SPOTLIGHT

Five key risks of retirement

Before your clients can embark on building a practical road map to financial security, they need to understand five key risks that can potentially derail a lifetime income plan.

Longevity
Longevity

Plan for living longer than you think

A retirement income plan may help to ensure that your client’s assets last as long as their retirement. When thinking about how long they might need income, many people tend to think in terms of life expectancy. But statistically, half of the population will live longer than their expectancy, which means that they will underestimate how long they will need their savings to last.

Plan for living longer than you think
Health care expenses
Health care expenses

Saving for rising costs

 

Longer life spans, rising medical costs, declining employer-sponsored medical coverage, and possible shortfalls ahead for Medicare all add up to make health care expenses a critical challenge for retirees and pre-retirees alike.

In fact, a Fidelity study1 estimates that a couple retiring in 2023 at age 65 may need current savings of approximately $315,000 to supplement Medicare and cover their out-of-pocket health care costs in retirement.

The estimate includes:
Saving for rising costs

Inflation
Inflation

Even low inflation could damage purchasing power²

Inflation is the long-term tendency of money to lose purchasing power. And it can have a particularly negative effect on retirees because it chips away at retirement income in two ways:

  • Increases the future cost of goods and services
  • Potentially erodes the value of assets set aside to meet those costs

 
Asset allocation
Asset allocation

Retirees need stocks for the long haul

Some people fear losing their nest egg, so they avoid stocks and stick with fixed-income investments. But by doing this they give up long-term growth potential and risk outliving their money.

1926–2022 comparison of average annual rising costs vs. average annual investment returns3

Retirees need stocks for the long haul

Past performance is no guarantee of future results.

Data for health care costs is from the Centers for Medicare and Medicaid Services, National Health Expenditures Estimates 2019–2028.

Fidelity Investments and Morningstar Inc, 2021 (1926-2022). Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only. It is not possible to invest directly in an index.

Examples of target asset mixes designed to meet various goals—Conservative: 14% domestic stocks, 6% international stocks, 50% bonds, 30% short-term; Balanced: 35% domestic stocks, 15% international stocks, 40% bonds, 10% short-term; Growth: 49% domestic stocks, 21% international stocks, 25% bonds, 5% short-term; Aggressive Growth: 60% domestic stocks, 25% international stocks, 15% bonds.

Excess withdrawal
Excess withdrawal

Sustainable withdrawal rates can extend the life of a portfolio4

Many people counted on Social Security and pension benefits to cover their retirement income needs. But today, retirees will be more personally responsible for funding their own retirements.

sustainable withdrawal rates can extend the life of a portfolio

Where will retirement income come from?

Many people counted on Social Security and pension benefits to cover their retirement income needs. But today, retirees will be more personally responsible for funding their own retirements.
Where will retirement income come from
Income for the Population Aged 65 and Older: Evidence from the Health Retirement Study (HRS), December 16, 2022.

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