Retirement Income Planning How to turn your retirement savings into the retirement income you may need.

Transcription

1 Retirement Income Planning How to turn your retirement savings into the retirement income you may need.

2 Creating an income strategy for retirement You ve spent years saving for retirement. Now it s time to make the transition to using that money to generate income throughout retirement. That takes a new way of thinking, a new strategy, and a new plan. When creating your strategy for income in retirement, you ll need to take into account the potential risks to your savings during retirement. You ll also need to estimate your expenses, then determine which expenses are essential, and the sources of income that can cover them. Then you ll need to decide on a retirement income strategy, and choose a mix of investments to help you reach your goals. 2 Your retirement dreams are uniquely yours. But no matter what they are, Fidelity is here to help you create a retirement income strategy to help you achieve them.

3 Table of contents Five Key Risks 4 Estimating Expenses and Income 6 Maximizing Reliable Income Sources 8 Creating a Retirement Income Strategy 10 Summary 14 Fidelity Is Here to Help 15 Things to consider when creating a retirement income strategy The five key financial risks you may encounter Planning for expenses and income Strategies to consider for income in retirement 3

4 5 Key Risks Understand and plan for these potential risks to your retirement savings. Fidelity can help you evaluate these retirement risks and how to factor them into your income strategy. 1 2 Outliving your savings You ll probably live longer than you think. In fact, there s a 50% chance that one member of a healthy 65-year-old couple will live to be 92.* What to Do: Take into account your personal health and family history, not just average life expectancy, when making your retirement calculations. Keeping up with inflation Inflation increases the future costs of things and has the potential to erode the value of your assets. Even a 3% annual inflation rate could reduce your buying power by half in 25 years. What to Do: You may want to consider investments that have the potential to outpace inflation. 3 Managing how quickly you spend your savings Think long term and use a conservative rate of withdrawal to help you withstand both bull and bear markets. What to Do: Fidelity suggests using no more than a 4% 5% withdrawal rate in your planning, and perhaps even less during the early years of retirement. * Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health. Remember that neither diversification nor asset allocation ensures a profit or guarantees against loss. Fidelity Investments Consulting Services,

5 4 Diversifying your investments wisely Because you could live 30 or more years in retirement, your investments need to have the potential for growth. Retirees with portfolios overly concentrated in conservative investments run the risk of outliving their assets. What to Do: Review your asset allocation and portfolio to evaluate the amount of potential growth you have, and determine if it aligns with your needs, risk tolerance, and overall goals. 5 Saving enough to cover the cost of health care Fidelity estimates that a couple retiring in 2010 at age 65 should plan on spending at least $430,000 out of pocket over the course of retirement to pay for medical expenses not covered by Medicare. What to Do: Increase your anticipated medical expenses when doing your calculations. Fidelity can help you evaluate these retirement risks and how to factor them into your income strategy. Call

6 Estimating Expenses and Income Once you understand the key risks to your retirement savings, it s time to start creating a retirement income strategy that is appropriate for the lifestyle you re planning for in retirement. To begin, you must estimate your expenses and income. Determining expenses There are two types of expenses you ll need to plan for. The first is essential expenses the ones you must cover. This could include things like food, housing expenses, and health care. The second type of expense is discretionary. This may include items such as travel, hobbies, or club memberships. A tool to help The Fidelity Retirement Income Planner* is an interactive online tool you can use to help develop your retirement income plan. You can use it on your own or with a Fidelity Representative. This tool will guide you step by step through the planning process and ask you specific questions about your estimated expenses, income, and current assets to develop a complete picture of your retirement. The tool then employs a sophisticated analysis that helps you understand if you have saved enough, how long your money may last, and even the impact of inflation on your savings. Determining income Once you understand your expenses, it s time to evaluate your sources of income. There are three types of income to consider as you create your strategy. Reliable income is the income you can depend on throughout retirement, such as Social Security, pensions, and certain annuities. Investment income can include interest, dividends, and even withdrawals you make from your investments. Although not necessarily a consistent stream of income, it is likely that you may be relying on some investment income in retirement. Employment income comes from continuing to work after you retire. Many retirees find they need, or want, to continue working, at least part time, in retirement. * The Retirement Income Planner tool is an educational tool. The tool s illustrations result from running a minimum of 250 hypothetical market simulations. The market return data used to generate the illustrations is intended to provide you with a general idea of how asset mixes have performed historically. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark that may differ from the diversity of your own portfolio. Please note that the projections do not reflect the impact of any transaction costs or management and servicing fees (except variable annuities); if these had been included, the projected account balances would have been lower. IMPORTANT: The projections or other information generated by Fidelity s Retirement Income Planner regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time. 6

7 Match the Reliability of Cash Flow to the Importance of the Expense Reliable Income Sources Social Security Company Pension Certain Annuities etc. COVER ESSENTIAL EXPENSES COVER GAP Essential Expenses Food Clothing Shelter Health Care etc. Investments Mutual Funds Stocks/Bonds CDs Real Estate IRAs, 401(k)s etc. Convert Assets for Cash Flow Systematic Withdrawal Plans Annuities FUND DISCRETIONARY EXPENSES Discretionary Expenses Travel Entertainment Club Memberships etc. For illustrative purposes only. Balancing income and expenses Fidelity suggests that you try to cover your essential expenses with guaranteed sources of income, such as pensions, Social Security, and certain annuities. If you can t, you ll either have to reduce your expenses, rely on investment income, or supplement your income by working. On the other hand, if your reliable income is greater than your essential expenses, you can use the surplus to cover some of your discretionary expenses or even reinvest the surplus back into your portfolio. However, most people may have to tap some of their investments or savings to cover their expenses for at least part of their retirement. 7

8 Maximizing Reliable Income Sources Not everyone can fully cover their expenses with reliable sources of income, so it s important to maximize income from the most common sources, such as Social Security and pensions. Social Security Social Security provides a key source of guaranteed income in retirement, is adjusted for inflation, and lasts a lifetime. Choosing when you collect Social Security can impact how much you receive by up to 8% a year. So it s important to carefully consider your options. When to start taking it. You can start taking reduced benefits when you reach age 62, but your full retirement age is the point at which you can begin drawing your full payment. If you take benefits before you reach your full retirement age, Social Security will reduce your payments. On the other hand, if you delay taking benefits until sometime between your full retirement age and age 70, the amount of your monthly benefit will increase. The impact of waiting. You don t have to start collecting at your full retirement age; you could defer your payments until age 70. For every year you delay payments until age 70, your monthly Social Security payments could increase by approximately 5% to 8%. Collecting while working. If you re still working and haven t reached your full retirement age, you might consider delaying collecting. Otherwise, your benefits may be reduced significantly, or even eliminated, if your earned income is above certain limits. 8 When to start taking depends on many factors: Age and family longevity. Delaying collecting until your full retirement age can result in higher payments over your lifetime. Taking benefits at 62 will result in reduced monthly payments. Will you continue to work? Continuing to work may have an impact on your benefits, depending on income limits. If you re planning with a spouse. When one spouse starts collecting Social Security, it could potentially affect payments to the other spouse. Delaying Can Increase Your Benefits This is a hypothetical example of someone whose full retirement age is 66, and primary insurance amount is $1,800.* $0 $1,350 $1,800 Waiting 4 years gets you $450 more a month. MONTHLY BENEFITS Sources: Social Security Administration and Fidelity Investments, * This hypothetical example assumes that the person is not working in retirement. Sample benefit amounts are not exact, due to rounding. They do not reflect annual cost-of-living adjustments or taxes. Had taxes been taken into account, the amounts would have been lower. This example is for illustrative purposes only. $2,376 Waiting 8 years gets you $1,026 more a month. AGE 62 AGE 66 AGE 70

9 Pensions If you are eligible to receive pension income from your employer, you ll want to think carefully about how to make the most of this valuable resource. Take it over time or all at once. Many pension plans allow you a choice of receiving periodic annuity payments for as long as you, or you and your spouse, live or the option of taking your pension as one lump-sum distribution, which can be rolled over to an IRA. However, your one-time payment may end up being less than your cumulative payments over a lifetime. Consider choosing regular payments if: Longevity runs in your family. You believe your former employer or the financial firm paying your benefits has the financial strength to continue providing your pension payments. Consider choosing a lump-sum distribution into an IRA or other investment vehicle if: You have other sources of income to cover your essential expenses, or you don t anticipate living past your life expectancy. You want or need more access to your pension assets. You want to manage your investments or believe you may be able to generate more income by moving your lump-sum pension payment into other investments. You believe that your former employer or the financial firm paying your benefits may not have the financial strength to continue providing your pension payments. Continue payments to your spouse or not. If you re married, most defined benefit pension plans will automatically provide your spouse with survivor benefits. However, if your spouse waives the benefit, the monthly benefit payment you receive now will increase. Many plans allow you to elect the percentage of your benefits you d like your spouse to continue to receive after you die. The lower the specified percentage, the higher the monthly benefit payment you ll receive while you re alive. Consider choosing payments only for yourself if: Your spouse is adequately covered by other sources of lifetime income. Your spouse may not expect to outlive his or her life expectancy, given family history or personal health. Consider choosing survivorship payments if: You are willing to take a reduced monthly benefit in return for knowing your spouse will continue to receive a benefit after your death. Note: Even if your employer defaults on its pension obligations, your income may still be guaranteed by the federal Pension Benefit Guaranty Corporation (PBGC) up to certain limits. Check to see if your pension has this coverage. Company pension is subject to the claims-paying ability of the company. In case of insolvency, the federal PBGC may replace some or all of the pension income up to certain limits. 9

10 Creating a Retirement Income Strategy Now that you understand how your income and expenses may align in retirement, it s time to create your income strategy. The first step is to determine your investing priorities. Determining your priorities Investing in retirement often requires a different approach as you may need to both generate income and have your assets last. Prioritizing your investing needs can help you determine how you might allocate different portions of your money. Guarantees: What level of guarantee will your investments provide to ensure that your income will continue for life? Growth potential: Will your investments benefit from potential gains to help you keep pace with inflation? Flexibility: Will you have access to your assets without fees or penalties if you need to pay for unexpected expenses? Principal preservation: Are you willing to spend part or all of your savings? Any strategy is a balance of benefits and trade-offs. Some investors will want more growth potential and will be willing to accept the potential for higher volatility. Some investors will want to preserve what they have and accept the potential trade-off of lower returns. How you prioritize your investing choices will depend on your goals and financial situation. Common retirement income strategies Once you ve determined your investing priorities, you re ready to create a strategy. Here are three common strategies among many that you might use to generate income in retirement. Chances are you won t rely on any one strategy. Instead, you ll probably want to mix and match key components to get a strategy appropriate for your lifestyle, needs, and investing goals. Strategy 1: Interest and Dividend Only. This strategy aims to preserve your principal and allows you to live on the interest and dividends generated by your portfolio. This is a powerful strategy if you want to leave behind a legacy, but it may require a substantial amount of savings to generate enough income to meet your needs throughout retirement. Strategy 2: Investment Portfolio Only. One way to help generate sustainable lifetime income is by setting up a systematic withdrawal plan (SWP) from your investment portfolio. SWPs draw income from certain pools of investments, such as stocks, bonds, or mutual funds. They can be set up to last for specific time periods and with payment adjustments each year if needed. Based on your age, you ll want to carefully consider what percentage of your assets you can withdraw each year. Generally, Fidelity believes a 65-year-old may not want to withdraw more than 4% 5% annually, but that percentage can vary based on market conditions as well as life expectancy. Strategy 3: Investment Portfolio plus Guarantees* The investment portfolio plus guarantees strategy adds the purchase of annuity products to provide some guaranteed income. This can help give you peace of mind that you will have income even in down markets or if you live longer than you anticipated. Remember that every choice involves trade-offs. By adding annuity products to your portfolio, you exchange some access and flexibility for guaranteed payments. * Guarantees apply to certain insurance and annuity prod ucts (not securities, or variable or investment advisory products) and are subject to product terms, exclusions, and limitations; the insurer s claims-paying ability; and the financial strength of the issuing insurance company. 10

11 How It Works Pros Cons Interest and Dividend Only Strategy Invests in securities that pay interest and/or dividends Withdraws only earnings and does not touch principal Principal returned if CD or bond held to maturity 1 Potentially lower credit risk if invested in FDIC-insured CDs 1 or U.S. government bonds 2 Typically requires sizable savings Limited growth potential Inflation, market, and interest-rate risk Credit and default risk Loss of purchasing power due to inflation over long periods of time Investment Portfolio Only Strategy Scheduled withdrawals are made from diversified investments, which are managed for total return Withdrawals consist of both earnings and principal Potential to generate income and growth Flexibility and access to your savings If investments are numerous, significant time may be needed to manage the portfolio Investments are subject to market risk, and earnings will fluctuate The possibility of outliving assets if the market performs poorly and you live longer than you anticipated Investment Portfolio plus Guarantees* Strategy Guaranteed income is generated from the annuity Additional amounts are generated like the scheduled withdrawals listed above Cover essentials with guarantees for your life, or for a set time period Some assets retain the flexibility and access to your savings, and may have growth potential You may want to consider this option if: You want to have confidence that you will receive a certain amount of guaranteed income as long as you live You can maintain a sufficient amount of your assets in more flexible investments in case of unexpected income needs You are healthy and expect to live a long, full life If investments are numerous, significant time may be needed to manage the portfolio Some investments may be subject to market risk, and earnings may fluctuate Limited access to annuitized assets A tool to help Fidelity Income Strategy Evaluator SM can help you explore different strategies when you re ready to begin generating income. Fidelity Income Strategy Evaluator is an educational tool. IMPORTANT: The projections or other information generated by Fidelity s Income Strategy Evaluator Tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Estimates of potential income and assets illustrated by the Tool are in future dollars and are based on data you have entered, product attributes and Income Strategy Evaluator assumptions, including market performance assumptions based on hypothetical scenarios using historical data. Other investments not considered by Income Strategy Evaluator may have characteristics similar or superior to those being analyzed. Numerous factors make the calculations uncertain, such as the use of assumptions about historical returns and inflation as well as the data you have provided. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark which may differ from the diversity of your own portfolio. Results may vary with each use and over time. Fund fees and/or other expenses will generally reduce your actual investment returns and, other than the applicable annual annuity charges for the variable annuity, are not reflected in the hypothetical projections generated by this Tool. 1 For purposes of FDIC insurance coverage limits, all depository assets of the account holder at the institution that issued the CD will generally be counted toward the applicable aggregate limit for each category of account. FDIC insurance does not cover market losses. For details on FDIC insurance limits see 2 Treasury securities are backed by the full faith and credit of the U.S. government. Assumes solvent issuer at maturity. Selling a security before maturity may result in a loss. Most bond funds do not have a maturity date, so holding them until maturity to avoid losses is not an option. Please remember, investing involves risk, including risk of loss. 11

12 Creating a Retirement Income Strategy Decide on a target income mix Once you have decided on your retirement income strategy, you ll need to decide on the types of investments to put your strategy into action. We call that your target income mix (TIM). Fidelity believes that you should consider mixing and matching different types of income-producing investments to meet your retirement income needs. Each type of investment has its own benefits and trade-offs, so you want to select the mix that s appropriate for you. Your target income mix can be made up of one, two, or all three of the following components in various proportions. Component 1: Investment portfolio with regular withdrawals. You take regular income withdrawals from your investments, such as stocks, bonds, mutual funds, CDs, etc. This choice is best for discretionary expenses, because these investments are subject to market risk. This approach still allows for potential growth in your portfolio to help keep up with inflation, but you have to be careful not to withdraw too much too quickly. Component 2: Fixed income annuity. Provides you a guaranteed income payment for life or a specified period of time. Best for essential expenses because it gives certainty of a guaranteed amount of income, even in extended down markets. It works by converting part of your retirement savings (an amount you choose) into a predictable income stream. Component 3: Variable annuity. Guarantees that you will receive payments on a regular basis, but the amount will vary based on market performance. Keeps your savings invested so you have the potential for growth. Like all investments, variable annuities have fees and trade-offs and it is important to research fees and look for highly rated companies. Variable annuities may be a valuable addition to your portfolio and are often used to help manage risk of inflation. Fidelity suggests no more than 50% of your assets go towards annuity purchases so you can have access to those funds for emergency or other needs. And because all annuities guarantees are only as strong as the insurance company providing them, you should consider the strength of the company you select. Principal value, income payments, and investment returns of a variable annuity will fluctuate and you may have a gain or loss when money is received. 12

13 Build Your Own Strategy A Combination Approach Investments that seek income and growth Investments with guarantees Diversified portfolio with systematic withdrawal: Growth and income potential, flexibility, generally lower fees than annuities Fixed annuity: Longevity protection, predicable income Variable annuity: Longevity protection, income growth potential For illustrative purposes only. How ANNUITIES work An annuity is a contract with an insurance company that helps turn a portion of your savings into an income stream. In exchange for a one-time purchase, the issuing insurance company guarantees* that it will pay you or your spouse regular income payments generally for life. Annuities may be appropriate for covering essential retirement expenses, as they can provide you with more certainty that you will be able to meet those items for as long as you live. Having some of your income guaranteed may also help reduce the pressure on other investments in your portfolio to create income, thus giving you flexibility in the rest of your portfolio. Annuities come with many different features to consider to determine if they are right for you. Typically, annuities deliver their maximum financial return to you the longer you live. If you are aware of any condition that might shorten your life expectancy, you may wish to consider other options. When purchasing annuities, it is important that you consider low-cost annuities from highly rated insurers, as high fees can negate many of the benefits of annuities. * Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. 13

14 Summary There are many things to take into account when you create a retirement income plan. We ve covered just a few. This checklist will help you make sure you have the important questions answered. Evaluate your lifestyle. How do you want to live during retirement? The answers will impact your expenses and the ability of your income to cover them. Estimate your income and expenses. You will have essential and discretionary expenses, and different income sources to cover your expenses. You need to anticipate how much of each you will have. Determine your investing priorities. How do you want to invest your savings in retirement? Create a strategy. Choose the components that fit your income needs and investing priorities. Put it into action. Create a target income mix of investments to meet your goals and needs. Review your plan regularly. Revisit your plan once a year, or when you have changes in lifestyle, goals, or financial situation. 14

15 Fidelity Is Here to Help Let Fidelity help you evaluate income-generating strategies available to you, and work with you one on one to help you develop an income plan that can provide a level of security, growth, and flexibility to help you meet your needs. We understand that what you want from your retirement is personal and different from everyone else. We can work with you to gain a clear understanding of your financial situation and goals throughout retirement and see how your retirement income, expenses, and investing preferences align with your lifestyle. Schedule a complimentary one-on-one consultation to discuss your financial goals with a Fidelity representative. Call Fidelity has the tools to help you create your retirement income strategy. Evaluate your anticipated income and expenses and see if you ve saved enough, and how long your assets may last with our Retirement Income Planner at Fidelity NetBenefits. Click on Tools and Learning > Preparing for Retirement > Retirement Income Planner. Create a retirement income strategy and identify a target income mix with our Income Strategy Evaluator at netbenefits.com/incomestrategy.* *Fidelity Income Strategy Evaluator is an educational tool. IMPORTANT: The projections or other information generated by Fidelity s Income Strategy Evaluator Tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Estimates of potential income and assets illustrated by the Tool are in future dollars and are based on data you have entered, product attributes and Income Strategy Evaluator assumptions, including market performance assumptions based on hypothetical scenarios using historical data. Other investments not considered by Income Strategy Evaluator may have characteristics similar or superior to those being analyzed. Numerous factors make the calculations uncertain, such as the use of assumptions about historical returns and inflation as well as the data you have provided. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark which may differ from the diversity of your own portfolio. Results may vary with each use and over time. Fund fees and/or other expenses will generally reduce your actual investment returns and, other than the applicable annual annuity charges for the variable annuity, are not reflected in the hypothetical projections generated by this Tool. Although consultations are one on one, guidance provided by Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions.

16 Guidance provided by Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. The retirement income planning and tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Fidelity Brokerage Services, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI FMR LLC. All rights reserved. RET-WHITE