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In 2019, we have witnessed frequent volatility in the U.S. markets — dramatic fluctuations in share prices that can undermine portfolio values.
With the Dow Jones Industrials Average hitting record highs in November, the ongoing trade impasse between the United States and China, and a looming presidential election, a majority of investors worldwide anticipate a significant drop in markets in 2020, according to a recent survey.
Such market gyrations are unnerving to many investors, but perhaps none more so than those who are retired or about to retire. Retirement is typically the beginning of the decumulation stage, when paychecks from work stop and retirees begin withdrawing money from their retirement accounts. Because their investment horizon is more immediate, these investors are particularly vulnerable to sharp declines in the markets. Sequence-of-returns risk – where the timing of withdrawals may have a negative impact on the overall value of the retirement account – can have significant long-term consequences on a retiree's life. Not only can a market downturn erode retirement cash flows, but many retirees and would be retirees also don't as much time as younger investors for their portfolios to rebound.
Legendary investor Peter Lynch characterized the high costs of this phenomenon when he observed: "More money has been lost trying to anticipate and protect from corrections than actually in them."
Given the historical frequency of market volatility in the U.S. stock market, investors should weigh the prospect of it occurring when they are about to retire or have already retired. One important way for clients to help shield themselves against sequence risk is to ensure that a portion of their planned retirement income is protected from the ups and downs of the market and guaranteed to last as long as they live. It's not surprising then that Americans are increasingly looking for guaranteed income options to protect themselves. Three in four workers tell us they're interested in having an option for guaranteed lifetime income in their employer defined contribution plans.
