Retirement Thumb rules

If you’re nearing or in retirement, it’s important to think about protecting what you’ve saved and ensuring you’ll have enough income throughout your retirement. After all, you worked hard to get to your “someday.” 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 five rules of thumb 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.

According to Fidelity’s annual retiree health care costs estimate, the average 65-year-old couple retiring in 2015 will need an estimated $245,000 to cover health care costs during their retirement, and that is just using average life expectancy data.¹ Many people will live longer and have higher costs. And that cost doesn’t include long-term care (LTC) expenses.

According to the U.S. Department of Health and Human Services, about 70% 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. The average private-pay cost of a nursing home is about $90,000 per year according to MetLife, and exceeds $100,000 in some states. Assisted living facilities average $3,477 per month. Hourly home care agency rates average $46 for a Medicare-certified home health aide and $19 for a licensed non-Medicare-certified home health aide.

Consider: Purchase long-term-care insurance. The cost is based on age, so the earlier you purchase a policy, the lower the annual premiums, though the longer you’ll potentially be paying for them. Read Viewpoints: "Long-term care: challenges and changes."

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 An HSA offers a triple tax advantage: You can save pretax dollars, which can grow and be withdrawn state and federal tax free if used for qualified medical expenses—currently or in retirement.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: "Three 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 suggest 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 just over $1,335 a month, it may not cover all your needs.² Read Viewpoints: "Longevity and your retirement" and "How to get the most from Social Security."

Consider: To cover your income needs, particularly your essential expenses, such as food, shelter, and insurance, that aren’t covered by other guaranteed income from Social Security or a pension, you may want to use some of your retirement savings to purchase an annuity. It will 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.³ Read Viewpoints: "Smart retirement income strategies."

3.	Be prepared for inflation.

Inflation can eat away at the purchasing power of your money over time. This affects your retirement income by increasing the future costs of goods and services, thereby reducing the purchasing power of your income. Even a relatively low inflation rate can have a significant impact on a retiree’s purchasing power.

Consider: Social Security and certain pensions and annuities automatically 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), and Treasury inflation-protected securities (TIPS), real estate securities, and commodities, may also make sense.

The cost of inflation

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

4.	Position investments for growth.

Too-conservative investments can be just as dangerous as a too-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. A strategy that seeks to keep the growth potential for your investments without too much risk may be the answer.

The sample target investment mixes below show a blend 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.

Find an investment mix with the right amount of growth potential and risk for you.

Data Source: Ibbotson Associates, Inc., 2015 (1926–2014). Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent the actual or implied performance of any investment option. Domestic stocks are represented by the S&P 500^® Index. The S&P 500® Index is a registered service mark of The McGraw-Hill Companies, Inc., and is a widely recognized, unmanaged index of 500 U.S. common stocks. Bonds are represented by the U.S. Intermediate-Term U.S. Government Bond Index, which is an unmanaged index that includes the reinvestment of interest income. Short-term instruments are represented by U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government. It is not possible to invest directly in an index. Stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuation than stocks but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are generally only slightly above the inflation rate. Foreign stocks are represented by the Morgan Stanley Capital International Europe, Australasia, Far East Index for the period from 1970 to the last calendar year. Foreign stocks prior to 1970 are represented by the S&P 500^® Index. 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 that 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. These target asset mixes were developed by Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company.

Consider: Have 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 help you seek 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 with our Planning & Guidance Center (login required).

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 you can enjoy your someday through 20–30 years of retirement, aim to withdraw no more than 4%–5% from your savings in your first year of retirement, then adjust that percentage for inflation in subsequent years.

Consider: Keep your withdrawals as conservative as you can. Later on, if your expenses drop or your investment portfolio grows, you may be able to raise that rate. Read Viewpoints: "How can I make my savings last?"

You can do it

After spending years building your retirement savings, switching 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 five key risks to your retirement income.

Learn more

• Create or fine-tune a retirement income plan in our Planning & Guidance Center (login required).