How spending shocks affect retirement planning

Market performance tends to dominate the conversation about risks to a retirement plan. But spending shocks can also curb a retirement portfolio’s longevity. In Morningstar’s 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 “balloon payment” toward the end of life.

Early retirement

Early retirement — before the standard age of 65 — is an increasingly common scenario. While Social Security’s full retirement age is currently between 66 and 67, the average retirement age is 62, according to  a study from MassMutual. That’s corroborated by  Social Security filing data, which show that roughly 25% of retirees take Social Security when it’s first available at age 62, and 15% 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.

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, 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%.

Keeping withdrawals low in early retirement may be challenging on a few levels, however. First, individuals aren’t 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. Meanwhile, Cobra coverage (extending workplace-provided coverage) for people 62 to 65 averaged $700 to $1,500 a month. For a62-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.

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’s ability to last over the longer time horizon.

Long-term care spending

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 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.

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.

Older adults can take different approaches to address this risk. They might set aside  a separate long-term care “bucket,” separate from their spending portfolios. Others may plan to use home equity.

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 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 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 that shock.

This article was provided to The Associated Press by Morningstar. For more retirement content, go to https://www.morningstar.com/retirement.

ChristineBenz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast.