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Recent Market Volatility - A Sign of Things Ahead?

 recent market volatility sign of things to come

There is no doubt that individual investors were hit hard by the financial crisis. Several months of double-digit negative stock market returns almost halved investor portfolio values from April 2008 to March 2009, according to Netspar (the Network for Studies on Pension, Aging, and Retirement).

If you think losing a significant proportion of your nest egg sounds like a life event that would color future money choices, you might be surprised by a November 2017 survey.

When Hartford Funds asked people about the lasting impact of the market meltdown and the ensuing “Great Recession,” 40 percent of them said the financial crisis of 2008 has had no lasting impact on their life. A higher number though, 42 percent, said they now avoid the market. And 46 percent of respondents said they have adjusted their spending and savings habits in the aftermath. 

Interestingly, people have made investment and lifestyle changes in the wake of that momentous market downturn—including avoiding the market all together—yet the perception of its impact has faded for many.

"Americans are forgetting what it felt like during those challenging times of 2008-11," according to a Hartford Funds executive.

Evaluating Market Rumblings

Billionaire Carl Icahn took to the airwaves during last week’s first market slide. He told CNBC that he believes there are too many exotic, leveraged products for investors to trade, and that “one day these securities are going to blow up the market.”

The market is a "casino on steroids" with all these exchange-traded funds and exchange-traded notes, he said.

“These funds, especially the leveraged ones, are the ‘fault lines’ that will eventually lead to an earthquake on Wall Street. These are just the beginnings of a rumbling." He added that he didn’t think this was the beginning of the end and that the market would likely bounce back.

With all this talk of market downturns versus market recovery, it can be a confusing time for a particular investor: the person trying to time their retirement strategy to result in an income-rich retirement and avoid a post-down-market, income-poor one.

What are Concerned Americans to Do?

The time to implement a forward-thinking retirement income plan is when you have strongly valued assets and ample savings. If you wait until some point in the future and major volatility drives investment portfolios lower, there may be the prospect of losses in two areas: both money and the time to recover from that loss.

This is best exemplified by one of the many potential risks facing those trying to plan for a secure retirement: Sequence of returns risk.

This is defined as the risk of receiving lower or potentially negative returns by beginning to take your retirement income withdrawals at the bottom of a bear market.  While you would see the prices of your portfolio holdings rise when the market recovers, you would also see a reduction in your overall portfolio growth. It's because of how much had to be withdrawn in early retirement when prices were down.

By contrast, someone who retires when stock prices are high (and takes early withdrawals of fewer equities because they are worth more) will likely have a higher overall portfolio return. This is because the high-stock-prices retiree has more equities left in that portfolio to earn returns later in retirement.

How to Avoid Sequence of Returns Risk

According to Wade Pfau, Ph.D., CFA, Director of Retirement Research at RetirementResearcher.com and a leading retirement risks authority, “attempting to sustain a fixed living standard using distributions from a portfolio of volatile assets is an inefficient retirement income strategy.”

One of the strategies Pfau champions to combat sequence-of-returns risk is income annuities to build a "lifetime income floor." A real-world example of this is having guaranteed annuity paychecks, in conjunction with Social Security and guaranteed income, to cover your monthly living expenses, or fixed-income needs.

You take care of your basic living expenses with what's essentially a guaranteed "floor" of income for life.

A Tax-Advantaged “Buffer Strategy”

Another strategy Pfau suggests is to have other assets available outside the financial portfolio to draw from after a market downturn, when the portfolio is otherwise down. He calls these “buffer assets.”

Rather than holding enough cash to fund two to three years of retirement spending, which could be a drag on a portfolio and miss out on any potential gain, he suggests using permanent life insurance policies. A cash value life insurance policy can be used to generate buffer income from the accumulated cash value. In turn, policy loans can be used to generate income which can be received on a tax-free basis.

Trading Potential Market Risk for Retirement Rewards

Start exploring well-thought-out retirement income strategies now so that you aren’t leaving your financial future to chance.

Consider these additional findings from that Hartford Fund survey: 26 percent of respondents planned to work longer than they had hoped as a result of financial hardship related to the recession, and 25 percent planned to change jobs or take on additional jobs.

Don’t find yourself putting your long-dreamed-of retirement on hold. Avoid the danger of sequence of returns risk by getting personal guidance on your unique situation.

Financial professionals can help you begin with a no-obligation goal-discovery appointment. Use our "Find a Financial Professional" section to connect with someone directly. Should you need a personal referral or have questions, call us at 877.476.9723.

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