Unsure when to retire?

Ruth Saldanha: We recently held the Morningstar Executive Forum in Toronto where we talked about the changing face of retirement for Canadian investors. One major factor in deciding what your retirement looks like is when you retire. Morningstar Investment Management's Head of Retirement Research, David Blanchett, has found that the uncertainty around the exact retirement age can significantly impact retirement outcomes. He is here today to discuss his findings today.

David, thank you so much for being here today.

David Blanchett: Thanks for having me.

Saldanha: First up, what are your findings around the retirement ages that people retire?

Blanchett: Sure. So, retirement age is one of the most important assumptions in a financial plan. And people will often say, well, I'll retire at age 65. And so, an important question is, like, how does that meet with reality? Do people actually retire when they expect to do so? And let's say that half do, half retire when they expect to retire. But the other half or the other 45% retire early, and some retire really early. And retiring, say, four years ahead of schedule can have significant negative implications on someone's overall retirement plan.

Saldanha: Earlier or later, what kind of impact does this uncertainty have on a retirement nest egg?

Blanchett: Sure. So, I mean, delaying retirement, I often call it like the silver bullet to improving someone's retirement outcomes. You've got one more year to save, one more year for your assets to grow, one more year for your CPP to grow, one less year to plan for in retirement. So, it's really, really good. And so, early retirement, it's like the exact opposite. So, when you retire early, it really creates a situation where you're probably not going to have nearly enough saved, because those last few years a lot of people really kind of turbocharge their savings. And so, I think that unless you plan for it, the possibility it could really come up and surprise you. And I think the key here again is that people don't retire when they expect to on average. And so, it isn't like it's totally random. It's not like, oh, half the people retire early, half retire late. Most people, especially those that target later retirement ages, tend to retire early. And again, that can really affect someone's overall retirement rate.

Saldanha: If you're forced into an early retirement, what are some of the options that you have?

Blanchett: There really aren't too many options. So, I think that the most obvious one is, you can choose to live off less, because you're going to have to, right. So, all of a sudden, if you've been planning for ever to retire at 65, and you retire 62, that's going to mean changes. I mean, there are things like reverse mortgages. But the problem is, is like, then you're really in a bind, right? If you're retiring early, it's usually because you have to. It's not a choice. And so, it could be a health issue; it could be mandatory retirement. And so, a lot of people think they will work part time in retirement. Well, what if that's not an option either? And so, all of a sudden, if you're retiring three years early, you're going to have a lot less safe retirement, and you may have to make some really hard choices in terms of what you're going to spend and how you're going to actually enjoy retirement which could easily last 20 or 30 years.

Saldanha: For younger investors, how do you bake this uncertainty into your retirement plan?

Blanchett: I think it's really for all investors. I think that especially for individuals that target a later retirement age. And so, it's a research I had what's called the rule of 61. And what I found was looking at this is the actual differences in real retirement ages and expected ages is that people that the target an age of 61, retire on time. People who retire like an earlier age, say, like age 59, retire usually like a year later than average. So, someone that says I'll retire at 59, retire at 60. But for every half a year – for every year after age 61, you retire a half year early. So, if you said age 69, that's eight years past age 61, you retire four years earlier than you expected, so 65 on average.

And so, there's this really, really important effect where people that are targeting these later ages, these more aggressive ages, like 70, aren't doing that. And so, if you – unless you show someone that, you say, hey, you may think you're going to retire at 70, but let's actually plan for 65. And if you do actually work till 70, that's awesome. So, I think, what you have to do as a planner, or just as an individual is to use realistic assumptions. And so, if you're targeting a later age, maybe base your planning, so base your savings, everything else off of a more reasonable age. And then, if you happen to work longer, that's great. But unless you think about it, and plan for it, it could really have important negative implications on retirement for you.

Saldanha: Thank you so much for joining us today, David.

Blanchett: Thanks for having me.

Saldanha: For Morningstar, I'm Ruth Saldanha.