5BIG THREATS TO YOUR RETIREMENT As your career winds down, consider incorporating a wealth preservation strategy to help protect your nest egg and, through proper strategy, generate income for life.
Welcome to the new retirement reality. In general, the days of the gold watch and generous company pension are gone. Today, most private companies no longer provide traditional retirement plans but instead offer 401(k)s or similar plans funded largely by the employee. As the costs associated with employer-provided retirement plans have gone through the roof, even government pensions are being called into question thanks to ever-tightening resources. Not even Social Security is immune from this trend, given that the ratio of contributing workers to claiming beneficiaries continues to decrease due to baby boomers retiring in record numbers. In fact, many question how long Social Security benefits can remain at current levels. If you are recently retired or rapidly approaching retirement, what does all this mean? It means you will need to assume responsibility for what s at stake and take more of a DIY approach to planning for your financial future. You must not only find ways to preserve the assets you have accumulated but also identify opportunities to generate income that lasts a lifetime, no matter how many years you spend in retirement. THE CHALLENGE WITH TRADITIONAL APPROACHES TO INVESTING Before we get started, it s important to note that there are many ways to invest your retirement assets. The most common asset accumulation and growth strategies involve a combination of stocks, bonds and cash, as shown in Figure 1. Your retirement portfolio most likely contains some mix of these types of assets. While the traditional asset allocation models may be appropriate during your working years, they do not address the pervasive wealth preservation problem, nor do they guarantee consistent monthly income in retirement. Traditional models are also not immune to the most common risk factors that threaten the effectiveness of your personal retirement plan. Let s now examine those five big threats in detail. Figure 1: A typical example of traditional asset allocation model Stocks Bonds Cash 20% 20% Traditional asset allocation may not meet your needs during your pre-retirement and retirement years.»» This model is hypothetical and does not reflect any particular investment portfolio. Asset Allocation is a method used to help manage investment risk. It does not ensure a profit and does not protect against losses in a declining market 60% 2
#1 BEWARE OF THE BEAR MARKET Traditional asset allocation can be majorly affected by an environment in which we experience a bear market, defined as a downturn of 20% or more lasting at least 60 days. A bear market can eat away at the stock and bond portion of your retirement portfolio. History shows us that since 1929, the U.S. stock market has experienced 25 bear markets, an average of one every 3.41 years. Depending on how your assets are invested, it could take years for your portfolio to recover! Suppose your portfolio declined 35% from $100,000 to $65,000. At a 4% annual return, it would take 11 years for your portfolio to recover to its initial value of $100,0002. At a 6% annual return, it will take 8 years to recover, and at 8%, it will take 6 years before you are back to where you started. If a bear market occurs mid-career, you may have enough time to recover from the loss. However, the situation becomes much more dire if you are at or near retirement. Once retired, you will likely begin withdrawing money regularly to cover your living expenses. What if a bear market occurs in your first year of retirement? Assuming you withdraw 5% from your portfolio each year and your investments grow at 8%, it will take 15 years for your portfolio to recover to its original value. If the annual return is 6%, it will take you 44 years. If the bear market recovery is really poor, generating an annual return of 4% or less, your portfolio may never fully rebound! Figure 2 compares two sets of data: the average number of years it takes to recover from bear markets during your working years while you are still accumulating assets, and the number of years it takes during retirement when you are withdrawing money at 5% per year. As you can see in this hypothetical example, a bear market experienced late in life can be a major threat to your financial future. Figure 2: Years to potentially recover from a bear market² Example shown for illustrative purposes only and is not a prediction of future results. 70 60 50 60 A bear market later in life can be a major threat to your financial future. Example assumes an initial portfolio value of $100,000. YEARS 40 30 20 44 Example does not reflect investment fees or taxes.»» Results based on calculations from Ativa Interactive. 10 0 11 8 6 15 4% Return 6% Return 8% Return Pre-Retirement (No Withdraw) In-Retirement (Withdraw) 1 http://www.marketwatch.com/story/22-things-you-should-know-about-bear-markets-2015-08-05 2 http://www.ativa.com/time-to-recover-from-a-bear-market/ 3
#2 RIDE THE MARKET VOLATILITY ROLLER COASTER Even if your portfolio is not bitten by a bear market in your late working years or while taking distributions, a traditional asset allocation would mean that your retirement income depends on stock performance. As we all know, the markets are inherently volatile. This presents a challenge in and of itself in planning for a comfortable lifestyle in retirement. Figure 3 shows annualized total returns of the S&P 500 Index3 from 12/31/2007 to 12/31/2016. Referencing the graph, you can see that although the broader market is recovering from the 2008 financial crisis, the impact of social and economic factors both in the United States and abroad continue to result in unpredictable returns and high levels of market fluctuation. Therefore, assets you have invested in the market result in putting your income at risk. As a younger investor still working and accumulating assets, you re likely to weather the markets ups and downs over time. On the flip side, these fluctuations can keep you awake at night when you are retired and make it nearly impossible to achieve a consistent flow of income over time. The last thing you want to spend time in retirement doing is obsessing over the stock ticker when you should be enjoying friends and family or mastering your favorite hobby. Figure 3: S&P 500 Index Annual Total Returns 2007-20164 35% 25% 15% 5% -5% -15% -25% -35% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Market volatility presents a challenge for planning a comfortable lifestyle in retirement. 3 The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading industries of the U.S. economy. The S&P 500 Index is a product of S&P Dow Jones Indices LLC ( SPDJI ). Standard & Poor s, S&P, and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ). 4 https://ycharts.com/indicators/sandp_500_total_return_annual 4
#3 EXPERIENCE THAT SINKING FEELING OF LOW INTEREST RATES While we ve discussed the potential pitfalls of investing in the market, it may lead you to believe that the easiest way to help protect your hard-earned assets from downside risk is to leverage a conservative vehicle like a bank CD5. Though a bank CD does indeed protect you from market declines, these assets provide risks of their own. Figure 4 shows average CD performance throughout the last 20 years, indicating that rates have decreased precipitously throughout this time. In fact, six-month and one-year rates have been hovering near zero for the past five years, as you ve likely noticed on recent bank or money market statements. While stocking away a portion of your assets in a bank CD may have been a good idea in the 1980s or even 90s, that is currently not necessarily the case. Speculators continue to follow the market and try to predict when interest rates will rise, but there is certainly no guarantee of if or when this will happen. With CD rates as low as they are currently, money in a bank CD is actually losing purchasing power because it isn t keeping pace with inflation. Plus, you would need over $500,000 in the bank to generate just $9,000 per year in income! This certainly isn t the most efficient way to maintain the lifestyle you likely desire in your golden years. Figure 4: Historical CD Rates (1984-2016) 6 12.25% 10.50% 8.75% 6-month CD yield 1-year CD yield 5-year CD yield 7.00% 5.25% 3.50% 1.75% 0.00% 1985 1990 1995 2000 2005 2010 2015 Money placed in a bank CD would decrease in value because it s not keeping up with inflation. 5 Certificates of Deposit (CDs) are time deposit accounts that entitle the CD owner to a specified annual interest rate over a specified period of time. CDs are FDIC insured up to $250,000. Conditions and restrictions apply. 6 http://www.bankrate.com/banking/cds/historical-cd-interest-rates-1984-2016/ 5
#4 TRAVEL THE LONGEVITY AND WINDING INCOME ROAD When thinking about life in retirement, it may be easy to envision yourself traveling the globe, enjoying time with loved ones or volunteering for a favorite cause. Yet when you picture this, at what age are you seeing yourself? Are you 70, 80, 90 or older? While living longer is a blessing, it can pose a major threat to your retirement security if you don t plan for it accordingly. In 1950, the average age 65 retiree could expect to live another 12.7 to 15 years 7. These days, about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95 8. While you are working and accumulating assets, time is your ally. However, once you are retired you may need steady retirement income for 30 years or more. Figure 5 shows the life expectancy for individuals living in the United States. By contrast, Figure 6 shows the value of a hypothetical retirement portfolio. This illustration assumes an individual has $250,000 upon entering retirement and withdraws $20,000 per year. It also assumes an average return of 2.5% per year from a bank CD or similar low-risk investment. Unfortunately, in this typical scenario, you would run out of savings in just 15 years at age 81. Therefore, you need a strategy that can help ensure your retirement savings will support your lifestyle even after you begin taking distributions, no longer how many years you may live. Figure 5: Life Expectancy in the United States at Selected Ages, by Sex⁹ 22 Additional years living after age 65 20 18 16 14 Females Both Males 12 1901 1910 1920 1930 1940 1950 1960 1970 1980 2000 2010 2015 7 http://life-span.healthgrove.com/l/66/65#gender%20differences&s=221tkd 8 Calculators: Life Expectancy provided by the Social Security Administration. Available at https://www.ssa.gov/planners/lifeexpectancy.html 9 CDC/NCHS, National Vital Statistics System, Vol. 66, No. 6, November 27, 2017; http://life-span.healthgrove.com/l/66/65#gender%20differences&s=221tkd; https://www.cdc.gov/nchs/data/hus/hus16.pdf#015 6
Figure 6: Depleting Savings in Retirement $300,000 $250,000 Remaining Retirement Assets $200,000 $150,000 $100,000 $50,000 $0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years in Retirement ASSUMPTIONS: Individual enters retirement with $250,000 and withdraws $20,000 per year. Asset is a CD or low-risk investment with a 2.5% annual rate of return. This example is intended for illustrative purposes only and is hypothetical in nature. It is not intended to illustrate any specific individual s financial situation. Your actual circumstances could vary significantly from the illustrated example. 7
#5 THE PRICE OF UNPREDICTABLE INFLATION RATES While we ve discussed some of the most obvious risk factors you may face in retirement, one threat that often goes overlooked when planning is the impact of inflation. Inflation is the gradual increase in the cost of goods and services over time. During the last decade, the inflation rate has increased an average of about 2% each year but was consistently higher the previous decade 10. Though we may not be able to predict how inflation will rise, we can expect it to impact how far our dollar will go in retirement. Many of the items affected by inflation are things you cannot live without, such as food, fuel and medical care. Therefore, planning in today s numbers can be an inaccurate forecast of what you can buy tomorrow. For example, an individual who retired in 1980 would currently have to shell out $58.50 to purchase what he could have bought with just a $20 bill when he entered retirement! Figure 7 illustrates how inflation might significantly reduce your ability to meet basic living requirements. Even if the inflation rate is only 3%, it will erode your purchasing power from $15,000 to $6,179 in 30 years. Figure 7: How Inflation Erodes Purchasing Power Example shown for illustrative purposes only and is not a prediction of future results. Today $15,000.00 In 10 Years $11,161,41 In 15 Years $9,627.93 In 25 Years $8,305.14 In 30 Years When working and accumulating retirement savings, inflation may not present a huge problem if your salary rises over time and you can increase your retirement contributions as it does. While taking distributions in retirement on the other hand, inflation can deplete what you ve accumulated even faster. Because traditional investment strategies may not offer a secure hedge against inflation, it s important you find an alternative solution that will. $6,179.80 10 Table of Historical Inflation Rates by Month and Year (1914-2016 in %). Available at www.usinflationcalculator.com/inflation/historical-inflation-rates/ 8
THE FLIP SIDE: TAKING AN APPROACH IN LINE WITH YOUR OBJECTIVES As you ve learned, traditional planning strategies may not necessarily be structured in a way that can help you preserve assets and generate lasting retirement income. Stocks and mutual funds can be an important part of your portfolio, particularly during your working years while you are accumulating assets and have plenty of time to rebound from market downturns. Yet as your working years come to a close, you ll want to consider working with a professional who is well-versed in helping clients prepare for the transition into retirement. There are several different types of agents and advisors who are trained to help you accomplish specific objectives when helping you manage your finances. Some are focused primarily on managing investments, and they will help you make stock and bond purchases or invest in mutual funds that are appropriate for your station in life. Others take a different approach and are trained to help you create a stable source of income during your retirement years to help protect you from running out of money too soon. Just as you would seek advice from a cardiologist for a heart condition, rather than some other type of specialist, it s important that you work with a professional who focuses on long-term income planning, rather than just growing an asset base through investments. STRATEGIES FOR RETIREMENT INCOME: NOW FOR THE GOOD NEWS! Once you ve selected a professional who understands your current financial situation, as well as your goals and objectives for retirement, he or she can help you identify strategies that can help you put your retirement goals within reach. In particular, a fixed index annuity 11 can offer upside interest potential with no market risk, as well as the ability to turn that asset into guaranteed income for life, 12 no matter how many years you live. How might this product help simplify your income and distribution planning? There are a number of ways your financial professional can help tailor annuity products and strategies to you, depending on your retirement income needs. You can defer income until a later date, depending on your financial situation. Deferral, for example, is a good option if you are near retirement but still want to work for a few more years. These income payments can be designed for a single life or joint lives to take care of just you if you re single, or you and your spouse if married. The fixed index annuity allows individuals the opportunity to earn interest based on the performance of an external market index, like the S&P 500, but not actually invest in the market. Therefore, they also protect your principal from market loss. In other words, if the market goes up on your annuity anniversary, you may be credited with interest calculated on the index s gains. If the market goes down, your money is protected by a zero floor. These products may also offer options (often at an additional annual cost) to increase your income payments the longer you live to help address inflation, or due to illness and long term care needs. Your financial professional can help you determine how much that could translate into retirement income. This approach helps reduce the risk of having to dramatically lower your standard of living or worse, running out of money. It also helps to protect a portion of your assets from a potential bear market and general market volatility and helps create a lifetime income stream, even if the market has a bad day, month, or year. Annuities are long-term retirement savings insurance products. The examples presented herein are for informational purposes only. They are not representative of any specific annuity and do not constitute investment advice. All withdrawals will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal tax penalty. Additional fees apply for living-benefits options. Violating the terms and conditions of the annuity contract may void guarantees. Annuities are subject to surrender charges for early withdrawal that could reduce the value of the annuity. 11 Guarantees are subject to the claims-paying ability of the issuing Insurance company. 12 Through the purchase of a Guaranteed Lifetime Income Rider. 9
TAKE FOR EXAMPLE Suppose you are in your late 50s and do not plan to retire for six or seven years. Or, suppose you are retired and in your late 60s. n either case, you may want a portion of your retirement savings to earn interest tied to one of the major market indices, such as the S&P 500 13. Using the traditional model, your financial professional might recommend that you purchase a mutual funds. However, your money would be subject to market volatility, including the possibility of a bear market which could significantly reduce your investment. A financial professional focused on generating retirement income, on the other hand, might suggest other products and strategies to address this challenge. One option is the fixed index annuity, which can protect your principal while offering the potential for interest that is based, in part, on the performance of a market index. Figure 8 is an example of a product that ties increases in your account to a percentage of the gains in the S&P 500. However, if the S&P 500 declines like it did during the 2008 financial crisis, your account will not lose any value (zero loss). Figure 8: S&P 500 vs. S&P 500 with Zero Loss and Percentage of Gains HYPOTHETICAL PERFORMANCE BLACK Line: S&P 500 returns GREEN Line: S&P 500 with zero loss and percentage of gains With a fixed index annuity, you benefit from tax deferral, meaning you don t pay income taxes on any interest earned in your annuity until you take it out. (Withdrawals before your age 59½ may be subject to an additional 10% federal penalty tax, in addition to ordinary income taxes, making this product a long term income product). Many annuities offer the option of taking flexible withdrawals under an income rider (sometimes at an added annual cost), allowing you to access a portion of your assets should you need it - usually up to 10% annually without surrender charges. And you always have the option of turning the annuity into a guaranteed 14 income stream for life. 15 13 An index is a composite of securities that provides a performance benchmark. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is not a guarantee of future results. 14 Guarantees are subject to the claims paying ability of the issuing Insurance company. 15 Through the purchase of a Guaranteed Lifetime Income Rider. 10
THE CHOICE IS YOURS As you approach retirement, you need to be able to manage the five risks we discussed: Bear markets, which may reduce your savings Market volatility, which may keep you up at night Low interest rates, which may limit your earning potential Longevity, which may cause you to run out of money Inflation, which may reduce your purchasing power While these risks may appear daunting, by sitting down with a financial professional who focuses on retirement income strategies, you can devise an income approach that includes strategies to help overcome these risks. Take responsibility for your golden years and help prepare yourself for a more confident, comfortable future.
Contact us today for help taking control of your retirement income needs. Call 508-659-5849 or visit www.caperwa.com 1020 PLAIN ST. SUITE 380 MARSHFIELD, MA 02050 (508) 659-5849 CHRIS@CAPERWA.COM WWW.CAPERWA.COM Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Cape Retirement Wealth Advisors and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision. This information is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Cape Retirement Wealth Advisors and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney. Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Retirement Wealth Advisors. No specific product is being offered for sale as part of this document. An annuity is a long-term retirement savings insurance product that can help protect you from outliving your money. It has the potential to grow tax-deferred. Some, but not all annuities, offer optional living benefits to help protect and guarantee your retirement income. Some annuities offer death benefits to protect your beneficiaries. You can decide how you want to fund your annuity, how interest is credited to it and how you take payments from it. CRWA-5BT-BRO-345769-122017