Few Put Finances First When Retiring

Will you retire when you want to, when you have to, or when you can afford it?

This is crucial, because when Americans retire is more important than it’s ever been to our financial well-being in old age. Yet the research indicates this doesn’t carry enough weight in people’s decisions.

This doesn’t make any sense. The typical combined 401(k)/IRA balance is a slim $111,000 for working households between 55 and 64 years old that have a 401(k). And fewer and fewer retirees have defined benefit pensions, which provide reliable income. More than half of us are at risk of experiencing a decline in our standard of living after we retire, estimate economists at the Center for Retirement Research, which supports this blog.

Yet a recent survey by Fidelity indicated that the majority don’t think about the financial impact of their retirement timing. Retirees and pre-retirees said leisure was a major reason they have retired or would retire – even if they were falling short of their financial goals.

The most powerful route to improving workers’ prospects is to delay retirement, which dramatically increases monthly Social Security benefits and the income that can be withdrawn from a 401(k).

But Mark Zoril, a Minnesota financial planner, said pre-retirees typically do not drill down into their finances, though they have a vague idea of where they’re at. What he often sees is that an important change precipitates the timing of a retirement, whether a friend’s retirement or deteriorating health.

“They get to a point where they’re ready to go, and what they’ll conclude – for better or worse financially – is they’re either going to be okay or they’ll figure it out,” he said.

Academic research confirms people retire for myriad reasons, which interact in complex ways. But in one such study, financial considerations were analyzed, and they barely registered as a factor in the decision for those who retired earlier than planned. Instead, people put poor health at the top of the study’s ranking of multiple reasons that older workers retire earlier than they’d planned – poor health was followed by layoffs and a spouse’s decision to retire.

Changes in wealth also had no impact on retirement decisions, according to a 2004 study that analyzed whether retirement plans changed in response to the 1990s boom in high-tech stocks or the 2000 bust. Specifically, older workers who owned stock portfolios didn’t retire any earlier than non-investors after the Nasdaq boom added to their wealth – and they didn’t postpone retirement so they could recover from the bust.

Something that might seem counterintuitive also happens: people in the strongest position to retire – those with more wealth and education than most – are often the last holdouts in the labor force, working well into their late 60s, 70s or longer.

But for the average person, financial considerations become paramount when the rubber meets the road – after you retire. Something to think about as we consider our New Year’s resolutions.

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