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Actions Your Clients’ Misconception Market Volatility in Retirement
Your Clients’ Misconception Market Volatility in Retirement
Clients know that, when investing during working years, a down market is an opportunity to buy low and reap the rewards when the market turns. That changes the day they stop contributing and begin withdrawing income in retirement. A downturn at the start can cut years off how long their assets will last, cause a shortfall, and could affect their legacy goals. Using cash value life insurance as an income cushion can help provide greater confidence for your clients.
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Actions Positive Returns May Create False Confidence
Historically, after a 3-year average annual return of 20%, there’s been a 50% chance of a negative return the next year. This is derived from Prudential analysis based on historical annual returns from the S&P 500 from 1926 to 2010. However, past may not be indicative of future results.
Positive Returns May Create False Confidence
Clients often choose to retire when the market is up. They don’t realize that, historically, high average annual returns over multiple years have a good chance of being followed by a negative year. Clients need a realistic expectation of what to do to prepare.
Use this Case Study when talking with clients. As always, our specialists can answer questions and help turn this concept into a conversation — 1-844-606-7868.
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Actions When Saving, the Order of Returns Doesn’t Matter
When Saving, the Order of Returns Doesn’t Matter
As long you don’t withdraw, the sequence of up and down years for the market doesn’t matter over a 25-year period. Even when the order of the returns is reversed, you end up with the same growth rate and dollar values.
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This chart shows a hypothetical account starting with $10,000, and assumes no more contributions, withdrawals, or taxes. It shows 25 years of hypothetical market returns in order on one line and then a second line with that order reversed. One line shows the order of returns starting with two positive years. Over the remaining 23 years, there are some negative return years interspersed with positive return years. The second line shows the reverse order of line one, so year 25’s percentage of return is shown as year 1, year 24’s is shown as year 2, and so on. Notice that the first two years have negative returns. What is plain to see is that it doesn’t matter what order the returns come in, you still end up with the same average annual return over the 25-year period, and if account values were shown here, you would see that the account value is equal also. Please note that these charts do not reflect the impact of income taxes on the returns.
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | Avg. Ann. Return |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| PRE-RETIREE A - Annual Return | 10% | 9% | -6% | 12% | 25% | 7% | -3% | 9% | 10% | -7% | 6% | 23% | 12% | 7% | -5% | 9% | 12% | 17% | 9% | 12% | 5% | -2% | 5% | -12% | -7% | 5.89% |
| PRE-RETIREE B - Annual Return | -7% | -12% | 5% | -2% | 5% | 12% | 9% | 17% | 12% | 9% | -5% | 7% | 12% | 23% | 6% | -7% | 10% | 9% | -3% | 7% | 25% | 12% | -6% | 9% | 10% | 5.89% |
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Actions When Withdrawing, Life Insurance Can Be a Cushion
When Withdrawing, Life Insurance Can Be a Cushion
If markets drop during the first few years of retirement, and clients take withdrawals from savings, they risk that the money may not last as long as planned. To illustrate, the same market returns are used below, but now starting with one million dollars and taking out $65,000 each year as income.
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Scenario 1 (Withdrawals from investments) starts with two years of negative returns. With continuing annual $65,000 withdrawals, the investments never recover, and the retiree runs out of money in year 23.
Scenario 2 (Withdrawals supplemented by Life Policy Cash Value) also starts with two years of negative returns, but withdrawals from a life insurance policy's cash value replace the income in years 1 and 2 only. The savings stay invested and go on to provide income for 23 years and more. The option to use income from a supplemental source during market volatility helps assets last longer. An added bonus is that income from life insurance is tax-advantaged1.
Scenario 3 (Withdrawals from investments) shows the first two years having a positive return (versus the other scenarios) and withdrawing $65,000 each year from the investment. This scenario shows how when the market has positive returns in the early years, taking $65,000 out each year doesn’t cause a need for an alternate source of income. Please note that these charts do not reflect the impact of income taxes on the returns or distributions.
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Actions Your Guide for Conversations On Market Volatility
Your Guide for Conversations On Market Volatility
Start talking to your clients right away using our case study. It helps show how life insurance can offer protection for their loved ones and provide versatility with supplemental retirement income, that can serve as a cushion to help offset the impact of market volatility.
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Actions Explore More Retirement Challenges
Explore More Retirement Challenges
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Actions Life Insurance Sales Desk
Life Insurance Sales Desk
Call Us: 844-606-7868
Email Us: lifesalesdesk@prudential.com
If you’re already appointed with Prudential, visit PruXpress to explore more about how life insurance can help your clients meet their protection needs and plan for retirement.
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Actions Footnote
- 1 Withdrawals are generally taxable to the extent they exceed basis in the policy. Loans are charged interest; they are usually not taxable. Loans that remain unpaid when the policy lapses or is surrendered while the insured is alive will be taxed immediately to the extent of gain in the policy. Unpaid loans and withdrawals reduce cash values and death benefits; may reduce the duration of the guarantee against lapse, which may lapse the policy; and may have tax consequences. For policies that are Modified Endowment Contracts (MECs), distributions (including loans) are taxable to the extent of income in the policy; an additional 10% federal income tax penalty may apply. Clients should consult their tax advisor for advice about their own situation.
Life insurance is issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY and/or NJ), and Pruco Life Insurance Company of New Jersey (in NY and/or NJ). All are Prudential Financial companies located in Newark, NJ.
Created Exclusively for Financial Professionals. Not for Use with Consumers.
For Compliance Use Only: 1012632-00001-00
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Actions Advisors - Life Insurance
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