CFP advises U.S. retirement savers to avoid a 'dangerous' assumption made by 64% of retirement savers.

Determining an exact time frame for retirement savings can be challenging.

According to the National Center for Health Statistics, the average American lifespan is 77½ years. For individuals born after 1960, the full retirement age, at which they receive a full Social Security benefit, is 67.

Most U.S. retirement savers are not planning on a lengthy retirement, with 64% saying they will save for 20 years or less, or not at all, according to CNBC's August 2024 Your Money retirement survey conducted with SurveyMonkey. Only 16% said they were planning on a retirement of 31 years or more.

Planning for a short retirement may not seem like a bad idea based on averages. However, if you live longer than expected, things can quickly become unfavorable, warns Yusuf Abugideiri, a certified financial planner and chief investment officer at Yeske Buie in Vienna, Virginia.

"It's a risky move to bet all your assets," he warns. "We always steer clear of such a plan."

The dangers of underestimating your retirement

According to Abugideiri, aiming for a specific number of years in retirement is risky because it relies on two significant assumptions.

For many people, the ability to work as long as desired is not a reality.

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"According to Abugideiri, in corporate America, once individuals reach a certain age, they become expensive and can be easily replaced at a lower cost. This often results in people being let go before their planned departure time."

According to research from the Employee Benefit Research Institute, the median retirement age for U.S. workers is 62.

Assuming you retire at the right time, you're relying on two assumptions: that you'll know how long you'll live and how your spending will look over that period. However, given medical advancements, this assumption is quite risky, says Abugideiri.

How the pros think about retirement longevity

The worst-case scenario for retirees is being unable to cover their expenses due to running out of money, which may result in taking on debt, significantly reducing their lifestyle, or not being able to afford necessary medical care.

Financial planners typically adopt a conservative approach when forecasting retirement outcomes for their clients.

"Instead of clients passing away with insufficient assets, we prefer them to have extra left over. We often estimate that they may live to 100 or 99 or 95, which is higher than the typical life expectancy, but not impossible. As a CFP and senior advisor at CGN Advisors in Manhattan Kansas, we project out to that extent and assess the likelihood of being financially secure throughout their entire lifespan."

To ensure that your assets endure beyond your retirement, you must determine a secure withdrawal rate, which is the amount you can withdraw from your retirement accounts annually while maintaining the growth of the principal.

The conventional approach to a 30-year retirement involves withdrawing 4% of your portfolio's value in the first year, and subsequently adjusting this amount for inflation. The amount you withdraw will be influenced by factors such as other sources of income, the amount you have saved at the time of retirement, your anticipated spending, and the likelihood of needing long-term care.

A common suggestion among planners is to incorporate flexibility into a withdrawal plan by reducing the amount taken, particularly during periods when the market has experienced a decline.

To prevent the portfolio from shrinking, Abugideiri advises avoiding overdrawing it, which can occur if you outlive your investment expectations. If you withdraw funds at a faster rate than the portfolio grows, the distributions will consume the portfolio, resulting in a negative curve.

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