Smart Moves for Retirement Savings in a Volatile Market
Worried about saving for retirement during turbulent times? YRA is here to convince you not to panic. Here are some of YRA co-founder Brian Saranovitz’s tips for navigating a volatile market.
At age 59 1/2 an employee with a 401k can typically complete an in-service withdrawal (tax free) to a roll-over IRA. At this point, the individual can utilize the Hybrid Investment Portfolio (HIP) described below. The first step is to transfer a portion of the portfolio to a high quality fixed indexed annuity. Creating a “safe money” Income Buffer, that is unaffected by stock market portfolio downturns, will increase the stock portfolios survival rate when experiencing severe market losses. The buffer should be in place prior to retirement to withdraw from when the stock market suffers a loss above 10%. The buffer can consist of any asset that will be unaffected by a market downturn such as cash value life insurance, a reverse mortgage reserve account, short duration high quality bonds, guaranteed Equity Index Annuities, etc. An Income Buffer should be created with 5-10 years of required annual retirement income to assure the funds are available to produce income necessary in the event of stock portfolio losses. The buffer should be utilized for income until the stock portfolio fully recovers from the loss in value. This strategy will dramatically reduce the effect of market volatility risk and sequence of return risk.
Hybrid Income Portfolio (HIP)
One of the number goals for retirement savings is to reduce volatility as much as possible as you approach retirement (5 years out and in retirement). Historically, high quality treasury bonds have been the vehicle of choice for mitigating risk in a portfolio. With today’s low interest rates and the inevitable increase in rates, placing substantial amounts of a portfolio in these investments will subject an investor to dramatically reduced overall returns over the foreseeable future.
Fixed Indexed Annuities (FIAs) can be an effective alternative to a stock/bond portfolio. As evidenced by the research report, Real-World Indexed Annuity Returns by David F. Babbel, phD, professor at Wharton School, U. Penn. Dr. Babbel analyzed actual fixed indexed annuity contracts between 1997-2010 and concluded, “the real world indexed annuities analyzed in this paper outperformed the S&P 500 index over 67% of the time, and outperformed a 50/50 mix of one year treasury bills and the S&P 500 79% of the time.”
The interesting fact about FIAs is that they offer absolute guarantee of principal. In addition, in, an economic downturn such as 2007-2009 when the stock market was down more than 40% and a 50/50 portfolio would have been down more than 20%, the same FIAs at worst offered a 0% return during these same timeframes.
Individuals within 5 years to retirement or in retirement typically use bonds to reduce volatility in their portfolio. However, with the low interest rate environment over the last 5 years, having a 50/50 stock/bond portfolio could hurt retirees long term. As an example, 10 year U.S. government treasuries had a return of .84% over the past 5 years. For this reason, it’s imperative to find viable low risk alternative to traditional government bonds in light of the current economic environment.
There are some advisors and individuals attempting to use below investment grade bonds (junk bonds), senior bank loan funds, and convertible bonds in an attempt to get additional yield from their bond portfolio. This could ultimately backfire as these types of investments all suffered 20+ percent losses in 2008. As well, there are tactical asset allocation strategies that attempt to increase returns, but once again these alternatives suffered significant losses in 2008 and are not suitable to the US treasury bond.
As Warren Buffet says, “As people get greedy, I get fearful. And when people get fearful, I get greedy.” Recently, I’ve seen some prospective clients throw caution to the wind due to the stock bull market we’ve seen since April. 2009. These people wrongly want to keep high stock exposure in their portfolios. I recommend that my clients maintain age appropriate portfolio allocations to assure they are properly invested in the event of a major stock market correction or potential bear market.
We believe our Multi-Discipline Retirement Strategy (MDRS), which integrates globally diversified stock and fixed indexed annuities, offers the highest return potential with the lowest risk.
Individuals could also consider a reverse mortgage as a buffer as well. Leading research indicates that the use of home equity in retirement will increase the probability of portfolio survival and increase the legacy to loved ones. HECM Loans or Reverse Mortgages have been called the “Swiss Army Knife” of retirement planning since they can be utilized as part of many diverse retirement planning strategies.[1]
[1] Using Reverse Mortgages In A Responsible Retirement Income Plan, Wade Pfau (2016)
To learn more about how to navigate through a volatile market, and how YRA can help you along the way, give us a call at info@yourretirementadvisor.com.
