The point of putting money aside for retirement is to ensure a steady stream of income from the time you stop working until the day you pass away. However, things get hard when you try to put a precise number on that duration.
Life expectancy is one perspective on it. The latest statistics from the National Center for Health Statistics show that the typical American lives to be 77½ years old. Those who were born after 1960 are eligible to collect their full Social Security payment at full retirement age, which is 67 years old.
It should come as no surprise, then, that the vast majority of Americans who have saved for retirement have no plans for a long hiatus. In a retirement study for Your Money that CNBC and SurveyMonkey ran in August 2024, 64 percent of Americans who are still putting money aside for retirement said they only intend to keep it for the next 20 years–or not at all. Only sixteen percent indicated they intended to retire for thirty-one years or longer.
It might not seem like such a bad idea to prepare for a brief retirement, considering the averages. Certified financial advisor and chief investment officer of Yeske Buie in Vienna, Virginia, Yusuf Abugideiri warns that things might become ugly fast if your life expectancy is higher than expected.
“It’s a really dangerous bet to be making,” he emphasizes. “Building a plan around spending your assets down to zero, for us, we simply avoid it at all costs.”
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According to Abugideiri, there are two major assumptions made when one sets a goal of having simply enough money to last a specific number of years in retirement.
“In corporate America, the trend is, once people start getting past a certain age, they tend to get expensive and can be replaced more cheaply,” he says. “We see people let go well before their planned depart time.”
Indeed, studies conducted by the Employee Benefit Research Institute have shown that the median retirement age for workers in the United States is 62.
Plus, retiring on schedule still requires you to assume two things: first, that you have a good idea of how long you have left to live and second, how your expenses will pan out throughout that time. “Considering the progress in medicine, it’s a very presumptuous statement,” Abugideiri remarks.
An expert’s perspective on retirement lifetime
When retirees run out of money while they’re still living, it can lead to a number of bad outcomes, such as falling further into debt, dramatically reducing their lifestyle, or even going without necessary medical treatment.
That’s why when clients ask financial advisors to forecast their future prospects, they usually play it safe.
Rather than seeing clients run out of money while they’re still alive, we’d like it if they died with some additional. According to Jamie Bosse, a CFP and senior adviser at CGN Advisors in Manhattan, Kansas, “most of the time we’ll project that they might live to 100 or 99 or 95,” which is greater than usual life expectancy but not unheard of. “We try to project out that far and see the probability of being OK for that whole time.”
A safe withdrawal rate is the maximum annual withdrawal from retirement accounts that does not prevent the principal from continuing to grow, which is important if you want your assets to outlive you.
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After 30 years of saving, the conventional wisdom holds that you should take out 4% of your portfolio value in the first year and keep taking out the same amount every year, adjusted for inflation. Whether you anticipate a need for long-term care, the amount you have saved up for retirement, your anticipated spending habits, and any other sources of income you may receive all play a role in determining how much you take out.
Incorporating volatility into a withdrawal strategy is something many financial planners suggest doing. For example, you may take a smaller amount out of your portfolio in years when the market drops.
Overdrawing your portfolio is a serious risk if you live longer than expected, thus staying within your means is the objective, according to Abugideiri. “If you’re distributing at a rate faster than the portfolio is growing, your distributions are going to cannibalize the portfolio, and the curve gets ugly quickly.”
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