Volatility is back: What to do to protect your pension from market risk

We got a taste of how a return to normal life felt over the summer. COVID-19 cases were declining, the stock market was approaching record highs, and concerns about pension risks such as volatility and inflation were not necessarily top of mind for US investors.

Fast forward a few weeks and things will look very different. Concerns about the Delta variant, rising inflation and large market fluctuations are creating a perfect storm for Americans. In fact, the Allianz Life Q3 Quarterly Market Perceptions Study showed that people are more concerned that a major market crash is on the horizon than they have been all year. At the same time, almost seven out of 10 (69%) say they are concerned that the rise in COVID infections will cause another recession.

In addition to concerns about the impact of market volatility on pension security, concerns about inflation are also high – and many believe it will get worse and affect pension schemes. The survey showed that 78% of Americans expect inflation to get worse over the next year, and 69% say it will negatively impact their purchasing power in the coming months.

It’s a lot for any investor to cope with, but those approaching retirement can really feel the pressure and look for ways to mitigate some of these major risks to pension security. Here are a few ideas.

Stay away from the sidelines

The survey showed that more than two-thirds (67%) say they keep some money out of the market to protect them from losses. While it may feel a bit counterintuitive, it’s important to remember that money left out of the market – even in times of volatility – does not work hard for you. This money, although subject to potential market declines, will also miss out on gains when the market recovers. However, always remember to set aside some cash for an emergency or rainy day fund.

Stay (or return to) the course

This common saying is so important in times of volatility. For those approaching retirement, large market declines can be stomach-churning. Be smart not to sell out during a downturn, explore low buying and be conscientious about rebalancing your efforts. If you reduced your retirement savings or 401 (k) contributions during the pandemic to help manage other economies, here’s your reminder to revisit your retirement strategy and resume where you may have cut back.

Explore protective products

If you are not ready to fully dive back into the market, a financial product that offers a level of protection may be a good choice for your portfolio. The survey showed that people will increasingly say that it is important to have some pension savings in products that protect against market losses (70% in Q3 compared to 64% in Q2). Furthermore, almost three quarters (72%) say they would be willing to weigh some upward growth potential in order to have some protection against market losses. Those with high investable assets (> $ 200,000) are even more likely to agree that it is important to protect pension savings from losses (83%) and that they are willing to sacrifice gains for this protection (81%) .

Some products, like an annuity, may offer a level of protection against market risk, as well as the possibility of income increases in retirement. The opportunity to increase income can either be built into the contract, or it can be optional and available at an additional cost.

Other options for clients looking to help reduce risk include certain exchange traded funds (ETFs) that allow you to participate in the growth potential of equities while allowing them to counteract downward exposure and volatility.

Adjust inflation directly

As inflation measures reach some of their highest levels in decades due to the COVID-19 pandemic, it is no surprise that 72% say they are concerned that rising living costs will affect their pension schemes, and 70% say that they are worried that they will be unable to afford the lifestyle they want as a retiree.

Now is the time to work with your finance professional to address these risks before retiring. Think of things like retirement income needs based on rising costs now, as well as over the course of a longer retirement. It can also be helpful to discuss annuity options and the constant flow of life income they can provide. Some annuities may also offer increasing income potential through either built-in or additional costs to help counteract the effects of inflation.

Market volatility has been almost constant over the last few years. And while COVID-19 remains an unpredictable factor, taking steps now to address volatility and inflation may help set up a pension strategy for future success.

* Allianz Life conducted an online survey, the 2021 Q3 Allianz Life Quarterly Market Perceptions Study, in September 2021 with a nationally representative sample of 1,005 respondents aged 18+.

Annuity guarantees are supported by the issuing company’s financial strength and capacity.

Investment involves risk, including any loss of principal. There is no guarantee that the funds will achieve their investment objectives and may not be suitable for all investors.

Vice President, Advanced Markets, Allianz Life

Kelly LaVigne is the Vice President of Advanced Markets for Allianz Life Insurance Co., where he is responsible for developing programs that help financial professionals serve clients with retirement, property planning and tax-related strategies.

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