My grandfather lived to the ripe old age of 89. This was especially notable because when he was in his 30’s he suffered a serious heart attack and underwent open-heart surgery. His long-term prognosis was not good, yet he ultimately went on to live a long and relatively healthy life. In his later years, after his wife passed and his health started to decline, he would often tell me in almost a regretful way that he never thought he would live this long.
This story is becoming increasingly common as life expectancy continues to go up. According to the CDC, 30 years ago the average life expectancy in the US was about 75. Today it is pushing 80. While a five-year swing may not seem that dramatic, when planning for retirement it can be quite substantial. Assuming a static retirement age of 65, this five-year increase amounts to a 33% increase in the amount of time your retirement savings must last. That means more must be saved or less must be spent to avoid running out.
According to the Social Security Administration, a married couple who both reach age 65 today has about a fifty percent chance that one spouse will live to age 90. That means many retirees must prepare for 25 years or more of retirement, a length of time that most older financial plans may not have planned for.
With the continued advances of AI and biotechnology there is a high likelihood that this trend toward longer lifespans will only increase further. That’s why I would argue the biggest retirement risk seniors face today isn’t market volatility or inflation, it’s the simple fact that retirees may live much longer than they can reasonably expect their savings to last.
That’s why when working with an advisor it’s important that their plans take a realistic approach to life expectancy. As a general rule, we typically build retirement plans assuming our clients will live to age 92. One of the first things clients often want to do if their plan is not projected to be successful is reduce expectancy age. This, in my opinion, is unwise. A healthy 65-year-old today actually has a life expectancy in the mid-80s, and many will live well into their 90s.
Since dying earlier is never a good financial strategy, the question becomes: what else can be done to ensure you don’t outlive your money?
First, you should consider working past age 65. Maintaining an income longer not only allows you to save more for retirement but also allows you to delay the start of Social Security benefits, increasing your lifetime guarantee from the program.
Second, even in retirement you might consider a more growth-oriented investment portfolio that increases your equity exposure. Historically, greater equity exposure has often produced higher long-term returns, albeit with an increased likelihood of volatility and risk.
Third, retirees must be very mindful of withdrawal rates. A general rule is to never take out more than 4% annually from your retirement accounts, but if you can live on even less than that, it increases your chances of not depleting them early.
Finally, protecting yourself from large healthcare expenses by purchasing long-term care insurance can also help you make your savings last if you or your spouse ultimately need care for an extended period of time.
Living longer is a gift, but it is one that requires thoughtful preparation. Because while none of us can predict exactly how many years we have left, making sure we are financially prepared for them may be one of the most important steps we can take.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)