How Spending Shocks Affect Retirement Planning

Longer retirements and costly late-life care can force retirees to withdraw more and weaken their financial plans. Garun .Prdt/ShutterstockMarket performance tends to dominate the conversation about risks to a retirement plan. But spending shocks can also curb a retirement portfolio’s longevity. We examined the implications of two major types of spending shocks: unanticipated early retirement and uninsured long-term care expenses at the end of life. The former may necessitate spending over a longer period, often with higher healthcare costs in the pre-Medicare years, while the latter can translate into an effective “balloon payment” toward the end of life. Early RetirementEarly retirement—before the standard age of 65—is an increasingly common scenario. While Social Security’s full retirement age is currently between 66 and 67, the average retirement age is 62, according to a study from MassMutual. That’s corroborated by Social Security filing data, which show that roughly 25 percent of retirees take Social Security when it’s first available at age 62, and 15 percent file at 63 or 64. Nearly half of the retirees surveyed by MassMutual said they had retired earlier than planned; commonly cited reasons included layoffs, being able to retire sooner than expected, or illness or injury.Early retirement has significant implications for retirement spending, with longer drawdown periods necessitating lower spending to maintain a high likelihood of not running out later on. In our base-case spending simulation, expanding the drawdown period from 30 to 35 years reduces the starting safe withdrawal rate from 3.9 percent to 3.5 percent. Stretching the time spending horizon to 40 years takes the starting safe withdrawal rate to 3.2 percent.