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5 ways to help protect retirement income

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 tips 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.

According to the Fidelity Retiree Health Care Cost Estimate, a single person age 65 in 2023 may need approximately $157,500 saved (after tax) to cover health care expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000 saved.1 (Note: Fidelity’s 2023 Health Care Cost Estimate remains the same as 2022, due in part to limits on expected retiree out-of-pocket costs for prescription drug coverage starting in 2025.)

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 69% 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.2 According to the Genworth 2021 Cost of Care Survey,3 the average cost of a semiprivate room in a nursing home4 is about $94,900 per year, assisted living facilities5 average $54,000 per year, and home health care homemaker services6 are $59,488 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. Some companies charge an annual fee until the policy is used, while others accept single pay or a predetermined number of payments. 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:7 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 $1,835 a month, it may not cover all your needs.8

Read Viewpoints on Fidelity.com: Longevity and retirement

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 can 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.9

Read Viewpoints on Fidelity.com: 3 keys to your retirement income plan

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.

The cost of inflation

Even a low inflation rate can reduce the purchasing power of your money.

For illustrative purposes only. Estimated future cost of $50,000 worth of goods or services over 25 years based on hypothetical rates of inflation of 2%, 3%, and 4%. Actual inflation rates may be more or less and will vary. Source: Fidelity Investments.

4. Position investments for growth potential

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.

Choose an investment mix you are comfortable with

Data source: Fidelity Investments and Morningstar Inc, 2022 (1926-2022). Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only. It is not possible to invest directly in an index. Time periods for best and worst returns are based on calendar year. For information on the indexes used to construct this table, see Data Source in the footnotes below. The purpose of the target asset mixes is to show how target asset mixes may be created with different risk and return characteristics to help meet an investor’s goals. You should choose your own investments based on your particular objectives and situation. Be sure to review your decisions periodically to make sure they are still consistent with your goals.

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 professional 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 professional to develop and maintain a retirement income plan or consider an annuity with guaranteed lifetime income9 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 guidelines for your retirement income.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Data Source: Fidelity Investments and Morningstar Inc. Hypothetical value of assets held in untaxed portfolios invested in US stocks, foreign stocks, bonds, or short-term investments. Historical returns and volatility of the stock, bond, and short-term asset classes are based on the historical performance data of various unmanaged indexes from 1926 through the latest year-end data available from Morningstar. Domestic stocks represented by IA SBBI US Large Stock TR USD Ext Jan 1926-Jan 1987, then by Dow Jones US Total Market data starting Feb 1987 to Present. Foreign stocks represented by IA SBBI US Large Stock TR USD Ext Jan 1926–Dec 1969, MSCI EAFE Jan 1970-Nov 2000, then MSCI ACWI Ex USA GR USD Dec 2000 to Present. Bonds represented by US Intermediate-Term Government Bond Index Jan 1926–Dec 1975, then Barclays Aggregate Bond Jan 1976 - Present. Short-term/cash represented by 30-day US Treasury bills beginning in Jan 1926 to Present. Past performance is no guarantee of future results. The purpose of the target asset mixes is to show how target asset mixes may be created with different risk and return characteristics to help meet a participant's goals. You should choose your own investments based on your particular objectives and situation. Remember, you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your goals. You should also consider any investments you may have outside the plan when making your investment choices. 1. Estimates based on a hypothetical single person or opposite-sex couple retiring in 2023, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2023. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. 2. US Department of Health and Human Services, https://acl.gov/ltc/basic-needs/how-much-care-will-you-need. 3. Genworth Cost of Care Survey, conducted by CareScout®, November 2021, https://www.genworth.com/about-us/industry-expertise/cost-of-care.html. 4. Based on 365 days of care. 5. As reported, monthly rate, private, one bedroom. 6. Based on annual rate divided by 12 months (assumes 44 hours per week). 7. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. 8. US Social Security Administration, April 2023, https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/. 9. Guaranteed lifetime income is subject to the claims-paying ability of the issuing insurance company.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

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