Most of us hope to live a long, healthy life. But when it comes to retirement planning, longevity is a double-edged sword.
The longer you live, the more years you need your savings to last. That sounds simple, but it’s one of the most difficult challenges in retirement planning today.
It’s called longevity risk. This is the risk that you’ll outlive your retirement savings.
It’s no longer just a concern for the very old or very poor. Even retirees with strong portfolios can face pressure if they live longer than expected, especially with rising healthcare costs, inflation, and unpredictable markets.
In this article, we’ll focus on understanding longevity risk, why it’s more relevant than ever, and the strategies we use to help clients prepare for long, confident retirements.
Whether you’re planning for yourself, your spouse, or both, now is the time to look ahead and build a plan that can go the distance.
The Growing Reality of Longevity Risk
Thanks to medical advances, healthier lifestyles, and better access to care, especially for higher earners, many retirees now spend 20 to 30 years in retirement. These extended retirement periods are reshaping fundamental personal finance principles.
Life Expectancy Has Extended Retirement Periods
We’re living longer than ever before. That’s good news, but it makes retirement planning a lot more complicated.
According to the CDC, average life expectancy in the U.S. has recovered to 78.4 years. Men live to about 75.8, and women to 81.1. But averages don’t tell the whole story. If you retire at 65, there’s a good chance you’ll spend 20 years or more in retirement.
The Fear is Real and Justified
Many people worry about the possibility of outliving their retirement savings, often even more than health concerns.
And this fear isn’t just emotional, it’s backed by hard data. The World Economic Forum found that retirees in several countries are likely to outlive their savings by 8 to nearly 20 years on average.
We’ve seen it ourselves. Even clients with strong portfolios feel pressure when they realize their income may need to last for 30 or more years.
The Hidden Costs That Compound Longevity Risk
Let’s take a closer look at some of the biggest costs that make retirement planning even harder.
Healthcare, inflation, and personal blind spots can quietly erode the financial security you’ve worked to build.
Here’s how these forces work against retirement plans.
Rising Health Care Costs Accelerate the Problem
Healthcare is one of the biggest wildcards in retirement.
Fidelity estimates (via BusinessWire press release) that a 65-year-old couple retiring today may need $315,000 just to cover healthcare expenses through retirement. That doesn’t include long-term care.
And long-term care is likely. About 70% of people over 65 will need it at some point. Nursing home care can be one of the most significant expenses in retirement, often costing tens of thousands of dollars per year.
Even with substantial retirement savings and careful planning, rising healthcare costs can create unexpected financial pressure, particularly if extended care is required.
Inflation Erodes Purchasing Power Over Decades
Inflation doesn’t seem like a big deal in any one year. But over time, it adds up.
Over time, even modest inflation can significantly reduce the purchasing power of your money.
According to the U.S. Bureau of Labor Statistics, inflation reached 9.1% in June 2022, the highest in four decades.
Fixed incomes don’t adjust automatically. So the longer you live, the more inflation becomes a silent threat to your lifestyle.
Why Traditional Retirement Savings Strategies Fall Short
Beyond hidden costs, traditional withdrawal strategies also pose major risks for today’s retirees.
We’ve already seen how inflation and rising costs create pressure on retirement plans. That’s why traditional strategies need a second look. If you want your money to last, you’ll need a more flexible approach.
Here’s why the common methods often don’t hold up.
The 4% Rule Needs Updating for Longevity Risk
The 4% rule suggests you can safely withdraw 4% of your portfolio each year in retirement. It was meant to avoid running out of money over a 30-year period.
But those assumptions no longer apply.
According to Morningstar, the new safe withdrawal rate is 3.7%, down from 4.0% just the year before. Other research is even more cautious.
Dr. Wade Pfau’s research indicates that in today’s low‑yield environments, a 4% withdrawal rate may fall short nearly 43% of the time, leaving only about a 57% chance of sustaining a 30‑year withdrawal plan. And if your retirement lasts 40 years or more, you may need to stay below 3.3% to avoid running out of money.
That’s a big difference. And it means that the 4% rule may give many retirees a false sense of security.
Sequence of Returns Risk Magnifies Longevity Risk
Average returns don’t tell the whole story. The order of returns can be especially critical during the early years of retirement.
If your portfolio takes a big hit in the first few years, your long-term results could suffer.
This is called sequence of returns risk, and it’s one reason retirement planning needs flexibility.
Static Strategies Don’t Adapt to Reality
Many retirees still follow a fixed rule like withdrawing 4% and increasing that amount for inflation each year.
But, life isn’t static. Markets and spending needs change over time.
Dynamic withdrawal strategies adjust income as conditions shift. For example, guardrails strategies increase or reduce withdrawals based on portfolio performance. This kind of flexibility can help savings last longer in uncertain markets.
Proven Strategies for Managing Longevity Risk
The good news is that longevity risk can be managed. It takes more than one solution. It requires a coordinated plan.
The key is to focus on strategies that protect your essential income, grow your portfolio, and adjust over time. Here are five components we use to help clients build retirement plans that last.
Create Reliable Income Floors
A strong retirement plan starts with covering essential expenses through reliable lifetime income you can count on, no matter what markets do.
Social Security is the foundation for most retirees. Delaying Social Security benefits from full retirement age to 70 can increase monthly payments by about 8% per year, according to the Social Security Administration.
Many people also add other guaranteed income sources to reduce pressure on their investments. These may include pension funds, annuities, or other sources of predictable lifetime income. When your basic needs are covered, you can invest more confidently for long-term growth.
Implement Dynamic Withdrawal Strategies
Dynamic withdrawal strategies are designed to adjust your income based on how your portfolio performs.
We often use guardrails or floor-ceiling approaches. These methods adjust your income based on how your investments perform. They can be applied across different retirement accounts, including 401(k)s and IRAs, to optimize your overall withdrawal approach.
- Guardrails strategies help protect your portfolio while allowing for higher starting withdrawal rates
- Floor-ceiling strategies set flexible withdrawal ranges that adjust based on market conditions.
- Bucket strategies help manage sequence of returns risk by setting aside short-term spending money in safer investments
These tools can offer more flexibility, which may be helpful for some retirees in adjusting to changing conditions.
Maintain Growth-Oriented Asset Allocation
A longer retirement means your money needs to work for you over time. That often requires keeping some exposure to growth, not shifting entirely to conservative investments.
The right mix depends on your goals, risk tolerance, and time horizon. Too little risk can limit growth, while too much can increase volatility. Finding balance is key.
Plan for Healthcare Costs Proactively
Healthcare is one of the biggest unknowns in retirement. But it’s not something to ignore.
We often review long-term care insurance options with clients in their late 50s or early 60s. Given the potential costs of healthcare later in life, it’s important to explore your options well before you need them.
Insurance may help transfer some healthcare risks, offering added protection during a long retirement.
Regular Retirement Planning Reviews and Adjustments
Retirement isn’t a one-time event. Things change. Your plan should too.
We revisit plans regularly to adjust for longevity projections, market shifts, and withdrawal rates.
That’s why it’s so important to stay in regular contact with your financial advisor. We keep an eye on the big picture, so you don’t have to.
Each of these strategies works on its own. But together, they build a plan that can withstand the test of time. That’s what it takes to manage longevity risk and retire with peace of mind.
Special Considerations for High-Net-Worth Clients
If you’ve built significant wealth, you may feel more prepared for retirement than most.
And in many ways, you are.
But that doesn’t mean longevity risk goes away. In fact, longer lifespans often make retirement planning more complex, especially for comfortable retirees and high-net-worth families.
Wealth Can Breed Overconfidence
A large portfolio can create a false sense of security. But wealth does not make you immune to risk. Market losses, high withdrawals, and inflation can combine to reduce even substantial assets more quickly than expected.
Longer lifespans add another layer of complexity. The more years you need income, the more important it becomes to manage risk and taxes carefully.
Legacy and Tax Planning Intersect with Longevity Risk
The longer you live, the more you may spend, which can reduce the legacy you plan to leave.
Required minimum distributions (RMDs) can push taxable income higher over time. Roth conversions may help manage that, but timing matters.This tax coordination becomes even more complex when pension funds and other employer-sponsored benefits are part of the income mix.
That is why extended retirements make tax planning critical. It affects not only your income needs but also the amount you leave behind.
Taking Action on Longevity Risk
Longevity risk is real, but it does not have to control your future. The sooner you start planning, the more flexibility you have. That is especially true for taxes, healthcare, and income needs.
These decisions are complex, and they work best when they fit together. Coordinated strategies protect retirement savings throughout extended retirement periods. That is why many people turn to an advisor who understands how to plan for longer lifespans.
You do not need to make every decision today. What matters is having a plan that can adjust as life changes. When you prepare for a longer life, you give yourself the chance to enjoy more of it with confidence and peace of mind.
Ready to explore your options? Schedule a consultation with us and start building a plan that works for your future.