In 2008, the stock market tanked in dramatic fashion, with the Dow declining by more than 50%. This was the biggest drop since the Great Depression of 1929. For those approaching retirement, it was a terrifying time as many lost thousands (some even losing hundreds of thousands), and their nest eggs literally vanished. Most were left with just two choices: keep working or retire with a lifestyle that was significantly downsized. Time was not on their sides, however, so full recovery wasn’t possible for most.
The last few years leading up to retirement are the worst to experience significant market loss, which is one of the main reasons financial professionals talk so much about volatility. There’s no guarantee when the next drop will be. Pulling back from risk as you get older is a great strategy to protect from a significant dip. Another option is to utilize a distribution strategy that can help curb loss potential as well.
According to a recent article from Nasdaq, one way to distribute retirement income is by using an actuarial-designed product, like an annuity. Here’s an example of how this could work:
A 70-year-old male has a portfolio worth $500,000 that he’s expecting to generate about 3%, or $15,000 a year with. Unfortunately, after a serious market downturn, his portfolio is reduced to $300,000. At the same 3% withdrawal rate, his annual income would drop significantly. In order to get to the $15,000 per year he had planned on, he would need to invest aggressively, putting him at more risk of losing even more money.
If instead, this same man had purchased an immediate annuity for $209,375, he could generate the $15,000 per year in lifetime income. This annuity would guarantee his a 7.2% return and help reduce any fears of running out of money in retirement.
Using an annuity to distribute income allows investors to avoid market losses, offering confidence that only a regular income stream can provide. It is important to acknowledge that annuities do come with surrender charges that make them a non-liquid asset. They also have fees and can limit your ability to participate in market gains. However, some retirees prefer the comfort of steady, guaranteed income that is offered by annuities.
Most traditional immediate annuities are pretty straightforward, but you’ll definitely want to work with a trusted financial professional when considering adding an annuity to your portfolio. For more information, visit our website at annuityfyi.com.
Written by Rachel Summit