You know how important it is to stay focused on your long-term goals, even when times get tough. But it's not enough to just know it. And while there are habits you can develop to remain resilient, staying strong in the face of market headwinds is more than just a matter of willpower or fortitude. To feel confident in staying the course when the headlines, your dipping account balance, and your emotions are trying to convince you otherwise, you need to feel secure in your ability to ride it out.
A well-diversified portfolio and an appropriately sized emergency fund are a good start. But it's also important not to forget about a critical component that can really give you the sense of security that you need to survive a volatile market: predictable income.
Developing a steady stream of income that doesn't come from market-based sources like income from bonds or stock dividends can provide a cushion that can help you tune out near-term volatility and avoid reactive or emotional decision making that could significantly hamper your ability to reach your long-term goals.
Understanding your needs as an investor
Fundamentally, most investors are seeking to fulfill 3 core needs: safety, security, and growth. Each of these needs may be satisfied by a different approach. For example, a reasonably sized cash allocation, set aside as an emergency fund, may provide a sense of safety in the event you need to deal with a sudden, unexpected expense, while a diversified investment portfolio of stocks and bonds offers the potential for long-term growth and can help you maintain your purchasing power in the face of inflation.
"When you can sort your assets into different buckets like this, it can make managing your money amid near-term volatility a little less daunting," says Lars Schuster, institutional portfolio manager at Strategic Advisers, LLC.
But what about the typical, day-to-day expenses that we need to account for? We all want to feel secure in our ability to pay our bills and maintain our desired standard of living. But the income that may be generated by investments may be too variable and volatile to count on.
In tough market conditions, investors who rely on investment income may be forced to draw down their principal faster than they had planned for in order to cover expenses, which could undermine their ability to achieve growth in the long-term. Should things get so challenging that the investor feels the need to draw money from their emergency fund, they are now in a particularly vulnerable position—with a reduced sense of safety, security, or expectation of growth. Before you know it, that long-term plan may have become significantly harder to achieve.
One possible way to help protect against this situation would be to purchase a fixed income annuity, which may provide a steady stream of income that isn't subject to market volatility and can help the investor feel confident that their essential needs will be covered. "In the context of retirement planning, we believe it's a good idea to cover essential expenses with guaranteed sources of lifetime income," says Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. "This can include sources like Social Security or pensions, but another way to set up a guaranteed stream of income is to purchase an annuity. It's kind of like buying your own pension."
Security through surety
"Having a more predictable stream of income, such as from annuities, to address near-term needs may help investors resist the urge that they have to act when markets fluctuate," says Schuster. "It can remove some of the emotional strain that might lead you to think you need to make a dramatic change in a portfolio with assets intended to be used many years in the future."
A fixed income annuity is a contract between you and an insurance company. In exchange for an up-front, lump sum payment, the insurance company will pay you (or you and your spouse) a specific amount of income every month for the rest of your life or for a set period of time if you so choose. The purchase is irrevocable, so it's important to fully understand what you're getting into.
As the name implies, an immediate income annuity1 will begin paying out immediately, while a deferred income annuity2 allows you to purchase now and begin receiving payments in the future, perhaps closer to retirement age. "With a deferred income annuity, you can purchase it in your 40s or 50s, say, and decide you want the income stream to start at age 65 or 70," says Ewanich. "You're setting aside money now to provide income later." The "fixed" nature of the annuity means that payments will keep coming and payout amounts won't decrease, regardless of what's happening in the financial markets.
If you decide an annuity is right for you, the type of annuity you select, and when you decide to purchase it, will depend on your specific circumstances and goals. (Learn more about when might be the right time to get an annuity.) However, if you're concerned about what's in store for markets in the coming years, a reliable stream of income may provide the sense of stability you're looking for.
"Locking in a set level of income by purchasing an income annuity may provide that sense of security that comes with knowing your essential expenses are taken care of," says Ewanich. "When the market experiences volatility, it can be easier to stay focused and keep the money you've set aside for growth invested for the long term. With that monthly payout from the annuity to rely on, it's easier to resist reacting to what's going on and feel good about the plan you have in place."
A strong foundation may help you weather what's to come
"Markets are going to be volatile," says Schuster. "And there are going to be some challenging years. But if you have a portion of your assets allocated to something that feels more secure, you may be less susceptible to the whims of the market and more able to have confidence that, over time, the money you've allocated for growth will help you in the long run."