How Sequence Of Returns Can Crash Your Client’s Retirement

George and Jane each have a $500,000 retirement nest egg. George retires and begins to withdraw $30,000 from his investment portfolio each year. Jane retires two years after George, and she also withdraws $30,000 from her investment portfolio each year.

But by Year 15, Jane is out of funds while George still has money in his portfolio. Why?

Graphic by Midland National

Sequence of returns – the coincidence of market timing - had a major impact on these two hypothetical clients. George began taking his income during the 1998-99 bull market run that led up to the dot.com crash. But Jane began taking her income during the 2000-2002 crash.

Graphic by Midland National

Sequence of returns is not a new concept but it’s a way to tell the story against the backdrop of longevity risk, said Isaac Norton, associate vice president, strategic marketing, with Midland National. He spoke at a webinar on longevity planning held by the National Association for Fixed Annuities.

Consumers and their financial advisors spend so much effort on accumulating retirement savings, but often lack a strategy for how to draw down those assets in the post-employment years, Norton said. Could a sequence of returns deplete your client’s retirement savings? A fixed indexed annuity could provide a solution, he said.

The George-and-Jane scenario is especially applicable now because of the recent market crash and uncertainty about the future, Norton said. “What are the risks? What are the market influences that could happen? The market correction that most people thought would happen at some point happened in an incredible dramatic way. So this topic only makes more sense, not less, as you’re talking to prospects and clients.”

Clients who have assets that are heavily exposed to market variations are challenged to make those assets last throughout a retirement that could last at least 20 years, he said. “How are they going to get down from that mountain when the timing of the market is going to impact whether their money is going to last as long as they do?”

Graphic by Midland National

A fixed indexed annuity is the best vehicle for a client to balance safety with growth, said Josh Woodvine, Midland National regional sales vice president.

He advised showing clients how FIAs can “give them a smoother ride” despite market fluctuations through these three factors:

1. FIAs let you participate in some of the market upside, although not all of it.
2. But not participate in any of the market downside.
3. FIAs have an annual reset feature enabling clients to lock in gains. “It can take you to the next level,” Woodvine said.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].