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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
Society of Actuaries RP-2014 Mortality Table projected with Mortality Improvement Scale MP-2014, as of 2015. 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 couple retiring in 2019 will need approximately $285,000 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 2019 at age 65 may need current savings of approximately $285,000 to supplement Medicare and cover their out-of-pocket health care costs in retirement.
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
Retirees need stocks for the long haul
1926–2019 comparison of average annual rising costs vs. average annual investment returns3
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, 2020 (1926-2019). 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
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.
- 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.
- 1. Fidelity Benefits Consulting estimate; 2019. Estimate based on a hypothetical couple retiring in 2019, 65 years old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual expenses 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 Costs 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. The graph above represents the average annual return percentage for the investment categories shown from 1926 to 2015 from Ibbotson Associates. Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. 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. Domestic stocks are represented by the Standard &l Poor's 500 Index (S&P 500®). The S&P 500 is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group presentation to represent U.S. equity performance. Foreign stocks (international equities) are represented by the MSCI® EAFE® (Europe, Australasia, Far East) Index for the period from 1970 to the last calendar year. Foreign stocks prior to 1970 are represented by the S&P 500. Bonds are represented by the U.S. Intermediate Government Bond Index, which is an unmanaged index that includes the reinvestment of interest income. Short-term investments are represented by U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government. Inflation is represented by the Consumer Price Index, which monitors the cost of living in the United States. 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.
- 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.
- Fidelity Advisor Income Replacement Funds is a service mark of FMR LLC.
- 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.