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In Practice

Your Expected Retirement Age Isn't Guaranteed

The best-laid retirement plans can go bad if the timing's wrong

Expected retirement age is one of the most important variables in a financial plan. The actual age of retirement can obviously have a significant impact on how comfortable a retirement is, but it is also an important variable driving pre-retirement behavior, since it helps determine how much money we need to save for retirement.

While the expected retirement age has been increasing, there is still a notable gap in the actual retirement ages today. Gallup surveys show that, on average, people retire about four years earlier than expected, and about 48% of people retire earlier than expected, based on the latest from the Employee Benefits Research Institute. It’s important to realize, though, that differences in actual and expected retirement age aren’t the same for everyone.

Expected and actual retirement ages align around age 61

Looking at the actual decisions made by retirees from the 12 waves (or survey years) from the University of Michigan's Health and Retirement Study, I recently completed an analysis comparing actual and expected retirement ages. What I found is that expected and actual retirement ages tended to align around age 61. Those expecting to retire after 61 tended to retire before the expected retirement age, and those expecting to retire before the age of 61 actually retired later. The most notable gap was for those expecting to retire after the age 61, where the difference was about a half a year for each year past age 61. For example, someone who plans to retire at age 69 will likely retire at age 65 (69 - 61 = 8 x 0.5= 4; 69 - 4 = 65).

Next, I looked at the potential impact of an earlier retirement and noted the impact can be significant. For example, an individual who thinks he or she (or they) is on track for a successful retirement, which for the purposes of this research we define as reaching one’s retirement goals, (e.g., with a 90%+ probability of success) only actually has about a 65% probability of success if we incorporate the potential impact of retirement-age uncertainty (especially given the fact people tend to retire before they initially expect to do so).

Ways to combat disparity in expected retirement age

Overall, the analysis suggests people should probably be saving more for retirement, potentially a lot more if they are targeting a retirement age past age 65. That's because the odds are they likely aren’t going to end up working that long.

One thing advisors and clients can do is model this potential uncertainty in a financial plan and understand the implications associated with what happens if the individual retires early. It’s common to treat returns as random in a financial plan; it’s time to start thinking about retirement age in a similar light.

Download the full research paper " The Retirement Mirage: Why Investors Should Focus Less on Timing and More on Saving"

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