For investors looking forward to retirement, it’s both the best and worst of times. On the bright side, longevity gains mean that people are living longer than previous generations. A 65-year-old couple, for example, has a 74% chance that at least one of them will live to see age 85.1 However, the cost of living in retirement is also climbing. Because the retirement age has stayed relatively constant over time, retirement is lasting longer, and costing more, than ever before. To help avoid outliving their assets, investors may need to plan carefully.
Understanding the Cost of Living in Retirement
Nearly half of retirees polled by the Employee Benefits Research Institute reported that their healthcare expenses are higher than expected, and 37% said their other retirement expenses are higher than expected.2 This is understandable given the precipitous climb in healthcare costs after age 65. Moving to an assisted living facility or nursing home, or hiring in-home care, can add to retirement expenses.
Paying for Retirement
Less than a third of retirees report that they work in retirement, which leaves those coping with high expenses resorting to adjusting their budgets, cutting costs where possible, and drawing down on savings and investments. Social Security can replace a portion of lost earnings—as much as 25% for higher earners. Delaying the date at which investors begin to draw on Social Security until after their full retirement age can increase the benefit.
We created our chart book, Talk, Plan, Act: Guiding Your Clients to a Secure Retirement, so that advisors can engage with clients who aren’t fully aware of what to expect, or what they need to consider to pursue the goal of a financially secure retirement. The chart book offers approachable education about Social Security, healthcare and housing costs, saving for retirement, and the specific challenges facing women, and is designed to help clients recognize the complex principles and issues relevant to retirement planning.
A Core Portfolio Holding for the Retirement Years
Of course, retirement planning doesn’t end with education. Because people are living longer, investors approaching retirement may want to think about seeking to balance income and growth potential to help prolong the life of their savings. Historically, investment-grade bonds have offered higher income potential than U.S. Treasuries, albeit with greater risk. More importantly, investment-grade bonds have held their value during past periods of market volatility, when stocks and high-yield bonds typically sold off. In our view, these characteristics make them a solid core portfolio holding for investors near or in retirement.
Oppenheimer Total Return Bond Fund4 operates within a risk-controlled framework, employing active sector allocation in its search for diversified sources of risk-adjusted return. Compared with the Fund’s benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index5, the investment team employs a shorter-term investment horizon of 6-12 months to manage for unexpected periods of volatility and help mitigate downside potential.
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- ^Source: Social Security Periodic Life Tables, 2013.
- ^EBRI 2017, Retirement Confidence Survey. No. 431.
- ^For illustrative purposes only. Individual benefits will vary based on earnings history and other factors. Examples in the graphs do not reflect cost of living adjustments (COLA) or inflation. According to SSA.gov, $1,341 was the average monthly Social Security benefit for a retired worker in January 2016. The percentages and amounts in the graphs are from http://socialsecurity.gov/OACT/ProgData/ar_drc.html.
- ^Prior to 6/1/17, the Fund’s name was Oppenheimer Core Bond Fund
- ^The Bloomberg Barclays U.S. Aggregate Bond Index is an index of U.S. dollar denominated, investment-grade U.S. corporate government and mortgage-backed securities. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Fund. Past performance does not guarantee future results.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates or an expectation of rising interest rates in the near future, will cause the values of the Fund's investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at or near historic lows. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Below-investment-grade (“high yield” or "junk") bonds are more at risk of default and are subject to liquidity risk. Mortgage-backed and asset-backed securities are subject to prepayment risk. Derivative instruments entail higher volatility and risk of loss compared to traditional stock or bond investments. Diversification does not guarantee profit or protect against loss.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.