This may come as a surprise to some people, but the baby boom’s retirement is already underway.
In 2004, 22% of the oldest baby boomers, then aged 48-58, were already out of the labor force. Over 2.2 million of them said they were retired. Many others are now deciding whether and when they can afford to retire. Assessing that is complex, and it is one of the most important financial decisions people will ever make.
Researchers are finding that relatively few retirees have made a good assessment of what they needed prior to leaving work. A number of people do turn to financial advisors for help, and that can be a positive and crucial step toward making a good decision. But advisors must provide clear, effective analyses that will allow clients to make informed choices.
Choosing to retire is not (usually) an irrevocable choice, but people who later discover they retired before being financially able to do so can have great difficulty getting a new job at the same compensation level as before. Therefore, it is important to get the when-to-retire decision right the first time.
How well are financial advisors now doing in advising clients about this? New research by Mathew Greenwald & Associates points to disappointing results.
The study consisted of researchers (ages 59, 62 and 65) presenting themselves to financial advisors from seven major financial firms, asking for an assessment of whether they could afford to retire. All but one advisor used a sophisticated model provided by the firm. Each understood the model and believed in it. But, as it turned out, the outputs seem to have serious flaws.
Here is how the process worked.
In the first meeting, the advisors focused on understanding their prospects’ investment risk tolerance and financial needs and goals. They also collected information on the financial assets.
At the second meeting, all but one advisor provided a projection of assets and expenditures for each year through the presumed length of retirement. Two did a Monte Carlo analysis, while the others made straight line projections of investment return, ranging from a 6% return each and every year through retirement to a 7.68% return. The two using Monte Carlo provided an estimate of likelihood of having enough funds: 75% and 90%, respectively. The others gave no assessment of the risk of outliving resources, just an assurance and a projection that the money would last.