7 things you may not know about IRAs

Make sure you aren't overlooking some strategies and potential tax benefits.

Fidelity Viewpoints

Key takeaways

• IRAs are available to nonworking spouses.
• IRAs allow a "catch-up" contribution of $1,000 for those 50 and up.
• IRAs can be established on behalf of minors with earned income.

It's the time of year when IRA contributions are on many people's minds—especially those doing their tax returns and looking for a deduction.

Chances are, there may be a few things you don't know about IRAs. Here are 7 commonly overlooked facts about IRAs.

1. A nonworking spouse can open and contribute to an IRA

A non-wage-earning spouse can save for retirement too. Provided the other spouse is working and the couple files a joint federal income tax return, the nonworking spouse can open and contribute to their own traditional or Roth IRA. A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family.

The amount of your combined contributions can't be more than the taxable compensation reported on your joint return.

2. Even if you don't qualify for tax-deductible contributions, you can still have an IRA

If you're covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your 2020 modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution to a traditional IRA might not be tax-deductible.¹ But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax-free until the time of withdrawal. You also have the option of converting those nondeductible contributions to a Roth IRA (see No. 7, below).

3. As of 2019, alimony does not count as earned income to the recipient

You will likely not be able to use money received as alimony to fund an IRA beginning in tax year 2019.

That's due to changes in the law introduced by the Tax Cuts and Jobs Act of 2017: Alimony payments from agreements entered into January 1, 2019 or after, are no longer considered taxable income to the recipient—and the source of IRA contributions must be taxable earned income. Alimony agreements entered into prior to December 31, 2018 are grandfathered in; they are tax-deductible for the person making the payments, and count as income to the recipient. It is the date of the agreement that decides the taxation of the alimony payment; not the year of receipt of the funds.

4. Self-employed, freelancer, side-gigger? Save even more with a SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.

Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA. The SEP IRA is similar to a traditional IRA where contributions may be tax-deductible—but the SEP IRA has a much higher contribution limit. The amount you, as the employer, can put in varies based on your earned income.

Self-employed people can contribute up to 20%² of eligible compensation to their own account. However, this does not apply to everyone. Please refer to the Deduction Worksheet for Self-Employed in IRS Publication 560 to determine your contribution limit. The deadline to set up the account is the tax deadline. But, if you get an extension for filing your tax return, you have until the end of the extension period to set up the account or deposit contributions.

5. "Catch-up" contributions can help those age 50 or older save more

If you're age 50 or older, you can save an additional $1,000 in a traditional or Roth IRA each year. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for retirement. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $44,000 more in your account than someone who didn't take advantage of the catch-up contribution.³

6. You can open a Roth IRA for a child who has taxable earned income⁴

Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give them a head start on saving for retirement. That's because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to persuade a teenager with income from mowing lawns or babysitting to put part of it in a retirement account, gifting money to cover the contribution to a child or grandchild can be the answer—that way they can keep all of their earnings and still have something to save.

That's still well below the annual gift tax exemption ($15,000 per person in 2021 or with gift splitting, a married couple could gift their child $30,000 a year.)

The Fidelity Roth IRA for Kids, specifically for minors, is a custodial IRA. This type of account is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in their name. This age varies by state. Funds in the custodial IRA do not count toward assets when considering Expected Family Contributions for college. Bear in mind that once the account has been transferred, the account's new owner would be able to withdraw assets from it whenever they wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.

7. Even if you exceed the income limits, you might still be able to have a Roth IRA

Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available anytime without tax or penalty, all qualified withdrawals are tax-free, and you don't have to start taking required minimum distributions at age 72.^5,6 But some taxpayers make the mistake of thinking that a Roth IRA isn't available to them if they exceed the income limits.⁷ In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.

If you don't have a traditional IRA you're still not out of luck. It's possible to open a traditional IRA and make nondeductible contributions, which aren't restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings—if any—between the time of the contribution and the conversion.

However, if you do have any other IRAs, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account.

Read Viewpoints on Fidelity.com: Answers to Roth conversion questions

No 401(k)? How to save for retirement

Don't worry—there are tax-advantaged options for people without a 401(k).

Fidelity Viewpoints

Key takeaway

• Freelancers and independent contractors have some of the same retirement plan options as small-business owners, including the IRA, SEP IRA, SIMPLE IRA, and self-employed 401(k).

If you are one of the millions of freelancers, entrepreneurs, workers with a side gig—or an employee with no workplace retirement plan—you can still save for retirement. As long as you have some earnings, you have some tax-advantaged saving options.

IRA

You've probably heard of IRAs, short for individual retirement accounts. Anyone with earned income (including those who do not work themselves but have a working spouse) can open an IRA. There are a few different options, Roth and traditional. Each offers a tax benefit.

To find out more about IRAs, read Viewpoints on Fidelity.com: Traditional or Roth account? 2 tips to choose and Traditional or Roth IRA, or both?

SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.

Who can open one?
The SEP IRA is available to sole proprietors, partnerships, C-corporations, and S-corporations.

How it works
Contributions to a SEP IRA may potentially be tax-deductible. The amount you can put in varies based on your income. The most an employer can contribute to an employee's SEP IRA is either 25% of eligible compensation or $57,000 for 2020 ($56,000 for 2019), whichever is lower. (Note that the rules on determining eligible compensation, which are different for self-employed and employee SEP participants, can be complex. Consult a tax expert or the IRS website for details.)

If you have employees, you have to set up accounts for those who are eligible, and you have to contribute the same percentage to their accounts that you contribute for yourself. Employees cannot contribute to the account; the employer makes all the contributions.

Who it may help
This account works well for freelancers and sole entrepreneurs, and for businesses with employees (as long as the owners don't mind making the same percentage contribution for the employees that they make for themselves). The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are typically no tax forms to file.

Things to keep in mind
The deadline to set up the account is the federal income tax filing deadline.

• For more information, read on Fidelity.com: Understanding the SEP IRA

Self-employed 401(k)

A self-employed 401(k), also known as a solo 401(k), can be an option for maximizing retirement savings even if you're not making a ton of money.

Who can open one?
If you are self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A spouse who works in the business can participate as well.

How it works
You get 2 opportunities for contributing to a self-employed 401(k)—first as the employee, and again as the employer.

As the employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $19,500 in 2020 ($19,000 in 2019). Once you're over age 50, you can also make catch-up contributions—for 2020 you can save an extra $6,500, for a total of $26,000 ($25,000 in 2019).

As the employer, you can contribute up to 25% of your eligible earnings. The employer contribution is always made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.)

Who it may help
These accounts give small business owners the opportunity to save a significant amount of money each year. The total that can be contributed for employee and employer is $57,000 in 2020 ($56,000 in 2019), plus an additional $6,500 ($6,000 in 2019) for people age 50 and over.

Things to keep in mind
After the plan assets hit $250,000, you have to file Form 5500 with the IRS.

The deadline for setting up the plan is the end of the fiscal year, generally the last business day of the year. You can make employer contributions to the account until your tax-filing deadline for the year, including extensions.

• For more information, read on Fidelity.com: Understanding the Self-Employed 401(k)

SIMPLE IRA

Like a 401(k), this account offers tax-deferral and pretax contributions, plus an employee contribution and an employer match.

Who can open one?
Anyone who is self-employed or a small-business owner can open a SIMPLE IRA. Small businesses with 100 employees or fewer can also open a SIMPLE IRA plan.

How it works
Like the self-employed 401(k), you get 2 chances to contribute.

• As the employee, you can contribute up to 100% of your compensation, up to $13,500 in 2020 ($13,000 in 2019).
• As the employer, you must either put in a 3% matching contribution or a 2% non-elective contribution. The latter is not contingent on the employee contribution, the way a matching contribution to a 401(k) typically is.

But be aware that a SIMPLE IRA can require the employer to make contributions to the plan even if the business has no profits.

Who it may help
The SIMPLE IRA is an inexpensive plan for businesses with fewer than 100 employees. It also allows for salary deferrals by employees and there are no tax forms to file.

The SIMPLE IRA also allows those age 50 and over to save an additional $3,000 a year.

Things to keep in mind
The deadline to set up the plan is October 1. You can make matching and nonelective contributions until the company's tax filing deadline—including extensions.

• For more information, read on Fidelity.com: Understanding the SIMPLE IRA

Consider a health savings account

Another option to consider is a health savings account (HSA). If you have an HSA-eligible health plan, these accounts offer a number of benefits, including a tax deduction, tax-free growth potential, and tax-free withdrawals to pay for qualified medical expenses—either now or in retirement.^*

After age 65, if you don’t need the money for health care costs, you can take withdrawals from the account penalty-free. But, similar to a traditional IRA, taxes on contributions and earnings will be due. HSA withdrawals are not subject to federal tax, provided you use the money for qualified medical expenses.

• For more information, read on Fidelity.com: How can an HSA benefit you?

Pick a plan and start saving

Time is one of the most important factors when it comes to building up your retirement fund. While you're young, time is on your side. Don't let the absence of a workplace retirement plan like a 401(k) stand in your way. There are plenty of other retirement savings options—pick a plan and start saving and investing.

How to grow old in your own home

Know these 6 success factors to help you age in place.

Fidelity Viewpoints

Key takeaways

• Develop a housing strategy that will serve your needs as you age. Staying in your home with modifications can be less expensive than moving to an assisted-living community.
• Run a complete safety check, looking for potential hazards, including area rugs that may cause you to trip, loose stair railings, or furniture that obstructs pathways.
• Avoid isolation. Find ways to stay in contact with friends, family, and neighbors on a daily basis—both via technology and in person.

When Marguerite Sullivan's spouse passed away, the 78-year-old had no interest in moving. She’s healthy, has many friends, and her 2 sons live nearby. Plus, she’s a confident driver and gets herself to doctor’s appointments and the grocery store.

Those are all important prerequisites for people who want to stay in their homes as they grow older, or "age in place."

“For those who wish to age in place, it’s important to think not only about a plan for staying in your home, but also about your support network,” explains Stacey Watson, head of life event planning at Fidelity. “Social connections are a critical element to living independently and aging well.”

Here are 6 things that aging singles or couples—and their children, other family members, or caregivers—should keep in mind when assessing the living situation. For more detail, read our Aging well: A planning, conversation, and resource guide.

1. Develop a real estate and housing strategy

As you plan for living in your later years in retirement, you should have a strategy for how to leverage any real estate assets along with a plan to support your need for future housing.

Real estate is an asset often used to fund retirement and to help pay for long-term health care expenses. Some people find it necessary to sell the family home to pay for higher levels of care or senior living accommodations. Some decide to sell after a spouse dies. Others may have a family member who moves back in to help take care of both the aging parent and the property. Whatever your situation, it makes sense to work with a financial advisor to help determine the role of real estate in your overall financial planning (see Senior Housing Options chart below).

"As you consider your strategy for housing as you age, remember that your approach may have to adjust over time," says Watson. "What works today in terms of independent living, living with family, assisted living, or skilled nursing may not serve your needs indefinitely. Take the time to have the conversation regularly with family members or caregivers, to ensure your plans continue to meet your needs."

2. Explore the benefits of staying put

There are many reasons why aging in place can be a win. For starters, staying in your home can be less expensive than moving to an assisted-living community. There are the upfront costs of moving, an often steep entrance fee, and monthly payments for room and board, which can easily top $3,000 a month.

Even more important are the psychological payoffs of not moving away from one’s friends, medical professionals, and faith community. Though these factors are hard to place a financial value on, they are a vital component of healthy aging.

3. Do a home safety check

“The first step in an aging-in-place plan is to run a complete safety check of your home to identify hazards," says Watson. "The good news is that many of the improvements that make it safer to stay in your house can be relatively easy and inexpensive.”

Sullivan’s children did just that. They walked around her house with an eye for any potential hazards that might cause trouble should her vision or mobility begin to deteriorate. Then they hired a home modification professional to help make needed changes.

Many of the improvements that may make it easier to stay in your house—such as raising electrical outlets to make them more accessible, and installing brighter outdoor lighting—aren’t expensive.

Sullivan’s home was retrofitted by installing secure handrails alongside the stairs to the front door, switching doorknobs to levers, adding automatic lights to hallways, removing rugs that might become tripping hazards, and placing grab bars in the shower.

4. Assess transportation

If you are at the point that you can no longer drive or walk to the grocery store or reach other important services, consider other transportation options.

If you have access to public transit, great. But it doesn't exist in a lot of places. Meanwhile, the driverless car may still be a few years away. So you may need to make other arrangements, such as ride sharing with friends and neighbors, or transportation assistance that many companion-care services offer. When it comes to groceries and getting things like prescriptions filled, automatic delivery or online delivery can be a great option. A family or friend can help manage orders and accounts and can track order history to help make sure you are getting what you need.

Senior Housing Options

When assessing the option that's right for you, consider the following:

1. Health: How is your overall health?
2. Activity level: How active and independent are you?
3. Life stage and style: What kinds of access and activities are important to you?

5. Tap into a supportive community or network

Isolation can be a stumbling block to aging well. And it can creep up slowly. No matter how safe the inside of a home is, if there isn’t enough interaction with a community, a plan can fall apart.

Part of aging in place successfully is being able to stay connected, and not fall into the depression that many people experience because they are isolated.

Getting comfortable on a computer so you connect online with your children, grandkids, and others is a good strategy. You might also investigate some of the companionship services available in the community, through websites such as Caregiving.org or tap into local Council on Aging resources.

Pull together a list of friends and relatives who can take you to a doctor’s appointment, or someone to help with errands. If your family doesn’t live nearby, you may want to have a pipeline to neighbors you can call for periodic checkups, especially if you live in an area of the country that experiences power outages and severe weather.

A growing number of communities use the "village" concept for services and support to seniors. The idea, originating in the Beacon Hill neighborhood of Boston, is to create a nonprofit organization that arranges for services—including transportation, home repair, and social activities—for a fee.

6. Make it an ongoing process

A myth of living in retirement is that people think they can make a plan once, and they’re done. Any plan needs to be reviewed regularly by you and your family member or caregiver.

What if you experience a health event, such as a bout of pneumonia that requires a lengthy hospital stay, or a fall that affects your cognitive ability or mobility? These are going to be very important points when you have to take a look at whether the plan you put in place is still going to work going forward.

Are you a concerned friend or family member? If so, check the home of your loved one after it is retrofitted and keep an eye open to see how your loved one is adapting to the changes. You may want to look out for any unexplained bruising on the aging person’s arms or legs that might be an indicator that they may be having trouble moving around. Also, look around the home when you visit. Is there a pile of mail? Are things in disarray? Check the refrigerator. Is it bare? Is food spoiling?

"In an ideal world, we will all age gracefully in place," says Watson, "but that often doesn't happen without careful preparation. Take the time to sit down and get the aging-in-place conversation going."

Your bridge to Medicare

Explore 4 health care coverage options as you transition to Medicare at age 65.

Fidelity Viewpoints

Key takeaways

• You might retire a few years earlier than anticipated: Explore your health care options before you become eligible for Medicare at age 65.
• Health care options between retirement and Medicare coverage include COBRA, private insurance, the public marketplace, and a spouse's plan.
• Once you've bridged the gap to Medicare coverage, you need to understand Medicare basics: eligibility, enrollment, and penalties.

Although you may have done a good job of planning your retirement, approaching age 65 is still full of complexities—including how your health care coverage will change and how you will pay for it.

For many people who have gap years between when they actually retired and when they had planned to retire, it can be a mad scramble to find affordable, quality health care coverage until they are eligible for Medicare at age 65.

Even after Medicare eligibility kicks in, there are still additional costs to cover. Health care is one of the biggest expenses for retirees.

4 key health care options between early retirement and Medicare

"With more and more employers dropping their pre-65 retiree medical plans,³ the questions of where and how to get the right coverage did not disappear with the Affordable Care Act and may still create indecision and uncertainty in someone who is otherwise ready to retire," says Greg Gagliano, senior vice president of product management at Fidelity.

If you are retiring before age 65 and you don't have access to retiree health care coverage from your employer, there are 4 main ways to obtain health care coverage to bridge the period between retirement and Medicare:

1. COBRA coverage. The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to continue your current health care coverage for a certain amount of time, but you may be required to pay the full cost of your health coverage plus an additional 2% charge. While you are working, your employer will typically cover a significant portion of the cost of your coverage, reducing the cost for active employees, but that is rarely the case for those who continue coverage through COBRA.
2. Spouse's plan. If your spouse or domestic partner is employed and has health coverage, you may be able to get covered on their employer's plan—and this may be your best and most cost-effective option. If your spouse or partner is already retired and has retiree medical coverage, you may be able to be added to that coverage as well.
3. Public marketplace. The marketplace was established by the Affordable Care Act and provides plan options available to anyone who is not yet eligible for Medicare. You can no longer be denied coverage for any reason, including a pre-existing condition. This was often a significant issue for those contemplating early retirement because affordable health insurance coverage was hard to find and obtain, particularly for those with pre-existing medical conditions. Costs for these plans can vary widely, but some people qualify for government-provided subsidies through premium tax credits that can make the coverage more affordable.
4. Private insurance. To obtain coverage, you can also look to your local health insurance agent, trade or professional associations, and other so-called "private exchanges" that offer plans from multiple carriers. You may have more plan options available to you through these outlets than the public marketplace, but note that government-funded premium tax credits cannot be applied to these plans. These plans can be found through insurance companies, agents, brokers, and online health insurance sellers.

"The public marketplace is usually a good outlet for pre-65 retirees who do not have access to an employer-sponsored retiree medical plan," says Gagliano. "These plans, which are sometimes referred to as 'on-exchange' plans, have stabilized since first introduced, but there are other private or 'off-exchange' plans available in every state (except Washington, DC) that provide even more choice and can offer coverage regardless of your health status."

Use our widget to answer a few questions and find out what choices may be available to you until you can enroll in Medicare.

Getting ready for Medicare

Once you've figured out how to bridge the gap to Medicare, you'll need to explore Medicare itself as you approach 65, the age when most people become eligible. There's a lot to learn. If you're like most people, you may be confused about how and when to transition from your interim coverage to Medicare—and when you need to do it. And remember, Medicare coverage is provided to each eligible individual who enrolls. You cannot cover your spouse under your Medicare coverage; they will have to enroll on their own when eligible. Here are answers to 6 common questions:

1. I'm eligible to claim my Social Security benefit as early as age 62. Will Medicare kick in at the same time?
   The answer is generally no. For most of us, the age to qualify for Medicare is 65, with a few exceptions: people with certain disabilities, end-stage renal disease (ESRD), or amyotrophic lateral sclerosis (ALS) may qualify at a younger age.
2. Will Medicare contact me directly prior to my becoming eligible?
   If you are already receiving Social Security benefits or railroad retirement benefits, Medicare will mail you a Medicare enrollment kit a few months before you become eligible. If you are within 3 months of turning age 65, reside in the United States or one of its territories or commonwealths, and don't want to apply for monthly Social Security retirement benefits just yet, but do still want to apply for Medicare benefits, you can enroll in Medicare online.
3. Are there deadlines for Medicare sign-up?
   Yes. Retirees who are already receiving Social Security benefits are automatically enrolled in Medicare Parts A and B, and coverage generally begins the month they turn 65. But retirees who haven't claimed Social Security will need to take action to sign up for Medicare. You can first sign up for Medicare Part A hospital insurance and Medicare Part B medical insurance during the 7-month initial enrollment period that begins 3 months before the month you turn 65. If you enroll in Part A and/or Part B the month you turn 65 or during the last 3 months of your initial enrollment period, the start date for your Medicare coverage may be delayed.
   
   Regardless of how you get Parts A and B, you must sign up for Part D if you want prescription drug coverage. (See the section below about Medicare Part D for important information about penalties.) Or, if you prefer, sign up for a Medicare Advantage Plan (Medicare Part C), which replaces parts A, B, and often D. Medicare Advantage Plans, a private-sector alternative to original Medicare, have the same initial enrollment period, as does Part D for prescription drug coverage.
   
   If you don't enroll in Medicare during the initial enrollment period around your 65th birthday, you can sign up between January 1 and March 31 each year thereafter for coverage that will begin on July 1. However, you could be charged a late-enrollment penalty when your benefit starts. For example, if a penalty applies, monthly Part B premiums increase by 10% for each 12-month period you delay signing up for Medicare after becoming eligible for benefits.
4. How do I sign up for Medicare if I am still working at age 65?
   If you retire after age 65 and have employer-sponsored health coverage, you will have an 8-month special enrollment period to sign up for Part A and/or Part B, which starts the month after your employment ends or the group health plan insurance based on current employment ends, whichever happens first. Usually, you don't pay a late-enrollment penalty if you sign up during a special enrollment period.
5. Can I make changes every year?
   Yes. The Medicare open enrollment period runs from October 15 through December 7 annually. This gives you the opportunity to re-evaluate your situation every year and make any changes.
6. If I retire outside the United States, can I bring my Medicare coverage with me?
   In most cases, no. The US government generally precludes Medicare from paying for medical services for retirees outside the country and its territories. A possible silver lining: You may be able to purchase affordable health insurance in some countries or tap into their private health care systems. But, some insurance companies operating outside of the United States and its territories may limit your participation or acceptance based on your age.

Read Viewpoints on Fidelity.com: 6 key Medicare questions

You may have to pay more

High-income retirees—in 2020, individuals with a modified adjusted gross income (MAGI) over $87,000 or married couples with a combined MAGI of more than $174,000—pay higher monthly premiums for both Medicare Part B and the Medicare Part D prescription drug plans, and in some cases, a lot more.

There are 5 Medicare premium brackets for Parts B and D. In addition to the standard $144.60 monthly premium, surcharges for Part B may apply. The brackets are based on the income from your latest tax return, so your 2019 tax return filed in 2020 will be the basis for your Medicare premiums paid in 2021.

"Pre-65 retirees—particularly affluent ones who are unlikely to qualify for federal premium tax credits—need to know that even under the provisions of the Affordable Care Act, coverage is likely to cost significantly more than when they were active employees or when they become eligible for Medicare," adds Gagliano.

Remember to also sign up for Medicare Part D

Whether you are currently taking prescription medications or not, you need to know the ins and outs of Medicare Part D—the Medicare Prescription Drug Plan. Prescription drug coverage may be included as part of a Medicare Advantage plan. There are lots of options to compare. When you first enroll in Medicare, it's important to plan for your future needs. Take the time to look into Medicare Part D prescription drug coverage.

Keep these 2 additional things in mind when enrolling in Medicare Part D:

1. If you don't enroll in Medicare prescription drug coverage when first eligible, you may be hit with a late-enrollment penalty, which will apply for the rest of your life. If you waited for more than 63 days since you were first eligible for Part D coverage and did not have "creditable coverage" (such as employer-sponsored coverage with prescription drug coverage that is as good as or better than what is offered under Medicare Part D), you will be subject to permanent financial penalties of an additional 1% per month that you go without coverage. This penalty is added to the premium for the plan you enroll in.
   
   Tip: Don't delay signing up for Medicare Part D if you don't have other prescription drug coverage. Say you delay enrolling for 20 months from when you no longer have creditable prescription coverage; when you finally sign up, your premium will be 20% higher.
2. You may have heard of the so-called "donut hole." If you fall into this "coverage gap," you may have to pay more for medications because there is a temporary limit on what the drug plan will cover for prescription drugs. In 2020, once you and your plan have spent $4,020 on covered drugs, you're in the coverage gap. This amount may change each year.
   
   Tip: You may want to consider scheduling a Medication Therapy Management consultation with your local pharmacist to explore combinations of prescriptions that may help you maintain your health, but at a lower cost. Then go back and discuss the pharmacist's recommendations with your doctor. All Medicare prescription drug plans (Part D) cover this consultation.

There are lots of health care and financial decisions to make as you transition to retirement. In addition to needing a strategy to generate retirement income and claim Social Security, you may need to develop a strategy to help you bridge the gap until you are eligible for Medicare coverage at age 65. Once you are eligible to enroll in Medicare, be sure to get the health care part of the equation right.

The Medicare system is different in many ways from employer-sponsored health coverage, so take time to understand the basics of Medicare. You and your spouse or domestic partner may have different needs and may be better off choosing different Medicare plans. So do your homework, shop around, and compare prices. Remember, as long as you remain enrolled in the Medicare system, you can make changes every year as your situation and health care options and needs change and evolve.

5 ways to help protect retirement income

These rules of thumb can help keep your retirement on track.

Fidelity Viewpoints

Key takeaways

• Plan for health care costs.
• Expect to live longer.
• Be prepared for inflation.
• Position investments for growth.
• Don't withdraw too much from savings.

If you're approaching the off-ramp to retirement—or already there—it's important to think about protecting what you've saved and helping to ensure that you'll have enough income throughout your retirement. After all, you worked hard to get to retirement. So you want to be able to enjoy it without having to worry about money. That means thinking ahead and planning for a retirement that may last 30 years or longer.

Here are 5 rules of thumb to help manage some things that can affect your income in retirement.

1. Plan for health care costs

With longer life spans and medical costs that historically have risen faster than general inflation—particularly for long-term care—managing health care costs is important for retirees. Retirement planning conversations should include a discussion of the impact long-term care costs have on individuals and their family’s future.

Many people will live longer and have higher costs. And that cost doesn't include long-term care (LTC) expenses. Having a dedicated pool of monies for long-term care expenses may be an important consideration to cover long-term care expenses, ultimately protecting your retirement income.

As reported by the US Department of Health and Human Services, about 70% of those aged 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.¹ According to the Genworth 2019 Cost of Care Survey, the average cost of a semiprivate room in a nursing home² is about $90,156 per year, assisted living facilities³ average $48,612 per year, and home health care homemaker services⁴ are $51,480 a year.

Consider long-term-care insurance: Insurers base the cost largely on age, so the earlier you purchase a policy, the lower the annual premiums, though the longer you'll potentially be paying for them. It is also important to research the strength of the company you select, as well as investigate other potential options for funding LTC costs.

Read Viewpoints on Fidelity.com: Long-term care: Options and considerations

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 triple tax advantage:⁵ 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.

Read Viewpoints on Fidelity.com: 3 healthy habits for health savings accounts

2. Expect to live longer

As medical advances continue, it's quite likely that today's healthy 65-year-olds 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. And recent data suggests that longevity expectations may continue to increase. People are living longer because they're healthy, active, and taking better care of themselves.

Without some thoughtful planning, you could outlive your savings and have to rely solely on Social Security for income. And with the average Social Security benefit for a retired worker currently around $1,514 a month, it may not cover all your needs.⁶

Read Viewpoints on Fidelity.com: Longevity and retirement and How to get the most from Social Security

Consider annuities: To cover your income needs, particularly your essential expenses  (such as food, housing, and insurance) that aren't covered by other guaranteed income like Social Security or a pension, you may want to use some of your retirement savings to purchase an income annuity. It will help you create a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.⁷

Read Viewpoints on Fidelity.com: Smart retirement income strategies

3. Be prepared for inflation

Inflation can eat away at the purchasing power of your money over time. Inflation affects your retirement income by increasing the future costs of goods and services, thereby reducing the future purchasing power of your income. Even a relatively low inflation rate can have a significant impact on a retiree's purchasing power.

Consider cost of living increases: Social Security and certain pensions and annuities help keep up with inflation through annual cost-of-living adjustments or market-related performance. Choosing investments that have the potential to help keep pace with inflation, such as growth-oriented investments (e.g., stocks or stock mutual funds), Treasury inflation-protected securities (TIPS), real estate securities, and commodities, may also make sense to include as a part of an age-appropriate, diversified portfolio that also reflects your risk tolerance and financial circumstances.

4. Position investments for growth

Overly conservative investments can be just as dangerous as overly aggressive ones. They expose your portfolio to the erosive effects of inflation, limit the long-term upside potential that diversified stock investments can offer, and can diminish how long your money may last. On the other hand, being too aggressive can mean undue risk of losing money in down or volatile markets.

An investment strategy (asset mix) that seeks to balance growth potential and risk (return volatility) may be the answer. You should determine—and consistently maintain—an asset mix that reflects your investment horizon, risk tolerance, and financial situation.

The sample target investment mixes below show illustrative blends of stocks, bonds, and short-term investments with different levels of risk and growth potential. With retirement likely to span 30 years or so, you'll want to find a balance between risk and growth potential.

Consider diversification: Build a diversified mix of stocks, bonds, and short-term investments, according to how comfortable you are with market volatility, your overall financial situation, and how long you are investing for. Doing so may provide you with the potential for the growth you need without taking on more risk than you are comfortable with. But remember: Diversification and asset allocation do not ensure a profit or guarantee against loss. Get help creating an appropriate investment strategy by working with a Fidelity advisor or utilizing our Planning & Guidance Center.

5. Don't withdraw too much from savings

Spending your savings too rapidly can also put your retirement income at risk. For this reason, we believe that retirees should consider using conservative withdrawal rates, particularly for any money needed for essential expenses.

We did the math—looking at history and simulating many potential outcomes—and landed on this guideline: To be confident that savings will last for 20–30 years retirement, consider withdrawing no more than 4%–5% from savings in the first year of retirement, then adjust that percentage for inflation in subsequent years.

Consider a sustainable withdrawal plan: Work with a Fidelity advisor to develop and maintain a retirement income plan or consider an annuity with guaranteed lifetime income⁷ as part of your diversified plan, so you won't run out of money, regardless of market moves.

Read Viewpoints on Fidelity.com: How can I make my retirement savings last?

You can do it

After devoting many years to saving and investing for your retirement, switching from saving to spending that money can be stressful. But it doesn't have to be that way if you take steps leading up to and during retirement to manage these 5 key rules of thumb for your retirement income.

3 reasons to contribute to an IRA

Saving in an IRA comes with tax benefits that can help you grow your money.

Fidelity Viewpoints

Key takeaways

• Give your money a chance to grow.
• Get tax benefits.
• The earlier you start contributing, the more opportunity you have to build wealth.

It can pay to save in an IRA when you're trying to accumulate enough money for retirement. There are tax benefits, and your money has a chance to grow. Every little bit helps and you can still put money into an IRA for the 2020 tax year.

If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense.

Read Viewpoints on Fidelity.com: No 401(k)? How to save for retirement

Here are some reasons to make a contribution now

1. Put your money to work

Eligible taxpayers can contribute up to $6,000 per year, or your taxable compensation for the year (whichever is less), to a traditional or Roth IRA, or $7,000 if they have reached age 50, for both tax years 2020 and 2021 (assuming they have earned income at least equal to their contribution). It's a significant amount of money—think about how much it could grow over time.

Consider this: If you're age 25 and invest $6,000, the maximum annual contribution in 2020, that one contribution could grow to $89,847 after 40 years. If you’re age 50 or older, you can contribute $7,000, which could grow to about $19,313 in 15 years.¹ (We used a 7% long-term compounded annual hypothetical rate of return and assumed the money stays invested the entire time.)

The age you start investing in an IRA matters: It's never too late, but earlier is better. That’s because time is an important factor when it comes to compound growth. Compounding is what happens when an investment earns a return, and then the gains on the initial investment are reinvested and begin to earn returns of their own. The chart below shows just that. Even if you start saving early and then stop after 10 years, you may still have more money than if you started later and contributed the same amount each year for many more years.

2. You don't have to wait until you have the full contribution

The $6,000 (or your compensation limit) IRA contribution limit is a significant sum of money, particularly for young people trying to save for the first time.

The good news is that you don't have to put the full $6,000 into the account all at once. You can automate your IRA contributions and have money deposited to your IRA weekly, biweekly, or monthly—or on whatever schedule works for you.

Making many small contributions to the account may be easier than making one big one.

It's important to note that you don't have to contribute up to the limit each year. Save what you can on a regular basis—even small amounts can make a big difference over time.

3. Get a tax break

IRAs offer some appealing tax advantages. There are 2 types of IRAs, the traditional and the Roth, and they each have distinct tax advantages and eligibility rules.

Contributions to a traditional IRA may be tax-deductible for the year the contribution is made. Your income does not affect how much you can contribute to a traditional IRA—you can always contribute up to the annual limit as long as you have enough earned income to cover the contribution. But the deductibility of that contribution is based on your modified adjusted gross income (MAGI) and the access you and/or your spouse have to an employer plan like a 401(k). If neither you nor your spouse are eligible to participate in a workplace savings plan like a 401(k) or 403(b), then you can deduct the full contribution amount, no matter what your income is. But if one or both of you do have access to one of those types of retirement plans, then deductibility is phased out at higher incomes.² Earnings on the investments in your account can grow tax-deferred. Taxes are then paid when withdrawals are taken from the account—typically in retirement.

Just remember that you can defer, but not escape, taxes with a traditional IRA: Starting at age 72, required minimum withdrawals become mandatory, and these are taxable (except for the part—if any—of those distributions that consist of nondeductible contributions).³ If you need to withdraw money before age 59½, you may be hit with a 10% penalty unless you qualify for an exception.⁴

On the other hand, you make contributions to a Roth IRA with after-tax money, so there are no tax deductions allowed on your income taxes. Contributions to a Roth IRA are subject to income limits.⁵ Earnings can grow tax-free, and, in retirement, qualified withdrawals from a Roth IRA are also tax-free. Plus, there are no mandatory withdrawals during the lifetime of the original owner. If you need to take an early withdrawal from a Roth IRA, withdrawals of earnings before age 59½ may be subject to both tax and early withdrawal penalties if withdrawn before the qualifying criteria are met.⁶

As long as you are eligible, you can contribute to either a traditional or a Roth IRA, or both. However, your total annual contribution amount across all IRAs is still $6,000 (or $7,000 if age 50 or older).

What's the right choice for you? For many people, the answer comes down to this question: Do you think you'll be better off paying taxes now or later? If, like many young people, you think your tax rate is lower now than it will be in retirement, a Roth IRA may make sense.

Need help deciding? Read Viewpoints on Fidelity.com: Traditional or Roth IRA, or both?

Make a contribution

Your situation dictates your choices. If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense. But one thing applies to everyone: the power of contributing early. Pick your IRA and get your contribution in and invested as soon as possible to take advantage of the tax-free compounding power of IRAs.

How to save money on prescription drugs

Practical tips to help you be a smarter health care consumer and reduce your family’s prescription drug costs.

Fidelity Viewpoints

Key takeaways

• Understand the details of your plan’s coverage.
• Speak frankly with your doctors about cost.
• Make your pharmacist a member of your team.

When it comes to the cost of prescription medications, the prognosis isn’t encouraging. Drug costs continue to climb: Total spending on prescriptions grew more than 16.8% in 2018 and is expected to do the same this year, according to a study by the Department of Health and Human Services.¹ In fact, prescription drugs today account for the largest share of your health plan premium, edging out even physician services (see chart).

Why have costs risen so much? A shortage of raw materials, delays in generics manufactured outside the United States, and high demand for certain drugs all play a role, says Sharon Frazee, a spokesperson for the Pharmacy Benefit Management Institute (PBMI). The average cost to bring a new major drug to market now exceeds $2.5 billion and can take up to 10 years.² People are also using more medications, with nearly half of the population taking at least one prescription medication in the past 30 days and nearly 11% taking five or more.^3,4 High-priced “specialty meds,” while offering new hope for hard-to-treat illnesses, also come at a cost. In a recent survey by the National Business Group on Health, large employers cite the use of specialty drugs to treat such conditions as cancer and hepatitis C as a leading contributor to higher health costs.⁵

To manage these escalating costs, health plans and employers are looking for ways to negotiate lower rates, including tightening their lists of covered drugs (called formularies) and requiring patients to shoulder more of the cost through copayments and coinsurance.⁶ Many employers have moved toward high deductible plans, too, in which enrollees must pay the full cost of their non-preventive prescriptions until they meet a deductible that can range from $1,350 to $6,750 for an individual.⁷ Not surprisingly, 4 in 10 adults worry about being able to afford prescription drugs.⁸ If you are among that group, or you simply want to keep your drug costs down, here are some tips:

1.Understand the details of your plan’s coverage

Review and make sure you understand the basics of your plan, such as the amount of your deductible and what your co-pays or out-of-pocket expenses are for different benefits. Do you have to meet a deductible before your non-preventive drug coverage kicks in? Approximately half of all medical plans have a deductible of some kind, says Frazee. “For others, you pay a copayment or coinsurance right away,” she explains. (See last section.)

Next, ask about your plan’s formulary, or its list of covered drugs. “During open enrollment at the end of the year, check that your plan covers your current medications, and how much of their cost it covers,” says Lisa Gill, deputy content editor for Consumer Reports Best Buy Drugs.

Many plans group the medications they cover into price categories called tiers. Tier-one drugs are typically your plan’s preferred generics, and they require the lowest copayment or coinsurance. If your medication is in a higher tier, you’ll pay a much larger share (see graphic). “Pharmacy benefit managers have moved a lot of drugs to more-expensive tiers,” adds Gill. “So out-of-pocket spending has gone up, even if the drug price hasn’t.”

Another critical question: Does your plan have preferred pharmacies where you’ll be charged a smaller copayment? Last year, 36% of plans had a preferred network, according to the Pharmacy Benefit Management Institute (PMBI). Almost all plans offer a mail-order option that will allow you to fill your prescription for 90 days at a drastically reduced cost.⁹ “People throw away a lot of savings by not filling a 90-day supply,” says Frazee. “A 30-day regimen may cost $10, compared to $17 to $22 for a 90-day supply. Some insurers even offer free maintenance drugs if you get them through mail order.” And some preventive medicines are also free under the Affordable Care Act. For instance, bowel preparation medicine before a colonoscopy is covered for people age 50 to 74.¹⁰

Tip: Find out if your health plan offers an app to help you estimate the cost of filling a prescription. If it does, use your smartphone to access information quickly about your covered meds and their costs. For instance, United Healthcare has a Health4Me app that lets you enter your prescription and get its cost at a network pharmacy or through mail order even before you leave the doctor’s office.

2.Speak frankly with your doctors about cost

“When doctors prescribe a drug, they may choose from several options, but they don’t necessarily know which ones are covered in your plan or how much each option will cost,” explains Dr. Michael Rea, a pharmacist and CEO of Rx Savings Solutions, which helps employees of member companies reduce their drug costs. “Sometimes one drug is clearly best for you. Other times, there may be less expensive alternatives that work equally well.” Bring up cost with your doctor and check your company’s formulary together to determine the lowest-cost solution for you.

Generic drugs typically cost 80% to 85% less than brand-name drugs.¹¹ Even among generics, drugs designed to treat the same condition may vary greatly in price. “The fastest-growing component of savings is from generic to generic,” says Rea. You may save money by moving from one generic to another, just as you would by moving from a brand-name drug to a generic.

In some instances you can save money and treat your condition equally well through the use of something called a pharmaceutical alternative. Unlike a generic, which has the same active ingredients as its brand-name counterpart, alternative medications use different active ingredients to treat the same condition.¹²

Alternative medications aren’t always an option, but when they are, they can provide big savings. Take the brand-name medication Crestor, which is used to treat high cholesterol. A 30-day supply of Crestor 5mg may cost around $222, according to Rx Savings Solutions. Substituting the generic Rosuvastatin 5mg could reduce the cost to $35.92 per month, but switching to a drug alternative such as Simvastatin 40 mg may cost as little as $1.12 per month—a savings of more than $2,500 a year.¹³ Be sure to talk to your doctor about what might work best for your particular situation.

Sometimes taking a low-cost drug before using a higher-cost one isn’t a matter of choice. In fact, 83% of insurers require so-called “step therapy” for at least 1 class of drugs, says Frazee. In step therapy, you and your doctor try lower-cost medications first, and move on to more expensive alternatives only if necessary. This strategy is especially common for medications that treat common conditions like diabetes and high cholesterol, says Frazee.

Tip: Read Viewpoints: How to talk to your doctor—and save money and research prescription drug costs and alternatives on Consumer Reports Best Buy Drugs™.

3.Make your pharmacist a member of your team

"Pharmacists can be some of your best advocates for making sure you get the best price,” says Gill. Instead of simply handing over your insurance card so the pharmacist can fill your prescription, take a few minutes to ask if there is a way you can save money. “Taking a few extra minutes to talk to your pharmacist could potentially save you thousands," says Frazee.

For instance, pharmacists can suggest such cost-reducing options as changing from a liquid to a capsule, taking 2 different prescriptions rather than 1 combination drug, or getting a higher-dose pill and splitting it. “In many cases, doctors don’t know if a medicine is scored and can be easily split,” says Dr. Heather Free, a pharmacist and spokesperson for the American Pharmacists Association.

Pharmacists also can help you determine if it would be better to use your insurance plan or pay cash. For a brand-name drug, your insurer’s negotiated price usually will be lower than you’d spend in cash, says Rea. Many pharmacies offer discount cards, too. However, you should be aware that when you use a discount card, your payment doesn’t count toward your deductible. If your family goes to the doctor a lot and tends to meet your annual deductible, a pharmacy discount card may not be a good option.

The app OneRx works with your insurance to help you determine how to get the best price. Take a photo of your insurance card, and OneRx will show estimated copayments based on your plan. The app also shows cash prices, which in some cases may be less than your copay.

Of course, getting the best price isn’t the only consideration when purchasing medications. “Once you find a pharmacy that gives you a good deal on your most expensive medication, move all of your medications to that pharmacy,” says Gill. The reason: If you take several medications, one pharmacy should oversee them to help prevent the possibility of harmful drug interactions.

While drug costs may continue to climb, you can save a bundle if you take the time to be a more careful consumer of health care, says Gill. Before filling a prescription, ask your doctor and your pharmacy if there are ways to keep your costs down. Keep tabs on your health plan benefits too, particularly during open enrollment. “People often assume that their plan will remain the same,” says Gill, “but covered benefits often change. If you don’t know the new details of your prescription drug coverage, you could end up spending a lot more in out-of-pocket expenses than you need to.” That’s money you could put in your pocket—or, better yet— in your retirement plan, where it could help you live a happier, healthier future.

Tip: When shopping at online pharmacies, use only US websites that have the blue and red “VIPPS” seal, recommends Consumer Reports. VIPPS, which stands for Verified Internet Pharmacy Practice Site, is awarded by the National Association of Boards of Pharmacy to online pharmacies that meet strict criteria, such as the use of specific practices related to quality assurance and customers’ right to privacy.¹⁴

Create income that can last a lifetime

Generate a "retirement paycheck" that isn't vulnerable to market ups and downs.

Fidelity Viewpoints

What a lifetime income annuity can do

• Lifetime annuities can hedge against market swings.
• They can provide guaranteed income for life.
• Also, lifetime annuities can help diversify your income sources.

The face of retirement in America has changed radically in recent decades. People are living longer. Pensions are increasingly rare. Add in market volatility, as well as questions surrounding the long-term financial health of Social Security, and it's no wonder many people feel anxious about funding their retirement.

If you were a newly hired employee at a Fortune 500 company in 1998, you had a 59% chance of having access to a pension plan. But, by 2017, only 16% of employees did. Over that same 19-year stretch, 42% of Fortune 500 employers froze their primary pension plan and 24% closed pension plans to new hires.¹ Today, the responsibility of financing your retirement is likely to fall squarely on your shoulders.

But there is a way to create a plan that can give you a regular "retirement paycheck"—through a lifetime income annuity. Resembling a traditional pension plan,² this investment vehicle can provide a guaranteed³ stream of income that lasts a lifetime and is not vulnerable to the inevitable ups and downs of the market.⁴

An added benefit is that by locking in some guaranteed income, you will have more freedom to invest the remainder of your retirement assets for growth potential as part of a diversified income plan. Investors might want to consider an income annuity to cover the portion of their essential expenses not covered by other guaranteed income sources like Social Security or a pension.

"What people may not realize is, once you have your essential expenses covered by guaranteed lifetime income, you gain peace of mind and the freedom to pursue the things you love in life," observes Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. "Additionally, you may invest your remaining assets for growth, rather than worrying about how to preserve and stretch your portfolio for the rest of your life."

A lifetime income annuity represents a contract with an insurance company that allows you to convert a portion of your retirement savings (an amount you choose) into a predictable lifetime income stream. In return for a lump-sum investment, the insurance company guarantees to pay you (or you and your spouse) a set amount of income for life. You also have the option of starting your income either immediately or at a date you select in the future.

Because an annuity's guarantees are only as strong as the insurance company providing them, you should consider the strength of the company you select and its ability to meet its future income obligations.

Having the backing of an insurance company can help mitigate 3 key retirement risks that, generally, can be very challenging to manage by yourself:

• Market risk – Regardless of whether the market goes up or down, the insurance company is obligated to provide you with income payments every year.
• Longevity risk – Rather than trying to figure out how much of your savings you can spend each year before running out of money, the insurance company assumes the responsibility for paying you as long as you live.
• Inflation risk – By including an annual increase option, where available, you can reduce the risk that inflation will diminish your purchasing power over time.

But not all lifetime income annuities are alike—some might provide higher levels of income with little or no flexibility in accessing assets, while others may provide lower levels of income with greater flexibility.

So you'll want to take the time to understand the differences among them and figure out which features might best meet your particular needs. Let's take a closer look at 2 categories of lifetime income annuities, namely, a fixed lifetime income annuity and a fixed annuity with guaranteed lifetime withdrawal benefits.

What is a fixed lifetime income annuity?

As part of a diversified income plan, a fixed lifetime income annuity can provide you with guaranteed income for the rest of your life with payments starting immediately or at a future date that you select when you purchase the annuity.

These annuities offer:

• Lifetime income – Avoid outliving your assets by ensuring you will receive a guaranteed stream of income beginning on a date you choose, up to 40 years from your time of purchase. You will also have the security of steady payments regardless of market fluctuations and downturns.
• Personalization – You may choose to receive guaranteed income for your lifetime (or for the lives of you and another person for joint accounts). In addition, you have the choice to purchase optional features to include protection for your beneficiaries or add an annual payment increase feature to help your payment keep pace with inflation.

The trade-off with an income annuity is that you typically must give up control of the portion of the savings you use to purchase one. In exchange, you don't have to manage your account to generate income, and you can secure a predictable income that lasts the rest of your life. However, be sure to ask your financial advisor about withdrawal features that are available on some income annuities, which may alleviate liquidity concerns. What's more, fixed lifetime income annuities are often able to provide higher income payments than other products, such as bonds, CDs, or money market funds, due to the "longevity bonus" they can provide (see the chart below). While the payments from traditional income solutions are limited to return of principal and interest from an investment, fixed lifetime income annuities also make available the ability to share in the longevity benefits of a "mortality pool." Effectively, assets from annuitants with a shorter life span remain in the mortality pool to support the payouts collected by those with a longer life span. Put simply, the longer you live, the more money you will receive.

What are the payment options and features?

Fixed lifetime income annuities offer various options that pay different amounts of income, based on the types of guarantees they provide. The 3 most common payment options are:

1. Life with a cash refund – With this option, the priority is ensuring that you never get back less in payments than your original investment. As with many income annuities, you get a lifetime income payment (but typically lower than a life-only option). If you pass away before receiving payments that total your original investment, the remaining value will be paid to your beneficiaries. This means, for example, that if you purchase an annuity for $100,000 and are paid only $10,000 of income during your lifetime, the remaining $90,000 is paid to your heirs.
2. Life with a guarantee period – You'll receive income payments for your lifetime. However, if you pass away before the guarantee period ends, any remaining income payments will continue to your beneficiaries until the end of the guarantee period. Here, you get a somewhat lower payment than life only, because the insurance company is guaranteeing to make payments for a minimum number of years.
3. Life only – You'll receive income payments over your lifetime. The life-only option offers the highest possible income payment because it's only for as long as you live; no money goes to your heirs. This option typically works well for those in good health and who anticipate a long life.

In addition to different payment options, annuities can include different features. One example is an annual increase option. This feature is based on a fixed percentage and provides for annual increases in the payment amount beginning on the anniversary following your initial payment. Note that the initial payment amount for an annuity with this option may be lower than an identical annuity without the option.

Let's take a look at how these payment options might differ, using Fidelity's Guaranteed Income Estimator tool. Shown below are the results for a hypothetical 65-year-old man who invests $100,000 in a lifetime income annuity starting today. We assume that he was born on November 1, 1954, and started receiving income on January 9, 2020.

What's right for you? Choosing a payment option means focusing on the specific features of a fixed lifetime income annuity and your personal goals. "Consider what's most important to you regarding your retirement plans. Do you need the most guaranteed income available, or are you willing to accept a slightly lower payment to help provide additional protection for your beneficiaries?" says Ewanich.

What is a fixed annuity with a guaranteed lifetime withdrawal benefit?

As part of a diversified income plan, a fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB) can provide guaranteed income for the rest of your life, starting on a date you select when you’re ready to start receiving income.

These annuities offer:

• Lifetime income – Avoid outliving your assets by guaranteeing a lifetime withdrawal benefit amount, beginning on a date you select.
• Flexibility – You choose when you would like to start receiving income, but if your situation changes and you need some or all of your money sooner, you have access to any accumulation value in your contract.⁵

From the time of purchase, you will know how much income you are guaranteed (or you and your spouse for joint contracts) at any age you decide to start lifetime withdrawals. Most importantly, you will have the security of a guaranteed cash flow, regardless of market fluctuations and downturns. Finally, in the event of your death, your beneficiaries will receive any remaining balance in your policy.

How do lifetime income annuities fit into a retirement portfolio?

A lifetime income annuity can help diversify your retirement income portfolio so a portion of your income is shielded from market volatility. Generally, Fidelity believes that assets allocated to annuities should represent not more than 50% of your liquid net assets. Why? Well, even though these products provide guaranteed income for life, they may also require that you give up some liquidity and access to that part of your portfolio.

Ultimately, your overall portfolio may benefit from a lifetime income annuity to help meet essential expenses throughout your retirement.

Social Security tips for couples

See 3 ways that may help married couples boost their lifetime benefits.

Fidelity Viewpoints

Key takeaways

• A couple with similar incomes and ages and long life expectancies may want to consider maximizing lifetime benefits by both delaying their claim.
• For couples with big differences in earnings, consider claiming the spousal benefit, which may be better than claiming your own.
• A couple with shorter life expectancies may want to consider claiming earlier.

Married couples may have some advantages when deciding how and when to claim Social Security. Even though the basic rules apply to everyone, a couple has more options than a single person because each member of a couple¹ can claim at different dates and may be eligible for spousal benefits.

Making the most of Social Security requires some strategy to take advantage of the basic benefit rules, however. After you reach age 62, for every year you postpone taking Social Security (up to age 70), you could receive up to 8% more in future monthly payments. (Once you reach age 70, increases stop, so there is no benefit to waiting past age 70.) Members of a couple may also have the option of claiming benefits based on their own work record, or 50% of their spouse’s benefit. For couples with big differences in earnings, claiming the spousal benefit may be better than claiming your own.

What's more, Social Security payments are reliable and should generally adjust with inflation, thanks to cost-of-living increases. Because people are living longer these days, a higher stream of inflation-protected lifetime income can be very valuable.

But to take advantage of the higher monthly benefits, you may need to accept some short-term sacrifice. In other words, you'll have less Social Security income in the first few years of retirement in order to get larger benefits later.

"As people live longer, the risk of outliving their savings in retirement is a big concern," says Ann Dowd, a CFP^® and vice president at Fidelity. "Maximizing Social Security is a key part of how couples can manage that risk."

A key question for you and your spouse to discuss is how long you each expect to live. Deferring when you receive Social Security means a higher monthly benefit. But it takes time to make up for the lower payments foregone during the period between age 62 and when you ultimately chose to claim, as well as for future higher monthly benefits to compensate for the retirement savings you need to tap into to pay for daily living expenses during the delay period.

But when one spouse dies, the surviving spouse can claim the higher monthly benefit for the rest of their life. So, for a couple with at least one member who expects to live into their late 80s or 90s, deferring the higher earner's benefit may make sense. If both members of a couple have serious health issues and therefore anticipate shorter life expectancies, claiming early may make more sense.

How likely are you to live to be 85, 90, or older? The answer may surprise you. Longevity has been steadily increasing, and surveys show that many people underestimate how long they will live. According to the Social Security Administration (SSA), a man turning 65 today will live to be 84 on average and a woman will live to be 86.6 on average. For a couple at age 65, at least one person, on average, will survive to age 93. Further, 1 in 4 65-year-old males today will live to 93, and 1 in 4 females will live to 95.²

Tip: To learn about trends in aging and people living longer, read Viewpoints on Fidelity.com: Longevity and retirement

Related Social Security webcast: Make your decisions with confidence

View the entire webcast.

Strategy No. 1: Maximize lifetime benefits

A couple with similar incomes and ages and long life expectancies may maximize lifetime benefits if both delay.

How it works: The basic principle is that the longer you defer your benefits, the larger the monthly benefits grow. Each year you delay Social Security from age 62 to 70 could increase your benefit by up to 8%.

Who it may benefit: This strategy works best for couples with normal to high life expectancies with similar earnings, who are planning to work until age 70 or have sufficient savings to provide any needed income during the deferral period.

Example: Willard's life expectancy is 88, and his income is $75,000. Helena's life expectancy is 90, and her income is $70,000. They enjoy working.

Suppose Willard and Helena both claim at age 62. As a couple, they would receive a lifetime benefit of $1,100,000. But if they live to be ages 88 and 90, respectively, deferring to age 70 would mean about $250,000 in additional benefits.

Strategy No. 2: Claim early due to health concerns

A couple with shorter life expectancies may want to claim earlier.

How it works: Benefits are available at age 62, and full retirement age (FRA) is based on your birth year.

Who it may benefit: Couples planning on a shorter retirement period may want to consider claiming earlier. Generally, one member of a couple would need to live into their late 80s for the increased benefits from deferral to offset the benefits sacrificed from age 62 to 70. While a couple at age 65 can expect one spouse to live to be 85, on average, couples who cannot afford to wait or who have reasons to plan for a shorter retirement, may want to claim early.

Example: Carter is age 64 and expects to live to 78. He earns $70,000 per year. Caroline is 62 and expects to live until age 76. She earns $80,000 a year.

By claiming at their current age, Carter and Caroline are able to maximize their lifetime benefits. Compared with deferring until age 70, taking benefits at their current age, respectively, would yield an additional $113,000 in benefits—an increase of nearly 22%.

Strategy No. 3: Maximize the survivor benefit

Maximize Social Security—for you and your spouse—by claiming later.

How it works: When you die, your spouse is eligible to receive your monthly Social Security payment as a survivor benefit, if it's higher than their own monthly amount. But if you start taking Social Security before your full retirement age (FRA), you are permanently limiting your partner's survivor benefits. Many people overlook this when they decide to start collecting Social Security at age 62. If you delay your claim until your full retirement age—which ranges from 66 to 67, depending on when you were born—or even longer, until you are age 70, your monthly benefit will grow and, in turn, so will your surviving spouse's benefit after your death. (Get your full retirement age)

Who it may benefit: This strategy is most useful if your monthly Social Security benefit is higher than your spouse's, and if your spouse is in good health and expects to outlive you.

Example: Consider a hypothetical couple who are both about to turn age 62. Aaron is eligible to receive $2,000 a month from Social Security when he reaches his FRA of 66 years and 6 months. He believes he has average longevity for a man his age, which means he could live to age 85. His wife, Elaine, will get $1,000 at her FRA of 66 years and 6 months and, based on her health and family history, anticipates living to an above-average age of 94. The couple was planning to claim at 62, when he would get $1,450 a month, and she would get $725 from Social Security. Because they’re claiming early, their monthly benefits are 27.5% lower than they would be at their FRA. Aaron also realizes taking payments at age 62 would reduce his wife's benefits during the 9 years they expect her to outlive him.

If Aaron waits until he's 66 years and 6 months to collect benefits, he'll get $2,000 a month. If he delays his claim until age 70, his benefit—and his wife's survivor benefit—will increase another 28%, to $2,560 a month. (Note: Social Security payout figures are in today’s dollars and before tax; the actual benefit would be adjusted for inflation and possibly subject to income tax.)

Waiting until age 70 will not only boost his own future cumulative benefits, it will also have a significant effect on his wife's benefits. In this hypothetical example, her lifetime Social Security benefits would rise by about $69,000, or 16%.

Even if it turns out that Elaine is overly optimistic and she dies at age 94, her lifetime benefits will still increase approximately 34% and she would collect approximately $129,000 more in Social Security benefits than if they had both claimed at 62 (vs. both waiting until age 70 to claim Social Security). If Elaine dies at 90, she will have 1.6% more benefits, or $6,000.

In situations where the spouse's Social Security monthly benefit is greater than their partner's, the longer a spouse waits to claim Social Security, the higher the monthly benefit for both the spouse and the surviving spouse. For more on why it's often better to wait until at least your FRA before claiming Social Security, read Viewpoints on Fidelity.com: Should you take Social Security at 62?

In conclusion

Social Security can form the bedrock of your retirement income plan. That's because your benefits are inflation-protected and will last for the rest of your life. When making your choice, be sure to consider how long you may live, your financial capacity to defer benefits, and the impact it may have on your survivors. Consider working with your Fidelity financial advisor to explore options on how and when to claim your benefits.

Ready to retire? You still need a budget.

It's important to start your retirement with a spending plan that works for you.

Fidelity Viewpoints

Key takeaways

• Try to match your essential expenses to guaranteed sources of income.
• Limit withdrawals from retirement savings accounts to 4%–5% in your first year of retirement,then adjust for inflation in subsequent years.
• Consider consolidating accounts at a trusted provider.

Making a budget may not be the first thing you look forward to in retirement, but it's one of the most important things to do to start your retirement on the right path. Along with an income plan that can deliver a steady "retirement paycheck" and an investing strategy that allows a portion of your nest egg the chance to grow, a realistic budget—based on all the sources of income you have coming every month—is an essential building block of retirement.

If you're ready to begin putting together a retirement budget, here are some tips to help.

Think big picture

For many people, the budgeting process stalls before it really gets started. That's often because they worry about the details of their discretionary (nice-to-have) spending instead of looking at the big picture. Start by understanding your essential (must-have) expenses and how you can use guaranteed sources of income, like Social Security, pensions, and annuities, to pay for them. (See the "Essential expenses" section below.)

Then create your discretionary budget by focusing on categories of spending—such as travel, gifting, and entertainment—rather than trying to account for every dollar you'll spend. A good practice is to match these nice-to-have expenses with income from individual retirement accounts (IRAs) and other tax-deferred retirement savings accounts.

Get organized

Plan ahead and think about the life you want to live in retirement, based on what you can afford. You need to know the details of your recent spending patterns, and determine whether your overall spending will go up, go down, or stay the same in retirement.

To start, tabulate your average monthly expenses like cable, telephone, and electric bills and know how much money is coming in versus going out. If you use credit cards, go online and look at year-end summaries to see where you spent the most money last year. Do the same with online bank statements. Next, identify your ongoing monthly bills and determine whether you need to continue all these services. Then look through your past bills and online bank statements to identify work-related expenses that you may no longer have to pay now that you're retired. Lastly, categorize expenses into "essential" and "discretionary" (see below).

Essential expenses

Cover essentials first. Health, comfort, and security are among life's most important priorities, so you'll want to make health care, housing, transportation, and food your budget priorities.

Health care: Planning for health care costs can be especially daunting with estimated costs for an average 65-year-old couple retiring in 2020 hitting a total of $295,000 (in today's dollars) over their entire retirement period. Even if you're covered by Medicare and an insurance plan from your former employer, supplemental premiums and out-of-pocket costs continue to rise.¹

Housing: If your home is paid for, good for you! But don't forget to add utilities, maintenance, and possibly larger home repairs. A good rule of thumb is to budget at least 1 % of your home's value for annual maintenance. So, if your home is worth $400,000, then budget approximately $4,000 per year for standard repairs, general upkeep, or accessibility upgrades.

Transportation: No longer having commuting costs is a big bonus of retiring, but your transportation costs won't drop to zero. Most people don't retire to sit around the house, so remember to include the cost of gas or public transportation for trips to activities, as well as vehicle maintenance expenses. If you are considering buying a new or used car, add that expense too.

Food: Although you may not be eating out at lunch with colleagues, overall expenditures on food will likely remain constant. Now that you're retired, it might be a great time to do some fun things like taking cooking lessons or entertaining for friends and family.

Discretionary spending

Once you have accounted for your "must-haves," you can begin budgeting for discretionary items, such as dining out, going to the movies, and those bucket-list adventures you've been dreaming of.

Travel: How you budget for travel will depend on the types of trips you're contemplating—weekend getaways, long vacations, or visits to family and friends. For short jaunts, you can build a monthly expense into your budget, putting the money you don't use into a pool for spending later. If you are planning for longer vacations, add a vacation fund to the budget.

Entertainment/dining out/gifting: You probably already have a good idea of how much it costs to go to the movies and dine out, but many people forget to include money they use to buy gifts for family and friends. If your budget allows for it, consider larger gifting priorities—such as giving money to future heirs to minimize inheritance taxes or contributing regularly to charities.

Stick to your income plan

A well-designed retirement income plan should be backed by an investing strategy that provides opportunities for your assets to generate earnings and helps your income keep pace with inflation. But investment returns will vary, and that, along with unexpected expenses, may require you to build some flexibility into your budget. One solution is to express your discretionary spending as a range. That way, you can choose to put aside unspent money in months when your costs are at the bottom end of the range and use it during months when your discretionary spending may be higher.

Tip: Fidelity suggests limiting withdrawals from retirement savings accounts to 4%–5% in your first year of retirement, and then adjusting this number in subsequent years.

Keep it simple

Remember why you retired—to have fun and do the things you never had time for when you were working! One way to simplify may be to consolidate your retirement accounts with a trusted financial services provider, which enables you to organize your income, investing, and spending in one place while potentially reducing fees.

If you need help with budgeting or reviewing your retirement earnings, consider working with a financial advisor. Or, if you are more of a DIY person, check out Fidelity’s online budgeting tools.

Social Security tips for working retirees

If you work in retirement, know the impact to your Social Security and taxes.

Fidelity Viewpoints

Key takeaways

• There are many reasons to keep working in retirement, but income is key.
• An earnings test kicks in if you claim Social Security early.
• Your earnings affect more than just your Social Security benefits.

Now that 70 is the new 55 when it comes to retirement, you may very well end up working at the same time you claim Social Security benefits. Even if you just have a part-time job or some consulting income, your paycheck can affect the amount you receive monthly, the amount you owe in taxes for the year, and your Medicare premiums.

Reasons abound to keep working, but for many, it simply comes down to the math.

"People are clearly concerned about not having enough savings to last for their lifetime, especially since we're living longer, on average," says Chris Farrell, author of Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and the Good Life.

If you plan to keep working while collecting Social Security, here is what you need to keep in mind:

When you claim matters

If you claim your Social Security benefits before your FRA, or full retirement age (which is between 66 and 67, depending on the year you were born), you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your FRA.¹

There will also be an earnings test until you reach that FRA: If you have earned income in excess of $18,240 in 2020, your benefits will be reduced by $1 for every $2 of earned income over the limit.

In the year of reaching your FRA, the earnings test limit is $48,600 in 2020, and your benefits will be reduced by $1 for every $3 of earned income over the limit.

These benefits are not truly "lost," however. If your benefits have been reduced due to earning, your monthly Social Security check will be increased after your FRA to account for benefits withheld earlier due to excess earnings. Note that "earned" income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they're all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of "unearned" income.

Once you reach your FRA, there is no earnings test and no benefit reductions based on earned income.

Income tax implications

Separate from the earnings test, Social Security benefits themselves are subject to federal income taxes above certain levels of "combined income." Combined income generally consists of your adjusted gross income (AGI),² nontaxable interest, and one-half of your Social Security benefits.

• For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,000, none of your Social Security is taxed. (See: Income Taxes And Your Social Security Benefits for more information.)
• For individual filers with combined income of $25,000 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
• For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.

Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.

Additionally, 13 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if this affects you.³

Social Security and Medicare

In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.

The good news is that these earnings can also count toward the calculation of your benefits. The Social Security Administration checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.

If you are making much less in retirement than before, could it hurt your benefits? No, because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.

Read Viewpoints on Fidelity.com: 6 key Medicare questions

The bad news is that your earnings may not only push you into a higher tax bracket, but also into a higher threshold for your Medicare premiums once you are over 65. Medicare sets the cost (premium) for Part B each year at a fixed rate for most participants ($144.60 a month for 2020), but it increases for individuals with an annual income over $87,000 and married couples with an annual income above $174,000. The cost for these higher-earning participants can range from $202.40 to $491.60 per month in 2020.

Contributing to retirement accounts

Another key advantage of ongoing earned income even after you collect Social Security is that you can keeping contributing to your retirement savings accounts like traditional IRAs, health savings accounts (HSAs), Roth IRAs, and 401(k)s.

Note: If you are over 72, you will have to take the required minimum distribution (RMD) from your traditional IRA, except for during the 2020 pause because of COVID-19.

Your traditional 401(k), or similar employer-based retirement plan, is a different story. In general, you can continue stashing away money in your current employer-provided plan as long as you're still working, even part-time, and you can delay taking your RMD until after you retire.

This additional savings can help, especially if your savings are running a bit behind your goals. The combination of the added savings, tax-deferred growth potential, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.

A way to secure retirement income later in life

Turn some of your traditional IRA or 401(k) into lifetime income.

Fidelity Viewpoints

Key questions

• Are you nearing age 72¹ or already taking required minimum distributions (RMDs)?
• Can you cover expenses without needing to take your full RMD?
• Would you like a stream of guaranteed income to start later than age 72?

Turning age 72 is an important milestone if you have a traditional IRA or 401(k). That's when you must begin taking mandatory minimum yearly withdrawals, known as required minimum distributions (RMDs) from these accounts.² But what if you don’t need that money for current living expenses and would prefer to receive guaranteed lifetime income later in retirement? Fortunately, the US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity³ (DIA) and not have that money be subject to RMDs starting at age 72.

What is a QLAC?

A QLAC is a DIA that can be funded only with assets from a traditional IRA⁴ or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b). At the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations.

"The creation of the QLAC has opened up the opportunity to defer income past age 72, the RMD start age, using tax-deferred savings like an IRA or 401(k)," explains Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company.

QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings. After all, more than 30% of American workers aren't confident they'll have enough money to maintain their standard of living through retirement, according to the 2019 Retirement Confidence Survey conducted by the Employee Benefit Research Institute.

A QLAC delivers a guaranteed⁵ stream of lifetime income beginning on a date you select. For instance, you may purchase a QLAC at age 65 and have your payouts begin at age 75. Typically, the longer the deferral period, the higher your payout will be when you're ready to start receiving income payments.

Prior to the 2014 ruling on QLACs, funding a DIA with qualified funds from an IRA posed a problem: IRAs and other tax-deferred plans such as 401(k)s include RMD rules that require you to begin taking withdrawals after you reach age 72. There are rules, however, about how much money you can use to fund a QLAC. Currently, you're subject to 2 limitations: Total lifetime contributions cannot exceed $135,000 across all funding sources, and QLAC contributions from a given funding source cannot exceed 25% of that funding source's value.⁶

How a QLAC can create steady, later-in-life income

Let's say you own one or more traditional IRAs with a total balance of $200,000 as of December 31 of the previous year. You would be limited to using $50,000, which is 25% of $200,000 and is less than $135,000, to fund the QLAC. (Some 401(k) plans offer access to QLACs; check with your employer or plan sponsor to learn more about the rules for your plan.) But if your total IRA balance is worth $540,000 or more, the maximum you can contribute to a QLAC is $135,000. Keep in mind that in both cases the money that remains in your IRA or 401(k) is still subject to RMDs.

Use our interactive widget below and adjust the green options in the white box to match your situation:

To make it easier to understand how a QLAC might fit into your retirement income plan, enter your personal information in the interactive widget. It assumes you're age 70 and investing $135,000 in a QLAC. You can personalize whether you're male, female, or purchasing as a couple. Then you can adjust when you want to start receiving income, as early as age 75 or as late as age 85. Finally, you can see what the amount of total lifetime payments would be if you lived to age 90, 95, or 100.

To provide a working example, let's assume a woman is approaching age 70½ and does not need her full RMD to cover current expenses. By investing a portion of her traditional IRA assets in a QLAC at age 70, she would not have to take RMDs on the assets invested in the QLAC, and she would receive guaranteed lifetime income starting at a date of her choice, up to age 85. During the deferral period, she would rely on Social Security, RMDs from the remaining money in her IRA, withdrawals from investments, and other income, such as part-time work or a sale of a business, to cover expenses. If she invests the $135,000 in a QLAC and defers to age 80, her guaranteed income would be $15,200 a year no matter what happens over time, and she would receive a total of $228,000 in payments if she lived to age 95—or more if she lived longer.

Decisions, decisions

Purchasing an annuity can be complicated, with many kinds to choose from. "Fortunately, QLACs don't add a layer of complexity," says Ewanich. "The restrictions within the US Treasury Department's QLAC rule simplify the process."

Consider these options:

Single or joint life? If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first.

Should you include a cash refund death benefit? When purchasing a QLAC, the income lasts for your lifetime (joint contracts pay income for you and your spouse, as long as one of you is alive). You may also want to consider adding a cash refund death benefit. This provides for a lump sum paid to your beneficiaries if your lifetime payments do not exceed the dollar amount you invested in the QLAC. While a contract without the cash refund death benefit may provide higher income payments, it does not include beneficiary protection for your heirs. Compare QLAC options, including a cash refund death benefit, with Fidelity's Guaranteed Income Estimator tool.

When do you want income to start? A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:

• A 70-year-old retiree with an existing income stream that will stop at age 75 (for example, proceeds end from the sale of a business, the retiree stops working part time, inheritance income ceases) might start income at age 76 for the QLAC to replace the income that is ending.
• A couple in their late 60s might like to include an income stream that begins at age 80 or 85 as part of their overall plan, to help cover higher anticipated health costs later in retirement.
• A couple at age 65 might be comfortable taking withdrawals from their investment portfolio to cover their expenses at the beginning of their retirement, but they are concerned about the potential need for it to last 30 years or more. They might consider a QLAC that provides lifetime income starting at age 85 to help address these concerns.

Can I change the income start date? For contracts that include a cash refund death benefit, you typically have the ability to change the income date by up to 5 years in either direction (subject to an age-85 maximum). For example, if you initially select age 78 as your income start date, you could subsequently change this date to any time from age 73 to age 83. Of course, the amount of income that you will receive will typically be adjusted to a lower amount if you decide to change the date to an earlier age, and a higher amount if you change the date to a later age.

Should I consider a QLAC?

Ewanich notes that the decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? "A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it," explains Ewanich.

In terms of when to make a decision about purchasing a QLAC, Ewanich suggests weighing the options before reaching age 72: "While the QLAC rule allows you to purchase after age 72, it's a good decision to make when you're initially planning your RMD strategy."

Get ready for your countdown to retirement

5 key questions to ask yourself—and answer—about 5 years before retirement.

Fidelity Viewpoints

Key takeaways

• Even if you are only about 5 years away from retirement, there's still time to hone your strategy to help meet your retirement goals.
• Beyond saving more and adjusting your asset mix, postponing retirement is generally an effective step for many preretirees to accumulate more wealth.
• Think through the details of your planned retirement: Where do you want to live? How will you pay for health care and other big expenses? What will you do to fill your time?

Chances are, you've thought about retirement quite a bit over the years, whether you've fantasized about how you'll spend your time or fretted about your 401(k) balance. If you're like most people, though, you may be a little fuzzy about what your retirement will really look like.

At some point, you'll need to bring your retirement into sharper focus. Ideally, that's about 5 (or more) years before you hope to retire, when retirement is close enough to know what you want it to look like, and yet far enough away that there’s still time to hone your strategy to help meet those goals or alter your plans.

"There are still lots of big decisions to think about 5 years out," says Ken Hevert, senior vice president of retirement at Fidelity. Hevert advises clearly defining how you want to spend your time, money, and energy during the next chapter in your life—and trying to enjoy the process.

Begin by asking yourself these 5 key questions:

1. What are your expectations?

"It seems like a simple question," says Hevert. "But we know that more than half of couples have no idea how much they expect to receive in monthly retirement income, and most either don't know or are unsure of what their Social Security payments may be in retirement."

This lack of planning and understanding may affect more than just your happiness in retirement; it could also affect when and how you'll be able to retire. Five years before you plan to retire may be a good time to refine your retirement planning estimates and reprioritize your goals. "You need to do as accurate and realistic a projection as you can," says Hevert.

Where do you plan to live?
If you plan to move, make sure you also consider how that will impact your cost of living, including the cost of health care and your access to it. If you have your eyes on moving to another state, be sure you understand any differences in taxes (e.g., state, income, estate, local, sales, and property taxes) as well as differences in the cost of living. If you plan to stay put, you'll want to consider how your home equity factors into your plans.

What do you want to do?
The early stages of retirement can be an expensive time. Many people overestimate how much they'll be able to work in retirement, and underestimate how much they'll spend. Take a hard, realistic look at both fronts.

While many preretirees are thinking ahead and factoring health care costs into their retirement savings plan, almost 4 in 10 are not.² In fact, 48% of preretirees estimated that their individual health care costs in retirement would be less than $100,000—far lower than Fidelity's current estimates.

If you've relied on your employer to pick up most of your health care tab, retirement could be a rude awakening: Only 18% of large companies offer health care benefits to retirees, according to a 2018 employer survey by the Kaiser Family Foundation. Although Medicare kicks in at age 65, you may need to buy supplemental insurance or, at the very least, budget for higher out-of-pocket health care expenses than you had while you were working.

Read Viewpoints on Fidelity.com: How to plan for rising health care costs

2. Will you have enough?

This is the most important question that many preretirees need to answer. According to Fidelity Investments' latest Retirement Savings Assessment (RSA),² the median baby boomer is on track to meet 86% of estimated retirement expenses: enough to cover the basics, but not sufficient to cover all estimated discretionary expenses.

With 5 years to go, you'll want to run some real numbers, either with help from an advisor or our Fidelity Planning & Guidance Center. If the numbers aren't encouraging, you may need to rethink your plans, step up your savings, or both. The good news: If you're age 50 or older, you may be able to make up for a savings shortfall with additional catch-up contributions to your 401(k) or IRA. If you are age 55 or older, you can also make an additional $1,000 catch-up contribution annually to your health savings account.

Read Viewpoints on Fidelity.com: How much do I need to retire?

"Consider an annual savings goal of at least 15% or more (including any employer match), including 401(k) and other workplace plans, IRAs, and other savings," says Steven Feinschreiber, senior vice president at Fidelity. "But that's only a rough guideline, and assumes continuous savings for 40 years of work and an age-appropriate asset mix."

For baby boomers who are nearing retirement, saving more and adjusting their asset mix has less impact for the simple reason that they have less time for those changes to impact accumulated wealth—though it may still help. For them, postponing retirement is generally the most effective step. Delaying retirement from 65—the average age people planned to retire, according to the RSA study—to their full Social Security retirement age (between 66 and 67, depending on their birth year) may be the best way for most preretirees to boost their retirement savings and increase their retirement income levels. If you delay claiming, you’ll have more time to build your retirement nest egg and a shorter retirement to fund.

3. Are you invested properly?

As you round the bend toward retirement, it’s not a good idea to take on any more investment risk than necessary for your time frame, financial circumstances, and risk tolerance. But remember that this does not mean the answer is always to become more conservative. The consequences of being too conservative can be just as worrisome when you account for inflation and the possibility that you could outlive your savings. That is why it is important to think about an appropriate asset allocation.

Although you can't control market behavior, you can help manage its long-term effect on your portfolio through investment choices and by modifying portfolios so they have an age-appropriate mix. According to the 2020 RSA survey², 41% of Baby Boomers are "on track" while some 40% of Millennials hold what Fidelity considers to be a more conservative asset allocation for an investor with this much longer retirement planning time horizon.

An ideal investment mix will depend on a number of factors, including your age, time horizon, financial situation, and risk tolerance. "Retirement is often the time to take some risks off the table," notes Hevert, "but some people are tempted to become too conservative. But don't forget that your goal is for your retirement savings to last for a 30-plus-year retirement time horizon. This usually means some longer-term growth potential is needed in the portfolio." A financial advisor can help you rebalance your portfolio to get the appropriately diversified asset mix to help you meet your needs.

Read Viewpoints on Fidelity.com: The guide to diversification

4. Where will your retirement income come from?

At the same time you think about shoring up your retirement nest egg, you need to begin thinking about how you'll convert some of these savings into retirement income. For many people, it's helpful to start by grouping potential sources of income into 2 basic buckets: guaranteed income from sources such as Social Security, pensions, and annuities, and variable income from a job, retirement savings, and other sources such as rental real estate.

Next, estimate your retirement expenses and then map out ways to meet essential expenses with guaranteed income sources, and discretionary expenses with nonguaranteed income. If you plan to work a bit during retirement, that may provide a conservative boost to your retirement income. But be cautious here. Survey data shows that many people are not able to work as long as they wanted. Finally, before you rush out to file for your Social Security benefits at age 62, consider the big picture: Generally, the longer you wait, the higher the potential lifetime benefits.

Read Viewpoints on Fidelity.com: Should you take Social Security at 62?

After your review your current investment mix, you may also want to consider shifting a portion of your investment portfolio into income-producing assets, such as bonds or dividend-paying stocks. A guaranteed income annuity³ is another option to consider if you're interested in converting your assets to income. Generally, the older you are when you buy an annuity, the higher the monthly payout, but there may be advantages to purchasing an annuity before you reach retirement age. But these potential moves should still be done within the context of maintaining an appropriate overall asset mix across stocks, bonds, and cash. Remember, your retirement income will likely need to last for 30 years or more, which typically requires some exposure to stocks.

Read Viewpoints on Fidelity.com: Create income that can last a lifetime

5. How does your home factor into your retirement?

Your home is likely one of your most valuables assets. If either downsizing or relocating is in your plans, you may want to start plotting the move now. If moving isn't in the cards, you may still want to think through whether it makes sense to pay down your mortgage faster—thereby saving on interest payments and improving cash flow in retirement.

Read Viewpoints on Fidelity.com: Should you move in retirement?

Alternatively, consider how to use some of your home equity to help finance your retirement. If tapping home equity is only a temporary solution to bridge the gap until you start to draw down your retirement assets or start receiving guaranteed income payments, consider applying for a home equity line of credit while you're still employed and more likely to qualify for the best rates. If home equity factors into your long-term planning, you could also consider a reverse mortgage. But proceed with care and be sure you understand all the associated costs and requirements. Before considering any of these ideas, make sure you consult a tax professional or attorney.

Get started

Between your investment portfolio, your home, and your lifestyle plans, there's a lot to cover between now and your retirement. Moreover, you'll likely revisit these topics several times over the next several years, as you well should. The point isn't to have all the answers right away, but to start preparing for the big decisions you'll soon face.

How to take care of aging parents and yourself

Protect your financial future while caring for aging loved ones.

Fidelity Viewpoints

Key takeaways

• Understand the long-term impact of caring for an aging loved one.
• Explore all your options to keep working and saving for retirement.
• Beware of taking on too many caregiving responsibilities on your own.
• Find time for yourself.

Caring for an aging parent is a compassionate—but often stressful—undertaking. It can take a huge emotional toll on everyone in a family, but for women, who are far more likely to be caregivers vs. men, the financial impact can hit especially hard. "Women who become caregivers for an elderly parent or friend are more than twice as likely to end up living in poverty than if they aren't caregivers," says Cindy Hounsell, president of the Women's Institute for a Secure Retirement (WISER). If caregivers take time off work, not only do they lose pay, but also those lost wages can affect their Social Security, pension payouts, and other savings—threatening their future finances.

Nearly half of caregivers report experiencing high emotional stress.¹ So what can women do to take care of themselves while they care for others? While helping an aging loved one can easily become all-consuming, there are steps you can take to protect your finances and your retirement. And because women tend to live longer, every penny counts.

Watch our webcast: "Role Reversal: Taking Care of Older Loved Ones" and hear from a panel of experts discussing all aspects of caring for loved ones as they get older—without losing sight of your own goals.

Understand the long-term impact

"For many women, fewer contributions to pensions, Social Security, and other retirement savings vehicles are the result of reduced hours on the job or fewer years in the workforce," explains Ann Dowd, vice president at Fidelity. "Women caregivers are likely to spend an average of 12 years out of the workforce raising children and caring for an older relative or friend."

Women enter and exit the workforce more often than men, usually to care for their children or their parents. Others make some sort of workplace accommodation, such as going in late or leaving early, shedding job responsibilities, dropping back to part-time status, or opting for reduced hours, when possible. This can mean lower wages, lost income, and missing out on potential promotions, which can add up.

Consider this example: Laura, age 56, left a $70,000-a year job to care for her mother for 3 years. The cost to her-$218,000 in lost salary and $63,000 in lost Social Security benefits, for a total of $281,000.² The long-term price can be even higher. You lose the opportunity to contribute to a 401(k) plan- (or other workplace retirement saving plan), as well as to receive contributions from your employer. Those periodic absences also significantly slice into your Social Security benefits.

Balancing work and family

If you are caring for an aging parent, what can you do to soften the effect of these financial changes?

Because leaving a job means losing not only your paycheck but also your benefits, try to continue working at least until you're vested in your company's pension or profit-sharing plan. You may be able to scale back your hours, but put in enough time to continue to get benefits like health insurance or retirement plan contributions. Also, check with your employer's human resources manager to see whether the company offers services to employees who are also caregivers.

You can also consult Eldercare Locator (www.eldercare.gov), sponsored by the US Administration on Aging, to find local services that might help you find a way to balance your job with your caregiving responsibilities.

If you are still able to work for a while longer, then be sure to participate fully in your employer's 401(k) plan and matching contributions. Remember, if you are over age 50, you can make additional contributions.

If your employer also offers a high-deductible health plan (HDHP) paired with a health savings account (HSA), the HDHP can play a valuable role in your financial future. Generally, an HDHP with an HSA enables you to set aside pretax dollars—many employers offer this as a payroll deduction—that can accumulate tax-free and can be withdrawn tax-free to pay for current or future qualified medical expenses,³ including those in retirement. Since health care is likely to be among your largest expenses in retirement, planning for medical expenses both now and in the future can be an important part of your overall savings plan.

If you must give up your current job in order to become a full-time caregiver, consider asking your family to pay you as an independent contractor for the care you are providing. If you are paid, you can set up a self-employed pension plan, such as a Simplified Employee Pension Plan (SEP), or an IRA. If you are married and have the support of your spouse, take advantage of a spousal IRA contribution (available to non-working spouses) to help keep your retirement savings growing. And, fund these accounts to the limit, if you can.

Beware of taking on too much on your own

While sons and daughters care more or less equally for their parents, a MetLife study⁴ found that daughters tend to take care of physical caregiving, while sons tend to help financially. Despite this, the disparity comes with long-term financial consequences for daughters. For example, if you're a woman providing more hands-on assistance, you're likely to be the first to notice that the supply of nutritional supplements is running low or that it's time for your father to begin using a walker. And, if you're providing more hands-on assistance, it's natural to reach for your own wallet to cover the costs. Yet, such miscellaneous expenses can cost an average of $12,000 a year, according to MetLife research, and can seriously eat into the money available to set aside for your retirement.

Some 3 in 10 US adults (29%) have a child younger than 18 at home, and 12% of these parents provide unpaid care for an adult as well. These so-called multigenerational caregivers provide more than 2.5 hours of unpaid care a day, on average, according to a new Pew Research Center analysis of Bureau of Labor Statistics data.⁵

"Do not be a martyr," warns WISER's Hounsell. "Ask for financial help from brothers and sisters." Work with a financial advisor to create a budget that encompasses both present and future care needs, as well as a system to record all costs to prevent family disputes.

Tip: Don't forget to tap into resources from advocacy groups such as the National Council on Aging which help people aged 60+ meet the challenges of aging by partnering with nonprofit organizations, government, and businesses.

Find time for yourself

Research from the National Alliance for Caregiving shows that, on average, adult caregivers spend nearly 19 hours a week in their helping role—or nearly 3 hours a day. So finding ways to save time is essential for reaching your personal and financial goals.

Investors interested in something to assist parents in handling their financial affairs might consider a managed account. For an annual fee, a professional advisor manages the assets, freeing the family from spending time on administrative chores—or having to justify their decisions to other family members. That's what Polly Walker, from the Boston area, chose to do when she took charge of her mother's care and finances 10 years ago. Although she is a Chartered Financial Consultant® and a financial writer, having a managed account gave her important peace of mind, she says, "Because it eliminated any concerns among my brothers and sisters about who was making the investment decisions."

Finally, with that bit of extra time you've gained, remember to protect your own health. That's especially important for women, who are more likely than men to feel the emotional stress of giving care, says the National Alliance for Caregiving study. Stress can affect your mental and physical health, as well as your ability to work productively—with unpleasant repercussions for your financial health too.

While it's natural for women to want to do all they can for their aging loved ones, the most important lesson to take to heart is this: Taking care of yourself first will enable you to do a better job of taking care of others.

Tip: Know when to get involved. "On average, children step in when parents are 75 years old—often after a loved one has made a direct request for financial assistance, when the parents' health becomes a significant factor, or when you notice a change in your parents' ability to handle daily living tasks," explains Dowd.

Key takeaways

• Medicare does not cover all health care expenses in retirement.
• Medigap can help eliminate many Medicare out-of-pocket costs, extend skilled nursing home and hospital coverage, and cover health care costs when traveling abroad.
• You can generally keep your doctors under Medigap.

Jeff and Alison Otto of Framingham, Massachusetts, knew picking a Medicare plan would take time and effort. So they talked to friends, family, and their doctor, and read extensively about their options. What really surprised them was the realization that Medicare would not cover all their health care costs in retirement, including those when traveling abroad.

"We travel a lot and want the security of knowing we can get medical treatment away from home," says Jeff, who with Alison is looking forward to visiting her family in England. So the Ottos decided to buy Medigap insurance to cover health care costs that Medicare does not.

Medicare and Medigap

Since its introduction in 1965, Medicare was designed to cover only a portion of a retiree's health care needs. "Original Medicare" includes 2 parts: Part A, hospitalization coverage, and Part B, physicians and outpatient services. Only selected services are covered, and costs are shared between Medicare and you.

When it's time for you to sign up for Medicare, you have 3 primary options: You can choose to pay what Medicare doesn't cover from your own pocket, buy supplemental insurance, such as Medigap, or buy an all-in-one policy called a Medicare Advantage Plan.

Medigap plans are sold by private insurance companies and are identified by capital letters—A, B, C, D, F, G, K, L, M, and N.¹ Each lettered plan, regardless of the insurance company, must offer the same standardized features. Beneficiaries eligible for Medicare starting January 1, 2020, won't be offered Plan F and Plan C. Beneficiaries who are already in Plan F and Plan C can continue their coverage as it is.

Why buy Medigap?

Here are 4 common reasons retirees choose to add Medigap to traditional Medicare.

1. Medigap can eliminate most of your Parts A and B out-of-pocket costs. Generally, under Medicare, you are responsible for a portion of the cost after deductibles. Your Medigap insurance may pay for your portion of coinsurance, copays, and other costs you owe.
2. Medigap provides some long-term care coverage. With Medicare, you get a limited number of coverage days for hospital stays, time in a skilled nursing facility (for example, after surgery or for rehabilitation services after a fall), or if hospice care is needed. Medigap provides additional time in these facilities, just in case.
3. Medigap covers health care needs when traveling abroad.² If you don't plan to travel frequently, it might be more cost effective to look into travel insurance, including medical evacuation insurance for emergencies overseas. Pricing will depend on where you are going, your age, and how long you will be traveling.
4. Medigap generally lets you keep your doctors. Still, it's important to check with your doctors, specialists, hospitals, and medical facilities to make sure they accept the exact insurance company and Medigap policy you are considering.

When should you enroll in Medigap?

You can enroll in a Medigap plan after you've enrolled in Medicare Part B. Generally, there are 2 time periods when you'll be eligible without any medical underwriting or worry about pre-existing conditions.

• You've turned 65 and enrolled in Part B. In this "initial enrollment period," you have 6 months to select and enroll in a Medigap policy.
• You are older than 65 and losing employer coverage. Once you enroll in Medicare Part B, you'll have 6 months to buy a Medigap policy.

If you miss your initial 6-month enrollment window, insurance companies generally require medical underwriting and you can be denied coverage, or may have to pay a higher premium for a Medigap policy, sometimes substantially higher.

As time passes, you can switch plans based on cost or a different level of coverage, but do so cautiously. Do not stop paying premiums on your existing plan before you find a new plan that will accept you. Switching by choice usually means you'll be subject to medical underwriting. Higher costs or outright denial may be the outcome.

How much Medigap coverage?

When deciding how much gap coverage you'll need, it's important to think about your health situation at age 65 and how healthy you might be at 75, 85, and 95. Steve Feinschreiber, senior vice president at Fidelity Financial Solutions, offers 4 rules of thumb to consider as you shop for Medigap insurance:

1. Don't overestimate the status or durability of your good health. "Consider the practical reality of needing more insurance as you age," advises Feinschreiber. "Even elite athletes run into health problems as they move through the decades."
2. Use your family health history as a guide. "Talk to your doctor about aging and take a look at your family history," says Feinschreiber. "It could be a good guide to help decide the kind of coverage you might want to plan for."
3. Choose your insurance separately from your spouse. Since there is no "joint" or "family" coverage under Medicare, it may be most cost effective for you and your spouse to choose different coverage options from separate insurance companies.
4. Weigh costs vs. coverage. Medigap plans can be quite costly. "If you find the costs for gap insurance are hurting the overall health of your retirement income plan, think about where you might be able to make trade-offs," says Feinschreiber. "It's about finding the right balance so you have sufficient coverage and don't run out of money over the course of your retirement."

Countdown to Medicare

Because choosing a Medigap plan can be rather time consuming and complicated, it's a good idea to get started early, perhaps by age 64, or at least 6 months before you retire. To simplify the process, use our checklist.

Checklist: Medicare and Medigap steps to take before you turn 65

(or at least 6 months before losing your employer health insurance)

Age 64

• Download your "Medicare and You" book from the Medicare website.
• Talk to your employer about coverage options if retiring or if continuing to work.
• Schedule an appointment with your primary care physician to discuss Medicare and Medigap options.
• Use Medicare Plan finder to search and compare various Medigap options in your area.
• Schedule any medical appointments needed, including vision and dental (to maximize your existing coverage).

1–3 months before turning age 65

• Apply online for Medicare Parts A & B.
• Make final decision for a Medigap policy.
• Finalize any details with your employer.
• Look for your Medicare cards to arrive in the mail.

65th birthday month

• Confirm that your coverage is in place for the first day of your birthday month.
• Apply for your Medigap Supplement Insurance.

Hopefully for you, like the Ottos, the transition into Medicare and Medigap will be quite seamless. The Ottos realize that their needs may change over time, especially as they curtail travel plans as they get older. "Although we've seen costs increase over the last 2 years since we enrolled in Medigap, we have the right level of supplemental coverage for now and think we're getting good value at $800 per month for the both of us including dental coverage," said Alison.

How and why to build a bond ladder

Ladders may offer predictable income and interest rate risk management.

Fidelity Viewpoints

Key takeaways

• Laddering bonds with a variety of maturities can help provide you with a source of predictable income.
• Ladders should be built with high-quality, noncallable bonds.
• Fidelity's Bond Ladder Tool can help self-directed investors build ladders.

Income-seeking investors can get exposure to bonds through mutual funds, exchange-traded funds (ETFs), and—for those with sufficient assets—individual bonds. A popular way to hold individual bonds is by building a ladder or portfolio of bonds with various maturities. Many investors build bond ladders to help create predictable streams of income and manage some potential risks from changing interest rates.

How ladders may help when rates are falling

Interest payments from bonds can provide you with income until they mature or are called by the issuer. When that time comes, there’s no guarantee you’ll find new bonds paying similar interest because rates and yields change frequently.

Laddering bonds that mature at different times lets you potentially diversify this risk across a number of bonds. Though a bond in your ladder might mature while yields were falling, your other bonds would continue generating income at the higher older rates.

How ladders may help when rates are rising

A ladder may also be useful when yields and interest rates increase because it regularly frees up part of your portfolio so you can take advantage of new, higher rates. If all your money is invested in bonds with a single maturity date, you might be able to reinvest at higher yields, but your bonds might also mature before rates rise. Ladders can also offer some protection from the possibility that rising rates might cause bond prices to fall.

"Laddering bonds may be appealing because it may help you to manage interest rate risk, and to make ongoing reinvestment decisions over time, giving you the flexibility in how you invest in different credit and interest rate environments," says Richard Carter, Fidelity vice president of fixed income products and services.

Bond ladder considerations

Before building a bond ladder, consider these 6 guidelines.

1. Know your limitations

Ask yourself—or your advisor—whether you have enough assets to spread across a range of bonds while also maintaining adequate diversification within your portfolio. Bonds are often sold in minimum amounts of $1,000 or $5,000, so you may need a substantial investment to achieve diversification. It may make sense to have at least $350,000 toward the bond portion of your investment mix if you're going to invest in individual bonds containing credit risk such as corporate or municipal bonds.*

Make sure that you also have enough money to pay for your needs and for emergencies. Also consider whether you have the time, willingness, and investment acumen to research and manage a ladder or if you would be better off with a bond mutual fund or separately managed account.

2. Hold bonds until they reach maturity

You should have a temperament that will allow you to ride out the market’s ups and downs. That’s because you need to hold the bonds in your ladder until they mature to maximize the benefits of regular income and risk management. If you sell early, you will risk losing income and may also incur transaction fees. If you can't hold bonds to maturity, you may experience interest-rate risk similar to a comparable-duration bond fund, which you may want to consider instead.

3. Use high-quality bonds

Ladders are intended to provide predictable income over time, so using riskier lower-quality bonds makes little sense. To find higher-quality bonds, you can use ratings as a starting point. For instance, select only bonds rated "A" or better. But ratings can change, so you should do additional research to ensure you are comfortable investing in a bond you may potentially hold for years. If you are investing in corporate bonds, particularly lower-quality ones, you need more issuers to diversify your ladder. This table suggests how many issuers you may need.

How do bond ratings work?

Moody's and Standard & Poor's are independent credit rating services that analyze the financial health of bond issuers. The ratings they assign help investors assess how likely an issuer is to be able to make principal and interest payments to bondholders.

4. Avoid the highest-yielding bonds

An unusually high yield relative to similar bonds often indicates the market is anticipating a downgrade or perceives that bond to have more risk than others and has traded its price down and increased its yield. One potential exception is municipal bonds, where buyers often pay a premium for familiar bonds and bonds from smaller—but still creditworthy—issuers that may have higher yields.

5. Keep callable bonds out of your ladder

Part of the appeal of a ladder is knowing when you get paid interest, when your bonds mature, and how much you need to reinvest. But when a bond is called prior to maturity, its interest payments cease and the principal is returned to you, possibly before you want that to happen.

6. Think about time and frequency

Another feature of a ladder is the length of time it covers and how often the bonds mature and return principal. A ladder with more bonds will require a larger investment but will provide a greater range of maturities. If you choose to reinvest, you will have more opportunities to gain exposure to future interest rate environments.

How to build a bond ladder

Here’s an example of how you can build a ladder using Fidelity's Bond Ladder tool. Mike wants to invest $400,000 to produce income for about 10 years. He starts with his investment amount—though he could also have chosen a level of income. He sets his timeline and asks for a ladder with 21 rungs (that is, 21 different bonds with different maturities) with approximately $20,000 in each rung. Then he chooses bond types. In order to be broadly diversified, each rung contains a range of bonds and FDIC-insured CDs with various investment grade credit ratings.

Mike lets the tool suggest bonds for each rung. On the next screen, the tool suggests bonds and shows a summary of the ladder, including the expected yield and annual interest payments. (Note: The screenshot below is incomplete and only shows 2 of the rungs in order to highlight the summary calculations, such as the Average Yield, at the top of the page.)

Another view shows Mike the schedule of interest payments and return of principal he could expect if he purchases the ladder.

Mike's expected cash flow appears to decrease as bonds mature, but he may be able to extend his income by reinvesting the principal.

While a well-diversified bond ladder does not guarantee that you will avoid a loss, it can help protect you the way that any diversified portfolio does, by helping to limit the amount invested in any single investment. Also, a bond ladder leverages the cash flow features of bonds in terms of their coupons and principal repayments: this gives it the potential to be an efficient and flexible vehicle with which to create an income stream tailored to the time period, with a payment frequency to meet your needs.