The day has finally arrived. You take a moment to reflect on the path leading up to the next stage in life. Medical school, residency, starting a practice, saving toward retirement, putting the children through college, paying for a wedding or two. You have been hardworking, diligent, and disciplined in your planning and preparation.
You are ready to transition into a deserved and anticipated retirement, which includes traveling, working on the golf game, helping the grandchildren with college, and spending time with loved ones.
The date is October 2000, and the beginning of the tech bubble. During the dot.com bubble, the NASDAQ Composite lost 78% of its value.
The date is now late 2007, and the housing market crash saw the S&P 500 decline 57.8% between October 2007 and March 2009.
You have spent 40-plus years in a profession that has helped countless patients and has provided you with the financial means to live a comfortable retirement. Now, due to forces out of your control, your retirement dreams and aspirations are in question.
The timing of your retirement has the potential to dictate one’s retirement success as measured by the ability to sustain a desired quality of life without running out of money.
A recurring question over the years has been: “Do I have enough assets to retire or will I run out of money some day?”
That is a simple question, but one that is complicated by the unknown – will you retire in the beginning of a bull market or a bear market? At what point in the financial cycle will you be forced to start drawing on your portfolio?
The sequence of returns, as it is referred to, can produce starkly different answers to these questions.
The good news is there are strategies that can mitigate those detrimental consequences of retiring at the wrong time. Here are six ways to protect yourself and your portfolio:
The most important step is to know how much money you will need in retirement. We recommend that before retiring, take the time to determine a realistic budget, and do not underestimate your expenses.
These expenses should be broken down into recurring essential expenses (e.g., food, utilities, mortgage, property taxes, etc.) and discretionary expenses (vacations, dining out, gifts, etc.). If the market declines for a year or two, you can use a predetermined formula to adjust discretionary expenses based on a percentage withdrawal of the portfolio balances.
Knowing how much you should have in equity exposure is an important determination. There is no reason to have a higher percentage in the stock market than is needed for future growth to meet goals and objectives. If your retirement looks sound with an allocation of 50% in the stock market, then there is no reason to assume more risk,
The benefits of the potential gains will not affect your lifestyle, but the consequence of the potential losses could be devastating. These are critical calculations to review in retirement preparation.
Design a portfolio that is exposed to various asset classes, different management styles, and different sectors. One should add investments that do not have a high degree of correlation with the stock market and alternative investments. This methodology can assist in reducing potential volatility while smoothing out future rates of return.
Always keep a cash reserve available that represents a minimum of six months of living expenses. These funds will be available for any unexpected expenses.
Consider some of the hedging techniques that are available. You may be able to protect a portion of your equity portfolio from a certain percentage to the downside.
Sometimes, this means giving up a little on the upside, but preservation of principal is important in a declining market, while still giving you upside potential. Some of these strategies are available through annuities.
Over the years, the annuity market has received its share of bad press regarding high fees and lack of flexibility. Some new annuity products have improved over the years and they can provide a useful role in a portfolio.
Part of a defensive strategy can be matching a guaranteed income stream from an annuity contract to a certain percentage of essential recurring expenses. This income is reliable, even in a down market, and can be guaranteed for life.
A reduction in principal will not change this income and, even if the principal were to be depleted, the income will continue.
Compare your actual spending to planned spending annually and make sure that you are not exceeding target withdrawals.
Forecasting the economic and financial climate when you retire is akin to a meteorologist forecasting the weather 2, 10, or 20 years into the future. It is little more than an outright guess.
By implementing the strategies above however, you can be better prepared to successfully navigate any financial storm that may come your way in retirement.
John J., John S., and Traudy F. Grande, CFPs, are the editors of the Money Matters column. They are owners and principals of Grande Financial Services Inc., Oakhurst, NJ, (www.grandefs.com) and registered principals of Wells Fargo & Co., member of SIPC. The Grandes advise doctors across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at firstname.lastname@example.org or call 800-722-1258.
Wells Fargo Advisors and its Financial Advisors provide non-fiduciary services only. They do not provide investment advice (as defined under the Employee Retirement Income Security Act of 1974 as amended [“ERISA”]), have any discretionary authority with respect to the plan, make any investment or other decisions on behalf of the plan, or otherwise take any action that would make them fiduciaries to the plan under ERISA.
The views expressed by the authors are their own and do not necessarily reflect the opinion of Ophthalmology Times, Wells Fargo Advisors Financial Network, or its affiliates.
Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences.
Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk.
A Guaranteed Minimum Income Benefit (GMIB) feature is an optional rider on a variable annuity that is available for an additional annual charge against the income base. It generally may only be selected at the time of contract purchase and cannot be changed later. It can usually be exercised only after a waiting period. A GMIB feature is not a cash or account value. Please be advised that depending on the performance of the investment option selected, the contract value at the time of annuitization could be such that the investor would incur a higher expense with the GMIB option without receiving any additional benefit.
Unlike variable annuities, equity indexed annuities (EIAs) are typically structured so that they are not securities registered with the SEC. Nor are the sales in EIAs regulated by the SEC or FINRA Regulation Inc.
Fixed annuities may have a higher initial interest rate which is guaranteed for a limited time period only. At the end of the guarantee period, the contract at a lower rate.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Grande Financial Services Inc. is a separate entity from WFAFN.