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Retirement Income

How retirement income is different than retirement planning and the 5 retirement realities that may affect you.

It’s important to understand that taking income in retirement (distribution) requires a different investment strategy than saving for retirement (accumulation). The table below outlines the key differences:

Accumulation Distribution
Emphasis on return Emphasis on income and capital preservation
A focus on creating a personalized investment portfolio A focus on creating total retirement income plan
Time horizon clearly defined, yet adjustable Time horizon unknowable and not adjustable
Impact of market declines is more manageable Impact of market declines is less manageable
Inflation managed by wage growth Inflation managed through investment choices

Learn about the 5 retirement realities and ways that you can work with your adviser to mitigate their impacts:

  • Longevity

    A lengthy retirement can deplete assets. Building a plan that can provide for longer retirements is crucial.

  • Market shocks

    Market declines are inevitable; reducing their impact is one of the keys to successful retirement income planning.

  • Inflation

    Even a modest inflation rate can take a toll on purchasing power. Growing income can help offset its impact.

  • Consumption

    Although some expenses decline in retirement, many may increase. Income and spending must be aligned for long-term success.

  • Health care

    As we age, the likelihood of facing rising medical costs increases. Investment plans should account for this possibility.

Longevity: “Will my money last?”

Perhaps more than any other factor, longevity has changed the very concept of retirement. People are living longer than ever, thanks to advances in science, medicine and healthier lifestyles. This is great news, but longer lifespans mean we must also plan — and save — for extended time horizons.

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

How you can plan for this retirement reality:

  • While lifespan is unknowable, there are some available data to help you plan ahead. Use the life expectancy calculator at ssa.gov to get an estimate of your potential lifespan.
  • Depending on your needs and risk tolerance, your adviser can develop an investment plan designed to extend the life of your money and will make adjustments as needed to help sustain assets over the long term.

Market shocks: “What if the market drops?”

During your working years, there may be enough time to recover from market downturns, but the story changes when you enter retirement, particularly if a series of poor results occurs early on in the distribution phase.

Standard & Poor’s 500 Composite IndexSM is a measure of 500 commonly held large U.S. stocks. Results for the S&P 500 Index assume reinvestment of all distributions. Results do not reflect sales charges. The market index is unmanaged and therefore, has no expenses. There have been periods when the funds have lagged the index.

How you can plan for this retirement reality:

  • Work with your adviser to develop a diversified retirement income strategy that can help you weather the ups and downs of the marketplace.
  • Remember that volatility — the ups and downs of the market — is an inherent part of investing. In challenging times, it’s helpful to maintain a long-term perspective. Your retirement could last 15, 20 or even 30 years.

Inflation: “What will my money buy?”

You can see the effects of inflation in your everyday life. For example, the average cost of a gallon of gas was $1.28 in 1982. In 2012, it was $3.87. Imagine how much it will cost 30 years from now.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index — Average Price Data, March 1982 and March 2012

How you can plan for this retirement reality:

  • Be aware of the role of inflation on your future purchasing power. You may not have noticed inflation during your working years because you may have received a cost-of-living increase in your salary.
  • Social Security benefits generally increase with inflation. Talk to your adviser about the potential benefits of delaying Social Security payments.
  • Work with an adviser to develop a strategy for you with investments that will help keep you ahead of inflation.

Consumption: “Can I continue to enjoy this lifestyle?”

Worrying about money is not how you want to spend your retirement; therefore it’s important to consider how much you’ll have to spend on a monthly or annual basis to understand what it will be like to live within your means.

Although total consumption generally decreases in retirement, keep in mind:

  • Amounts represent averages only.
  • Inflation is not taken into account.
  • Medical costs can be much higher depending on client’s health.

Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2010

How you can plan for this retirement reality:

  • Discuss your needs, goals and desires in retirement with your adviser, who can help you estimate what you’ll need.
  • Work with your adviser to develop a strategy designed to help you live the lifestyle you’d like, while reducing the chances of outliving your savings and maintaining an emergency fund for unexpected expenses.

Health care: “Will medical costs deplete my savings?”

The rising cost of health care is “the most significant threat to the long-term economic security of workers and retirees,” according to the Social Security Advisory Board. For years, medical costs have been rising at a rate well above that of overall inflation (an increase of 6% versus 4%, respectively*) — a trend that’s expected to continue in the future.

* Source: U.S. Bureau of Labor Statistics, Consumer Price Index, annual inflation rates 1961–2010

Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2010

How you can plan for this retirement reality:

  • Work with your adviser to develop a retirement income strategy that factors in your insurance coverage options and the rising cost of health care.
  • The simplest defense against rising health care costs is to stay healthy! Be sure to take good care of your health and get regular exercise.

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.