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The High Price People Pay for Retiring Earlier Than They Expect

The Wall Street Journal - 08/07/2018

Think you know when you're going to retire? Think again.

While retirement ages have been rising recently, there is still a significant gap in actual and expected retirement ages -- with about 50% of people retiring earlier than expected, with an average gap of approximately three years.

Retiring early can wreak havoc on a retirement plan. It gives you one less year to save, one less year for your assets to grow, one more year to fund retirement, and will likely mean you'll have to claim Social Security benefits one year earlier. Therefore, given the significant percentage of people who are retiring early, it's important to know who is most at risk of retiring earlier than expected.

In order to better understand this issue, I recently conducted an analysis using a government data set that tracks expected and actual retirement ages over time. What I found is that the most important predictor of early retirement wasn't related to job stress, physical health, savings, etc.

It was all about the expected age of retirement.

In fact, I found that age 61 was an important bogey for planning purposes, since those who expected to retire before age 61 actually tended to retire at their expected retirement age or slightly later, while those who planned on retiring after age 61 tended to retire early.

The impact for those planning to retire after age 61 was especially pronounced, where people tended to retire about a half-year early for each year after 61 they planned to retire. So, someone who thought she would retire at age 69 actually stopped working at age 65 (69 - 61 = 8, 8 x 0.5 = 4, 69 - 4 = 65).

Lots of things can cause you to retire early - health problems, downsizing, having to care for a spouse or other family member, etc. Most of these things are difficult, if not impossible, to predict beforehand. Therefore, given the significant negative impact retiring early can have on your standard of living in retirement, it's worth considering a few pre-emptive moves:

1. Be realistic about your timetable. Don't just pick an age for planning purposes because it means you can save less. Instead, make sure your estimate tracks what you expect to happen based on how much you enjoy working, trends in your industry, etc.
2. Save more than you think you need to. Saving more - say 12% of your income, instead of 10% - will come in handy if you do end up retiring early. And it gives you a cushion if the markets misbehave as you start winding down the working phase of your life.
3. Create a "what if" plan. When running any kind of retirement projection, do an additional "what if" projection that incorporates retiring two or three years early. Then, ask yourself how financially secure you'd feel going forward if this came to pass.

Keep in mind that a retirement plan, while valuable, is only as good as its assumptions. The age at which you assume you're going to retire has a significant impact on your target savings rates. So, it makes sense to play it safe and pick an earlier retirement age, especially if you were planning on retiring later than 61. Your future self will thank you.

David Blanchett is the head of retirement research for Morningstar Investment Management.

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