The importance of flexible retirement planning

-- | 14/08/2018 Text size Decrease

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Many investors plan to retire at a very specific date, but that might not be ideal. Joining me to share some research on that topic is David Blanchett. He is head of retirement research for Morningstar Investment Management. David, thank you so much for being here. David Blanchett: Thanks for having me. Benz: David, you recently wrote a research paper where you looked at retirement dates and how setting a very specific retirement date might not be an optimal way to approach it. But let's start by talking about why delaying retirement can be such an attractive fallback plan, because increasingly people have heard if you wait a few years even, that can be really impactful in terms of the sustainability of your plan. What's the appeal from a financial standpoint of waiting? Blanchett: Right. As you made a point, delaying retirement is like the best thing you can do to improve your retirement outcomes and it does four things. It gives you one more year to save for retirement, one more year for your assets to grow, one less year to plan for retirement and one more year to delay claiming Social Security. And the problem is, the reverse is also true. So, if you retire early, it can really negatively affect your retirement outcome. Benz: Well, that's the thing. And that's one thing that you looked at in this research is that people might feel that they have some level of control over when they retire, but they might not have as much control as they think. What kinds of things can get in the way of someone retiring at a specific date? Blanchett: You name it, right? So, I mean, there is – I think like the big ones are things like healthcare and layoffs. And when I looked at this, I was looking at someone who is, say, 10 years away from retirement. So, they make their forecast, I'm going to retire at age 65. And then things happen. And for the most part though, when things happen, they require someone to retire early, and maybe two or three years early on average. And that really affects their outcome. Because if you are planning to age 65 and you're retiring at 62, retirement becomes a lot more expensive. Benz: Right. So, you looked at some research. Where did you find this research about how retirees' desired retirement dates can be in conflict with their actual retirement dates? Blanchett: So, there's a great dataset called the Health and Retirement Study and it tracks people over time. Because what you actually need is someone to say if they are 55-years-old, I'm going to retire in 10 years and then come back 10 years from now and see when they actually retire. Because what you don't want to do is look at data after someone has already retired, because adjust their expectations over time, things happen. What you want is someone to kind of give you that estimate and then check back in the future to see how that actually panned out. Benz: Okay. So, one thing that you looked at in the research was you attempted to identify whether there were any commonalities as to what might cause someone to retire earlier. What did you find there? Did you find any predictors? Blanchett: I found a few things. I looked at 20 different variables. So, this is at, say, age 55. So, I'm 55-years-old, I'm making a guess 10 years into the future. And there were a few things we looked at, like, job stress, physical labour, income, total household assets and I thought… Benz: Gender is always one. Blanchett: Gender – all these different variables. But you know, the thing that got me was that the expected age of retirement was the number one driver hands-down. Other stuff mattered a little bit. But when you expect to retire is the predominant driver of when you actually end up retiring. Benz: Okay. So, though if I'm not supposed to hinge my whole retirement plan on this desired retirement date, say, I say, well, 67 is really when I plan to hang it up. What should I do instead? If creating my whole retirement plan around a very specific date isn't a great idea, what are my alternatives? Blanchett: I think you have to pick an age, right? So, what I found in the research is that the people who retire – or target age 61, retire at age 61. Those that retire or target retirement before 61 retire a little bit later. So, if I was talking about retiring at 59, I retire at 60. What gets interesting though is past age 61, you retire early and early and early. So, about half-a-year for every one year past age 61. So, the average person that said age 69 is their retirement age, retired at 65. And so, you still have to target an age for retirement. The key though is saying, well, what if, okay? So, maybe I say, I'm going to retire at age 67. What happens if it's 64? How does that impact your overall retirement plan? Benz: So, make sure that your plan includes a contingency plan and in the paper you argue that planning to save more is one way to potentially be a contingency plan? Blanchett: Right. So, a lot of advisers run what's called a Monte Carlo analysis and they treat returns as random. They say that returns can go up by 20 per cent, down by 20 per cent. Well, retirement age is kind of random as well. And so, one thing you can do is look at different ages and to your point, the one kind of solution here is to save more for retirement. A lot of folks don't want to do that. Benz: Or hear that, right? Blanchett: Or hear that. But that's really all you can do to prepare for that possibility. Benz: Okay. Interesting research, David. Thank you so much for being here to discuss it with us. Blanchett: Thank you. Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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