A wide range of factors can cause people to retire earlier than expected, new J.P. Morgan research finds, but U.S. workers rarely plan for an earlier-than-anticipated retirement, and most overestimate their ability to work beyond age 62.

This overestimation can be hugely damaging to individuals’ retirement prospects, according to the 2015 “Guide to Retirement” report from J.P. Morgan Asset Management (JPAM). Even a successful retirement saving effort can be derailed by an unanticipated early retirement, the report finds, so it’s critical for people to perform scenario testing to assess their risks. They should also proactively identify ways to mitigate the damage of an early retirement, perhaps by taking advantage of insurance products or supplemental retirement accounts.

The research finds about three in four (73%) employed Americans plan to work beyond age 65—but only 27% of those surveyed by JPAM were actually able to continue working beyond 65. The research shows many are forced to retire earlier than expected or desired because of a disability or chronic health problem.

But even with “work longevity” lower than predicted, the labor participation rate for older Americans is steadily climbing. JPAM observes that in 1992, just 21% of people ages 65 to 69 remained employed in the civilian labor force, whereas by 2022 the projected figure shoots up to 38%. As of 2012, the workforce participation rate for this age category was approximately 32%.

As explained by JPAM’s Katherine Roy, who serves as the firm’s chief retirement strategist, and David Kelly, chief global strategist, expanding longevity partly underpins this figure. But Kelly is quick to add that this increasing percentage of workforce participation is somewhat misleading and does not necessarily represent greater wealth generation opportunities for the typical individual in this age group.

“The increasing workforce percentage is in large part explained by the fact that this segment of the population will simply become so much larger as the Baby Boomers age into it,” Kelly notes. “There will be more people in the age category that are working, but working beyond age 65 is not a strategy that can be relied upon. It is a phenomenon known in statistics as a ‘mix-shift’ effect. We are going to experience an absolutely huge mix-shift in terms of the number of over-65 people during the next decade.”  

Put another way, Kelly says, the absolute number of people in the U.S. in the age 65 to 69 category is about 31 million, but in 2022 the number is projected to reach 46 million. This means the growth in the over-65 population will occur much more rapidly than growth in the overall population.

“In some ways, this actually spells real trouble for retirees,” Kelly comments. “The price of medical services is already inflating faster than any other consumer good besides education, and vastly increased demand will not help the trend. On the other side, we see prolonged low interest rates that are really unlike what earlier generations of retirees faced. This has significant implications for portfolio strategy and risk outlook.”

“Another important fact that is directly tied into this conversation is that still only about 2% of people wait until age 70 to start drawing Social Security benefits,” Roy says. “This is despite all the positive messaging and increased understanding that it can be a huge financial benefit to defer Social Security payments beyond 62 or 65. It shows that people aren’t necessarily living up to their own expectations about how long they’ll be able to work. Many of these decisions, frankly, are made for you.”

Various factors cause people to retire earlier than expected, the research continues, including health problems, employability issues and family obligations. The research identifies the median U.S. actual retirement age at 62, whereas the median anticipated retirement date remains 65. This conflicting thinking leads to poor real-world decisionmaking in a variety of areas, JPAM warns.

Kelly notes that most economic forecasters anticipate an annual average U.S. GDP growth of only about 2% over the next decade and a half.

“Personally, I feel we will be lucky to get a 2% growth rate in the U.S. in the medium term,” Kelly adds. “The clear message from this is that both pre-retirees and retirees will have to look globally to build reliable sources of returns and income. It probably also argues for greater equity exposure all along the retirement savings lifecycle. There is a confluence of factors in the market right now that really highlights the longevity risk many people face.”

Kelly feels diversification will remain an often-cited and critically important principle in navigating this new normal for U.S. workers and retirees. Specifically in the area of retirement plan administration, he feels sponsors and advisers will increasingly come to understand asset-allocations solutions are the best option for the biggest number of retirement savers. He adds that auto-enrollment into a pre-diversified and regularly rebalanced qualified default investment alternative (QDIA) is “probably the most important feature a plan sponsor can adopt, given everything we are discussing today.”

“Overcoming participant inertia and emotion is the most important thing,” he continues. “We have one slide in the new report that shows just how poorly emotional investors do. It shows six of the best 10 trading days for the S&P 500 between 1995 and the end of 2014 occurred within two weeks of the 10 worst days.”

Kelly explains that, for a $10,000 initial investment, missing these 10 best days of equity returns would mean the difference between generating $65,450 over the 10-year time period or $32,650. Missing the 20 best days drops the return on $10,000 to $20,350, and missing the best 30 days would return just $13,440.

“I don’t know if I can’t think of a clearer explanation for why trying to time the markets and reacting to the financial news headlines is almost guaranteed to make you do worse, as a retirement investor,” he concludes. “I think I can speak for plan advisers and sponsors when I say it is really remarkable, the amount of time we have to spend actually convincing long-term investors to behave like long-term investors. If we can prevent people from trying to time the markets, we’ll do that much more to improve retirement readiness.”

The full 2015 “Guide to Retirement” is available for download here.