Retirement planning age assumptions often differ from individuals’ actual retirement ages. And this gap in time needs to be anticipated in the financial planning process.

The Impact of Retirement Age Uncertainty on Retirement Outcomes study encourages planners to consider modeling early retirement to ensure clients are prepared. Written by adjunct professor at The American College David M. Blanchett, PhD, CFP^®, CFA, this research paper explores the implications of early retirement on required savings levels and variables that can help predict when someone might retire earlier than expected.

“Retiring early can have a significantly negative impact on a retiree’s likelihood of meeting his or her retirement income goal by reducing the time for saving and investing, lowering the potential Social Security benefit, and potentially extending the retirement period (assuming the decision to retire early is independent from any kind of health shock),” Blanchett states in the study.

Financial planners should consider modeling early retirement to prepare clients for the possibility that it may occur, especially for individuals targeting retirement past the age of 65. In order to do this effectively, advisors need to be able to openly discuss retirement trends and communicate to clients the various reasons why people in the workforce tend to retire earlier than expected.

In this article, we will dive into retirement age trends and the different variables, detailed in the retirement age study, that ultimately affect clients decisions to retire earlier than expected.

Retirement Age Trends

When making a financial plan, the expected retirement age typically comes directly from the client. In theory, the client should have a relatively good idea of when he or she will retire. In reality, however, a growing body of research demonstrates that investors do not tend to retire when expected, instead primarily retiring earlier. For instance, the increases in retirement age have corresponded to increases in the eligibility for government retirement pensions, along with other financial incentives to delay retirement.

Factors affecting actual retirement age

Instead of a planned date in one’s calendar, retirement now exists as more of a transition at the end of a long career. This transition period is affected by a series of coinciding factors leading up to an individual’s eventual retirement:

1. Environmental factors: the nature of one’s day-to-day work and the non-working conditions, such as home environment and family system, can have a significant effect on an unforeseen change in the retirement timeline.

2. Physical factors: cognitive health, mental health, and economic status. One of the biggest drivers of early retirement is health. In this case, health problems often influence retirement plans more strongly than economic and financial variables. A loss of control of retirement age, due to health shock, can negatively affect physical health, mental health, well-being, life satisfaction, and adjustment to retirement.

3. Demographic factors: age, gender, education, and race each play a big role in when an individual can and will retire – whether it be on time, earlier, or later than expected.

4. Psychological factors: the preferences and expectations regarding retirement and retirement timing, attitudes toward retirement, role identity, and personality characteristics.

5. Subjective life expectancy: statistical measure of the average time a human is expected to live, based on demographic factors. This factor plays the largest role in the assumption factor of retirement planning.

6. Macroeconomics: the behavior and performance of an economy as a whole. This factor focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product, and inflation. Postponement of retirement may also occur in periods of economic downturns. For higher socioeconomic groups, stock market fluctuations can have a significant effect on retirement age, whereas changing unemployment rates have a greater effect amongst lower socioeconomic status groups.

A financial plan is only as good as its assumptions. While financial planners are increasingly treating returns as a random variable in financial plans, there is obviously a good deal of uncertainty associated with other key assumptions. Blanchett’s paper explores the implications of retirement age uncertainty and finds that many individuals are likely to retire at earlier ages than expected, and that this can potentially have a significant impact on required savings (or retirement success). Therefore, it is essential that financial planners understand the implications associated with the expected retirement age assumption.

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David M. Blanchett, PhD, CFP^®, CFA joined The American College in July 2017 as an Adjunct Professor of Wealth Management and leading contributor to the Wealth Management Certified Professional^® (WMCP^®) designation program. A highly-regarded researcher and head of retirement research for Morningstar Investment Management LLC, he has published over 100 papers in a variety of industry and academic journals. Blanchett received the 2014 and 2015 Montgomery-Warschauer Award for co-authoring the June 2013 Journal paper, “The 4 Percent Rule Is Not Safe in a Low-Yield World” and for his May 2014 Journal paper, “Exploring the Retirement Consumption Puzzle.” Additionally, his research has received awards from the Academy of Financial Services (2017), CFP Board (2017), and the Financial Analysts Journal (2015).