The Myth of the Average Retiree: Helping Employees Prepare for an Unknown Future

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A person with one foot in a bucket of ice water and the other in a bucket of boiling water is, on average, comfortable. So it goes with retirement planning. Historical averages are used, since the future is unknown, to help workers with their saving, investment, and retirement planning decisions. But workers also should be made aware that they will face unavoidable risks over an unpredictable future and, alas, that the only surefire way to mitigate the danger of running out of money in retirement is to save more and work longer.

Yet most guidance is based on the assumption that the future will look like the past—as demonstrated by checking any one of the myriad of retirement planning Web sites, seminars, articles, and self-help books—or even a sit down for a one-on-one with a financial advisor. Thus, taking history as a guide, the average participant can expect to earn a 10 percent return on US stocks and a 5.5 percent return on bonds (based on 1926 to 2012 performance); endure a 3.23 percent rate of inflation (based on 1913 to 2012 consumer price indices); and, upon retiring at age 65, live to age 85.7 for a male and 87.6 for a female (or age 90 for the longer-lived of a 65-year-old couple). Then, armed with this “knowledge” and taking the participant’s current salary, and assuming his or her spending in retirement will equal a fixed percentage of final salary (many programs use 80 percent), the crystal ball software will spit out a recommended annual savings target, investment allocation and the number that person must have squirreled away to retire comfortably.

If everything works out on average, those recommendations will be spot on. But averages have very little to do with predicting what will happen to an actual person. In reality, half of retirees live beyond their life expectancy, investment markets can tank right after a couple hits their savings goal and retires, or some similar “black swan” event can occur.

Originally Published in Benefits Law Journal Vol. 26, No. 2 - Summer 2013.

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