Admit it - you want your investment accounts to rise and NEVER fall. In retirement, this feeling becomes more natural as you despise the thought of ever running out of money – and don’t even want to think of having to go back to work! So, can you prevent investment losses while retired?
Before answering, there is one term you should understand: Opportunity Cost. This is a term when making one decision, an investment decision in this case, and giving up the potential benefit of another decision. Opportunity Costs are plentiful when it comes to investing.
During your accumulation years, you may have categorized your risk as “conservative,” “moderate,” or “aggressive” and that guided how your portfolio was built. Maybe you concerned yourself with finding the “best-performing funds” even though you knew past performance does not guarantee future results.
Historically, stocks have generally provided higher investment returns compared to bonds.1 However, stocks have also been the most volatile. Each calendar year, we may see a market correction – a 10% decline in the S&P 500 index, which is made up of stocks. While working and adding to your portfolio, you are more willing to accept this and might take advantage of these declines and buy more shares.
When retirement approaches, a change in your mindset may drive changes in how you shape your portfolio and the investments you choose to fill it.
For instance, it may mean that you hold more cash than you ever did when you were earning a paycheck. It also may mean that you consider investments that shift the risk of market uncertainty to another party, such as an insurance company. Many retirees choose annuities for just that reason.
If afraid of market losses, whether you are investing in stocks or bonds, then annuities can alleviate that fear. Annuities may offer guarantees that other investments cannot offer, like a fixed rate of return for a specific period. Other annuities may offer guaranteed lifetime income withdrawals so that you do not have to fear running out of money.
The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits.
And although annuities may offer that guaranteed fixed rate of return, it may not match what can be attained in the stock market. That is where “Opportunity Cost” comes into play.
The march of time affords us ever-changing perspectives on life, and that is never truer than during retirement. If you can no longer “stomach” the investment losses, then now might be a great time to review your portfolio, and see what changes may need to be made to alleviate your concerns.
1. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. This is a hypothetical example used for illustrative purposes only.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.