Who Plans to Retire Early?

We often joke that our job was created because of increasing life expectancies and pensions seldom being offered. Obviously, finance and investing have become more complicated over time and there is an ever-increasing number of investment vehicles and planning strategies to help our clients choose between. We also understand there is great value placed in our ability to help clients balance current and future wants and needs. Although each of these subjects is vital in the discussions we have with clients, we inevitably come back to one major question with all clients: “How do I take what I have saved and make it last for my lifetime?”


When Social Security was established in 1935, the minimum retirement age to receive full benefits was set at age 65. The average life expectancy in 1935 was 61 years old! When Social Security started paying monthly benefits in 1940, the average life expectancy for those having attained age 65 was 77.3 years for men and 79.6 years for women. Although Social Security is in the process of moving the full retirement age to 67, life expectancies for people who attain age 65 have risen more than 7 years.


We find similar, if not worse, trends when we look at private and government pension systems. Simply put, life expectancies have increased quicker than retirement plans have been able to modernize to these facts. We have all heard the statistics about Social Security and various pension systems being under great stress; we believe this lack of evolution has occurred and will continue to place more burden on individual retirees.


With healthcare costs climbing, fewer pensions being offered, and limited inflation on social security, individuals and families are charged with creating their own lifetime income stream from their accumulated assets before retirement. Today, we work with some people over 100 years old. In most of these cases, they stopped working at least 35 to 40 years ago.  Think about the financial lifecycle of such a person. They became employed sometime in their early 20s, worked and saved for 40 years, and now are living off what they saved for more than 40 years. Interestingly, most of these individuals have some type of pension, either from their work or a current or deceased spouse. We are confident this will not be the case for the 100-year-olds we see over the next 20 years because we know the evaporation of that offered benefit. Retirees will be required to not only accumulate significant assets but also create a plan that is sustainable over many decades. We believe this challenge creates two critical questions for retirees: 1) How will inflation impact my ability to provide a lifetime income stream? and 2) How could retiring early impact this same income stream? 


Using our Monte Carlo system, we tested several cases to measure the impact of an extended retirement (i.e. early retirement and/or extended life expectancy) as well as the impact of varied rates of inflation. Although inflation has been subdued for the past two decades, we find it vital to include a higher rate of inflation in our calculations, particularly for those testing lifetime income.


In this case study, we have Drs. Bob and Mary Saver who are both 50, working as physicians, with plans to retire at age 65. They each make a combined $360,000 per year and have already saved a combined $1,800,000 towards retirement in 401ks. In this case, they show a 92% chance of success with life expectancies extended to age 100. This would be a very strong result. (A 92% chance of success is one we would deem quite good, a conclusion we typically establish at 85%).  


But notice the impact if we increase the inflation rate:


  • 3.97% Inflation = 92% Probability of Success (this is our base case)
  • 4.97% Inflation = 84% Probability of Success
  • 5.97% Inflation = 80% Probability of Success


Now notice the impact when we extend the life expectancy ten years to 110 on these same inflation rates:


  • 3.97% Inflation = 91% Probability of Success
  • 4.97% Inflation = 80% Probability of Success
  • 5.97% Inflation = 65% Probability of Success


We recognize that these are extremely difficult conditions to apply. As unlikely as 5.9% average inflation and both members of a married couple reaching age 110 might be, these are the sort of variables we like to include to test the resiliency of a financial plan. Although we have seen inflation rates come down over the past two years, we did witness an inflation report of 9.1% in June of 2022.  We believe inflation is a factor that has resurfaced as a critical planning variable.

In the case of Drs. Bill and Mary Saver, the probability of success is barely affected by them living ten years longer, but it is impacted far more severely when we apply higher inflation. 


With so much innovation in healthcare, we all must assume we will live much longer. The idea of accumulation of retirement assets and then depletion of said assets in retirement is a now-risky approach. For that reason, we have introduced the idea of an “Endowed Retirement” to many clients. Much like an endowment for a university or college, the goal is to establish a pool of funds substantial enough to perpetually provide an inflation-adjusted income stream. If this is established, the longevity risk discussed above can be virtually eliminated. We recognize it might sound unlikely to live past 100 or 110 but countless scientists are working on reversing and/or slowing the effects of aging. Considering the progress made over the last century, it is easy to understand why some experts feel we are not even close to the end of innovation that will lead to us living longer lives. 


“I think there are those alive today who will live to be 200 years old,” declared Stanford Professor Stuart Kim.  


It would be nice to know your retirement funds would last that long.





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