Longevity Risk: Could You Outlive Your Savings?

Mark Riepe is a 58-year-old in good health who lives in the San Francisco Bay area. For the purposes of retirement planning, he expects to live till he's 90; for his wife, he projects 94.

"For a long time, I thought my wife couldn't live without me," Mark jokes, "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."

Mark knows something about retirement planning. He's head of the Schwab Center for Financial Research—a position he's held for 25 years. And while he's spent his career thinking about how to make assets last a lifetime, estimating his own life span and determining how much to save for what's likely to be a long retirement is a challenge even for him.

"The hard thing for everyone, including me, is figuring out the extent of our retirement, and what the associated price tag will be," he says.

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. A 2016 study showed the richest 1% of women lived 10.1 years longer than the poorest 1%; for men, the difference was 14.6 years. (Overall, the number of centenarians—those living to at least age 100—rose a whopping 88% between 2010 and 2020, according to the U.S. Census Bureau.)

The bottom line: If you're healthy and wealthy, your savings will need to last a long time.

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 27 more years, to age 82; a woman the same age should plan for 31 more years, to 86.

Planners at Schwab see it differently. Studies have found a significant correlation between greater wealth and more favorable health outcomes, including lower mortality and higher life expectancy. "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," says David Jamison, CFP^®, a director in Schwab's Wealth & Advice Solutions team. 

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.

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," David says. "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, David explains how he and other Schwab financial 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 a 75% probability a client will have at least a dollar left upon death.

"A successful retirement plan will balance your current needs and wants with your future goals," David says. "On a more fundamental level, our job is to help our clients enjoy their golden years in whatever ways they see fit."

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," David says. "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 2023 is $4,555), 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," David says.

There are also automated investment products that, while not guaranteed, can use your projected income needs and life expectancy to potentially help generate a sustainable monthly paycheck from your portfolio.

"Figuring out how much you can withdraw from your portfolio each year without depleting it too soon is a huge challenge for retirees," David says. "Automated products that continually monitor your situation and offer solutions to keep you on track are a real boon to retirement-income planning. They can help put your mind at ease that your portfolio will last as long as you do."