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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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