Are You Prepared to Weather an Income Storm in Retirement?
You can’t predict future market downturns, but you can be better prepared to weather them in retirement. As a retirement saver, you may be familiar with how market volatility impacts your retirement accounts today.
However, once you retire and begin drawing income from your retirement accounts, market volatility can pose a greater risk, potentially shortening the longevity of your retirement assets.
Because of this risk, it’s crucial to have alternate sources of retirement income that you can rely on during market downturns. The following example illustrates the advantages of planning ahead.
What if You Retired in 2000? *
Suppose that you retired in 2000 with $1,000,000 of your retirement savings invested in a non-qualified account that will have the same returns as the S&P 500 Index 1 from 2000 through 2019. The following chart shows the returns over this 20-year period. For purposes of this example, we will ignore the impact of investment expenses and taxes, which you would need to pay if this were anactual investment.
Source: MassMutual
Annual Retirement Income — $50,000
What if you were to withdraw $50,000 from the account at the beginning of each year for 20 years? The following chart shows the year-by-year account value through 2019.
Annual Retirement Income — $50,000
What if you were to withdraw $50,000 from the account at the beginning of each year for 20 years? The following chart shows the year-by-year account value through 2019.
As you can see, the two big market downturns had a long-term impact on the account. Following both declines, the account was never able to fully recover its value. So, after taking $1,000,000 of income out of the account over the 20 years, you are left with about $271,000 at the end of 2019.
Improving the Outcome
Let’s look at the same situation, but with a modified income strategy. Assume that you will take the same $50,000 of income out of the account at the start of each year, unless the year follows a substantial negative return. In those years, you will skip the withdrawal and assume that you got the same income from an alternate source, one that is not directly impacted by market returns. The following chart illustrates the results using this strategy.
Summary
The following charts compare the results under each income scenario:
By skipping account withdrawals in four of the twenty years, you took $200,000 (20%) less out of your account. However, the ending account balance increased by over $865,000, saving you over $665,000 in lost earnings.
Dependable Income During Market Downturns
In order to take advantage of the long-term growth potential that equities and other higher-risk assets offer during retirement, you need to be in a position to weather the economic downturns that impact them over time. This means having dependable sources of income that are not directly impacted by short-term disruptions in the financial markets.
Bank products such as certificates of deposit and savings accounts provide reliable value. Investments such as money market funds and short term government bond funds are also good options. These and other near-cash investments should be part of every retiree’s safe income sources. However, while they are low-risk, they also offer low returns.
Another Option to Consider
Another option to consider is participating permanent-whole life insurance. In addition to providing permanent life insurance protection, whole life accumulates guaranteed cash value that increases each year on a tax-deferred basis and never decreases in value due to market conditions. So, it can be a reliable alternate source of funds during financial downturns.2 Whole life insurance also offers some valuable income tax advantages. Overall, it can play an important role in your retirement income strategy.
Connect with us to learn more about your retirement risks and possible solutions. Let us help you protect and secure your future, today.
Another Option to Consider
Another option to consider is participating permanent-whole life insurance. In addition to providing permanent life insurance protection, whole life accumulates guaranteed cash value that increases each year on a tax-deferred basis and never decreases in value due to market conditions. So, it can be a reliable alternate source of funds during financial downturns.2 Whole life insurance also offers some valuable income tax advantages. Overall, it can play an important role in your retirement income strategy.
Connect with us to learn more about your retirement risks and possible solutions. Let us help you protect and secure your future, today.
*Massachusetts Mutual Life Insurance Company (MassMutual), Reducing The Impact of Market Downturns, 2023
IMPORTANT DISCLOSURES
1. The S&P 500 Index is a list of securities frequently used as a measure of U.S. stock market performance. These investment results and account values are hypothetical. They do not reflect fees and charges associated with an actual investment. Had fees and charges been reflected, the values would be lower. You cannot invest directly in an index. Past performance does not guarantee future results.
2. Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty if the policyowner is under age 59½.
Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse and may result in a tax liability if the policy terminates before the death of the insured.
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The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value for loans in the policy’s early years.
The information provided is not written or intended as specific tax or legal advice. FundaDream, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
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