What are the 3 greatest retirement risks?

Speaker 1 (00:08): Hi, and welcome to Your Thriving Practice, a podcast from Global Atlantic. I'm your host, Jenn Bernstein.

Speaker 1 (00:18): As Vice President of Advanced Markets at Global Atlantic, Thea Marasa-Scafidi spends much of her time exploring three key issues that clients on the cusp of retirement are thinking about and dealing with everyday changes in the market and the risks they pose to a client's long-term sequence of returns, the impact of increased longevity, and the risks to spending power posed by inflation. In this week's episode of Global Atlantic's, Your Thriving Practice podcast, Thea and I will discuss some of the ways in which clients might mitigate the risks posed by these three forces smooth out and even take advantage of the sequence of returns, better plan for the decades they're likely to live post-retirement and ensure that they're able to maintain their lifestyles despite inflationary pressures. Those inflationary pressures may be moderating now but are sure to come back at some point in the future. Thea, thanks so much for being here. Good to see you. Looking forward to dipping into your expertise here.

Speaker 2 (01:19): It's great to be here. Thank you so much for having me.

Speaker 1 (01:21): So, let's start by talking about the concept of sequence of returns. What do you mean by that and what are the risks it poses?

Speaker 2 (01:29): Simply put sequence of returns is the concept that the timing of positive and negative returns can impact the longevity of a client's portfolio. Poor performance immediately before retirement and in the first few years of retirement when withdrawals have started, can negatively impact the longevity of the client's retirement funds.

Speaker 1 (01:49): Can you give us a couple of concrete examples of how this might play out in real life? Perhaps focusing on how two different people approaching retirement who start out with the same size portfolio might end up facing very different financial situations depending on where the market was at the time that they retired.

Speaker 2 (02:08): Absolutely. So, for this example, let's think about two clients who are just entering retirement. Susan and Sam, we look at these clients over a 20-year period of retirement. Each retiree starts with $500,000. They take an initial 4% withdrawal that increases annually to account for increased cost of living, and they have an average annual return of around 6%. But these clients have one distinct difference, the sequence of the returns that make up that 6% annualized return. So, let's say Susan retired in 1989, it's a positive time in the market. She has positive returns through the first few years of retirement and the 20 year period we look at ends during the crash of 2008, Susan would still have over a million dollars in her retirement savings thanks to the growth she experienced early in her retirement, despite that 2008 crisis, if Sam retired in the same time period, but with the returns reversed, so let's say Sam retires in 2008 and we work backwards to 1989, Sam would be left with less than $5,000 at the end of that 20 years.

Speaker 1 (03:18): Wow, that's huge and scary. Absolutely. Well, obviously they might have planned a little differently, right? Maybe Sam could have put off his retirement until the market was on the rise again. But that's not always possible as we know. How else could he have avoided that risk, which proved disastrous to his finances? There's

Speaker 2 (03:33): A few ways to address sequence of return risks, and delaying retirement is definitely one of them. If a client has the option, it is worth looking into delaying until the bear market they're experiencing recovers. But that's not an option for everybody. There's a theory of asset allocation that some advisors use that uses buckets of investments to satisfy the income needs of the retiree at their different time horizons. So, there's a short-term bucket typically filled with cash and cash equivalent securities. They have a midterm bucket with short duration bonds and a long-term bucket that holds long duration bonds and equity holdings that may be more subject to market volatility. The strategy lets clients ride out that volatility of those long-term investments before they need to access them. Finally, annuities are a great option here. Putting a portion of retirement assets into an annuity with guaranteed income can offset the risk of taking income in a bear market early in retirement. So, if we think about Sam, even if we just took half of his retirement funds that we illustrated half of his $500,000 retirement portfolio and we reposition that into an annuity, Sam can reduce the distributions he takes from the remaining liquid portfolio. And at the end of that 20-year horizon, we looked at Sam can be left with more than $300,000 in his liquid retirement savings.

Speaker 1 (04:58): And we know annuities have been very popular over the last several years with an unstable financial environment. Absolutely. That makes sense. There's always gonna be market downturns, right? I mean, that's something that can't be avoided in someone's lifetime.

Speaker 2 (05:10): Exactly. Markets move in a cyclical fashion, they move up and down. There's bull markets, bear markets, and recoveries throughout every client's retirement horizon

Speaker 1 (05:21): Thea longevity is another risk facing retirees, right?

Speaker 2 (05:25): Absolutely. So, 50 years ago, a client retired at 65 and only lived an average of four and a half years in retirement. It's a very different planning environment than today. When we see a client retire at 65 and live two or three decades in their retirement,

Speaker 1 (05:41): What can a financial professional do to ensure their client doesn't outlive their money?

Speaker 2 (05:46): There are products on the market that can help financial professionals ensure the retirement of their client. Retirement insurance products like annuities are built to protect against longevity risk. So yes, they have a savings portion to the planning, but in essence, they're a way to ensure that income is provided that a client cannot outlive.

Speaker 1 (06:08): Over the past few years, most people have been dealing with inflation, the impact of which is a reduction in purchasing power. While inflation has come down dramatically, the increase in most prices that came because of inflation is just now the new normal. What can financial professionals do to help their clients navigate inflation?

Speaker 2 (06:26): Well, there's a few things that they can look at. Absolutely. Inflation has come down from the last couple of years, but as we discussed with longer and longer retirement horizons, they're going to see inflation rise again during the course of their retirement, more than likely. So, a couple of things you can do. Number one, maximize and delay your social security. If a client believes that they have longevity ahead of them and they have the ability to delay for maximum social security, that may be the right option for them. They also need to look at a diversified investment portfolio. Ensuring that all your eggs are not in one basket is the best way you can protect against inflation. And finally, I come back to annuities. You know this retirement insurance is really meant to take the weight and the pressure off of other retirement assets. So, part of that diversification has to be looking at what an annuity can do to help a client protect their income for the long term.

Speaker 1 (07:24): So Thea, the options you've provided through which clients can work around these three key risks, the market longevity and inflation are very helpful. Interestingly, one instrument that seems to help clients deal with all three risks is, as you've mentioned several times, annuities. Let's focus on those for a moment. Annuities help with market risks, as you've explained. Are there other benefits to annuities? Absolutely.

Speaker 2 (07:48): So, annuities are tax deferred investments, meaning you can take after tax dollars that you earn in your paycheck or in your other investments and turn them into a private retirement account, turn them into a way to avoid taxable gain while you're waiting to retire. They also provide guaranteed income and can provide a private alternative to the pensions that older generations once enjoyed. You know, we see less and less participation in employer sponsored retirement plans. I know that there are lots of efforts to increase that participation, but we also have seen a severe decrease in the availability of pensions. So, annuities are a wonderful alternative to that to allow clients the benefits of a pension while privately funding that solution.

Speaker 1 (08:37): Thank you, Thea, that was really enlightening. Of the three risks that we've discussed, the market longevity and inflation, is there one of those that stands out to you?

Speaker 2 (08:46): Longevity. Longevity is the through line for all of these retirement risks. Clients are living longer, which means they'll have more time to see the impact of market risk and inflation on their portfolio

Speaker 1 (08:58): Thea we really appreciate your time and expertise. Very insightful conversation. Appreciate you. Thank

Speaker 2 (09:04): You so much for having me.

Speaker 1 (09:05): So, in our next episode, we're gonna dive a bit deeper into longevity. We'll talk exclusively with Professor Moshe Milevsky, who will use his background in mathematical financial economics to explain the difference between chronological age and biological age. We'll discuss why understanding what that means can make a big difference in what sort of financial planning a client undertakes. And to our listeners, be sure to subscribe, rate and review Your Thriving Practice on your favorite podcasting app. Until next time, I'm Jenn Bernstein. Thanks for listening.

Speaker 3 (09:49): For the case study of Sam and Susan, the illustration is for illustrative purposes only, and does not reflect the outcome of any actual person, or reflect the performance of any Global Atlantic product or stock market investment. Past performance is no guarantee of future results and actual results will vary. The illustration should not be considered a recommendation to buy, sell or hold any investment or product.

The opinions, beliefs, and viewpoints expressed by the guests on this podcast do not necessarily reflect the opinions, beliefs, and viewpoints of Global Atlantic Financial Group. Global Atlantic Financial Group, global Atlantic is the marketing name for the Global Atlantic Financial Group, LLC, and its subsidiaries, including Forethought Life Insurance Company and Accordia Life and Annuity Company. Each subsidiary is responsible for its own financial and contractual obligations. These subsidiaries are not authorized to do business in New York.