Personal Finance

Delaying retirement has become standard advice to help fix an unsatisfactory retirement plan, but it may not be realistic for everyone.
By Steve Wendel | 06/09/18

As we plan for retirement, many of us start with the age at which we'd like to retire and then work backward. What will I need to save? What standard of living will I have, now and in retirement? How should I invest?

About the Author
Steve Wendel is head of behavioural science for Morningstar. Before assuming this role in 2015, he was principal scientist for HelloWallet, where he studied savings behaviour and coordinated the research efforts of the firm’s advisory board. He has written two books: Improving Employee Benefits, which shows HR practitioners how they can use behavioural economics to help employees maximize their benefits, and Designing for Behavior Change, which describes HelloWallet’s step-by-step approach to applying behavioural economics and psychology to product design. Wendel holds a doctorate from the University of Maryland.

If we don't like the answers, we make adjustments accordingly.

For those of us who don't intend to work indefinitely, when we'll retire is the foundation upon which our retirement plan rests. Unfortunately, that foundation isn't nearly as solid as we think. We often systematically misjudge when we'll actually retire, and that can wreak havoc our finances.

In a new paper, David Blanchett, Morningstar's head of retirement research, analyzes the gap between when people in the United States think they will retire and when they actually do. He finds that despite their intentions, roughly half of Americans retire earlier than planned. On average, the best formula for this gap--between intended retirement age and actual--is this: Subtract 61 from the planned retirement age, then divide by 2.

For example, people who expect to retire at 65 will most likely actually retire two years early, at 63. People who plan to retire at 67 will likely actually retire three years early, at 64. Those who plan to retire before 61 often misjudge in the other direction (retiring later than expected), but they are a smaller portion of the population.

For many of us, we think we'll work longer than we actually do. This happens for a variety of reasons--including health issues and job changes--and the impact can be severe: fewer years of saving combined with more years of retirement that we need to fund from our savings.

Blanchett analyzes the impact of retirement age uncertainty on the probability of having what one needs for retirement. Run the numbers for your own plan or have your advisor do it. Consider:

"What would happen to your standard of living in retirement if you suddenly retired two, three or four years early--without saving more and without making any other changes?"

"For those already in retirement, did you end up retiring earlier than you'd initially planned? What effect did that have on your finances in retirement?"

There is another challenge for pre-retirees as well. Delaying retirement has become standard advice to help fix an unsatisfactory retirement plan: if you don't have enough money, just retire later. Blanchett's analysis shows that planning to delay retirement isn't the life raft it seems to be, and it doesn't always translate into reality.

At an individual level, determining one's actual retirement age (given health, job and other factors) isn't a straightforward calculation. The formula above gives a good estimate, on average, of the gap between people's planned and actual retirement date, but there is quite a bit of variability. It's not just that people are likely to retire early, but that the date is uncertain and idiosyncratic.

Blanchett's findings suggest that given this uncertainty regarding retirement age, some investors may need double their current savings to achieve their retirement targets. A person's retirement age is simply too unpredictable, and we must plan accordingly to help avoid negative surprises. We should focus on saving and investing, and less on the timing of retirement.

For more information on the research and its surprising findings, see The Retirement Mirage by Blanchett.

Don’t miss out on communications from Morningstar Canada! Sign up for our specialised newsletters, get early notice of our events, and get access to exclusive promotional content. Manage your subscriptions here.
Video Reports
Click here to view all