What’s in a Number? The Framework for an Advisor’s Recommendation

Recently I completed a college level course on Retirement Income Planning. It is a part of the course work for the Retirement Income Chartered Professional™ (RICP™) certification I am working on. Because our firm specializes in RETIREMENT PLANNING for individuals very near or in retirement, I found much of the curriculum of this class to be information I already knew. However, I did come across a number of interesting statistics, and their sources, that really help to provide a framework for some of the advice and strategies we sometimes recommend.

For example, did you know that, in a recent Retirement Confidence survey by the Employee Benefit Research Institute, 47% of Americans report that they retired earlier than expected? Reasons cited were because of a health situation of their own or a family member for whom they needed to be a caregiver, or downsizing or company closures.1 Other studies report similar findings. In my opinion, forty-seven percent is a high number. As a financial planner, it tells me that, in most cases when someone tells me they intend to retire at 65, or at Social Security’s Full Retirement Age, which is now age 66 and for retirees in a few years it’ll be closer to age 67, I should create and discuss retirement scenarios with my clients where they retire earlier. Can they be successful at those earlier ages? If not, what changes are necessary in order for them to be successful? Unfortunately, the situations that cause these earlier retirements – health issues or job loss – are often beyond our control, as well as difficult to change in a beneficial manner once they’ve occurred. Contingency planning in a financial advisor’s forecasting is key.

Another interesting statistic is found when analyzing retirees who have planned on working during retirement. We find that many people, while planning their retirement, think that working part-time, consulting, or getting a new job in a new field or a hobby that generates income sounds like a great idea. While that may very well be true, a 2013 study found that 69% of those still working expected to work in retirement, while the percentage of retirees who actually do is only about 25%. Of those working, while most gave a positive reason for working such as wanting to stay active and involved, 90% identified at least one financial reason for continuing to work, including wanting to buy extras, keeping HEALTH INSURANCE or other benefits, a decrease in the value of their savings and investments, or needing money to make ends meet.1   Thus, many retirees who think they might have some working income in retirement, often don’t. Here, too, the planner’s job is to analyze scenarios without the working income during retirement. Is retirement under the given parameters still feasible? Or does the retiree need to contemplate working longer at the full-time job, spending less, saving more, or any number of other factors they might be able to consider changing?

An interesting corollary statistic that goes along with earlier full retirement is that more than 50% of retirees start their SOCIAL SECURITY BENEFIT at 62.2 While this might make perfect sense from the standpoint that someone may have had to retire earlier than planned, and, in needing income, decides to go ahead and start Social Security, unfortunately, it is also evidence in many cases of poor and short-sighted planning. Social Security is often the cheapest and most effective annuity a retiree can purchase. For individuals whose early retirement isn’t due to their own health circumstance that causes a likelihood of shortened life span, early draw is a double whammy - of the lost income early on from the early retirement, coupled with smaller SOCIAL SECURITY BENEFITS and smaller cost of living raises for the rest of their life. If fact, when you consider that, for more than two-thirds – 67% or more – of retirees, social security makes up more than half of their retirement income2, this decision is particularly costly.   If there were a way to wait later to draw benefits – even by a year or so – it can make a tremendous difference. An advisor should work with clients to analyze different social security starting ages and the trade-offs in early retirement versus later on. What other ways might the client be able to make ends meet, while also giving themselves greater income later to fend off life’s higher costs due to inflation? It’s often counter-intuitive, particularly to advisors who manage people’s money, but sometimes the retiree may be benefitted by drawing on the nest egg FIRST, in order to defer social security and receive the bigger guaranteed benefits and cost of living raises, later.

Consider another statistic: Studies published by the National Bureau of Economic Research from data dating back to the mid-1980’s found that individuals in higher socioeconomic classes tend to live longer. Reasons cited include better EDUCATION which helps these individuals to better understand and use health information, access to better healthcare, a negative correlation between socioeconomic status and risky behaviors like smoking, binge drinking, obesity and lack of exercise.3Knowing this, higher wealth individuals should definitely consider the idea of drawing social security at later ages, as drawing early might often be a GAMBLE on dying young. Social security deferral strategies can make a difference into the tens, or even hundreds of thousands of dollars over a retiree’s lifetime. Advisors should acquire skills and tools that help them to help clients to evaluate this decision, which arguably might be one of the largest financial decisions a retiree will make.

Of course, for each and every one of these statistics, it’s likely that you or I can think of situations where the reverse was also true – where a person doesn’t retire early, perhaps even working longer than anticipated – sometimes just because they like it; where getting part-time work in RETIREMENT DOES occur; when social SECURITY draw at age 62 is the right decision – regardless of socioeconomic status. Statistics provide a framework from within which to think, plan, and understand results, but at the end of the day what matters is the combination of the art and the science of financial planning. It’s knowing when and how to use the statistics, coupled with the unique and individual circumstances, needs, and goals of every client family, that make financial planning successful in creating a client’s opportunity, SECURITY, success, and legacy.


1Employee Benefit Research Institute (EBRI) 2013 Retirement Confidence Survey, as discussed in Retirement INCOME Process, Strategies, and Solutions by David A. Littell and Kenn Beam Tacchino, page 156-157.

2Retirement Income Process, Strategies, and Solutions by David A. Littell and Kenn Beam Tacchino, page 81.

3The National Bureau of Economic Research, NBER Reporter: Research Summary Spring 2003 on Health, Income, and Inequality by Angus Deaton. www.nber.org/reporter/spring03/health.html


UncategorizedJon Castle