Don’t gamble on retirement.
When people save for retirement, the biggest concern is the returns on investments. When they retire however, it’s not only the returns they need to care about, but also the order of those returns.
Negative returns during the first couple of years of retirement can increase the risk of running out of money, much more so than the same negative returns happening later in retirement. This is called sequence of returns risk.
What should people do to help mitigate this risk? Many people might think that they can mitigate sequence of returns risk by reducing or eliminating equity holdings in portfolios. But this compromises the upside potential that equities can provide and may lead to running out of money quicker. Portfolios with higher allocations to equities have typically outperformed, because downside volatility in the U.S. equity markets has historically been relatively short-lived.
Adding income annuities to a retirement portfolio can be an efficient way to hedge sequence of returns risk. How? Income annuities are uncorrelated with capital markets and they reduce the net withdrawals from a portfolio. This helps lessen the likelihood of “selling at the bottom,” and allows retirees to keep some of their money invested in the market and take advantage of any possible future gains. Having additional sources of guaranteed lifetime income also reduces the role luck plays in retirement outcomes.
Contact a New York Life financial professional today to learn about how you can take some of the uncertainty out of retirement.