How Long Should I Plan for Retirement? A Guide to Secure Retirement Income Planning
Retirement planning is one of the most important financial decisions you’ll ever make. Many financial plans make assumptions about longevity, but planning for an excessively long life can lead to unnecessary underspending, while underestimating lifespan can result in financial shortfalls. Three important risks center around: Investment Risk – The variability of market returns can impact retirement income. Inflation Risk – The purchasing power of money may decline, and failure to account for inflation properly can lead to financial strain. Longevity and Mortality Risk – The uncertainty of lifespan impacts how retirement assets should be managed. The important questions focus on longevity risk (outliving resources) and mortality risk (one spouse dying earlier than expected and reducing household income). These two risks create a dilemma in retirement planning. How Long Should I Plan For Retirement? If you underestimate your lifespan, you risk running out of money. If you overestimate, you might live too frugally and miss out on enjoying your wealth. Most financial plans default to assuming a 30-year retirement, with a fixed lifespan to age 90 or 95. However, this one-size-fits-all approach can create financial risks. A smarter strategy considers longevity risk, mortality risk, and retirement income sustainability. In this comprehensive guide, we will go over: How long people are living today (historical trends in life expectancy) The risks of outliving your savings (longevity risk) The financial impact of losing a spouse early (mortality risk) The best strategies for a sustainable retirement income Common retirement planning mistakes to avoid By the end, you’ll be better equipped to plan for a retirement that lasts, without overspending or underspending. How Long Do People Live? Understanding Life Expectancy Trends To plan retirement correctly, you must first understand how long people live today. Life Expectancy Over The Last Century In 1900, the average life expectancy at birth in the U.S. was 47 years. As of 2020, it’s nearly 80 years. Source: CDC, Social Security Administration, mortality.org More importantly, life expectancy increases as you age. Please keep in mind these are averages, but if you’re 65 today, you have a 50% chance of living to 85. A 65-year-old couple has a 50% chance that at least one spouse will live past 90. 25% of 65-year-olds will live to 95 or beyond. To put this in perspective, consider the individual who was 65 in 2020. They were born in 1955. In 1955, their life expectancy was probably a little over 68 years. Now, at age 65, their life expectancy is 85 years, 17 years longer on average. This data proves that planning retirement to 95 is not extreme – it’s realistic for many people. Why Traditional Life Expectancy Assumptions Fail Most retirement plans use a fixed life expectancy, usually age 90 or 95, to determine how long income needs to last. While this seems safe and conservative, it often leads to oversimplification, rigid planning, and missed opportunities. Retirement isn’t a one-time calculation. Life expectancy isn’t a single number. It’s a moving target that changes as you age and as your circumstances evolve. Just as investment plans are regularly reviewed and updated, your retirement timeline should also adjust based on real-life developments: health status, medical advances, family history, and lifestyle changes. For example, if you’re 65 today and healthy, the fact that you’ve already reached 65 improves your odds of reaching 85, 90, or beyond. But most traditional plans never revisit that assumption. They set it and forget it. The result? Retirees either underspend out of fear or overspend by assuming too much certainty. Here’s why fixed life expectancy assumptions fall short: Life expectancy increases with age. If you make it to age 70, your life expectancy is no longer 85; it has increased. Fixed models ignore this progression. Health and lifestyle play a major role. Non-smokers, physically active individuals, and those with healthy diets typically outlive the averages. A 65-year-old in excellent health could easily live 25 to 30 more years. Family history matters. If your parents and grandparents lived into their 90s, your personal odds of longevity are higher than average. This nuance is rarely reflected in traditional plans. Higher income and education correlate with longer life. Studies show that individuals in the top income quintiles live significantly longer than those in lower ones. Yet most life expectancy assumptions are based on general population averages. Static planning ignores medical and technological advancements. Innovations in medicine, diagnostics, and treatments extend lifespans. A fixed plan doesn’t account for progress that may add years to your life. Psychological behavior skews decision-making. When clients see a retirement plan that ends at age 90, they subconsciously think of it as a finish line. That can distort spending behavior by either being too cautious or too reckless. To improve accuracy and confidence, your retirement plan should treat life expectancy as a dynamic probability, not a static endpoint. The Two Biggest Retirement Risks: Longevity vs. Mortality Longevity Risk: What If I Live Too Long? One of the most overlooked dangers in retirement planning is the longevity risk, which is the risk of living longer than expected and running out of money as a result. While it may seem like a “good problem to have,” it can be financially devastating if not planned for correctly. Many retirees assume they’ll live into their 80s and base their savings and withdrawal strategy accordingly. But the truth is, you could live 10 to 15 years longer than expected, especially with improvements in healthcare and genetics working in your favor. Without a flexible, sustainable income strategy, these extra years can put serious stress on your portfolio. This is, by far, the biggest concern we see with investors nearing retirement. Example: Jane’s Retirement Plan Jane, 65, retires with $3.5 million in savings. She plans for a 30-year retirement (to age 95). She withdraws $120,000 per year from her IRAs to help cover expenses. If she lives beyond 95, she could run out of money. The problem? Jane doesn’t know if she’ll live to 75 or 105. A 30-year retirement is no longer rare. If your plan only anticipates 20 to
Defensive Asset Allocation – What You Need to Know
Although investing is often described as a balance between risk and reward, most investors care more about one than the other. When the stock market is soaring, we chase returns. When it crashes, we wish we had been more cautious. This emotional tug-of-war is why asset allocation is important. It determines how your investments are spread across different asset classes like stocks, bonds, and commodities, ultimately influencing your portfolio’s risk and return. Contrary to what you may hear from investing pundits and prognosticators, markets are unpredictable. That’s why Defensive Asset Allocation (DAA) can be a useful investment strategy – it is designed to help investors manage risk, protect against downturns, and still participate in market growth. This approach blends momentum investing and risk management to adjust allocations dynamically, aiming for steady long-term gains while avoiding catastrophic losses. DAA differs from traditional asset allocation strategies by being proactive rather than reactive. Many investors follow a fixed allocation strategy, meaning they hold onto their investments regardless of market conditions. DAA, however, continually evaluates market trends and adjusts accordingly. If you define market timing as trying to predict when the markets will rise or fall, then we feel that nobody can consistently time the markets. But appropriately responding to events is something we all can do. DAA doesn’t predict crashes—it responds to them as quickly as possible. Investing is never about avoiding risk entirely—it’s about managing it wisely. A well-structured portfolio should not only capitalize on growth opportunities, but it should also shield against significant losses. The financial landscape is littered with investors who suffered severe setbacks because they failed to adjust to changing conditions. Defensive Asset Allocation provides an alternative, allowing investors to stay engaged with the market while mitigating excessive downside risk. This strategy is particularly valuable during times of economic uncertainty when traditional investment approaches may struggle to adapt quickly enough. By the end of this guide, you’ll understand what Defensive Asset Allocation is, how it works, its pros and cons, and whether it suits your investment goals. What is Defense Asset Allocation? Defensive Asset Allocation (DAA) was developed by Wouter Keller and JW Keuning as an investment strategy that reacts to market trends rather than predicting them. Unlike traditional buy-and-hold methods, DAA actively adjusts a portfolio based on market conditions, focusing on capital preservation and steady returns. Core Principles of DAA Momentum-Based Investing – DAA prioritizes assets with strong recent performance, a principle rooted in behavioral finance: assets that have been rising tend to continue rising, and vice versa. By identifying these trends early, DAA captures upside potential while systematically cutting exposure to declining assets. This ensures that capital is allocated efficiently, reducing the chances of being stuck in prolonged downtrends. Momentum is one of the few verified anomalies in the markets. Breadth Momentum – This concept tracks the overall market’s strength. If only a few assets are performing well while the rest lag, it signals potential trouble ahead. Breadth momentum provides insight into whether a rally is broad-based or driven by a handful of stocks. If market participation weakens, the strategy shifts toward defensive positions, helping investors avoid market corrections before they fully unfold. This principle is important for spotting early warning signs of downturns and preventing significant portfolio losses. Defensive Shifts – When market conditions weaken, DAA reallocates into safer investments like government bonds, cash, or defensive assets to mitigate risk. Unlike traditional strategies that stay fully invested in equities regardless of volatility, DAA proactively moves capital away from riskier positions when warning signals emerge. This ability to switch between risk-on and risk-off modes helps smooth returns and reduces drawdowns so that investors are not caught off guard by sudden market downturns. Adaptive Rebalancing – Unlike traditional rebalancing methods that follow a fixed schedule, DAA employs adaptive rebalancing based on market conditions. This means it adjusts allocations dynamically rather than waiting for a pre-set date. When the market exhibits strength, DAA increases exposure to high-momentum assets. When risk indicators rise, it moves swiftly into defensive positions. This approach provides a continuous, responsive framework that enhances portfolio resilience. Adaptive rebalancing not only maximizes participation in bullish trends but also acts as an insurance mechanism against prolonged downturns, making it a key differentiator of DAA from static asset allocation models. The goal is simple: protect against downturns while maintaining steady growth. Why Traditional Strategies Can Fall Short Most investors are familiar with buy-and-hold or the 60/40 portfolio, where 60% of investments are in equities and 40% in bonds. While these approaches have worked historically, they are not immune to severe drawdowns. In 2008 and 2020, markets crashed rapidly, and many investors saw years of gains wiped out in months. DAA offers an alternative by making tactical asset allocation decisions. If market signals turn negative, the strategy moves towards defensive investments to avoid deep losses. Key Componets of Defense Asset Allocation 1. Asset Allocation Breakdown A typical DAA portfolio consists of: 43% Equities (stocks, ETFs, and exchange-traded funds covering broad markets) 40% Bonds (government and investment-grade bonds) 17% Alternative Assets (real estate investment trusts, gold, commodities) This diversification ensures exposure to growth while maintaining downside protection. A well-balanced portfolio mitigates risk by spreading investments across various asset classes, reducing the impact of volatility in any single market. This allocation is also flexible – adjustments are made based on market conditions to optimize performance. The combination of equities for growth, bonds for stability, and alternative assets for hedging enhances resilience in different economic environments. This diversification ensures exposure to growth while maintaining downside protection. A well-balanced portfolio mitigates risk by spreading investments across various asset classes, reducing the impact of volatility in any single market. This allocation is also flexible – adjustments are made based on market conditions to optimize performance. The combination of equities for growth, bonds for stability, and alternative assets for hedging enhances resilience in different economic environments. 2. Momentum Investing Markets are constantly shifting, and DAA allows your portfolio to remain on the right side of momentum. Instead of blindly holding assets, it allocates more to the
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