When markets spiral down during a bear market, long-term investing—specifically retirement planning—can get tricky. The question of how much to sock away each year is hardly cut and dry; there are many different factors besides market conditions, such as how soon investors are able to start saving and when they intend to retire.
Many conventional retirement planning models advocate putting enough away so that investors can plan on withdrawing no more than 4 percent of retirement savings a year. It’s also generally understood that it’s easier to retire near the end of a bull market, when the stock market rises, than the year of a bear market. That’s because accounts holding equities may be flush with market gains following a bull market.
But here’s some food for thought: Economist Wade Pfau advocates that investors who retire near the end of a bull market need to save more money than those who retire at the end of a bear market. The reason? At the end of a bear market, retirement savings start to grow as markets go up. But at the end of a bull market, stock prices are more likely to fall.
Saving in unpredictable market conditions
So what can your clients do to save confidently for retirement, regardless of whether they retire at the beginning of a bull or bear market, or even during a black swan event? There are a few ways to account for ever-changing market conditions. First, investors can start retirement saving as early as possible. https://www.financialplanningassociation.org/article/journal/MAY11-safe-savings-rates-new-approach-retirement-planning-over-life-cycle, investors who saved for 30 years, expected to live in retirement for 30 years and invested their savings in a 60/40 stock-bond split, needed to put away 16.62 percent of their annual income to replace half of their income when in retirement. That can be a difficult target for some clients, depending on circumstances. Comparatively, investors who started saving 10 years earlier and were able to sock away money for 40 years only needed to save 8.77 percent a year to achieve the same result, Pfau notes.
Saving early can make a big difference. Plus, there are other common sources of income to supplement cash flow during retirement such as Social Security, pensions or part-time work.
Smoothing out market bumps with annuities
Another step that clients can take to ensure regular income in retirement is to invest in products such as annuities, which help smooth out the dips at the end of a bull market.
In addition to the three most common types of annuities — fixed, variable and indexed — there is now also another annuity product that could be considered a hybrid of indexed and variable annuities. Called a registered index-linked annuity, it calculates returns based on the performance of certain stock market indexes (thus they are “index-linked”), but can also be subject to loss of principal. However, this downside risk can be limited by available floors and/or buffers that either limit loss or establish a threshold for loss. An annuity like this could help clients to defend their retirement portfolios during certain market downturns, while offering the potential for more generous participation in market-linked growth.
By saving as early as possible and creating diversified income streams in retirement, clients can strive for predictability in retirement, no matter the market conditions.
Registered index-linked annuities are complex Insurance and investment vehicles. Before investing, investors should speak with a financial professional about the Contract’s features, benefits, risks and fees and whether the Contract is appropriate for them based on their financial situation and objectives.
Investors should carefully consider the investment objectives, risks, charges and expenses of a variable annuity and the underlying investment options before investing. This and other information is contained in the prospectuses for a variable annuity and its underlying investment options. Prospectuses may be obtained by contacting PLICO at 800.265.1545.
Product guarantees are backed by the financial strength and claims-paying ability of the issuing company.
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