Retirement income should not depend on the market; It should depend on math

The ups and downs of the market can keep retirees on edge, worrying about potentially large losses from which they may never recover.

And those concerns are not necessarily wrong. From 1928 to March 2022, there have been 26 “bear markets.” A bear market is a market decline of more than 20% that lasts for at least two months. The average bear market decline since 1928 has been 35.62%, so the potential for big losses is real.

However, the good news is that there are ways to protect yourself from these inevitable market downturns. After all, your retirement shouldn’t be an endless series of sleepless nights. And, with careful income planning that meets your lifestyle needs, accounts for emergencies, and includes an adequate amount for investment and growth, it doesn’t have to be that way.

For me, this approach to retirement can be summed up with this sentence: Your income should not depend on the market. It should depend on math.

How could such math work?

Let’s say a couple is about to retire, their savings plan went well, and they have $1 million set aside. That’s a nice tidy sum, but at a time when retirement can last 20 years, 30 years or more, it’s still important to plan wisely so that the money is spread out over the rest of their lives. And as you probably know, people are living longer these days, which means making the right financial decisions is even more important.

This is where the math comes in, and we start to cube that money.

security cube

Unexpected emergencies arise in life, both in and out of retirement, so it’s good to have money in reserve that’s set aside just for that purpose, to help with a smoother journey through retirement. We always ask our customers how much they need in this bucket to feel comfortable, in case the car needs new tires, the roof leaks, or some other crisis, big or small, strikes. As you can imagine, the amounts they give vary, but let’s say the couple in our example sets $50,000 as the figure they want in the safety bucket. That gives us a head start on exploring how to manage the rest of your savings.

revenue cube

It is by reflecting on the contents of this bucket that retirees must decide how much money they will need to bring in each month to pay for their lifestyle. Certainly, they need money to buy groceries and to pay the electricity bill, the water bill and other necessary expenses. But they also want free time.

Let’s say our couple sets an income goal of $6,000 a month and they expect to receive $2,000 a month each from Social Security, for a total of $4,000. That means there’s a $2,000 gap to fill between what Social Security provides and your income goal.*

One possibility to close that gap would be to use at least some of your retirement savings to purchase an annuity, which works similarly to a personal pension plan, with the potential to provide a guaranteed monthly income that you won’t outlast. There are different types of annuities, but I favor fixed index annuities because you can’t lose money in them, which means you have the potential for a more predictable stream of income, regardless of what the market does.**

Now that they’ve taken care of their monthly expenses, our couple can move on to the next part of this math problem: calculating what they have left over for long-term investment purposes.

growth cube

Sure, retirees need to be careful with their money, but this is the bucket where you can be a bit aggressive with investments because your income needs are covered and you have that safety bucket that offers protection in case of an emergency. The growth cube allows you to keep up with inflation and hopefully beat it.

Of course, this is also a bucket that can lose value if the market falls, so it shouldn’t be money you expect to be dipping into anytime soon. The last thing you want in retirement is to be forced to withdraw money from your savings when the market is tanking. The account balance would begin to drop rapidly as market forces, combined with your withdrawals, depleted it. That’s a scenario that could send retirees back into the workforce.

Many people take the approach that retirees should be conservative with their money, but that may not be true with all of their money. As long as you’re careful about your lifestyle and your emergency fund is in place, it’s okay to find ways to grow your money. This does not mean that you should be too aggressive. No need to gamble Vegas style. But you can build a portfolio that’s a little heavier on stocks and a little lighter on bonds than the 60/40 split that so many people recommend. Unfortunately, it’s common in the financial world to see people getting advice dealing with generalities like the 60/40 split, but when you enter retirement, you shouldn’t rely on cookie-cutter approaches. You need to get advice that is specific to your needs.

One of the best things about this three-bucket approach is the ability to take advantage of market growth without having your entire retirement fortune tied up in it.

Certainly their numbers, and their needs, will be different than this example couple. Perhaps your comfort level requires more or less money in that emergency fund. Maybe you expect to travel a lot when you retire and want enough money in your income bucket to cover those wants.

That’s why, as retirement approaches, it’s important to sit down with a financial professional who can help you find the answers to your own math problem. That way, those market ups and downs won’t have as much power over you, and instead you can focus on the joy that retirement brings.

* The hypothetical example provided is for illustrative purposes only; it does not represent a real-life scenario and should not be construed as advice designed to meet the particular needs of an individual’s situation.

**Fixed Index Annuities are designed to provide credited principal and interest guarantees, and a death benefit for beneficiaries. The interest credited on your contract may be affected by the performance of an external index. However, your contract does not participate directly in the index or in any equity or fixed interest investment. You are not buying shares in an index. They are subject to surrender charges and may have applicable fees. The guarantees are backed by the financial strength of the issuing company.

Ronnie Blair contributed to this article.

Insurance services are offered through Capital A Insurance. Securities offered through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Investment advisory services offered only by duly registered persons through AE Wealth Management, LLC (AEWM). Neither MAS nor AEWM is affiliated with Capital A Insurance or Capital A Wealth Management. 1126032 – 4/22
All investments are subject to risk, including possible loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. References to guarantees or annuities generally refer to fixed insurance products, never to securities or investment products. The guarantees of insurance and annuity products are backed by the financial strength and ability to pay claims of the issuing insurance company.

Managing Partner, Capital A Wealth Management

Brandon Domenick is a managing partner at Capital A Wealth Management in Cranberry Township, PA. Domenick began his career in the financial industry after earning a bachelor’s degree in business administration from Westminster College. He maintains his FINRA Series 65 securities registry through AE Wealth Management and is also licensed in life, accident and health insurance.

Appearances on Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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