by Dave Kutcher
As people near their retirement age, balancing financial risk in an ever-changing environment can seem like a daunting task. Most people have been relegated to self-funding the majority of their retirement in plans such as 401(k), 403(b), IRA, etc.
In determining how they should or how they have been investing their money, many have sought to find a way to balance risk between growth and safety and most people have come to learn it is very difficult to have both.
Seeking safety and minimizing risk typically means sacrificing growth. Sacrificing growth means you may fall short on building your nest egg or you may not be able to enjoy as much of your money each year during retirement in the form of distributions.
Last month we talked a little bit about how the sequence of your returns can have a major impact on the success of managing your retirement distributions. Timing can be a crucial factor in your plans, most particularly if you have exposure to markets seeking long term growth.
We think, however, that you should retire on your terms, not when the investment markets dictate.
We have all seen tremendous volatility in the financial market, both positive and negative, experiencing historic gains in the market as well as historic downturns. While the overall long-term value of the investment markets might be positive, the impact of volatility leading up to and in the early years of a retirement distribution plan cannot be overlooked.
Overcoming negative returns requires a lot from the financial markets. The rate of return required to bring your retirement account values back to where they were prior to a decline is no short order. A 45% loss in the stock market requires an 81.9% gain just to get you back to where you were pre-decline. A 35% loss requires a 53.9% gain to break even one year later. Even moderate losses require strong gains just for you to break even. Additionally, if you must take money out during that decline, the problem is almost impossible to overcome.
The answer to finding balance or managing market volatility might seem easy… put your money where there is no risk of loss; Bank Certificates of Deposit (CD), Money Market accounts and Fixed interest annuities to name a few.
The problem with these solutions is that they now demand you consider other financial risks that were less noticeable in a more aggressive, growth-oriented investment plan. Those risks include Inflation and taxes. When the rate of return on your money is not keeping pace with inflation and taxes, the buying power of your retirement distributions diminish. In our current environment, even more aggressive investments are struggling to keep up, never mind the lower returns one can expect from these no-risk alternatives.
Folks up here in Alaska have been accustomed to certain consumer goods being higher than they are in the lower 48, but the most recent inflationary environment is certainly enough to wake all of us up to the reality in our daily lives of not having our money keep pace with rising costs.
At Kutcher Financial Services, we help people find balance between protecting our investments from market loss and the potential for continued growth at market like rates of return.
Balance is important in so many areas of our lives. Understanding “risk-return” balance is vital to meeting retirement goals. We have programs that can meet this challenge head-on, providing 100% protection from market downturns without giving up the opportunity to achieve market-based growth. Utilizing programs such as this goes a long way to removing the risk of a negative sequence of returns on your money, putting you back in the driver’s seat so you can retire on your terms, not when the market dictates.
I am Dave Kutcher, a retired Marine Corp captain and founder and owner of Kutcher Financial Services in Eagle River. We are on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio. You can contact us at Kutcher Financial Services, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.
