The bear market has roiled many retirees’ or soon-to-be-retirees’ income projections, creating the dilemma of how to recover from those losses. Jerry Golden, president of MassMutual’s Income Management Strategies Division, shares the following scenario and potential solutions for a hypothetical client, “Joe, the retiree.”
Joe is a 65-year-old widower with two children and six grandchildren. He has $1 million saved in a rollover IRA account that represents the bulk of his savings. The market’s recent volatility has unnerved Joe, who has the following financial goals: (1) a reasonable inflation-adjusted income that is protected; (2) the ability to provide some money for his children and grandchildren; and (3) access to a portion of assets for unexpected expenses
In October, 2007, Joe was 64 and looking forward to beginning his retirement in one year. He had a traditional portfolio allocation of 65 percent equity mutual funds and 35 percent in bond mutual funds. He planned his retirement income with the assumption that he would take out 4 percent ($40,000) in the first year with subsequent years adjusted for inflation, which he estimated would average 3 percent. Even if markets experienced zero growth over the next year, he figured he’d have enough money to last throughout his retirement with some money left for his children and grandchildren.
By October 2008, Joe’s portfolio had dropped with the bear market. His equity mutual fund portfolio was down 38 percent, which was the average result for investors given market conditions. His bond mutual funds were down 9 percent, also on par with average market performance. Consequently, his portfolio was down 28 percent over the last 12 months to $719,850 ($401,700 in the equity mutual funds and $319,150 in the bond mutual funds).
Joe was still counting on receiving $40,000 per year to meet his basic living expenses. His job requires that he retire at 65, so he can’t delay retirement, and he doesn’t want to take another job in retirement to subsidize his income.
Joe is apprehensive about market volatility and doesn’t want to lose any more of his money to market downturns. However, he also wants to ensure that his money has the potential to grow, as he wants to leave some money to his children and grandchildren. Golden outlines several options that Joe and other investors in similar positions can consider. (Note: the amounts shown are for illustration-only because rates are subject to change.)
Goal 1: Protect future income from being eroded by poor market performance
Solution 1: Purchase an inflation-adjusted income annuity for $554,346; this will provide $40,000 of inflation-adjusted, guaranteed income each year for the rest of his life. This leaves $165,504 in discretionary money that Joe can move into a growth portfolio of stock and bond funds; he can also access these funds if needed. If Joe leaves the money in this portfolio to accumulate for 30 years and it experiences average results, he could have as much as $929,411 to leave his heirs. There is no guarantee he’ll achieve that result, of course, but his current portfolio also lacks guarantees.