It’s a common problem: Clients plan to retire in their late 60s. They make a plan with their advisors. Everything’s good.
Then the clients change their minds. They suddenly want to retire sooner. The advisor has no Plan B.
That unexpected change can “have a significant negative impact” says Morningstar in a new study, “The Impact on Retirement Age Uncertainty on Retirement Outcomes.” Advisors who haven’t planned for that eventuality could find their clients running out of money.
An unexpected early retirement can drain the final retirement balances, so much so that the assumptions of the original plan are ruined. And clients often retire sooner than planned.
“The average person who says he is going to retire at age 67, [actually] retires at age 64,” says David Blanchett, head of retirement research at Morningstar and a speaker at Financial Advisor's Inside Retirement conference in Las Vegas on September 26. “You need to prepare your plan with this possibility in mind.”
Add to this the problem that millions of Americans aren’t putting enough aside in the first place to protect a standard of living in retirement. In a recent survey by the Employee Benefit Research Institute, only 17 percent of American workers felt very confident in their ability to retire comfortably. Academics question the precision of the savings gap, but there’s no debate there is one.
“No matter how you slice it … nearly half of Americans have saved nothing for retirement, and the median 401(k) balance is under $100,000 among working age households who have saved something,” says Stephen Wendel, head of behavioral science at Morningstar.
Wendel ran computer simulations on various household retirement plans, estimating which ones would succeed and fail. In his own paper, “Easing the Retirement Crisis: How Financial Planning and Personalized Advice Can Head Off Extreme Austerity,” he looked at eight possible advisor actions and how they would affect these plans.
In these scenarios, retired clients can become “highly dependent” on Social Security, the Morningstar research suggests.
“Many Americans face a scary prospect: needing to survive on much less money during retirement than they’re used to, or not being able to afford a retirement at all,” Wendel writes.