The Challenge of Deciding When to Retire
Thursday, March 13, 2014
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 41.3%, up 0.8 points
  Neutral: 31.8%, down 1.0 points
  Bearish: 26.8%, up 0.2 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »


One of the biggest decisions a person will make is when he or she will voluntarily retire. Though a great deal of emphasis has been made to encourage saving for retirement, arguably not enough emphasis has been placed on determining the “optimal” date for retirement or considering what one’s retirement lifestyle will be.

Two recent analyses looked at retirement date decisions and uncovered two different insights. The first, a poll by Gallup, found that finances play a significant role. The second, a study by the Michigan Retirement Research Center at the University of Michigan, said cognitive abilities play a role. Both considered different data and sought to answer different questions, which explains some of the difference between the conclusions.

Gallup surveyed over 85,000 working adults. The research firm found that nearly 50% of working baby boomers (those born between 1946 and 1964) do not plan to retire until at least age 66. One out of 10 predicted that they will never retire. Not surprisingly, those who strongly believe they have enough saved plan to retire earlier (age 66) than those who strongly believe they have not (age 73). Job satisfaction also played a small, but not significant, role in the desire to retire later rather than earlier.

The Michigan Retirement Research Center analyzed data from the American Life Panel (ALP). The ALP is run by RAND and the University of Southern California. It surveys more than 6,000 adults age 18 and older. These researchers found a link between cognitive scores and retirement expectations. Higher cognitive scores were associated with later projected retirement dates and more coherent retirement expectations. The Michigan researchers also found a correlation between longer expected longevity and postponing retirement.

The Michigan Retirement Research Center said expectations about Social Security reform also had some influence. Those who expect benefits to be reduced in the future intend to retire later, not earlier. The researchers theorized that “the uncertainty about Social Security may lead individuals to anticipate working longer to compensate for the reduction in the generosity of the benefits.”

One common link between these studies may be the presence of planning. Those who planned for retirement appear to be better prepared for the event. Those who have not report difficulty imagining what retirement will be like or view it as a goal that remains elusive and distant.

What is not apparent in either analysis is how much thought people gave to actually envisioning their retirement expenses and lifestyle. A report by S. Katherine Roy, the chief retirement specialist at J.P. Morgan, found that spending peaks at age 45 and then declines by 43% by age 75. Furthermore, today’s younger retirees (ages 65 to 74) are more likely to have a mortgage (40% in 2010 versus 22% in 1989). Roy’s analysis is notable because she based it on data from 1.5 million households with mortgage, debit and credit card relationships with Chase.

The challenge for those who are nearing retirement or who have recently retired is balancing the reality of what their retirement lifestyle will actually be versus what they expect it to be. Actual financial needs could differ significantly from projections (either less or more). The level and type of activity may also differ considerably (working versus not working, traveling versus staying at home, etc.) Health care is a wildcard expense whose amount and timing often cannot be predicted.

There is no easy solution to this challenge, but relying on a few basic guidelines can help. Save as much as possible before retirement. If there is a reasonable expectation of living past age 80 for you or your spouse, try to avoid claiming Social Security benefits before age 70. Use an inflation-adjusted 4% withdrawal rate from your savings as your baseline for budgeting. Give a lot of consideration to how you intend to keep yourself occupied during retirement. Most importantly, be flexible with your financial plans. Newer research, including a Vanguard study scheduled for the April AAII Journal, suggests using range of withdrawal rates rather than a fixed withdrawal rate (e.g, 4% of savings).


More on AAII.com

The Week Ahead

Next week, 10 members of the S&P 500 will report earnings. Included in this group are Adobe Systems (ADBE) and Oracle Corp. (ORCL) on Tuesday, FedEx Corp. (FDX) on Wednesday and Nike (NKE) on Thursday.

The week’s first economic reports will be the March Empire State manufacturing survey, February industrial production and capacity utilization, and the National Association of Home Builders March housing index, all of which be released on Monday. Tuesday will feature the February Consumer Price Index and February housing starts and building permits. The March Philadelphia Federal Reserve Survey and February existing home sales will be released on Thursday.

The Federal Open Market Committee will hold a two-day meeting starting on Tuesday. The meeting statement will be released at 2:00 p.m. ET and Federal Reserve Chair Janet Yellen will hold a press conference at 2:30 p.m. ET on Wednesday.

The Treasury Department will auction $13 billion of 10-year inflation-adjusted securities (TIPS) on Thursday.

Friday is a quadruple witching day, which means both options and futures contracts expire.

Monday is St. Patrick’s Day; be sure to wear something green.

The NCAA men’s college basket tournament will start on Tuesday with the play-in games. I’ll be rooting for my alma mater, the University of Kansas, to win it all.

AAII Sentiment Survey

Both bullish sentiment and neutral sentiment extended their streaks of above-average readings in the latest AAII Sentiment Survey. Bearish sentiment increased slightly, but continues to stay below its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 0.8 percentage points to 41.3%. Optimism has now been above its historical average of 39.0% for five consecutive weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, declined 1.0 percentage points to 31.8%. Although this is the second consecutive weekly drop, neutral sentiment remains above its historical average of 30.5% for the 10th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, edged up 0.2 percentage points to 26.8%. Even with the increase, pessimism remains below its historical average of 30.5% for the 23rd time in 27 weeks.

As the numbers show, the trend of cautious optimism and above-average neutral sentiment among individual investors continues. Many AAII members are encouraged by the overall upward momentum of stock prices, earnings growth, economic expansion, the Federal Reserve’s tapering of bond purchases and low interest rates. Some AAII members are fretting about elevated stock valuations, the pace of revenue growth, the pace of economic expansion and Washington politics.

This week’s special question asked AAII members to predict the odds of the current bull market lasting into at least a sixth year on a scale of “very likely” to “very unlikely.” Respondents were optimistic overall with 34% saying the chances of the bull market celebrating its sixth birthday were somewhat likely, 16% saying likely and 24% saying very likely. Economic growth was the primary reason given. Many respondents also said the sustained low interest rates and the accommodative Federal Reserve policy will help stocks move higher. Less than 15% of respondents do not expect the bull market to reach a sixth year (7% said somewhat unlikely, 5% said unlikely and 2% said very unlikely). Valuations and underlying fundamentals were the top reasons given for the pessimism.

There were some expectations for greater volatility this year. Slightly more than 8% of respondents on both the bullish and bearish side used the words “volatility” or “correction” in their comments.

Here is a sampling of the responses:

  • “Somewhat likely because of low interest rates and inflation; there are no good alternatives to stocks right now.”
  • “It will last into the sixth year, but volatility will increase.”
  • “I think it is very likely that the bull market will run for a few more years, if only because the Fed continues to pump a massive amount of liquidity into the system.”
  • “The bull market will last longer because the economy is improving.”
  • “Somewhat unlikely since economic conditions are so-so and P/E’s are moderately high.”

» Take the AAII Sentiment Survey