The Retirement "Volatility Buffer" Strategy: Protecting Income When Markets Fall

The Same Market Decline Can Feel Very Different in Retirement

When you’re working, a market downturn can certainly be uncomfortable. But if you’re still earning a paycheck and contributing to retirement accounts, you may have time to wait for markets to recover.

Retirement changes that dynamic. Once your portfolio becomes part of your paycheck, you may be withdrawing money while markets are falling. That combination can create a risk many retirees haven’t encountered during their accumulation years: sequence-of-returns risk.

It’s Not Only Your Average Return That Matters

Sequence-of-returns risk refers to the possibility that the timing of investment gains and losses can materially affect a retiree who is simultaneously taking withdrawals.

Two retirees could experience similar long-term average returns and still have different outcomes if one experiences significant losses early in retirement while withdrawing money. The order of returns — not just the average — can matter once withdrawals begin.

Selling After a Decline Can Turn a Temporary Market Loss Into a Retirement Problem

When investments decline, selling assets to fund living expenses means fewer assets remain available to participate in a potential recovery. Over time, that can compound the effect of an early downturn.

This doesn’t mean retirees should abandon market investments. Market assets may still play an important long-term role in a retirement strategy.

What Is a Retirement Buffer?

A retirement buffer is a portion of a broader retirement strategy designed to help fund certain spending or income needs without relying entirely on the sale of market-based investments during an unfavorable period.

A buffer is not a market-timing strategy, and it does not attempt to forecast declines. It is an organizational decision about which dollars are expected to fund near-term income and which dollars are intended to stay invested for longer-term goals.

Different Dollars, Different Time Horizons

An Annuity Can Be One Tool for Building a Retirement Buffer

Depending on the type of contract and the features selected, certain annuities may potentially help create:

• Contractual lifetime income
• Principal protection
• Predictable interest
• Protection from direct market losses, depending upon annuity type

For example, income annuities or annuities with applicable income features may help create dependable retirement cash flow. Fixed or fixed indexed annuities may potentially provide a protected allocation that isn’t directly exposed to market losses, subject to contract terms such as caps, participation rates, spreads and surrender charges.

Why Not Just Protect Everything?

Eliminating market exposure can create its own trade-offs. Even a retiree focused on protection may still need:

• Long-term growth
• Inflation protection
• Liquidity
• Flexibility
• Legacy assets

Protection from volatility is only one retirement objective. Emphasizing it exclusively may reduce the ability to address others.

Should You Move Money Out of the Market Before Retirement?

Retirement doesn’t automatically mean getting out of the market. Many retirees continue to hold market-based investments for years or decades after they stop working.

Answering that question generally involves reviewing several factors together rather than any single rule of thumb:

• Time horizon for each portion of savings
• Expected spending needs, essential and discretionary
• Guaranteed income already in place, such as Social Security or a pension
• Liquidity requirements and emergency reserves
• Risk tolerance and comfort with fluctuation
• Other assets, including real estate and taxable accounts
• Retirement timeline, including when withdrawals begin

This article does not provide an individualized allocation recommendation. Decisions about how to structure retirement assets should reflect your full financial picture and, where appropriate, guidance from qualified professionals.

You Don’t Have to Predict the Market to Prepare for Market Volatility

No one knows exactly when the next major market decline will occur or how long a recovery will take. A retirement strategy shouldn’t depend on knowing.

The purpose of a retirement buffer is to consider whether some near-term income and spending needs can be separated from assets intended for longer-term market growth.

For some retirees, cash and other liquid assets may help accomplish part of that job. For others, protected-income strategies or certain annuities may potentially play a role. The right mix depends on the individual.

The goal isn’t to eliminate market risk. It’s to avoid allowing a bad market at the wrong time to dictate your retirement decisions.

Important Information: This article is educational and is not investment, tax or legal advice, nor a recommendation to buy or sell any product or security. Annuities are insurance products; guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company. Annuity features, costs, limitations and surrender charges vary by contract and state. Market-based investments involve risk, including possible loss of principal. A buffer strategy does not guarantee investment performance or any particular retirement outcome. Consider consulting qualified professionals about your specific situation.