Discussions about retirement risks often focus on uncertain market performance and the significant losses that can occur early on. This is understandable. A study from 2025 highlighted that retirees whose portfolios face downturns in the first five years are at a greater risk of depleting their funds over three decades compared to those who experience positive returns right away.
Additionally, while not as severe as market downturns, unexpected spending can also threaten the longevity of retirement savings. Our research explored two primary types of spending shocks: the impact of retiring earlier than expected and the financial burden of uninsured long-term care. Early retirement can lead to substantial out-of-pocket medical costs prior to Medicare eligibility, while long-term care needs often escalate later in life.
Early Retirement
More and more people are retiring before reaching the standard age of 65. Although the full retirement age for Social Security currently ranges from 66 to 67, the average retirement age is around 62. According to a survey by MassMutual, about 25% of retirees first access Social Security at age 62, with another 15% applying at ages 63 or 64. In fact, nearly half of MassMutual’s respondents reported retiring earlier than they originally planned due to factors like job loss, health issues, or unexpected opportunities.
Early retirement significantly alters spending patterns. A longer withdrawal period necessitates lower withdrawal rates to ensure sustainability. For instance, increasing the withdrawal period from 30 to 35 years drops the safe withdrawal rate from 3.9% to 3.5%, and extending it to 40 years lowers it further to 3.2%.
However, managing withdrawals can be tricky for those retiring early. Medicare coverage doesn’t kick in until age 65, which might lead to increased medical expenses. Projected monthly premiums for ages 62 to 65 could reach between $800 and $1,200 in 2025. Meanwhile, COBRA insurance costs for the same age bracket might average between $700 and $1,500 monthly. This means, for someone withdrawing around $35,000 from a $1 million portfolio at a 3.5% rate, a substantial portion could end up going towards health expenses.
Moreover, early retirees might want to delay Social Security claims to boost their eventual benefits. But, deferring these claims can mean higher initial withdrawals, which may jeopardize the portfolio’s endurance over time.
Long-Term Care Spending
Similar to the financial strains caused by early retirement, long-term care costs can lead to significant spending shocks as people age. A 2025 report revealed that 43% of baby boomers will face long-term care expenses, which average around $242,373. The chances of needing care rise with longevity; for example, at age 75, only 24% of men and 27% of women will require long-term care, but by age 95, those figures jump to 52% and 60%, respectively.
These costs can dramatically affect financial security. A study indicated that 41% of older households with long-term care expenses are likely to face cash flow issues when these costs are factored into retirement asset evaluations.
Older individuals might consider various strategies to manage this risk. One common approach is to create a separate long-term care fund, calculated based on average care costs and duration. Others might sell their homes or leverage a reverse mortgage to access home equity for care expenses.
On the financial tightrope, some might devise a spending plan for their healthier years and rely on government assistance for future long-term care needs. However, qualifying for Medicaid necessitates strict limitations on income and assets, presenting difficulties, especially for couples with one spouse in better health. Furthermore, those who depend on government aid often face limited choices regarding their care options, including potential exclusion from home care.
A final strategy could be to include projected long-term care costs in the overall retirement budget—essentially adjusting retirement spending to anticipate possible spikes in expenditure. To estimate this shock effect, we assumed that spending in the final two years of retirement would double compared to the preceding year. Adjusting for this, the safe withdrawal initiation rate for retirees at age 67 who claim Social Security would be 3.5%, compared to 3.9% without such considerations.
