Retirement Income Planning

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Today, we’re going to talk about retirement income planning and what we call sequence of events risk.

Most people accumulate wealth in their retirement plans where their money is invested in securities, which are usually made up of stocks and bonds. At retirement, they use these accounts to generate retirement income.

One of the challenges is that when you go to take money out of these accounts, you will have to pay income tax on all distributions. The second challenge is that if you withdrew money in a year following a market decline, you would have a steep reduction in the account value. This is what we call sequence of events risk.

Positive Sequence of Events Risk Example

Let’s say you were retiring in 2008 and began taking money out of your invested 401(k) to generate retirement income, the sequence of the returns would position the beginning to your retirement negatively.

Historically, about 25% of the years have been negative years in the market. So, one out of every four years is potentially going to be bad. If we’re going to live, let’s say from 65 to 90 (25 years), we will most likely have approximately four to six bad years, where we’ll be withdrawing money out of that account when it’s negative. Why am I mentioning this?

When you’re accumulating money, you want to make sure to provide yourself a smart alternate asset class — an asset class that works much differently than a 401(k) account,  which is made up of mutual funds buying stocks and bonds. Those accounts are subject to both market risk and interest rate risks, unlike permanent whole life insurance.

Implementing a Long-Term Strategy

In a hypothetical example above, a $2,000,000 portfolio, having two years of negative returns coupled with a withdrawal of $150,000 per year, would bring that $2,000,000 portfolio down to about $1,000,000. If you continue down that path, at the end of 15 years — even though the account returned 11% — the portfolio would have been down to approximately $900,000.

Alternatively, if you withdrew from that account only in years following a positive return, and did not withdraw from the account when there was a negative return, instead of ending up in 15 years with only $900,000, you would end up with $3.3 million. That’s $2.4 million more.

Now granted, you would have withdrawn $500,000 less, and you would have needed income to be generated for retirement in those years following a negative year when you didn’t withdraw out of your investment account.

What Are The Benefits?

1. When we withdraw money from this type of asset class, we are going to be able to do so tax free, by withdrawing up to your basis and then borrowing anything in excess of your basis.
2. In times like 2008-2009 when just about every asset class went down in value, the cash values of life insurance did not go down.

Let me explain. When I withdraw from the life insurance, it has an exponential growth effect on the retirement account because I didn’t have to withdraw from the account itself. Thereby allowing the account to avoid selling at the bottom and taking advantage of the rebound effect that normally happens after down years in the market.

On top of that, the cash value life insurance is creditor protected in most states. For example, in New York state where I live, creditor protection is unlimited. This means I’m able to create an asset class that does not move in the same direction as other types of asset classes and is therefore protected from most creditors.

Lastly, these policies which have guaranteed cash values and dividends can also be issued with a rider to allow for the payment of long-term care expenses. This can be extremely beneficial during long periods of time where we need retirement income and our likelihood of long-term care expense may increase dramatically.

Smart planning is not just about accumulating wealth but designing a long-term plan that takes into consideration distributions, retirement income, longevity risk, market risk, and sequence of events risk.

If you’d like to learn more about how to properly prepare so that you have an adequate and diversified portfolio of different products to make your retirement work seamlessly, give us a call, or send us an email. We would love to talk to you.

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS.  Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.