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Financial Planning

Next steps for at-risk clients when the stock market drops

A bull market has been taking place for over nine years now. In fact, it recently became the longest in history. Though the markets will eventually experience a correction and pull back, clients invested in stocks, those clients nearing retirement and those who are already retired would likely be hit the hardest if they aren’t prepared.

While the direction of the markets is out of your control, you can ensure your clients are more prepared for the next drop. This can take two forms: positioning their investments and preparing them mentally.

Review your client’s financial plan and asset allocation

For those clients nearing retirement, this may be a good point in time to review their financial plans and see where they are in terms of meeting their goals. If they are ahead of schedule towards accumulating sufficient retirement savings or achieving other financial objectives, perhaps it makes sense to decrease their stock allocation.

For those clients already retired, it could be important to ensure their investments are properly positioned for the next market downturn. Too heavy an investment in stocks can have negative consequences, including client panic, which can lead to selling at a loss and damaging retirement plans.

Review your client’s retirement income sources

This could also be a good time to ensure that you and your client are both clear on all sources of income available to them in retirement. This might include Social Security, a pension from their employer, or income from employment or some sort of business interest.

Comparing these sources of income to the client’s overall cash flow needs (or those that are anticipated if the client is not yet retired) will help you advise the client on the amount they will need to generate from their retirement and other investment accounts. This process can also help you identify any anticipated savings gap or surplus the client may have.

For clients already in retirement, it is still important to review their plans for generating retirement income and ensure they are positioned to maintain the income streams needed when the markets shift. Which accounts should they tap and when? How should their investments be allocated to provide for the growth they need without excessive risk? They’ll rely on your expertise in answering these essential questions.

Annuities might be a good fit

For clients in or approaching retirement, this might be an ideal time to consider annuities for part of their retirement savings. Annuities are designed to offer guaranteed lifetime income that, once initiated, can remain in place regardless of how the stock market performs.

Two types of deferred annuities, fixed and indexed, offer minimum guaranteed rates of return during the accumulation phase with a number of annuitization and other options available when it comes time for your clients to use their money for retirement.

Annuities can offer your clients a reliable stream of pension-like income in a world where many employer pensions have gone by the wayside. This can be a good complement to money held in retirement accounts like IRAs or 401(k) accounts, providing your clients with a guaranteed component of their monthly income stream.

One tactic often used is to purchase an annuity with an objective to provide sufficient income to cover a client’s basic monthly needs, such as food and housing. Their other investments can provide growth over time. This can lend a feeling of security for those clients in or near retirement, as the prospect of a stock market decline looms larger.

Conversations you should have with your clients now

This is a smart time to gauge your client’s feelings on risk and the stock market. Certainly, most of your clients who are in or nearing retirement have vivid memories of the precipitous stock market decline of 2007-09. During 2008, the S&P 500 finished the year down over 37 percent, with other sectors declining even further.

As their financial professional, you should be both talking with them about the potential risk embedded in their portfolio and the need to think longer-term and not to panic. If there are any lessons to be learned from the financial crisis, they include:

  • Staying invested is important, however, it’s also important to have an investment strategy that is in line with the client’s goals, their risk tolerance and their time horizon.
  • Diversification is key. This means not only diversifying between asset classes, but also in terms of income streams. The case for products like annuities is a compelling one for many of your clients.
  • Don’t panic. It’s important to discuss risk and the fact that stock market and economic pull-backs are a normal part of a cycle.

Stock market declines are common. Clients who have a plan and who understand these stock market dynamics are less likely to panic and sell at a loss. This could have negative effects, forcing retired clients to go back to work and delaying the retirement plans of other clients. Now is the time to identify those clients most at risk and help ensure they are properly positioned to weather the next market downturn.

Annuities are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity’s remaining death benefit, contract value, cash surrender value and future earnings. Annuities also may be subject to income tax and, if taken prior to age 59 ½, an additional 10% IRS tax penalty may apply.
An indexed annuity is not an investment in an index, is not a security or stock market investment and does not participate in any stock or equity investments.

Product guarantees are backed by the financial strength and claims-paying ability of the issuing company.



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