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

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

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.

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.

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





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