Planning for unexpected events is a normal part of life. But when you get to retirement, market conditions can have a lasting impact on the long-term value of your nest egg. That’s why it’s important to prepare for what you can’t control by securing alternative sources of retirement income that aren’t reliant on the financial markets.
Let’s look at Sarah, for instance.
Sarah is approaching retirement with $1,000,000 saved in a non-qualified account and intends to withdraw $75,000 per year.
(For the sake of this example, we’ll disregard the effects of investment fees and taxes, which she would incur if this were a real investment.)
During the first two years of Sarah’s retirement, the market went down, and the value of her investments dropped considerably.
Now she has two options:
1. Continue with annual withdrawals.
Let’s see what happens if Sarah sticks to her plan of withdrawing $75,000 from her account at the beginning of each year.
2. Skip withdrawals following down years
Sarah can also choose to skip withdrawals entirely in years when the market performs poorly. This strategy can help her protect her principal balance and allow her investments more time to recover.
Diversification is Key
As the numbers above suggest, having a reliable alternative source of income during retirement can be crucial. This could be a fixed-income annuity, a part-time job, or a rental property. By having multiple income streams, Sarah would have been able to cover her expenses without having to withdraw funds from her investment account during the bear market.
Diversification does not guarantee profit nor is it guaranteed to protect assets. Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. Hypothetical examples are included for illustrative purposes only.
Recent Comments