The final week of February was a brutal one for the stock market, as fears of a worldwide coronavirus outbreak sparked a massive sell-off. Now you'll often hear that you don't have to worry about losing money in a stock market downturn as long as you sit tight and leave your investments alone until things stabilize. 

That's all fine and dandy, but what if you're right on the cusp of retirement or already retired and therefore don't have that luxury? Are your golden years doomed?

A recently conducted study discovered that over 47% of baby-boomers approaching retirement within the next 10 years have too much risk in their portfolios.  Imagine having your retirement accounts wiped out overnight....the thought of postponing retirement could seem like one long nightmare.

The thing most people don't realize is when you lose money in the market due to a recession, it takes a long time just to get back to even.  A study by Brigham Young University showed that after experiencing a 35% loss in the market, there's only a 61.1% probability that you will get back to even in the next 5 year period. 

To put this in perspective, delaying retirement by 5 or even 10 years could become a reality if you're retirement plan isn't hurricane proof.  If you're already retired, the chance of going bust dramatically increases.

With just one year out to the next presidential election, CNBC Invest in You and Survey Monkey polled 2,776 adults about the state of their finances, opinions about candidates and how they might affect the economy. The survey, with a margin of error of plus or minus 3 percentage points, was conducted Oct. 20 through Oct. 25.

More than two-thirds of respondents said they believe the economy is going to weaken going into 2020. People who identify themselves as Republican are far less likely to agree, with 46% saying a recession is coming, compared with 84% of Democrats.

Is Your Retirement Plan Prepared to Weather Any Market Storm?

The first step in determining whether or not your retirement plan is hurricane proof, is to complete a risk analysis with a fiduciary advisor.

Identifying how much risk your current portfolio has will expose areas of opportunity to strengthen your plan.

Income Gap Analysis

Next, you should have a retirement income gap analysis performed.  This will show you how much guaranteed lifetime income you need in retirement to cover basic living essentials in retirement.  Research shows that having at least your basic costs of livinging in retirement covered by a combination of guaranteed lifetime income sources such as social security, pensions and lifetime income annuities is mathematically proven to improve retirement outcomes and help weather market storms.

Having a Recession Proof Plan

During times of economic uncertainty, many investors may convert their retirement assets to cash, transfer to CDs or convert to other cash equivalents.  While doing this may be protecting your assets from any loss, you're also sacrificing any potential growth that could be had.  Is there a better way? Yes. It’s called having a plan. Businesses have them to manage their cash flow, inventory, expenses and such, and they use them to help navigate the constantly changing economic environments. Retirees and near-retirees need a plan, too. A plan keeps you from making quick and all-too-often misguided emotional decisions that may derail your retirement.

The type of plan you need isn’t one that tries to predict recessions. That’s akin to roulette. It either works, or it doesn’t. Instead, the type of plan you need is one that acknowledges that recessions will come along during your pre-retirement years or during retirement. Rather than the constant guessing game of trying to avoid them, you make an action plan, so you know how to power right through.  This plan is called your Retirement Preservation Account.

How and When to Implement Your Retirement Preservation Account

In designing our Retirement Preservation Account strategy, our #1 priority was that it provided a recession proof strategy to secure the #1 asset of retirement, and that is your income.  This sensible type of plan models out your income and expenses over varying market conditions and provides indicators on when you may need to reduce spending or adjust your income. You know ahead of time the specific actions you will take if your financial plan metrics fall below predefined threshold amounts.

With a recession-proof plan, it doesn’t mean the recession won’t affect you. It means you know what to do when it comes along.  With your income base being stabilized with guarantees for life, you can navigate a recession much more confidently.

When to Implement:  Within 10 years of retirement is optimal but implementing it even after you've retired is still recommended.

What is a Retirement Preservation Account?

A Retirement Preservation Account is an account which contracts with Top Rated Insurance Companies to provide guarantees on your principal and retirement income.  In exchange for a lump sum of money or premium, the insurance company will give you safe growth options using indexing strategies with indexes such as the S&P 500, allowing your money to participate in a portion of the gains of the assigned index, without experiencing any of the losses.  Depending on the indexing strategy and crediting method selected, when your account has grown, you lock in the gains.  If the index goes down, your money stays where it is.  This is called a guaranteed floor of 0% which means it will never be less than it's highest locked in gain point.  In addition,  the contract also has a Guaranteed Lifetime Income feature added.  When you are approaching retirement, the contract with the Insurance Company will also have your Guaranteed Retirement Income for Life options outlined, showing you the amount of income you can expect to receive each year, which is guaranteed for life.  When you're ready, signal the insurance company to turn on your income stream. The longer you defer, the higher the income payout will be. 

Let’s look at an example:

Suppose you’re 10 years out from retirement and you’re 55 years old. You plan to retire at 65. You need $80,000 a year to be comfortable. You plan on delaying your Social Security to age 70 at which time you’ll get about $37,000 a year. From age 65 to 70, you’ll need to withdraw $80,000 a year from savings and investments.  After age 70, only $43,000 a year. You want to plan for a 30-year withdrawal time horizon.  Rather than relying on only your investments in the market which are exposed to market risk, you would instead convert a portion of your retirement nest egg to a Fixed Indexed Annuity with a Lifetime Income feature.  You would move enough assets over to the FIA to provide you a guaranteed income stream.  Doing this establishes a guaranteed income base essentially making your retirement recession proof. Lastly, having your money in a Fixed Indexed Annuity allows you to participate in a portion of the gains of the under-lying index while having guarantees of no loss.  This is the best of both worlds and an optimal strategy leading up to retirement.

But, What if I need access to my money?

Most Fixed Indexed Annuity contracts offer access up to 10% of your principal each contract year with no penalty.  For most, this is plenty if needed.  Certain FIAs have features that will allow full access to the principal in the event of an emergency such as a terminal, critical, or chronic illness.  FIAs work very similar to a Certificate of Deposit with a bank in the sense that you give a lump sum of money for a certain period of time in exchange for safe growth and other benefits.  

Annuity Association is happy to offer potential clients a complimentary evaluation appointment with a local licensed Fiduciary Advisor to help you determine the right financial strategy for retirement.  Complete the form below to request your appointment and a member from our client services team will contact your shortly.