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How to Account for Uncertain Retirement Timing in a Financial Plan

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

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, and to focus more on saving and investing than on the timing of retirement.

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

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

Test your knowledge with the Morningstar Retirement Quiz for Advisors.
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