While it’s understandable to feel uneasy when the market experiences periods of extreme volatility, it’s important not to panic and instead focus on what you can control. Implementing new strategies, in consultation with us, may help keep long-term goals on track.

The Meaning of Strategy

The term strategy has multiple meanings, and it may be helpful to define it in the context of this article. Strategy is a “plan, method, or series of maneuvers for obtaining a specific goal or result.” In order to successfully reach a specific goal or result, a “plan” or “series of maneuvers” is needed.

An annuity income strategy, where appropriate, can be utilized during times of significant market volatility. Volatility is typically more tolerable for the long-term investor, but may not be if you are in, or approaching, retirement. When analyzing the math behind investment losses, as the below chart illustrates, the decline becomes compounded beyond the loss itself. The greater the percentage loss that the portfolio sustains, the larger the gain that is needed to rebuild it back to its original value.

Generating A Retirement Income Stream

The numbers in the chart reflect that the larger the loss in the portfolio, the more difficult it will be to get the asset values back up to their prior levels.

During times of market volatility, it’s important to meet with us and revisit your financial plan. Having a plan in place—that is created with your specific long-term goals in mind—can help put things in perspective. There are also several strategies that we could employ during times of volatility. These strategies can not only attempt to reduce the level of risk in the portfolio, but they may also assist in stabilizing a future retirement income stream.

Fixed Index Annuity

When protecting a portion of assets for income in the future, a very different strategy—a Fixed Index Annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider—can be considered. This benefit includes a Withdrawal Base (also known as a Benefit Base) growth feature, which increases the future income base by a certain percentage (typically 8-12%) each year that you delay taking income.

Guaranteed income for life options are available from most insurance companies, and can begin immediately, or the income payments can be deferred to a later date in the future. Most companies allow investors to defer taking income for up to 10 years. This option is popular among those who are looking to create a future guaranteed income stream for themselves, typically, at or near retirement age.

Here is an example of the how the first strategy works:

A 65-year old had a portion of their assets ($1,000,000) earmarked for supplemental retirement income to begin in five years, when they turned 70. If these assets were invested in equities in March 2021, and lost 30%, the amount of their future income stream would likely be in jeopardy, considering their value was now reduced to $700,000. Furthermore, many 65-year-olds could potentially become fearful of their plunging market values, and sell-out at the wrong time.

Annuities may bring a level of certainty to portfolios, during uncertain financial times, which could help you remain invested when markets are experiencing volatility. In the above example, the individual was looking to take out a conservative distribution rate of 4% (or $40,000 per year) from the $1,000,000 at age 70, but since the values were now down 30% to $700,000, the 4% withdrawal rate would only distribute $28,000 per year. If they planned on taking out the same $40,000 from their $700,000 value, that would equal a spend-down rate of 5.72%. (This amount is considered significantly higher than the suggested “safe withdrawal rate” of 3.5%-4%.)

When utilizing a Fixed Indexed Annuity, with a Guaranteed Lifetime Withdrawal Benefit rider, the $700,000 could be invested, and the Withdrawal Base could grow by 7% every year that the person waited to take income. If the desire was to wait five years before taking any withdrawals, the Withdrawal Base would grow by 8% each year, or $56,000 ($700,000 x 8% = $56,000). When the person reaches age 70, the Withdrawal Base would have grown by 40% ($700,000 x 8% Withdrawal Base x 5 years = $280,000), and therefore, they could take out 7% (payouts vary by company, but current rates apply) from the $980,000 Withdrawal Base. This figure would represent a lifetime guaranteed income stream of $68,600 per year—for life. (That’s 58% more than originally planned at 4% withdrawal, or $40,000 from the original $1,000,000

The Annuity Income strategy can be employed with a variety of products, including a Variable Annuity. The variable product would offer a similar concept of a growing “benefit base” with a future income stream in mind. However, the underlying investments would fluctuate more (up or down) in value, and the costs may be significantly higher.

We can help you review the features and benefits of the various programs available.