With retirements often lasting 30 years, retirees typically need to keep some of their savings in stocks to provide long-term growth potential. Riding out stock market volatility becomes trickier in retirement, though, because it’s critical for retirees to get income from their portfolios without being forced to sell positions at a loss. Selling into a market downturn leads to more than just capital losses. It also means investors lose the growth potential of those funds over the long term.
One way to balance income needs and growth potential is pairing long-term growth assets with alternative sources of income that can provide funds when stock prices are down.
“Having access to alternate sources of retirement income can reduce the risks associated with market downturns,” says Neil Drzewiecki, Head of Life Product at MassMutual. “That flexibility means more peace of mind for investors and the potential for their savings to last longer.”
The Value of Flexibility
To illustrate the value of an alternative income source, consider Brian, a hypothetical investor with a $1 million portfolio at retirement and a pattern of market returns that mirrors the S&P 500 index between 1973 and 1992.
Brian plans to take annual withdrawals of $75,000. Once he reaches age 72, his distribution plan adjusts upward if his required minimum distribution (RMD) exceeds $75,000 in a given year. In this scenario, Brian takes $1.5 million in total withdrawals over 20 years, while his retirement balance falls to less than $500,000.
If Brian has access to an alternative income source, he could avoid withdrawing funds from his retirement portfolio following years with a negative market return. The outcome in this scenario is decidedly different.
The higher balance in Brian’s account means that he must take higher RMDs in some years. As a result, he withdraws $1,528,401 over the 20-year period. However, he also winds up with more than $2.6 million remaining in his portfolio.
Alternate Sources of Income
There are a number of ways to create sources of income that you can depend on during down markets. Bank products such as certificates of deposit and savings accounts are obvious choices. Investments such as money market funds and short-term government bond funds are also options. These and other near-cash investments should be part of every retiree’s safe income sources. However, while they are low-risk investments, they also provide lower returns.
Another option to consider is participating whole life insurance. In addition to providing permanent life insurance protection, whole life accumulates guaranteed cash value that increases each year on a tax-deferred basis and never decreases in value due to market conditions.
Suppose Brian had purchased a $500,000 whole life insurance policy at age 45, while working and saving for retirement. His annual premium was $16,305 and the policy was guaranteed to be paid up when he turned 65. His distributions in retirement would likely be tax advantaged, meaning a $54,000 distribution4 from his policy would produce the same income as a $75,000 withdrawal from his traditional IRA, assuming a tax rate of 28%.
Whole life insurance can be a reliable alternate source of funds during financial downturns. It also offers some attractive income-tax advantages that allow the policyowners to access the cash value on a tax-advantaged basis. Accessing their tax advantaged cash value in a down year can help reduce the overall amount withdrawn from the retirement portfolio, leaving more funds invested in higher-risk and higher-return asset classes for longer. Overall, it can be an important part of a client’s retirement income strategy
The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, clients should know that there may be little to no cash value available for loans in the policy’s early years.
 The S&P 500 price index is a measure of common stock market performance in the U.S. It is an unmanaged index and does not reflect the fees or expenses associated with an actual investment. Individuals cannot invest directly in an index.
 The Required Minimum Distribution (RMD) is the minimum amount that must be withdrawn annually from a traditional IRA once the account owner reaches age 72 (age 70½ for those who reached age 70½ by the end of 2019), based on the account balance at the start of each year. If the full RMD is not taken as required, the short-fall will be subject to an excise tax.
 Returns and account values are hypothetical and do not reflect the fees and charges associated with an actual investment.
 Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty if the policyowner is under age 59½. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
FOR FINANCIAL PROFESSIONAL USE. NOT FOR USE WITH THE PUBLIC.
Reprinted from Wealth Management, [10/01/2022]. Used with permission.
The information provided is not written or intended as specific tax or legal advice. MassMutual®, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
The products and/or certain features may not be available in all states. State variations will apply. Whole Life Legacy series policies ((Policy Forms: MMWL-2018 and ICC18-MMWL in certain states, including North Carolina)/ (MMWLA-2018 and ICC18-MMWLA in certain states, including North Carolina)) and MassMutual Whole Life series policies on the digital platform (Policy Forms: WL-2018 and ICC18WL in certain states, including North Carolina) are level-premium, participating, permanent life insurance policies issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001