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.

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Plan for living longer than you think

93 95 87 89 93 98 Male age 65 Female age 65 Couple (both age 65) 50% chance of one spouse surviving 25% chance of one spouse surviving 65 70 75 80 85 90 95 100

Based on Society of Actuaries RP-2014 Mortality Table projected with Mortality Improvement Scale MP-2017 as of 2018. For illustrative purposes.

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.

Saving for rising costs

Fidelity estimates that a 65-year-old opposite gender couple retiring in 2022 will need approximately $315,000 to cover medical costs in retirement.1

The estimate includes:

  • ■ Prescription drug out-of-pocket costs
  • ■ Expenses associated with Medicare Part B and D premiums
  • ■ Medicare cost-sharing provisions: co-payments, coinsurance, deductibles, and excluded benefits

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 2022 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.

Even low inflation could damage purchasing power²

$60K $50K $40K $30K $20K $10K $0 Today 5 years 10 years 15 years 20 years 25 years Years from retirement start date 2 % inflation 3 % inflation 4 % inflation Dollars $50,000 $30,477 $23,880 $18,756

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

Retirees need stocks for the long haul

1926–2020 comparison of average annual rising costs vs. average annual investment returns3

ConservativeBalancedGrowthAggressiveGrowthInflation3.0%5.96%7.98%9.70%Health carecosts 5.4%9.00%Rising costsAverage annual portfolio returns (1926–2020)

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.

  • 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 (1926-2020). 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.

Sustainable withdrawal rates can extend the life of a portfolio

How a couple retiring in 1972 with $500,000 is affected4

10 % 9 % 8 % 7 % 6 % 5 % 4 % $1M $2M $.5M $0 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 DOLLARS REMAINING A couple, both age 65, would have run out of money at age 88 if they had withdrawn 5 % , adjusted upwards for inflation each year. Hypothetical Couple (both age 65)** 100 % at age 65 99 % at age 70 98 % at age 75 94 % at age 80 83 % at age 85 63 % at age 90 35 % at age 95

Even the savviest asset allocation strategy can misfire without an equally wise strategy for withdrawing assets. The withdrawal rate can dramatically affect how long the money will last.

  • For charts which highlight varying levels of stocks, bonds, and short-term investments, the purpose of these hypothetical illustrations is to show how portfolios may be created with different risk and return characteristics to help meet a participant‘s goals. You should choose your own investments based on your particular objectives and situation. Remember, you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your goals. You should also consider all of your investments when making your investment choices. All index returns include reinvestment of dividends and interest income. It is not possible to invest directly in any of the indices described above. Investors may be charged fees when investing in an actual portfolio of securities, which are not reflected in illustrations utilizing returns of market indices.
  • ** Probability of a couple surviving to various ages is based on Annuity 2000 Mortality Table, Society of Actuaries. Figures assume a person is in good health.

Where will retirement income come from?

62% may be the retiree’s responsibility

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.

38%from outsidesourcesSocial SecurityPension62%from yourown sourcesInvestmentsEarned IncomeOther14%45.2%15.4%3.1%22.3%TotalRetirementIncome
  • Social Security Administration, Income of the Aged Chartbook, 2014 (released April 2016), based on highest quintile of $72,129. For illustrative purposes only.
  • Stocks are composed of domestic and foreign stocks.

Related Commentary

All Retirement Planning Insights

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  • 1. 2022 Retiree Health Care Cost estimate is based on a hypothetical opposite-gender couple retiring in 2021, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2021. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.
  • 2. All numbers were calculated based on hypothetical rates of inflation of 2%, 3%, and 4% (the historical average from 1926 to 2018 was 3%) to show the effects of inflation over time; actual inflation rates may be more or less and will vary.
  • 3. Returns include the reinvestment of dividends and other earnings. Data source: Morningstar Inc., 2021 (1926-2020). Domestic stocks are represented by the S&P 500® Index, bonds are represented by U.S. Intermediate Government Bond Index, and short-term assets are based on the 30-day US Treasury bill. Foreign equities are represented by the MSCI Europe, Australasia, Far East Index for the period from 1970 to the last calendar year. Foreign equities prior to 1970 are represented by the S&P 500® Index. Inflation is represented by the Consumer Price Index. U.S. stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuation than stocks but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are generally only slightly above the inflation rate. Asset allocation does not ensure a profit or protect against a loss.
  • 4. Source: Fidelity Investments. Hypothetical value of assets held in an untaxed account of $500,000 invested in a portfolio of 50% stocks, 40% bonds, and 10% short-term investments with inflation-adjusted withdrawal rates as specified. This chart uses historical monthly performance from January 1972 through December 2012 from Ibbotson Associates; stocks, bonds, and short-term investments are represented by the S&P 500, U.S. Intermediate-Term Government Bonds, and U.S. 30-day T-bills, respectively. You cannot invest directly in an index. This chart is for illustrative purposes only, is not indicative of any investment and is not intended to project or predict the present or future value of the actual holdings in a participant’s portfolio or the performance of a given model portfolio of securities.
  • Asset allocation does not ensure a profit or protect against a loss.
  • Past performance is no guarantee of future results.
  • Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.
  • Diversification does not ensure a profit or guarantee against a loss. Investing involves risks, including risk of loss.
 
 

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