3 retirement income concerns for underprepared clients

One of the most significant risks is the sequence of returns risk – withdrawing from an underperforming portfolio. For retirees, this risk can wreak havoc on a portfolio.

If a retiree withdraws income while an account is down or underperforming, that essentially locks in underperformance. Experiencing this negative sequence of returns can deplete assets sooner than expected, and result in market losses that may not be rebuilt once income is withdrawn.

Financial professionals can help clients incorporate long-term strategies to address sequence of returns risk to their retirement portfolio. Those strategies could include saving more to provide a larger buffer, diversifying a portfolio across asset classes, investing in dividend-paying stocks, and allocating a portion of a portfolio into a guaranteed source of income.

The length of one’s retirement can be seen as a risk multiplier. The longer a client needs to draw income from their assets, the more likely it is that a big problem will arise. If you need to draw income over five years, you may not experience a recession or an unpredictable “black swan” event with severe impact on the market. But if you need to draw income over 30 years of retirement, the likelihood of experiencing these disruptions increases.

A sound retirement income strategy can be especially important for clients who are on the edge of financial preparedness.

It’s tricky to find a balance between risk and reward. A basic strategy often used to help reduce risk is to hold 60% equities and 40% bonds in a portfolio. This strategy is intended to insulate retirement savings from a potential downturn. But this risk avoidance might not lead to the level of returns a retiree needs to fund their retirement.

While incorporating risk management strategies can be important for long-term financial planning, many Americans don’t have quite enough in retirement savings for this level of risk avoidance. In the current economic environment, the 10-year bond return is around 4%. This level of return may make it challenging to attain the overall amount of income needed for clients without aggressively investing the equity portion.

Buffered products, such as some exchange-traded funds and annuities, offer upside potential with varying levels of risk mitigation. Incorporating these types of risk management products into a portfolio could help the 53% of Americans who are hesitant to invest any additional money in the market for the near future.

A holistic financial plan will consider these concerns and build in risk mitigation strategies. With the proper planning, financial professionals can help underprepared clients feel reassured in their retirement strategy.