risk. What is that?
It’s the probability of having losses early in retirement or just before you retire. Financial pundits fondly call this period the “retirement red zone.”
Even a 15% loss can throw a retirement plan off track, especially if you are already taking money from your accounts for income. Then it simply compounds the losses.
It’s a challenging time for retirees, who now are taking a triple-hit. Never-before-seen market swings are reducing the value of their portfolios. The novel coronavirus pandemic is shutting down many workplaces, which means that workers don’t have regular income to save.
Many retirees who are still working were likewise affected. And low interest rates continue to be unfriendly to retirees with fixed-interest holdings.
Meanwhile, Michael Finke, professor of wealth management at The American College of Financial Services, points out another area to keep an eye on: how the pandemic is affecting the probability of success of our retirement plans.
Your Measure for Retirement Success Matters
In an article in Advisor Perspectives, Finke talks about how the heavy sequence risk of this unexpected event is so relevant:
“The market’s response to the coronavirus had a stark effect on portfolio values. Less apparent, but more important, was how it reduced the probability that your financial plans will succeed in reaching clients’ financial goals…”
“A retiree holding a 50/50 portfolio with an assumption of 8% arithmetic returns on stocks and 4% bond returns (with 1% asset management and investment expenses) has a 94% chance of successfully following a 3% rule withdrawal strategy over 30 years. In other words, there is a 94% probability that they can spend $30,000 at age 65 and then increase this spending amount by a 2% rate of inflation annually through the age of 95.”
“But, after the first day of retirement, this probability is no longer 94%. The retiree realizes a daily random return that changes the probability of success. Returns above market expectations will increase the probability of success. Returns below expectations will reduce the probability that the client will successfully be able to maintain their desired lifestyle.”
As Bob Powell points out in a commentary, this success rate is only relevant “the first day of retirement.” It isn’t a static number where if someone stays the course, things will be magically guaranteed to get back on track.
What Are the Takeaways?
If anything, these times remind us of a couple of things. First, an unexpected event like the coronavirus pandemic can knock an existing plan off-balance. They may require big adjustments that didn’t seem necessary beforehand.
Secondly, this success rate doesn’t necessarily predict future events that can also bring the same or less disruption. Either way, retirement investors should understand that their plan is just as much a safety net as a roadmap.
A well-crafted plan requires frequent checkups, and it can help you make needed adjustments for improving your chance of success.
What Can I Do to Improve My Chances of Retirement Success?
So, what does Finke suggest that retirement investors can do for their own plans?
1. Have more frequent check-ins with their advisor, revisiting their goals, strategy, and progress. Finke suggests doing so on a quarterly basis. This gives you more time and room to anticipate life changes as well as adapt.
You will be able to more closely monitor risk. And what does risk mean in this case? According to Finke, it’s the situation “that if you get unlucky, there’s going to be a lower probability that you’re actually going to be able to successfully achieve your retirement lifestyle.”
2. For retirement income, cover fixed expenses with guaranteed income sources: annuities, pension income, and Social Security benefits. The variable expenses should be tied to holdings with less predictability: stocks, mutual funds, ETFs, and so on.
If you are wanting guaranteed income, you might look at fixed index annuities. Not only do they pay guaranteed income, they also guarantee the principal that is put into them.
What’s more, for savers wanting growth, they earn interest based on an underlying index, such as the S&P 500 price index. When the index goes up, they earn interest based on a portion of the growth. But when the index goes down, the money is protected against index losses.
The Value of Financial Guidance Can’t Be Understated
Regardless of where you choose to put your money, it’s important to have a solid relationship with an experienced financial professional.
Your advisor can help you stay on track during turbulent market periods such as the one we are in now.
Not only that, a good advisor will more than likely have some ideas about what you can do to maintain your retirement plan. There may be some possibilities that you haven’t thought of yourself.
Staying the Retirement Course
Even though things happening now may be occupying the majority of your attention, don’t lose sight of the future.
The losses that you likely have sustained may make it hard for you to stay invested. But moving all of your money into guaranteed instruments, such as cash or Treasury securities, may not be your best interest in the long run.
This is where a financial advisor can help you to see the bigger picture rather than just your present circumstances.
Creating Predictable Income
Ideally, you should be able to pay for your living expenses in retirement from sources of guaranteed income. Those include Social Security and your pension (if you have one).
But for many retirees and pre-retirees, this isn’t a viable possibility. For those who can’t do this, many advisors recommend devoting an appropriate portion of their savings to income-producing instruments that will make up the shortfall.
Your advisor can also help you come up with other strategies to guard against inflation and manage other risks.
Time Is of the Essence
Consult with your financial advisor as soon as possible if you think the pandemic may have disrupted your retirement plan. They are there to serve you. And they will do everything within their power to keep your retirement plan on track.
What if you don’t have a financial professional to guide you? Or perhaps you want another opinion of your existing strategy. No worries, help is just a click away at SafeMoney.com.
Use our “Find a Financial Professional” section to connect with someone directly. You can request an appointment with an agent or an advisor to discuss your goals, situation, and concerns. Should you need a personal referral, call us at 877.476.9723.