{"id":479308,"date":"2026-02-16T22:31:11","date_gmt":"2026-02-16T22:31:11","guid":{"rendered":"https:\/\/www.newsbeep.com\/ca\/479308\/"},"modified":"2026-02-16T22:31:11","modified_gmt":"2026-02-16T22:31:11","slug":"how-spending-shocks-affect-retirement-planning","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/ca\/479308\/","title":{"rendered":"How Spending Shocks Affect Retirement Planning"},"content":{"rendered":"

Uncertain market performance\u2014specifically, big losses early in retirement\u2014tends to dominate the conversation about risks that can imperil a retirement plan. And for good reason: We found in our 2025 retirement spending research<\/a> that hypothetical retirees whose portfolios incurred losses in the first five years of retirement were much more likely to run out of money over a 30-year horizon than retirees who enjoyed better returns early on, assuming the same spending patterns for both sets of retirees.<\/p>\n

Although they get less play than market shocks, spending shocks can also curb a retirement portfolio\u2019s longevity. In our research, we examined the implications of two major types of spending shocks: unanticipated early retirement and uninsured long-term care expenses at the end of life. The former may necessitate spending over a longer period, often with higher healthcare costs in the pre-Medicare years, while the latter can translate into an effective \u201cballoon payment\u201d toward the end of life.<\/p>\n

Early Retirement<\/p>\n

Early retirement\u2014before the standard age of 65\u2014is an increasingly common scenario. While Social Security\u2019s full retirement age is currently between 66 and 67, the average retirement age is 62, according to a study from MassMutual<\/a>. That\u2019s corroborated by Social Security filing data<\/a>, which show that roughly 25% of retirees take Social Security when it\u2019s first available at age 62, and another 15% of retirees file at 63 or 64. Nearly half of the retirees surveyed by MassMutual said they had retired earlier than planned; commonly cited reasons included layoffs, being able to retire sooner than expected, or illness or injury.<\/p>\n

Early retirement has significant implications for retirement spending, with longer drawdown periods necessitating lower spending to maintain a high likelihood of not running out later on. In our base-case spending simulation, for example, expanding the drawdown period from 30 to 35 years reduces the starting safe withdrawal rate from 3.9% to 3.5%. Stretching the time spending horizon to 40 years takes the starting safe withdrawal rate to 3.2%.<\/p>\n

Keeping withdrawals low in early retirement may be challenging on a few levels, however. First, individuals aren\u2019t eligible for Medicare coverage until age 65, so bridging healthcare coverage in the intervening years has the potential to increase spending. Insurance coverage for 62- to 65-year-olds from the ACA marketplace averaged between $800 and $1,200 a month in 2025, according to data from Boldin<\/a>. Meanwhile, Cobra coverage (extending workplace-provided coverage) for people aged 62 to 65 averaged $700 to $1,500 a month. For the 62-year-old taking a safe withdrawal rate of 3.5% ($35,000) from her $1 million portfolio, healthcare costs would consume roughly a third of those withdrawals.<\/p>\n

Further complicating matters for young retirees is that many individuals wish to delay Social Security to increase their eventual benefits. At the same time, delaying Social Security can necessitate higher withdrawals in the early part of retirement, thereby imperiling the portfolio\u2019s ability to last over the longer time horizon.<\/p>\n

Long-Term Care Spending<\/p>\n

Just as early retirement can cause a spending shock at the front end of retirement, long-term care costs can prompt a spending shock later in life. A 2025 report authored by Spencer Look and Jack VanDerhei<\/a> of the Morningstar Center for Retirement & Policy Studies found that 43% of baby boomers will incur long-term care costs, with the average cost of that care $242,373. The likelihood of needing care correlates with longevity: While just 24% of men and 27% of women who die at age 75 will require long-term care, 52% of men and 60% of women who die at age 95 will require long-term care.<\/p>\n

Incurring sizable long-term care costs can have catastrophic effects for a financial plan: The Morningstar study found that when long-term care costs are included in the analysis of the viability of retirement assets, 41% of older-adult households that incur long-term care costs are likely to run out of funds.<\/p>\n

Older adults can take different approaches to address this risk. They might set aside a separate long-term care \u201cbucket,\u201d<\/a> taking care to segregate it from their spending portfolios and using the average cost and duration of care to determine the right size for that bucket. Others may plan to use home equity, either by selling the home or employing a reverse mortgage, to cover long-term care expenses.<\/p>\n

Alternatively, those with very tight finances might create a spending plan to cover their costs during their healthy years, then rely on government resources if they require long-term care after that. The challenge with that plan is that Medicaid imposes strict limits on the income and assets that an older adult can retain while also qualifying for government-funded long-term care; this can create a particular challenge for married couples with a \u201cwell\u201d spouse. Additionally, those who rely on government-provided care may have little choice in terms of where they receive care; home-based care may not be an option.<\/p>\n

The final option for handling the cost of long-term care is to build it into the spending plan, spending less throughout retirement to account for the possibility of a spike in spending later in life. To help model a long-term care shock, we assumed spending in years 29 and 30 to be twice what spending was in year 28. Factoring in that type of shock, the starting safe withdrawal percentage for the person retiring and claiming Social Security at age 67 is 3.5%, versus 3.9% for our base case without.<\/p>\n","protected":false},"excerpt":{"rendered":"Uncertain market performance\u2014specifically, big losses early in retirement\u2014tends to dominate the conversation about risks that can imperil a…\n","protected":false},"author":2,"featured_media":479309,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[45,49,48,133,131,132],"class_list":["post-479308","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-business","tag-ca","tag-canada","tag-finance","tag-personal-finance","tag-personalfinance"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/479308","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=479308"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/479308\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/479309"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=479308"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=479308"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=479308"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}