Retiring in times of risk requires protection against market and interest rate volatility


We’re starting to hear that ugly ‘r’ word again – recession. It’s not officially here yet, and hopefully it won’t, but the possibility is permeating the media.

For those hoping to retire soon, or those who have done so recently, the word “recession” can be apprehensive. Although we are not in a meltdown situation like in 2008, when the global financial crisis pushed the United States into recession, we are facing many negative factors that affect our economy and many pension plans. These include rising inflation, raising interest rates to fight inflation, a global pandemic that will not go away, Russia’s invasion of Ukraine and the likelihood of a tax increase in the future.

In 2008, people nearing retirement needed to make financial adjustments to secure the fixed income they depended on. Now the scenario is similar as another wave of retirees face worries about safeguarding their finances.

But never fear: retiring during a recession or an economic period that raises concerns on many fronts can be done. If you’re planning to retire soon or are in the early stages of retirement, here are some key points to consider and options to protect your money:

2 ways to protect yourself from market risk in retirement

An indexing strategy can help you counter your risk during a stock market decline. The idea is to put some of your money in accounts that aren’t affected by a market downturn and withdraw from those accounts during your early retirement years. Two vehicles that reduce market risk are indexed universal life (IUL) and a fixed indexed annuity.

Indexed universal life is a type of permanent life insurance with a cash value and death benefit that your beneficiaries will receive tax-free. Money in your cash value account can earn interest based on the performance of a stock market index chosen by your insurer, such as the S&P 500 or the Nasdaq Composite. But unlike investing directly in an index fund, you won’t lose money when the market drops. This is because a guarantee applies to your principal, insuring it against loss.

The catch is that there’s usually a cap on the maximum return you can earn. Additionally, IUL policies can incur many fees and other costs. On the plus side, IULs have unlimited contributions, growth, and tax-free distributions.

Fixed indexed annuities also offer growth potential while protecting your capital from market volatility. The additional interest potential is tied to the performance of a market index, such as the S&P 500. The interest rate is guaranteed never to fall below zero, even if the market index declines. But as with indexed universal life insurance, these investments limit what you can earn with caps.

Fixed-index annuities provide a steady stream of income and tax-deferred growth; taxes are not due until a withdrawal is made. It is important to know, however, that once you purchase an annuity, you are locked into it for a certain number of years, and if you withdraw money during this surrender charge period, you will be subject to redemption fees. Usually, you can withdraw up to 10% each year with no surrender charge.

Some possible antidotes to rising interest rates

Traditionally, a safer asset would be bonds, but rising interest rates mean bonds will likely lose value. While higher rates raise hopes for more leverage from certificates of deposit and other short-term savings, there are fears that bond market investments will continue to decline, making fixed income yields disappointing.

There are several things you can do while pursuing your retirement goals in this rising rate environment:

  • Shorten the duration of your obligation. The longer a bond’s duration, the more sensitive it will be to interest rate increases and the more its price will fall.
  • Take control of your debt. Rising interest rates mean that the cost of debt will rise. Paying off your debts can give you more control over your income.
  • Consider stocks that are not rate sensitive. Rising interest rates can make it more expensive to borrow and use credit, which can impact consumer behavior. This can lower the value of stocks that rely on consumer borrowing, such as automobiles, clothing and durable goods. In contrast, non-discretionary spending sectors, such as energy, utilities and food, are more likely to hold up in a rising rate environment because they are essential.

Although retiring in times of economic uncertainty or during a recession can be stressful, being proactive and planning for the above factors can help reduce your worries. A comprehensive financial plan is important at any stage of your life. A plan carries even more weight as you approach retirement in a tough economy.

Dan Dunkin contributed to this article.

This content is provided for informational purposes only and is not intended to be used as the basis for financial decisions. Strickler Financial Group is an independent financial services company that uses a variety of investment and insurance products.
Investing involves risk, including the potential loss of principal. Any reference to [protection benefits, safety, security, lifetime income, etc] generally refer to fixed insurance products, never to securities or investment products. Guarantees for insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.
Securities offered only by persons duly registered through AE Financial Services, LLC (AEFS), Member FINRA/SIPC. Investment advisory services offered only by persons duly registered through AE Wealth Management, LLC (AEWM), a registered investment adviser. Strickler Financial Group is not an affiliate of AEFS or AEWM.

Founder, Strickler Financial Group

Russell Strickler is a CERTIFIED FINANCIAL PLANNER™ and Accredited Investment Fiduciary® professional with Strickler Financial Group who has worked in the financial services industry since 2005. He earned his Bachelor of Business Administration and CFP® certification from Oakland University .

The appearances in Kiplinger were obtained through a public relations program. The columnist received help from a public relations firm to prepare this article for submission to Kiplinger was not compensated in any way.


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