Ida May Fuller was 64 years old when she retired from her job as a legal secretary in 1939.
Her timing was perfect: She had the distinction of being the first beneficiary of the then-new Social Security program. She received her first check in January of the following year, for a whopping $22.54.
Because the program was so new, she had only been paying Social Security taxes for a few short years before she retired, having been charged a total of $24.75.
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At the time, life expectancy was considerably shorter than today and she could reasonably expect to collect benefits for about a year.
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How Social Security was originally designed
The average American woman in 1940 lived to age 65. Men generally lived to around 60. Due to that short life expectancy, Social Security was originally designed under the assumption it would pay benefits for an average of three years per beneficiary.
Ida May, however, lived to be 100 years old, collecting nearly $23,000 between 1940 and the year of her death, 1975. It was perhaps a sign of things to come: Americans on average are living much longer than before.
While we're also retiring later — frequently in our 70s — we still commonly spend years, even decades, in retirement.
This sounds wonderful. Who wouldn't want to live longer while not having to go to work? While definitely a positive for many, living longer also introduces an element of financial threat known as longevity risk.
Living longer in retirement naturally means our savings must last longer as well, and that's changed the way we plan for retirement.
Planning for an extra 10 years or more
Just 15 years ago, clients would usually plan to live to their mid-80s. Today, that's often considered the absolute minimum prudent target, with planning for age 90 or 95 much more common.
For the average retired married couple, there's now a 51% chance one of them will live to be 90. Should this trend continue, there's a chance our retirement could routinely last as long as our working years.
It's now more important than ever that we plan accordingly for long life expectancies and the extra years of inflation and health care costs our savings will confront.
How to make your savings last
A popular theory of retirement is to make the day you run out of money coincide with the day of your death: "Let the last check bounce as they're digging my grave."
As with many popular assumptions, while this idea sounds great — you'd get full enjoyment from all the money you saved while you were working — actually making it happen is unlikely.
When the date of our passing is unpredictable, timing the date of our zero-balance day becomes impossible.
Rather, it's better to plan for a savings withdrawal rate that will allow your money to at least partially replenish itself through interest and other gains.
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If your savings generate an average return of 5%, withdrawing less than 5% per year will help keep you from spending down your savings.
This doesn't mean you can't enjoy your money at a greater withdrawal rate in some years, provided you're willing to reduce your distributions in other years to make up for it.
Spending more in the beginning
Many retirees are more interested in expensive experiences like travel early on in retirement, with the desire to be that active waning as their retirement progresses.
This naturally leads to a tendency to spend more in the initial years, with that spending balanced by reduced distributions later in retirement. Spending then often rises again later in retirement due to increased health care needs.
Your financial adviser can model your planned retirement spending to determine if it's likely to be sustainable, factoring in considerations like increased early spending and later health care costs.
By stress-testing your plans against your nest egg and having a willingness to adjust those plans if the tests indicate an uncomfortably high chance of running out of money before your retirement ends, you can enjoy the retirement of your dreams without worrying it might become a nightmare.
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