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A more pragmatic view of retirement planning

July 09, 2014

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

plan your retirement by choosing the retirement age

According to figures from the Center for Retirement Research (CRR) at Boston College, barely over half of American workers will be financially ready to retire at age 65. Retirement industry professionals and commentators tend to cite statistics like that as a cautionary tale, to remind people of the importance of saving for retirement. But there is a chance this could backfire.

If people learn that that there is a considerable chance they will not have enough money to retire, it could discourage them from even trying to save for retirement. Also, there is a misery-loves-company effect in this type of statistic: When some people learn that it is fairly normal not to have enough savings for retirement, they feel more comfortable with their own failure to save.

Perhaps rather than focusing on how many people won't be able to retire at the customary retirement age, it would be better to focus on when people's current savings efforts are likely to enable them to retire -- and how they can bring that age downward.

The age of readiness

A 2012 study by the CRR provides a perspective that may be helpful toward this goal. Rather than simply looking at people's retirement readiness at a normal retirement age, the CRR projected retirement readiness over a series of ages. They found that while just 55 percent of households will be ready to retire at age 66, by age 70 that number jumps to 86 percent.

This approach represents a more constructive view of retirement readiness. It does not view it as a question of if a person will be ready for retirement, but rather one of when they will be ready. That positive approach could help encourage people to keep saving.

Risks of planning on a prolonged career

By showing that retirement preparedness rises sharply with age, the CRR study underscores the benefit that working longer can have on retirement funding. This is not just because working longer gives you additional years of savings, but also because each additional year worked subtracts a year you will spend in retirement living off your savings. However, working longer should not be viewed as a perfect solution, as it comes with some risks.

First, there is the risk that you will not be healthy enough to keep working for years beyond age 65. This risk is especially acute in physically demanding occupations. Second, there is a question of marketability. As your training and educational background become increasingly dated with age, your skills may be less and less in demand. For either of these reasons -- health or demand -- working longer may not always be an option.

Because planning on working longer has its risks, perhaps projecting an age of retirement readiness based on your current rate of savings should be just the first step in retirement planning. Once that is done, the goal should shift to adjusting your savings in a way that aligns that figure with your ideal retirement age.

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