Swings in Financial Markets

If the Stock Market Crashes, Will Your Retirement Plan Crash Too?

When planning for retirement, you must consider how you can account for the swings in financial markets. How will a sluggish economy, natural disasters, terrorist attacks, corporate scandals and other unforeseen events affect the stock market and your ability to fund retirement?

Between 2000 and 2002 the stock market declined dramatically from the heights it saw in the 1990s. During this time the market lost 37 percent in value. This loss meant that many people who had been well prepared for retirement could not stop working. Their retirement assets – often held in 401ks invested in the stock market - were cut in nearly half. Around the end of this decline in 2002, AARP conducted a survey of 50 to 70 year old investors who owned stocks. AARP learned that:

• Of the respondents who owned stocks, 77 percent said that they had lost money in the previous two years.
• Of those who lost money and had not yet retired, 21 percent postponed retirement as a result of their losses.
• Of investors who lost money in stocks and had already retired, 10 percent either returned to work after retirement or continued to work due to their losses.
• Among investors who lost money, 43 percent think that they will be less comfortable in retirement due to their losses, and 20 percent expect to have difficulty paying for health care and prescription drugs during retirement.

And, many retirement experts would summarize that these opinions were optimistic.

Stock market declines significantly affected the retirement plans of most of these individuals. In retirement, you need to plan for how much money you will need for every year you are alive – but just as you don’t know how long you will live, you can not know what rate of return you will receive from your various investments.

Many retirees hope to gain income from their savings or keep pace with inflation by investing in financial vehicles that offer high rate of returns. The problem is that – as a general rule – investments that offer high rates of return are often the riskiest.

Other retirees hoard their savings in accounts that offer no or very small dividends – meaning their principal is safe, but the money may be loosing value by not keeping pace with inflation. And the savings are certainly not creating income.

It is difficult to find just the right way to allocate your assets. But, it is critical to understand that you should try to plan on having enough guaranteed income to cover your basic needs should something happen to make the financial markets collapse.

Products that offer guaranteed income include Annuities and Annuitized Reverse Mortgages.