hero designing retirement income

Designing retirement income for underprepared clients

Making a plan now can help clients who are not independently wealthy address risks down the road.

According to Investment Company Institute, more than $37 trillion was in retirement plan assets as of September 2021.1 And a 401(k) study by Fidelity Investments revealed the average 401(k) balance climbed to a record $130,700 in 4Q 2021.2

While the savings are encouraging, there is a real challenge for those not independently wealthy. Once retired, they will need to create an income strategy that produces the income they need while being sensitive to market risks.

One of the most significant risks is the sequence of returns risk. In other words, withdrawing income from an underperforming portfolio. If a retiree withdraws income while the account is down or underperforming, the underperformance may be locked in. The amount removed no longer can increase if, or when, the market rises again. So, the withdrawal happens at the wrong time (during a difficult market). To find out more about protecting retirement income from sequence of returns risk, download our consumer brochure.

Running a simple spreadsheet model that assumes a flat yearly return, let’s say 6%, might result in a very positive outcome because it doesn’t reflect the volatility needed to achieve the 6% return during the decumulation phase. We'll likely get a very different result if we run a Monte Carlo simulation with a commensurate amount of volatility.

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Finding a balance

Another problem in today’s investment environment is the basic strategy often used to help reduce risk by holding a portfolio with 60% equities and 40% bonds. The idea of a risk-averse strategy is to insulate retirement savings from a potential downturn. Except, this risk avoidance might not lead to the necessary level of returns.

In the current environment, the ten-year bond return is around 2%3. So, while 60% of the portfolio is in equity, the other 40% may only be only getting 2% returns. This can make it challenging to attain an acceptable overall return for clients without being too aggressive with the equity portion.

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A risk multiplier

One final thought on risks like high inflation or deep market adjustments: The length of one’s retirement can be seen as a risk multiplier. That is to say, the longer you need to draw income from your assets, the more likely it is that a big problem will present itself. So, for example, if you need to draw income over five years, you may not run into a recession or “black swan” event. But if you need to draw income over thirty years, the likelihood of these disruptions may be greater.

All this to say that a sound income strategy can be important to those who are not independently wealthy.

A financial product like an annuity can also protect a portion of a portfolio from market risk. An index variable annuity provides an opportunity to grow assets while also providing a level of protection and a guaranteed stream of retirement income.

Variable annuities are subject to investment risk, including loss of principal, and contract values fluctuate daily. Investment returns and principal value will fluctuate with market conditions so that units, upon distribution, may be worth more or less than the original cost.

Withdrawals will reduce the contract value and the value of any protection benefits. Withdrawals taken within the contract withdrawal charge schedule will be subject to a withdrawal charge. All withdrawals are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal additional tax.

Guarantees are backed by the financial strength and claims-paying ability of the issuing company. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.

• Not FDIC insured • May lose value • No bank or credit union guarantee • Not a deposit • Not insured by any federal government agency or NCUA/NCUSIF

Products are issued by Allianz Life Insurance Company of North America. Variable annuities are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297.

Product and feature availability may vary by state and broker/dealer.