The quick answer (and what longevity risk means)

Longevity risk is the possibility of living longer than your retirement savings. It’s one of the core challenges financial planners help their clients protect themselves against. Longevity risk matters more than ever today, thanks to a few key factors:

• Retirements are getting longer.
• Healthcare and living costs are rising.
• Market volatility can work against you.

The good news is that even with this longevity risk, it’s possible to build a portfolio that will last as long as you need it to in retirement.

What is the biggest fear about retirement?

One of the most common fears people have as they plan for retirement is running out of money, and it’s not an unreasonable one. With longer lifespans and fewer pensions to support people, the chances of running out of money in your lifetime are more common than they once were.

Unlike young people, retirees have fewer opportunities to increase their nest egg if they need to. In your 70s and 80s, there’s a good chance you’ve left the workforce, making it hard to build your savings back up. Additionally, you can’t easily access borrowed funds because of your lack of income.

A good retirement plan and a good financial advisor will take into account this very real fear and will take concrete steps to minimize the chances of it coming to fruition.

Why longevity risk is getting bigger for retirees

People are living longer (and retirements can be long)

According to the Social Security Administration, someone in their 60s today can reasonably expect to live well into their 80s. When Social Security retirement benefits were created in the 1930s, it was more common for people to live until their late 50s or early 60s – earlier than the retirement age.

In other words, people 90 years ago often had no retirement at all, while retirees today might live for decades. While there are certainly benefits to today’s longer lifespans, it also requires people to save throughout their entire working years instead of just worrying about retirement later in life.

Inflation and healthcare can stretch budgets

Even low inflation can quickly eat away at your purchasing power over decades. Rising costs have been a major concern for Americans throughout the 2020s, especially retirees. This increase is even more pronounced for healthcare costs.

Not only has the cost of healthcare increased significantly over the past 15 years (up 7.5% from 2022 to 2023 alone), but healthcare needs typically increase as you age, making those costs even more painful.

Market timing and withdrawal pressure

Sequence of returns risk, a phrase frequently used by financial planners, is the danger that a market downturn early in your retirement can create.

Because your portfolio doesn’t have time to bounce back from a market downturn, you’re forced to sell assets at a lower price, permanently reducing your total retirement nest egg. Unfortunately, it’s largely just the luck of the draw – there’s no way to predict or ward against a market downturn when you retire. If you retire in a market downturn, you may be forced to pull from your retirement investments at a less-than-opportune time.

Although you can’t predict when markets will decline, keeping a balanced mix of equities, fixed income, and alternative investments can help reduce the risk of having to sell stocks at an unfavorable time. Regularly reviewing your portfolio and your spending needs ensures that your investment strategy aligns with your risk tolerance and long-term goals.

What causes longevity risk (and why it hits some people harder)

Early retirement and longer time horizon

It’s a simple fact that the earlier you retire, the more years your savings will have to cover. Retiring at 60 instead of 65, for example, adds five additional years of withdrawals that you’ll have to account for, while also reducing the number of years your portfolio will have to accumulate. Private healthcare costs before you are eligible for Medicare should also be considered in your spending need.

In some cases, retiring early can affect your total lifespan. Someone retiring early because of health issues might have a shorter total lifespan, while someone retiring early to leave a stressful work environment might have a longer lifespan.

Whatever the reason for your early retirement, you should plan for those extra potential years.

Underestimating spending

Many people assume their spending in retirement will stay flat or decline when they retire. And while that’s often the case, it’s not true across the board. Retirement often brings new (and expensive) hobbies, such as travel, new activities, or home renovations.

Additionally, spending costs often rise in retirement, which can also affect the overall cost of living.

When you’re making your retirement projections, it’s important to be realistic about your likely spending and consider your desired lifestyle (and its price tag).

Underestimating lifespan in the plan

Many people use the average lifespan when estimating their retirement savings needs. While that’s sufficient for many people, there are plenty who live well past the average, into their 90s or even 100s.

Even if your health and family history make it likely you won’t outlive the average, it’s best to have more than you need rather than less.

Groups that may face higher risk

Longevity risk doesn’t affect everyone the same. For example, women live longer than men on average, but face workforce patterns that may result in less retirement savings and lower Social Security benefits. Everyone must examine their unique longevity risk and the steps they can take to mitigate it.

Build a realistic retirement budget

A well-planned and realistic budget can make a huge difference in helping your savings last longer in retirement. There are a few things you should consider when establishing your budget.

Essentials vs wants vs surprises

A practical retirement budget includes three layers: essentials, wants, and surprises.

Your essentials include your housing, food, utilities, insurance, and other similar expenses. These are non-negotiable costs, meaning they must be in your budget (though it’s possible to reduce them).

Wants are expenses that are bonuses. They contribute to your quality of life, but aren’t essential. These include travel, dining out, and entertainment.

The final category of any budget is surprises. You could face unexpected home repairs, medical events, or other costs at any time, so it’s important to have a plan for those. Some may be covered with your emergency fund, but you also might absorb some into your monthly budget.

Stress-test the plan (good years and bad years)

Your budget likely relies on some key assumptions about market performance and annual withdrawals. While it’s fine to have a best-case scenario in mind, it’s also important to stress-test your budget against bad market years or higher-than-expected inflation.

As you’re creating your budget, consider which expenses could be reduced or eliminated if your withdrawals end up being lower than you hoped. Commit to reducing monthly portfolio withdrawals if any debts such as a mortgage or car loans are paid off. This simple step can add longevity to your portfolio over time and reduce the risk of running out of money.

How long will my retirement savings last?

There’s no one answer to how long your retirement savings will last. The good news is that while there are no promises, there is a reliable framework you can use to think through it.

The 4 inputs that drive the answer

Generally speaking, four inputs affect how long your retirement savings will last:

• Spending needs: The more you plan to spend in retirement, the more you’ll need to save. Excessive spending can drain your retirement savings quickly, so it’s important to have an accurate projection in mind. Ideally, you should plan for more than you’ll need, not less.
• Income sources: Most people don’t have a single source of income in retirement. 401(k) plans, pensions, and Social Security can all play a role, along with other forms of income. Take all of these sources into account when planning your savings needs.
• Investment mix and risk: A portfolio that’s too conservative may not keep pace with inflation. Meanwhile, one that’s too volatile presents a greater chance of loss. Make sure you’re adjusting your investment mix to reflect your time horizon, and adjust your savings goals based on your risk tolerance.
• Withdrawal approach and taxes: The order in which you withdraw from your accounts will affect both how long your money will last and how much you’ll end up paying in taxes. However, there’s no one best strategy. Some people prefer to pull from Roth accounts first to minimize their taxes, while others prefer to let the Roth dollars grow as long as possible. It all comes down to your overall portfolio and other financial goals (including your legacy plan). Ideally, you want to have a few different “buckets” you can pull from in retirement. Having a mix—like a Traditional IRA, a Roth IRA, and a regular taxable investment account—gives you more flexibility and can help you manage taxes more efficiently.

A quick self-check readers can do today

Before meeting with a financial planner, here are some questions you can ask yourself to assess your current retirement readiness:

1. Do I know what my monthly retirement spending and needs are?
2. Have I estimated my Social Security benefits at different claiming ages?
3. Do I know how many years my current savings would last at my expected spending rate?
4. Have I accounted for inflation in my retirement projections?
5. Do I have a plan for healthcare and long-term care costs?
6. Is my investment mix appropriate for my time horizon?
7. Do I have a retirement withdrawal strategy in place?

If you’re confused about what any of these questions mean or how to properly answer them, your financial advisor can help.

Ways to plan for longevity risk

Start with an “income floor”

Rather than focusing on your ideal level of income, work with an income floor, or a base amount of income you can rely on regardless of what the market does. For most people, their income floor will include Social Security benefits, pensions, and a low withdrawal rate from their personal retirement savings.

As long as your essential expenses are covered by this income floor, then any extra income you have can make room for the extras that make retirement more enjoyable.

Keep flexibility in spending

There’s a good chance that your spending isn’t going to look exactly the same from year to year in your retirement. You may adjust your spending based on your current lifestyle, your health, and the current market conditions. Building flexibility into your budget allows you to spend less in certain years, giving your portfolio time to recover from market downturns.

Plan for inflation exposure

Inflation is practically a guarantee, and it’s important to plan for it in your retirement portfolio. Some assets, including short-term bonds and cash instruments, don’t necessarily keep up with inflation. If they make up your entire portfolio, you’ll likely see your purchasing power decrease over time rather than increase.

Even during retirement, it’s often worth keeping at least some exposure to higher-earning assets, including equities and inflation-adjusted bonds, that can help you manage your longevity risk, especially in the early years of your retirement.

Revisit the plan every year

Your retirement plan isn’t a set-it-and-forget-it project. Instead, it’s a living document that may evolve over time as your finances and goals change. Continue monitoring your income and spending situation. Meanwhile, your financial planner will stay up to date on market changes, tax law changes, and investment trends that may affect your portfolio’s longevity.

For additional help with your long-term plan, read our guide on how to prepare for retirement and build your roadmap.

Social Security timing and longevity risk

Why delaying Social Security can help some retirees

While you can start collecting Social Security retirement benefits as early as 62, it’s often better to wait until the full retirement age, or even age 70, when you can get a higher monthly benefit. If one spouse earns a lot more than the other, it can often make sense for the higher-earning spouse to delay taking Social Security until age 70. That way, the surviving spouse can receive a larger benefit down the road.

Social Security is a guaranteed inflation-adjusted income stream that you can’t outlive, so it’s often in your best interests to get the highest monthly amount possible.

What to weigh before delaying

While delaying Social Security benefits has some clear advantages, it’s not right for everyone.

For example, if you’re in poor health and have a shorter expected lifespan, it may be better to get benefits as early as possible to maximize the amount you’ll actually collect. Delaying Social Security and using taxable IRA withdrawals to fill the gap doesn’t always make sense. You’ll want to think carefully about how much you’d need to withdraw during the delay, the tax impact of those extra withdrawals, and how missing out on investment growth during that period could affect your long-term savings.

It’s also important to consider your other income sources and your spouse’s benefits. Someone with a spouse to financially share in the burden with or with other significant income sources will be better able to delay benefits than someone who truly needs the income at age 62.

Tools and resources for a sustainable retirement

What a retirement longevity calculator should include

An online retirement calculator can be a valuable tool in helping you estimate your retirement savings needs. The most accurate tools will account for many factors, including your current age, expected retirement age, estimated Social Security benefits, expected portfolio return, inflation assumptions, expected lifespan, and projected retirement spending. Choosing a calculator that’s too simple could reduce the value of its projections.

Retirement planning milestones by age

Retirement planning isn’t a single event – it’s something that takes place over the course of many decades. A retirement planning timetable can provide some structure and eliminate some of the uncertainty.

Planning steps before 65

As we mentioned, retirement planning begins long before you reach age 65. Some steps you can take earlier on include contributing regularly to retirement accounts, adjusting your asset allocation over time, running Social Security income projections, establishing a withdrawal strategy, and making key decisions about your future.

Adjusting your lifestyle to extend savings

Lifestyle adjustments to save money often aren’t popular, but they can help extend the life of your retirement savings, especially if the market underperforms in the years leading up to your retirement. Here are a few strategies to consider:

• Downsize your lifestyle: If you raised children who have since grown and moved out, there’s a good chance you have more space in your home than you need. Downsizing your home can mean a lower mortgage or rent payments, lower utilities, reduced maintenance costs, lower property taxes, and more. You’ll also have the excess equity in your home to pad your retirement nest egg.
• Set spending guardrails: Setting rules for your discretionary spending can help you stay on track and reduce the decision-making you have to do regularly.
• Look for part-time work: Plenty of people take on part-time work during retirement, partly to earn a bit of extra money, and partly to get out of the house and active in the community. Even a small amount of extra income early in retirement can have a major impact in the long run.
• Consider a phase retirement: Rather than a hard stop to your working years, consider slowly phasing out. Options include transitioning to a consulting role, gradually reducing your hours, switching to a lower-stress job, or shifting to part-time work. It can also help with some of the shock of suddenly exiting the workforce after decades of working.

Longevity Risk FAQs

What is the greatest fear people have about retirement?

For many people, the greatest retirement fear is running out of money during their lifetime. While this is a real financial risk, you can take steps to minimize it with proper planning.

What is the risk of outliving my retirement savings?

The probability of outliving your retirement savings depends on many factors, including your starting savings balance, spending rate, investment returns, other income sources, and how long you live. A financial planner can evaluate your situation and recommend a retirement number that offers the most protection.

Why is longevity risk becoming a bigger problem for retirees?

Longevity risk is becoming a bigger problem because people are living longer than they were in the early and mid-1900s. Additionally, traditional pensions have been replaced by personal savings plans like 401(k) plans that put the onus on the individual to save rather than on the employer. Finally, rising costs continue to put pressure on retirement savings.

What is a realistic retirement budget?

A realistic retirement budget looks different for everyone, but it should include essential costs, discretionary spending, and unplanned costs. It should also account for inflation, potential rising healthcare costs, and the risk of bad market years.

Is it true that the earlier you retire, the longer you live?

There’s no hard and fast rule that says that the earlier you retire, the longer you live. While that may be the case for some people, factors like health, financial resources, working conditions, and the reason for retiring early all play a role. Either way, anyone considering an earlier retirement should plan to build a larger nest egg to prepare for a longer retirement.

Why is it a good idea to delay Social Security benefits to reduce longevity risk?

The later you start collecting Social Security benefits, the higher your monthly benefit will be, with the maximum benefit amount being available at age 70. Social Security is the only guaranteed, inflation-adjusted income stream most people have, so it’s worth at least exploring delaying benefits to get the highest possible monthly amount.

The bottom line

• Longevity risk is very real, but there are steps you can take to protect yourself against it.
• Factors like longer lifespans, rising costs, and market volatility all contribute to longevity risk.
• Some possible strategies to mitigate longevity risk include delaying Social Security, planning for a longer life than you expect, and protecting against inflation in your portfolio.
• Creating a budget is a critical step, and it should include both an income floor and plenty of flexibility.
• Revisit your retirement saving and spending plan every year to respond to changes in your personal circumstances and the overall market.

How a financial advisor can help

Longevity risk is a legitimate fear of many retirees. And unfortunately, unlike other problems, it’s not one you can easily solve once it’s upon you. Instead, avoiding it requires years of careful planning. A financial planner can help protect you from this risk by evaluating your current financial situation, modeling different scenarios, helping plan your retirement income, and continuing to monitor your portfolio for changes.

The advisors at Wealth Enhancement Group are prepared to help you with your retirement plan. Set up a complimentary consultation to connect with an advisor and learn more.

There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss. Investing involves risk, including possible loss of principal.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes, and potential illiquidity. Investing involves risk, including possible loss of principal.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor’s specific circumstances. Investing involves risk, including possible loss of principal.

This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

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