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Safeguard your retirement income

How a "secured income strategy" may help guard against market volatility.

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You've been diligent about saving and investing throughout your career, and you feel confident your portfolio will produce enough lifetime income to fund a rewarding retirement.

But will it really be that easy? Could an unexpected market downturn like the one we’ve been experiencing derail your plans? As the bear market of 2008 to 2009 showed, a market downturn may deliver a nasty blow to your savings when you are just beginning retirement—a blow that might have lifestyle-changing implications.

Many investors nearing or just entering retirement may be too conservative in their investment portfolio, or too heavily invested in cash or cash-like instruments. While this protects savings, at least in nominal terms, it may hinder growth potential. Others may be too aggressive, or too exposed to the stock market’s sometimes sharp swings. The good news, however, is that there may be a way to consistently manage your portfolio to weather the volatility of the markets—via a “secured income strategy.”

What is a secured income strategy?

This strategy involves taking a portion of your savings—typically from a tax-deferred retirement account—just before or just as you retire, to purchase a deferred variable annuity with a guaranteed lifetime withdrawal benefit (GLWB). This approach effectively “locks in” some of your future retirement income today and protects it from a market drop.

What are the risks to which this strategy may be applied?

This approach can help you shelter a portion of your retirement savings from three important risks—one you'll face throughout your investing lifetime, as well as two that are specific to investors in or approaching retirement.

1. Overreacting to short-term market events. Some of the emotional tendencies that define us as human beings tend to hamper our ability as long-term investors. We can be optimistic even when it's unwarranted, and we may overreact to news, exhibit loss aversion, experience regret, and copy the behavior of others in times of stress. Particularly in volatile markets, these tendencies may make long-term investment discipline and investment success even more difficult to achieve. As seen in the chart right, many investors have badly lagged the returns of equity and fixed income markets in the past decade.

2. Sequence-of-returns risk. This risk involves the actual order in which investment returns occur. Typically, negative returns earlier in retirement have a more severe impact on your portfolio than negative returns later in retirement. That’s because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. This means that a smaller amount is left behind to experience any potential future growth. A sharp market downturn in the years leading up to retirement can have a similar impact and dramatically reduce the value of your investment portfolio and, thus, its ability to generate future income. In the chart to the right, two hypothetical portfolios, A and B, each begin with $100,000. Each investor aims to withdraw $5,000 per year, and it is assumed that both portfolios experience exactly the same compound annual returns over a 25-year period, only in inverse order, or “sequence.” Portfolio A has the bad luck of having a sequence of negative returns in its early years and is completely depleted by year 20. Portfolio B, in contrast, scores a few positive returns in its early years and ends up 25 years later with more than double the amount of assets it started with.

3. Longevity risk. This is the risk that you outlive your retirement income sources. On average, a 65-year-old woman has another 23 years to live, while a man can expect to live another 20 years.1 But when it comes to retirement income planning, life expectancy figures can be seriously misleading. Half the people born at any given time will outlive their own life expectancies. This means that most people ought to think hard about longevity risk—the real possibility of living 20, 30, or even 40 years past retirement age. Without planning, a longer-than-expected life could easily lead to a couple or individual outliving his or her savings. You may think you have an accurate read on your future retirement expenses, and confidence in your ability to fund them, but life can be unpredictable. So, it may be helpful to have a portion of your retirement income guaranteed for life.

How does a secured income strategy help mitigate these risks?

Owning a deferred variable annuity with a GLWB enables you to transfer some of the key risks faced in retirement to the insurance company that issues the annuity. Among the potential benefits:

  • An income stream you can’t outlive. The guarantees offered by GLWB products ensure income for the life of the annuity contract owner as well as the life of his or her spouse (if optional coverage is selected), even if the annuity's account balance is exhausted because of a combination of market performance and income withdrawals. These guarantees help to address longevity risk.
  • A set level of guaranteed income. The income produced by this investment won’t go down if the market performs poorly. This feature helps protect against sequence-of-returns risk. Remember, you are insuring your income, not your account value, the latter of which will still fluctuate with changing market conditions.
  • Upside growth potential. While you’re protecting your income needs against downside market risk, you may still benefit if the market goes up. Most GLWB products allow for potential increases in their guaranteed income in a rising market. These increases are also protected against future market declines. Once your income experiences an increase, it cannot be reduced because of any subsequent poor market performance.
  • Additional investment confidence. "The use of a secured income strategy may help conservative investors feel comfortable with a little more risk and, thus, the potential for higher longer-term returns into their portfolios," says Tim Gannon, vice president of product management at Fidelity Investments Life Insurance Company.

What type of investor might it be right for?

Gannon says two types of investors—each with a near-term need for lifetime retirement income—might benefit most from this strategy. The first type is an investor who is reluctantly "moving out of cash" and investing in the market for potential growth opportunities. These individuals, typically in their mid to late 50s, have most of their retirement savings in cash because they’re afraid of losing their money.

“The challenge is that a portfolio made up mostly of cash has limited growth potential and may be vulnerable to the risk of inflation,” says Gannon. "A secured income strategy may give you a way to access the growth potential of riskier investments, with the confidence that you will receive a steady level of income no matter what the market does." By contrast, an income annuity may provide more income per dollar invested but does not have the upside potential of a GLWB.

The second type of investor who may benefit from a GLWB is one who is just entering retirement and is concerned about the market’s potential impact on his or her nest egg as he or she begins to take distributions from a portfolio. "Some recent retirees are worried that another bear market, like the one we saw in 2008, would completely disrupt their lifestyle," Gannon says. "This strategy can help protect a retirement portfolio from sequence-of-returns risk, and may reduce the chance that an investor might react emotionally to a market drop."

Important considerations

While this strategy does have potential advantages for some investors, it’s not a strategy for everyone and should be discussed in detail with your financial adviser. You should evaluate the costs associated with these types of guarantees in relation to your tolerance for uncertainty.

For some investors, it may be worth paying for guaranteed income and making sure you don’t have to delay retirement. But other investors may not need this protection. If you already have sufficient guaranteed income—possibly a combination of Social Security, pension benefits, and income annuities—or you’ve got reliable income resources that could withstand a significant market downturn and still cover your living expenses, you may not need this additional security.

It’s also important to remember that any guarantees are only as good as the insurance company that backs them. So make sure you choose an annuity that is offered by a company with a strong credit rating. Finally, although you can access your money in a GLWB annuity, if you need to withdraw more than the guaranteed income provided, do so with caution. In most cases, excess withdrawals and any withdrawals before age 59½ may reduce the guaranteed withdrawal benefit amount and may be subject to surrender fees.2

As you approach retirement, understanding your income needs and setting up reliable sources of income should be top of mind. You should start this process no later than five years before you plan to retire.

If you’ve planned well and saved carefully, you’re almost there. But if market volatility and its potential to derail your retirement plans are keeping you awake at night, you may want to consider the merits of a secured income strategy.

Allowing an insurance company to manage certain risks may help you, in turn, feel more confident, knowing that no matter what the market does, or how long you live, the “check” will be in the mail.

Learn more

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Before investing, consider the investment objectives, risks, charges, and expenses of the fund or annuity and its investment options. Call or write for a free prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Past performance is no guarantee of future results.
Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Pensions are guaranteed by the employee's employer unless the employer has transferred the liability to a third-party insurance company.
1. These longevity projections assume that a person is in good health; they are based on the Annuity 2000 Mortality Table, Society of Actuaries.
2. Excess withdrawals and any withdrawal before age 59½ may significantly reduce the guaranteed withdrawal benefit amount, and a surrender fee may apply. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if made before age 59½, may be subject to a 10% IRS penalty. Before purchasing a deferred variable annuity, there are a number of factors that need to be reviewed with a licensed agent to determine product suitability.
3. Fidelity Income Strategy Evaluator is an educational tool.
4. Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions and limitations and the insurer's claims-paying ability and financial strength.
Investing in a variable annuity involves risk of loss—investment returns, contract value, and, for variable income annuities, payment amount are not guaranteed and will fluctuate.
Bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. Lower-quality or high-yield securities carry greater risk than investment-grade securities.
Equity investments involve more risk because their value will fluctuate according to their performance.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
IMPORTANT: The projections or other information generated by Fidelity’s Planning & Guidance Center Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
Investing in small-cap stocks may have a greater risk because they are subject to abrupt or erratic price fluctuation.
The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
MetLife Growth and Income annuity (Policy Form Series No. 8800 (10/09)) is issued by MetLife Insurance Company USA, Charlotte, NC 28277 and, in New York (Policy Form Series No. 6800 (10/09)), only by Metropolitan Life Insurance Company, New York, NY 10166 (collectively and singly "MetLife"). MetLife Insurance Company USA and Metropolitan Life Insurance Company are affiliates. The contract's financial guarantees are solely the responsibility of the issuing insurance company. Fidelity Brokerage Services, Member NYSE, SIPC, and Fidelity Insurance Agency, Inc., are the distributors; they are not affiliated with any MetLife company.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
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