Key Takeaways
- Americans are living longer, with many retirees potentially facing 25–30+ years in retirement.
- Longevity risk is the possibility of outliving your retirement savings due to living longer than expected.
- Strategic Social Security claiming decisions can help maximize your lifetime benefits.
- A personalized withdrawal strategy can help you prepare for an extended retirement.
- Healthcare planning, including preparing for long-term care costs, is essential for financial security.
Understanding Longevity Risk in Retirement
Living longer is undoubtedly something to celebrate. However, increased longevity brings a significant financial challenge: the possibility of outliving your retirement savings. Known as longevity risk, this retirement planning challenge is a growing concern for today’s retirees.
Simply put, longevity risk is the chance you’ll live longer than expected and potentially run out of money in retirement. With medical advances and healthier lifestyles, many Americans are living well into their 80s, 90s, and beyond. The number of Americans expected to live to age 100 or more is expected to quadruple over the next three decades, according to the U.S. Census Bureau. Among couples, there’s a 20% chance one partner could live to at least 100.
Depending on when you expect to retire, this extended lifespan means your retirement savings may need to stretch for 25–30+ years — significantly longer than previous generations. Additionally, longer lifespans often come with increased healthcare costs and a potential need for long-term care, risks in retirement that can add up to significant expenses over time.
How to Estimate Your Lifespan and Retirement Needs
Planning effectively for longevity after retirement requires a realistic assessment of how long your post-career years might last. While no one can predict their exact lifespan, several factors can help you make an educated estimate:
- Family history and genetics
- Current health status and lifestyle habits
- Gender (women typically outlive men)
- Access to quality healthcare
Beyond estimating your lifespan, calculating your retirement income needs involves getting a clear picture of your anticipated expenses so you can determine approximately how much money you’ll need during those years. Here are some key questions to ask yourself:
- How will you spend your time? Do you plan to travel, pursue new hobbies or activities, or spend time with family?
- What will your day-to-day expenses look like? Consider the basics, such as housing, transportation, groceries, utilities, etc.
- Will you stay in your current home and location, downsize, or move to a place with a lower cost of living?
- Will you pay off your mortgage before retiring?
- Do you plan to work part time?
- Do you want to leave a legacy for future generations?
Remember to account for potential long-term care costs, which can be substantial. The average annual cost of a private room in a nursing home is more than $120,000, and home health aide services average nearly $78,000 annually.
Preparing for future healthcare and caregiving needs is an important part of your retirement planning. This might include setting aside dedicated savings, exploring insurance options, or creating other strategies to cover these and other potential expenses.
Determining the Best Time to Claim Social Security
One of the most important decisions you’ll make when it comes to longevity retirement planning is when to begin claiming Social Security benefits. While you can start as early as age 62, delaying your benefits until your full retirement age (66–67 for most people) or even until age 70 can significantly increase your lifetime benefits.
You’re eligible for 100% of your Social Security benefit at your full retirement age. However, for each year you delay claiming beyond your full retirement age, your annual benefit increases by approximately 3% to 8% (depending on your birth year), up to age 70. Waiting as long as you can to collect Social Security has the potential to provide valuable protection against longevity risk in retirement by providing a larger income stream for as long as you live.
Of course, what works for someone else may not be the best approach for you. The optimal claiming strategy depends on your unique circumstances, including your health, financial needs, and whether you’re married. Connecting with a knowledgeable professional to explore different scenarios can help guide you toward the timing that works best for your situation.
How Much Should You Save for Retirement?
When planning for longevity risks in retirement and how much you may need to save to address them, consider these key factors:
- Your desired lifestyle in retirement
- Anticipated living expenses, including housing, healthcare, and leisure activities
- Expected income sources (Social Security, pensions, etc.)
- Inflation’s impact on your purchasing power over time
- Potential healthcare and long-term care costs
A common rule of thumb suggests aiming to replace about 70–80% of your pre-retirement income. However, this percentage may be higher or lower depending on your specific retirement goals and circumstances. Getting a personalized retirement checkup can give you a much clearer picture of exactly how much you’ll need for your unique situation.
Adjusting Your Withdrawal Rate for a Longer Retirement
How you withdraw from your retirement accounts is just as important as how much you save. The traditional “4% rule” — withdrawing 4% of your portfolio in the first year of retirement and adjusting that amount for inflation in subsequent years — may be too aggressive for those who might live into their 90s or beyond.
For retirees planning for a potentially longer retirement, a more conservative withdrawal rate of 3–3.5% might be more appropriate. Additionally, implementing a flexible withdrawal strategy that adjusts based on market ups and downs can help your savings last longer.
It’s also important to factor in unexpected healthcare costs or emergencies when planning your retirement income strategy. Building a cushion for these unplanned expenses helps ensure you’re prepared for whatever life brings, without derailing your long-term financial security.
Should You Add an Annuity to Your Retirement Plan?
Annuities can be a valuable tool for retirement longevity planning by creating guaranteed lifetime income, regardless of how long you live. By converting a portion of your retirement savings into an annuity, you can create a steady income stream that continues for as long as you live.
There are several types of annuities to consider:
- Immediate annuities begin paying out right away
- Deferred annuities start payments at a future date
While annuities can provide valuable income security, they also involve tradeoffs such as limited ability to access your money and potential fees. Consulting with a fee-only financial advisor can help you determine if an annuity is appropriate for your retirement strategy and, if so, which type may best meet your needs.
Using Health Savings Accounts (HSAs) to Manage Retirement Healthcare Costs
Health Savings Accounts (HSAs) offer a powerful triple tax advantage for managing healthcare costs in retirement:
- Contributions are tax-deductible
- Growth within the account is tax-free
- Withdrawals for qualified medical expenses are tax-free
Unlike Flexible Spending Accounts (FSAs), HSAs have no “use it or lose it” provision, allowing you to accumulate funds over time to cover healthcare expenses in retirement. After age 65, you can even use HSA funds for non-medical expenses without penalty (though income tax will apply).
For those eligible to contribute (individuals with high-deductible health plans), maximizing HSA contributions can be an excellent strategy for building a dedicated healthcare savings fund for retirement.
Accounting for Additional Risks to Your Retirement Savings
Beyond the challenge of living longer than expected, several other factors can impact how long your retirement savings will last:
- Inflation risk: Even modest inflation can significantly reduce your spending power over a 25- to 30-year retirement.
- Market volatility: The “sequence of returns” risk means that experiencing poor investment returns in the early years of retirement can permanently reduce how long your money will last, even if markets perform better later.
- Healthcare costs: Medical expenses typically increase faster than the general cost of living.
- Unexpected expenses: Emergency home repairs, family needs, and other unplanned costs can arise at any time.
Longevity financial planning tactics such as diversifying your investments, maintaining an emergency fund, and regularly reviewing your retirement strategy can help protect your financial future from these and other risks in retirement.
Ready to Plan Your Retirement?
Creating a retirement strategy that lasts a lifetime requires a thoughtful approach — one that considers your unique circumstances, goals, and aspirations. At Blankinship & Foster, our team specializes in helping pre-retirees and retirees create sustainable retirement longevity strategies designed to provide financial security throughout their golden years, however long they last.
Our longevity financial planning approach focuses on developing personalized solutions that balance your current lifestyle with long-term security. We work closely with you to create a strategy that aims to help you achieve a retirement worth looking forward to — one where you get to enjoy life on your terms.If you’d like help building a retirement strategy designed to support you for the long haul, we invite you to contact us for a complimentary consultation. Our experienced team of financial planners in San Diego is here to help you navigate the complexities of retirement planning and create a path to a secure and fulfilling retirement.