After several years of substantial market gains, the recent stock market downturn is keeping some FRS members and retirees up at night.
Watching your asset balances drop is difficult, but the big issue for everyone is the sequence of returns risk. Income projections are based on year-after-year growth. An average return is used to account for dips. But if you have steep negative returns early on, your retirement account will not perform as expected. Selling investments—and locking in losses—makes matters even worse.
If you are soon retiring, what should you do with your DROP money? What are your options? Remember, diversification is critical. You may want to roll over a portion of your DROP money into accumulation IRA that offers a guaranteed fixed rate of return.
1. Cover necessary expenses with guaranteed income.
Since Social Security, your FRS pension, and fixed annuity payments are not affected by market volatility, it is a good idea to use that money for regular bills like food, utilities, and mortgage payments. A guaranteed fixed-rate annuity or an indexed annuity will protect your principal and your earned interest from market loss. You can choose to take out interest only every year and preserve your DROP principal. There are short-term IRAs (two to three years), mid-range (five to seven years), and long-term (10 years). Typically, the longer the duration, the higher rate you will get.
2. Increase your liquidity.
The general rule of thumb is to keep one or two years of costs (beyond necessary expenses) as cash or cash equivalents. This way, you can ride out market lows and reduce your sequence of returns risk.
3. Get your financial house in order.
If you have not already, now is the time to write or update your will, living will, power of attorney, and other directives. If you alone manage your family’s finances, you should also make sure your spouse or other beneficiary has your account numbers, logins, and passwords.
4. Meet with a DROP Advisory Council member.
One of our DROP Advisory Council members can help you build a retirement income an expense plan. It is complimentary for all FRS members. It is the financial retirement roadmap for your retirement success. He or she can help you choose the right DROP IRAs for your specific plan. They also can recommend health insurance and Medicare Plans. We can do the meeting on ZOOM or in person. Also, please attend one of our workshops. We conduct these workshops throughout the state.
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