Clients need to plan for not only when they want to retire, but also when they might have to retire.

One of the cornerstones of any retirement and estate plan is a simple but crucial decision: At what age do I want to retire?

According to a recent survey from Gallup, the average American who has yet to retire now plans to stop working for good at age 66. That’s up from an average age of 60 in 1995, which is surely the result of a few different factors. Among them: the idea that more people enjoying their jobs and wanting to work longer, but it’s also an artifact of the waning power of many people’s retirement savings.

But it’s important to remember that 66 is merely the planned retirement age. The average U.S. retirement age, in actuality is 61. That’s up from 57 two decades ago, according to a Gallup survey conducted last year. The trend to retire older started in the 1990s, rising pretty continuously into the 2000s. It leveled off then, but increased again after the recession hit in 2007 and 2008, when people couldn’t afford to retire. And that is in large part a result at least in part of involuntary retirements, people losing their jobs late in life and not being able to reclaim them.

So we have two data points in conflict with each other; and it’s important for clients to realize why they might differ. Clients prepare themselves for when they want to retire, but they also need to be prepared for when they might have to retire.

This is an issue that affects even high-net-worth individuals. Market Strategies International polled a group of affluent investors, with an average of $623,000 in investable assets, and found that only 28 percent of them were highly confident that they would be able to generate sufficient income during their retirement to cover their expected expenses.

This group is clearly expecting not to have to rely on a pension in retirement. While 39 percent of current retirees depend on a pension, only 22 percent of those affluent are expecting that to be their primary source of income.

Two major concerns have affected retirees’ potential security in recent years: (1) the rising cost of health care; and (2) the increasing longevity that most Americans are enjoying. Whether it’s the result of ObamaCare or from other market forces, the growth of health care costs have begun to slow. Health care spending grew more slowly than the U.S. economy from 2010 to 2012, according to the Office of the Actuary at the Centers for Medicare. That marked the first time since 1997 that health expenditures didn’t grow faster than the gross domestic product. So that part of the equation may be getting under control.

But lifespans continue to increase. The average life expectancy for all Americans is now 85. According to a report published in the Financial Analysts Journal, if 85 is the average life expectancy, that means 20 percent of retirees will die before 82, while another 20 percent will live past 90. With those odds, retirement planners have no choice but to create plans that will be in place through to the age of 90.

Retirement itself is sort of an accident of history. Everyone knows that when Franklin D. Roosevelt proposed Social Security back in 1935, retirement was set at age 65.

But FDR didn’t come up with that idea; the retirement age of 65 was first established in Germany under Chancellor Otto von Bismarck, who set it as a mandatory retirement age for railroad workers, primarily for safety reasons. So it’s been around for a long time. But Bismarck didn’t expect his workers to make it much past 65, not to mention 90.

Fast-forward to 2014: Prospective retirees want to retire at 66 — which leaves 24 years for at least 20 percent of them. But they may be forced to retire at 61, putting an extra five years into their golden years.

That’s the challenge for retirement and estate plans — that they be flexible enough to account for the difference between an older worker’s desires and what he or she may actually be forced to confront. The proactive financial advisor will make sure that his or her clients are prepared for any eventuality.

 

See also:

The glide path debate considered

Boomers’ retirement confidence takes a dive

5 more retirement truths your boomer clients need to know