Greetings! I hope and trust that this finds you well and enjoying life.
According to new research from Morningstar Investment Management, retiring early could be at least as hazardous to your wealth as a major market correction. It’s a significant issue because most pre retirees think they can manage and control the timing of retirement. However they can’t control the market. And in reality the end of a working career, can be as hard to time as the end of a bull market.
In a white paper titled “The Retirement Mirage,” David Blanchett, head of retirement research at Morningstar Investment Management, states that “choosing when to retire is one of the single most important financial decisions we make in our lives.” Yet most people don’t view it that way, thinking of their retirement date as being more about lifestyle choices than finances. Moreover Blanchett noted, retirement “planning timelines” are often wrong. The person who expects to retire at 65 may wind up leaving the work force at age 65 or earlier. Whether that exit is prompted by health issues, job changes, family demands or something else, the financial impact is the same and it’s devastating.
Mr. Blanchett’s conclusions are important for two reasons:
- Most people who feel that they have insufficient retirement savings figure they will simply work longer to play catch-up and the statistics show that won’t be the way it plays out for everyone who needs it.
- Blanchett said that if you factor retirement uncertainty and the unknowns into the picture, some pre retirees may need to double their current savings in order to reach their needed goal by a sooner than expected retirement date.
Think about it. That’s a big number to need to achieve. Double the savings just to have enough! This is where pre retirees should compare the ill timing of retirement to a market crash. Two forms of risk that financial planners encourage people to address are “sequence of return risk” and “longevity risk.” These are related issues affecting how long your money lasts. Sequence-of-return risk is the possibility that someone retires just as the market experiences a significant correction causing them to start drawing on their nest egg at a point when the market is reducing it. Studies show that when the early years of retirement see normal withdrawals plus bad market conditions, it impacts the ability of the savings to last a lifetime. Conversely, quitting work at a point when the market is going well can significantly improve the duration of savings. Longevity risk is simply the possibility that you outlive your money because you lived longer than you anticipated and planned for.
Now consider what happens when someone loses or leaves their job a few years ahead of the retirement plan target date. Earned income stops and you start to draw on savings earlier. Furthermore it’s a temptation to take Social Security benefits earlier, which is usually not a good idea from a financial longevity standpoint.
Asked which is worse, a market crash in the first years of retirement or the loss of employment income ahead of schedule, Blanchett said he thinks that the impact of the sooner than planned retirement is the bigger concern.
“The thing you can do that helps the most (in creating a successful retirement) is delay retirement,” Blanchett said. “If you delay retirement by a year you have one more year to save, one more year for your assets to grow, one less year to plan for and one more year you can delay claiming Social Security. “When you retire early it is pretty devastating on your overall retirement picture, because it’s permanent and you really can’t rebound from that.”
Working longer is the default plan for millions of Americans who fall into the large group of people who haven’t reached their financial goals as retirement age approaches. But planning to work longer and making it happen are two different things. A recent employee Benefits Research Institute study showed that median expected retirement age was 65, but that the actual retirement age was closer to 62. Likewise, recent research from Gallup noted that people typically retire four years earlier than they expect. “Most people who say they are going to retire later don’t actually retire later,” Blanchett said. “The expectation may be that you’re going to retire at age 70, but it’s more likely you are going to retire at age 66.”
Combating this possibility is tough because most people haven’t really considered it extensively in their financial planning. The retirement planning process calls for an anticipated retirement age. This date is essential for determining how many years the saver has to reach his goals and how much he must save to get there. “You need to look at the plan and then say ‘What if I have to retire earlier than that?” Blanchett explained. “Look at your plan and say ‘What happens if I have to retire at 62 instead of 65?” If you are satisfied with the projected outcome when the last few years of saving don’t occur and your retirement lifespan is extended by say five years, then retirement is possibly secure for you. If however you feel uncomfortable that your nest egg will last through your final days and you would be compromised by losing your job early, you need to revise your plan or at least create a contingency plan. This may mean saving more and/or having a method to delay accessing your retirement funds and Social Security early.
You can’t control what the market does and you can’t know if you will retire into a good market or a bad one. And in some cases we can’t control when we will retire. What we can control is how much we save. If you save as if you may have to retire early, you’ll be a lot happier than if you are forced to retire early and never planned for it.”
Call if you have questions or concerns about your retirement plan or feel that we can help in any way.
Jeff Christian CFP, CRPC
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