How many of us are nervous about the stock market these days? How many of us are delaying retirement, or if already retired, thinking about the need to return to work? The volatility of the stock market has caused almost universal concern, and (according to the JPMorgan Market Insight) since virtually all categories of investments have declined in value, be they equities, corporate bonds, municipal bonds or real estate, there seems no place to hide. Or so it seems…

In my opinion, the concern about volatility in our retirement funds dates back to a fundamental change that took place several decades ago. It used to be that when an individual worked for a large corporation, they were provided with benefits including a pension plan. That pension plan provided for a set monthly income when an employee retired. Starting in the 60’s and 70’s, that changed. Instead of giving employees a pension plan, corporations provided for us to plan for our own retirement by allowing us to save in tax deferred vehicles such as IRA’s and 401k’s.

Why did companies make this change? Two reasons: 1) it was less expensive, and 2) it transferred investment risk away from them and on to the shoulders of the retiree. Furthermore, we as employees generally embraced the idea of the 401k. It allowed us to plan for ourselves, gave us a sense of independence, and allowed for us to do a better job providing for our own retirement and improve our lives in retirement by enjoying a potentially even higher level of income.

What few individuals fully comprehended was the risk, and it is that risk that is now haunting us.

The best way to understand this is through an example. Here are the cases of Mike and Charlie.

Mike graduated college in 1970 and became a school teacher. For 37 years he taught in public schools, showing up for work every day. Why did Mike become a school teacher rather than go in to the corporate world? In a word – benefits. Mike was provided the usual benefits, such as sick and vacation days, health insurance coverage; he even put money into a 403b plan, and of course was provided with a pension plan. You see, when corporate America changed to the 401k, government employees, teachers, police officers, and firemen continued to enjoy the benefit of knowing that upon retirement that they would get a pension; paying a monthly amount regardless of what the stock market did.

Upon retirement in 2008, Mike began collecting a pension of $5,000/month or $60,000/ year.

Charlie on the other hand entered the work force for corporate America. He was given certain benefits such as sick and vacation days, health insurance coverage, and although he was not offered a pension plan, was given the opportunity to shelter part of his income by contributing to his 401k. And, Charlie contributed diligently. Over the years he contributed almost $150,000 of his own money to his 401k, but between the employer’s matching funds and growth of the investment through capital gains and dividends, it had accumulated to a grand total of $1.5 million.

Charlie was proud of his accomplishment, and was told that he could comfortably withdraw 4% per year (or $60,000) from his 401k and the funds would last his lifetime and probably even grow so that he could eventually take even more. Upon retirement in 2008, Charlie began collecting $5,000/month or $60,000/year from his 401k.

Then the year 2008 happened. The stock market began to decline, and declined more and more until October 2008 when the decline was steep, and the decline continued through the end of 2008.

Mike was collecting his $5,000 per month, and cared little what the stock market did. Sure, his 403b had declined in value, but he could wait it out. His pension was safe. After all, it was guaranteed!

Charlie was also collecting his $5,000 per month, but unlike Mike became very concerned about the market. By the end of 2008, his portfolio fell from $1.5 million to under $900,000! More than that, his withdrawal of $60,000 per year now represented almost 7% of his remaining portfolio! Could his 401k last his lifetime withdrawing at that rate? And where should he invest his money? Everything had gone down, including stocks, bonds and even real estate? Should he reduce his withdrawals to 4% of $900,000, or $36,000 per year, or stop withdrawing funds and go back to work? What should he do?

This story is all too familiar. How many retirees are cutting back on their spending or are returning to work? How many people are just like Charlie? How many would like to be just like Mike?

For those of us like Charlie, we have focused our entire adult life in accumulating a number; a balance; an amount of money as a target that we hoped would support us for the rest of our lives. Perhaps we have made a mistake. Instead of focusing on that number, perhaps we should have focused on the amount of monthly income we needed and sought out ways to guarantee that income stream.

Recent years have brought about major changes to investment products. We’ve seen the commercials for these investment products, either the 800 pound gorilla in the room or the retirement “Red Zone.” Of course these products have restrictions, and of course there are expenses, but they allow for monthly income to be guaranteed for life while still having some control over your investments and still allowing for the possibility of increasing that monthly income in later years.

So, there is a way for you to take that stock market volatility away from you and to place it somewhere else. There is a way to still capture potential gains in the market, and benefit monthly from them in the later years of your retirement. There is a way for your loved ones to benefit as well.

If you would like to talk about removing stock market volatility from your retirement plan, give me a call. I will review with you one of the many plans available to you, including their risks and expenses. I promise that there will be no pressure; just straight talk in a warm, friendly atmosphere.

So, if you would like to learn more, give me a call.

Sincerely,

Jerry L. Style, EA, CFP®
Advisory Representative