The Longest Retirement Lever – Your Retirement Age
By Macy Jae Moore on May 17, 2023
Written by: Zeke Anders
Archimedes said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world”. A lever can be a helpful tool which amplifies your strength. Leverage can allow us to purchase a home or expand a business. The length of your working career and retirement are important levers in your financial plan. A longer savings and accumulation period is a lever in your favor. A longer retirement, from retiring early or living longer, is a lever that can increase risk. This piece will cover how these levers affect your financial plan and provide a framework for deciding when to retire.
We recently covered how long you should plan for your retirement to last[1]. To recap, most people should plan for a longer retirement than they think, as there is a decent probability of living well into their 90s, especially for at least one member as couple. If you retire at age 65, that means a lever 30-years long or more. If you retire earlier than 65, that adds length to the retirement lever. There may be additional costs associated with retiring earlier than 65 as well. Medicare is not available until age 65, and the earliest you can claim Social Security is age 62, which, if you claim at 62, permanently reduces your benefits. These costs and penalties are like adding weights to your lever. Your withdrawal rate is another weight on the lever. A low withdrawal rate is light weight on the lever, a high withdrawal rate is a heavy weight on your lever.
For Illustrative Purposes Only
Investment returns are another important lever, but future returns are unknowable. Taking more risk increases your chances of higher returns but may also increase volatility. Volatility is the key driver of sequence of returns risk and the reason the 4% rule, withdrawing 4% of your portfolio in the first year of retirement and adjusting for inflation thereafter, is not the 5% rule or 6% rule. While U.S. equities have returned 9-10% on average historically[1], taking withdrawals from the portfolio while it is down leaves fewer assets to participate in the recovery. Thus, we can’t safely withdraw 9-10% per year from an investment portfolio. Sequence of returns risk is highest at the beginning of retirement because of the potentially long period of withdrawals ahead. A longer retirement or a higher withdrawal rate may require taking more risk through a higher allocation to equities, even with the risk of higher volatility.
Here is a case study to illustrate these ideas. We have a couple, both of whom are 65 years old. They have $800,000 in a taxable joint account and $1,200,000 in an IRA. Their combined Social Security benefit at full retirement age is $54,000 per year, adjusted for inflation. They plan to spend $130,000 before taxes in retirement, adjusted for inflation each year. Their accounts are invested in 70% equities and 30% bonds. Using 1,000 randomly generated market return scenarios, they have an 84% probability of success of reaching age 90 without running out of assets. If they live to 95, their probability drops to 78%, and if they live to 100 the probability drops to 71%. This is a substantial change. Keep in mind that if they are non-smokers of average health there’s a 34% probability one of them will live to 95, and a 12% chance one of them will live to age 100. If they retired at 60 with the same desired spending, the probability of their assets lasting to age 90 drops to 64%, and declines for longer life expectancies. If they were to reduce their spending from $140,000 to $120,000 they would increase the probability of their assets lasting throughout retirement back to the ‘retire at age 65’ values.
| Taxable Assets | $800,000 |
| IRA | $1,200,000 |
| Social Security | $54,000 |
| Desired Spending | $140,000 |
| Stocks/Bonds | 70%/30% |
For Illustrative Purposes Only
This isn’t to say everyone should work into their 70s, or that a 40-year retirement can’t work. It depends on your assets and your needs. The 4% rule worked for a 30-year retirement historically[1]. A lower withdrawal rate could be sustainable for longer than 30 years. A lower probability of success could be corrected with small but persistent adjustments. It may help to delay claiming social security even if you retire earlier to reduce your withdrawal rate through the rest of your retirement[1]. Much of this risk is mitigated if a significant portion of your retirement income needs are covered by pensions or Social Security. Working a little longer can make a big difference in your financial plan. A Stanford Longevity Center study showed that 3 months of work increases retirement income as much as saving an additional 1% of earnings for 30 years[2]. Deciding when to retire is personal and depends on many factors including your physical and mental health, family needs and responsibilities, and more. But to the extent there’s an option around when to retire, it is important to acknowledge the power of the lever that is the length of your retirement.
[1] https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp[1]
https://twickenhamadvisors.com/blogs/unobstructed-thoughts/whole-life-insurance-as-a-buffer-asset
Zeke Anders – Planning Specialist | zanders@twickenhamadvisors.com
Disclaimer
Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.
