Saving money for retirement has been your goal for years. But once you finally retire and begin using your savings, it can be hard to know how much is safe to spend. After all, you want to have enough to live comfortably through all your years of retirement.
Stock market returns and your own longevity can impact how long your savings last. You can’t control what happens in the market or how long you live, but you can reduce the risk of outliving your savings with the help of guaranteed income products.
Making the most of your savings in retirement is not just about how the market performs. It’s also about when market ups and downs happen, relative to when you need the money.
If your investments lose value in the early years of retirement – right when you’re starting to withdraw money to live on – those losses can have an outsized impact. You’re pulling money out of a shrinking account, which leaves less left over to benefit from any market recovery later. The same average return over 20 or 30 years can lead to very different outcomes depending on whether the bad years hit at the beginning of retirement, or later, once your savings have had time to grow.
Let’s look at two retirees, Mary and Jack. They start with the same amount of savings, take the same withdrawals, but experience very different market conditions at different times in their retirement. Each retiree:
There’s one difference: Mary experiences market gains early in her retirement, while Jack experiences market losses early in his.
In Mary’s first two years of retirement, the stock market is up, so her savings get a head start on growth. These gains help set her up for a higher rate of return over her remaining 28 years of retirement, even if the market experiences losses later on. In Mary’s example, the market declines for the last two years of her retirement, but she’s well protected with money to spare – a total of $877,000 still in her account after 30 years - due to her luck in having positive market returns early on.
Jack has less luck with market conditions. In his first two years of retirement, the stock market is down, so his savings lose some value. Although the market recovers, and eventually even grows during Jack’s last two years of retirement, the early losses mean that his savings do not grow the way Mary’s do. Jack runs out of money in year 29 of his planned 30 years of retirement.
The market conditions Mary and Jack experienced early in their retirement made a big impact on how long their savings lasted, even when they spent the same amount of money.
To reduce the risk of early stock market losses negatively impacting their savings, some retirees turn to guaranteed income products like fixed indexed annuities (FIA). Annuities are long-term retirement planning tools that can provide steady, predictable income for life – regardless of how the stock market performs. Depending on the policy, an FIA may offer:
Knowing you have guaranteed income may help you feel more comfortable spending money on things that matter to you. It can reduce your concerns about running out of money because of poor market returns at any stage in your retirement.
Talk with your financial professional about ways to balance growth potential, income needs and protection in retirement, and if an annuity is the right fit for your financial goals.
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