Down Markets Matter

At Harrison Financial Services we believe strongly in providing a holistic approach to wealth management, ensuring our clients have a comprehensive portfolio to help them reach their personal and financial goals. Having complimentary products in your portfolio can be a critical component of your long-term financial success.

During retirement, individuals often utilize systematic withdrawals from their qualified retirement accounts such as IRAs and 401(k)s for general living expenses. While common for the withdrawals to be a primary source of income, they should not be taken without first giving thought to market performance. Doing so could have a negative impact on the long-term value of your account. When the market is down, where you withdraw funds matters – even for your qualified accounts.

Consider the following example:

When taking systematic withdrawals beginning at age 65, an IRA account that had a value of $1.5 million in 1977 would have had a balance of $1,471,672 after 20 years. In this example, the market was negative in the first year by 2.07%, followed by a positive return of 3.98%, leaving the investor roughly $1.27 million and feeling quite anxious about his or her ability to sustain their investment throughout the rest of the retirement. There was an additional year of negative returns that further impacted the portfolio’s value, resulting in a total value of about $1.47 million after 20 years. In contrast, by skipping withdrawals during the years when the market was down, and instead taking only the required minimum distributions (RMDs)* the IRA balance would have been preserved in excess of $2,820,416. Keeping funds invested during the down markets and giving them an opportunity to recover during subsequent positive years can make a significant impact in the overall value of your account.

Many retirees face the dilemma of balancing their increasing aversion to risk with maintaining a portfolio that offers an acceptable rate of return. They have a need for ongoing income and taking systematic withdrawals from their accounts when shares have substantially depreciated in value means the account may never recover when the market turns positive.

As an alternative, individuals should consider taking only the required minimum distribution and utilizing a “safe”, liquid “buffer” account to provide the necessary supplemental income. This approach may provide the time needed for the investment assets to recover from the market loss and help to avoid the negative principal reduction. Non-Qualified Investment portfolios and over-funded and optimized permanent life insurance policies^ are two alternatives to helping build substantial liquidity in a non-taxable fashion.

This strategic thinking requires foresight and working with a trusted advisor who has the knowledge and industry experience to help clients in the preservation and distribution planning phase of wealth management.

^The primary purpose of permanent life insurance is to provide a death benefit. Using cash values to supplement your retirement income will reduce the benefit and may affect other aspects of your life insurance plan. Accessing the cash values through policy loans, surrenders of dividend values, or cash withdrawals will or could reduce the death benefit; necessitate greater outlay than anticipated; or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).

*Required minimum distribution from the IRA under federal tax law.

Hypothetical example for illustrative purposes only. Beginning value $1.5 million in IRA; S&P 500 historical return during 1977-1996 including dividends; $120,000 withdrawal each year with a 3% inflation rate applied: $0 withdrawal in years after negative return except for required minimum distribution. The 50/50 portfolio is represented by the S&P 500 Index for equity and the BarCap US Aggregate Bond Total Return USD for fixed income. The S&P 500 Index is a list of securities frequently used as a measure of U.S. Stock Market performance. These numbers do not reflect fees and charges associated with an actual investment. Historical S&P 500 returns from Bloomberg.

This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

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