(How) Has COVID Changed Retirement Expectations?

Nevin E. Adams, JD 

A new study reviews data from two databases[1] to see how (if?) retirement expectations have been impacted by the experience of the COVID-19 pandemic.

The research—titled “Retirement Expectations vs. Reality: Factors that Impact Retirement Decisions” and authored by Liu, Zhikun Liu, David Blanchett, Qi Sun & Naomi Fink—concludes pretty quickly that while “there is a natural upward trend for participants to expect a later and later retirement age when they are older,” this “natural trend of delaying retirement has no statistically significant relationship with the COVID-19 pandemic.” That conclusion meshes well with previous research on the topic. 

But having pretty rapidly dispensed with that, the paper turns to the logical follow-on; if COVID-19 did not alter participants’ retirement expectations significantly, what does? Also, are there significant gaps between expected and actual retirement ages?

The researchers note that the most significant factors that influence participants’ retirement decisions relative to expectations are health, wealth, age, change of marital status, mortality expectations, education levels, disability, and major illness diagnosis. They also caution that correctly anticipating retirement timing is “not only crucial for individuals’ own retirement success but also important for financial planners to provide appropriate advice and services to their clients.” Moreover, they note that it’s important for financial advisors to grasp clients’ retirement age expectations to make individually customized financial plans.[2] 

Predictions Versus Reality

Now, what they described as a “growing body of research” indicates that individuals’ retirement age projections are inconsistent with their actual retirement age, resulting in inaccurate projections. Meanwhile, incorporating retirement age uncertainty into a financial plan can significantly impact required retirement savings levels. That said, older Americans’ expected retirement ages were described as “bimodal, often centered around two Social Security Benefit (SSB) claiming ages—62 and 65 years old, which are the initial eligible claiming age and full SSB claiming age.” In fact, the report notes that more than 34% and 31% of older Americans plan to retire around age 62 or 65, respectively, consisting of the majority of the population. However, it is clear that actual retirement ages differ from expectations. More than 44% of the respondents retire before age 62.

The regression results indicate that keeping everything else equal, “participants with more education, better health, longer self-perceived life expectancy, a larger number of living children, and older age are associated with both later retirement expectations and actual retirement ages in their 50s. On the contrary, having more wealth and major illness diagnoses are factors that are associated with both earlier retirement expectations and actual retirement ages. 

That said, the researchers noted that “even among retirees who were only ten years away from their retirement age (i.e., in their 50s), only one in six accurately predicted their first retirement age. In fact, more than half of the participants ended up retiring earlier than their expectations.” Indeed, and while participants’ expected retirement ages were (as noted above) usually centered around two Social Security claiming ages (62 and 65), the researchers noted that their actual retirement ages are more likely to follow a negatively skewed (retire earlier) distribution.

Life Changes

The researchers note that certain life changes—specifically an increase in wealth, widowhood, and major illness diagnosis will positively (retire later) impact participants’ expected retirement age. On the other hand, they note that getting married, improvement in self-reported health, and self-perceived life expectancy increase will cause participants to expect earlier retirement ages. The researchers also cite what they call an “interesting phenomenon”: Although older Americans expect to retire later when they experience a wealth increase prior to their retirement, their actual retirement age is actually getting younger and closer to their original expected retirement age (meaning the gaps between the two are smaller). On the other hand, they note that an increased life expectancy pushed back the actual retirement age and led to a growing retirement age gap.

Ultimately, they recommend that since many retirement service products and financial planning engines integrate a self-reported retirement age into their design, they might want to consider incorporating retirement uncertainty (such as the discrepancy between retirement expectations and reality discussed in this study) into the product design and implementation. “The more accurately participant-facing calculators and financial plans represent the range of outcomes with associated probabilities, the better they can help workers achieve a successful retirement,” they write.
 
Footnotes

[1] The conclusions were based on data from responses to an online financial wellness assessment offered by Prudential Financial and the Health and Retirement Study (HRS) data, a nationally representative longitudinal survey of more than 37,000 individuals over the age of 50. Analyses from both data sets indicated that older Americans’ retirement expectations (including planned retirement age and Social Security benefit claiming age) remain uninterrupted despite enduring the impact of the COVID-19 pandemic on their work and financial situations in 2020.
[2] This study also introduces several alternative definitions of “actual” retirement. They write, “since participants may go back to work after their first retirement, either full-time or part-time, their retirement well-being could be significantly impacted by their decisions to reenter the workforce. Policymakers, employers, and retirement service providers may also take the participants’ potential multiple retirement periods into consideration. Future studies could focus on the similarities and differences between these retirement definitions and investigate the patterns in which retirees stop working or reenter the workforce one or more times.”