“Going into 2021, retirees should understand that investment-only retirement income plans are not as efficient and profitable as integrated plans that include transfer of risk through life insurance and income annuities.” Jerry Yu
For the first time in a while, Americans are less concerned about how the presidential race outcome will shape the future economy than they are about other factors. The latest survey from financial website Bankrate indicates that looming changes in the political landscape are of much less concern to those surveyed than is the ongoing COVID-19 pandemic.
Around 44% of respondents said they believe that the novel Coronavirus will do the most significant economic damage over the next six months. Only 34% were concerned that the November vote will have a greater impact. Both groups have in common the belief that tough times are ahead for the US. As a result, many retirees and pre-retirees are bracing themselves for a rough landing, spending less, and saving more. While this is logical, spending less is bound to have a hard impact on a consumer-driven economy.
So, what should retirees and those within 5-7 years of retiring do to ride out any economic upheaval safely?
Understand where you are in your economic life. The economic impact of a downturn varies greatly depending on where you are in your money lifecycle. If you are in a particular place when a market crash occurs, such as a few years from retirement or already retired, you will have to work much harder to recover from losses. For example, say you own a stock priced at $20 and that stock loses 50% of its value. It is now worth only $10. You’d have to have a 100% gain for that equity to make it back to its original pricing. How likely is that?
Stop using “accumulation” phase strategies when you retire. Those who are already retired have an uphill battle even in good times. Since most are no longer working and contributing to retirement accounts and employer plans, withdrawing money is costly, especially in a bear market. There is a temptation to try and stretch one’s savings by chasing after returns and adding riskier investments to the portfolio. Some retirees cling to the same “dollar-cost” averaging matrix they used during their working years, often with disastrous results. There is a genuine possibility that if you depend on your investments for income and are forced to keep making withdrawals due to a market downturn, you will run out of money. Suppose you cling to an accumulation mindset. In that case, you need to educate yourself more on safe money and income strategies, which vary significantly from those used by accumulation-phase planners.
Lose your “set it and forget it” mindset and re-balance your portfolio. There’s been some talk lately about a “Great Reset” precipitated by the pandemic. The degree of permanency of societal and monetary changes is debatable, but some positive shifts are worth noting. One of them is that more and more seniors are ditching “set it and forget it” in favor of a more hands-on approach to personal finance. These retirees are consulting their income and retirement planners more frequently to ensure that their balanced portfolio is age and situation-appropriate, instead of cross their fingers and hoping for the best. It is critical that your assets are correctly structured and protected with a holistic, dynamic risk management plan that offers real diversification, including “safe money” vehicles.
Build a cornerstone with a guaranteed lifetime income. In my opinion, one of the absolute best ways to create a sounder, less stressful retirement is to tap into the unique benefits offered by safe money products. For example, annuities provide a tax-advantaged way to protect your principle, provide guaranteed, predictable income, and provide a legacy for loved ones. Permanent life insurance can also do a great job of helping you experience some growth in retirement while potentially blunting the effects of risk on your wealth.
Have a written road map. Diversification is a concept pounded into peoples’ heads so much that many believe diversification is a magic money potion that guarantees they won’t experience retirement losses. Diversification, however, is only a method to help you manage risk. Diversification won’t eliminate risk, nor will it ensure prosperity. For this reason, you need a well-thought-out, actively managed, and regularly-reviewed financial blueprint.
Partner with a trusted advisor who is not only an expert in the best ways to spend your money in retirement but who also takes time to discover your risk tolerance, money habits, and goals. Retirement planning is not a one-size-fits-all proposition. Post-career planning must take into account your unique and constantly-evolving life situations to be effective.
Seek the guidance of a fiduciary. You can lessen your anxiety about money by partnering with a financial fiduciary. A fiduciary is someone who is obligated to seek out and recommend only those solutions which best fit your needs and goals. Fiduciary advisors are legally bound to always act in your best interests. When looking for someone to help you avoid running out of money in retirement, be sure to ask candidates if they are fiduciaries.
Regardless of what happens as 2020 comes to a close, strategic planning and preparation can go a long way in making the transition to 2021 smoother. There will be challenging situations ahead, but those in or nearing retirements can create more certainty when they are pro-active, rather than reactive.