A stock market crash in retirement can do more than shrink your account balance. It can threaten the income you depend on to pay your bills and enjoy the retirement you worked so hard to build.
I don’t know when the next correction will happen. But I do want you to understand what a market downturn could mean for your retirement income and how using a portion of your savings to create a personal pension may help.
Need help choosing the best annuity for your unique situation? Have questions about getting an annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!)
Tip: See how much an annuity could pay you using my annuity calculator
Why Can a Market Crash Be So Damaging in Retirement?
When you’re retired or approaching retirement, a strong stock market can make everything look comfortable. Then you start wondering what happens if those gains disappear right when you need your money.
Some experts expect markets to keep climbing. Others point to inflation, economic uncertainty, and other reasons to expect a correction.
My approach is to focus on what you can control: how you structure your income.
Imagine you have $500,000 invested in stocks and the market drops 30%. Your balance falls to $350,000, before accounting for any withdrawals.
If you need that account to provide your paycheck, you face a difficult decision. Do you reduce your spending, or keep withdrawing the same amount from a smaller balance?
That is the retirement disaster I want you to think about. The problem is what happens to your lifestyle when your income depends on investments that have fallen in value.
Will a 4% Withdrawal Strategy Give You Enough Income?
You may have heard that withdrawing 4% is the answer to retirement income planning. But before you rely on that number, look at what it means in dollars.
- A 4% withdrawal from $1 million is $40,000.
- A 4% withdrawal from $2 million is $80,000.
- Social Security or a pension may supplement those amounts.
For some households, that works. For others, the income falls short, especially if they haven’t accumulated $2 million.
Now imagine a $1 million portfolio falls 20%, leaving $800,000. If you calculate your withdrawal as 4% of the new balance, your annual income falls from $40,000 to $32,000.
That calculation is different from the traditional 4% guideline, which starts with an initial withdrawal and then adjusts that dollar amount for inflation. Continuing the original withdrawals after a decline means taking money from a smaller portfolio.
Either way, I want you to ask a practical question: Will this approach provide the income I need when markets are struggling?
💡 Pro Tip: Start with the paycheck you need in retirement. A large account balance alone does not tell you whether your income plan will support your lifestyle.
How Can an Annuity Create a Personal Pension?
I look at annuity contracts as tools. Their purpose in this discussion is to turn a portion of your savings into contractual lifetime income.
I’m not suggesting that you buy an annuity to beat the stock market or get rich. Stocks and mutual funds may be better suited to the long-term growth portion of your plan.
But if Social Security and any existing pension don’t provide enough income, an annuity can help fill that gap.
Instead of trying to generate every dollar of retirement income from your investments, you can use part of your money to buy a pension-like payment. You can then keep other money invested for growth.
In the video above, I encourage you to compare several approaches:
- Annuities with lifetime income riders.
- Deferred income annuities, or DIAs.
- Single premium immediate annuities, or SPIAs.
The right comparison depends on when you want income to begin, whether it covers one person or two, and the contract’s benefits and costs. Annuity guarantees depend on the issuing insurance company’s claims-paying ability and the terms of the contract.
👉 Want help comparing lifetime income options? Visit my website to use the calculators and schedule a call with me.
What Could $800,000 Provide in Lifetime Income?
In the video above, I walk through an example involving a Nebraska couple. One spouse is 65, the other is 62, and they have $800,000 they are considering using for retirement income.
They plan to wait five years before starting payments. At that point, they will be 70 and 67.
The Corebridge illustration shown in the video provides $94,720 per year in joint lifetime income, or approximately $7,893 per month.
Those figures belong to the example in the video. They are not a current quote or a promise that every couple investing $800,000 will receive the same payment.
If this couple also received a hypothetical $50,000 per year from Social Security, their combined annual income would be $144,720. That is approximately $12,060 per month before taxes.
Now suppose they also keep $500,000 invested in the stock market. A 30% decline would reduce that stock portfolio to $350,000, but their contractual annuity income would continue under the contract’s terms.
That is the separation I want you to understand. They still have money invested for growth, while a separate portion of their savings supports their retirement paycheck.
How Do the Income Rider, Fees, and Benefit Base Work?
The illustration includes an income rider with a fee. I don’t want you to overlook that cost, because it comes out of the annuity’s account value.
In this example, the rider provides a 12% simple annual increase to the income benefit base during the five-year waiting period. Here is the calculation:
- The starting benefit base is $800,000.
- Each annual increase is $96,000, or 12% of the original $800,000.
- Five increases add $480,000.
- The benefit base reaches $1,280,000.
- Applying the illustrated 7.4% payout factor produces $94,720 per year.
The benefit base is used to calculate income. It is not a cash balance you can withdraw, and the 12% roll-up is not a 12% investment return.
The video above also shows why that distinction matters. Under the zero-growth illustration, the account value is depleted around the older spouse’s age 77; another illustrated scenario shows depletion around age 80.
However, the covered lifetime income continues under the rider’s terms even after the account value reaches zero. That continuing payment is the reason for buying the income protection.
I also discuss alternatives without an explicit rider fee. You need to compare the income, remaining account value, death benefit, and contract terms instead of judging the options by the fee alone.
💡 Pro Tip: Ask to see the account value and income benefit base separately. Then ask what happens to your income and your beneficiaries’ benefits if the account value is depleted.
👉 Want help understanding an illustration? Schedule a call with me through my website, and we can review the numbers together.
How Do You Choose an Income Strategy That Fits?
Start by deciding whether you need income for one lifetime or two. In the video’s separate single-life comparison, the illustrated payment increases to approximately $104,000 annually because it covers one person instead of both spouses.
That is a comparison between payout choices, not a promise that an existing joint-life contract automatically increases its payment when a spouse dies.
You also don’t have to place all your annuity money with one insurance company. As I explain in the video above, some people divide it among two or three contracts and receive separate income payments.
My goal is to help you compare the options and understand what you are buying. I receive commissions, and those commissions vary by product and other factors.
I want you to review the illustrations, ask questions, and decide whether an annuity belongs in your portfolio. You should understand the income and tradeoffs before making a decision.
A market crash may hurt the growth portion of your savings. Building a separate source of contractual income can help keep that decline from dictating your entire retirement lifestyle.
Need help with finding the best annuity for your retirement?
Click here to schedule a call with me.
On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have