The prospect of achieving a comfortable retirement by investing in the stock market can be alluring. We’ve all heard the success stories of people making astronomical returns on their investments. But what you don’t hear about is all the people who ultimately missed out on the returns they could’ve otherwise had if they chose a safer option.
The sneaky truth about IRAs and 401(k)s that brokers don’t talk about is that you are mainly at the whims of chance when you have your money in the market. Just a few bad years during the distribution phase could have a disproportionally negative impact on your savings and even throw your entire retirement plan off course. This phenomenon is called the “sequence of return risk.” Here, we will explore exactly what it is and how annuities could offset this risk.
Broadly speaking, sequence of return risk refers to the possibility that an investor experiences a loss of value to their portfolio right before retirement or early on in their distribution phase.
However, once you’ve entered the distribution phase and are actively withdrawing money from your account, drops in market performance disproportionally affect your total assets. When this happens, the lifespan of your retirement funds is reduced, limiting your revenue, and putting you in danger of outliving your income.
The problem with putting your money in the stock market is that it can often feel like gambling with extra steps. Brokers and proponents of investing fixate on the average rate of growth, but when your goal is to live comfortably during your distribution phase, when losses happen matter more than the lifetime of the investment.
No investment grows every year. Some years you might experience high gains, but you will also experience negative years. The problem is that there is no way of guessing when those negative years will come. There are so many variables to market performance that it all ultimately comes down to luck.
Say, for example, you open a 401(k) and begin your accumulation phase in the prime of your earning years. During the first three years of your investment, you happen to have the bad luck of accruing net losses in each of those years. Although not ideal, you still have decades of contributions ahead, and over time, the years of positive growth could average out to a net positive gain by the time you enter the withdrawal face – no harm, no foul.
Now, let’s say that your retirement fund enjoys a fruitful accumulation phase, with few negative years. But, once you are about to enter the distribution phase, you string together those same three negative years. In this scenario, you do not benefit from time because you have begun to withdraw your funds to serve as income while taking losses and not earning as much as you once did to replenish those funds over time.
In this second scenario, you are negatively impacted by two different factors:
When we enter retirement, we all want certain securities. For starters, we want to ensure that we will not outlive our money. Secondly, we want to have enough income to live comfortably.
With the traditional retirement models of IRAs and 401(k)s, you have little control over the outcome of your funds. Ultimately, whatever the market does will force you to adjust your plans, and that type of uncertainty can be challenging to manage during retirement.
Annuities allow you the freedom to circumvent the gamble of the stock market. For a smaller investment, made as either a lump sum or a series of payments during the accumulation phase, you can secure a pre-determined and ensured income for as long as you need it—no guessing, no luck, just cold hard cash that is contractually guaranteed and transferable to beneficiaries.
Retirement planning should be about, well, planning. ABB Wealth Strategies can help you create an effective retirement strategy and guarantee your income so you can live comfortably and never worry about your funds. Call us today to learn more about your options.