The five to 10 years leading up to retirement can be a time of increased risk for savers.
During this time, clients are likely to have the largest 401(k), IRA, and savings balances of their lifetime. And external factors including market volatility and other investment risks can place increased pressure on your client’s portfolios.
Understanding these risks — and how to face them – can help you guide them to the “sweet spot” in retirement planning — the optimum mix of the right income strategy for a client’s retirement planning horizon.
- What Time has Taught Us
This year marks 10 years since the financial crisis – a time when consumer confidence levels hit their lowest point in a generation, and the emotional roller coaster of investing was again put into motion. A survey released this month by Lincoln finds that savers are concerned about the possibility of a future crisis – placing an increased demand on solutions that can offer protection for their portfolios.
If another major economic downturn were to occur, 40% of pre-retirees claim that they can’t afford to lose anything before needing to adjust their savings plan and retirement goals. In addition, more than half are very concerned about their money growing enough to provide a lasting income stream in retirement.
While we cannot predict when another crisis will hit, savers can take steps to prepare and ensure some of the same mistakes are not made twice.
If history has taught us anything, it’s that the markets move in cycles. Experts see patterns and make predictions, but no one knows for certain what the market will do next. Having a dependable income plan in place can help give pre-retirees more confidence along their journey through the various stages of saving and during all market cycles. As they consider where they stand against their retirement time horizon, here are some ways they can consider protection against risk.
- 25 Years to Go
For a client 25-years out, time is on their side. A long investment horizon is one of their primary risk-management tools at this stage. Typically, investors who are 25 years away from retirement can better tolerate risks like market volatility because their focus is on long-term growth. Having a long time horizon to accumulate assets gives portfolios a better chance to recover from any short-term dips.
But clients can still take steps during this time to ensure wealth accumulation is tempered with protection, for instance, against sequence of returns risk. Sequence of returns risk is the effect of random market returns on a portfolio. If not managed properly, the sequence in which clients receive returns could pose a risk to their retirement goals when they start taking income from savings. If a client experiences negative returns just before and during the first few years of retirement, they may be at a greater risk of running out of assets prematurely.