Retiring earlier than expected can derail an individual's retirement income plan in several ways — by reducing the time horizon for saving and investing, speeding the point at which portfolio withdrawals begin and potentially reducing Social Security benefits.
Fortunately, there is a way financial advisers can help clients judge their potential margin of error for guessing wrong. In other words, if clients say they'll retire at age 70, what is the likelihood of that and the potential downside of getting it wrong?
Strangely, factors that advisers may assume correlate with an earlier retirement — such as the level of job stress, how physical a job is and whether health problems limit someone's work — have practically no predictive power in this regard, according to David Blanchett, head of retirement research at Morningstar Investment Management.
The only factor with a healthy degree of accuracy is the client's expected retirement age relative to the "magic" age of 61, Mr. Blanchett said in a report published Thursday.
Mr. Blanchett found that a client's actual retirement age converges toward age 61. Clients who expect to retire at 58 will, on average, actually retire later and those forecasting that they'll retire at 70 will do so roughly four years earlier. Those predicting a retirement age of 61 are typically spot on.
Mr. Blanchett expresses the concept as a mathematical correlation — each retirement year planned before or after age 61 results in a half-year's difference in actual retirement age. For example, a client planning to retire at 69 will likely do so four years earlier, at 65. (Here's the formula: 69 - 61 = 8 x 0.5 = 4; 69 – 4 = 65.)
"I was sure I'd find these other really robust measures of what we can use to predict errors around retirement age," Mr. Blanchett said. "But the No. 1 driver, hands down, is the expected age of retirement."
(His analysis assumes clients are estimating their retirement age when retirement is at least 10 years away, not just one or two years in the future.)
The findings in the report, "The Retirement Mirage: Why Investors Should Focus Less on Timing and More on Saving," can help advisers craft clients' financial plans more accurately, Mr. Blanchett said. This is becoming especially important as many near-retirees view delayed retirement as a way to plug a gap in their savings.
Advisers can show clients how an average person with the same anticipated retirement age at the client fared in reality. For instance, if a 50-year-old client expects to retire at 61, advisers can say, "You'll be pretty close," Mr. Blanchett said. But if a client says 70, the better estimate is age 66, he said.
Advisers can use this information to build a financial plan that takes into account the average case, rather than just relying on the age at which the client expects to retire, he said.