The stock market was created to make more money. This is for people who have plenty of time between their 20s and 50s to work, save, invest, recover from market declines, and watch their money soar during a bull market. is a great and exciting concept.
However, it was not created to guarantee a lifetime income to families and investors.
This is an important distinction for those nearing retirement to consider when working with a financial planner to develop a retirement income diversification strategy.
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As people reach their 50s and 60s, there comes a time when the way they view money and risk changes. You only have a limited amount of time to recover from a market downturn, and once your paycheck stops, the money you’ve worked hard to save and invest will need to last for the rest of your life.
Again, stocks don’t guarantee that, but the most popular options I see financial advisors using when it comes to retirement income planning rely primarily on stock performance. . People put most of the money they’ve saved over decades of work into stock market portfolios and expect it to last.
Market volatility requires portfolio diversity
The stock market is perhaps more volatile than ever. In 2022, the S&P 500 had its worst first half since 1970, dropping 20.6% from January to June. The stock ended a turbulent year down 19.4%.
Then, in 2023, most experts predicted a decline in market performance. they were wrong. The S&P has had a great year, down 24%. No one knows how the market will move. In other words, trying to “time” the market is dangerous.
Admittedly, at first glance, considering the growth of the market over the past decade or so, putting most of your money there might not seem like pushing more chips into the middle of the poker table. . But in your 60s, 70s, and beyond, your view can change, or you should, because the set of return risks can become even more detrimental. As a result, you may need to reconsider how you allocate the ratio between stocks and safer funds when planning your retirement income. Return sequence risk means that the order and timing of declines in investment returns can have a significant impact on retirement savings and their duration.
Primarily for that reason, people prefer to reduce their weight in stocks in retirement while having a reliable source of income that is not subject to a range of return risks, such as bank certificates of deposit (CDs), fixed annuities, and bonds. It would be wise to consider. This includes life insurance, real estate (if you own investment property) or real estate investment trusts (REITs), as well as Social Security and pensions.
I’m not saying that focusing your retirement income primarily on the stock market won’t work. There were times when that happened. But how the stock market moves and when you withdraw your money is important and really important. Early retirement is more important than post-retirement.
For example, if someone needed $1,000 a month from their stock portfolio in a given year and sold $12,000 worth of those assets, it would be a problem if the market was down at the time. That’s the worst thing you should not do – sell stocks at a loss when withdrawing money. Every time that happens, you will realize a loss.
Some people may say they survived the Great Recession of 2007-2009 because the market recovered, but that’s because they had plenty of working years left. The difference after you retire is that you no longer add money to these accounts. Instead, you will withdraw your funds and it will take longer for your portfolio to recover.
Steve and Bill’s story
Withdrawing funds from the market at different times can produce dramatically different results. The following story illustrates how the years following retirement can be affected. Imagine two brothers, Steve and Bill. Each had saved $500,000 for retirement. Each decides to withdraw the same amount, or $30,000, from their stock portfolio each year of retirement. Key Difference: Steve retired in 2010, when stocks were in the middle of an epic bull market. Meanwhile, Bill retired in 2000. Ten years after Steve retires, his balance has increased from $500,000 to $874,494.
But Bill’s timing wasn’t so good. When he retired and began withdrawing funds, the market declined in the first three years (2000, 2001, and 2002), so by 2009 his $500,000 had been reduced to $96,318. It created the effect of a snowball rolling down a hill, and he was unable to push it back up the hill.
Note: These hypothetical examples are provided for illustrative purposes only. Source: finance.yahoo.com.
(Image credit: Provided by Chris Morrison)
Incurring significant market losses early in retirement can have a significant impact on how long your money lasts. Significant market declines cause some people to leverage their portfolios while they are losing value, resulting in diminished assets and less ability to bounce back during a recovery.
If you go to bed every night investing a lot of money in stocks and you don’t know if you’re going to end up like your eldest brother or your next brother, Maybe you should be open to options. Affects a range of return risks.
don’t fly blind
Some financial companies use Monte Carlo simulation models to stress test their customers’ plans. Clients upload their portfolios to a computer software program that runs many market scenarios and outputs professional reports. Let’s say the report predicted an 87% chance of success, as it did for someone I know. That seems pretty safe, but remember, this is someone’s retirement fund we’re talking about and it needs to last until retirement.
I give this talk at workshops and seminars. I’m planning on boarding a plane in a few weeks. Suppose the pilot gets on the loudspeaker, announces the estimated flight time, says that the weather is good but there may be some mild turbulence, and that there is an 87% chance of getting there alive.
At that point, I’m going to take off my seatbelt, get off the plane, and look for another airline.
Things may go well in the market, but what happens if the market crashes a few years after you retire and most of your money is locked up in the market?
Consider less risky options. If more than one advisor is primarily telling you to stay in stocks, interview multiple advisors. Don’t be too vulnerable to a series of return risks.
Dan Dunkin contributed to this article.
The Kiplinger appearance was obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this article for publication on Kiplinger.com. No compensation was made to Mr. Kiplinger.
Insurance products are offered through our insurance business, The Legacy Retirement Group. Legacy Retirement Group is also an investment advisory business offering products and services through AE Wealth Management, LLC (AEWM), a registered investment advisory firm. AEWM does not offer insurance products. Insurance products offered by The Legacy Retirement Group are not subject to investment advisor requirements. This article is for informational purposes only and is not intended as investment advice or a recommendation to undertake any investment or financial strategy. Investment and financial decisions should always be based on your specific financial needs, objectives, goals, time horizon, and risk tolerance. Please consult a professional regarding your situation. 2611061 – 9/24
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