While market performance often dominates discussions about retirement risks, spending shocks can significantly impact the longevity of retirement portfolios. Morningstar’s research highlights two major types of spending shocks: unanticipated early retirement and uninsured long-term care expenses at the end of life.
Early Retirement
Early retirement, occurring before the standard age of 65, is becoming increasingly common. Although Social Security’s full retirement age is between 66 and 67, many retire at 62, according to MassMutual. This trend is supported by Social Security filing data, which shows that 25% of retirees take benefits at 62, and 15% file at 63 or 64. Reasons for early retirement include layoffs, unexpected financial readiness, or health issues.
Early retirement affects spending by extending the drawdown period, necessitating lower spending to avoid depleting funds. For instance, extending the drawdown period from 30 to 35 years reduces the safe withdrawal rate from 3.9% to 3.5%. Bridging healthcare coverage before Medicare eligibility at 65 can increase spending, with ACA marketplace insurance costing $800 to $1,200 monthly in 2025. Delaying Social Security to increase benefits can also require higher early withdrawals, risking long-term portfolio sustainability.
Long-Term Care Spending
Long-term care costs can cause significant financial strain later in life. A Morningstar report found that 43% of baby boomers will incur long-term care costs, averaging $242,373. The need for care increases with longevity, affecting 52% of men and 60% of women who die at age 95.
To manage this risk, retirees can set aside funds specifically for long-term care, use home equity, or rely on government resources if finances are tight. Alternatively, they can incorporate potential long-term care costs into their spending plans, reducing spending throughout retirement to prepare for future spikes. Modeling a long-term care shock, the safe withdrawal rate for someone retiring at 67 drops to 3.5% from 3.9% without the shock.
Original reporting: Texarkana Gazette — read the source article.
