Morningstar - Winter 2019 - 37

EXHIBIT 4

Additional Savings Treating a retirement-age goal as uncertain significantly increases the size of the nest egg needed to fund
retirement, especially for older target retirement ages.
High Success Target

Moderate Success Target

Additional Savings Required

Low Success Target

120%

117
103
89
69
55
41
31
8

4
-6 -15

21 8

13 2
-2

60
61
Target Retirement Age

0
-20

-2

-8

-10

17 5

40
28

100

Source: Morningstar.

older retirement age, because they tend to retire
earlier than expected.
Next, we conducted an analysis to determine the
additional savings required to achieve the same
probability of success for a given withdrawal rate
when incorporating retirement-age uncertainty
versus more traditional retirement modeling.
This is determined through stochastic simulation
(in which we tested different current savings levels
until the one that results in the same probability
of success is determined). For example, assuming
a retiree is targeting a retirement age of 65
and a 4% median initial withdrawal rate (across
simulations), the total retirement need (at
age 65) would be $52,076.3 The probability of
success of achieving this income level (to age 95)
is 56%. To achieve the same probability of
success (56%) for the same income level ($52,076),
the current balance at age 55 would need to
increase by 28% to $641,450 (from the assumed
portfolio of $500,000).
This analysis is conducted for retirement ages from
60 to 70, in one-year increments, and for initial

withdrawal rates (at the target retirement age) of
3%, 4%, and 5%. To make the results more
intuitive, we note that the 3% initial withdrawal
target has a high probability of success, 4% initial
withdrawal a moderate probability of success,
and the 5% initial withdrawal target a low
probability of success. The results are included
in E X H IB IT 4 .
Implications of Uncertainty
Incorporating retirement-age uncertainty can
significantly increase the required savings
levels, especially for individuals targeting later
retirement ages and with a higher target
probability of success (in other words, a retiree
who would take a 3% initial withdrawal).
If the "average investor" is assumed to be seeking
a 4% initial withdrawal rate (a moderate
success target) and wants to retire at age 65, the
impact of retirement-age uncertainty would
require approximately 25%4 more savings than
suggested by traditional models.

These results suggest ignoring retirement-age
uncertainty can have a significant negative impact

on retirement outcomes. While financial planners
are increasingly treating returns as a random variable in financial plans (through a Monte Carlo
simulation), other key assumptions also carry a good
deal of uncertainty. It is essential that financial
planners understand the implications associated
with the expected retirement-age assumption. K
David Blanchett, Ph.D., CFA, CFP, is head of retirement
research with Morningstar Investment Management. He is
a member of the editorial board of Morningstar magazine.
References
Greenwald, L., Copeland, C., & VanDerhei, J. 2017. "The
2017 Retirement Confidence Survey-Many Workers Lack
Retirement Confidence and Feel Stressed About Retirement
Preparations," EBRI Issue Brief, No. 431 (Employee Benefit
Research Institute, March 21).
Munnell, A.H. 2015. "The Average Retirement Age- An
Update," Center for Retirement Research, March, No. 15-4.
OECD. 2013. "Pensions at a Glance." Pensions at a Glance
2013: OECD and G20 Indicators, OECD Publishing.
RAND HRS Data, Version P. 2016. Produced by the RAND
Center for the Study of Aging, with funding from
the National Institute on Aging and the Social Security
Administration. Santa Monica, CA (August).

3 Note, $26,000 of this would be covered from Social Security retirement benefits, so the remainder ($26,076) would need to be funded by the portfolio, which has a median value of $652,147 at
retirement (before withdrawals begin). This results in a 4% initial withdrawal rate ($26,076 / $652,147 = 4%).
4 28.29% to be exact

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Morningstar - Winter 2019

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