Advisers Should Consider Unpredictable Retirement Age in Client Retirement Planning

Researchers are increasingly finding that people underestimate the age they will—or will need to—retire.

A study from the Employee Benefit Research Institute (EBRI) finds 48% of people retire earlier than expected. Another study from Prudential finds 51% of retirees retired earlier than planned.

A report from Morningstar says that according to the Health and Retirement Study data, planned and actual retirement ages align at 61, with those planning to retire earlier than that tending to retire later than expected, and those planning to retire after 61 tending to retire earlier than expected. In other words, actual retirement ages pull toward 61, with each retirement year planned before or after age 61 resulting in a  half-year’s difference in actual retirement age. For example, someone who plans to retire at age 69 will likely retire at age 65 (69 – 61 = 8 × 0.5 = 4; 69 – 4 = 65).

Using certain assumptions, Morningstar tested the traditional approach financial planners use to generate a client plan (which assumes retirement age is certain) against approaches that incorporate the probability of retiring earlier than expected (following the nonlinear path discussed previously). Delaying retirement can have a significantly positive effect on the probability of an investor achieving retirement success; however, Morningstar found the uncertainty around retiring earlier than expected results in much lower probabilities of success for people planning to retire after age 61, dragging down the probability by about 40 percentage points for some ages. “In other words, retirement savers who think they have a 90%-plus chance at meeting their goals might actually have more like a 65% probability of success,” the report says.

Using stochastic simulation to calculate the additional savings needed at retirement to get those probabilities back to where they were before Morningstar incorporated the uncertainty of retiring early, the firm found the assumptions people use to improve their probability of success actually work against them, by considerable margins in some cases. Saving more is needed—more than double in some situations—as the target retirement age increases and as the withdrawal rate decreases.

Morningstar suggests individuals and their advisers must incorporate retirement age uncertainty in their retirement planning by focusing on saving. “Buying guaranteed income when appropriate, derisking investment portfolios, working in retirement, and a host of other factors still apply. But they should not distract individuals and their advisers from setting aside enough income throughout their working lives to reach their retirement goals,” the report says.

Morningstar research finds that a combination of moderate interventions can significantly improve retirement outcomes.