The Long Game

Jonathan Clements

RUNNING OUT OF MONEY is retirement’s biggest financial risk—though this, of course, never actually happens. Thanks to Social Security, almost all retirees will have some monthly income, no matter how long they live.

Still, Social Security alone probably won’t make for a comfortable retirement, though it is the financial cornerstone for many. In fact, Social Security accounts for at least 50% of income for half of retirees. That includes a quarter of those age 65 and up for whom their monthly benefit is at least 90% of their income—a statistic I find shocking.

Want to do better? You need to not only save diligently during your working years, but also figure out how to draw down those savings over a retirement of uncertain length. That brings me to three sets of statistics that prompted me today to tackle the topic of longevity.

  • A recently released survey found that 48% of respondents believe they’ll outlive their retirement savings. To state the obvious, we should make it a priority to save enough during our working years so we’re financially comfortable for as long as we live—and yet half of folks think they’ll fall short.
  • I received an email from a correspondent who cited life expectancy as of birth as a guide for retirement planning. It’s not the first time I’ve seen this error made. When today’s 65-year-olds were born, life expectancy was age 67 for men and 73 for women. But life expectancies as of birth include those unlucky folks who die before reaching age 65. What if you make it that far? Today’s 65-year-olds can, on average, expect to live to 82 if they’re a man and 85 if they’re a woman.
  • In 2021, U.S. life expectancy declined for the second year in a row, driven largely by COVID-19, though drug overdoses also played a significant role. But what if you’re careful about your health? It’s always dangerous to rely on average life expectancies, because there’s a 50% chance you’ll live longer. But it’s especially dangerous if you see a doctor regularly, exercise, aren’t obese, don’t smoke and so on. One indication: Affluent, healthy individuals—the sort of folks who buy income annuities—are assumed by insurance companies to live perhaps five years longer than the general population.

When we’re in our 20s and 30s, financial experts badger us to give some thought to our 60-year-old self. But I worry that 60-year-olds also need to be badgered to worry about their 90-year-old self. All too often, I read that we should spend heavily early in retirement because we’ll need less money later on. Indeed, I sense that many folks believe their elderly self will be so out of it that he or she simply won’t appreciate whatever money is left. But will we still feel that way as we approach age 90, with our nest egg dwindling and long-term-care costs looming?

That raises the thorny question: As we plan for retirement, how long should we expect to live? If you know health issues will limit your lifespan, it might be possible to make a reasonable estimate. But for the rest of us, let me offer a radical suggestion: We should assume we’ll live forever and plan accordingly.

What does this mean in practice? For starters, if you’re a single individual in decent health or the spouse who had the higher lifetime earnings, consider delaying Social Security until your late 60s and perhaps all the way to age 70. A fat monthly Social Security check is the best financial defense against the cost of a long life.

Second, if Social Security alone doesn’t provide enough income to cover at least your fixed living costs, consider purchasing immediate-fixed annuities that pay lifetime income. I’d suggest buying a series of annuities over time, in case interest rates rise in the years ahead and so you can purchase from multiple insurers, thus hedging the risk that any one insurance company gets into financial trouble. I’d also suggest buying annuities where the monthly payments rise each year by, say, 2%.

Third, I wouldn’t use the 4% rule, where you withdraw 4% of your portfolio’s value in the first year of retirement and thereafter step up your annual withdrawals with the inflation rate. I think the 4% rule is a useful guideline for those looking ahead to retirement. But once retired, I’d favor a strategy where there’s no risk of depleting a portfolio.

My preference: Each year, withdraw a fixed percentage of your portfolio’s remaining value. For instance, in 2023, you might opt to withdraw 4% or 5% of your nest egg’s year-end 2022 value. The higher the percentage you choose, the greater the chance your annual withdrawals will shrink over time. Still, whatever percentage you pick, you’ll never run out of money—because you’re always withdrawing a percentage of whatever remains.

To be sure, that means you could potentially reach the end of your life with a substantial portfolio. If that really bothers you, consider annuitizing even more of your nest egg. But as for me, I’d be happy to reach my final years with a heap of money. A fat financial account will mean fewer money worries at the end of my life—and I’m more than happy to bequeath a healthy sum to my kids and my favorite charities.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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