Just as your life has likely been nothing like your parents’, your retirement probably won’t be either. It’s no longer as simple as signing up for Social Security, collecting your pension, and settling back. You will probably be more active, live and work longer, and need to rely more on what you’ve saved for income. And that means ensuring that this income has the potential to last for your lifetime and to weather rising health care expenses, inflation, and market ups and downs.
While this may sound overwhelming, it doesn’t have to be. First, take the time needed to make a smart choice around how and when to take Social Security, which is an important source of guaranteed income in retirement. (Read Viewpoints: How to get the most from Social Security). Then, turn your focus to creating a diversified income strategy that leverages three types of income-generating investments: fixed-income annuities, variable annuities, and an investment portfolio. Your mix can be made up of one, two, or all three types in various proportions, based on your preferences and income needs.
“Together, these components can work to help provide a stream of guaranteed income1, the potential for growth, some flexibility to refine your plan over time, and protection from market volatility,” explains Fidelity executive vice president John Sweeney.
Creating a plan that includes some guaranteed income is particularly important if you happen to retire when the markets are down or inflation is rising for a prolonged period. The chart below shows that if you had just started taking withdrawals from your retirement investments in 1972 (when the markets were down and inflation was rising), your investment portfolio would have been depleted early in your retirement. The earlier a market downturn happens in retirement, the greater the effect on your portfolio. That’s why it’s important to lock in some guaranteed income for retirement so you can cover essential expenses no matter what the markets do.
Components of a diversified income strategy. We believe it makes sense to use guaranteed income1 from fixed-income annuities and certain types of variable annuities,2 in addition to your Social Security or pension income, to help ensure that your essential expenses (food, utilities, health care, and other must-haves) are covered—even if a bear market hits in the early years. Then you can position your investment portfolio for growth, as well as use it for your discretionary spending (vacations, hobbies, and other nice-to-haves).
“By diversifying your income, you can create an efficient retirement strategy—one that uses the least amount of savings to generate the after-tax income you need,” notes Klara Iskoz, CFA®, vice president in Fidelity Strategic Advisers.