Investing for Longevity: Will Your Retirement Savings Last?

What’s your greatest fear about retiring? Most people say running out of money. The possibility that you will run out of money in retirement is known as longevity risk.

Estimating how long your retirement savings need to last is a fundamental input in financial planning. It affects your quality of life, your health care options and how much you can leave behind for loved ones. But you can’t predict how long you'll live with 100% accuracy.

Fortunately, you can reduce the risk of outliving your savings through careful planning and smart choices. Here are a few tips that may help.

What We Can Get Wrong About Longevity

Longevity—how long you might live—is often confused with life expectancy, which is how long, on average, an individual of your age, gender and health is anticipated to live, according to the Society of Actuaries. Longevity is a complex calculation of probabilities that change over time.

Plan to Live Longer Than You Think

Probability of Today's 65-Year-Old Living to Various Ages

^{Source: Actuaries Longevity Illustrator, 2024 Society of Actuaries and American Academy of Actuaries. All calculations are based on the information provided and the 2019 Social Security Administration mortality table, with future mortality improvement projected using the Society of Actuaries’ MP-2021 scale.}

How long you have already lived changes the calculation.

• If you live to age 65, there’s a higher likelihood that you’ll make it to age 85.

• And if you make it to 85, there’s a higher likelihood that you’ll make it to age 90.

The Actuaries Longevity Illustrator can help you forecast how long you might live based on your age, health and gender. Having a realistic understanding of how long your retirement could last can help you more effectively combat longevity risk.

Managing Longevity Risk: Balancing Interlinked Risks

How do you minimize the chance of outliving your retirement savings? The simple answer would seem to be to aim for the highest returns with your investments—that is, take on more market risk. However, doing that can increase other risks that could lead to losses you may not be able to recover from.

For example, increasing stock allocations generally offers higher growth potential, but it also increases your exposure to downside risk: Market declines occur more often than you may think. Over the past 90 years, the stock market has declined 20% or more every eight years.²

What if a big decline occurs when you’re close to or in retirement? That’s known as sequence risk, the timing or sequence of your portfolio’s performance.

Other types of risk come into and out of play as you move toward retirement. For instance, interest rate risk becomes more important when fixed-income investments increase the closer you get to your retirement date.

Inflation risk also rises as retirement nears because the loss of purchasing power can mean you need to withdraw more money than planned to cover the higher cost of living.

Investing for retirement should involve balancing the many risks investors face, according to our Multi-Asset Strategies team. The team developed a proprietary balance-of-risks framework for managing our target-date asset allocation funds.

Our professionals actively manage multiple risks as they change in relative importance over time and through various market environments. Here are some of the key risks our team monitors:

4 Components to Longevity Risk

1. Growth risk: The possibility that your investments don’t gain enough to see you through retirement.

2. Market risk: The risk that a market downturn will significantly harm your chances of having a fully funded retirement.

3. Macro environment risks: The chance that unexpected changes in the economy, like a recession or high inflation, will hurt investment performance.

4. Behavioral risks: The risk that investor decisions will hurt retirement readiness, such as abandoning a retirement plan during a market downturn.

Our team’s risk management process is focused on reducing the possibility of large losses. The aim is to generate a smoother path of investment returns, which may lead to more investors successfully reaching their retirement goals.

You can gauge a portfolio manager’s ability to manage risks by looking at an investment’s risk-adjusted returns . “Risk adjusted” simply refers to an investment’s gain or loss relative to its risk. So, if two investments have the same absolute return during a given period, the one that got there with lower risk has a better risk-adjusted return.

Take Social Security Strategically So Money Lasts Longer

For many retirees, Social Security is a key income stream in retirement. If you can delay taking benefits, you may be able to minimize the risk associated with increasing longevity because you’ll receive more monthly income from Social Security once you start to take it.

You may be eligible to receive benefits starting at age 62 and that may be the right decision for you depending upon your situation. However, waiting until full retirement age (which varies depending on when you were born) or until age 70 could mean that you get a higher monthly benefit.

Married couples may want to consider their Social Security strategy together. Each spouse’s earnings and anticipated life expectancy help determine how and when it makes sense to take this benefit.

Before you file, run a few different scenarios to see how your benefits would change based on when you collect. You can contact the Social Security Administration up to four months before starting benefits, but you can review your options much earlier. Socialsecurity.gov is a good resource, or you can call for an appointment at 800-772-1213.

Seek a Sustainable Withdrawal Rate to Lower Longevity Risk

Of course, the rate at which you withdraw your savings when you’re in retirement also impacts how long it will last. Your withdrawal rate is how much you take from your retirement accounts each year to fund living expenses. A sensible withdrawal strategy can help you make the most of the money you have worked so hard to accumulate.

• A withdrawal rate that is too high can deplete your savings sooner rather than later.

• A withdrawal rate that is too low means you may unnecessarily miss out on having the lifestyle you really want.

In the examples below, withdrawing 10% each year may result in the money running out after eight years. That’s too short a time horizon for most people retiring now. However, reducing the withdrawal rate to 4% shows the money lasting 29 years.

You often hear about withdrawal rates between 3% and 5% as a guideline, but it depends on your situation.

Impact of Withdrawal Rate on How Long Your Money Lasts

(Hypothetical Examples)

^{These hypothetical situations contain assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities. Assumes a portfolio with 50% equity, 45% bond, 5% cash equivalents over 30 years at a 90% confidence level, with the following average monthly capital market returns: stocks 7.9%, 18.90% standard deviation; bonds: 5%, 4.95% standard deviation; cash equivalents: 2.25%, 1% standard deviation. The correlation between stock and bond returns is 0.2. Inflation rate is assumed to be 2% annually and is included in each of the withdrawal rates depicted above.}

^{Standard deviation defines how widely returns vary from the average over a period of time.
Source: American Century Investments, 2024.}

Misinformation about benefits, finances and investing can undermine retirement goals. Learn more about some common money mistakes that could derail your retirement plans.

Tackling Longevity Risk Is Smart Contingency Planning

Accounting for longevity risk in your retirement planning involves looking at the probabilities of living to various ages and the financial resources you’ll need in those situations. You can think of it as contingency planning—being prepared for the unexpected.

Consider working with a financial advisor who can help you develop a plan based on your individual circumstances and objectives—and make the most of the time you have left before retiring.