The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money

Chapter 13. A Long Life Is a Big Risk

The Danger: We Run out of Money Before We Run out of Breath

Live long and prosper. Maybe.

Drawing down a portfolio in retirement is one of life's trickiest financial conundrums. We don't know what the inflation rate will be and what surprise expenses we will face. We don't know what long-run returns we'll earn and when the next bear market will hit.

On top of all this, there's another big uncertainty: We don't know how long we will live—and that means it is hard to gauge how much money we can safely pull from our nest egg each year. Withdraw too much and we could outlive our savings. Withdraw too little and we may spend our retirement scrimping unnecessarily.

What to do? Welcome to the world of longevity risk.

Outliving the Averages

Life expectancy can be a tad confusing. Some folks look at life expectancies as of birth. But such averages are dragged down by those who die before they reach retirement age. Instead, if you're thinking about spending down a portfolio in retirement, you want to focus on life expectancy as of age 65. Today, a 65-year-old man can expect to live until age 83, while a 65-year-old woman can expect to live until 85.

But even these numbers are misleading, because they are just averages. Not only will half of retirees live longer, there's also a huge variation around these averages. Some people will die in their late sixties or early seventies, while a sizable minority will make it to age 90. Moreover, if you are married, you're ...