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TALKING POINTS
Consider the Realities of Retirement When Planning for Retirement Income

Retirement brings change to all facets of life, including investing. Effective retirement income portfolios must take into account the many challenges that may arise during decades of living in retirement.
 


Saving for retirement is different than planning for income during retirement. Without a paycheck to replenish assets depleted by spending or market downturns, it becomes more and more important for investors to develop plans that will help lower volatility, emphasize income and account for inflation.

Saving for retirement:

  • Emphasis on returns
  • Time horizon is clearly defined yet adjustable
  • Impact of market declines is more manageable
  • Inflation can be managed through wage growth


Living in retirement:

  • Emphasis shifts to income and capital preservation
  • Time horizon is unknowable and not adjustable
  • Impact of market declines is less manageable
  • Inflation must be managed through investment choices

 


 

Understanding Five Key Retirement Income Realities

When building a retirement-income strategy, investors need to select investments that can mitigate the impact of certain retirement realities that many will face over decades of living in retirement. While it may be tempting to forego riskier investments in favor of stability, a broadly diversified portfolio can help clients make the most of their nest eggs.

Talking points you can use:

  • Explain the five key retirement realities:
    • Longevity: The Society of Actuaries estimates that one spouse in a couple age 65 has a 50% chance of living to at least 90.1 But a lengthy retirement can deplete assets. An appropriate investment program must be designed to help provide for retirement income needs over long periods and through market cycles.
    • Market shocks: Market declines are inevitable. Standard & Poor’s 500 Composite Index has sustained three declines of 10% or more since the March 2009 market bottom.2 Mitigating the impact of such declines is particularly important when withdrawals commence.
    • Inflation: Inflation can take a meaningful toll on purchasing power, meaning a dollar will buy less over time. Growing income during retirement can help offset the impact.
    • Consumption patterns: Though living expenses generally decline in retirement, the drop-off can be gradual. Providing income to meet meaningful ongoing expenses is key.
    • Health care: Health care costs continue to rise, and such expenses often increase as we age. According to the Insured Retirement Institute: For the remainder of their lifetimes, a healthy 65-year-old man and woman can expect health care expenses (including premiums) to top $369,000 and $417,000 respectively.3 Investment plans should account for this possibility.
  • Describe investments that may help mitigate these realities:
    • Longevity: Retirees need investments that pursue a balance of growth potential and current income to help meet future needs, such as:
      • Equity funds designed to provide a balance between growth and income
      • Stock funds that seek to invest in companies based outside the United States
      • High-yield bond funds that offer total return potential
      • Global bond funds that can offer broad diversification
      • Corporate bond funds that can provide relatively higher yields
    • Market shocks: To help reduce the impact of declines, consider investments that have the potential for lower volatility, such as:
      • Investments with a track record of lower volatility than the S&P 500
      • Equity funds that invest in dividend-paying companies to help provide income
      • High-quality, lower-risk U.S. government securities funds
      • Mortgage funds
      • Shorter-term bond funds that can provide a source of income
      • Tax-exempt bond funds with a focus on relatively high-quality municipal bonds
    • Inflation, consumption patterns and health care: Consider investments that will help cover expenses today and in the future, such as:
      • Equity funds that seek to provide dividend income higher than the S&P 500 yield
      • Equity funds that seek to provide rising income by investing in companies with a history of increasing dividend payments
      • Funds with relatively low expenses to help maximize total return and dividend income
      • Shorter-term bond funds that can provide relatively stable current income
      • Tax-exempt bond funds to help reduce the impact of taxes
      • Some annuities, which can be customized with contracts that seek to provide income payments that will increase to help keep pace with rising inflation and expenses


 

Investing for Retirement Income Is Different

Because the realities of life in retirement are different, so too is investing for retirement income. Strategies for accumulating a retirement nest egg differ from the approaches necessary to provide income when one’s earning days are over.

A number of different investment strategies have historically helped retirees meet their income needs.

Talking points you can use:

  • Describe the three most prevalent strategies:
    • Total return: This approach relies on a combination of income and capital appreciation that seek to provide retirees with a regular paycheck — typically a combination of income generated by portfolio investments and proceeds from investments sold to meet income needs. Success depends on an investment portfolio growing at a faster rate than what’s being liquidated. The approach calls for flexibility as the amount of income needed may vary from year to year.
    • Pooled approach: This strategy emphasizes investor objectives, grouped by time horizon and importance. To pursue those objectives, separate investment pools are created with asset mixes matched to those goals. For example, assets for crucial near-term needs like living expenses could be invested in short-term bonds, preservation-oriented mutual funds or Treasury bills. Assets for long-term “nice-to-have” goals could be invested in growth-oriented mutual funds. Pools and objectives can be evaluated and adjusted individually, according to market environment.
    • Income certainty: Used on its own or in combined with another approach, income certainty aims to lock in an income stream through products like annuities, which can offer a steady, guaranteed payout regardless of market or economic conditions (subject to the claims-paying ability of the contract issuer). Variable annuities typically have additional insurance-related expenses and, depending on how they’re used, can trigger tax consequences. But for many retirees, the peace of mind that comes with knowing they have a stable income stream is of utmost importance.  Though these investments emphasize income, they may also feature growth potential.

This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

1

Source: Applied Risk Management During Retirement, Milevsky and Abaimova, June 2005, Society of Actuaries RP-2000 table

2

Source: Standard & Poor's

3

Source: Health Care Expenses and Retirement Income, Insured Retirement Institute, January 2012