Is Your Retirement Plan Protected from Market Risk?

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The markets cause a lot of financial stress for many of us. We work hard to save for retirement, choosing the investments that match our risk level and will hopefully grow our investment into something we can live on in the future. But market risk is a real thing and something we have limited control over.

Simply put, market risk is the risk of financial loss resulting from market movements. The markets are continuously fluctuating, and while we shouldn’t make emotional decisions based on daily ups and downs, we can evaluate our investment strategy with market risk in mind to maximize our future gains. Most of us believe that if we sit tight and trust our plan, our investments will grow. This is true, but the amount of growth varies widely.

Market Risk and Retirement Income Planning

In a comprehensive research study, Wade Pfau, a prolific retirement researcher, demonstrated the impact of market risk on retirement income planning. He analyzed 151 hypothetical portfolios that each earned market returns. The only variation between the portfolios was the 30-year period measured. The final result was that the amount accumulated at retirement differed by quite a bit! The average accumulation was ten times salary, but outcomes ranged from 3 to 27 times salary depending upon the 30-year period tested.

What he found was that the final years of retirement accumulation, when the value of the portfolio was at its peak, had the most impact on the concluding value at retirement. If your retirement date falls near the start of a bear market, your nest egg may be depleted quicker than if your timing was different. What are your options? How can you minimize risk with something that isn’t completely in your control?

Evaluate Your Strategy

One way to acknowledge this obstacle to your retirement income planning is to adhere to a divided investment strategy where investments and products with minimal market risk are chosen to meet your basic needs in retirement. Then, the second part of this plan is to invest in products with more risk to address discretionary and unexpected expenses and legacy goals.

This method allows your necessary expenses to be met while still allowing for more growth. Some investment options you can look at are Treasury or low-risk government bonds, annuity income, or possibly deferring Social Security benefits. This strategy allows you to have peace of mind that you will be taken care of in retirement, despite market volatility.

Consider Timing

Another way to reduce market risk is to have the lowest exposure to equities in the years nearest retirement age, where a sequence of negative returns can have a devastating impact on your portfolio. As you near retirement age, your personal investment risk level will decrease, so make sure that you rebalance your portfolio so that it is in line with your life situation.

Reduce Your Withdrawals

When you are choosing your withdrawal rate, consider market conditions and lower withdrawals in bad years to protect your savings. You may need to do this for just a short amount of time, cutting back on expenses to ride out the market downfall.

Purchase Downside Protection

Downside protection limits or reduces losses if an investment declines. It cushions your loss so that the impact on your portfolio isn’t as disastrous. This protection can be in the form of hedging, or a put option. Put options guarantee that you can sell your stock at a guaranteed amount for a limited period of time.

A stop-loss order is another choice that instructs your broker to sell an investment if the price falls below a specified amount. Also, research derivatives and income riders in deferred annuities as a way to protect your assets. Talk to your advisor about the pros and cons of downside protection and whether they would work for you.

Market risk is real and can make a significant difference in your retirement planning. Reach out to me to evaluate your portfolio and find ways to minimize this threat. To learn more, download our free report, 12 Keys to a Successful Retirement Strategy today. Call my office at 770.249.7424 or email me today at beau@richlifeadvisors.com.


About Beau Henderson

Beau Henderson is a financial advisor, author, coach, radio personality, and CEO of RichLife Advisors. He has helped over 3,000 clients to not just improve their relationship with money, but to live the life of their dreams.

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RichLife Advisors, LLC provides investment advisory services through Fiduciary Capital, Inc. Beau Henderson is a licensed life insurance professional in GA, SC, TX, CA, IL, KY, OH, MI, PA, MD, and NY.

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