The idea behind saving for retirement is to provide yourself with income between when you stop working and when you die. But try to put an exact figure on that amount of time, and things can get tricky.
One way to think about it is life expectancy. The average American lives to 77½ years old, according to the most recent data from the National Center for Health Statistics. For those born after 1960, full retirement age — when you receive a full Social Security benefit — is age 67.
So maybe it’s not surprising that most U.S. retirement savers aren’t planning on a lengthy retirement. Among Americans still saving for retirement, 64% say they’re planning to save for 20 years or less (or not at all), according to CNBC’s August 2024 Your Money retirement survey conducted with SurveyMonkey. Just 16% said they were planning on a retirement of 31 years or more.
Given the averages, planning for a short retirement may not seem like a horrible idea. But things can get ugly, quickly, if you live longer than you think you might, says Yusuf Abugideiri, a certified financial planner and chief investment officer at Yeske Buie in Vienna, Virginia.
“It’s a really dangerous bet to be making,” he says. “Building a plan around spending your assets down to zero, for us, we simply avoid it at all costs.”
The dangers of underestimating your retirement
Aiming to only have enough for a certain number of years in retirement is risky, Abugideiri says, because you’re making two big assumptions.
One is that you’ll be able to work as long as you want to, which, for many people, isn’t the case.
“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,” Abugideiri says. “We see people let go well before their planned depart time.”
In fact, the median retirement age for U.S. workers is 62, according to research from the Employee Benefit Research Institute.
And even if you retire right on time, you’re relying on a second assumption: that you know roughly how long you’ll live and how your spending will look over that period. “Given medical advancements, it’s a really risky assumption,” Abugideiri says.
How the pros think about retirement longevity
The worst case scenario for retirees is running out of money while they’re still alive, which may mean sinking into debt, cutting back drastically on their lifestyle or not being able to afford essential medical care.
That’s why financial planners tend to err on the side of caution when modeling retirement outcomes for clients.
“We would rather see clients die with extra assets left over than run out while they’re still living. A lot of times we’ll project that they might live to 100 or 99 or 95, which is higher than typical life expectancy, but not unheard of,” says Jamie Bosse, a CFP and senior advisor at CGN Advisors in Manhattan Kansas. “We try to project out that far and see the probability of being OK for that whole time.”
For your assets to outlast you, you’ll need a safe withdrawal rate in retirement, which is the amount you can withdraw from your retirement accounts each year while still allowing the principal to continue growing.
A traditional model for a 30-year retirement is withdrawing 4% of your portfolio’s value in the first year, and continuing to take out that amount, adjusted for inflation, thereafter. What you take out will depend on factors such as other income you may be receiving, the amount you have saved at the time of retirement, your planned spending and whether you’ll need long-term care.
Many planners recommend building dynamism into a withdrawal strategy — by taking less, for instance, in years when your portfolio has been dinged by a dip in the market.
The goal, says Abugideiri, is to avoid overdrawing your portfolio, a real risk if you end up outliving your expectations. “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.”
