If you’re retired or about to retire, witnessing the steepest stock market decline since 1987 is unnerving. And that’s just one way the coronavirus is impacting our lives right now. Still, for many people selling stocks and collecting dividends is a key component of their retirement income. So, how do you generate the same amount of income in retirement after stocks have fallen so sharply?
If you have a well-constructed financial plan, the answer is simple: You could stop selling stocks (above and beyond what’s necessary to rebalance your holdings).
LEAN ON YOUR DIVERSE INCOME SOURCES
Markets rise and fall over time. That’s why a financial plan includes stocks for growth, but also includes income sources that are largely unaffected by markets (pensions, annuities, Social Security, cash value life insurance and a cash reserve). Diversifying your sources of income is key to making sure you can generate income without having to worry about what’s happening in the market. With stocks officially in a bear market, now is the time to lean on income that isn’t affected by the downturn. That’s because selling stocks now will lock in losses and you will likely need to sell more shares to generate the same amount of income. That reduces the size of your stake in a company or fund, and it may also lower your overall dividend and interest income.
Instead, now might be a time to temporarily lean on other income sources. For example, instead of selling stocks, you could use your cash reserve, or access cash value* in a whole life insurance policy to supplement your income. That can give markets time to recover, allowing you to sell at better prices later.
OTHER INCOME GENERATING OPTIONS
If you’re not able to access stable funds, or don’t have enough in those accounts to cover your needs right now, that’s OK. There may be other ways to access funds without selling your investments. You can, of course, reduce your expenses to make up for any income reductions associated with a market decline.
As another option, you could tap a home equity loan or line of credit (HELOC) to replace your market-based income sources for a while. Be aware that HELOCs should be managed properly because you may risk accruing more debt.
More broadly, the Federal Reserve recently dropped interest rates to historically levels near zero, reducing the interest rates on loans of all types. While it may not be your top choice, you may be able to get a competitive low rate on a personal loan or line of credit.
And, if you go into it with a good repayment strategy, you could open a new credit card with an interest-free introductory period. Some companies are even temporarily waiving interest. Keep in mind, while interest will be waived, you’ll still need to make your minimum payments. Failure to do so could cause that 0 percent rate to expire and you may accrue more debt in the process. But, if you plan it well, you could add expenses on that card during the introductory period to cover any gaps in income. A credit card should be your last option, and you’ll want to pay off the balance in full once that introductory period ends and before interest starts accruing— so plan accordingly!
DON’T OVERLOOK YOUR OPTIONS
Here’s the bottom line: You have options. But every person’s financial situation is a little different, which means it’s a really good time to have a discussion with a financial advisor to ensure you aren’t overlooking any of the options you have on the table to generate income in retirement.
*Each method of utilizing your policy's cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy's cash surrender value and death benefit and may also affect any dividends paid on the policy. Loans taken against a life insurance policy can have adverse effects, including tax liability, if not managed properly. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.