Risk Management
One of our key objectives is helping reduce risk for our clients.
When you reach retirement, two common risks are sequence of returns risk and longevity risk.
Sequence of returns risk is the risk that there will be large market losses early on in retirement while withdrawals are taking place. You know that the market will have both "good" and "bad" years in the future; you just don't know when those will occur, and if they occur in the first few years it can have a devastating effect on your ability to sustain income/withdrawals for the long term.
One potential solution for sequence of returns risk is the volatility buffer strategy. The idea is that if a large portion of your assets are protected from market loss, you can draw from those accounts when the market is down and take distributions from your remaining market assets when the market is up. This may allow you to sustain a much higher "safe withdrawal rate" in retirement because you have handled sequence of return risk. A proper volatility buffer is something that is contractually protected from any loss and still grows enough to keep pace with inflation long term. Bank products such as CDs or money market accounts, or insurance products such as fixed or fixed indexed annuities* could potentially be used as volatility buffers. A volatility buffer should be valued based on a contract rather than market opinion.
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Longevity risk is the risk of outliving your money. Even if you manage your withdrawals carefully, it is possible to run out of money if you do not have sources of guaranteed lifetime income. Most people have some level of guaranteed income in retirement in the form of social security or a pension. Certain types of fixed or fixed indexed annuities can also be used to create guaranteed lifetime income that can supplement other sources of income. If you set aside some money to have enough in guaranteed income to meet your basic retirement needs, the rest of your assets can be used as desired for vacations, gifting to kids or to charities, or anything else you may want to do in retirement.**
A note on diversification: Many people assume that proper diversification means being invested in many different market sectors, or in a variety of different stock and bond mutual funds. However, this does not provide any certainty of principal protection. True diversification is to have a mix of opinion based assets and contract based assets. Opinion based assets are valued based on someone else's opinion. Stocks, bonds, mutual funds, and even your home value are based not on what you think they are worth, but what someone else is willing to pay. Some examples of contract based assets would be bank accounts, CDs, insurance products, or even rental properties (the value of the property is opinion based but the rental income is contract based).
At Higher Ground Financial Group, we do not provide securities investment advice, or any advice relating to market assets. You will need to consult a securities licensed professional to receive specific advice on opinion based assets. We are licensed to provide insurance recommendations regarding the portion of your assets you have determined should be contract based, and we can help you build volatility buffers and/or guaranteed lifetime income strategies using insurance based solutions.**
*Fixed annuities are insurance products that are designed to meet long-term needs for retirement income. Early withdrawals may result in loss of principal and credited interest due to surrender charges. Any distributions are subject to ordinary income tax and, if taken prior to age 59 ½, an additional 10% federal tax.
**Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.