Why Retirees with Advisors are Still Running Out of Money and What To Do About It

The National Academy of Medicine (NAM) is currently conducting a study over the next decade to encourage “breakthrough ideas, research, and technologies that could extend health and well-being into later life.”

According to NAM, “Aging will be a defining challenge of our time, the rapidity of population aging will change the ways in which families, communities, societies, industries, and economies function. Multidisciplinary, innovative solutions are urgently needed to support and engage our older populations and maximize their years of good health.”

This challenge “will require policies, socioeconomic infrastructure, and innovations that enhance the health of older populations while creating sustainable, health-promoting systems that support longer lives,” the NAM stated “[All sectors will need to] collaborate to promote the lifestyles, behaviors, services, supports, and infrastructure that are critical to fostering effective, affordable, and equitable outcomes.”

While NAM is hopeful for concise data to establish the structure for these goals, there still remain some specific issues facing the aging cohort. Many are outliving their money in retirement due to uncertainty in the retirement planning that was done. In particular, retirement dates and estimated retiree longevity. Advisers need to recognize that their clients don’t necessarily have control over their retirement date, and to plan accordingly.

According to David Blanchett, the head or retirement research of Morningstar, “Ignoring retirement age uncertainty can potentially have a significant impact on potential retirement outcomes.” Furthermore Blanchett states, “Financial planners should consider showing clients the implications of an early retirement to potentially get them to save more than they would using a more traditional approach where retirement age is treated as certain.”

In reference to Blanchett’s award winning paper,“the Rule of 61”,“Individuals targeting a retirement before age 61 tend to retire later than expected,” Blanchett states. While, “Individuals targeting a retirement age of 61 retire when expected; and those targeting a retirement age after 61 generally retire approximately a half-year early for each additional year of work planned past age 61.”

Not only do advisers need to anticipate the risk factors for clients as they approach retirement—sequence risk, market risk, inflation risk, health risk, and longevity risk, etc — but also, the likelihood that a client might retire two years earlier or later than planned.

Clients who retire a few years earlier than expected could result in significant negative implications on his or her retirement savings target. Factor in a shorter saving period, a longer retirement, and a smaller Social Security benefit, an early retiree might need to save 25% more than expected to enjoy the same level of retirement security.

“If the “average investor” is assumed to be seeking a 4% initial withdrawal rate (i.e., a moderate success target) and wants to retire at age 65,” Blanchett wrote, “the impact of retirement age uncertainty would require approximately 25% more savings than suggested by traditional models (28.29% to be exact).”

“Half of your clients will retire earlier than expected. About 24% of those who retire early do so because they can afford to. About 10% retire to pursue other activities. The remaining 66% retire because of ill health, layoffs or the need to care for an ailing spouse,” he said.

Those who can afford to retire early, such as highly educated professionals, tend to work longer and retire later. However, those who need to work longer, who have earned and saved less prior to retirement, are often the ones who are forced to retire early because of poor health or job loss.

Blanchett’s projections varied from person to person depending on several variables, including, health, gender, education, marital status, housing wealth, savings, occupation, income, and remaining years to retirement. His findings are largely based on the Health and Retirement Study, a long-term population study by the Rand Corporation, the Social Security Administration, and the Centers for Retirement Research. Participants in the study have been interviewed every two years since 1992.