IMHO: Chances Are…
June 22, 2011 (PLANSPONSOR.com) - I’ve long adhered to the wisdom of having a “Plan B,” a fallback position if the things you hope will work out—don’t.
Now, sometimes those fallbacks aren’t completely well-formed (ask my wife), but to my way of thinking, assuming that everything will work out “according to plan” is just tempting fate.
When it comes to saving for retirement—or, more accurately, to having enough saved for retirement—workers have long had a set of “Plan Bs,” though not always completely well-formed, to put it mildly. They have assumed that if they weren’t saving enough at present, they would “catch up” by saving more “later”; they have assumed market returns to grow their accounts that defied reality (if not common sense); and some have gone so far as to assume they had a pension coming in situations where it was clear that no such safety net would be present.1
And then, a study published by the Employee Benefit Research Institute (EBRI) threw cold water on what has, IMHO, been a “best case” assumption by a growing number of workers: that they would close any retirement savings gap…by simply working longer (see Delaying Retirement no Guarantee of Being Able to Afford Retirement
Now, real-world data has shown (and shown for some time now) that the median retirement age for Americans is not even as old 65 (it’s been 62). Still, the headline to the EBRI press release conveyed a much starker message: “Delaying Retirement Past 65 No Guarantee of Households Being Able to Afford Retirement.” In fact, the study says that, even if a worker delays his or her retirement into their 80s, “there is still a chance the household will be “at risk” of running short of money in retirement.”2
Well, the truth is, there’s also a chance that a meteor will land on your head on the way to work—though it’s a small one. And though actuarial tables and the like purport to provide some kind of statistical certainty to an assessment of how long we’ll have on this “mortal coil,” the reality is more complicated. People defy those odds every day, both by living well beyond projected life expectancies, and sometimes by—well, life is sometimes shorter than we think it will be.
Indeed, those are all assumptions that, dutifully plugged into a retirement planning calculator, can “solve” many projected retirement savings gaps. However, human nature (and the markets) being what they are, in real life, they tend to be little more than wishful thinking.
Admittedly, determinations of retirement security are best done at an individual level, though our industry (and those who occasionally write about it) is frequently inclined to take the easy way around these issues. But, as the EBRI researchers noted, “a retirement target based on averages (such as average life expectancy, average investment experience, average health care expenditures in retirement) would, in essence, provide the appropriate target only if one was willing to settle for a retirement planning procedure with approximately a 50 percent “failure” rate.” In other words, as the researchers noted, “the problem with using a 50 percent probability of success, of course, is that the household is in a position where they will “run short of money” in retirement one chance out of two”—a clear problem if you happen to be one of those who run short.