The Center for Retirement Research at Boston College has an important new paper out entitled How Important is Asset Allocation to Financial Security in Retirement? I encourage you to read it carefully.
The motivation for this paper is the concern that financial advice tends to focus too much on financial assets, which gives too much emphasis and prominence to asset allocation decisions. Most people have too little financial wealth and typical financial tools are silent on the levers that will have a much larger effect on retirement security for most Americans. As the article points out, these levers include delaying retirement, tapping home equity through a reverse mortgage, and controlling spending. Accordingly, the paper concludes that given the relative unimportance of asset allocation, financial advisers would be of greater help to their clients if they focused more on a broad array of tools – including working longer, controlling spending, and taking out a reverse mortgage.
I agree with this argument, but would add an additional point along with a caveat.
The additional point is a crucial one: everyone needs to save more. It is the single most important thing one can do to enhance his or her retirement prospects. The ideas that the article focuses on — working longer, controlling spending, and taking out a reverse mortgage — are good ones. Saving more is even better.
My proposed caveat relates to the (good) idea that people would be well served by working longer. As the article points out, retiring later is an extremely powerful lever. Because Social Security benefits are actuarially adjusted, they are over 75 percent higher at age 70 than at age 62. As a result, they replace a much larger share of pre-retirement earnings at later ages – 28.6 percent at 62 and 51.5 percent at 70 in an example offered by the article — reducing the amount required from savings. By postponing retirement people also have additional years to save and allow their balances to grow. Finally, a later retirement age means that people have fewer years to support themselves on their accumulated retirement assets.
But the caveat is an important one. Working longer is an excellent idea, but it is not always viable. Health can deteriorate. Jobs can disappear. Opportunities can vanish. Indeed, a recent Society of Actuaries survey found that half of retirees had retired from their primary occupation before age 60. And, though other studies show an increase in the percentage of people over age 65 who are employed, many who lose jobs in their 50s and early 60s experience more difficulty finding new employment than younger people. As a consequence, a commitment to work longer is a good thing, but it is no substitute for planning and saving so as to be able to retire sooner, because you may not have a choice.