Overcoming five major retirement challenges

E*TRADE Capital Management, LLC in collaboration with Morgan Stanley Wealth Management1


Summary: Learn common challenges and considerations when planning for retirement income.


While saving for retirement is an important topic, it’s at least as important as what comes next: Your plan of action once you enter retirement. No matter how well you save during the accumulation phase, it’s critical to plan how you convert those assets to income.

Here are five challenges to recognize and ideas to help plan for them.

1. Life expectancy

According to the Society of Actuaries, a man in his mid-50s today has about a one-in-three chance of reaching age 90, while a woman of the same age has a roughly 50% chance.2 This means that you may very well spend as many years in retirement as you did during your career—and the longer you are in retirement, the more money you will need to have saved.

2. Volatility

When it comes to investing, market volatility is par for the course. This can range from typical ebbs and flows to major swings from unpredictable events such as 9/11, the 2008 financial crisis, and the coronavirus pandemic.

3. Inflation

Inflation is the rate at which the prices of goods increase on an annual basis. Even relatively low rates of inflation can have a harmful effect on purchasing power over time. For example, $1,000 today will only be able to purchase $552 in goods 30 years from now, assuming a 2% annual inflation rate. With a 3% rate, that $1,000 will only buy $412 worth of goods. If inflation goes up to 5% or 6%, the results could be more drastic.

For many retirees, higher inflation is especially difficult because they may be living on a fixed income that can’t support rising costs.

4. Taxes

In general, earnings from interest are taxed at ordinary income rates, just like wages. In contrast, earnings from appreciation—known as capital gains—may be taxed at lower rates. Some kinds of investment earnings are partially or completely tax-exempt (like municipal bonds or gains in a Roth IRA3), while investments in retirement plans such as a 401(k) or Traditional IRA are tax-deferred.

If you’re in a high tax bracket, you may want to be especially aware of how—and where—your assets are invested.

5. Leaving a legacy to loved ones

Even if they have enough income to comfortably meet living expenses, leaving a legacy is top of mind for many retirees. Both federal and state taxes can reduce the amount you hope to pass on.

Tips for living in retirement

A once-common strategy was to reallocate investing portfolios from predominantly equities to predominantly fixed income and to live on the interest generated by these holdings. With today’s interest rates near record lows and life expectancies expanding, this strategy may no longer be realistic.

Here are some ways to help address the challenges discussed above.

Limit withdrawals

One potential retirement income strategy is the “4% rule of thumb.” By withdrawing 4% a year from retirement assets, investors may avoid depleting their nest egg for approximately 25 years. The 4% comes from a statistical analysis technique called Monte Carlo simulations. This strategy, however, is not foolproof. There’s always the chance that you could live longer than 25 years post-retirement.

In a time when guaranteed retirement income for most people is limited to Social Security, this 4% rule may not be viable for every investor. Certainly, it offers benefits. You can invest in whatever you want and withdraw more than 4% on occasion, if your investments are performing well. But will you have the discipline to reduce withdrawals in years when the market declines? And will you be lucky enough to avoid losses in the early years of your retirement?

Identify sources of guaranteed income

Another idea that may make sense for at least part of a retirement nest egg is variable annuities. Issued by insurance companies, variable annuities offer a variety of professionally managed investment options. Like a 401(k) plan or IRA, assets in a variable annuity grow tax-deferred until they are withdrawn by the contract owner. When the time comes to retire, you can elect to receive life contingent income distributions. Depending on the specifics of the rider you select, you may be able to receive income that is guaranteed to last for as long as you live.

Consider how you’ll pay for care

Nobody wants to think about having to rely on others for care, but it’s essential to plan ahead for such a possibility, especially later in life. The cost of long-term care services—whether provided in the home, at a community facility, or in a nursing home—may not be covered under major medical plans or Medicare and often exceed what the average person can pay from income and other sources, particularly in retirement.

One alternative to paying entirely out of your own pocket is long-term care insurance. By paying an annual premium, you can transfer the risk to an insurance company and help protect your assets from the rising cost of care. Life insurance or annuities with a long-term care rider are another option for helping to pay for these expenses.

Bottom line: There’s more than one way to overcome retirement challenges. The first step is to recognize them so you can plan ahead with optimism and confidence.

The source of this Morgan Stanley article, Overcoming Your 5 Biggest Retirement Challenges, was originally published on February 7, 2022.

  1. The views expressed in this article are from Morgan Stanley Wealth Management. The original content has been modified for E*TRADE Securities and E*TRADE Capital Management, LLC audiences.
  2. Society of Actuaries, 2019
  3. Earnings in a Roth IRA grow tax-free and distributions are tax-free as long as they are considered qualified.  If 5 years have passed since the tax year of your first contribution to a Roth IRA and you meet certain criteria such as being 59½ years old, then you have met the requirements for a qualified distribution.

This material has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies discussed in this material may not be appropriate for everyone.

Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the variable annuity contract and the underlying investments, which should be considered carefully before investing. Prospectuses for both the variable annuity contract and the underlying investments are available from the issuing insurance company. Please read the prospectus carefully before you invest.

Variable annuities and insurance products are offered in conjunction with Morgan Stanley Smith Barney LLC’s licensed insurance agency affiliates.

All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.

Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk and possible loss of principal.

Withdrawal and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty. Early withdrawals will reduce the death benefit and cash surrender value.

If you are investing in an annuity through a tax-advantaged retirement plan such as an IRA, you will get no additional tax advantage from the annuity. Under these circumstances, you should only consider buying an annuity because of its other features such as lifetime income payments and death benefit protection.

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