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Planning for a Longer Retirement: Why Underestimating Longevity is Risky

When it comes to saving for retirement, the goal is to ensure you have enough income to cover your needs from the time you stop working until you pass away. However, calculating the exact length of retirement can be difficult, and many Americans might be underestimating how long they’ll need to stretch their savings.

We aim to make things easier by sharing tips and guides. Plus, we also offer this Retirement Calculator that can help plan your retirement.

The Average American Retirement

According to the National Center for Health Statistics, the average American lives to 77½ years old. For those born after 1960, full Social Security benefits are available starting at age 67.

Given these statistics, it’s not surprising that many U.S. retirement savers are planning for relatively short retirements.

According to reports, 64% of Americans saving for retirement said they expect to save for 20 years or less, with only 16% planning for a retirement lasting 31 years or more.

While this might seem reasonable based on the averages, there are significant risks associated with underestimating the length of retirement.

The Dangers of Underestimating Retirement Longevity

The main problem with planning for a shorter retirement is that it’s based on two major assumptions that may not hold true:

1. You’ll be able to work as long as you want: Many people expect to work until their desired retirement age, but this isn’t always the case. As people age, they often become more expensive to employ and may be replaced by younger, cheaper workers. In fact, the median retirement age for U.S. workers is 62.

2. You know how long you’ll live: Assuming that you can predict your life expectancy is risky, especially with advances in medical technology that can extend lifespans. Many people don’t account for the possibility of living much longer than expected, which can put a strain on retirement savings.

Planning for Longevity: Advice from Financial Experts

Financial planners advise being cautious when it comes to planning for retirement longevity. The worst-case scenario is running out of money during retirement, which could lead to financial strain, debt, or an inability to afford necessary care. To avoid this, planners typically model retirement outcomes using more conservative assumptions.

We suggest planning as though you could live to 95, 99, or even 100 years old, rather than relying on the average life expectancy. This approach increases the likelihood that your savings will last for the duration of your life.

Safe Withdrawal Rates in Retirement

To ensure your assets last as long as you do, financial planners often recommend following a safe withdrawal rate — the percentage of your retirement portfolio you can withdraw each year without depleting it too quickly.

The traditional guideline is to withdraw 4% of your portfolio’s value in the first year of retirement and adjust that amount for inflation in subsequent years. But, there are several alternatives to the 4% rule.

Also, the right withdrawal rate depends on several factors, such as your other sources of income, how much you’ve saved, your planned spending, and whether you anticipate needing long-term care. Many financial advisors also recommend building flexibility into your withdrawal strategy, such as withdrawing less in years when your portfolio has taken a market hit.

In fact, the opinion on the 4% rule is divided. We talked about this in a previous issue titled ‘The 4% Rule Sucks’.

The Importance of Dynamic Withdrawal Strategies

A dynamic withdrawal strategy allows for adjustments based on your portfolio’s performance, helping you avoid withdrawing too much during market downturns.

We must mention that if you withdraw at a rate faster than your portfolio’s growth, it can quickly deplete your savings.

The key goal is to avoid outliving your savings by managing your withdrawals carefully and staying mindful of how long you may live. Planning for a longer retirement can help ensure that your assets continue to grow and last throughout your lifetime.

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.