One of the most important “aha” moments I communicate to clients when we’re doing retirement income planning is the following: You’re not going to retire when you plan on retiring. You’re probably going to retire earlier.
This is ironic given the fact that clients often hire me to design and implement a plan that will enable them to retire at a specific age. Whether it’s 62, 65, 68, 70, or some other age, most of us want to target a date when we no longer have to be dependent on our ability to earn a living. It doesn’t matter if we’re working for someone else or if we’re self-employed.
Actual vs. planned retirement age
To understand and appreciate the fact that there’s a good chance that you will retire before you expect to do so, all you need to do is review key results of two recent well-known and respected annual studies:
The EBRI 2014 Retirement Confidence Survey released in March found a significant gap in planned versus actual retirement age. Per the study:
- 49% of people retired earlier than planned.
- 38% retired about when planned.
- 7% retired later than planned.
The EBRI Survey has shown a consistently increasing trend in the percentage of people retiring earlier than planned since 2007 when it was 37%. It jumped to 51% in 2008 and has hovered between 41% and 50% from 2009 through 2014.
The results of Gallup’s most recent survey on this subject released at the end of April found that the average actual retirement age among retirees is 62. This is the highest age in recent years since first asking this question in 1991, increasing from 59 just four years ago.
Gallup also asked non-retirees when they expect to retire. It turns out that the average expected age is 66, or four years greater than the average age at which retirees surveyed actually retired. This wasn’t an unusual finding. The average expected retirement age among non-retirees has consistently exceeded the average actual retirement age among retirees by four to seven years over the last 13 years, with an average gap of just under five years.
Reasons for the disconnect between expected and actual retirement age
There are five primary reasons for the disconnect between expected and actual retirement age. They are as follows:
1. Social Security full retirement age (FRA) for current retirees is less than FRA for future retirees.
Retirees who are 77 and older today were entitled to begin collecting their full Social Security retirement benefit at age 65. Full retirement age increases to 66 for individuals who are currently 60 to 71. If you’re 54 or younger, you won’t qualify for your full benefit until you turn 67. Given these facts, it isn’t unusual that the average expected retirement age is 66, and, furthermore, that it exceeds the average age of individuals who are already retired.
2. Dependence on Social Security as a major source of retirement income is expected to decline.
According to the Gallup poll, 55% of retirees said that Social Security is a major source of their retirement income. This compares to 31% of non-retirees who believe that this will apply to them. It makes sense that pre-retirees will need to work longer to generate other sources of retirement income.
3. Dependence on pension funds as a major source of retirement income is expected to decline.
In addition to being less dependent on Social Security, non-retirees also predict that pension funds as a major source of retirement income will be less significant than it is for retirees. While Gallup found that 38% of retirees reported that pension funds are a major source of retirement income, this fell to 21% for non-retirees. This finding isn’t surprising given the fact that the number of defined benefit pension plans has declined significantly in the private sector in recent years. Once again, projected inability to count on traditional sources of retirement income translates to expected longer employment.
4. Volatility of expected sources of retirement income compared with traditional sources of retirement income.
Assuming that Social Security and traditional pension plans aren’t expected to be major sources of retirement income in the future, what will replace them? The Gallup study showed that only 22% of retirees are dependent on retirement savings such as 401(k) plans. This compares to 48% of non-retirees who say that this will be responsible for a major portion of their retirement income. Given the fact that Social Security and defined benefit pensions both represent known and predictable lifetime streams of income versus a 401(k) plan with its associated volatility, relatively small size in many cases, and lack of easy conversion to a known stream of sustainable income, it’s understandable that pre-retirees expect to delay their retirement.
5. Unexpected retirement
Per the EBRI 2014 Retirement Confidence Survey, 49% of retirees left the workforce earlier than planned. While some retirees gave positive reasons for retiring early, many cited negative reasons for doing so. The top three were as follows:
- Health problems or disabilities (61%)
- Changes at companies, such as downsizing or closure (18%)
- Having to care for spouses or other family members (18%)
Implications for retirement income planning
The implications of the results of the EBRI and Gallup studies for retirement income planning are significant. Assuming that you begin doing retirement income planning when you’re 50 and your goal is to retire at 65, this in and of itself is a daunting undertaking, especially with today’s life expectancies. Given the fact that there’s a good chance that your actual retirement age will be less than your target age, your work is really cut out for you.
This drives home a point that I’ve been emphasizing to my clients for years — you can never start planning too early for retirement. It’s a known fact that life throws us curve balls, many of which are beyond our control. Given this reality, until you’ve designed a plan with (a) dependable sources of lifetime income that can be turned on at various ages to cover essential retirement expenses, and (b) protection from known and unknown risks that are likely to occur in one’s retirement years, your plan, and your associated ability to enjoy your retirement years, are at risk.
If you simply plan for a single retirement age, you will likely find yourself short of funds later in retirement if you retire prematurely, all else being equal. Based on the EBRI and Gallup findings, a “Plan B” targeting an earlier retirement age is essential. Bottom line: You need a plan to retire before you plan to retire.