Concerned about the effects of market volatility on your retirement? Insightful strategies for ensuring stable income, timing Social Security benefits, and fostering lasting financial confidence are shared here.

This episode is part of a monthly podcast series focused on retirement planning. With actionable advice and relatable discussions, these episodes, released every third Wednesday, will equip you with tools to enhance your financial confidence for the future.

If recent economic news has left you unsettled, you’re not alone. Fluctuating markets can shake the confidence of even seasoned investors.

Let’s face it: The markets don’t consider your retirement timeline. They remain indifferent to whether you’re retiring next year or five years from now, and they certainly don’t mind if you’re losing sleep over your preparedness.

The bright side? There are proactive measures you can take to bolster your confidence.

In this podcast episode, we spoke with two leading experts in retirement: Jason Fichtner, Executive Director of the Retirement Income Institute, and David Blanchett, head of retirement research at Prudential. They discussed strategies to help you step off the emotional market rollercoaster and create a retirement plan that feels secure and manageable.

WHY MARKET VOLATILITY AFFECTS NEAR-RETIREES MORE

As you near retirement, market volatility can feel particularly daunting. Research indicates that this heightened sensitivity is no accident. Blanchett explains that individuals often react more intensely to market shifts as they approach retirement. "It’s a behavioral response — the notion that retirement is a one-time opportunity, and the consequences of a market downturn just before retirement can be severe,” he notes.

These fears are justified. This is where the concept of “sequence-of-returns risk” comes into play. Essentially, while you may expect an average return of around 8% over time, what you actually receive are a series of annual returns — some higher and some lower, averaging out to that figure.

Experiencing low returns early on in retirement can lead to complications. If you withdraw funds from a diminishing portfolio, you cement losses and reduce the amount available for growth when the market rebounds. Even strong market performance later may not compensate entirely due to diminished capital.

A proven method to mitigate this risk is through protected income.

INCOME THAT LASTS A LIFETIME

Protected income, as the term suggests, is income that you won’t outlive. This type of income primarily stems from three sources: Social Security, pensions, and annuities. In contrast, most retirement income sources are variable, fluctuating with market performance.

Social Security and pensions form the first two components of the traditional “three-legged stool” of retirement, with personal savings making up the third. However, this stool has become increasingly unstable as pensions fade away for many workers.

Experts suggest that annuities can help restore balance. Blanchett points out that they can be particularly useful for covering essential expenses. “Approaching retirement with a protective mindset can help you remain invested and achieve greater long-term returns,” he explains.

RETHINKING RETIREMENT PORTFOLIOS: INCORPORATING PROTECTION

Protected income does more than ensure stability; it can also enhance retirees’ spending comfort and confidence. Research by Blanchett and Retirement Income Institute Fellow Michael Finke reveals that retirees who annuitize their assets for income tend to spend twice as much as those with non-annuitized savings.

“Having a steady income stream allows for increased spending capacity,” says Blanchett. “You’re more likely to spend that income compared to a portfolio-based approach.”

This is why Fichtner suggests we start viewing protection as an essential asset class. With longer life expectancies, the decline of pensions, and economic uncertainties reshaping our financial landscape, it’s time to reconsider traditional investment strategies.

Fichtner recommends a portfolio allocation of 50-60% in equities, 20-30% in bonds, and the remainder in protective strategies. “This could include life insurance or annuities,” he states, emphasizing the importance of integrating protection into your overall portfolio strategy.

SOCIAL SECURITY: MYTHS AND REALITIES

The future of Social Security often fuels retirement anxieties, yet experts argue that many fears are exaggerated.

“Social Security isn’t going bankrupt,” insists Fichtner, a former official at the Social Security Administration. “It benefits from consistent payroll tax revenues, functioning as a pay-as-you-go system.” That said, one of the four Social Security trust funds is projected to be depleted around 2032.

If Congress doesn’t intervene, the Social Security Administration will only be able to disburse what it collects in payroll taxes, potentially leading to a 20% reduction in benefits. However, Fichtner believes this scenario is unlikely. “Can you envision Congress allowing a 20% cut for seniors? That’s improbable,” he argues.

DELAYING SOCIAL SECURITY: A STRATEGIC MOVE

Hearing concerns about Social Security’s future may prompt some to claim benefits early. However, those who can afford to wait stand to gain significantly.

“For those who can consider delaying — with sufficient retirement savings and good health — waiting as long as possible typically yields the highest income,” Blanchett advises.

Benefits can be claimed from age 62, but doing so early results in permanent reductions. For instance, someone eligible for $1,000 monthly at 67 would receive about $700 at 62 but could increase that to around $1,240 by waiting until 70.

“Claim Social Security when you need it, but if you can afford to delay even briefly, it’s wise to do so,” Fichtner adds, emphasizing the value of a higher, inflation-protected monthly benefit.

BRIDGE ANNUITIES: A SMART WAITING STRATEGY

While working longer can help delay claiming Social Security, it’s not the only strategy available. Consider using a bridge annuity.

Bridge annuities provide income for a limited time, covering expenses until you start receiving Social Security benefits.

“A bridge annuity can provide monthly payments until you reach 67 or 70,” Fichtner explains. “Once it concludes, you can claim Social Security, ensuring a higher inflation-protected benefit for life.”

THE KEY STEP: DEVELOP AND TEST YOUR PLAN

For anyone approaching or in retirement, one crucial step is devising a comprehensive income strategy.

“Review your monthly expenses and align them with your retirement income,” suggests Fichtner. “Can you meet your expenses? What if inflation rises by 10%? Test various scenarios to gauge your financial resilience.”

Developing a solid plan is often easier with assistance. Utilize free online retirement planning tools to get started, and consult a financial professional for in-depth guidance.

If you’re seeking an advisor, take your time to find the right match. It’s akin to car shopping; test several options before making a decision. Many professionals offer complimentary consultations or low-cost introductory sessions, providing a great starting point.