19 June 2019

Better Have a Plan B for Retirement

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Those who don't have a retirement plan had better figure out a plan B for retirement, because a new study suggests that they're more likely to misjudge their expected retirement date. While a number of studies have found a gap in retirement expectations, a new analysis by the Employee Benefit Research Institute (EBRI) finds that those without a retirement plan had larger differences between expected and actual retirement compared with those who had either a DB or DC retirement plan.

Moreover, according to the EBRI analysis, those who participated in a retirement plan reported a lower-than-expected probability of working full time after age 65. For example, in 2012, the expected probability of working full time after age 65 was 50.8% for those who did not participate in a retirement plan in their current jobs, compared with 44.0% among those who did.

The expected probabilities of working full time after age 65 are higher for those in DC plans compared with those in DB plans, though the gap between expected and actual retirement is generally very small between those with DB plans and those with DC plans.  However, those with DB plans showed a much higher increase in the expected probability of working full time after age 65 between 2006 and 2012. The expected probability of working full time after age 65 does not vary with wage earnings.

Impact of the Financial Crisis  

The EBRI analysis also found that the gap in retirement expectations widened following the 2008 financial crisis. According to the report, prior to September 2008, when the investment markets crashed, 83.9% of workers retired either earlier or no later than three years after their expected retirement, compared with only 59.3% who did so after September 2008. 

The EBRI report notes that most of the past studies on the retirement expectations gap are based on cross-sectional data, which compare the retirement expectation of workers to the actual retirement decision of retirees. While those findings suggest that workers are overly optimistic about working longer than the actual experience of retirees, these comparisons are generally made between the expectations of workers and the experience of a completely different group of retirees. The EBRI analysis examined the expectation and actual retirement decision for the same set of individuals and also compares this to the cross-sectional findings. 

Cross-sectional findings suggest that workers expect to work later than shown by those who have already retired. In 2012, the expected probability of working full time after age 65 was 48.7% for full-time men and 46.0% for full-time women, though only 12.7% and 6.0% of men and women actually worked full time after age 65.

Longitudinal findings (comparing the same individuals at different points in time) revealed that more people actually retired (35.9%) after 65 than expected (18.9%), and that actual retirement is more evenly distributed between pre- and post-years of expected retirement than what the cross-sectional findings suggest. Longitudinally, 38.0% retired before they planned, but 48.0% retired after they planned.

Click here to access the full article on NAPA Net.

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