7 Tips for Safeguarding Retirement Income in a Turbulent Market

The American College of Financial Services conducted a flash survey of Retirement Income Certified Professionals® (RICP®s) and 60 percent reported that none of their clients made changes to their retirement plans during times of market turbulence, despite the majority of clients feeling more concerned about their retirement security now than one year ago.

Don’t let market volatility scare you — or your clients — into inaction. Investment options exist that can help to minimize the negative impact of volatile markets on client retirement income plans. Below are seven tips for helping your clients safeguard their retirement income in a turbulent market.

1) Reduce the Withdrawal Rate

Despite the four percent rule being commonly accepted as a rule of thumb in retirement income planning, a client’s safe withdrawal rate depends on the interaction of their portfolio investments and market volatility — not the other way around. For clients who must retire during down market years, flexibility with spending to temporarily reduce their withdrawal rate can help preserve and increase the longevity of their portfolio.

2) Take Advantage of the Downturn

There are some upsides to market downturns that can help safeguard a client’s retirement savings or income and put them in a better position for the future. Sometimes, selling assets during down markets and realizing a loss can reap positive tax benefits. This technique, called tax-loss harvesting, isn’t the best recommendation for everyone and should only be considered as part of a client’s comprehensive retirement income plan. Another possible recommendation would be to execute a Roth conversion during a downturn. In this example, moving money from a traditional IRA or 401(k) into a Roth account, which offers tax free earnings and withdrawals- could result in a lower tax bill than if the same number of shares was converted in a positive market.

3) Reduce Portfolio Volatility

One way to mitigate risk in a retirement portfolio is through stock diversification. Allocating assets among different industries and categories — health care for example, tends to do well even in down markets — balances risk and creates diversification. Having the right mix of asset classes will also lower the portfolio’s standard deviation and in turn, its volatility. Be sure to include small-cap stocks, international stocks, and other asset classes into your client portfolios to reduce volatility when appropriate.

4) Protection From the Inevitable

Market volatility is a normal part of investing. Advisors know that investment values will fluctuate over time and should incorporate downside protections into their clients’ retirement income plans. Two types of downside protection are: using put options and purchasing variable annuities. A put option gives the holder the right to sell an underlying asset at a set price during a specified time period. Using a put option can limit the growth potential of a retirement portfolio however, and should not be used throughout the entire retirement period. Purchasing a variable annuity with a guaranteed living withdrawal benefit rider and incorporating it into the retirement plan can provide clients with a guaranteed income floor in retirement.

5) Consider Non-Market Assets

In addition to market assets, consider tapping into non market-correlated income sources to incorporate into client retirement plans since they won’t fluctuate with the market. These can include reverse mortgages, cash value life insurance, or holding cash reserves to cover early retirement expenses, all of which are effective ways to generate income in the early years of retirement without having to sell off stocks. Keep in mind that due to their complex nature, these recommendations should only be given if or when they fit a client’s specific needs.

6) Exercise Caution When Using Cash

Just over 25 percent of Americans reported their long-term savings was cash instead of investments. Cash can provide a cushion by delaying the need to sell stocks during down years, but holding too much in cash can have a detrimental effect on a client’s retirement security in the long run. Not only does the value of cash decrease over time due to rising inflation, but research shows that when retirees spend assets — in this case cash — instead of income, they become negatively affected mentally and emotionally.

7) Build a Ladder Over Turbulent Markets

One strategy to create guaranteed retirement income streams that have built-in protection against market volatility is bond laddering. Since bonds are tied to the federal interest rate, they can provide a good source of retirement income while managing interest rate risk. Bond laddering is typically used as a long-term strategy and involves purchasing multiple bonds with staggered maturity dates. If yield drops before one of the bonds matures, the other bonds will not be affected because they were locked in at a higher interest rate. The type of bonds that a client needs will depend on their specific situation, time horizon and goals.

Clients who feel unnerved and anxious due to recent market volatility present an opportunity for skilled advisors to educate them on the value of a comprehensive retirement income plan.