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How to Cope With Stock Market Volatility in Retirement

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The global pandemic, war in Ukraine and other world events have contributed to wild swings in the stock market. Retirement savers have seen both tremendous gains and precipitous losses in their 401(k) investments over just the past two years.

A steep drop in the stock market can be particularly devastating to retirees, who have few options to replace their depleted life savings. But there are a variety of ways for retirees to prepare for and cope with stock market declines so that their day-to-day income needs continue to be met, regardless of market conditions. Here’s how to protect yourself from stock market risk in retirement:


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How to Create Your Retirement Income Stream

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During your working years, your largest income stream is generally from employment. When you retire, however, your income will likely need to come from a variety of sources, such as retirement accounts, after-tax investments, Social Security, pensions or even continued part-time work.

For those looking to create a retirement income stream, there are a variety of strategies available depending upon your specific income needs and lifetime goals. Two simple retirement income strategies include the total return approach and the bucket approach.

Total Return Approach to Retirement Income

The total return approach is probably the best-known strategy. With this approach, assets are invested with a focus on diversification, using a portfolio of investments with a varied potential for growth, stability and liquidity, based on your time horizon, risk tolerance and need for current and future income. There are three defined stages within this approach, which are contingent upon how near you are to retirement:

Accumulation phase: During peak earnings years, the objective is to increase total portfolio value through long-term investments that offer growth potential. 

Pre-retirement phase: As you approach retirement this should include a gradual move toward a more balanced growth and income-based portfolio, with an increased allocation toward stable and liquid assets as a means of preserving your earnings. 

Retirement phase: Once retired, maximizing tax-efficient income while protecting against principal decline may result in a portfolio heavily weighted toward income-producing liquid assets. 

Pros and cons: The benefit of adopting the total return approach is that, as a rule, the portfolio should outperform one that is heavily weighted toward income generation over a longer time frame. The largest disadvantage of this approach is that it takes discipline. It is important to remember that the appropriate withdrawal rate should depend upon your personal situation and the economic environment, though many advisers suggest starting with a withdrawal rate of 3%-5%, which may then be adjusted each year for inflation.

Bucket Approach to Retirement Income

This approach behaves similarly to the total return approach throughout the accumulation phase, but as you enter pre-retirement, you divide your assets into smaller portfolio “buckets” with each holding investments geared toward different time horizons and targeted to meet different needs. Generally there are three common bucket types based upon specific needs, but you are certainly not limited to just these three:

Safety bucket: This bucket is set up to cover a period of about three years and focuses on relatively stable investments, such as short- to intermediate-term bonds, CDs, money market funds, bond ladders and cash. This portfolio is designed to cover your needs and avoid tapping into the next two buckets when markets are down, since the average bear market historically lasts less than three years. 

Income bucket: This bucket should focus on seven years of income needs and is designed to generate retirement income while preserving some capital over a full market cycle. This bucket typically includes assets with a focus on distributing income while still providing some growth potential.  Examples might include high-quality dividend-paying stocks, real estate investment trusts or high-yield corporate bonds. 

Growth bucket: This bucket is used to replace the first two buckets after 10 years and beyond and contains investments that have the most potential for growth, such as non-dividend paying equities, commodities and alternatives assets.  Though holding a higher risk profile, this portfolio has a longer time horizon thus more time to make up short-term losses. 

Pros and cons: The benefit of adopting the bucket approach is that it can help create a sense of calm during market storms. Instead of panicking oneself out of growth assets during a downturn, a retiree can feel confident knowing their next several years of income needs are already in a more conservative position.  The difficulty with this approach is deciding when to move assets from one bucket to the next, again requiring discipline.

Funding Sources for Creating a Retirement Income Stream

Beyond Social Security and pensions, a number of instruments can be used to create retirement income. Which ones you use will depend upon your specific goals.

Interest and dividends: The benefit of this source is that investors can expect to receive a stated consistent monthly or quarterly payment using an instrument like dividend-paying stocks, closed end funds (CEFs) or exchange-traded funds (ETFs) with a long-term track record. The disadvantage of relying on interest and dividends is that most retirees cannot live on these payments alone, especially when yields are low and inflation is high. Additionally, when it comes to dividend payouts, companies can adjust them, cut them, or even stop them altogether.

Bond ladder: This strategy involves building a portfolio of multiple individual bonds that mature at varied stepped dates, often annually. When each bond matures, the ladder is extended by purchasing another bond, or it may fund the income need in that given year. The benefit is that a bond ladder can offer consistent, predictable return on investment. Additionally, it provides protection from some call risk, as it is unlikely the bonds would be called at the same time. The disadvantage of this income source is you may be forced to reinvest at lower interest rates, quality of bonds can vary in risk, and they can have a return lower than inflation, especially if purchased at a premium to the par value.

Certificate of deposit (CD) ladder: Similar to a bond ladder, this type of investment involves purchasing multiple certificates of deposit with stepped maturity dates. A new CD is purchased as each one matures later than the next, extending the ladder, or again used as income at maturity. While this income source is more secure than the bond ladder because CDs are insured by the FDIC, interest is not paid upon maturity.  Also, be aware that some CDs automatically reinvest, which could keep you from receiving the income, so it is wise to look specifically for CDs without this feature.

Annuities:  With immediate annuities that are backed by an insurance company, you pay a lump sum in exchange for a guaranteed payment that starts immediately. With deferred annuities, you invest in a contract, but the payout may not start for several years. While they are reasonably secure and offer tax-deferred growth and potentially tax-advantaged income, there are several disadvantages. The fees can be high, there is a tax penalty for withdrawals prior to age 59½, and they may be difficult to get out of without surrender charges if you later change your mind. It’s important to look for highly rated insurance companies when searching for guarantees because they can be dependent on the claims-paying ability of the insurance company.

Managed payout: A managed payout fund is also known as a Retirement Income Fund (RIF), income replacement fund, or monthly income fund. This source often consists of mutual funds generally created with retirees in mind, which pay regular and predictable income. The caveat being that income is not guaranteed and payments often fluctuate, and the fund manager may use principal to meet the payout schedule.

Real estate investment trusts (REIT): A REIT is a company that owns or invests in income-producing real estate and allows individuals to invest in large-scale commercial real estate or real estate loans. Types of REITs include:

Publicly traded: Available on the major stock exchanges. 

Public, non-traded: Open to all investors, but may lack liquidity and do not trade on the primary stock exchanges. 

Private, non-trade: Usually not open to the public due to high net-worth and/or high-income requirements.  Again, may lack liquidity and do not trade on the primary stock exchanges 

REITs are further broken down by type, including:

Equity REIT: Owns income-producing real estate like office, industrial, retail, hospitality, residential, timber, healthcare, self-storage, data centers, and infrastructure. 

Mortgage REIT (mREIT): Provides financing for real estate. 

Hybrid REIT: Combines income-producing real estate investments and real-estate backed loans. 

The benefit of REITs is that they may offer a reasonable hedge against inflation as most of their taxable income must be distributed to shareholders.

Part-time income: Not everyone is fully ready for retirement, and work can offer a sense of self-worth. The additional income can help hedge against inflation by covering expenses during a down market instead of selling investments at a loss to pay the bills. The chief caveat is the potential reduction of Social Security benefits while earning income due to the Social Security Administration earnings test.

Alternative investments: These investments do not fit into the traditional equity, fixed income or cash options. For this purpose, they generally consist of private equity, venture capital, hedge funds, commodities, tangible assets and real property.

As you can see, there is no one-size-fits-all approach to retirement income planning. Each of these strategies requires a dramatically different approach. With this in mind, you should seek the advice of your financial adviser to help you construct a customized portfolio that will meet your retirement needs.


by Kris Maksimovich, AIF®, CRPC®, CRC®



Why You Should Use a Wealth Management Service

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Since you’re reading this, my guess is that you’re at least a bit concerned about your financial future. That’s good. If you’re a reasonable adult, you’ve likely grasped that planning for that is a must, particularly in this era of uncertainty. After all, money worries and the stress they produce is one of the biggest enemies of peaceful living.

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The No. 1 Reason People Aren’t Saving for Retirement Doesn’t Have to Hold You Back, Too

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Throughout the U.S., many people have far too little retirement savings to support themselves after they stop getting paychecks.

There are some common reasons why so many workers are unable to save for their later years. In fact, more than 9 in 10 people responding to a recent Goldman Sachs survey identified the same key issue that’s interfering with their efforts to invest for their future.

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How to Beat Retirement’s Nemesis: Inflation

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With prices rising at their fastest rate in decades, people in retirement or approaching it should take extra care to protect their savings.

Shuran Huang for The New York Times
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How to Prepare for Retirement After Age 60

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How to assess where you are and what you can still do to get ready for retirement.

If you find that your current accounts won’t provide the desired income you would like in retirement, you can make some additional changes.

There is still time to improve your retirement finances in the years leading up to retirement. By reviewing how much you have saved and thinking about how much longer you want to work, you may be able to update and improve your retirement plan. Use the following guidelines to get ready for retirement after age 60. Read More

7 Reassuring Signs Your Retirement Is on Track

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A financial checkup could help put your mind at ease

Fewer than 1 in 5 people have established a comprehensive financial plan for their retirement, according to a Fidelity Investments study. But even if you are among those who do, how do you know your plan will hold up in every insomnia-inducing scenario you envision? Read More

6 Signs That You’re Really Ready to Retire

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Timing is everything when it comes to retiring comfortably

After years of hard work, you’re certainly entitled to a happy retirement. You may have already started daydreaming about it, at least a little. Will you travel the world, volunteer for your favorite charity, go fishing, or spend more time with the grandkids? The possibilities are endless. Read More

How Much You Should Have in Your Retirement Fund at Ages 30, 40, 50 and 60

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FluxFactory / Getty Images

In your 20s, as you start your career and make real money for the first time, your spending changes. After living with Mom and Dad or in a college dorm, you can afford a place of your own and might want to splurge on the place with the amazing rooftop deck. You might have some disposable income for the first time — even after making the monthly payment on those student loans — and want to take a weekend trip each month with friends. Read More

3 Moves That’ll Lead to an Early Retirement

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These smart choices could be your ticket to an early workforce exit.


Key Points

  • You don’t need to earn a ton of money to retire early.
  • A few wise moves on your part could help you close out your career when you want to.

Many people strive to retire early, whether that means exiting the workforce in their early 50s, late 50s, or early 60s. If early retirement is a big goal of yours, here are three things you can do to make it happen.

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3 Essentials for a Successful Retirement

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To plan for the next phase of your life, you need clear strategies to provide for these three retirement needs.

Retirement is the longest vacation you will ever take.

To get the most out of that special time, which rewards all your years of hard work, retirement requires careful and precise planning. But the reality is, most people spend more time planning a dream vacation than they do analyzing and charting all the details of their retirement. Read More

5 drawbacks of only using a 401(k) for retirement

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A 401(k) retirement plan is an excellent tool to help employees save for retirement. Many employers offer a company match, which is basically extra compensation. Not only that, but you also usually get a tax break for your contributions in the year you make them.

But if you’re only saving for retirement in a 401(k), it could end up hurting you when you’re ready to start living on your savings. Here are five drawbacks of only using a 401(k) for retirement.

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The Two Best Retirement Strategies

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Best path to a great retirement? Keep track of your Social Security benefits and use the RMD rule to calculate income from savings.

You can employ many strategies and tactics to improve your odds of enjoying the retirement you desire. But of the hundreds that you could pursue there are two that are easy to implement — and could make a big difference in your life. Read More

8 Key Steps to Planning for Retirement as a Couple

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Ready for retirement? Not so fast. You might be surprised at some of the issues that come up for couples when they plan.

When you make financial decisions as a single person, it’s all about what works for you. When you’re in a long-term relationship, though, that changes.

Couples, even if they keep aspects of their finances separate, still need to pay attention to ways to manage retirement planning together.

If you want to have a successful retirement as a couple, start taking the following steps now. Read More

10 Questions Retirees Often Get Wrong About Taxes in Retirement

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You worked hard to build your retirement nest egg. But do you know how to minimize taxes on your savings?

Retiring in 2021? 4 Moves to Make Today

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After working hard your entire life, you may finally be at a point where retirement is right around the corner. But retiring in 2021 won’t be like retiring in any other year. That’s because we’re still in the midst of a pandemic, and that could have a serious impact on both your finances and your general plans. With that in mind, here are four important moves to make if you plan to retire in the coming year.

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