- Protecting against sequence risk a decade before retirement means anticipating what could go wrong in the future.
- The SECURE Act allows you to continue contributing to your IRA at any age as long as you are still working.
- An annuity can also be a source of guaranteed income for your retirement years.
Retirement planning can be pretty challenging if you have not prepared ahead of time. It is important to assess your savings for retirement throughout but it becomes more critical during the retirement red zone. Ten years before or after retirement are regarded as a red zone by financial professionals. How your retirement portfolio behaves during this time determines your standard of living after you retire.
The good news is that you can prepare for a happy and smooth-sailing retirement by knowing about the challenges of this time period. Read through this post to learn how you can plan a secure future when you are just 10 years away from retirement.
Determine Your Risk Tolerance
When you are only a decade away from retirement, you’re probably looking to preserve your savings. During this time, you should especially plan for risks that might come your way if you retire in a bear market. Ten years away from retirement, your retirement portfolios should focus on high-quality stocks and investment bonds. This can help you generate more income for your golden years.
Protect against Sequence Risk
Retiring in a bear market is much more damaging than a downturn after a decade or so into retirement. Not only will it have a negative effect on how much you can withdraw, but it will also cause poor returns later in your retirement. Protecting against sequence risk a decade before retirement means anticipating what could go wrong in the future. You can protect against sequence risks before and after retirement in the following ways:
- Keep working as long as you can to save more for your retirement. Especially in your peak earning years, open a personal investment account and make the most of those earnings.
- Keep saving and investing even after you retire. Workers with an individual retirement account used to only be able to contribute up until age 70 1/2, but that age limit has now been removed. The SECURE Act allows you to continue contributing to your IRA at any age as long as you are still working.
- Diversify your portfolio by investing in high-quality, dividend-paying stocks. You can also invest in government bonds to expand your portfolio.
Although it’s true that during the years you’re saving for retirement if the market drops you may have time to rebuild your assets that are subject to market volatility but once you start withdrawing your money that’s when market volatility can have a big impact on how long your assets will last and how comfortable you can live at retirement.
One factor in how big an impact is your sequence of returns. That’s the year by year returns that your retirement assets continue to experience while you’re drawing on them for retirement income.
Here are a couple of examples. Say you’re retiring with a nest egg of a million dollars and you plan to withdraw $50,000 per year with a slight increase every year for inflation, meanwhile your remaining asset is still invested and still subject to the ups and downs of the market. Of course we can’t predict those ups and downs, your sequence of returns, but let’s say that in your 1st year of retirement you get a really good return (+27) and the next year you get another positive return, (+9) not as good as your 1st year but still positive. Then in year three, a little less (+7).
Then in year four, ouch! The market drops and you take a loss (-15). Now with compounding, you’ll average of good positive return over those 4 years (6%).
So let’s keep repeating that sequence of returns in the exact same order until your annual withdrawals have completely used up the asset. In this example that’s 38 years of income.
But, what would have happened if you had started withdrawing money in a down market? To find out, let’s take those same numbers and this time, we’ll reverse the order.
You still get the same compounded average but this time you’re starting out with a significant loss (-15), then an okay gain (+7), then a better gain (+9) and then, a really good gain (+27) and as before, we’ll keep repeating that sequence until your annual withdrawals have completely used up the asset.
But in this example it happens about 13 years sooner. You have lost 13 years of income and only because you got the same returns in a different order. Of course there’s no way to predict the order of your returns whether it will be an up market, a down market, or a flat market when you start your retirement.
However there are potential retirement income solutions like an annuity that can provide protection against losses due to market volatility. An annuity can also be a source of guaranteed income for your retirement years. Remember every additional year your assets last, could mean fewer financial worries and a level of comfort.
Benefit from Fixed Indexed Annuities (FIAs)
Fixed indexed annuities are a great solution for a lot of basic retirement concerns. They not only protect your hard-earned money but also provide a solution to the longevity risk. Here are the two major benefits of fixed indexed annuities:
- Secure Your Principle: The top benefit of the FIA is that even with market volatility, they do not lose value. This means that your savings will not be subject to market fluctuations. You will never lose your interest after it is included in your principle.
- Provide a Solution to the Longevity Risk: As the average human age is increasing, it means you have to provide for yourself during retirement for a much longer time. A Longevity Risk can stretch retirement income thin. Moreover, long-term care costs can devastate your savings for retirement. FIAs provide guaranteed lifetime income so you can never outlive your earnings.
Retirement planning is not something that you can put off for later, especially if you are just a decade away from retirement. Take professional help and invest in fixed indexed annuities to get rewarding outcomes of a secure future.
Jennifer Lang Financial Services is an Independent Agent and closely monitors the most competitive life insurance carrier rates to help you get the best possible fixed index annuity. Get in touch with us to get a financial plan design that works best for your specific circumstances.