Will I outlive my retirement savings? This question dogs many retirement savers who view their accounts, often far shy of $1 million, with dread and fear.
After all, aspiring retirees have to plan for longer lifespans, potentially steep medical costs and the uncertainty surrounding government programs such as Social Security.
Meanwhile, the average saver who is 61 or older with a workplace retirement account has $449,228 invested for retirement, according to a recent BlackRock survey. (Workers who are 61 and older with no employer accounts available have just $258,094 saved.)
If you need help saving for retirement, talk to a financial advisor.
But there is good news for worriers: Even a relatively moderate increase to the amount in your retirement savings can drastically extend its lifespan, reducing the chances that you’ll outlive your money.
And while saving an extra six figures for retirement is easier said than done, it can be readily achievable, even for folks already in their 50s. A modest percentage increase to a retirement account, or the deposit of a one-time windfall such as an inheritance or large tax refund, can make a significant difference. Here’s how we analyzed the data.
Our Analysis
SmartAsset crunched the numbers on how long three retirement investment accounts would last, given certain spending, macroeconomic and investing patterns. The accounts total $400,000, $500,000 and $600,000.
We used research to develop a data-informed model of typical saving and spending behaviors for the account-holders. While, in reality, every retiree’s saving and investing behaviors will differ, these figures gave us an average profile upon which to run the numbers.
Spending: We assumed that each retiree spends $50,595 per year, or $4,216 per month. That’s the average amount someone between the ages of 65 and 74 spends in retirement, according to a Fidelity analysis of Bureau of Labor Statistics data.
Next, we calculated that Social Security covers 39% of those expenses each year, based on a $1,657 average monthly disbursement in January 2022, according to Social Security Administration data. (Although the future of Social Security is uncertain, we opted to assume it’ll continue in this analysis, perhaps optimistically counting on the political will and economic conditions to keep it funded.)
Thus, the retiree must withdraw $2,559 from his or her account in the first month of retirement to cover expenses. We estimated this figure increases 2.2% annually, or 0.18% monthly.
While today’s inflation rate is much higher than 2.2%, we wanted to view inflation over the long term and take into account a retiree’s personal inflation rate, which may be lower than the average, based on spending patterns.
Investments: In this analysis, SmartAsset assumed that the owner of this account doesn’t need to take required minimum distributions (RMDs) and is withdrawing just what he or she needs to live in retirement. We’re also assuming this account is something like a Roth IRA in which no taxes are due upon withdrawal.
To run these numbers, we also considered a retiree who is invested in a diversified investment fund returning 5% per year.
Running the Numbers on Outliving Retirement Savings
Our three savers are identical with the exception of the starting amount in their retirement accounts. Here’s what they look like:
Saver 1: This investor starts out with $400,000 in a retirement account. Her first month in retirement includes withdrawing $2,559 to cover living expenses. As the months and years tick along, her expenses rise with inflation, but her investments grow faster, earning a 5% return on investment.
Her respectable savings account lasts 192 months, or 16 years. If she retires at age 65 in 2022, she’ll be 81 in 2038 before her account hits $0.
Here’s where the problem lies: The probability that a 65-year-old, nonsmoking woman in excellent health will live until 85 – or four years beyond her savings – is 72%, according to the American Academy of Actuaries and Society of Actuaries’ “Longevity Illustrator.” The probability for a man is 63%.
So, chances are, assuming a retirement age of 65, this saver would outlive her retirement fund. She’d have to lean on other retirement accounts or survive on Social Security, potentially creating financial stress in her final years.
Saver 2: This saver launches into retirement with a $500,000 account, using the same spending patterns as Saver 1. Her savings last a solid 257 months, or 21 years and five months, into 2044.
That extra $100,000 bought her nearly six-and-a-half more years and financial security into her late 80s.
While that’s not bad, the odds that she’ll live another three to four years – to age 90 – are 54%. The likelihood that a man in similar health will live to 90 is 43%. So it’s still a coinflip whether this saver will outlive this specific retirement account.
Saver 3: This investor is the squirreliest saver. She barrels into retirement with $600,000 and the same expenses and investments her peers have. Saver 3’s savings stretch 332 months, or 27 years and 8 months. If she retired at 65 in 2022, she’d be between 92 and 93 in 2050 before exhausting the funds in this account.
The chance she’ll live to 95 is 31% (22% for an equivalent male). So, there’s still a potential to outlive this account, but a much lower likelihood than in the other two scenarios.
To put this in perspective, a savings increase of 50% over a $400,000 base account nearly doubles the lifespan of this nest egg. Not bad.
Saving an Additional $100,000
Of course, saving an extra $100,000 or $200,000 takes concerted effort. But it's not impossible for investors who approach it with slow and steady dedication, capitalizing on the beauty of compounding returns.
For example, if you start saving an extra $5,000 per year in a Roth IRA (assuming a 5% return and 25% tax rate) at 51, you’d have nearly $103,000 extra in retirement at the age of 65.
Saving an extra $1,000 per year starting at age 29 will also net you $100,000 extra toward retirement by the time you turn 65.
Bottom Line
You don’t have to double or triple your retirement savings to have a major impact. In fact, increasing your retirement investment account by 25% or 50% can make the account last years longer, helping to reduce the likelihood that you’ll outlive your money. Saving for your golden years is not an all-or-nothing calculation.
Retirement Planning Tips
- Planning for retirement can feel like solving a complicated puzzle, but you don't have to go at it alone. A financial advisor can help you put the right pieces together by assessing your needs and connecting you with the services that are right for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security plays a critical role in the retirement plans of many. By delaying Social Security beyond your full retirement age, you can increase your benefit up to 8% per year until age 70. SmartAsset's Social Security Calculator can help you determine the best time to claim your benefits.
Questions about our study? Contact press@smartasset.com.
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