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Getting ready for retirement

KNOW WHAT TO EXPECT AND HOW TO PLAN FOR IT

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INTRODUCTION

Whether you’re just starting to think about retiring, or you’ve already begun preparing, we hope this guide will offer a clear, helpful overview of the planning process. We’ve written it to help spark new ideas, start conver- sations with those you care about, and help prepare you for what to potentially expect along the way.

We have more in-depth information to share on all of the topics covered. And of course, we’re always here to talk, answer questions, or help you build a plan that’s right for you.

Hello, and welcome

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CONTENTS

In this book1

Designing your retirement

PAGE 5

2 Creating income

in retirementPAGE 17

3 Preparing for the five forces

PAGE 31

GETTING READY FOR RETIREMENT

Designing your retirement

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Retirement is personal.

And whatever your goals for the future might be, the best way to achieve them is by planning ahead.

A great first step in building that plan is painting a clear picture of the retirement lifestyle you seek, so you can be well prepared for it.

In this chapter, we’ll explore the building blocks of that vision: who you want to be with, where you’ll be living, how you’d like to spend your time, and when you’d like it all to happen.

Thinking through these ideas can help you start connecting the dots between your dreams and your means.

DESIGNING YOUR RETIREMENT

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It’s often the people in life that bring us the most joy. So it’s important to consider the ones you care about most, and how those relationships could affect your plan. For many, this is a mix of family—parents, a partner, children, or grandchildren—as well as friends, community members, and other social circles.

You might have family members you’d like to live closer to, or friends you share hobbies and interests with.

You might want to support the financial needs of loved ones, in retirement or as part of a lasting legacy.

Who you want to spend time with can play an important part in the design of your plan.

Thinking about Who


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Have you given any thought to where you’d like to spend your time during retirement? Your home is likely a key asset, and a core ingredient of your plan.

Some people are happy to stay where they are, in a community and area they’re familiar with. Others have a destination in mind—maybe closer to family or friends. It might be somewhere with a unique culture, climate, or pace of living that suits them. It could even be more than one place throughout the year.

It’s not uncommon for homeowners to look for something with less maintenance, fewer expenses, or better access to medical care.

Wherever you want it to be in the world, “home” is a source of comfort and happiness, and plays an important role in your plan, both emotionally and financially.

Thinking about Where


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Freedom... It can be the best part of retirement. And picturing how you want to spend your time can be helpful when figuring out how you’re going to fund it.

For some of us, retirement is a time to relax with friends and family. For others, it’s a bold new chapter—a chance to chase passions, explore the world, or even start a new dream job.

You might want to travel, take classes, volunteer in your community, or further a special project or cause. It’s entirely up to you.

Whatever you’re passionate about, having a clear idea of the things you’ll be doing and their cost will factor into your plan.

Thinking about What


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The answer of “when to retire” varies: it could be a natural point in your career, or simply when you feel financially ready—or somewhere in between.

Today, the way many people approach retirement is evolving. For some it still means a tangible shift from work to play. But increasingly, it’s a transition from full- to part-time employment, volunteering to stay active, or generating supplemental income.

If you have a specific age in mind—based on your goals, your employer, or other factors—we can use it as a reference point for the elements of your plan.

If you’re not entirely sure about “when,” that’s fine too. We can start with a range of scenarios to figure out the best way forward.

Thinking about When


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Remember, there’s no right, wrong, or “perfect” way to retire—it’s all about what’s right for you and your family. But whatever retirement means for you, planning ahead is the best way to be ready for it.

Retirement planning is a journey, and we can help you think through some of the big (and little) questions along the way.

Once you’ve painted a picture of the lifestyle you envision—the Who, What, When, and Where of retirement—we can help build a plan for How, to realize as much of that vision as possible.

In the next chapter, we’ll cover the process of building an income plan to generate the resources you’ll need.

To-dos

Think about Who

Think about Where

Think about What

Think about When

SUMMARY


Creating incomein retirement

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With a good starting point for your retirement goals and priorities in hand, it’s time to get to work on a detailed plan for funding your vision.

In a nutshell, your “plan” is a blueprint for turning what you own when you retire (your assets) into a secure, steady income that helps pay for all your needs and wants (your expenses) for the rest of your life.

We can help you work through all of the personal factors and decisions in designing your retirement income plan, and adjust or fine-tune it over time. But the goal is straightforward—make the most of what you have now to pay for the things you’ll need and want in the future.

CREATING INCOME IN RETIREMENT

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Retirement isn’t like crossing a finish line, where suddenly all the work of saving and investing is behind you. In fact, it’s more like passing a baton to your assets. They continue working on your behalf, and you pay yourself an income with the resources they generate.

Your financial needs will change over the course of retirement, so you’ll want to put your assets to work in different ways. Having separate streams of income can help give you the room to adapt.

Like building a house, constructing your income plan for retirement is a process. Trying to consider every single factor at once (especially at the outset) can be overwhelming. It’s better to start with the foundation and design your way up.

Putting yourassets to work


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The best way to start is by creating an up-to-date list of your assets. Maybe you own a home, other properties, or a business. Perhaps you have life insurance or even stock options. Then there are retirement accounts, like a 401(k), IRA, or a pension from an employer, as well as Social Security, investment portfolios, personal savings and checking accounts—put them all on the list.

There might also be other sources of income you expect to have in retirement, like rental income from a property, or ongoing payments from a trust. If you don’t have detailed information for everything at your fingertips, don’t worry. Just get a list of your assets together so we can form an idea of what you have to work with. From there, we can work together to get them organized and begin the planning process.

Mapping what you have


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Before you embark on this next phase of life, you’ll want to be confident you have the assets and income to make it work. So next up is a realistic estimate of how much your retirement lifestyle may cost.

No one knows exactly what to expect financially for the next 30 years. So a good starting point is to use your current expenses, and adjust them based on what you expect to do in the first few years of your retirement.

Using today as a starting point, we can look out across your retirement timeline to help you build a plan that covers your future expenses.

It helps to break expenses into three categories:

Estimating yourexpenses


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Essential expenses These are your “must haves”: day-to-day costs like groceries, utilities, transportation, health care, and home or rental expenses. In other words, things you’d prefer not to live without.

Discretionary expenses These are the “nice to haves”: activities like hobbies, travel, and dining out, or purchases like a vacation home or a new vehicle.

Emergency expenses This is your “rainy day fund”: for surprises like a leaking roof, or an unforeseen health issue. A common rule of thumb is to set aside at least three to six months’ worth of expenses, just in case.

You might also have specific ideas or needs for financially supporting children, grandchildren, or loved ones during retirement or after you’re gone. While this isn’t an expense per se, if you have any goals, list those as well.

Ultimately, your plan can help project much further into your retirement to help cover your future expenses. But a three- to five-year estimate is a good place to start.


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Once you have an accurate snapshot of your assets and a thoughtful estimate of your retirement expenses, you can build the plan that connects the two for the income you’ll need.

You probably won’t live off one single source of income in retirement; you’re likelier to tap a mix of different incomes. A strong plan generally combines guaranteed income with options that provide potential for growth and flexibility—so your nest egg isn’t in any one basket.

Relatively secure assets (like bonds, CDs, and income annuities) can provide a potentially steady income stream for essential and emergency expenses. Assets with growth potential (like investment portfolios) can help offset discretionary expenses and potentially extend your nest egg further into retirement.

Potential incomestreams


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Here are some of the most common sources of income people incorporate into their retirement plans:

Social Security A guaranteed source of income and one of the most important decisions you’ll make in terms of timing. You’re eligible to start collecting benefits at 62, but if you wait until your full retirement age (65–67, depending on the year you were born) or even later, you’ll get a higher monthly benefit. So the date you start collecting should factor into your overall strategy.

Tax-deferred investment accountsYour 401(k) or IRA will begin to bear fruit after all those years of contributions. The date you can begin taking penalty-free withdrawals will depend on your age, your account, and your employment status. At age 72,* the government requires you to take annual withdrawals referred to as required minimum distributions, or RMDs for short. There are costly penalties if you miss these deadlines, so make sure you factor RMDs into your plan.


* The change in the RMD age requirement from 70½ to 72 applies only to individuals who turn 70½ on or after January 1, 2020. Please speak with your tax advisor regarding the impact of this change on future RMDs.

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Investment portfolio withdrawalsWithdrawing from your portfolio is often part of the mix. A common rule of thumb is to withdraw no more than 4% per year from your portfolio. Of course, how much you choose to withdraw is personal, and will vary depending on how you need to use that money. Withdrawals from an investment portfolio are often used for discretionary expenses.

An employer-sponsored pension Depending on the type of career and employer you had, a pension may be part of your plan. Pensions typically provide a secure, steady income stream for retirement expenses. The amount of monthly benefit depends on your employer and the specifics of the plan, which often factor in age, salary, contributions, and years of service.

Income annuities Income annuities can be used to cover essential expenses though a guaranteed* stream of income for either a set period of time or for the rest of your life. The amount of income you receive can depend on whether you opt for a guaranteed income amount or an income amount that fluctuates based on the performance of the annuity’s underlying investments.

* Annuity guarantees are subject to the claims-paying ability of the issuing insurance company.


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Factor in taxes

Remember, you’ll still be subject to income tax in retirement. Most retirement income is taxed as either wages or capital gains, depending on where it comes from in your plan. So consider including a smart tax strategy to help make the most of your assets over time.

Other income sources Part-time work, real estate rental income, or an ongoing business may play a role in your plan. It’s important to have a realistic sense of how well you can count on any one of them in the short term and further down the road. Some people find they no longer want—or are able—to work as long as they’d originally thought.


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To-dos

Make a list of all your assets

Start to estimate your expenses

Identify your potential income streams

Whatever vision you have for retirement, building an income plan for the resources you’ll need is the best way of realizing it. A good place to start is by mapping out what you have now, then estimating the expenses you anticipate in retirement.

With these points in mind, your plan will lay out how to save and invest to provide a steady, diversified stream of income from multiple sources in retirement. Your plan will adapt over time to balance the need for growth and security, and—to the extent possible—protect you from forces outside your control.

In the next chapter, we’ll discuss those particular forces, how they can affect the components of your plan, and why it’s so important to consider them in your overall strategy.

SUMMARY

Creating income in retirementGETTING READY FOR RETIREMENT

Preparing for the five forces

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Chances are your retirement will be longer and more active than any previous generation’s, so your plan will naturally evolve and adapt over time. But even the most well considered plan is subject to forces beyond your control. Collectively, these forces are like the weather—you can’t control them, but you can prepare for them. So it’s important to build them into your strategy.

PREPARING FOR THE FIVE FORCES

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The good news is, we’re living longer today than ever. But this means your assets may have to provide income for longer than they used to. Being thoughtful about how much you withdraw and spend—especially early in retirement—can have a dramatic impact on how long your money lasts.

However difficult it may be, you may need to modify your spending habits as you plan your retirement lifestyle, to ensure you don’t outlive your savings.

Expect a long life


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Male, 65 years old

50% LIVE TO 25% LIVE TO

Female, 65 years old

Couple,* 65 years old

92

90 96

94 98

85 9387years years

AVERAGE LIFE EXPECTANCYFOR AMERICANS

years years

years years

*At least one surviving individual

Source: Society of Actuaries RP-2014 Mortality Table projected with Mortality Improvement Scale MP-2014 as of 2016.

Note: Figures assume examples are in good health. For illustrative purposes only.

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You’ll need to budget for potential health care costs in retirement (which we can help with), and understand how planning ahead for long-term care needs is an important piece of overall retirement planning.

Long-term care needs can look different for everyone. Many people think of long-term care as only medical care, like nursing homes. It actually includes a wide range of services, including helping with the basic personal tasks of everyday life. These can include things like bathing, dressing, or eating, plus other tasks, such as housework, taking care of pets, or taking medication.

Including long-term care needs as part of your planning can help alleviate stress on you and your loved ones in the future. Planning ahead will help make sure that you and your family have time to investigate the options available to you so there is no need to make hasty decisions as a result of a crisis. Here are some important considerations to help you and your family with your planning discussions:

Plan for health care costs

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• Who could you become financially responsible for in your retirement?

• What kinds of health conditions run in your family?• How would you handle a health event?

° What’s your plan for your care?

° Who will make decisions if you’re unable to?

° Do your loved ones know your wishes?

° Can they get to key planning documents?

° Do they know what you expect them to do?• How have you prepared your (spouse/partner) to

manage your household’s finances?• Would your loved one know who to contact if something

happened to you?

You will also need to understand the role Medicare will play in your overall health care expenses. Because costs are outpacing inflation, options like employer-sponsored insurance and Medicare may not be enough for your needs.

There are a number of ways to cover these costs, like buying a long-term insurance policy, spending your existing savings, or investing in a Health Savings Account (HSA for short). HSAs are tax-advantaged investment accounts that grow tax free from year to year so long as the withdrawals are spent on qualified medical expenses. HSAs are only available to those who are enrolled in a high-deductible health plan.

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HOME CARE

per hour

per month per year

ASSISTED LIVING NURSING HOME

$4,000 $100,375

ESTIMATED HEALTH CARE COSTS TO CONSIDER

$22

Source: Genworth 2018 Cost of Care Survey Note: Figures based on national median.

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Remember when a movie ticket only cost $4 instead of $8? Then you know firsthand the effects of inflation. If prices can change that dramatically in just 20 years, imagine how inflation might affect the buying power of your money over the long term of your retirement.

As you build your income plan, it’s important to include some investments with growth potential that help keep up with inflation throughout the years.

Consider the“inflation” effect

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Source: United States Department of Labor, Bureau of Labor Statistics, www.bls.gov/charts/consumer-price-index/consumer-price-index-average-price-data.htm, (April 10, 2019). Note: Figures based on national average.

Dozeneggs

IMPACT OF INFLATION ONEVERYDAY EXPENSES

Gallon ofgasoline

$1.54

$1.01

1lb loafof bread

0.

$0.88

$1.26

$0.99

$2.56

1999 2019 1999 2019 1999 2019

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Market declines are one thing when you’re still saving and investing during your working years. But they can be especially challenging when you’re relying on what you have saved to last the rest of your life. As you approach retirement, it’s tempting to invest conservatively for fear of market volatility, but as you can see from the chart opposite, you could be missing growth opportunities that offset inflation and other costs.

A well-rounded income plan has a strategic balance of guaranteed income sources and investments with growth potential—and rebalances over time to meet your needs.

Ride marketups and downs

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S&P 500® ACTIVITYOVER 20 YEARS

+264

%

+90%

1997

02,

000

3,00

01,

000

2017YEAR

U.S

. MA

RK

ET V

ALU

E ($

)

2007

–46%

–16%

+17%

+5

9%

–53%

Source: Fidelity Investments, December 31, 2017. Past performance is no guarantee of future results.

The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The S&P 500® Index is a registered service mark of The McGraw-Hill Companies, Inc. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks that includes the reinvestment of dividends.

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To make certain you enjoy a comfortable retirement, you need to understand your sources of income and retirement expenses, and put together a plan for how much, and when, you will withdraw your savings. Establishing what will essentially be your paycheck in retirement is a critical decision. Your annual withdrawal rate—especially early in retirement — can impact how long your money may last.

As the chart on the next page shows, the less you withdraw each month, the longer your savings could last in retirement. A good rule of thumb is to withdraw no more than 4% to 5% of your savings in the first year of retirement, and then adjust the amount every year for inflation.

Your withdrawal rate should be looked at in conjunction with other potential income streams, such as your investments, Social Security, real estate, and, perhaps, work in retirement. The more income you could have in retirement, the lower your withdrawal rate might be, which gives your savings the potential to grow.

Remember, a withdrawal rate of 4% to 5% is just a starting point. Your retirement date, investment mix, savings at retirement, and spending plans—all play a role in figuring out the right number for you.

Withdrawal rates

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10070 80 90AGE

VA

LUE

OF

PO

RTF

OLI

O (

$)

02,

000K

500K

1,00

0K1,

500K

4%Withdrawal

Rate

5%Withdrawal

Rate

6%Withdrawal

Rate

WITHDRAWAL RATES CAN SIGNIFICANTLY EXTEND THE LIFE OF A PORTFOLIO

Hypothetical value of assets held in a tax-deferred account after adjusting for monthly withdrawals and performance. Initial investment of $500,000 invested in a portfolio of 50% stocks, 40% bonds, and 10% short-term investments. Hypothetical illustration uses historical monthly performance, from Ibbotson Associates, for the 35-year period beginning January 1972: stocks, bonds and short-term investments are represented by the S&P 500® Index, U.S. intermediate-term government bond, and U.S. 30-day T-Bills, respectively. Initial withdrawal amount based on 1/12th of applicable withdrawal rate multiplied by $500,000. Subsequent withdrawal amounts based on prior month’s amount adjusted by the actual monthly change in the Consumer Price Index for that month. This chart is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results.

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To-dos

Ask yourself: do people in your family tend to live a long time?

Consider a long-term care insurance policy

Consider investments that are well balanced, and offer

a level of growth potential and flexibility

As you look ahead to retirement, remember that some forces affecting your finances—like longevity, health care costs, inflation, market performance, and withdrawal rates—are largely beyond your control.

But that doesn’t mean you can’t be proactive; we can help you build a plan that takes these forces into account, can adapt over time, and keeps you prepared for what’s to come.

SUMMARY

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To sum it all up, your retirement assets and expenses should factor into a carefully crafted plan that can adapt over time to provide a steady, diversified stream of income, so you can fulfill as much of your retirement vision as possible.

We hope this guide has been helpful in understanding the planning process. Remember, planning for retire-ment is a journey, and wherever you are along the way, we’re here to help.

Whatever your retirement vision might be, we’re happy to share more information, discuss your needs and goals, and work together on a plan that’s right for you and your family.

Thanks for reading!

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We’d be happy to help you get prepared for retirement. Please feel free to call us, or meet with us in person.

Fidelity.com/gettingreadytoretire

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Keep in mind that investing involves risks. The value of your investment will fluctuate over time and you may gain or lose money.

The tax information and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Fidelity Brokerage Services LLC, Member NYSE, SIPC. 900 Salem Street, Smithfield, RI 02917 726767.6.0 1.9879071.103 © 2020 FMR LLC. All rights reserved.

http://www.fidelity.com/gettingreadytoretire

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