Your Retirement Fund Longevity Score: Are You Ready?
The **Retirement Fund Longevity Score** isn't a single number; it's a qualitative assessment of whether your nest egg can withstand the three greatest threats to retirement success: living too long, market volatility, and rising costs. Your goal is to maximize this "run-time" well beyond your expected lifespan.
The Benchmark: The 4% Withdrawal Rule
The starting point for assessing your longevity is the **4% Rule**. This rule suggests that if you withdraw $\text{4\%}$ of your initial portfolio balance in the first year of retirement and adjust that amount for inflation annually, your money has a high probability (historically over $\text{90\%}$) of lasting for at least $\text{30 years}$.
How to Get Your Target Nest Egg
Your target retirement savings is calculated by reversing the 4% rule:
$$\text{Target Savings} = \frac{\text{Desired Annual Income}}{\text{0.04}}$$
For example, if you need $\text{\$60,000}$ per year from your savings (after factoring in Social Security and pensions), your target is: $\text{\$60,000} / \text{0.04} = \text{\$1,500,000}$.
3 Factors That Ruin Your Longevity Score
Achieving your target savings is only half the battle. These three risks can quickly derail the most disciplined plans:
1. Sequence of Returns Risk 📉
This is the risk that poor investment returns occur early in your retirement, just as you begin withdrawing money. Selling assets at a loss early on means you have fewer shares left to recover when the market eventually rebounds.
- Mitigation Strategy: Implement a **bucket strategy**. Keep 1-3 years of living expenses in highly liquid, low-risk assets (cash, CDs, T-Bills) so you can draw from this "safe bucket" during a market downturn instead of selling off depreciated growth assets.
2. Longevity Risk (The Risk of Living Too Long) 🏥
Longevity risk is the chance that you outlive your money. Since life expectancy for a couple who reaches age 65 suggests a high chance that one spouse will live into their $\text{90s}$, planning for only $\text{30 years}$ of retirement may be insufficient.
- Mitigation Strategy: Plan for $\text{35}$ or $\text{40 years}$. For guaranteed income later in life, consider **delaying Social Security** until age 70 (which can increase your annual benefit by $\text{8\%}$ per year past your Full Retirement Age) or using a small portion of your savings to purchase a deferred **annuity** that pays out only after age 85.
3. High Healthcare Costs 💊
Healthcare is one of the biggest budget unknowns. A typical healthy 65-year-old couple can expect to spend hundreds of thousands of dollars on medical expenses throughout retirement, not including long-term care.
- Mitigation Strategy: Maximize contributions to a **Health Savings Account (HSA)** while working (if eligible). This account offers a rare triple tax advantage and can be used as a supplementary retirement savings vehicle specifically for medical expenses. In retirement, plan for a dedicated medical expense line item that **increases faster than general inflation**.
Use our advanced simulator to stress-test your portfolio against the Sequence of Returns Risk.
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