That Uncertain Age
A new study concludes that uncertainty about one specific aspect of retirement means that some investors may need to double their current savings to hit their retirement targets.
That specific aspect? Retirement age. A new report
by Morningstar concludes that “a person’s retirement age is simply too unpredictable, and we must plan accordingly to help avoid negative surprises.”
The report, authored by David Blanchett, Morningstar’s Head of Retirement, finds that not only do many people retire earlier than expected, but it’s “nearly impossible to predict who will be part of this group.” Retiring early not only reduces saving and investing time, but also lowers the potential Social Security benefit, and potentially increasing time spent in drawdown, “making it harder to reach retirement success.”
The report notes that researchers are increasingly finding that people underestimate the age they will – or will need to – retire. And, perhaps stating the obvious, the report explains that “if an investor’s retirement age is uncertain, planning for retirement must take this into account.” The report goes on to explain that retiring earlier than planned likely means cutting short the savings and investment period, lowering the Social Security benefit, and possibly extending the payout period. Moreover, when one plans to delay retirement in order to fix a savings shortfall, “it may not help one’s finances in the way we would expect.”
Citing Health and Retirement Study data, Blanchett notes that 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,” he writes, “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.” As an example, Blanchett notes that someone who plans to retire at age 69 will likely retire at age 65 (69 – 61 = 8 × 0.5 = 4; 69 – 4 = 65).
While the report acknowledges that delaying retirement can have a significantly positive effect on the probability of an investor achieving retirement success, “…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.” Blanchett explains that “retirement savers who think they have a 90%-plus chance at meeting their goals might actually have more like a 65% probability of success, something they and their advisors won’t likely be comfortable with.”
Using a stochastic simulation to calculate the additional savings needed at retirement to “get those probabilities back to where they were before we incorporated the uncertainty of retiring early,” Blanchett notes that the results were “stark.”
“The assumptions people use to improve their probability of success actually work against them,” he notes, “by considerable margins in some cases.” Blanchett notes that, “saving more is needed – more than double in some situations – as the target retirement age increases and as the withdrawal rate decreases.”
Blanchett concludes that to offset this risk, individuals and their advisors 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,” he writes. “But they should not distract individuals and their advisors from setting aside enough income throughout their working lives to reach their retirement goals.”