Retirement Income Strategies

Retirement income strategies are not just for the wealthy. As retirement nears, the traditional strategy has been to move growth-seeking products to more conservative, fixed-income products. According to a recent study, for a married couple age 65 there is now a 50 percent chance that at least one spouse will live to age 94. This means that you may need to plan for your retirement savings to potentially last 25 to 30 years.

One drawback to a longer life is the greater possibility of outliving your savings — creating all the more reason to develop a retirement income strategy designed to last a longer lifetime. Sixty-one percent of Americans surveyed said they were more afraid of outliving their assets than they were of dying.

A significant loss in the years just prior to and/or just after you retire could negatively impact the level of income you receive over the course of your life. In fact, if a loss occurs earlier in life, there is also the chance that you may have more time to recover (versus a loss occurring later in retirement). Why? Simply because a smaller pool of assets is left to sustain you throughout your retirement years, and your assets may not have as much time to recover.

Here are some risks uniquely felt by retirees that should be addressed with your retirement income plan:

  • Reduced earnings capacity – Retirees face reduced flexibility to earn income in the labor markets as a way to cushion their standard of living.
  • Visible spending constraint – While investments were once a place for saving and accumulation, retirees must try to create an income stream from their existing assets as an important constraint on their investment decisions.
  • Heightened investment risk – Retirees experience heightened vulnerability to risk once they are spending from their investment portfolio. The financial market returns experienced near one's retirement date matter a great deal more than most people realize.
  • Unknown longevity – The length of one's retirement could be much shorter or longer than a person's statistical life expectancy.
  • Spending shocks – Unexpected expenses could relate to any number of matters, including health and long-term-care needs, fraud and/or theft, an unforeseen need to help other family members, changes in public policy, divorce, changing housing needs, home repairs and rising prescription costs. Retirees must preserve flexibility and liquidity to manage unplanned expenses.
  • Compounding inflation – Retirees face the risk that inflation will erode the purchasing power of their savings as they progress through retirement. With just a 3% average annual inflation, the purchasing power of a dollar will fall by more than half after 25 years.
  • Declining cognitive abilities - A retirement income plan must take into account the unfortunate reality that many will experience declining cognitive abilities, hampering portfolio management and other financial decision-making skills.