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For those who are within five years of retirement — either those who are five years away, or who have recently entered — the market volatility being experienced today as a result of the White House’s embattled tariff policy are likely to endure challenges as they navigate the potential impacts of market volatility.
This is according to retirement experts who have recently spoken with outlets including the New York Times and the Wall Street Journal, as older Americans with a market stake in their retirement nest eggs are increasingly trying to assess what impact it will have on their cash reserves and retirement timelines.
Wade Pfau, a professor of retirement income at the American College of Financial Services and an expert who has advocated for the strategic employment of reverse mortgages in retirement planning, told the Times that short-term tumult in close proximity to the actual retirement date can have an impact on the stability of a portfolio.
“What happens to the market and the economy in those near and early retirement years matters disproportionately to the success of your entire retirement plan,” Pfau told the outlet.
But there are certain steps that those in this position can take, according to Pfau and other experts the outlets spoke to. Building a cushion of cash on a long-form retirement plan can be beneficial, particularly for those who saw their portfolios gain in their first year of saving.
“It’s also a good idea to identify other sources of income you could tap if needed, such as annuities, a home equity line of credit or even a reverse mortgage if you have substantial equity in your house,” the Times said based on input from Pfau and others.
In a previous instance of heavy market volatility brought about by the beginning of the COVID-19 pandemic, Pfau had mentioned during that time that reverse mortgages could be seen as a “buffer asset” to tap temporarily until the market became more stable.
“I’m personally finding the idea of a buffer asset even more compelling in terms of not having to plan for such a low withdrawal rate because of the ability it provides to skip taking portfolio distributions at particularly dangerous times in retirement,” Pfau told HousingWire’s Reverse Mortgage Daily (RMD) in March of 2020. “I would guess that others would become more open to the idea.”
Pfau also relayed the possibility of using a reverse mortgage line of credit to weather market volatility to the Journal.
“Another option is to tap home equity with a reverse mortgage line of credit,” the Journal reported based on his input. “There can be downsides, including high fees on reverse mortgages, so weigh the pros and cons carefully, Pfau said.”
Other potential tips include diversifying investment assets by including more bonds in the mix, and adjusting spending based on market conditions.
“A very small change in spending can have a dramatic effect,” Pfau told the Journal.
There is a distinct misunderstanding that somehow annuity distributions are ALL income. Certainly the IRS does not look at them that way. The IRS requires a ratable recognition of income of what little income an annuity may generate, particularly with fixed payment immediate annuities. In that case the majority of the payouts are a return of the investment in the annuity (what the consumer paid for the annuity).
The distortion is far worse with loan payouts from either a HELOC or from a reverse mortgage. These payouts must be repaid in FULL with interest. A payout that is required to be repaid is not normally referred to as income; such payouts are commonly referred to as debt proceeds. To the extent that proceeds are NOT repaid, tax law concludes that the nonrepayment of the proceeds results in income (or in some cases, gains).
If what is received by an employee from an employer is legally agreed to be paid back BEFORE the original payout is made, then the payout is not income but loan proceeds. Such proceeds may result in cash inflow to the borrower but certainly NOT income.