David Blanchett is the head of retirement research for Morningstar Investment Management. He recently authored a research paper that looked at retirement dates and how setting a very specific retirement date might not be an optimal way to approach it.
Delaying retirement can be an attractive plan to improve your retirement outcome.
Doing so gives you one more year to save for retirement, one more year for your assets to grow, and one less year to plan for retirement.
The problem is that the reverse is also true. If you retire early, it can really negatively affect your retirement outcome.
Plan for the uncertain happening.
Look at someone who is, say, 10 years away from retirement. They forecast their retirement age to be 65. Then things happen. It could be a layoff or a health issue. For the most part though, when such things happen, the individual is required to retire early, and maybe 2 or 3 years early on average. That really affects their outcome. Because if you are planning to age 65 and you're retiring at 62, retirement becomes a lot more expensive.
When you expect to retire is the predominant driver of when you actually end up retiring.
You have to pick an age. What I found in the research is that the people who target age 61, retire at age 61. Those that retire or target retirement before 61 retire a little bit later. If I was talking about retiring at 59, I retire at 60. What gets interesting though is past age 61, you retire earlier and earlier and earlier, about half a year for every one year past age 61. The average person that said age 69 is their retirement age, retired at 65. You still have to target an age for retirement.
The key though is saying, well, what if? Maybe I say, I'm going to retire at age 67. What happens if it's 64? How does that impact your overall retirement plan?
Steve Wendel, Morningstar’s head of behavioural science, points out to a scary prospect when it comes to retirement: surviving on much less money during retirement than you are used to living on or not being able to afford a retirement at all.
Based on his study, Wendel suggests will help you succeed in retirement:
1) Multiple levers are available to improve this outlook, such as delaying retirement, contributing more to one’s savings, lowering one’s expectations for retirement. Individually, each will require extreme action – like a 10-year delay in retirement. But when combined, they can be tremendously effective.
2) Personalized advice is quite essential. Stop guessing. Don’t go for generic savings rates. You may end up paying a stiff price for not having advice tailored for their needs.
3) Beware of simple rules of thumb like “older people need asset allocation, and younger people need contributions.” In his study, Wendel found that among older, mass-affluent American households (ages 45 to 60), asset allocation is still the least impactful lever. Delaying retirement and cutting one’s expected standard of living matter most, in the extreme. The financial picture and most powerful tools to improve it are actually quite similar for younger (ages 25–40) and older populations, on average.
