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Retirement Income
Learn why planning for retirement income is not the same as retirement planning, and how to prepare for five retirement realities that may affect you.
It’s important to understand that taking income in retirement (distribution) requires a different investment strategy than saving for retirement (accumulation). The table below outlines the key differences:
Accumulation
Distribution
Emphasis on return
Emphasis on income and capital preservation
A focus on creating a personalized investment portfolio
A focus on creating a total retirement income plan
Time horizon clearly defined, yet adjustable
Time horizon unknowable and not adjustable
Impact of market declines is more manageable
Impact of market declines is less manageable
Inflation managed by wage growth
Inflation managed through investment choices
Learn about the five retirement realities and ways that you can work with your financial professional to reduce their impacts:
Longevity: “Will My Money Last?”
Perhaps more than any other factor, longevity has changed the very concept of retirement. People are living longer than ever thanks to advances in science, medicine and healthier lifestyles. This is great news, but longer lifespans mean we must also plan — and save — for extended time horizons.
Longevity Risk: Married Couples, Age 65
Calculations based on Society of Actuaries, 2012 Individual Annuity Mortality Tables, Basic.
How You Can Plan for This Retirement Reality:
- While lifespan is unknowable, there are some available data to help you plan ahead. Use the life expectancy calculator at ssa.gov to get an estimate of your potential lifespan.
- Depending on your needs and risk tolerance, your financial professional can develop an investment plan designed to extend the life of your money and will make adjustments as needed to help sustain assets over the long term.
Market Volatility Over the Past 20+ Years
Standard & Poor’s 500 Composite Index is a measure of 500 commonly held large U.S. stocks. Results for the S&P 500 Index assume reinvestment of all distributions. Results do not reflect sales charges. The market index is unmanaged and therefore, has no expenses. Investors cannot invest directly in an index.
Source: S&P 500
The S&P 500 Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2019 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.
How You Can Plan for This Retirement Reality:
- Work with your financial professional to develop a diversified retirement income strategy that can help you weather the ups and downs of the marketplace.
- Remember that volatility — the ups and downs of the market — is an inherent part of investing. In challenging times, it’s helpful to maintain a long-term perspective. Your retirement could last 15, 20 or even 30 years.
The Effects of Inflation Over 30 Years
Source: U.S. Bureau of Labor Statistics, Consumer Price Index — Average Price Data, June 1988 and June 2019
How You Can Plan for This Retirement Reality:
- Be aware of the role of inflation on your future purchasing power. You may not have noticed inflation during your working years because you may have received a cost-of-living increase in your salary.
- Social Security benefits generally increase with inflation. Talk to your advisor about the potential benefits of delaying Social Security payments.
- Work with an advisor to develop a strategy for you with investments that will help keep you ahead of inflation.
Average Annual Expenditures by Age Group
Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, September 2018
Although total consumption generally decreases in retirement, keep in mind:
- Amounts represent averages only.
- Inflation is not taken into account.
- Medical costs can be much higher depending on the client’s health.
How You Can Plan for This Retirement Reality:
- Discuss your needs, goals and desires in retirement with your advisor, who can help you estimate what you’ll need.
- Work with your advisor to develop a strategy designed to help you live the lifestyle you’d like, while reducing the chances of outliving your savings and maintaining an emergency fund for unexpected expenses.
Rising Health Care Costs in a Typical Retirement
Source: U.S. Bureau of Labor Statistics, Consumer Expenditures Survey, September 2018
How You Can Plan for This Retirement Reality:
- Work with your advisor to develop a retirement income strategy that factors in your insurance coverage options and the rising cost of health care.
- The simplest defense against rising health care costs is to stay healthy! Be sure to take good care of your health and get regular exercise.
ABOUT AMERICAN FUNDS
Teamwork Built on Individuality
Multiple perspectives come together to inspire better results.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
S&P/TSX Composite Index is a market capitalization-weighted index that is the headline index and the principal broad market measure for the Canadian equity markets. It includes common stocks and income trust units.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.