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Does Your Client Plan to Retire Early?

The importance of a robust financial plan when retirement age is uncertain

David Blanchett, Morningstar Investment Management LLC


As I pointed out in my recent paper, “The Retirement Mirage,” there’s a significant amount of uncertainty associated with when someone is actually going to retire: Many retirees, especially those targeting later retirement ages (past age 61) tend to retire earlier than expected. The uncertainty surrounding retirement age raises the larger issue of robustness with respect to financial plans, especially since retirement is usually the most expensive “purchase” most people will ever make.

Retirement age is one of many uncertainties in a financial plan

If we knew exactly how long retirement was going to last, what the annual need would be, as well as the returns of the portfolio, it would be possible to estimate the exact required amount necessary to fund retirement. Unfortunately, since we can’t know these numbers before retirement, we have to make a guess for each.

Returns are one way financial planners are increasingly introducing uncertainty in a financial plan through Monte Carlo projections (which treat returns as random). Using random returns represents a significant improvement over an assumed constant rate of return (i.e., a deterministic projection) since there are significant uncertainties associated with investing over time. Another variable with a significant degree of uncertainty is how long retirement is going to last. The length of the retirement period is based on two points: the assumed age retirement starts and the assumed age retirement ends. The age retirement begins is typically provided by the client, while the retirement end age (or death) is typically determined using a mortality table.

How an early retirement age can potentially impact your financial plan

In the previously noted research, I found that someone who was targeting a retirement age of 65 would actually likely retire close to age 63, on average, and this would significantly reduce the likelihood of achieving a retirement goal. This type of thing isn’t likely to be captured in any kind of financial plan where you don’t raise the possibility of it occurring. The key, therefore, is to start thinking about the things that could potentially go wrong (or with respect to retirement age, that are likely to go wrong) and provide the client some into insight into what it would mean for accomplishing their goals—retirement or otherwise.

It’s impossible to predict the future, but it is possible to prepare for it. This preparation, though, doesn’t just require any financial plan. It requires one that's tailored for your unique situation.

For important information regarding the research, data, and statistics discussed above, download the full study.

Please see below for important disclosure. 

Read more in our research about retirement age in “The Retirement Mirage”

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Important Disclosure

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are as of the date indicated; such opinions are subject to change without notice. Morningstar Investment Management and its affiliates shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation.

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