The vast majority of the 2000 investors surveyed who were not yet retired said that they planned to retire before age 70, even though they knew that delaying retirement would maximize their benefits. What may be driving this earlier retirement is the lack of difference between their estimated SS benefit and their estimated monthly income.
Recent studies may challenge assumptions on retirement planning, for clients and advisors. These studies provide more than key data financial analysts should know. Taken together, they show a compelling conclusion that using a financial planner greatly increases the chances of succeeding saving sufficiently for retirement. Here are three take aways from studies from the Center for Retirement Research and Schroder Investment Management.
First, housing costs are more than a bump in the road to retirement. Where it used to be true that paying down a mortgage ensured an additional pool of funds for retirement, that may no longer be so. New research shows that the cost of housing negatively impacts saving for retirement only in instances when salaries do not keep up with housing costs.[1] Areas with high housing costs but also higher salaries tend to see only a small gap caused by reduced savings, since Social Security (“SS”) benefits are tied to lifetime wages. But that assumption only holds for employment that generates SS income. For many investors who have periods of employment that do not generate SS income, such as consulting or reduced hours work, higher cost of housing will negatively affect savings. Also, younger generations are delaying house buying due to the prohibitive cost of housing, which may mean they enter retirement with a mortgage.
Second, those who hit their earning stride later in life have less accumulated wealth. For many generations, like GenX and Millennials, which means a significantly lower total amount of retirement savings. New research from the Center for Retirement Research shows that demographic changes like a declining share of households that are married and have college degrees are dragging down savings. Additionally, later generations opted to forgo 401(k) savings during the Great Recession. The result of that choice is a significant stagnation in 401(k) savings.[2]
Third, and finally, new research from Schroders Investment Management[3] shows that many on the cusp of retirement, those ages 45 to 60, are planning to collect SS before age 70.[4] The vast majority of the 2000 investors surveyed who were not yet retired said that they planned to retire before age 70, even though they knew that delaying retirement would maximize their benefits. What may be driving this earlier retirement is the lack of difference between their estimated SS benefit and their estimated monthly income. Many non-retired survey respondents said that they estimated they would need $4,940 in monthly income in retirement to be comfortable. Those survey respondents who were retired said their total retirement income, including SS benefits was $4,170, a gap of only $770, or 15% between estimated need and total income. It’s true that the total income includes sources other than SS, but this may be driving the change away from delaying retirement until age 70.
An additional important note: the survey found that retirees with a financial advisor and a formal financial plan had an average monthly income almost twice of those who lacked one. This added monthly income may also contribute to the retirement planning details shared by those not yet retired, including, a greater independence in choosing the date of retirement or how much monthly income they plan to spend. That means financial advisors are significantly affecting the flexibility of the non-financial aspects of retirement planning for their clients.
[1] https://crr.bc.edu/the-impact-of-high-housing-costs-on-retirement
[2] https://crr.bc.edu/why-do-late-boomers-have-so-little-wealth-and-how-will-early-gen-xers-fare
[3] Schroders released it’s 2023 US Retirement Survey, conducted by 8 Acre Perspective. The full report is available here: https://mybrand.schroders.com/m/46d9adc913fa6d8b/original/Schroders_2023_US_Retirement_Income_Survey_Rpt_FINAL.pdf
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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