UpFront | Published in June 2012

Not Enough

Income drop in retirement could be 28%

By Tara Cantore | June 2012
Illustration by Brian Rea

American households may experience a drop of 28% in retirement income. Nearly four in 10 retiree households report having inadequate income to cover monthly expenses, according to Fidelity Investments’ Retirement Savings Assessment. These estimated income gaps could force significant sacrifices.

To help improve retirement readiness, Fidelity conducted an analysis that quantifies the benefits of taking five steps, basic to retirement planning. “While there is evidence that Americans are saving more for retirement, our analysis finds that they need to take additional steps to prepare for the future and take better control of their personal economy,” says Kathleen A. Murphy, president of Personal Investing at Fidelity Investments.

Specifically aimed at the Baby Boomers and Generation X, the steps include a mix of strategies applicable to both working or retired investors:

1. Adjust asset allocation. Twenty-one percent of those surveyed are invested too conservatively, with limited exposure to stocks, based on their current age and planned retirement date. This highlights how many investors have improperly allocated­ their assets and are losing the long-term earnings potential of stocks.

2. Increase savings. Respondents indicate they saved an average of $3,500 in 2011, but most still could benefit more from the tax-advantaged, deferred savings potential of their workplace or individual retirement accounts (IRAs). This is especially important for younger investors, who have a longer time frame and more potential for their money to grow.

3. Adjust retirement date. The average planned retirement age is 65, but delaying full retirement by a couple of years or continuing to work part time can help preserve assets so they can last through retirement. This can be especially powerful for Boomers, many of whom potentially face a drop in retired income.

4. Annuitize retirement assets. Fewer than one-fifth of retirees (17%) use an annuity to create a guaranteed lifetime income stream to cover essential expenses, but this financial product can be an important tool to help ensure that savings last through retirement, particularly if a retiree lives beyond his mid-80s.

5. Tap into home equity. Seventy-two percent of respondents own a home and one-third of homeowners (32%) have no mortgage. Through downsizing and expense reduction, home equity could be harnessed to generate income in retirement.

“Most Americans have the potential to get significantly closer to achieving their retirement goals, but they have to take action and consider implementing a mix of these five steps,” Murphy says.

The steps are further detailed in a Fidelity Viewpoints article, “Don’t Take a Lifestyle Cut in Retirement,” which shows how, if implemented, they would help a Baby Boomer and a Gen X household.

A hypothetical example profiles a typical Gen X household, based on that group’s survey responses. This generation reported an estimated need of $4,900 in monthly retirement income. Based on their current household salary of $74,000 and the amount currently saved for retirement, these households will have approximately $3,200 in monthly retirement income—a shortfall of $1,700, Fidelity estimates. After taking all five steps, the Gen X household could completely erase its estimated retirement income deficit.