3 retirement income concerns for underprepared clients

Underprepared clients will need to create a strategic income strategy that will provide enough income while being sensitive to market risks

Many Americans have the same big retirement goal – to leave the workforce and have enough money to last the rest of their life. That means amassing enough wealth to be able to sustain their lifestyle without going to a job for a paycheck.

While some achieve this goal, many are on the edge of financial preparedness for retirement. And many worry about running out of money. The majority of Americans (61%) said they are more afraid of running out of many than they are of death, according to the 2023 Annual Retirement Study.*

Once retired, they will need to strategically create an income strategy that will provide enough income while being sensitive to market risks. These clients may want to consider incorporating risk mitigation strategies into their retirement income plan.


Sequence of returns risk

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of returns can deplete assets sooner than expected, and result in market losses that may not be rebuilt once income is withdrawn.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.


Longevity as a risk multiplier

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.


Avoiding risk by limiting returns

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 like 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.

*Allianz Life conducted the online survey in February and March 2023 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50K+ (single) / $75K+ (married/partnered) OR investable assets of $150K.