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

This chart displays the probabilities of survival beyond age 65 for one spouse in a marriage. The first column shows ages above 65, and the second column shows their probability of survival to that age. The probability rate of one spouse surviving until age 75 is 98.8 percent. The probability rate of one spouse surviving until age 80 is 95.7 percent. The probability rate of one spouse surviving until age 92 is 55.8 percent. The probability rate of one spouse surviving until age 97 is 25.4 percent. The probability rate of one spouse surviving until age 100 is 11.9 percent.

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 Shocks: “What if the Market Drops?”

During your working years, there may be enough time to recover from market downturns, but the story changes when you enter retirement, particularly if a series of poor results occurs early on in the distribution phase.

Market Volatility Over the Past 20+ Years

This line chart shows the frequent ups and downs of the S&P 500 by plotting its monthly returns 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 © 2020 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.

Inflation: “What Will My Money Buy?”

You can see the effects of inflation in your everyday life. For example, the average cost of a gallon of gas was $1.15 in 1989. In 2020, it was $2.14. Imagine how much it will cost 30 years from now.

The Effects of Inflation Over 30 Years

This bar chart shows how prices have risen over the past 30 years on everyday items such as eggs, which increased 66% from $0.94 to $1.55 a dozen; gasoline, which increased 86% from $1.15 to $2.14 a gallon; bread, which increased 122% from $0.66 to $1.47 a pound; and orange juice, which increased 27% from $1.85 to $2.36 for a 12 oz frozen concentrate.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index — Average Price Data, June 1989 and June 2020

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 financial professional about the potential benefits of delaying Social Security payments.

  • Work with a financial professional to develop a strategy for you with investments that will help keep you ahead of inflation.

Consumption: “Can I Continue to Enjoy This Lifestyle?”

Worrying about money is not how you want to spend your retirement; therefore, it’s important to consider how much you’ll have to spend on a monthly or annual basis to understand what it will be like to live within your means.

Average Annual Expenditures by Age Group

This chart shows how much money is spent on expenditures for housing, transportation, health care, personal insurance & pension, food, apparel & services, entertainment and miscellaneous by adults in the following age brackets: under 25, 25-34, 35-44, 45-54, 55-64, 65-74 and 75 and older. As a person enters and moves through retirement, the amount of money they spend on housing, transportation, personal insurance & pension declines, while health care expenses rise.

Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, September 2019

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 financial professional, who can help you estimate what you’ll need.

  • Work with your financial professional 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.

Health Care: “Will Medical Costs Deplete My Savings?”

The rising cost of health care is “the most significant threat to the long-term economic security of workers and retirees,” according to the Social Security Advisory Board.

Rising Health Care Costs in a Typical Retirement

The chart shows how health care costs as a percent of annual spending increased from 5.5% for 25-34 age bracket to 6.4% for 35-44 age bracket to 6.9% for 45-54 age bracket to 8.6% for 55-64 age bracket.

Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, September 2019

How You Can Plan for This Retirement Reality:

  • Work with your financial professional 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.

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