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.
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.
*At least one surviving individual. Source: Based on Society of Actuaries RP-2014 Mortality Table projected with Mortality Improvement Scale MP-2021, as of 2022.
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 2024 at age 65 may need current savings of approximately $330,000 to supplement Medicare and cover their out-of-pocket health care costs in retirement.
The estimate includes:
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
All numbers were calculated based on hypothetical inflation rates of 2%, 3%, and 4% (historical average from 1926 to 2022 was 3%) to show the effects of inflation over time. Actual inflation rates may be more or less.
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.
1926–2023 comparison of average annual rising costs vs. average annual investment returns3
Stocks are composed of domestic and foreign stocks.
This graph is for illustrative purposes only and does not represent actual or implied performance of any investment option. All indices are unmanaged, and it is not possible to invest directly in an index. Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. Data source: Morningstar Inc., 2024 (1926–2023). 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, and 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.
* Data for health care costs is from the Centers for Medicare and Medicaid Services, National Health Expenditures Estimates 2023–2032.
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.
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.
Source: Income for the Population Aged 65 and Older: Evidence from the Health Retirement Study (HRS), December 16, 2022.
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Retirement Income Planning Brochure
Covers five key risks in retirement and explains how a financial representative can help build a retirement income plan; a companion piece for the Shareholder Worksheet.
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Retirement Income Planning Shareholder Worksheet
A streamlined financial worksheet that follows the principles of the program. Gives your clients 'homework' to help initiate the income planning process.
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Retirement Income Planning Presentation
Planning for income to last your lifetime.
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1. The 2024 Retiree Health Care Cost Estimate is based on a single person retiring in 2024, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2021 as of 2022. 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. This calculation takes into account Medicare Part B base premiums and 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. This 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. This graph is for illustrative purposes only and does not represent actual or implied performance of any investment option. All indices are unmanaged and it is not possible to invest directly in an index. Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. Data source: Morningstar Inc., 2023 (1926–2023). 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. See Important Information on slide 23 for further details. Asset allocation does not ensure a profit or protect against a loss.
4. Source: The chart uses Monte Carlo simulations to project a range of hypothetical market return scenarios. Simulations are based on a historical performance analysis of asset class returns, including a range of potential returns for each asset class, volatility, and correlation. Asset classes are represented by benchmark return data from Morningstar, Inc., not actual investments. Stocks (domestic and foreign) are represented by the IA SBBI® US Large Stock TR USD Ext Index from the year 1926 through 1986 and the Dow Jones U.S. Total Market IndexSM from 1987 through the last calendar year. Bonds are represented by U.S. intermediate-term bonds from 1926 through 1975 and the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 through the last calendar year. Short-term investments are represented by four-week U.S. Treasury bill rates from 1926 through the last calendar year. Morningstar, Inc., is an independent provider of financial information. Morningstar does not endorse any broker-dealer, financial planner, insurance company, or mutual fund company. The IA SBBI® US Large Stock TR USD Ext index tracks the monthly return of S&P 500. The historical data from 1926 to 1969 is calculated by Ibbotson. Dow Jones U.S. Total Market IndexSM is an unmanaged market capitalization-weighted index of over 5,000 U.S. equity securities that contains all actively traded common stocks with readily available price data. Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged market capitalization-weighted index of U.S. dollar-denominated, investment-grade, fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year.
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.