Going up the mountain, a climber has a good perspective of where to place each foot or where to find handholds. They can see the terrain and determine the best approach. Conversely, an experienced climber will tell you the descent may be the most challenging part of the climb, and it is hard to see where to take the next step or even the best route to get you down the mountain safely.
Likewise, the same volatile markets that benefit investors saving for retirement can ravage a retiree’s nest egg.
Dollar Cost Averaging
Young investors are trekking up the mountain. They have a portion of every paycheck going into a 401(k) or other retirement saving plan and are dollar-cost-averaging into the market. This practice of making consistent investments, regardless of what the market is doing, has an enormous payoff. Market dips allow the systematic investor to buy at a discount – when things are on sale. Then by remaining invested, they take advantage of long-term appreciation.
Diversifying investments over a range of market sectors can help 401(k) investors manage risk and the emotional side of investing. No one knows what area of the market will do well at any given time. While diversification does not guarantee investors will not experience a loss, it does help reduce the risk that investors will experience an unrecoverable loss.
Spreading investments across many market sectors, investors will have a portion of their account that may experience growth and another sector that may experience a loss during the same time. If done correctly, the combination of diversified investments can help smooth out the ups and downs in the investors’ accounts.
Declining Balances in Retirement
Like a climber descending a mountain, dollar-cost-averaging out of the market can have a devastating effect on retirees. Why? If a retiree takes money from an investment that is dropping in value, they remove the potential of riding the market back up. The investment has been sold, possibly at a low point, and the shares cannot recover. This is known as the sequence of return risk.
Experiencing negative market returns in the early years of retirement can prematurely reduce a nest egg. This is a serious problem because retirees are living longer than ever before. Traditional diversification may not deliver the protection one might expect when taking withdrawals. These obstacles require a strategy to properly allocate risk and distribute money at the right time and from the right account – Not easy to do.
Lifetime income planning takes a different approach to risk allocation. It is designed to protect the retiree’s income source from market volatility while at the same time remaining invested for long-term appreciation. Using lower risk investment strategies to support income needs allows investments with greater risk to remain invested to navigate volatility.
If you are nearing retirement, let us show you the benefits a Lifetime Income Plan can provide you.
Listen to a deep dive on the Power Up Wealth podcast.
