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How Many Years of Retirement Should You Prepare For?

By Christy Bieber – Jul 30, 2020 at 7:15AM

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You don't want to run out of money too soon!

"Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money." This quote from Jonathan Clements is as apt a description as you can get. 

Unfortunately, one of the most challenging aspects of retirement planning is that you have no idea how long your money will have to last. You can't possibly know how long you're going to live, so it's pretty hard to figure out how many years of spending to plan for. There is data that can give you an idea of your average life expectancy. which can be helpful to get a better idea of how large your nest egg needs to be. 

Older woman looking out window.

Image source: Getty Images.

How many years of retirement should you plan for?

Recent data from J.P. Morgan shows the probability that men or women aged 65 and older will live to specific ages. According to the data, people currently 65 years old have the following probabilities:

  • A woman has an 86% chance of living until 75, while a man of the same age has a 79% chance. 
  • The chances of making it to 80 are 73% for a woman and 63% for a man.
  • Women have a 58% chance of reaching 85, compared to 44% for men. 
  • There's a 34% chance of reaching 90 if you're a woman, and 23% chance if you're a man.
  • The chances of making it to 95 are 14% for a women and 7% for a man.
  • There's a 3% chance that a woman will celebrate her 100th birthday, and just a 1% chance for a man. 

Since you definitely don't want to run out of cash too soon and, being that there's a 25% chance of living until 90 (no matter who you are), it's a good idea to bet on being retired for at least 25 years if you quit working at 65. And this has a lot of implications as far as your retirement planning goals for a few reasons:

  • You'll need your money to support you for a long time -- 35 years in some cases!
  • Inflation will have a large impact over 25 years or more, forcing increases in your withdrawal rate as you age to help maintain the same standard of living.
  • Without changes to Social Security, your buying power from these benefits will erode over time, as inflation outpaces cost of living adjustments. Benefits have already lost 1/3 of their value in the past decade, and this trend will likely continue -- which means you'll become more reliant on savings as you age since your Social Security income won't go as far.

The key to addressing all of these factors, and preparing for 25 years or more of retirement, is to adopt a safe withdrawal strategy. If you choose the right approach, your money should last for the rest of your life, even if you're among the small minority that becomes a centenarian. 

The good news is, there are a few different strategies you could adopt, including withdrawing 4% in your first year of retirement and increasing that amount by inflation annually, or following the withdrawal rates recommended by the Center for Retirement Research

How to make sure your money lasts

Deciding on one of these approaches once you're already in retirement is essential to ensure your cash lasts, but deciding on a strategy earlier on will help you make sure you're saving enough.

If you opt for the 4% rule, for example, you can determine how much income you want your savings to produce and multiply by 25 to figure out how large your nest egg needs to be. If you want $40,000 in annual income as a retiree, that would mean you'd need to save $1 million in a retirement account.

So whether you're retiring in two weeks or 20 years, research your options, pick your withdrawal strategy today, and base either your savings goals or your retirement budget around it. If you do that, you can hopefully make sure your money last for the rest of your life -- however long that may be. 

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