Market Downturns Can Be Pension Breakers: How to Protect Yourself

The stock market was meant to grow your money. That’s a great and exciting concept if you’re in your 20s and 50s and have a lot of time to work, save and invest, recover from market dips and watch your money rise during a downturn. bull market walk.

However, it was not created to provide for a family or investor guaranteed lifetime income.

That’s an important difference that people nearing retirement should keep in mind as they work with a financial planner to create a diversified retirement income strategy.

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When people reach their fifties and sixties, it’s time to look at their money and risks differently. There is less time to recover from one down marketand when the paychecks stop, the money they have worked so long and hard to save and invest should last the rest of their lives.

Again, stocks don’t guarantee that, but it’s still the most popular option I see financial advisors using retirement income planning is largely dependent on stock performance. People are putting most of the money they’ve saved over decades into their stock market portfolio, hoping it will hold up.

Market volatility requires portfolio versatility

The stock market is volatile, perhaps more so than ever before. In 2022, the S&P 500 took a hit worst first half since 1970and fell 20.6% from January to June. It ended the tumultuous year discount of 19.4%.

Subsequently, most experts predicted that the market would perform poorly in 2023. They were wrong. The S&P had one great yearwith an increase of 24%. No one really knows how the market will perform, which means it’s risky to try to ‘time’ it.

Sure, at first glance, given the historical growth of the market over decades, putting most of your money there doesn’t seem like pushing so many of your chips to the center of the poker table. But in your 60s, 70s and beyond, the perspective changes, or should, when the sequence of return risks can become more damaging. That might make you reconsider how you allocate your ratio between stocks and safer funds when creating a retirement income plan. Sequence of return risk means that the sequence and timing of poor investment returns can have serious consequences for your retirement savings and their longevity.

Primarily for this reason, people would be wise to consider reducing their weight on equities in retirement while they have reliable sources of income that are not subject to the risk of compounding returns, such as: bank deposit certificates (CDs), fixed annuities, bondslife insurance, real estate (if you own investment properties) or real estate investment trusts (REITs), along with Social security and pensions.

I’m not saying that focusing primarily on the stock market for retirement income won’t work; there have been times when that was the case. But what really matters is how the stock market performs and when you get the money out. It is more important when you are in the early years of retirement than later in retirement.

For example, if someone needs $1,000 a month from their stock portfolio in a given year and they sell $12,000 worth of those assets, that’s a problem if the market is low at the time. That’s the worst thing you can do: sell stocks at a loss if you take the money out. Every time that happens, you realize a loss.

Some people will say they survived the war Great recession from 2007-2009 because the market recovered, but that was because they still had enough working years left. The difference with retirement is that you are no longer adding money to those accounts. Instead, you take money out and it takes longer for your portfolio to recover.

The story of Steve and Bill

Taking money out of the market at different times can lead to dramatically different outcomes. The following story illustrates the consequences the first years of retirement can have. Imagine two brothers, Steve and Bill. Each saved $500,000 for retirement. They decided to withdraw the same amount from their stock portfolio each year after retirement: $30,000. The Key Difference: Steve retired in 2010 as stocks entered an epic bull market. Meanwhile, Bill retired in 2000. Ten years after Steve’s retirement, his balance had grown from $500,000 to $874,494.

But Bill’s timing wasn’t so good. When he retired and started withdrawing money, the market fell for the first three years (in 2000, 2001 and 2002), so by 2009 his $500,000 had shrunk to $96,318. It created the effect of a snowball rolling downhill, and he couldn’t push it back up the hill.

Graphic shows the order of return risk.

Note: These hypothetical examples are for illustrative purposes only. Source: finance.yahoo.com.

(Image credit: Courtesy of Chris Morrison)

Retiring early can have a huge potential effect on the longevity of your money. A big market downturn causes some people to tap their portfolios as they lose value, leaving them with fewer assets and fewer opportunities to bounce back during a recovery.

If you go to bed every night heavily invested in stocks and don’t know whether you’ll end up like the first brother or the second brother, perhaps it would be appropriate to be open to other options that aren’t subject to sequence risk of return.

Some financial companies use Monte Carlo simulation models for this purpose stress-test their clients’ plans. A client’s portfolio is uploaded into a computer software program that runs through many market scenarios, and a professional-looking report comes out. Let’s say that report, like someone I know, predicted that the chance of success was high: 87%. That sounds pretty safe, but remember that this is someone’s retirement money we’re talking about, and it’s necessary to last until retirement.

I tell this story in workshops and seminars: In a few weeks I’ll be boarding a plane. Let’s say the pilot gets on the speaker, gives us the estimated flight time, and says the weather is good, but there may be some light turbulence, and that we have an 87% chance of getting there alive.

At that point, I’m going to unfasten my seat belt, get off the plane, and find another airline.

It may all be going smoothly in the market, but what if your pension collapses a few years later and most of your money is tied up in it?

Consider your less risky options. Interview multiple advisors if one or more advisors tell you that you should mainly stay in stocks. Don’t be too vulnerable to returns sequence risks.

Dan Dunkin contributed to this article.

The Kiplinger appearances were obtained through a PR program. The columnist received assistance from a PR firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Insurance products are offered through the insurance company The Legacy Retirement Group. The Legacy Retirement Group is also an investment advisory practice offering products and services through AE Wealth Management, LLC (AEWM), a registered investment advisor. AEWM does not offer insurance products. The 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 as a recommendation to adopt any investment or financial strategy. Investment and financial decisions should always be made based on your specific financial needs, objectives, time horizon and risk tolerance. Consult a professional about your personal situation. 2611061 – 24/09

This article was written by and represents the opinions of our contributing advisor, not the Kiplinger editorial staff. You can consult the details of advisors at SEC or with FINRA.