Rosy Assumptions on Retirement Timing Invite Rude Financial Surprise

There has been a general trend toward working longer in recent years. (Shutterstock)

CHICAGO—Working longer can boost the odds of a secure retirement—that is an article of faith in retirement planning circles these days.

But many people do not wind up working as long as they expect or hope. And baking in too much optimism about career longevity to your retirement plan can take a heavy toll.

A new research report by Morningstar warns that assumptions about working longer actually can work against you—by considerable margins in some cases—if retirement comes sooner and savings fall short.

“What people are doing is picking unrealistic ages,” said David Blanchett, head of retirement research at Morningstar and author of the report. “You might say that you want to work until 67, but a lot of things can go wrong.”

Most formal retirement plans are built around a specific retirement age. But health problems, job loss or just plain burnout often produce a different outcome. Blanchett found that for anyone planning to retire after age 61, the chances of meeting your income and standard-of-living goals can fall sharply if you do not work at least to that age.

“In other words, if your plan predicts a 90 percent chance of meeting your goals if you work until your late sixties, you might really only have a 60 percent chance of meeting that goal,” he said in an interview.

There has been a general trend toward working longer in recent years. Labor participation rates have jumped substantially among men and women in their 60s and early 70s. Thirty-nine percent of men age 65 to 69 were working in 2017, compared with 27 percent in 1990, according to an analysis by the Urban Institute of U.S. Census Bureau data. Among women, the comparable participation rate jumped to 29 percent from 17 percent.

Data on claiming of Social Security benefits also points toward delayed retirement. As recently as 2004, half of all men and 55 percent of women filed at age 62. But in 2016, just 32 percent of men and 37 percent of women were filing at 62. The share of men filing at their full retirement age—66—also jumped from 11.5 percent in 2004 to 17.9 percent in 2016. For women it rose from 7.5 percent to 12.6 percent

Alternate Scenarios Needed

But when it comes to individuals, numerous surveys point to the unpredictability of actual retirement dates. Blanchett reviewed one of the best available data sets—the University of Michigan Health and Retirement Study (HRS). This is an especially useful data set because it tracks a specific group of households over time, allowing a comparison of when people predicted they would retire—and when they actually did.

The HRS data suggests that planned and actual retirement ages align at 61, Blanchett reports. That is, people who plan to retire earlier than that age tend to retire later, and those who plan to retire after 61 retire earlier than expected. Each planned retirement year (earlier or later) results in a half-year difference in actual retirement age. For example, people who plan to retire at age 69 likely will retire at 65.

Blanchett searched the HRS data for other predictors of whether people will achieve their intended retirement age, such as gender or how frequently they exercise. “Some were worthwhile, but only on the margin,” he said. “By far, the most important predictor was the expected age, and how far it varied from 61.”

Blanchett also looked at the probability of retirement plan success for people who make it to their planned retirement ages against those who do not. That was done using Monte Carlo analysis, which uses algorithms to serve up a range of possible outcomes.

If you work with a financial adviser, your plan likely revolves around a specific retirement age assumption. Blanchett’s findings suggest that you have a conversation about “what if?” scenarios—run some alternatives examining the impact of an earlier date. If you are a do-it-yourselfer, most online planning tools can help you make alternate projections.

But Blanchett’s key finding is that people need to save more, to protect against overly optimistic assumptions of a delayed retirement. How much more you should be saving depends on how long you hope to work and your expected annual rate of withdrawal. For example, if you aim to work to age 69 and withdraw 4 percent annually, the amount of money you are saving now should be ratcheted up by 80 percent.

Is that realistic, considering the retirement saving shortfall most workers already face? “The average saving rate is 3 percent now, and many people could double that,” he said. “I know some people won’t do that, but this data should at least get people thinking about making a plan—you need to be conservative and realistic about your goals.”

But the risks of a working longer plan also point to the importance of Social Security for most retirement plans—the program is designed to help people cope with risks such as premature loss of work and income. Workers can file for benefits as early as age 62, but for some workers facing an earlier-than-expected retirement, it will make sense to delay claiming benefits even if it means using savings to meet living expenses. This offers one of the best routes to higher retirement income, since benefit amounts are increased 8 percent for every 12 months of delay.

By Mark Miller