Having a financial plan in place for the good times and the bad is essential, especially as one approaches retirement.

Periodically, a financial plan should be revisited, and new strategies considered. 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 a Financial Advisor, 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.

If your portfolio loses
You would need this overall return to break even
5% 5.26%
10% 11.11%
15% 17.65%
20% 25.00%
25% 33.33%
30% 42.86%
35% 53.85%
40% 66.67%
45% 81.82%
50% 100.00%

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 a Financial Advisor 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 a Financial Advisor 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 6-8%) 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 clients that 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 client 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 2020, 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-old clients 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 an investor remain invested when markets are experiencing volatility. In the above example, the client 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 the client 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 Index 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 client waited to take income. If the desire was to wait five years before taking any withdrawals, the Withdrawal Base would grow by 7% each year, or $49,000 ($700,000 x 7% = $49,000). When the client reaches age 70, the Withdrawal Base would have grown by 35% ($700,000 x 7% Withdrawal Base x 5 years), and therefore, the client could take out 5.25% (payouts vary by company, but current rates apply) from the $945,000 Withdrawal Base. This figure would represent a lifetime guaranteed income stream of $49,612 per year—for life. (That’s 24% more than originally planned.)

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.

Consult with a Financial Advisor to review the features and benefits of the various programs available.

Working with Janney 

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile. When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences. Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

The examples provided are all hypothetical and do not take into account any specific situations. The hypothetical examples are provided to help illustrate the concepts discussed throughout and do not consider the effect of fees, expenses, or other costs that will effect investing outcomes. Any actual performance results will differ from the hypothetical situations illustrated here. Please consult a professional to help you evaluate your situation before implementing any of the strategies discussed here.

Annuity guarantees are subject to the claims paying ability of the issuing insurance company. Many annuities have surrender charges and other fees and expenses that may apply, consider these expenses as they apply to your specific circumstances. An indexed annuity is designed for protection against down markets; the potential for some growth linked to an index and, in some cases, a guaranteed level of lifetime income through optional riders. Indexed annuities typically do not have an up-front sales charge, but there are often substantial surrender charges and in exchange for downside protection, returns are significantly limited by caps, participation rates, and spreads.

Annuities are offered by prospectus which is available upon request from your Janney investment professional. The Prospectus contains important information, including, among other information, a description of an Investment Product’s risks, investment program, fees and expenses, and should be read carefully before any investment decision is made.

For a full description of Janney’s investment advisory products and services, please refer to Janney’s Form ADV Part 2, available on Janney’s website or by contacting your Janney Financial Advisor. Janney Montgomery Scott LLC Financial Advisors are available to discuss the suitability and risks involved with its advisory accounts.

 

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For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

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