How to Protect Your Retirement Savings - Fidelity
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fidelity.com https://www.fidelity.com/viewpoints/retirement/protectyourretirementincome?print=true Five ways to protect your retirement income If you’re nearing or in retirement, it’s important to think about protecting what you've saved and ensuring that your income needs are met now and in the future. Here are five rules of thumb to help manage the risks to your retirement income. 1. Plan for health care costs. With longer life spans and medical costs that historically have risen faster than general inflation—particularly for longterm care—managing health care costs can be a critical challenge for retirees. According to Fidelity’s annual retiree health care costs estimate, the average 65yearold couple retiring in 2014 will need an estimated $220,000 to cover health care costs during their retirement, and that is just using average life expectancy data. 1 Many people will live longer and have higher costs. And that cost doesn’t include long term care (LTC) expenses. According to the U.S. Department of Health and Human Services, about 70% of those age 65 and older will require some type of LTC services—either at home, in adult day care, in an assisted living facility, or in a traditional nursing home. The average privatepay cost of a nursing home is about $90,000 per year according to MetLife, and exceeds $100,000 in some states. Assisted living facilities average $3,477 per month. Hourly home care agency rates average $46 for a Medicarecertified home health aide and $19 for a licensed nonMedicarecertified home health aide. Consider: Purchase longtermcare insurance. The cost is based on age, so the earlier you purchase a policy, the lower the annual premiums, though the longer you’ll potentially be paying for them. If you are still working and your employer offers a health savings account (HSA), you may want to take advantage of it. An HSA offers a tripletax advantage: You can save pretax dollars, which can grow and be withdrawn state and federal tax free if used for qualified medical expenses—currently or in retirement. 2. Expect to live longer. As medical advances continue, it's quite likely that today’s healthy 65yearolds will live well into their 80s or even 90s. This means there's a real possibility that you may need 30 or more years of retirement income. An American man who’s reached age 65 in good health has a 50% chance of living 20 more years, to age 85, and a 25% chance of living to 92. For a 65yearold American woman, those odds rise to a 50% chance of living to age 88 and a oneinfour chance of living to 94. The odds that at least one member of a 65year old couple will live to 92 are 50%, and there’s a 25% chance at least one of them will reach age 97. 2 And recent data suggest that longevity expectations may continue to increase. You may live longer than you expect.
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How to Protect Your Retirement Savings
Transcript of How to Protect Your Retirement Savings - Fidelity
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04/05/2015 HowtoProtectYourRetirementSavingsFidelity
https://www.fidelity.com/viewpoints/retirement/protectyourretirementincome?print=true 1/6
fidelity.com https://www.fidelity.com/viewpoints/retirement/protectyourretirementincome?print=true
Fivewaystoprotectyourretirementincome
Ifyourenearingorinretirement,itsimportanttothinkaboutprotectingwhatyou'vesavedandensuringthatyourincomeneedsaremetnowandinthefuture.Herearefiverulesofthumbtohelpmanagetheriskstoyourretirementincome.
1.Planforhealthcarecosts.
Withlongerlifespansandmedicalcoststhathistoricallyhaverisenfasterthangeneralinflationparticularlyforlongtermcaremanaginghealthcarecostscanbeacriticalchallengeforretirees.
AccordingtoFidelitysannualretireehealthcarecostsestimate,theaverage65yearoldcoupleretiringin2014willneedanestimated$220,000tocoverhealthcarecostsduringtheirretirement,andthatisjustusingaveragelifeexpectancydata.1Manypeoplewilllivelongerandhavehighercosts.Andthatcostdoesntincludelongtermcare(LTC)expenses.
AccordingtotheU.S.DepartmentofHealthandHumanServices,about70%ofthoseage65andolderwillrequiresometypeofLTCserviceseitherathome,inadultdaycare,inanassistedlivingfacility,orinatraditionalnursinghome.Theaverageprivatepaycostofanursinghomeisabout$90,000peryearaccordingtoMetLife,andexceeds$100,000insomestates.Assistedlivingfacilitiesaverage$3,477permonth.Hourlyhomecareagencyratesaverage$46foraMedicarecertifiedhomehealthaideand$19foralicensednonMedicarecertifiedhomehealthaide.
Consider:Purchaselongtermcareinsurance.Thecostisbasedonage,sotheearlieryoupurchaseapolicy,thelowertheannualpremiums,thoughthelongeryoullpotentiallybepayingforthem.
Ifyouarestillworkingandyouremployeroffersahealthsavingsaccount(HSA),youmaywanttotakeadvantageofit.AnHSAoffersatripletaxadvantage:Youcansavepretaxdollars,whichcangrowandbewithdrawnstateandfederaltaxfreeifusedforqualifiedmedicalexpensescurrentlyorinretirement.
2.Expecttolivelonger.
Asmedicaladvancescontinue,it'squitelikelythattodayshealthy65yearoldswilllivewellintotheir80soreven90s.Thismeansthere'sarealpossibilitythatyoumayneed30ormoreyearsofretirementincome.
AnAmericanmanwhosreachedage65ingoodhealthhasa50%chanceofliving20moreyears,toage85,anda25%chanceoflivingto92.Fora65yearoldAmericanwoman,thoseoddsrisetoa50%chanceoflivingtoage88andaoneinfourchanceoflivingto94.Theoddsthatatleastonememberofa65yearoldcouplewillliveto92are50%,andtheresa25%chanceatleastoneofthemwillreachage97.2Andrecentdatasuggestthatlongevityexpectationsmaycontinuetoincrease.
Youmaylivelongerthanyouexpect.
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Peoplearelivinglongerbecausetheyrehealthy,active,andtakingbettercareofthemselves.
*Atleastonesurvivingindividual.Source:Annuity2000MortalityTable,SocietyofActuaries.Figuresassumethatindividualsareingoodhealth.Forillustrativepurposesonly.
Withoutsomethoughtfulplanning,youcouldeasilyoutliveyoursavingsandhavetorelysolelyonSocialSecurityforyourincome.AndwiththeaverageSocialSecuritybenefitbeingjustover$1,294amonth,itlikelywontcoverallyourneeds.3
Consider:Tocoveryourincomeneeds,particularlyyouressentialexpenses,youmaywanttousesomeofyourretirementsavingstopurchaseanannuity.Itwillhelpyoucreateasimpleandefficientstreamofincomepaymentsthatareguaranteedforaslongasyou(oryouandyourspouse)live.4
3.Bepreparedforinflation.
Inflationcaneatawayatthepurchasingpowerofyourmoneyovertime.Thisaffectsyourretirementincomebyincreasingthefuturecostsofgoodsandservices,therebyreducingthepurchasingpowerofyourincome.Evenarelativelylowinflationratecanhaveasignificantimpactonaretireespurchasingpower.Ourhypotheticalexamplebelowshowsthat$50,000todaywouldbeworthonly$30,477in25years,evenwitharelativelylow(2%)inflationrate.
Thedangerofinflation:Thevalueofyoursavingsisreduced.
Evenalowinflationratecanreducethepurchasingpowerofyourmoney.
Source:FidelityInvestments,2014.Allnumberswerecalculatedbasedonhypotheticalratesofinflationof
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2%,3%,and4%(historicalaveragefrom1926to2013was3%)toshowtheeffectsofinflationovertimeactualratesmaybemoreorlessandwillvary.
Consider:Whilemanyfixedincomeinvestmentsandretirementincomesourceswillnotkeepupwithinflation,somesources,suchasSocialSecurity,andcertainpensionsandannuitiescanhelpyoucontendwithinflationautomaticallythroughannualcostoflivingadjustmentsormarketrelatedperformance.Investingininflationfightingsecurities,suchasgrowthorientedinvestments(e.g.,individualstocksorstockmutualfunds),TreasuryInflationProtectedSecurities(TIPS),andcommodities,mayalsomakesense.
4.Positioninvestmentsforgrowth.
Atooconservativeinvestmentstrategycanbejustasdangerousasatooaggressiveone.Itexposesyourportfoliototheerosiveeffectsofinflation,limitsthelongtermupsidepotentialthatdiversifiedstockinvestmentscanoffer,andcandiminishhowlongyourmoneymaylast.Ontheotherhand,beingtooaggressivecanmeanundueriskindownorvolatilemarkets.Astrategythatseekstokeepthegrowthpotentialforyourinvestmentswithouttoomuchriskmaybetheanswer.
Thesampletargetassetmixesbelowshowsomeassetallocationstrategiesthatblendstocks,bonds,andshortterminvestmentstoachievedifferentlevelsofriskandreturnpotential.Withretirementlikelytospan30yearsorso,youllwanttofindabalancebetweenriskandreturnpotential.
Findaninvestmentmixwiththerightamountofgrowthpotentialandriskforyou.
Withretirementlikelytospan30yearsorso,youllwanttofindabalancebetweengrowthandpreservation.
Thepurposeofthetargetassetmixesistoshowhowtargetassetmixesmaybecreatedwithdifferentriskandreturncharacteristicstohelpmeetyourgoals.Youshouldchooseyourowninvestmentsbasedonyourparticularobjectivesandsituation.Rememberthatyoucanchangehowyouraccountisinvested.Besureto
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reviewyourdecisionsperiodicallytomakesuretheyarestillconsistentwithyourgoals.ThesetargetassetmixesweredevelopedbyStrategicAdvisers,Inc.,aregisteredinvestmentadviserandaFidelityInvestmentscompany,basedontheneedsofatypicalretirementplanparticipant.Datasource:IbbotsonAssociates,2014(19262014).Pastperformanceisnoguaranteeoffutureresults.Returnsincludedthereinvestmentofdividendsandotherearnings.
Thelowerthewithdrawalrate,thelongeraportfoliomaylast.
Pastperformanceisnoguaranteeoffutureresults.Theinformationprovidedregardingthehistoricalsustainabilityofvariouswithdrawalratesishypotheticalinnatureandisforillustrativepurposesonly.Itisnotintendedtopredictorprojectinvestmentresultsanddoesnotreflectactualresultsofanyinvestmentorinvestmentstrategy.Individualresultswillvary.The28yearretirementperiodisbasedonaretirementageof67andaunisexlongevityassumption.Balancedportfolio:50%stock,40%bonds,10%cash.Analysisusesoverlappinghistoricalperiods,whichlimitsstatisticalrelevance.Frequencyofsuccessuseshistoricalrealreturndataforwithdrawalperiodsbeginningeachmonth,withtheearliestperiodbeginningJanuary1,1926,andthelatestperiodendingJuly31,2013,usingahypotheticalbalancedinvestmentportfolio.Seefootnotefivebelowforinformationontheindexesusedforthebalancedportfolios.
Consider:Createadiversifiedportfoliothatincludesamixofstocks,bonds,andshortterminvestments,accordingtoyourrisktolerance,overallfinancialsituation,andinvestmenttimehorizon.Doingsomayhelpyouseekthegrowthyouneedwithouttakingonmoreriskthanyouarecomfortablewith.Diversificationandassetallocationdonotensureaprofitorguaranteeagainstloss.GethelpcreatinganappropriateinvestmentstrategywithPortfolioReview(loginrequired).
5.Don'twithdrawtoomuchfromsavings.
Spendingyoursavingstoorapidlycanalsoputyourretirementplanatrisk.Forthisreason,webelievethatretireesshouldconsiderusingconservativewithdrawalrates,particularlyforanymoneyneededforessentialexpenses.
Acommonruleofthumbistouseawithdrawalrateof4%to5%.Why?Weexaminedhistoricalinflationadjustedassetreturnsforahypotheticalbalancedinvestmentportfolioof50%stocks,40%bonds,and10%cash,todeterminehowlongvariouswithdrawalrateswouldhavelasted.Thecharttotherightshowswhatwefound:In90%ofhistoricalmarkets,a4%ratewouldhavelastedforatleast30years,whilein50%ofthehistoricalmarkets,a4%ratewouldhavebeensustainedformorethan40years.
Consider:Keepyourwithdrawalsasconservativeasyoucan.Lateron,ifyourexpensesdroporyourinvestmentportfoliogrows,youmaybeabletoraisethatrate.
Inconclusion
Afterspendingyearsbuildingyourretirementsavings,switchingtospendingthatmoneycanbestressful.Butitdoesn'thavetobethatwayifyoutakestepsleadinguptoandduringretirementtomanagethesefivekeyriskstoyourretirementincome,asoutlinedabove.
Learnmore
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CreateacomprehensiveplantohelpmakeyourmoneylastwithourRetirementIncomePlanner(loginrequired).
DeveloparetirementincomestrategyusingtheFidelityIncomeStrategyEvaluatorSM(loginrequired).
Beforeinvesting,considerthefunds'investmentobjectives,risks,charges,andexpenses.ContactFidelityforaprospectusor,ifavailable,asummaryprospectuscontainingthisinformation.Readitcarefully.
Investinginvolvesrisk,includingriskofloss.
1.Source:FidelityBenefitsConsulting,2013.Basedonahypotheticalcoupleretiringin2012,65yearsorolder,withaverage(82male,85female)lifeexpectancies.Estimatesarecalculatedfor"average"retireesbutmaybemoreorlessdependingonactualhealthstatus,areaofresidence,andlongevity.AssumesindividualsdonothaveemployerprovidedretireehealthcarecoveragebutdoqualifyforMedicare.Thecalculationtakesintoaccountcostsharingprovisions(suchasdeductiblesandcoinsurance)associatedwithMedicarePartAandPartB(inpatientandoutpatientmedicalinsurance).ItalsoconsidersMedicarePartD(prescriptiondrugcoverage)premiumsandoutofpocketcosts,aswellascertainservicesexcludedbyMedicare.Theestimatedoesnotincludeotherhealthrelatedexpenses,suchasoverthecountermedications,mostdentalservices,andlongtermcare.
2.SocietyofActuariesIAM2000mortalitytables,updatedto2013withScheduleGAdjustments.Figuresassumeapersonisingoodhealth.
3.U.S.SocialSecurityAdministration,April2014.
4.Guaranteedlifetimeincomeissubjecttotheclaimspayingabilityoftheissuinginsurancecompany.
5.Forthebalancedportfolios,thefollowingindexeswereused.Fordomesticstocks,theIASBBIS&P500TR.Forforeignstocks,theMSCIEAFETR.Forbonds,theIASBBIU.S.IntermediateTermGovernmentTR.Forcash,theIASBBIU.S.30DayTreasuryBillTR.Thestockcomponentofeachportfolioincludes70%domesticand30%foreignstockfromJanuary1970toJuly2013.BecauseMSCIEAFEdataareavailableonlyfromJanuary1970,thestockcomponentbeforethattimewas100%domesticequity(S&P500TR).TR:Totalreturn.Assetclassreturnsreflectthereinvestmentofalldistributions.HistoricalinflationrateswerederivedfromtheIASBBIU.S.InflationIndex.Securitiesindexesarenotsubjecttofeesandexpensestypicallyassociatedwithinvestmentsinsecurities.Feesandotherexpenseswillreduceactualinvestmentreturns.
FidelityPortfolioReview,FidelityRetirementIncomePlannerandFidelityIncomeStrategyEvaluatorareeducationaltools.
TheS&P500Indexisamarketcapitalizationweightedindexof500commonstockschosenformarketsize,liquidity,andindustrygrouprepresentationtorepresentU.S.equityperformance.S&P500isaregisteredservicemarkofStandard&PoorsFinancialServicesLLC.
TheMSCIEurope,Australasia,FarEastIndex(EAFE)isanunmanaged,marketcapitalizationweightedindexdesignedtorepresenttheperformanceofdevelopedstockmarketsoutsidetheUnitedStatesandCanada.
TheIASBBIU.S.IntermediateTermGovernmentBondIndexisanunweightedindexthatmeasurestheperformanceoffiveyearmaturityU.S.Treasurybonds.Eachyear,aonebondportfoliocontainingtheshortestnoncallablebondhavingamaturityofnotlessthanfiveyearsisconstructed.
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TheIASBBIU.S.30DayTreasuryBillIndexisanunweightedindexthatmeasurestheperformanceof30daymaturityU.S.Treasurybills.TheIASBBIU.S.InflationIndextracksU.S.inflation.
Votesaresubmittedvoluntarilybyindividualsandreflecttheirownopinionofthearticle'shelpfulness.Apercentagevalueforhelpfulnesswilldisplayonceasufficientnumberofvoteshavebeensubmitted.
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