What Is Your Retirement Planning Horizon?

Bill Bengen’s 1994 research that established the 4 percent rule was seeking the maximum constant dollar withdrawal that would have lasted for any historical 30-year period. But is 30 years the right planning horizon for you? If not, how should you adjust the guideline?

There are several primary factors that will affect your planning horizon:

• At what age will you retire? Social Security’s full retirement age is in the process of increasing from 65 to 67. Many retirees will find it necessary to wait until age 70 to maximize the benefit. Others will collect as soon as they can at age 62. The earlier you plan to retire, the longer your time horizon.
• Are you married or single, male or female? An average male that is 65 today can expect a 5 percent chance of living until age 95. An average female has a 5 percent chance of living until age 98. Married couples at age 65 today have a 5 percent chance of at least one spouse living another 34 years. These metrics suggest that the 30-year planning horizon may be actually be short-sighted for risk averse retirees, in which case a lower withdrawal may be appropriate.
• Is your spouse roughly the same age as you, or a very different age? The average age difference between husbands and wives is about two years. There are many circumstances where the age difference is much larger. When couples retire at roughly the same time, one spouse may be quite a bit younger. Plan based on the younger spouse’s age.
• How healthy are you? If you take pride in your health and maintain an active lifestyle, there’s a good chance you’ll live longer than average. Look to your parents and grandparents for an indicator of genetic longevity. It may be important to plan for a longer retirement if someone in your family tree has made into their 90s.
• What is your tolerance for risk? Are you just looking to plan for a horizon that is accurate “on average,” or do you need more piece of mind? If you want to be sure you won’t outlive your horizon, you may consider the number of years for which less than 5 percent of retirees will outlive the horizon. As alternatives, we consider the length of time at which only 1 percent, 10 percent, or 50 percent of retirees will outlive the horizon.

At the extremes, a healthy, risk-averse couple retiring at age 55 may want to consider a horizon that is more than 40 years, whereas a single male working until he’s 80 can safely plan for a retirement of less than 20 years.

The table below looks at planning horizons based on recent life expectancy data. These factors can help you assess an appropriate planning horizon and judge whether rules of thumb such as the 4 percent rule should be adjusted accordingly. As compared with a 30-year horizon, a 20-year horizon can probably increase the safe withdrawal rate by about 1.3 percent, whereas a 40-year horizon should probably decrease the safe withdrawal by about 0.7 percent.