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Preserving One’s Standard of Living in Retirement

Chances are good you’re familiar with individual strategies for filling income gaps in later life: saving more at work or cutting household expenses, among other steps. But carefully combining a handful of these efforts could be the best way to reach your retirement goals.

That’s the argument that Fidelity Investments makes in a paper and survey published last week: “Don’t Take a Lifestyle Cut in Retirement.” The report notes that the average worker expects to face a 28% income shortfall after leaving the office. That recognition, not surprisingly, is prompting many Americans to take individual steps – such as delaying retirement – to shore up their nest eggs.

A more effective approach, Fidelity says, is to combine five well-known strategies – two during your savings years and three just prior to, or in, retirement. In doing so, workers give themselves a better chance of achieving their desired lifestyles after age 60.

The five strategies: adjusting asset allocation; increasing contributions to a workplace savings plan; delaying full retirement; annuitizing a portion of your portfolio; and downsizing your home.

Fidelity begins its analysis with two hypothetical investors: Brett, age 37, with an anticipated monthly shortfall in retirement of $1,700, and Sam, age 55, with a monthly shortfall of $2,100. Adjusting asset allocation alone or simply saving more at work will help each individual somewhat. (Most participants in Fidelity’s survey were investing “more conservatively than a potential age-based allocation would suggest – with low, or even no, stock exposure in their portfolio.”)

But combining the two strategies could boost Brett’s monthly income an estimated $1,200 in retirement, and Sam’s an estimated $750 – more than the sum of the two steps taken individually. In this case, nest eggs have the potential to get bigger faster when a more growth-oriented portfolio is coupled with a higher savings rate.

Similarly, when all five strategies are employed, each investor in Fidelity’s scenarios could end up with an estimated gain of about $1,700 a month. That would still leave Sam (the baby boomer) with a relatively modest shortfall, highlighting the importance of adopting an age-appropriate asset allocation and increasing your savings rate as early as possible.

Yes, embracing all five strategies is challenging. But attacking possible income shortfalls in later life on multiple fronts – instead of just one or two – could make for a more rewarding retirement.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.