5 Reasons You Should Assume You’ll Live to 100 When Planning for Retirement
Written by
Laura Bogart
Edited by
Kristen Mae
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
When you plan your retirement, you’d probably rather think about which vacations to budget for than how long you’ll live. Yet longevity should be a major part of your financial planning — otherwise, you run the risk of outliving your savings. Even if you live a frugal lifestyle, factors like rising healthcare costs, market downturns or poor withdrawal decisions can chip into your nest egg faster than you’d expect.
The smart move? Plan as if you’ll live well past the average life expectancy. Nobody’s talking about budgeting for Rip Van Winkle years, but overestimating how long you’ll live can help you prepare for some of the biggest drains on your retirement savings. GOBankingRates talked to experts who explained why longevity risk — outliving your retirement funds — is such a concern for retirees, and how to avoid it.
1. People Are Living Longer and Longer
Simply put, the longer you live, the longer your money needs to last. With advancements in medicine and healthier lifestyles, Americans may need their savings to last for decades after retirement.
Bill Kearney, co-founder of Crown Advisors LLC, has studied the phenomenon. To illustrate the severity of longevity risk, he cites research from Allianz Life Insurance that found more respondents feared running out of money than death itself.
“This fear isn’t unfounded: With life expectancies continuing to rise and many Americans living well into their 80s and 90s, retirees may need their savings to last 25, 30 or even 35 years after they stop working,” he said. “The combination of increasing healthcare costs, inflation eroding purchasing power over decades, and the decline of traditional pension plans has made longevity risk a critical planning challenge that can no longer be ignored.”
2. Healthcare Costs Are Growing
It’s no secret that as you age, you’re more likely to need medical care — including long-term care — all of which can be expensive.
Bruce Maginn, advisor at Solomon Financial, said retirees should prepare for significant healthcare-related expenses — often more than they anticipate.
“The cost of healthcare expenses rises faster than inflation and is often underestimated, leading to an unforeseen depletion of your retirement savings,” he said. “The average 65-year-old couple can expect to spend over $300,000 during the next 20 years, without accounting for long-term care expenses.”
3. Inflation Will Impact Your Cost of Living
Retirees aren’t exempt from rising costs. If they underestimate how long they’ll live, they risk not having enough saved to maintain their lifestyle.
“Historically, the average retiree can expect their cost of living to double in 20 years,” said Maginn. “Inflation eats away at your nest egg, forcing you to withdraw more money each year just to keep up with the rising cost of living.”
For Kearney, the financial hardship from outliving your savings can also carry severe emotional — even physical — consequences. He outlines a scenario in which someone depletes their retirement assets to the point where they only have Social Security and perhaps a small pension left — leading to a devastating lifestyle change that can take away independence and dignity.
“Simple pleasures like dining out, playing golf or taking vacations become unaffordable luxuries, fundamentally altering how people experience what should be their golden years,” he said. “This potential loss of autonomy and quality of life creates a paralyzing anxiety for many, as they struggle with uncertainty about when — or if — they might face this scenario.”
4. Your Income Needs To Keep Pace With Your Spending
Steve Sexton, CEO of Sexton Advisory Group, reminds clients that while nobody has a crystal ball, it’s wise to plan for a longer life to avoid running out of money when you’re most vulnerable.
Sexton compares relying only on savings in retirement to draining a bathtub without the faucet running — money flows out, but nothing comes in. He says it’s important to establish income-producing assets well before retirement.
“Think of income-producing assets, like rental properties, annuities [and] dividend-paying stocks, as your faucet — they keep the water flowing so you don’t run out,” he said. “This is why solid retirement plans need to employ a balanced mix of growth, protection and steady income to better safeguard your financial well-being in your golden years.”
5. Withdrawal Rates Affect How Long Your Money Lasts
Developing a conservative approach to withdrawing your assets is another smart way to avoid becoming cash-strapped in retirement. Maginn recommends a strategy that minimizes debt and includes both assets that outpace inflation and ones that are stable, but not tied to market volatility.
“Common sense can be exercised by withdrawing from those asset classes that have performed well lately, and discipline can be exercised by automatically rebalancing your asset allocation,” he said.
Many experts point to the ‘4% rule’ as a starting point for withdrawal planning, but adjusting that percentage based on market conditions and personal needs can make your money last longer.
Bottom Line
You don’t want to outlive your savings in retirement. Between healthcare costs and the effects of inflation, that may seem like a daunting challenge. But with the guidance of a trusted financial advisor, you can build income-producing assets and develop a smart withdrawal strategy to help ensure your nest egg lasts as long as you do.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
More From GoBankingRates
