A recent study showed that 82% of Americans lack a written plan for retirement. Whether you are nearing retirement or already retired, putting a plan in place to help ensure you will have income throughout your life is critical.
With better health care and nutrition, Americans are living longer than ever, so you may spend 20 or 30 years in retirement. Two or three decades without a regular paycheck means that you must make the assets you have saved—along with Social Security and any pensions you may have—create the income you need through retirement.
Successful retirement planning begins with understanding. Our financial professionals can help you develop a comprehensive retirement income strategy that addresses:
- Risk factors impacting your retirement
- The importance of income diversification and planning
Understanding Retirement Risk Factors
With retirement comes a change in your financial management and your life. This is a time when living without employment means that your income will come from various retirement sources such as savings, social security, and pensions. It is important to have a plan that considers certain risks that may threaten your retirement security. The key is to acknowledge the risks to your retirement income and develop a plan that helps manage them.
Longevity and Health Care Costs
Longevity is a critical factor impacting retirees today. While none of us can predict how long we will live, individuals at age 65 have a high probability of spending 20 years or more in retirement. Ensuring your assets last throughout retirement requires careful planning now to determine how inflation, rising health care costs, nursing home care, and other vital factors may affect your income over time (See Figure 1).
Are You Confident That Your Savings Will Last a Lifetime?
Obviously, your longevity is unknown but creating a suitable investment plan can help provide the income you need to live your retirement in the style you choose—for 10, 20, 30 years, or more. Consider these average life expectancies shown in the table on next page.
Inflation and Rising Costs
As life spans increase, many people will spend more time in retirement than they spend working. The longer your time in retirement, the greater the potential that inflation may erode your savings and impact your lifestyle. This makes it important for you and your financial professional to develop an income strategy to help outpace inflation. Many basic living expenses have increased dramatically in the past two decades. Furthermore, steadily rising health care costs represent a particular risk for retired Americans—especially as we live longer, more active lives.
Figure 1.
Figure 2.
Figure 3.
Market Volatility
Today’s financial markets have become increasingly volatile and complex, leaving many people wondering when they will be able to retire and how long their retirement assets will last. A sudden market downturn can significantly impact investors who are not well-diversified or do not have the time frame to wait out a market recovery.
How Exposed Are Your Retirement Assets to the Markets?
As shown in the graphic to the left, if a large percentage of your retirement portfolio was in the market in 2008 (point A), it may have dropped substantially in value (point B). Based on the S&P 500 year-end returns for 2008, a $100,000 investment portfolio value would have dropped to $61,500. If you were fortunate to have assets in the market in 2003 (point C), your $100,000 would have risen to $126,400 based on the S&P 500 year-end returns for 2003 (point D). While market volatility can generate positive long-term rewards over time, it can also have a negative impact on investment portfolios during shorter time frames (See Figure 2).
Understanding Your Retirement Needs
For many years, you may have pursued an investment strategy emphasizing growth to help build retirement assets. However, once retired, your income will likely need to outweigh your need to accumulate new assets. This makes it critical to re-evaluate your risk tolerance and preferences to help ensure that both your investment strategy and spending plan are aligned with your retirement lifestyle needs and goals.
How Long Will Your Income Last?
For most individuals, an essential part of retirement income planning is determining an appropriate withdrawal or spending strategy. What is the appropriate withdrawal rate for you—4%? 5%? 6%? By establishing a withdrawal rate that’s too high, you could potentially outlive your money. As the graphic to the left shows, the rate at which you withdraw from your retirement savings is a central factor in the sustainability of your retirement portfolio
(See Figure 3).
Finding the Right Balance
Ensuring you will have the income you need at and throughout retirement is a balancing act, with savings on one side and your income needs and associated risks on the other.
Achieving the right balance to ensure your income needs are met throughout retirement requires a comprehensive retirement income plan and strategies that holistically address:
- Risk factors that threaten to undermine your plans (longevity, inflation, market volatility, withdrawal rates)
- Your personal goals and tolerance for risk
- How you will protect and grow income in retirement
- Priorities and trade-offs that may help you better manage your income needs and spending
| Stable Income | Guaranteed Income | Growing Income |
|---|---|---|
| Goal: Steady income stream | Goal: Guaranteed income for life | Goal: Income with growth potential |
| Concerns: “I am increasingly nervous about the investment markets. Should I move all my assets out of growth investments into more conservative fixed income investments?” “I don’t want to touch my principal during retirement. How can I live off my investment earnings?” |
Concerns: “Is there a way to guarantee that my income needs will be met throughout retirement?” “My lifestyle is important to me. I’d rather work longer than cut back on lifestyle needs.” |
Concerns: “I understand that the market may be volatile, but how do I invest to possibly outpace inflation?” “I want to ensure my essential expenses are covered, but I’m comfortable with some ups and downs where discretionary income is concerned.” |
| Helps manage: Market volatility | Goal: How long assets will last and market volatility | Goal: Adverse impact of inflation |
| Benefit: Minimizes impact of market volatility with a focus on bonds, bond funds, fixed income instruments, cash expenses regardless of market activity. | Benefit: Combination of insurance and annuity products creates a stream of guaranteed income designed to cover essentials. | Benefit: Seeks to provide growth to help outpace inflation through a diversified portfolio that consists of high-quality income producing dividends and growth stocks as well as stock mutual funds. |
| Considerations: May not produce income adequate to outpace inflation and rising health care costs over time | Considerations: Liquidity needs, insurance fees, and potentially limited control of assets | Considerations: Severe market drops or prolonged periods of volatility can reduce portfolio value |
Figure 4.
Strategies to Help You Retire with Confidence
Working with you to develop your retirement income plan begins with mapping out specific strategies addressing your needs, concerns, and timeline. Using income modeling tools, our financial professionals will work with you to evaluate retirement income scenarios and potential trade-offs. Only then can a fully diversified retirement income strategy be designed that is compatible with your situation.
Income Strategies with Your Retirement in Mind
Asset allocation and diversification are essential components during your years of saving for retirement. How you allocate your assets across various asset classes during this accumulation phase can have a profound impact on the savings you have upon entering retirement.
However, once in retirement, the focus will likely be to include an allocation designed to meet specific income objectives, including asset protection, growth, and guaranteed income. To help meet these objectives, consider the three elements of a retirement income strategy (See Figure 4):
- Stable Income
Provides stable income with principal preservation to help protect against market volatility.
Investment category: Bond and fixed-income investments - Guaranteed Income
Provides guaranteed income to help protect against outliving your assets.
Investment category: Insurance and annuity products - Growing Income
Provides growth and income to help offset inflation. Subject to market volatility.
Investment category: Equity income investments such as stocks
Helping You Understand Your Needs
Our firm provides the tools, resources, and strategies to help you transition from asset accumulation to retirement income planning. From addressing risks and concerns to recommending tailored strategies, we provide the support you seek along your path to retirement.
Nina Azwoir, First Vice President of Investments, Wintrust Wealth Management. © Morningstar 2020. All Rights Reserved. Used with permission. This information may answer some questions but is not intended to be a comprehensive analysis of the topic. In addition, such information should not be relied upon as the only source of information, competent tax and legal advice should always be obtained.
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