Overcoming Risk With Retirement Income

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As you approach retirement, your financial goals typically change. Instead of focusing on saving, it may be time to think about how you're going to make your money last.

In fact, having enough money to last a lifetime is the top retirement goal for two-thirds of investors.

Developing an income plan is one step you can take in your journey for lifetime income. This article covers five risks you may want to consider when creating your plan.

Risk 1: Outliving Your Assets

Thanks to improvements in health care and medicine, today’s retirees are living longer, healthier and more active lives than ever before. Average life expectancies continue to climb with each passing decade.

As the chart shows, there’s a high probability of living well into your 80s and 90s.

Probability of 65-year-olds Surviving to Select Ages (Average Health)

  • 50% of 65-year-old males will live to age 87.
  • 50% of 65-year-old females will live to age 89.
  • For 65-year-old couples, there is a 50% chance both spouses will live to age 82 and 50% chance one spouse will live to age 93.

Longer life expectancies may mean greater risk of outliving your savings. You can mitigate this risk by including a source of lifetime income in your plan.

Risk 2: Interest Rates Are At All-Time Lows

Retirees have historically relied on fixed income investments to provide retirement income. From 1968-2002 the interest rate on a 10-Year U.S. Treasury Note was 5% or higher, which provided retirees with decent interest earnings from a safe environment. However, interest rate yields have trended down over the last 30 years, hitting a historical low of 1.37% in 2016.

10-Year Treasury Constant Maturity Rate
10 Year Maturity Rate Graph

Fixed income investments can bring a level of safety to your portfolio, but low yields may result in less retirement income.

Consider investments other than fixed income for generating retirement income.

Risk 3: Market Volatility Can Derail Your Plans

A major market downturn could wipe out years of accumulated assets and derail your retirement plans. The graph below shows historical values of the S&P 500® from 2000-2018. While the peaks represent opportunities for growth, the valleys represent threats for significant loss.

Historical Fluctuations in S&P 500® Index Values

One sharp market drop could compromise your financial security.

You can protect your portfolio by including income sources that aren't subject to market loss.

Risk 4: The Sequence Of Returns Can Make Or Break A Portfolio

The order or sequence of returns on your portfolio is an important factor to consider in retirement. In the following example, the hypothetical portfolios assume a $500,000 investment and 5% annual withdrawals. They use the same historical S&P 500® Index returns from the same 20-year period, only the sequence is reversed. You can see how early losses have a critical effect on the portfolios' ending values.

Impact of Sequence of Returns in Retirement
Sequence of Returns Graph

Although it can have a significant effect on your savings, you can't predict or control the sequence of returns.

Having a reliable source of income that's protected from market loss can help avoid cashing in investments during market downturns.

Risk 5: Inflation And Taxes Aren't Going Anywhere

A thorough income plan must account for inflation and taxes — two realities that can’t be avoided. Even a low inflation rate can reduce your purchasing power over time. Inflation has caused living expenses of $50,000 in 1983 to go up to $125,300 in 2018 — a 150% increase! This means $100 in 1983 was only worth $39 in 2018.

Impact of Inflation on Living Expenses and Purchasing Power LivingExpenses-PurchasingPower-Graph 

Additionally, with today's low tax rates, there may be little chance to reduce your tax burden in retirement.

Having a well-diversified portfolio and taking advantage of tax-deferred growth may help your assets grow at a faster rate and minimize the effects of inflation and taxes on your retirement income.

Finding Peace of Mind

Incorporating an annuity into your income plan may help you achieve a more financially secure retirement. Talk with your financial professional about the benefits of purchasing an annuity, which may include tax-deferred growth, protection from market loss and lifetime income.

Great American specializes in offering annuities that are easier to understand, helping you to achieve your goals with no surprises.

Great American Life Insurance Company® and Annuity Investors Life Insurance Company® are not investment advisers and the information provided in this document is not investment advice. You should consult your investment professional for advice based on your personal circumstances and financial situation.

This information is not intended or written to be used as legal or tax advice. You should seek advice on legal and tax questions based on your particular circumstances from an independent attorney or tax advisor.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates ("SPDJI"), and has been licensed for use by Great American Life Insurance Company®. Standard & Poor's®, S&P® and S&P 500® are registered trademarks of Standard & Poor's Financial Services LLC, a division of S&P Global ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Great American Life. Great American Life's products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties makes any representation regarding the advisability of investing in such products nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

All guarantees based on the claims-paying ability of the issuing company. Products issued by Great American Life Insurance Company® and Annuity Investors Life Insurance Company®, members of Great American Insurance Group, Cincinnati, Ohio.© 2019 Great American Life Insurance Company. All rights reserved. GAIG.com.