U.S. workers are living longer, and those extra years are running up against declines in the types of retirement income guaranteed to last as long, like Social Security and defined-benefit pension plans, according to a report issued today by the Fidelity Research Institute.
Fidelity estimated the “guaranteed income gap” could total billions of dollars a year and said the problem is compounded by the fact that workers underestimate how long they’re likely to live.
Fidelity’s research shows that on average, retirees estimate that their savings need to last until age 85, while pre-retirees think their savings need to last until age 83. In fact, a healthy 65-year-old man has a 24% chance of living to 90 and a healthy 65-year-old woman has a 35% chance of reaching 90.
In order for retirees to have enough money to last their lifetimes, when they’re deciding how to invest their savings, they should consider “lifetime income products,” like annuities, in addition to stocks and bonds, Fidelity argued.
It includes in that category not only income annuities and variable annuities, but also systematic withdrawal plans, in which retirees draw down a fixed percentage of their savings each year.
Fidelity noted that the amount a retiree has saved will have a bearing on which option is best. Retirees who have to withdraw only a small portion of their savings each year to pay the bills may not need to incur the additional costs of buying some type of annuity, the report says, but those who will need to withdraw a moderate or large portion of their savings each year can probably benefit by buying some type of annuity.
Retirees face ‘guaranteed income gap,’ Fidelity warns - Financial Week