Managing retirement assets is stressful and it’s very difficult to not make emotional decisions. Very few people are able to rely on objective analysis and it’s no surprise. The old saying that fear and greed are the driver’s behind most decisions is absolutely true. Given that all of you have seen some serious swings with investment accounts in the past 30 years I understand why it’s hard to time some of the biggest financial decisions you will ever make.
2018 has been something of a microcosm of the last 30 years. It started with the stock market reaching a record high but before the end of January came a correction that skimmed more than 10% off the value of the Dow and the S&P 500.
Many were reminded of 2001 or 2008 and expected the route to continue, if not for fundamental reasons then definitely because it was about time for it to happen. This extended recovery we’ve seen since the banking crisis of 2008 has had people jumping back into the market at every point along the way.
I’ve talked to people who stayed the course from the beginning and saw a nice rebound while others sold and sat on the sidelines, envious of the yields that could have been. I always tell people, “in ten years we’ll know exactly what we should have done.” It’s my variation of an old adage and I use it to remind everyone that all you can do is go with the best option today.
So this year has been interesting. The market rose to new highs, corrected and scared everyone only to slowly recover and approach or exceed those record levels today. Since we’ve seen it come all the way back I am reminded of some decisions people made early in 2018.
After creating an income plan for one gentleman, I asked him for any concerns about buying the annuity. He replied that if the market rose another 15% he would regret not staying in the market with all his assets.
This person had a nice-sized portfolio and modest income needs so it wasn’t a critical move either way but I had to remind him that buying an annuity doesn’t mean you are taking all possibility of growth off the table.
Here are the details:
Portfolio value was just shy of $1M
Protecting enough to secure income would have cost $200,000
If he didn’t buy the annuity and the market rose 15% his portfolio would have been worth $1,150,000
With a 50% participation rate on the annuity and the same increase in the market he would get…
15% on $800,000 and 7.5% on $200,000
Total portfolio value of $1,135,000
So when the market gains 15% he gets 13.5%
Noticing he wouldn’t be giving up much yield he decided to protect what was needed for retirement income.
Fortunately, it was done in time to avoid the correction in late January so rather than limiting his gains, the annuity insulated the portfolio from greater loss. What is needed for retirement income is protected and the rest of the portfolio can continue to grow forever. Regardless of what happens in the stock market he will be able to pursue the kind of long-term growth that will build a serious amount of wealth through retirement.
When is the right time to buy an annuity? When you’re ready to remove the stress of uncertainty.
Have a great weekend!