Creating Retirement Income In Turbulent Markets

Written By: Katana Abbott

There are over 73 million baby boomers who are pondering how they will create income to take them through the third stage of their lives without running out. 

Times have changed since I first started my career as a financial advisor in 1987.  That was 30 years ago, and back then, the consensus was that retirement was like a 3-legged stool made up of pension, Social Security, and savings, and if one of those legs was wobbly, your stool could fall over, meaning your retirement wasn’t stable.

Today, all those legs are wobbly!

Issue #1:

Employees used to retire with a “defined benefit pension plan.”  In this type of plan, companies would reward loyal employees with 25-30 years of service by paying them an ongoing income stream after they retired for the rest of their lives. But this benefit is disappearing. 

In fact, the percentage of workers with defined benefit pensions peaked at 60% in the 1980s. Today, the number of employees with these traditional pension plans is at just 4%, leaving Americans the responsibility of not only funding their own retirements, but having to know how to invest as well in the new “defined contribution pension plan” better known as a 401(k)

In other words, all the risk has been shifted to the employee!

Issue #2: 

Today’s retirees face the issue of figuring out how to create income from the funds they have accumulated in their 401(k) plans when interest rates are below 3%.  In addition, they need to become money managers knowing how to navigate turbulent markets.    

Thirty years ago, when I first became a financial planner, it was easy to generate income because rates were around 8% on 10-year Treasury bonds.  Today’s US Treasury bonds are paying under 3%.

What does that actually mean?  Let’s say you have saved up $350,000, and you put that money into bonds:

  • At 8%, you could earn $28,000 per year and have $2300/month to live on.
  • At today’s 3%, you could earn $10,500 per year and have $875/month to live on. 
  • That is a $1425/month pay cut!

Now add inflation to this, and stock market volatility, and you can see the problem anyone looking to retire is facing when it comes to turning assets into income!

Think about it.  How many Americans lost 50% of their retirement portfolios in the Great Recession of 2008?

  • With a defined benefit plan, the employer would need to make up this difference because they are guaranteeing the employee a specific amount of monthly lifetime monthly income. 
  • With a defined contribution plan (401k), the employee needs to make up this difference. 
  • The risk has shifted to the employee!

This is a HUGE issue that the average person does not yet understand.  Let’s say you had a “defined benefit pension plan” that would pay you a guaranteed income of $25,000 for life, how much do you think you would need in your 401(k) to guarantee that you would receive that $25,000 for at least 30 years? 

Here are two popular strategies:

  • If you look at taking a 3% withdrawal rate (what most brokers are recommending today), you would need about $800,000 to generate the $25,000/year. 
  • You could create your own “pension” plan with an annuity. For example, a 62-year-old with a fixed indexed annuity and a guaranteed income rider, may need approximately $500,000 to provide lifetime income of $25,000/year.  As a bonus, some plans may double your income for up to five years if you needed long-term care.    

Understanding how to turn your assets into income at retirement is one of the most important tasks ahead of you. There are other options as well, and these examples are just for illustration purposes. Be sure to discuss with your advisor, because your personal situation will certainly vary.

Protecting what you already have needs to be a top priority as well. We all know what happened in the 2009 Great Recession when stock portfolios dropped about 50%, as well as the market drop of 26% or 6,400 points in just a few days in March 2020.    

Volatility is great when you are accumulating in your plan and have many years until you retire or want to access that money, but for those who are nearing or in retirement now, market corrections can cause emotional stress, especially if you need to access those funds when the market is down.

 There are several strategies to generating income at retirement. 

  • One of the most important parts of a plan is to have an adequate cash reserve to cover at least one year of expenses. 
  • If you are retired, having three to five years of “safe” money that you can access during a market correction.
  • Having guaranteed annuity income to cover your basic living could help you sleep at night and allow your money in the market to ride the ups and downs.

If you are planning to retire comfortably, you will need a plan to replace your income.  I believe this new retirement reality needs a New Retirement Solution™, and this could include work.

For many, retirement will indeed no longer mean the end of working, but more of a career and lifestyle transition, with many options such as:  continuing to work part-time, learning new things, taking courses, encore careers, starting a business, getting and staying fit, writing a book, volunteering, and traveling.  It will be a combination of working, learning, and exploring new things.

What is your dream for an ideal retirement or what many are calling their 3rd Act?

  • How will you spend your time?
  • Will you continue to work or launch a passion project?
  • Where will you live? 
  • Will you downsize or even live overseas?
  • How will you stay fit and healthy?
  • Who will make decisions for you if you cannot care for yourself? 
  • When will you take Social Security? 
  • How much income will you need and how much will you have?
  • Are you prepared for the next stock market correction?

This is not a time for do-it-yourself or trial-and-error solutions.  It’s time to get smart, to get support and to create a personal retirement plan for the next chapter of your life. 

To help you understand ways to generate income and when to take Social Security, I invite you to pick up my free guide:  Smart Strategies to Maximize Your Retirement Income.  Let’s explore how you will create the income and lifestyle you need, so you can thrive in your 3rd Act!  Come learn more at www.katanaabbott.com

Katana Abbott, CFP®, is a Midlife Millionaire® Coach, founder of the Smart Women Companies, and the host Smart Women Talk with over a million subscribers.  For over 30 years, Katana has shown women how to take charge of their life and finances and believes it’s never too early to plan for expected and unexpected events like retirement, encore careers, moving abroad, or preparing for long-term care.  She has written several books, created a financial literacy course, and is a popular speaker. Katana has been honored by NAWBO as one of Detroit’s Top 10 Business Women, receiving the Breakthrough Award. To download her new retirement guide, Three Smart Strategies to Maximize Your Retirement Income visit www.katanaabbott.com

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