Clients looking to retire but are uncertain about reaching their retirement goals often are encouraged to use more conservative projections in their planning or to build more of a cushion into their savings.

However, the best thing financial advisors can do for clients in this position is simply to get them to delay retiring, according to a paper written by David Blanchett, head of retirement research, investment management, with Chicago-based Morningstar Inc.

According the paper, entitled “The ABCDs of Retirement Success” (published in the Journal of Financial Planning), the first step is to quantify the relative importance of the four factors that drive retirement outcomes – alpha (outperformance), beta (asset allocation), cash flow and delayed retirement.

Although all of these factors are significant, they are not equally important and each aspect affects outcomes differently, Blanchett’s paper states. For example, returns matter greatly once savings get large, but are relatively insignificant when account balances are small.

Similarly, generating above-average returns does not have nearly as great an impact on retirement success as the amount that clients withdraw annually or a portfolio’s asset allocation.

The longer the portfolio’s lifespan, however, the lower the initial withdrawal rate is likely to be and the greater importance real returns will have on determining whether or not your retired client’s goal is actually achieved.

This underscores the importance of retirees maintaining some percentage of their account balance in investments that have a higher anticipated return, such as equities, Blanchett’s paper notes.

However, in many instances, the impact of delaying retirement – by even just one year – is the most significant factor in successful retirement outcomes, the paper states.

Not only does delaying retirement prevent clients from drawing down their savings, it also gives clients the opportunity to add to their retirement accounts and increases anticipated payouts from government pensions.

For clients nearing retirement, delaying retirement by a single year can increase the probability of success by about 10.6%, the paper estimates – roughly equivalent to generating 1% of alpha during each year of retirement. Delaying for just four years can increase retirement income by 33%.

In part, this increase is due to receiving enhanced Social Security (the U.S. equivalent of the Canada Pension Plan and old-age security) benefits. For each year retirees delay taking Social Security up until the age of 70, benefits – adjusted yearly for inflation – rise substantially.

Delaying retirement both increases the initial monthly benefit and means future cost-of-living adjustments will be larger, which further insulates the client. This is particularly important for retirees who expect to invest in relatively conservative portfolios during retirement.

(Note that U.S. Social Security provides generally higher monthly benefits and offers greater survivor protection than the combined Canadian programs.)

Blanchett’s paper uses probabilities of success for various retirement periods, based on different period lengths of delay, to estimate the impact of waiting on varying life expectancies.

The conclusion: waiting has a significant, positive effect on success rates. And, not surprising, the longer a retiree lives, the more significant postponing retirement becomes.

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