Many people assume retirement calculators offer a dependable way to plan for the future. But most rely on a single assumption: that you’ll live an average-length life.
Average life expectancy has dipped slightly in recent years, but more people are living far longer than the charts assume. You probably know someone whose parent is pushing 100, or already there. This trend is accelerating, with the U.S. Census Bureau predicting a more than fourfold increase in the number of Americans aged 100 and older in the next three decades. [i]
If your retirement plan is based on a life expectancy of 85, what if you live to 95 or even 105? Where will the funds come from to cover these additional years, especially with rising healthcare costs and inflation eating into your purchasing power? These are not hypothetical scenarios. They are the new reality for retirees who may spend not just 20, but 30 or even 40 years in retirement, potentially facing a significant financial burden.
Why Retirement Calculators Often Miss the Mark
The problem is that most calculators and the financial plans built around them don’t reflect the very real possibility that you could live far longer than average. They underestimate how long your money needs to last and usually completely ignore how longevity amplifies other risks, such as healthcare shocks and taxes.
Researchers from three U.S. universities analyzed 36 widely used retirement calculators, including those from major financial institutions. The results were alarming: more than two-thirds gave overly optimistic projections. Only 11 of the 36 calculators passed basic accuracy tests. The rest were found to be “misleading,” “overly simplistic,” or “of little help to consumers.” [ii]
In other words, the green “on track” light you see after entering your numbers might be giving you false comfort. Without a deeper look, you won’t know what risks are lurking beneath the surface.
Can You Afford an Extra 15 High-Cost Years?
Studies suggest that a 65-year-old couple today has a nearly 50% chance that at least one spouse will live past age 90, and about a 20% chance one will reach 95. [iii] Yet, many retirement tools encourage people to plan for only a 25- or 30-year retirement, instead of the 35 to 40+ years that may be needed.
That might not sound like a significant gap, but the cost of even an extra decade can be enormous. A $75,000 annual lifestyle, multiplied by ten years with even modest inflation, could require an additional $1 million or more in savings. And that’s before factoring in healthcare, long-term care, or market volatility.
Healthcare Shocks and Long-Term Care
Here’s where the numbers get even more startling: A 65-year-old couple retiring today may need more than $315,000 to cover out-of-pocket healthcare expenses in retirement, according to Fidelity. [iv]
That massive number doesn’t even include long-term care, which Medicare expressly excludes. If one spouse needs at-home care, memory care or assisted living, costs can easily exceed $100,000 per year. According to Genworth, the national median price for a private room in a skilled nursing facility is now over $127,000 per year. [v]
Calculators often bury this reality in a single checkbox or ignore it entirely. But for retirees living into their 90s or beyond, healthcare is one of the most financially disruptive events they’ll face.
Taxes on Retirement Income
Many calculators also ignore the impact of taxes in retirement. That’s a critical mistake.
Depending on your income and location, up to 85% of your Social Security benefits can be taxable. Add in other income and required minimum distributions (RMDs) from traditional IRAs or 401(k)s, and retirees often find themselves in higher tax brackets than expected.
The longer you live, the longer these taxes chip away at your income. Without a tax-efficient withdrawal strategy, more of your retirement dollars go to the IRS than you planned for. Yet, few calculators display this erosion in a meaningful way or emphasize the importance of planning for it.
Accountability Matters More Than Assumptions
Here’s something else calculators ignore: accountability. You can plan for longevity, model inflation, and stress-test your scenarios. Still, if your investments don’t deliver consistent results, the entire plan can fall apart.
That’s why it’s essential to work with an advisor who prioritizes accountability and helps keep your investment plan on track. One of the strongest signals of this capability is GIPS® compliance. Short for Global Investment Performance Standards, these are internationally recognized guidelines for calculating and presenting investment returns. Firms that follow them voluntarily agree to use standardized reporting and disclose performance in a way that can be independently verified.
GIPS compliance doesn’t guarantee outperformance, but it serves as a powerful filter for identifying high-performing advisors. After all, underperforming advisors rarely choose to be measured so openly. (Learn more about GIPS®.)
What Should You Consider?
Retirement calculators can be a helpful starting point, but they’re not a real financial plan. And they’re certainly not a risk management tool. What you need is a comprehensive financial plan that takes into account all potential risks and factors.
A more realistic approach often includes:
- Planning for longevity, aiming to age 95 or 100, not 85
- Accounting for long-term care and unexpected medical costs
- Incorporating a smart tax strategy for withdrawals
- Building flexibility for behavioral and market surprises
- Stress-testing your plan against a myriad of possible conditions
What’s the best way to do this? The gold standard for planning is to use a CERTIFIED FINANCIAL PLANNER™ professional to help you develop a comprehensive financial plan. You don’t have to figure it all out on your own. Whether it’s preparing for retirement, lowering your tax liability, or creating a legacy plan, a CFP® professional can help you make more strategic decisions.
Key Takeaway
It’s crucial to ensure your money lasts as long as you do. And with more Americans than ever expected to reach 100, the question isn’t whether your retirement plan is giving you a false sense of security; it’s whether your plan can handle reality.
Ready to build a plan that’s made to last?
Talk to our CFP® professionals and GIPS® compliant financial advisors today.
[i] https://www.pewresearch.org/short-reads/2024/01/09/us-centenarian-population-is-projected-to-quadruple-over-the-next-30-years/
[ii][ii] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2732927
[iii] https://retirementresearcher.com/long-can-retirees-expect-live-hit-65/
[iv] https://www.plansponsor.com/health-care-retirement-will-cost-average-315000/
[v] https://investor.genworth.com/news-events/press-releases/detail/982/genworth-and-carescout-release-cost-of-care-survey-results
