Will you retire at the ’wrong’ time?
The sequence of returns can impact how long your retirement savings may last
Sequence of returns
The order in which you may encounter positive investment returns
and negative investment returns — known as the “sequence of
returns” — poses a retirement risk that you may want to consider.
Why It Matters
During the accumulation years,
when income is not being withdrawn, the sequence of returns has no impact on ending values. It’s the average return that matters.
If an investor earned a hypothetical average return of 4.5%* over the accumulation period, it makes no difference whether strong returns— or negative returns—are encountered early on. The ending values are the same.
An accumulation example.
*Note: Return shown is the arithmetic average return. The above illustrations are hypothetical. They are not intended to be indicative of the performance of a specific investment option. Performance illustrated is not indicative of future results.
As illustrated here, the ending values are identical — even when the order of returns is reversed.
Investor with early gains
Investor with early losses
During the distribution years,
once withdrawals begin, the sequence of returns can have a long-lasting impact.
While the hypothetical average return over 10 years for both investors is 4.5%,* when $5,000 is withdrawn each year, the investor who experienced negative returns early was left with $50,310 after 10 years. That’s $44,088 or 47% less than the investor who encountered strong returns early on.
A distribution example.
*Note: Return shown is the arithmetic average return.
The above illustrations are hypothetical. They are not intended to be indicative of the performance of a specific investment option. Performance illustrated is not indicative of future results.
Consider the case of two individuals retiring just two years apart, and how the market’s returns, when combined with their withdrawals, impacted the value of their retirement savings.
Why does the sequence of returns matter?
Both individuals started with the same amount of money and withdrew the same amount each year.
Ted vs. June
Ted retired at the end of 2000 and began taking 5% annual withdrawals from his investment in 2001.
3 years into retirement
at the end of 2003, his account value is $179,792.
14 years into retirement
at the end of 2014, Ted’s $250,000 investment is worth $176,615.
This material is intended only for educational purposes to help you, with guidance of your financial professional, make informed decisions. We do not provide investment advice or recommendations.
The illustrations shown are hypothetical and assume past performance of the S&P 500® Index (Total Return). Includes dividend reinvestment. They are not intended to be indicative of the performance of a specific investment option. Indexes are unmanaged and cannot be invested in directly. Performance illustrated is not indicative of future results.
Ted encounters a sharp market downturn
early in his retirement.
S&P 500 return
Value after withdrawal
June retired at the end of 2002 and began taking 5% annual withdrawals from her investment in 2003.
June encounters strong returns
in the early years of her retirement.
at the end of 2005, her account value is $333,962.
at the end of 2016, June’s $250,000 investment has grown to $514,978 — nearly three times the value of Ted’s investment.
After 14 years, the difference in their account values is dramatic — more than $338,000! Encountering negative investment returns in the early years of retirement may increase the likelihood of eventually running out of money.
While no one can control the sequence of returns, there are strategies that can help protect against this retirement risk and provide lasting income no matter how the market performs.
Ted and June retired just two years apart.
Ending account values:
It may be time to consider an annuity with an optional income benefit for a portion of your investment portfolio.
Help protect your retirement income from sequence of return risk and guarantee lasting income.
See page 13 for additional information about annuities.
Annuities are long-term products designed for retirement. In the Accumulation phase, they can help you build assets on a tax-deferred basis. In the Income phase, they can provide you with guaranteed income through standard or optional features. You can annuitize your contract and receive lifetime income payments for no additional cost if a lifetime annuity option is chosen or elect an optional income protection benefit. Certain variable, index and fixed annuities offer income protection benefits, which are subject to additional fees, age restrictions, withdrawal parameters and other limitations. With variable annuities, investment requirements may also apply. Depending on investment performance and your income needs, you may not need to rely on the protection provided by an optional income protection feature. Early withdrawals may be subject to withdrawal charges, and a Market Value Adjustment (MVA) may also apply to certain index annuities and fixed annuities. Partial withdrawals may reduce benefits available under the contract and the amount available upon a full surrender. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply. Keep in mind, for retirement accounts (such as IRAs), an annuity provides no additional tax-deferred benefit beyond that provided by the retirement account itself.
Guarantees are backed by the claims-paying ability of the issuing insurance company.
An annuity with an optional income protection feature can help you:
• Grow your future retirement income
• Secure a guaranteed income stream that can last for as long as you live
• Provide lifetime income for a surviving spouse with a
joint life option
There are different types of annuities to choose from, depending on your needs and goals, as well as your risk tolerance. Income protection features are generally available for an additional cost. Your financial professional can provide you with additional details.
Can an annuity help you address your retirement income needs?
Talk to your financial professional today.
Variable annuities: Variable annuities offer professional money management, along with insurance features (such as a guaranteed death benefit and annuity income options) that you pay for through what is called a separate account charge. Variable annuities are subject to additional fees, including a contract maintenance fee, expenses related to the operation of the variable portfolios, and the costs associated with any optional features, if elected. An investment in a variable annuity is subject to risk, including the possible loss of principal. The contract, when redeemed, may be worth more or less than the total amount invested.
Index annuities: Index annuities are not a direct investment in the stock market. They are long-term insurance products with guarantees backed by the claims-paying ability of the issuing insurance company. They provide the potential for interest to be credited based in part on the performance of the specified index, without the risk of losing premium due to market downturns or fluctuations. Index annuities may not be suitable or appropriate for all clients.
Fixed annuities: Fixed annuities offer a rate of return guaranteed by the insurance company. Although not all fixed annuities offer income protection benefits, most offer a range of income options through annuitization, including the opportunity for guaranteed lifetime income.
Additional information about annuities.
Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges, expenses and other information regarding the contract and underlying funds, which should be considered carefully before investing. Please contact your insurance and securities licensed financial professional or call 1-800-445-7862 to obtain a prospectus. Please read the prospectus carefully before investing.
All contract and optional benefit guarantees, including any fixed account crediting rates or annuity rates, are backed by the claims-paying ability of the issuing insurance company. They are not backed by the broker/dealer from which this annuity is purchased.
Products and features may vary by state and may not be available in all states. The purchase of an annuity is not required for, and is not a term of, the provision of any banking service or activity.
Annuities issued by American General Life Insurance Company (AGL), Houston, TX. Certain annuities issued by The Variable Annuity Life Insurance Company (VALIC), Houston, TX. AGL and VALIC do not issue annuities in New York. In New York, annuities issued by The United States Life Insurance Company in the City of New York (US Life). Variable annuities are distributed by AIG Capital Services, Inc. (ACS), Member FINRA, 21650 Oxnard Street, Suite 750, Woodland Hills, CA 91367-4997, 1-800-445-7862. AGL, US Life, and ACS are members of American International Group, Inc. (AIG).
This material is general in nature, was developed for educational use only, and is not intended to provide financial, legal, fiduciary, accounting or tax advice, nor is it intended to make any recommendations. Applicable laws and regulations are complex and subject to change. Please consult with your financial professional regarding your situation. For legal, accounting or tax advice consult the appropriate professional.
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