Morgan Stanley
Wealth Management

How to Avoid Outliving Your Retirement Savings

Jul 26, 2023

If your retirement lasts longer than you expect, will you be ready? Here’s how to make your money last.

Dan Hunt

Key Takeaways

  • Americans are living longer; more than a third of today’s 65-year-olds expected to reach age 90.
  • A longer-than-expected lifespan can put considerable strain on even a well-funded retirement plan.
  • Aligning investment strategy with income needs, taking steps to help reduce taxes and, in certain cases, delaying Social Security payments can help stretch your nest egg.
  • Long-term care insurance and annuities may provide additional financial safeguards.

Most people look forward to retirement and the prospect of new hobbies, travel and quality time with family. Improvements in medical care have increased the length of time that retirees may have to enjoy these years. However, with longer retirements comes a new challenge: Will your retirement savings last?

 

You might be surprised how long you need to plan for. In 1970, the average retirement lasted between 12 and 16 years. Now it’s common for retirements to span 20 years or more1–and that number may continue to increase in light of potential future medical advances. Current data suggests more than a third of 65-year-olds will live to age 90, and the likelihood that at least one member of a couple will live to that age is nearly one in two.2 And higher income and education levels tend to increase the likelihood of longer lifespans even more.

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What that means for your savings is that it has a steeper hill to climb. Consider a hypothetical 65-year-old retiree with a retirement fund. Morgan Stanley analysis suggests that if she has a median lifespan, the probability is just 9% that she won’t be able to maintain her planned spending without eventually running out of money. However, if we assume the longer lifespan typical of higher-income retirees, her odds of outliving her nest egg jump to 30%.

 

Fortunately, there are a variety of strategies you can use to reduce longevity risk in retirement savings. Here are five to consider:

  1. 1
    Maximize your savings

    If you’re saving for retirement, consider increasing your pre-retirement savings: Contribute the maximum allowed to your workplace retirement plan and individual retirement account (IRA), which offer tax advantages, as well as using taxable investment accounts and potentially even certain insurance products.

     

    If you’re retired, taking less out of your accounts may help you stretch your nest egg if necessary. Certain types of investments, such as bonds or dividend-paying stocks, can also help you generate income for your spending needs in retirement without necessarily having to sell those securities.

  2. 2
    “Smooth out” your taxable income

    A strategy known as “income smoothing” aims to help reduce your future tax liability once your required minimum distributions (RMDs) kick in at age 73. For example, you may decide to withdraw more money than you need from tax-advantaged accounts, such as traditional IRAs (but not Roth IRAs), earlier than required in order to lower your balance. Why? Even though you’d have to pay taxes now on those higher withdrawals, that strategy could help you avoid being pushed well into higher tax brackets that can result in significantly larger tax payments when your RMDs eventually kick in. 

  3. 3
    Delay Social Security

    Social Security benefits can provide a significant boost to the sustainability of your nest egg. Though you can begin collecting reduced Social Security benefits as early as age 62, you won’t be entitled to full benefits until you reach what the federal government considers “full retirement age,” which for most retirees is 66 or 67. However, it often pays to defer Social Security longer to lock in a higher income stream, adjusted for inflation. In general, your Social Security benefit can increase by an additional 7.4% for each year you wait to claim it after your full retirement age, up to age 70.

     

    Even accounting for the delay in receipt of benefits, we estimate that deferral pays to the tune of over 3% per year more in cumulative benefits plus cost-of-living adjustments, which is a very attractive return. There are caveats, of course. For example, very high withdrawal rates may increase the risk of the sustainability of your plan, so retirees with lesser funding levels may be better off claiming at full retirement age, or potentially even earlier.

  4. 4
    Consider annuities

    Annuities are a financial product that offer guaranteed payments for the rest of your life or for a set number of years, potentially reducing the risk that a longer life will jeopardize your comfortable retirement. There are different types of annuities to consider. Variable annuities, for example, have a value based on the performance of a portfolio of professionally managed investments. Fixed index annuities are benchmarked to the performance of an index, like the S&P 500, with minimum and maximum returns. Fixed annuities offer contractually specified growth and payout rates. Your Financial Advisor can help you determine the best solutions for you based on your personal financial situation. 

  5. 5
    Consider long-term care insurance

    Long-term care insurance, including riders on life insurance and annuity products, provide access to tax-efficient benefit dollars enabling flexibility and choice in paying for services required due to an extended care event. Funds may be used for nursing homes, health aides, or potentially care provided by family members. Such care can be very expensive without insurance. For example, in 2021, the national annual median cost of an in-home health aide was more than $61,000 and the median cost of a private room in a nursing home facility was more than $108,000.3 Complicating matters, such expenses typically arrive at the end of life, when you may have already spent much of your nest egg. 

i
Your Financial Advisor can help you determine the best solutions for you based on your personal financial situation.

How a Morgan Stanley Financial Advisor Can Help

The prospect of planning for a longer retirement can be intimidating but using the strategies above can help minimize the risk of outliving your assets. Your Morgan Stanley Financial Advisor has a variety of tools that take into account the many factors that matter to strategy, from longevity to sequential return risk to tax efficiency and beyond. Such resources and expert guidance can be critical to help you decide the right portfolio strategy and distribution plan for your specific situation and preferences. Your Financial Advisor can also help you figure out how much you need to save for a longer retirement—and help make sure you’re on track to start that retirement from a place of financial security.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

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Footnotes:

1 Expected Number of Years in Retirement, by Sex, Organization for Economic Co-operation and Development, 2020, https://stats.oecd.org/index.aspx?queryid=54758#

2 Your Retirement Checklist, Social Security Administration, January 2022, https://www.ssa.gov/pubs/EN-05-10377.pdf

3 Cost of Care Survey, Genworth, June 2, 2022, https://www.genworth.com/aging-and-you/finances/cost-of-care.html

Disclosures:

Hypothetical Performance

General: Hypothetical performance should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Hypothetical performance results have inherent limitations. The performance shown here is simulated performance not investment results from an actual portfolio or actual trading. There can be large differences between hypothetical and actual performance results.

Despite the limitations of hypothetical performance, these hypothetical performance results may allow clients and Financial Advisors to obtain a sense of the risk / return trade-off of different asset allocation constructs.

Investing in the market entails the risk of market volatility. The value of all types of securities may increase or decrease over varying time periods.

This analysis does not purport to recommend or implement an investment strategy. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations in this analysis. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. No analysis has the ability to accurately predict the future, eliminate risk or guarantee investment results. As investment returns, inflation, taxes, and other economic conditions vary from the assumptions used in this analysis, your actual results will vary (perhaps significantly) from those presented in this analysis.

The assumed return rates in this analysis are not reflective of any specific investment and do not include any fees or expenses that may be incurred by investing in specific products. The actual returns of a specific investment may be more or less than the returns used in this analysis. The return assumptions are based on hypothetical rates of return of securities indices, which serve as proxies for the asset classes. Moreover, different forecasts may choose different indices as a proxy for the same asset class, thus influencing the return of the asset class.

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one's state of residence and, if applicable, local tax-exemption applies if securities are

issued within one's city of residence.

The returns on a portfolio consisting primarily of environmental, social, and governance-aware investments (ESG) may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy. Investors should consult with their tax advisor before implementing such a strategy.

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

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