Nothing lasts forever. That’s especially true when it comes to financial markets. Many investors make the mistake of thinking the current state of the markets will last forever. That can be a problem regardless of whether markets are trending up or down. Both bull markets and bear markets inevitably end at some point.
During your working years, you may be able to tolerate the fluctuations and volatility of the market. After all, your retirement may be years or decades in the future, so a brief downturn may not be catastrophic.
Retirement, however, could be a different story. If you’re like many retirees, you’ll rely on some level of income in the form of distributions from your savings. You may take withdrawals from a 401(k) plan or an IRA. Or you might rely on interest or dividend income from investments. Either way, a downturn in the market could threaten your retirement assets and your ability to generate income.
Fortunately, there are steps you can take to minimize the impact of a market downturn. Below are three such planning strategies. If you haven’t thought about how a downturn could impact your retirement income, now may be the time to do so.
Many retirement plans include a dangerous assumption. They assume a constant withdrawal amount throughout retirement. The withdrawal amount may seem reasonable at the beginning of your retirement, but it could become excessive if your savings balance declines over time. If the market endures a prolonged downturn and you take the same withdrawal amount, you could deplete your assets.
A better approach might be to take a flat percentage of your ending balance from the previous year. That way, your withdrawal changes along with market returns and your asset balances. Yes, that might mean your income goes down in some years, but it could also increase in others. However, this approach minimizes the risk that your withdrawals will prematurely deplete your savings.
The whole point of retirement is to stop working, so it may seem illogical to consider part-time work as part of your retirement strategy. However, even a modest amount of side income could be enough to offset any threat to your income from market losses.
You also may be able to generate income without working a traditional job. For example, if you have special expertise from your career, you may be able to use that knowledge to work part time as a consultant or teacher. You could rent out extra rooms in your home. There are a number of ways to generate supplemental income and still maintain a flexible retirement schedule.
Finally, you may want to consider using an annuity to convert a portion of your income into a guaranteed stream of income. One strategy is to use an immediate annuity, which offers a stream of income that’s guaranteed for life no matter how the markets perform.
Another option is a deferred annuity with a guaranteed* minimum income benefit. Your money has the ability to grow through either interest payments or market returns. However, you can also take withdrawals. As long as you stay within a certain withdrawal limit, your income is guaranteed for life regardless of market performance.
Ready to develop your income strategy? Let’s talk about it. Contact us today at Benefit Resource Partners. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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17106 – 2017/10/30