Stability Over Stress: Building A Retirement Plan For Uncertain Times
If you’ve read economic headlines recently and thought, “Well, that’s not comforting,” you’re not alone. Market swings and broader economic uncertainty are enough to make even confident investors second-guess their strategies.
And here’s the hard truth: The markets don’t care if you’re retiring next year. They don’t care if you’re five years away. And they definitely don’t care if you’re lying awake at night wondering if you’ve done “enough.”
The good news? You can take steps to feel more confident.
On a special episode of the HerMoney Podcast, sponsored by LIMRA, we sat down with two of the smartest voices in retirement – Jason Fichtner, Executive Director of the LIMRA Retirement Income Institute and David Blanchett, head of retirement research at Prudential, a portfolio manager at PGIM and a LIMRA Retirement Income Institute Fellow – to talk about how to step off the emotional rollercoaster of the markets and build a retirement plan that feels stable, predictable and livable.
WHY MARKET SWINGS HIT HARDER AS RETIREMENT GETS CLOSER
If you’re approaching retirement, volatile markets can feel especially unsettling. Research shows that’s no coincidence. According to Blanchett, people tend to react more strongly to market swings as retirement nears. “It’s very behavioral — it’s this idea that you only get one shot at retirement and the implications of a market drop just before you retire are really significant,” he shares.
In fact, those fears are not unfounded. For that, you can thank something experts call “sequence-of-returns risk.” This is the idea that although you might achieve a suitable average return — say 8% — over time, what you’re really getting is a series of annual returns, some higher and some lower, that average to that number.
When low returns hit early in retirement, the results can be problematic. If you take withdrawals (even ones you planned on) from a shrinking portfolio, you lock in losses and leave fewer dollars available to grow when markets recover. Even strong returns later may not fully make up the difference because there’s less money left to benefit from those gains.
One of the most effective ways to guard against this risk is with protected income.
INCOME YOU CAN’T OUTLIVE
Protected income is exactly what it sounds like – income you can’t outlive. It comes from three sources: Social Security, pensions and annuities. Most other retirement income sources are considered variable because they fluctuate with market performance.
Social Security and pensions are parts one and two of what’s often called the “three-legged stool” of retirement, with the third leg being comprised of personal savings. The challenge? That stool has gotten a bit wobblier due to pensions largely disappearing for many workers.
Annuities, experts say, can help restore stability. Blanchett notes they can be especially valuable for covering essential expenses. “If you come at retirement from a perspective of protection and understanding what may happen, it may make it easier for you to stay invested and earn that higher return through investing in stocks over the long term,” he explains.
RETHINKING RETIREMENT PORTFOLIOS: PROTECTION AS AN ASSET CLASS
Research shows protected income can do more than provide stability – it can also improve retirees’ confidence and spending comfort. Research from Blanchett and Retirement Income Institute Fellow Michael Finke shows that retirees with assets that they annuitize to provide income spend twice as much as those with equal amounts of non-annuitized savings.
“There’s this additional benefit from having more lifetime income,” says Blanchett. “It gives you the capacity to spend more. You actually are more willing to spend that income than you are from a portfolio.”
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It’s part of the reason that Fichtner says we need to start “thinking about protection as an asset class.” While traditional retirement investing often relied on a 60/40 mix of stocks and bonds, longer lifespans, the disappearance of pensions and economic uncertainty are prompting a rethinking of that approach.
Fichtner proposes a mix (depending upon your situation, of course) of 50% to 60% equities or 50% equities, 20% to 30% bonds and the rest protection. That “could be life insurance or an annuity,” he notes, adding that “it’s important to start thinking about that whole portfolio, and a slice of that now being protection.”
SOCIAL SECURITY: THE HEADLINES VS. REALITY
As for leg number one? The future of Social Security often dominates retirement anxiety, but experts say many of the fears are overstated.
“Social Security is not going bankrupt,” Fichtner, a former Social Security Administration official, stresses. “It has significant revenues coming in from payroll taxes that Americans pay today, but it is a pay-as-you-go system.” Importantly, one of the four Social Security trust funds (the one responsible for Social Security checks) is scheduled to be depleted around 2032.
If Congress fails to act, the Social Security Administration will only be able to pay out from that trust fund what it takes in in payroll taxes. As a result, benefits could be reduced by 20%. However, Fichtner believes that scenario is unlikely. “Imagine having Congress up on Capitol Hill refusing to do anything and resulting in a 20% benefit cut for seniors? We don’t think it’s likely,” he says.
DELAYING SOCIAL SECURITY CAN BE ONE OF YOUR BIGGEST WINS
When people hear concerns about Social Security’s long-term outlook, many feel tempted to claim as soon as possible. But for retirees who are able, the benefits of waiting are as significant as ever.
“For anyone who is willing to actively consider the decision – they’ve got money saved for retirement, they’re in reasonable health – waiting as long as you possibly can is likely to result in the highest available income,” says Blanchett.
Benefits can be claimed as early as 62 or delayed until 70. But claiming early comes with permanent reductions. For example, someone eligible for $1,000 per month at age 67 would receive about $700 per month at age 62. Waiting until age 70 would increase that benefit to about $1,240 per month.
“You should claim Social Security when you need the money, but if you can afford to delay, even a few months or a few years, you should, because that inflation-protected, higher monthly benefit will go a long way,” says Fichtner.
BRIDGE ANNUITIES = A STRATEGY TO HELP YOU WAIT
Working longer is one way to delay claiming Social Security, but it’s not the only option. Another strategy is using what’s called a bridge annuity.
While lifetime annuities provide payments that last as long as you live, bridge annuities work differently. They provide income for a limited period — for example, helping cover expenses between retirement and when you begin claiming Social Security.
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“You’d start getting an annuity, which is protected, that would then give you money every month until you turn 67 or 70,” explains Fichtner. “Then that annuity turns off, and you claim a Social Security with a higher monthly benefit, which is then inflation-protected for the rest of your life.”
THE MOST IMPORTANT STEP: BUILD – AND STRESS TEST – A PLAN
Whether you’re nearing retirement or already there, experts agree on one essential step: make sure you have a comprehensive income plan.
“Go over your monthly expenses and match them up with your retirement income,” suggests Fichtner. “Can you still cover your expenses? Can you still cover your expenses if inflation goes up 10%? Run those types of scenarios and see how you fare.”
Building a plan is often easier with guidance. Free online retirement planning tools can help get you started. Working with a financial professional can also help you take things to the next level.
If you’re searching for an advisor, Blanchett and Fichtner agree that it’s worth it to take your time and find the right fit.
“It’s like buying a car,” says Fichtner. “Test drive them first before you buy. Realize that a lot of professionals will meet with you and either give you a free consultation, or you can do a one-hour session for a small fee. That’s a good place to start.”