Here’s a strange problem to have: you may live a very long time. Longer than your parents did, longer than the actuarial tables assumed a generation ago, and possibly longer than you’re currently planning for. That’s wonderful news for you, and a genuinely tricky variable for your portfolio. Here’s the big financial question: How much can you withdraw each year without running the risk of outliving your savings? The honest answer is that it depends heavily on how long “the rest of your life” turns out to be, which is exactly why longevity and withdrawal planning need to be considered together.
Why longevity changes the math.
The longer your retirement lasts, the longer your portfolio has to support your spending. That sounds obvious, but it has some important implications. A withdrawal strategy that works well over a 20-year retirement may be much less sustainable over 30 to 35 years. Generally speaking, a longer time horizon means being more thoughtful about how much you withdraw while still giving your portfolio enough opportunity to grow. The challenge is that you don’t know your timeline in advance, which is why it’s more useful to build a plan that still works reasonably well if retirement lasts longer than expected.
Rethinking “average” life expectancy.
Life expectancy statistics can be helpful, but they aren’t necessarily a great expiration date for your financial plan. An average tells you something about a large population. It doesn’t tell you how long you will live. Your health, family history, lifestyle, and other factors can affect your individual longevity. For couples, there’s another consideration. You’re not necessarily planning until one person’s life expectancy. You’re often planning for the possibility that one spouse could live considerably longer than the other. This is one of the more important mental shifts in retirement planning. Instead of asking “How long am I expected to live?” it’s often more useful to ask, “Is my plan still okay if I live longer than expected?”
The withdrawal rate conversation.
You’ve probably heard of the “safe withdrawal rate”. It’s this idea that you can withdraw a certain percentage of your portfolio each year while maintaining a reasonably low probability of running out of money over a particular period. It’s a useful framework, but not a guarantee. Your sustainable withdrawal rate depends on a number of factors, including how long your retirement lasts, how your portfolio is invested, what markets do (particularly early in retirement), and how flexible you can be with your spending. That last point is important. Someone who can temporarily reduce discretionary spending during a difficult market may have more flexibility than someone whose portfolio withdrawals are almost entirely devoted to fixed expenses.
Instead of searching for one perfect withdrawal percentage, it tends to be much more useful to think in terms of a withdrawal strategy instead.
Build an adjustable plan.
Because longevity is uncertain, rigid withdrawal plans can be fragile. Markets have good years and bad years. Your spending will change. Inflation will affect cost of living. Your health and priorities may evolve. Your withdrawal strategy should be able to respond. Here are a few approaches that tend to add resilience:
- Flexible spending strategies, where withdrawals adjust based on portfolio performance rather than staying fixed year to year;
- Maintaining a mix of growth and stability, so your portfolio has the potential to keep pace with a longer time horizon without taking on more risk than necessary;
- Guaranteed income sources, such as Social Security, pensions, or annuities, which can cover essential expenses regardless of how long you live or how markets perform;
- Periodic plan reviews, checking in every so often to see whether your withdrawal approach still matches your actual spending, health, and portfolio performance.
Don’t forget about the later years.
Your spending may change substantially as you age. Some expenses may decline, while healthcare, support, or long-term care expenses could increase. You need to think about what those later years could look like financially. If you’re planning for a long retirement but haven’t considered the possibility of higher healthcare or care-related expenses as you age, there may be an important gap in the plan. It’s helpful to think about longevity, healthcare costs, and portfolio withdrawals as connected pieces rather than separate topics.
Your withdrawal strategy isn’t permanent.
The amount you withdraw in your first year of retirement doesn’t have to dictate what you withdraw 10, 20, or 30 years later. Revisiting your plan periodically, rather than locking it in once, gives you the chance to adjust before a small issue becomes a bigger one. A 30-year plan should be allowed to evolve over those 30 years.
It’s impossible to answer the “how long will I live” question. What you can do is take a look at your current withdrawal plan and ask whether it has enough flexibility built in to handle a longer-than-expected retirement. If you’d like help modeling different retirement lengths, market environments, and spending patterns to see how your plan holds up, don’t hesitate to reach out.
Frequently asked questions.
Should I plan my withdrawals assuming I’ll live to 100?
Not necessarily, but it can make sense to build some cushion into your plan for a longer-than-expected retirement. How much cushion you need depends on factors like your health, family history, and overall financial situation.
Does the order in which I withdraw from different accounts matter for longevity planning?
Yes. The order in which you withdraw from taxable, tax-deferred, and tax-free accounts can affect your taxes and potentially how long your savings last.
How do market downturns early in retirement affect long-term withdrawal sustainability?
Market declines early in retirement can be particularly damaging when you’re also taking withdrawals, because you’re selling investments when their values are down. This is often referred to as sequence-of-returns risk.
Is it better to underspend early in retirement to protect against longevity risk?
Rather than automatically underspending, it may make more sense to build flexibility into your plan so you can adjust spending as your circumstances and portfolio change.
Can annuities fully solve the longevity problem?
Certain annuities can provide income for life and help reduce the risk of outliving your savings, but they’re not a complete solution. Costs, liquidity, guarantees, and other trade-offs should all be considered.
Disclaimer: The information above is for general educational purposes only and should not be considered financial, tax, or legal advice. Always consult with a qualified professional regarding your specific situation. You should consult with your CPA and/or attorney before implementing any estate planning, gifting, or tax-related strategy.