A new study on retirement readiness suggests that most pre-retirees seriously underestimate the number of years they will be retired and thus the amount of savings they will need to last them through those years. For example, the average pre-retiree believes he will need to make his retirement savings last until age 83. However, a healthy 65 year-old man living today has a 24% chance of living to at least age 90, while a healthy woman of the same age has a 35% chance of living until 90.

As a result, a “guaranteed income gap” will be faced by those people in retirement, as guaranteed income sources replace less and less of their pre-retirement income. The study, conducted by the Fidelity Research Institute and written by the Institute’s Van Harlow and professor Moshe Milevsky of York University, forecasts that those guaranteed income sources, like Social Security and pensions, will replace less than 30% of the average pre-retiree’s income by the 2030s, compared to the current 39% replacement rate.

The challenge for consumers and their advisors is to plan for retirement knowing that they will have “a much smaller [safety] net to catch them if they make a planning mistake,” notes Harlow. The report, Structuring Income for Retirement, then assesses three different income-generating vehicles and their place in the retirement portfolio, and using a “retirement sustainability quotient,” proposes five guidelines for building a “sustainable” retirement portfolio:

1. Retirement income plans should not only consider asset allocation but also income products that can offer longevity insurance, inflation hedging, and assured

payment streams.

2. When income products are being considered, investors should clearly understand

that there are trade-offs between guaranteed lifelong income and inflation

protection versus such values as investment control, liquidity, fees, and costs and

the potential size of bequests to heirs.

3. Those who have sufficient assets to sustain retirement incomes at very low rates of

withdrawals may find that the additional longevity insurance they might gain by

buying annuities or other income products costs more (in terms of much-reduced

estates) than it is worth (in terms of minimally increased sustainability).

4. Those who need to draw higher percentages from their nest eggs may, by contrast,

find that committing a portion of their assets to income products can substantially

increase the sustainability of their retirement income plans–albeit at the cost of

reducing any possible bequests.

5. Retirement income plans have a core trade-off: higher income or bequest targets

mean lower chances for success. Higher targets for income or bequests generally

also suggest larger allocations to variable annuities with guaranteed minimum withdrawal benefit features or to traditional systematic withdrawal plans.

Finally, the authors call for continued education and research on income

products and” innovation centered on making these products more flexible, transparent, and cost-efficient.”