Retirement Planning: A reality check

Nov 04, 2019

This article is just a wake up call for those who are laid back as far as their retirement planning goes.

I have drawn on the work of STEVE WENDEL, Head of Behavioural Science at Morningstar, and DAVID BLANCHETT, Morningstar's head of Retirement Research, to make my point.

Choosing when to retire is one of the single most important financial decisions we make in our lives.

Think about it. When we retire is the foundation upon which our retirement plan rests. Because many of us start with the age at which we'd like to retire and then work backwards.

  • If I am retiring at X age, how much will I need to save?
  • How many years would I live without the job I currently have?
  • How much must I save?
  • How must I invest those savings?
  • Based on the savings, what standard of living will I have, now and in retirement?

So as you can see, this decision has a lasting impact on our ability to have a comfortable retirement. It also shapes our pre-retirement behaviour long in advance of retirement itself. Knowing when we plan to retire helps determine how much money we need to save and that has a direct impact on our current standard of living.

When deciding on the age to retire, here are some brutal and blunt questions you must answer.

What would happen to your standard of living in retirement if you retired at the age of XX?

Now what would happen if you decided to retire 2 or 3 or 4 years prior to that -- without saving more and without making any other changes?

I did say that when we retire is the foundation upon which our retirement plan rests. I hasten to add that 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.

For example, someone who expects to retire at 58 may end up actually retiring at 55. Why? It could be that the company released her, for whatever reason. Or health issues did not permit her to continue working. Or, the death of her spouse forced her to relocate. Imagine the double whammy; the number of years in retirement has gone up by three, while the savings of those 3 years has been cut short.

So if you have not saved enough, blindly telling yourself that you will delay your retirement may not be a surefire solution. Delaying retirement has become the standard solution. It is a fallback plan that can improve your retirement outcome. But it may not turn out to be the life raft it appears, because it doesn’t always translate into reality.

Last year, David Blanchett, Morningstar's head of retirement research, analyzed the gap between when people think they will retire and when they actually do. He found that despite good intentions, roughly half of Americans retire earlier than planned. 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.

Here are some thoughts to ponder upon:

  • There is uncertainty around the age of retirement. At an individual level, determining one's actual retirement age isn't a straightforward calculation given the factors of variability.
  • Given the unpredictability, it is better to focus on what is under our control. Focus on saving and investing, and less on the timing of retirement.
  • It is also wise to err on the side of caution. Plan to avoid negative surprises. This means that some investors may need double their current savings to achieve their retirement targets.
  • It’s not a straightforward calculation. You have to take into account numerous factors. Don’t shy of personalized advice. It is quite essential is most cases. Stop guessing. Don’t go for generic savings rates. You may end up paying a stiff price for not having advice tailored for your needs.
  • Don’t look at just one factor. There are multiple levers are available to help you plan and improve what may be a bleak outlook. Maybe your asset allocation is not the most conducive, you could look at delaying retirement, contributing more to one’s savings, lowering expectations for retirement, cutting your current standard of living, are some that come to mind. When combined, they can be tremendously effective.

A final word: Take this very seriously. Remember there is a scary prospect out there that will force you to survive on much less money during retirement than you are used to living on. Or, on the very extreme, not being able to afford a retirement at all.

Read more on the subject of Retirement here.

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