How can I help make my retirement income last?

If you're currently retired or getting close to it, you have less time to recover from fluctuating markets and economic uncertainty. Will your money last? Should you reduce your exposure to stocks? If you got out of the market, when should you get back in? These are likely some of the questions going through your mind.

To help answer these questions Fidelity "ran the numbers" using a hypothetical retired couple. We examined the impact of changes that they can make to their investment mix or lifestyle to help make their savings last during a market downturn.

Using Fidelity's Retirement Income Planner¹ (log in required), Bob and Lisa found that with this strategy, their original portfolio had an 89% chance of lasting for 27 years, until they are 93.

Impact of market volatility

Due to a steep market decline, the couple's portfolio lost about 16% of its value and was down to just below $631,000. The same $32,000 in income that they need from their investments now requires a 5.1% withdrawal rate, which will affect how long their money will last.

Because of the change in their situation, Bob and Lisa need to take another look at their portfolio. Will their original plan still work for them? What can they do to make sure their portfolio can still provide them with the income they need?

The first thing the couple should do is make sure that their investment mix still reflects their risk tolerance. If they've never assessed their tolerance for risk, they should do so. Or, if market events have caused their appetite for risk to change, their investments should be aligned with that.

Fidelity evaluated five common investor reactions to significant market declines and applied them to Bob and Lisa's situation:

1. Make no changes to their investment mix.
2. Rebalance to their original investment mix of 50% stocks, 40% bonds, and 10% cash because the market decline changed their mix.
3. Change their mix to a conservative portfolio—50% bonds, 20% stocks, and 30% cash.
4. Convert to all cash until the market stabilizes, and then back to their original portfolio mix of 50% stocks, 40% bonds, and 10% cash.
5. Convert their entire portfolio into cash and leave it that way.

How long Bob and Lisa's portfolio may last¹

As the chart shows, in average markets, four of the approaches could still come close to meeting their requirements. But if they convert to all cash, they will run out of money before they are 93.

When market returns are poor, however, in each approach their money would fall significantly short of what they need. If they want to be more confident that their money will last, there is more they can do in addition to adjusting their investment mix. They can also consider the following lifestyle changes:

• Delay Social Security payments— This strategy will typically mean higher payments later in retirement. And the longer they delay (up to age 70), the higher the payments may get.
• Work part time for the first few years of retirement— This may help them cover expenses with earned income, allowing them to withdraw less from assets, thereby preserving more of their portfolio.
• Revisit budgets and withdrawal rates— Reducing yearly expenses by $5,000, and the amount withdrawn from their portfolio to $27,000 from $32,000, may help alleviate the need to sell investments in a down market. It may also leave Bob and Lisa better positioned to reap the benefits of stronger returns when markets recover.
• Skip cost-of-living adjustments— These adjustments are one way of ensuring that income can keep up with rising costs. However, if their goal is to have their assets last, skipping these adjustments and withdrawing $32,000 a year for five years, instead of giving themselves an annual raise, may help in the long run.

The chart below shows how these lifestyle adjustments coupled with changes to their investment mix, may affect how long Bob and Lisa's money may last in a poor market.¹

Impact of lifestyle changes on Bob and Lisa's portfolio

For example, if Bob and Lisa had decided that they wanted to stay in a conservative portfolio, several of the lifestyle changes (skipping inflation adjustments, reducing expenses, or both) will get them to their goal even if markets continue to perform poorly.

If they are adamant about an all-cash portfolio during their full retirement, Bob and Lisa can do it, but they would need to both reduce their expenses significantly ($5,000 in this example) and stick to that lower budget for the next five years. For many investors, this would not be easy.

While an all-cash portfolio may reduce the chances of your money lasting as long as you need it, retirees should consider keeping 3-5 years of living expenses in cash. This will help them avoid having to sell investments in a down market in order to meet expenses.

Ultimately, every person's situation and needs are different, and there is no single strategy or course of action that is right for everyone. These examples, however, show that small changes can make a difference, and a combination of portfolio and lifestyle adjustments may have the best chance of success.

How Fidelity can help

• Evaluate your tolerance for risk and get an appropriate investment mix with Fidelity's Portfolio Review² (log in required).
• Compare your expenses to income, see how long your money may last, and create an income plan with Fidelity's Retirement Income Planner (login required).
• Consider key factors before taking Social Security.
• Learn about guaranteed³retirement paychecks.
• Call (800) 343-3548 to speak with a Fidelity planning consultant about strategies that may be appropriate for you.