00:00 Speaker A
Investors have enjoyed back-to-back years of double-digit returns from the S&P 500, but trade uncertainty, geopolitical conflict, and inflation could potentially weigh on portfolios. Our next guest says there are three risks investors near retirement should be aware of. I want to bring in John Shrewsbury, who is the GenWealth Financial Advisors co-owner and managing principal for this week’s FA Corner, brought to you by Capital Group. Great to have you here with us. So, let’s just dive into where some of those who are near retirement should be monitoring in the range of different items that could impact some of their returns for their, their hard-earned nest egg at this point.
01:29 John Shrewsbury
Brad, obviously times like these are scary for people as they approach retirement. When you think about what retirement really means, it means that you’re kind of walking off the, uh, the paycheck cliff and, and depending on your own resources to do that. And your resources are being bopped around by the market volatility that is, uh, being prompted by the uncertainty in the Middle East. So, you’ve got a situation here where people are also facing risks that they don’t really even appreciate, I think. Number one is inflation risk because in working years, your job usually keeps pace with inflation in terms of pay increases. When you go into retirement, prices still go up, but you have to increase your income from your portfolio. So, your portfolio has to support those income increases that you would get in retirement. Longevity risk is another issue. If you think about the risk of living too long, and I know that sounds funny because we all want to live a long life, but longevity kind of stretches your portfolio and causes you an undue strain. The longer you live, the more your portfolio has to work to provide that income. But the big risk that we see that kind of combines with what’s going on right now is timing risk, or what we would call sequence risk, sequence of return risk. Imagine this, as you’re walking into retirement, all of a sudden your portfolio drops pretty significantly and you’re forced to sell things at a time when you probably don’t want to sell them. That is sequence risk. So, those are the three big risks that we see in retirement. And I think people oftentimes think they have to be tactical to address those risks, but you really have to be strategy-based, and that’s what we would prescribe as a proper strategy to navigate around that market volatility.
04:33 Speaker A
Amid the confluence of these events, how can those near retirement effectively de-risk to make sure that they are kind of navigating with their own investments and portfolio navigating in a sense that will continue to grow their money regardless of how volatile things get?
05:08 John Shrewsbury
I think number one, you’ve got to focus on the next five years and then isolate a portion of your portfolio into less risky investments so that you’re not reverse dollar cost averaging or you’re not selling things when the market is volatile. If you isolate that and go into cash and cash equivalents, low-risk bonds, things of that nature, then you’ve got a pool of calm money that will get you through most of the upheavals that you see in the market. And then if you kind of stair-step your portfolio in time segmented buckets, if you will, more of a balanced approach after that five-year period of time. And then after 10 or 15 years, you can go into equities because you’re going to need that growth. And I think the real magic of this is to harvest gains from those equity buckets and those balance buckets, and refill your income bucket as time goes on and you have the opportunity to do that when markets settle down and performance is better than it might be during a downturn.
06:48 Speaker A
And what about for the part of your portfolio where you still do want to have exposure to risk? Are there new opportunities that you’re seeing really make themselves clear at this point?
07:10 John Shrewsbury
There’s always a lot of opportunities to stabilize risk. There’s obviously, you know, options that you can take on your equity portfolios. There’s also a means by which an indexed annuity can downside risk protect, but still give you upside potential. Registered index linked annuities have the opportunity of getting most of the upside of the market, but also can buffer the downside. And for folks where that’s appropriate for them, then that could certainly be a way that they could have a little bit more sleeping power when it comes to those equity portfolios against the backdrop of a volatile market.
08:17 Speaker A
John, thank you so much for taking the time here with us today to break this down. That was FA Corner, brought to you by Capital Group.