Americans May Experience Income Drop in Retirement

American households could face an income drop of 28% in retirement. 

Nearly four in 10 retiree households (38%) report not having sufficient income to cover their monthly expenses, according to Fidelity Investments Retirement Savings Assessment. For households that are planning for retirement, estimated income gaps could force significant sacrifices that could include cuts in discretionary expenses.

To help improve Americans’ retirement readiness, Fidelity conducted an analysis that quantifies the potential monetary benefits of five straightforward steps—such as adjusting asset allocation and annuitizing retirement assets. In the context of a comprehensive retirement plan, this analysis can help individuals better understand which steps may make the greatest impact.

“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,” said Kathleen A. Murphy, president, Personal Investing, Fidelity Investments. “The study underscores the importance of early engagement in the retirement planning process and the potential impact these five actionable steps can have in helping address the retirement income gap that many Americans are facing today.” 



Five Steps That Can Improve Monthly Income in Retirement  

Fidelity modeled five steps for three generations (Baby Boomers, Gen X and Gen Y) to determine the potential impact on future retirement income. The steps include a mix of strategies that can be taken whether an investor is working or in retirement:

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 are still not fully benefiting from the tax-advantaged/deferred savings potential of their workplace or individual retirement accounts. 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 have a better chance of lasting through retirement. This can be especially powerful for Boomers, many of whom are facing a potential drop in retirement income.

4) Annuitize Retirement Assets: Fewer than one-fifth of retirees (17%) are using an annuity to create a guaranteed lifetime income stream to cover essential expenses, but it can be an important tool to help ensure savings last through retirement, particularly if a retiree lives beyond his or her 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 said.

To help Americans take improve their current retirement plan, Fidelity released “Don’t Take a Lifestyle Cut in Retirement,” a Viewpoints article. It outlines the five steps and the hypothetical impact of each for a Baby Boomer and for a Generation X household.

A hypothetical example profiles a 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, Fidelity estimates these households will have approximately $3,200 in monthly retirement income—a shortfall of $1,700. After taking all five steps, this household could completely erase its estimated retirement income shortfall.