Longevity Risk: Could You Outlive Your Savings?
I am in my early 60s and in good health. For the purposes of retirement planning, I expect to live well into my 90s; for my wife, I project a few years more.
For a long time, I thought my wife couldn't live without me, but I've been disabused of that notion, so I tacked on four years for her, given that women tend to live longer than men.
As head of the Schwab Center for Financial Research for more than 25 years, I like to think I know something about retirement planning. But while I've spent my career thinking about how to make assets last a lifetime, estimating my own life span and determining how much to save for what's likely to be a long retirement is a challenge.
The hard thing for everyone, including me, is figuring out the extent of our retirement and what the associated price tag will be.
Experts call this the retirement-consumption puzzle. We can reasonably estimate every input—pension and Social Security benefits, returns on stocks and bonds—except the most important one: how long we'll live. It's like packing for a car trip without knowing whether you're going across town or across the country.
So, what's a traveler to do?
In general, experts say to pack as much as possible. If you're in good health and you don't smoke, plan to be on the road a long time. If you're married and have long-lived relatives, you may be in the car even longer.
Are you affluent? Fill the cooler full of snacks—you'll need them. Studies consistently show that greater wealth is associated with lower mortality.
The bottom line: If you're healthy and wealthy, your savings will need to last a long time.
Think 90-something
The worst outcome in retirement isn't leaving too much money behind—it's not having enough to go the distance. However, estimating that distance depends on whom you ask.
The Social Security Administration (SSA) reckons a man now age 55 can anticipate living for 28 more years, to age 83; a woman the same age should plan for 31 more years, to 86.
At Schwab, we see it differently. Due to the wealth effect, we generally recommend that men plan to live to age 92 and women to 94—unless your individual or family health history suggests otherwise.
What's more, the SSA considers only your sex and date of birth, comparing you with every other American in its vast database, irrespective of your individual circumstances.
For those who want a more bespoke estimate of their longevity, there are several online tools that consider more factors of life expectancy, including education, ethnicity, and history of chronic illness.
What's your number?
Myriad tools exist online to help estimate your longevity. Here are three with varying degrees of specificity.
- The Social Security Administration's Life Expectancy Calculator requires just two inputs: age and gender.
- The American Academy of Actuaries and the Society of Actuaries' Longevity Illustrator is relatively simple but asks two important questions the SSA doesn't: Do you smoke, and how's your general health? It also allows you to estimate your and your spouse's longevity in tandem—an important planning consideration for couples.
- The Blue Zones True Vitality Test, developed in collaboration with the University of Minnesota School of Public Health, asks roughly 40 questions related to your overall health, including your education level, ethnicity, income, postal code, and history of chronic illness.
Plan to succeed
Estimating your longevity is an important aspect of retirement planning, but creating a solid financial plan and updating it regularly may be even more consequential to your success.
Financial planning isn't something you do just once. Your health, the market, and even tax laws can all change on a dime, so it's a good idea to check in at least once a year—and update your life expectancy should any of your assumptions change—to make sure you're still on track.
What, precisely, does being on track look like? Drawing on clients' financial plans, Schwab planners use specialized software to estimate how long clients' assets will last, given their life expectancy, spending needs, and the anticipated returns from their investments. The system aims for at least 75% probability a client will have at minimum a dollar left upon death.
A successful retirement plan will balance your current needs and wants with your future goals. On a more fundamental level, it should help you enjoy your golden years in whatever way you see fit.
Stretch your dollars
No matter how much planning you do, there's no way of knowing for certain how long your retirement journey will last. The risk of running out of money is the top concern for most retirees—even those with ample savings. Fortunately, there are ways to guard against it.
First and foremost is Social Security, which offers guaranteed income for life. It may not cover all your expenses in retirement (the maximum monthly benefit in 2025 is $5,108), but it can go a long way in supplementing your portfolio income.
If your life expectancy is on the high side, you should strongly consider delaying your Social Security benefit. That's because each year you wait to collect beyond your full retirement age (between 66 and 67, depending on your birth year) increases your monthly payouts by 8% (up to age 70, after which there's no additional benefit). You can estimate your monthly benefit at various ages using your actual income history.
Retirees who want even more predictability might consider putting at least some of their money into an annuity, which makes guaranteed payments for life once the contract is annuitized—regardless of how the stock market performs.
Once you purchase an annuity, however, you should be aware of the terms of withdrawal and potential surrender charges. Depending on the type and status of the annuity, you may not be able to get the principal back outside a set payment schedule without incurring penalties. That said, some clients find that investing part of their savings in a guaranteed source of income, such as an annuity, covers their basic expenses, which means their remaining investment portfolio can help facilitate other long-term goals, such as legacy planning.
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