Sixty-four months to the day, the Dow Jones Industrial Average crossed over and ended last Friday’s trading session above 14,000.
Finishing at 14,009.79 on Feb. 1, the last time this feat was accomplished was on Oct. 1, 2007 when the Dow industrials closed at 14,087.55.
After achieving this milestone over five years ago, the blue chips quickly took a sharp turn south, racking up 13 out of 17 losing months. It dropped a dizzying 7,324.26 points, or 52%, between Oct. 1, 2007 and March 2, 2009 when it finished at 6,763.29 before finally bottoming out at 6,469.95 on March 6, 2009.
So what’s different this time? More importantly, as someone approaching, or in the midst of, retirement, what should you do? Let’s answer these questions one at a time.
What’s different this time?
Let’s start by calling the Oct. 1, 2007 breakthrough “14K-1” and the Feb. 1, 2013 event “14K-2.” (not to be confused with RG3 for you football fans).
14K-1 was a much steeper climb beginning one year prior to October 1, 2007 when the Dow closed at 11,670.35 on Oct. 2, 2006. The Dow increased by 2,417.20 points, or 20.7%, from this date until it crossed the 14,000 threshold on October 1, 2007. There were only three losing months along the way, with the largest one coming in at 439 points, or 3.5%.
14K-2 proved to be a more gradual ascent than 14K-1 during the preceding year. The 14K-2 Dow began its journey about 1,000 points higher than the starting point for 14K1, closing at 12,716.46 on Feb. 1, 2012. As a result, the one-year increase was 1,293.33 points, or 10.2%, or approximately half of 14K-1’s experience. Like 14K-1, 14K-2 also realized three losing months during the 12 months prior to hitting 14,000. Unlike 14K-1, the largest monthly loss was much more dramatic, with a decline of 1,161 points, or 8.7%.
What should you do?
Although the final one-year climb was twice as steep in the case of 14K-1 vs. 14K-2, the fact of the matter is that history repeated itself this past Friday when the Dow once again hit, and broke through, the 14,000 barrier. The question is, what should you do differently this time if you’re a pre-retiree or retiree to protect yourself against the possibility of a dramatic decline in the value of your portfolio similar to the 17-month aftermath of 14K-1?
As a retirement income planner, I look for windows of opportunity for my clients to transfer, what amounts to slivers of their investment portfolio in many cases, from the unpredictable fluctuations of the stock market to conservative investments that are designed to provide guaranteed income that they can depend on throughout retirement. Fixed-income annuities are most suitable for this purpose, including single premium immediate annuities, SPIAs, deferred income annuities, DIAs, and fixed index annuities FIAs with income riders.
Since my crystal ball shattered years ago, I don’t try to time the market to determine when it has peaked in order to recommend and perform this heroic service for my clients. Shifting a portion of a managed investment portfolio to guaranteed income (subject to the claims-paying ability of individual insurance carriers) at opportune moments has proven to be a winning strategy for my clients who are within 20 years of, or are in, retirement.
They have everything to gain and nothing to lose. Each time that a client implements this recommendation, he/she accomplishes two important goals shared by all individuals doing retirement income planning: (a) portfolio risk reduction and (b) decreased likelihood of running out of money in retirement.
Although I haven’t done any formal large-scale studies, I can confidently state from personal and client experience that the comfort of a predictable retirement income stream generally results in reduced short- and long-term stress levels, fewer cases of insomnia, and less health issues in general for those individuals who implement this strategy compared to those who don’t.
This unequivocally trumps the short-term euphoria associated with increased portfolio values in a bull market.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.