Many retirees stop working earlier than expected, often disrupting their financial plans.
In Part II, Broadcast Retirement Network’s Jeffrey H. Snyder discusses the facts that the actual odds of working during retirement are a lot lower than expected (75% expect to work, but only about 30% do so) with MissionSquare Research Institute’s Zhikun Liu, PhD, CFP and Amova Asset Management’s Naomi Fink.
Jeffrey Snyder. Broadcast Retirement Network
This morning will be our in part two of our conversation, retirement expectations versus reality. And we’re going to welcome back to the program Dr. Zhikun Liu of Mission Square Research Institute and we’re going to welcome to the program, Naomi Fink of Nico Asset Management. Dr. Liu, so great to see you again and Naomi, welcome to the program.
Zhikun Liu, PhD, CFP, MissionSquare Research Institute
Good to see you again, Jeff.
Naomi Fink, Amova Asset Management
And lovely to be here and participate in the filming.
Jeffrey Snyder. Broadcast Retirement Network
Yeah, and again, we’re talking, this is part two of our conversation and Dr. Liu, I want to pick up the conversation from the conversation yesterday with you and Dr. Blanchett. I want to follow up on the influencing factors and key takeaways. How do we view implications for some factors like health, wealth, and our own perception of life expectancy?
Zhikun Liu, PhD, CFP, MissionSquare Research Institute
Yes, I think those are good factors to discuss, Jeff. I’m glad you picked them out. Let’s talk about health first.
I just want to ask the audience, when you think about health, when you think you’re getting healthier before your retirement, are you going to work longer or you want to retire earlier? What do you think, Jeff?
Jeffrey Snyder. Broadcast Retirement Network
Personally, I think people want to retire earlier, but I could be wrong.
Zhikun Liu, PhD, CFP, MissionSquare Research Institute
Yeah, I value your opinion, but the statistic shows people are actually going to work longer. When they think they’re going to get healthier, they’re going to live longer, they delay their retirement a little bit according to their expectations. So that’s what the statistics find.
And I think those are interesting factors to discuss. Wealth is another example. When people accumulate more wealth before retirement, they tend to retire earlier.
And the factor itself also shrinks the gap between people’s expected retirement and their actual retirement. So when people are getting wealthier, they are retiring earlier, and their retirement age is very close to their expectation. So that’s what we find for these factors.
Again, back to yesterday’s recording, we actually talked about some other factors like self-perceived life expectancy. When people are expecting to live longer, they are actually going to delay their retirement. But we find that this factor actually disturbs their retirement expectation.
So there is a bigger gap between the expected retirement and actual retirement. So when employers find out that their employees are getting more self-perceived life expectancy, maybe because of social security changes and the mortality table changes, they need to make sure that they re-evaluate the original retirement expectation. So they don’t have the bypass design in a different way.
So it’s missing their target.
Jeffrey Snyder. Broadcast Retirement Network
And Naomi, always great to see you. Thanks for joining us this morning. Is there an economic or societal impact for these influencing factors in delaying or not exceeding or not meeting expectations?
Naomi Fink, Amova Asset Management
Sure. So thank you for asking me this question. I’m an economist, so I love to talk about economic impact.
And just to maybe turn to the economic theory. So the economic theory tells us that, well, two maybe interesting things in this context. Number one, that there is an income effect and there’s a substitution effect of the decision to supply labor to continue to work.
And the income effect tells us, OK, well, I can make more money. Let’s work longer. The substitution effect, however, works in the other direction and tells us, well, I actually enjoy not working.
And so what’s the price of leisure? Well, the price of leisure is the same as the price of labor. And the other thing that I wanted to talk about is the time value.
I mean, the effects over time. So if I think that I’ve done my best earning and I can afford to retire, and I’m not really going to comparatively make that much tomorrow, then I’m going to retire. So the individual in the theory assesses not only the income effect and the substitution effect, but also looks at those effects over time and says, well, have I done, have I maximized, have I done the best I can over time?
And if so, I’m going to enjoy my leisure. And I think the results pretty much line up with the theory here, basically, with the wealth aspect. If you can afford to retire and you do think, all right, I’ve done it, I’ve done my best earning, then I can afford to, I do retire.
That’s the main impact. And if I have a positive health surprise or I have greater expected longevity, then it seems like, you know, you go and you weigh the impact and you say, all right, well, I have more years, a greater number of years in retirement. And if I do have a greater number of years in retirement, that can be great, but then I’m going to have to be able to fund that.
So as David, I mentioned yesterday, then one effective way to do that is to work longer. So I think here we do see some of the theory actually materializing in practice.
Jeffrey Snyder. Broadcast Retirement Network
And just to follow up on that, Naomi, and then I want to pivot to Dr. Liu and bring him in, but do we need to realign retirement expectations so they’re more in line with reality? Because as we’re talking, they don’t always align. And so we may need to communicate more effectively with people and say, hey, you might not have that much time to what you think.
Your perception may not meet the reality.
Naomi Fink, Amova Asset Management
So I’d like to talk about two things here. Number one, it’s the policy, the government’s perspective. And number one, the government’s priority is to keep as many people as fully employed as possible, providing they want to, and also providing they can supply productive labor.
So in that respect, the greater longevity that we’ve been experiencing over the recent decades does lend itself to having people work for longer. And also, conversely, when you do have different conditions, you have a labor supply shortage, chronic labor supply shortages, actually, that’s what we’re experiencing right now in Japan, what happens? Well, you have quite a few people past traditional retirement age joining the labor force.
Again, that’s happening in Japan right now. There are a lot of people who have greater longevity. They’re pretty healthy.
They may retire once, but then they un-retire because they would also like to comfortably afford retirement. So that’s one aspect. Also, just about realigning expectations.
Certainly, any deviation from your expected retirement date is going to potentially increase or decrease, all else equal, your retirement resources. That’s true. But there are some things that are just random.
And probably rather than trying to change stuff, you can’t change randomness, then the best thing you can do is actually plan for that randomness. So what you want to probably do is gain a good understanding of those factors that can be better planned. For instance, getting married, you can, to some extent, plan when you want to get married.
You can’t really plan when you’re going to get ill. You probably don’t want to get ill at all. So what you have to do is understand the factors surrounding it.
And what you have to do, allow yourself a margin to plan for things that might not be your central scenario. So I think that that’s probably the mix of questions here on the policy side, as well as on the individual household side, things that can help people achieve better outcomes in retirement.
Jeffrey Snyder. Broadcast Retirement Network
And just to build on that, Dr. Liu, do we also need to redefine what retirement is and what it represents?
Zhikun Liu, PhD, CFP, MissionSquare Research Institute
Yes, Jeff. I will pull our audience’s attention back to the US labor force and the research we actually published. We find that there is a discrepancy between people’s retirement expectation and their actual retirement age.
The expectation is bimodal, meaning that they want to focus their retirement on the social security claiming ages. But the reality is they usually retire earlier, and it’s a left skew normal distribution, if you will. So we need to redefine or reconsider retirement.
People retire and they work part time. Maybe they un-retire, like Naomi said, and go back to work. And this pattern is crucial for both the employees to save for their retirement future and employers to design retirement strategies to help them.
So we need to study what kind of factors are changing this pattern and define the retirement terms in the sense that we know when you say you’re going to retire, which it could mean that you are going to retire from your main job, but you still have sources of income. Or it means you retire for a certain period of time and pick up some labor later. So we need to reconsider that.
And by studying this pattern, we can help the employees to consider when they’re going to stop and reenter the workforce, especially for those who do this multiple times throughout their retirement age.
Jeffrey Snyder. Broadcast Retirement Network
So Naomi, I mean, what I’m hearing Dr. Liu say, it sounds almost like a shifting to a phased approach of retirement. So you’re not 100% retired. Maybe you dial things back.
Am I hearing that correctly?
Naomi Fink, Amova Asset Management
So I think it’s probably beneficial to have other options than just one full and final retirement. And that’s not only because it helps us be more flexible in the face of randomness, but it also helps us deal with greater longevity better. And also it helps us deal with situations where people, maybe against the theory a little bit, derive some greater value and meaning from work.
And I’d like to consider a specific example. And that’s of municipal firefighters and police officers. Typically, they retire earlier than the average municipal worker, and their employment is structured so that these very labor and stress-intensive jobs only go to a certain age.
But even these jobs, a lot of times, there are structures in place to allow deferred retirement, at least for a few years. There are these drops, deferred retirement option plans, that some of these municipal safety workers or county safety workers can take advantage of. And beyond that, a lot of times the retirement age is right now, considering the longevity, so early that they can feasibly consider second careers.
They can do something, apply skills that they obtained in their first career to something else, or a lot of them go back into education and try something completely different. So I think we’re in a very different situation to maybe earlier in the 20th century, when longevity was not as great, and when people had one job for life and retired at the end of it. I think certainly there is a lot of room for different retirement arrangements.
Jeffrey Snyder. Broadcast Retirement Network
Yeah, I completely agree. And again, those workers, municipal workers, police firefighters, extremely stressful and physical jobs. Dr. Liu, I want to kind of bring you back. I want to kind of wrap things up. Let’s talk about some key takeaways. And then I can’t let you go without you giving us a little bit of a tease about the next set of research that we can expect from the Mission Square Research Institute.
Zhikun Liu, PhD, CFP, MissionSquare Research Institute
Thank you, Jeff. I think the key takeaway is to bring awareness to, like you said, both employer and employees about the discrepancy between people’s retirement expectation and the reality. By knowing that, people can preemptively design strategies to combat the uncertainty of retirement.
And I’ve already heard a lot of retirement product and service designers start to use this research to consider the key factors and redesign their retirement strategy and the product, such as annuity, targeted funds, et cetera. So that’s the conclusion for this study. And we are going to have a full house of exciting research coming out from the major surveys we conducted, the annual workforce survey.
We asked the HR managers, what do you think about different topics, such as financial well-being of your employee, how to design the recruitment and retention strategies for public sector workers to retain young talents. And we also have survey to ask the workers themselves, what do you think about your financial well-being retirement future? How do you like the employers to tailor their employment benefits to your needs?
Beyond that, we have some investment study coming out, too. We look at whether public sector workers have more stickiness or more likely to accept the default investment in their DC plans. And we found that demographics plays an important role.
So a lot of exciting studies are coming out, student loans, financial well-being of women, and also we even look at the views of American youth on financial independence and retirement planning. Lots of exciting studies are coming out.
Jeffrey Snyder. Broadcast Retirement Network
Yep, very exciting. And we’re looking forward to having you back in the coming weeks and months. Dr. Liu, Naomi, great to see you. Thanks for joining us. Great work. We look forward to having you both back on the program again very soon.
Thank you very much, Jeff. And don’t forget to subscribe to our daily newsletter, The Morning Pulse, for all the news in one place. Details, of course, at our website.
And we’re back again tomorrow for another edition of BRN. Until then, I’m Jeff Snyder. Stay safe, keep on saving, and don’t forget, roll with the changes.
