Help Protect Your Wealth
In finance, just as in life, you can’t avoid risk completely, but you can try to manage it, make it work in your favor and protect your wealth.
- Market Risk is the chance the value of an investment will go down, not up, causing you to lose money.
- Inflation Risk is the possibility that you may not earn enough on your investments to keep up with inflation.
- Return Risk is the chance your investments won’t grow enough to get you to your long- term goals, such as retirement.
Preparing For A Down Market In Retirement
As you save for retirement, you know you’re going to have to ride out a few down markets. That risk is the trade-off for getting potentially higher returns. But once you retire, those same market declines could possibly jeopardize the amount of money you have to live on.
What if you had retired in 1997?
Hypothetically, let’s say you were 65 in 1997 and retired with $1 million in an IRA. The chart below shows what would have happened to your money as you took out $75,000 per year to live on, based on the actual performance of the S&P 500 Index from January 1997 – December 2017. Over the last 20 years, the average return on the Index was positive, but it also had several years of negative returns. Notice how quickly the account shrinks in the years with a negative return.
Plan for the Unexpected
If you can avoid taking money out of your savings in the year following a market decline of more than 5%, you may get a different result. Using this approach, the hypothetical account is still worth over $900,000 at age 85, even after withdrawing over $1.3 million, and with significant declines in the index at ages 68, 69, 70 and 76.
*past performance is no guarantee of future results
Considering the average 65-year-old lives until about age 85, it makes sense to plan for at least a 20-year retirement. What if you live longer than that? This scenario doesn’t leave much room for the unexpected, such as living longer than average, an emergency or a medical need that requires you to take out more money than planned.
Where can you get money to live on if you don’t take it out of your retirement account? Cash-value life insurance is one option. Not only does it provide money for your loved ones when you pass away, it may also provide an alternate source of funds if you experience a market decline in retirement. You can take out what you paid into the policy and then take policy loans from the cash value to provide money when you need it, without tax consequences. The sooner you purchase cash value life insurance, the more likely you’ll be able to have the policy completely paid for by the time you retire, and the more time you’ll have for the cash value of your policy to grow.