Signals,RetirementOptions,PhasedRetirement

andRetirementDecisions

AnnaM.Rappaport,FSA,MAAA
AnnaRappaportConsulting

Presentedatthe2008Retirement20/20Conference
DefiningtheCharacteristicsofthe21stCenturyRetirementSystem
CrystalGatewayMarriot,Washington,DC
November1718,2008

Copyright2009bytheSocietyofActuaries.
AllrightsreservedbytheSocietyofActuaries.Permissionisgrantedtomakebriefexcerpts
forapublishedreview.Permissionisalsograntedtomakelimitednumbersofcopiesof
itemsinthismonographforpersonal,internal,classroomorotherinstructionaluse,on
conditionthattheforegoingcopyrightnoticeisusedsoastogivereasonablenoticeofthe
Societyscopyright.Thisconsentforfreelimitedcopyingwithoutpriorconsentofthe
Societydoesnotextendtomakingcopiesforgeneraldistribution,foradvertisingor
promotionalpurposes,forinclusioninnewcollectiveworksorforresale.

Abstract

Successinretirementdependsonbuildingenoughresources,notretiringuntil
wehaveenoughandmanagingassetswellafterretirement.Thispaperfocuses
onwhenandhowweretire.Howandwhentoretireisacomplexdecision
influencedbydifferentkindsofsignals.Thispaperfocusesonnewknowledge
aboutsignalsandhowtheyinteractwithretirementdecisions.Thepaper
demonstrateshowtheageatretirementinfluencesretirementsecurity.The
primaryfocusofthepaperishowindividualsdealwiththesystemtoday,and
systemimprovementisasecondaryfocus.SocietyofActuaries(SOA)andother
researchisusedtosupportthediscussion.

Introduction

Manyyearsago,whenIwasworkingtoearnanMBAfromtheUniversityof
Chicago,Itooklaboreconomicsfromaverywellknownlaboreconomist.Atthe
timeIhadsubstantialexperienceworkingasanactuaryincludingseveralyears
ofpensionconsulting.Theprofessortriedtoteachme(andtherestoftheclass)
thatindividualstakejobsearlyinlifebycalculatingthevalueoftheirfuture
wagesandbenefitsincludingpensionsandmaximizingthispresentvalue.We
hadrepeateddisagreementsonthistopicasIindicatedthatvirtuallynoone
coulddothis,andthatbenefitsmanagersatourclientscouldnotdoiteither.We
leftattheendofthetermwithouteitheroneofuschangingperspectivesabout
howeconomicanalysisaffectshumanbehavior.Duringthatperiod,retirement
hadbecomeawellestablishedpartoftheAmericandream,andmiddleclass
Americansgenerallylookedforwardtoaretirementofleisure.Retirement
securityforAmericanswasgenerallyassumedandnotasubjectinthenewsvery
much.

Thatwasmorethan20yearsago,andinthelastdecade,alothaschanged.
Retirementisinthenewsalot,andthereisagreatdealofconcernabout
insecurityinretirement.Whilemanypeoplewillhaveasecureretirement,many
otherAmericanswillnot;andbeingmiddleclassduringworkingyearsdoesnot
ensureretirementsecurity.Inpartthisisduetothewayindividualsrespondto
programsthatrequireindividualresponsibilityandpersonalsavings.Many
Americansdonotdowellwiththedecisionsthatareneeded.Thereareemerging
insightsaboutthatresponseasadifferentacademicdisciplinehasbeenapplied
tounderstandinghumanbehavioranddecisions.Thisdisciplineofbehavioral
financefocusesonhowpeoplebehave.RichardH.ThalerandCassR.Sunstein,

inNudgeImprovingDecisionsaboutHealth,WealthandHappiness,1
provideaverydifferentanalysisofhowindividualsmakedecisions.They
differentiatebetweenHumansandEcons.Theyintroducedmetotheformalidea
ofchoicearchitecture.Inmylaboreconomicsclass,welearnedthatallhumans
canbeexpectedtoactlikeEcons.InNudge,welearnedthatitisnowaccepted
thatHumansmakedecisionsinverydifferentways.Behavioralfinancetellsus
that:
Inertiaisaveryimportantfactor,anddefaultoptionsaremuchmore
likelytobechosenthanotheroptions.Defaultsaremorelikelytobe
chosenwhetherthedecisionistrivialorveryimportant.
Nudgescanbeveryimportantindrivinghumanbehavior.
Framingmattersthedesignoftherangeofoptionswillpushpeoplein
differentdirections.
Wheretherearetwooptionsandcombinationsareallowed,50percent
50percentisalikelychoice.
Wheretherearemanychoices,peopledonotchoosewell.Toomany
choicesarebewilderingtothechooser,andoftenitisdifficultto
understandtheimplicationsofthealternatives.
Decisionframingandchoicearchitectureinfluencemanydifferenttypes
ofdecisions.

WehavelearnedfromtheSOAresearchonpostretirementneedsandrisksthat
manypeoplehavemisperceptionsandmisunderstandingsaboutretirementrisk,
andthattheytendtothinkshortterm.2Publicconfidenceaboutpersonal
retirementsecurityexceedstherealityoftheassetsbeingaccumulatedformany.
Wehavelearnedfrombehavioralfinancethatweneedtoconsiderchoice
architectureandhowwedefineourchoices.

Ihavetriedtosynthesizetheideasfromlaboreconomics,behavioralfinance,the
SOAandotherresearchonhowpeopleperceiveretirementandwhattheydo.
Myconclusionsare:
ThewordretirementisaNudgeorsignal.InmyviewaNudgeisa
signalwithapushattachedtoit.
Thewordsearlyretirementgivepeoplepermissiontomoveawayfrom
worktheydontlike,withoutrequiringthemtodoadetailedanalysisof
theirresourcesandneeds.
1

Yale University Press, 2008

Society of Actuaries, Public Misperceptions about Retirement Security, 2004 and Public Misperceptions
about Retirement Security, Closing the Gaps, 2007 and Spending and Investing in Retirement: Is There a
Strategy? 2006.
2

IfwestartanillustrationanddiscussionaboutSocialSecuritybenefits
withtheageofthelargestmonthlybenefitratherthantheearliestbenefit,
wewouldprobablygetdifferentdecisionsabouttheageofretirement.
Planningforretirement,particularlyforthelateryearsandlongerterm,is
acomplextaskandveryhardformostpeople.
Itisnotuncommonforpeopletomakedecisionsthatwillaffectthemfor
25or30yearsormore,eventhoughtheiranalysisdoesnotfocusonmore
thanthenextfiveyears.
Thefactthatpensionplanssetretirementagesataparticularageandthat
SocialSecuritydoesnotincreaseretirementagesbeyond67,andhasnot
changedthatprovisionforover20years,createsafixedretirementage
mindsetratherthananexpectationthatretirementageswillincreasewith
lifespans.
Thesignalsaboutretirementfocusmoreonleisureandincomethanon
theneedforincomeandlifetimesecurity.
Thesignalsaboutretirementfocusmoreondreamsthanrisksandrisk
management.

GoalsandContextforthePaper

Mypurposeistothinkaboutsuccessfulretirementforindividualsandfor
societyasawhole.Successinretirementdependson:
Buildingenoughresources.
Notretiringuntilwehaveenoughsinceworkisoftenpartofretirement,
thewhenisreallywhenandhow.
Managingassetswellafterretirement.

Thispaperfocusesonwhenandhowweretire,acomplexsetofdecisions
influencedbydifferentkindsofsignals.Newknowledgeaboutsignalsandhow
theyinteractwithretirementdecisionsisexamined.Thepaperdemonstrates
howtheageatretirementinfluencesretirementsecurity.Theprimaryfocusof
thepaperishowindividualsdealwiththesystemtoday,andsystem
improvementisasecondaryfocus.Thepaperisorganizedinseveralsections:
Thesignalsaboutretirement.
Decisionsaboutretirement.
Creatingabetterfuture.

WhythisPaper

Iseeaworldinwhichlifespansareincreasinggradually,andtheretirement
systemischangingalot.Wecanthinkabouttheretirementsystemashaving
bothspectacularsuccessesanddefiniteweaknesses.Fromanindividualpointof
view,itcanbeseenasasuccessorfailuredependingoncircumstances.This
workisprovidedwithintheideathatwecanimprovethesystemandtheresult
formanypeople.

Mypersonalgoalsaresocietalandfocusonseveraldifferentoutcomes:
Moreindividualsthinkinglongtermanddoingbetterpersonalplanning
forretirement,withmoreanalysisaspartofthatplanning.
Financialsystems,publicandprivate,tosupportretirementthatworks
withouttoomuchindividualdecisionmaking.Systemsthatsupport
betterworkoptions,laterretirementandretirementsecurityforasmany
Americansaspossible.Systemsdesignedtorecognizethatmany
individualswillnotdogoodlongtermplanning.
BetterworkoptionsforthirdageAmericansastheymovetowardfullexit
fromthelaborforce.
Laterretirementandfullexitfromthelaborforcethatgraduallyadjuststo
changinglifespans,andhelpsmaketheideaofretirementmore
affordableformorepeople.

Thispaperonretirementagesandoptionsispartofabroaderefforttolookat
signalsandhowtheyaffecttheretirementsystem.Understandingand
modifyingthesignalsaboutretirementageswillnotbringaboutchangedirectly,
butitcanhelpustomeetthesegoalsbyhelpingtochangeexpectationsand
Nudgeustowardsomewhatdifferentsystems.

Signalsareimportantinthinkingaboutthegoalsbecause:
Theycreateexpectationsaboutpersonalchoicesanddrivetheoptionswe
consider,andsometimesoverrideanalyticalplanning.
Theymotivateindividualsandemployerstoconsidercertaintypesof
workoptions,provideideasaboutwhatispossible,andtheycreate
expectationsaboutwhatagoodemployershoulddo.
Theyhaveencouragedusnottothinkaboutthegradualincreaseinlife
spansaswemoveforward.
Theyinfluencethestructureoffinancialsystemsusedtosupport
retirement.

TheSignalsaboutRetirement

Wecanthinkaboutthesignalssurroundingretirementinseveraldifferentways:
Thewordsdescribingretirement.
TheprovisionsoftheSocialSecuritysystemandcommonpensionplans.
Theadvertisementsandliteraturethatareinthecommonpress.
Rolemodels,peersandfamily.
Whatisnotsaid.

WordsDescribingDifferentAspectsofRetirement

Therearemanydifferentwaystodescriberetirementandretirementages.How
manypeopleareconsideredtohavethestatusofretirementwillbedifferentif
onemeasuresreceiptofbenefits,laborforceactivityorselfdefinition.Wecan
thinkofretirementasreflectingoursourcesofincome,ourstateofmind,our
activitypatternorsomecombinationofthese.Wecanthinkofretirementalsoas
beingthetransitionpointbetweenaccumulationofassetsversususeofthemto
supplementorreplaceincome.

Thesearesomeofthedefinitionsfromthereportsonthe2007RisksandProcess
ofRetirementSurvey.Theyreflectcarefulcraftingandshowsomeoftheissues
surroundingthemeaningofretirementandretirementages:

RetirementThisisgenerallydefinedasexitingfromonesjoboroccupation,typically
atanageatwhichtheindividualhasnoexpectationsofreturningfulltimetothelabor
force.Forthepurposesofthe2007Survey,retirementisbasedonexitfromaprimary
occupationortheselfdefinitionofrespondents.

RetireeTraditionally,apersonwho,havingattainedacertainageoften,butnot
necessarily,normalretirementagehasleftthelaborforce,withnoexpectationof
returning.Today,manyretireesleavefulltimework,butcontinuewithsomework.As
retirementischanging,thereisnocleardefinitionofretirement,andselfdeclarationof
statusproducesvaryingdefinitionswhenbasedonlaborforceparticipationcriteria.
Otherstendtoconsiderthemselvesretirediftheyarecollectingretirementbenefits.For
thepurposesofthe2007Survey,respondentswereconsideredretireesiftheyclassified
themselvesasretiredinanemploymentstatusquestionorwereemployed,butresponded
thattheyhadretiredfromaprimaryoccupation.

FullRetirementAgeDefinedbySocialSecurityastheageatwhichmonthlyretirement
benefitsareavailableinfullwithoutreductionforearlyretirement.Forbirthcohorts
through1937,thishasbeenestablishedat65.Forthosebornin1938,fullretirementage
forSocialSecurityiscurrentlysetat65yearsandtwomonths,increasinganadditional
twomonthsforeachsubsequentbirthyear,reachingage66forthosebornfrom1943
through1954.Itincreasesagainbytwomonthsforeachsubsequentbirthyearafter
1954,reachingage67forthosebornin1960andafter.

NormalRetirementAgeFormosttraditionaldefinedbenefitpensionplans,thishas
beenestablishedas65,thesameageatwhichfullSocialSecuritybenefitswereavailable
forbirthcohortsthrough1937.Seealso,FullRetirementAge.

PhasedRetirementThereisnostandardagreedupondefinitionofphasedretirement.It
isusedtodescribesucharrangementsasworkingparttimebeforeretirementorretiring
andthentakinganewjob,becomingselfemployedorworkingonalimitedbasisfora
formeremployer.Viewedbroadly,itmayincludereducingonesworkschedulebefore
retirement,changingdutiesatnormalretirementage,workingparttimeinretirementor
somecombinationofapproachestograduallyphaseoutofthelaborforce.Thedefinition
ofphasedretirementistypicallylimitedtosituationswhereapartialpensionpaymentis
availableortoasituationwheretheindividualisworkingforthesameemployeras
before.

Theauthordoesnottotallyagreewiththisdefinitionofphasedretirementand
wouldincludesituationswheretheindividualisworkingforanewemployer,or
phasingdownwithoutpartialpensionpayments.Thisdisagreementservesto
illustratethattherearemanynuancesinthesedefinitionsandthereisno
consensusamongexpertsaboutexactlywhattheymean.

Notdefinedinthesurveyreportsisearlyretirement,atermusedinmany
pensionplanstodefinebenefiteligibilitypriortonormalretirementage.Usually
thereisabenefitreductiontoreflectthelongerperiodofpayment,butthisisnot
trueinallsituations.

NotethatexceptfortheSocialSecuritydefinition,whichcalledforagradual
increaseinretirementages,agesaregenerallydefinedasafixedageandthey
donotbuildinanyexpectationthattheywillgraduallyincreaseaslifespans
increase.

SignalsfromSocialSecurity,EmployersandEmployerPension
Plans

SocialSecuritytellsusthatpeopleareexpectedtoretirebetween62and70.Age
62istheearliestretirementageforSocialSecurity,andtherearenofurther
benefitincreasesorreasonstodelayclaimingafterage70.Ifpeopleevaluatedthe
differencesinbenefitscarefully,theymightconcludethatSocialSecuritybenefits
sendasignalthatthereisanadvantageinwaiting,butitappearsthatmanydo
notdothis.Themonthlyworkerbenefitin2008foraworkerwithmaximum
earningsinallyearsbasedonclaimingagein2008isasfollows:

Maximum2008SocialSecurityBenefits
foraWorkerInitiallyClaimingBenefitsin2008
Claimingage Monthlybenefit
62
$1682
65
$2030
70
$2794

SocialSecurityalsotellsusthatworkisanacceptablepartofretirement.Inthe
calendaryearspriortofullSocialSecurityretirementage(about66nowand
increasingto67),itispossibletoworkwhilereceivingbenefitswithearningsof
uptotheearningstest,$13,560in2008,withoutanyadjustmentinbenefits,and
abovethatamountbenefitsarereduced$2forevery$1earned.Afterthefull
benefitage,SocialSecuritybenefitscanbeclaimedwithoutanyrequirementwith
regardtofuturework.Thereisnoadjustmentinbenefitsforcontinuedwork.
NotethattheleveloftheSocialSecuritymonthlybenefitisveryimportanttothe
economicsecurityofretiredmiddleandlowerincomeAmericans.Forfouroutof
10olderwomenwholivealone,theirSocialSecuritybenefitisvirtuallyallthat
theyhave.

Manypeoplefeelthatemployersexpectthemtoleaveastheyreachtheirearly
60s.Provisionsofretirementplansaswellasbuyoutsreinforcethisexpectation.
Arecentsurveytellsusthatiftheywantpeopletostaylonger,Employersmay
justneedtoask:Manyretireesreporttheywouldhavebeenopentoanapproachfrom
theiremployeraskingthemtostaylongerwiththecompany.Sixtyonepercentsaythey
wouldhaveviewedtheexperiencepositively.Just10percentindicatetheywouldhave
reactednegativelytoanapproachaskingthemtodelaytheirretirement.3
3

EBRI 2008 Recent Retirees Survey, Washington, D.C. This study looked at what would have encouraged
recent retirees in the aerospace industry to say longer.


Employerdefinedbenefit(DB)planstellusthatweareexpectedtoretireby
normalretirementage.UnlikeSocialSecurity,employerDBplansaredesigned
tosignalallornothingretirement,andtheygenerallydonotformallysupport
phasedretirement.Mostphasedretirementcomeseitherbyworkingparttime
beforeretirementorreturningtoworkafterretirement,eitheratthesame
employeroranotheremployer.Earlyretirementagealsosignalsthatitistimeto
thinkaboutretirement.Thenormalformofpayment,lifeincomewithsurvivor
benefitsformarriedparticipants,signalsusaboutthinkingaboutthepension
planasincomereplacement.Evenplanswithlumpsumsprovidethesesignals
sincetheycommunicatebenefitsasincome.

Employerdefinedcontribution(DC)planstellusmuchlessaboutwhenor
whetherweareexpectedtoretire.Manyofthempaybenefitsprimarily(andin
somecasesonly)asalumpsum.Theyprovideasignalaboutretirementsavings
andresources,butleavemuchmoreopenexpectationsaboutwhentoretireand
abouthowtousefunds.Theymakeplanningfarmoreimportant.

AdvertisementsandLiterature:TheNewRetirement

Commonadvertisementsforfinancialservices,retirementhomes,vacationsand
otherproductsarefullofsignalsandshowretirementasacontinuousvacation,
fishingtriporgolfgame.Theyfocusonleisureandshowhappy,healthypeople.
Theytendtocreatesignalsandimpressionsaboutleisure.Theyforgetthat
vacationisabreakfromwhatwenormallydo,andthatwecannotbeon
vacationallofthetime.Peoplewhoretiredreamingofapermanentvacation
oftenfindtheyareunpreparedtodealwithanewsetofdailyrealities.Whatwas
excitingasabreakfromworkcaneasilybecomeboringifitisadailyactivity.
Recently,expertsfocusedonsuccessfulplanningareincreasingthinkingabout
threedimensionsofplanningfinancial,healthandactivities.Thefocuson
activitiesconsidersnotjustleisure,butwork,volunteerism,hobbies,familyand
buildingasatisfyinglifeinthethirdageandbeyond.

Recently,therehasbeenalotoffocusontheliteratureonhowretirementis
changing,andonworkasapartofretirement.Severalbooksprovide
terminologyandfocusonthenewretirementdesignedtocreatesignalsabout
retirement.Theauthornotesthatmuchofthisworkfocusesontheearlyyearsof
retirement.Someofthisliteratureignorestheneedforriskmanagementand
planningforlimitations


Herearesomeexamples:

DontRetire,Rewire!byJeriSedlarandRickMiners.Thecoverpromisesus
fivestepstofulfillingworkthatfuelsyourpassion,suitsyourpersonalityor
fillsyourpockets.

PortfolioLife,byDavidCorbett.ThecoverpromisesusThenewpathtowork,
purposeandpassionafter50.

Encore,byMarcFreedman.Freedmandiscussesworkthatmattersinthesecond
halfoflife,andtellsstoriesofpeopleinencorecareers,whoworkbothfor
moneyandthepromiseofworkthatmatters.

Otherbooksprovidealongertermandmorebalancedapproachlookingat
challengesandrisksaswellasnextsteps.

ProjectRenewment,byBerniceBratterandHelenDennis.Thisworkoffersa
trailblazingretirementmodelforthegenerationofwomenjustnowleavingthe
workforce.Thesewomenwerethepreboomersandbabyboomerswho
pioneeredthenewterritoryofwomenintheworkplaceandworklifebalance.
Theauthorsemphasizethepossibilityofpositivechange,enlightenmentand
adventure.Theyalsodiscusschallengesandmoredifficulttodiscusstopicssuch
ascaregiving,lossofaspouseandwhattodowhenyounolongerhaveyour
identity.

SmartWomenDontRetire,TheyBreakFree,byGailRentsch.Thisbook
describeshowwomenarereinventingtheirlivesandcareersinthesecondhalfof
life.

TheQuest,fromSteveVernon.Thismaterialisaretirementplanningprogramin
theformofaDVD.

ThereisadifferenttwistonthistopicinapaperfromtheAustralianInstituteof
ActuariestitledItstimetoabolishretirement(andhereshowyoudoit)by
DarrenWickman.4Thispaperfocusesonthereplacementofretirementbya
LifetimeIncomesystemthatfocusesondisability,notretirement,andalso
supportscyclinginandoutofwork,trainingandleisure.Governmentfunds
4

Paper presented to the Institute of Actuaries of Australia Biennial Convention, September 2007.

10

wouldnotbeusedforincomereplacementforpeoplewhoareabletoworkin
thisapproach.

Thetypicallifecyclepatternisevolving,butretirementcertainlyremainspartof
thelifecycleintheUnitedStates,Canada,Europeandmanyothercountries.A
numberofpeoplehavesuggestedlookingforanewtermfortheevolving
pattern,andsomehavesuggestedreplacingthesystemwithaverydifferentone.
Itistheauthorsopinionthatwewillneverreachagreementaboutterminology
toreplacethewordretirementandthatfurther,mostpeoplewontreallybeable
toworkafterage75,sothatwhilewemightretirelater,retirementisunlikelyto
goaway.

RoleModels,PeersandFamily

Asetofsignalsandexpectationsiscreatedbywhatothersdo.Weare
particularlyinfluencedbyfamily,peersandpubliclydefinedrolemodels.An
extremeexampleofthiswillservetoillustrate.Duringarecenttriptothe
DominicanRepublic,atourguideexplainedhowthesuccessofSammySosa,a
majorleagueU.S.baseballplayeroriginallyfromthatcountry,hadchangedthe
aspirationsofmanyyoungpeople.Formanyofthem,Sosassuccesshadled
themtothinkbeyondtheworldaroundthemandtodreamaboutandreachfor
fargreatergoalsinlife.

Theimpactofpeersondecisionswasafocusatthe2008RetirementResearch
CentersConference.Oneofthepresenterssaidthatthisinfluencedhispersonal
researchagendawhenheaskedhismotherhowshedecidedaboutwhento
retire,andsherepliedthatshehadstartedoutbytalkingwithherfriends.Some
oftheresearchpresentedwasstructuredtoexplorehowpeersinfluenced
individualsastheymakeretirementdecisions.ThepaperWhoDetermines
WhenYouRetire:PeerEffectsandRetirementfindsIndeed,ourmainfindingis
thatindividualdecisionsaboutwhentoretirestronglycorrelatedwiththeretirement
timingdecisionsoftheirpeers,whowedefinedtoberetirementeligiblecoworkerswithin
thesameemployer.Theauthorspointoutthatthisiseconomicallylogicalin
somesituationswherethecircumstancesarethesame,butillogicalinothers
wherethecircumstancesarenotthesame.5Theysuggestfurtherresearchon
peereffectsandtheirupsidesanddownsides.
5

Chalmers, John M.R., University of Oregon, Johnson, Woodrow T. U.S. Securities and Exchange
Commission, and Reuter, Jonathon, Boston College, Who Determines When You Retire? Peer Effects and
Retirement, presented at the 2008 Center for Retirement Research Conference.

11


Picturesofwhatwecandoandbeareimportantaswethinkaboutemerging
patternsofthirdageactivity.Thisisthefirsttimeinhistorythatsomanypeople
arelivingtohigherages,andthatpeoplearehealthyandactiveattheseages.For
manypeople,familypatternsbeforethemprovidenohelpinshapingtheirown
thirdage.Weneedtofindmorerolemodelstohelpusthinkabouthowtobuild
ournewlives.Severalofthebooksreferencedaboveareaboutlookingat
personalrolemodelsandindividualstories.

Rolemodelsandexamplesareimportantforindividualsbutalsoforemployers
astheythinkaboutphasedretirementandnewjoboptions.Employersseekout
casestudies:

AcasestudythatbridgestheorganizationalandindividualperspectivesisBon
SecoursHealthSystem,whichusesthreedifferentapproachestophased
retirement.6
Employeesmayretireatage65butcontinueworkingparttime(not
morethan24hoursperweek)whilecollectingtheirfullpension.
Employeeswhoworkpastage70.5beginreceivingapensioncheckin
Aprilofthefollowingyear,regardlessofwhethertheycontinuetowork
forBonSecours.
Employeeswhoprefertoretirealtogethermaycomebacktoworkafteran
absenceofatleastthreemonths.Theycontinuetoreceiveretirement
benefitsaftertheyarerehired,regardlessofhowmuchtheywork.

Employeeswhochooseanyoftheoptionscontinuetoearnpensioncreditifthey
workover1,000hoursinayear.Theirbenefitisthenrecalculatedwhentheystop
working.

DawnMalonefromBonSecoursHealthSystemdescribedsomecasestudiesof
employeesandhowtheyhadmovedfromjobtojob.Hereisoneexample:

Inthisnextscenario,welllookatNettiescareer.Shebegannursingin1957.
Sheworkedonthreeunits.Shewasoneofthefirstworkingmotherstorequest
flexschedulingtoaccommodatechildcareissues.Herhusbandwasinthe
militaryandwasgoneformonthsatatime.Shewasoriginallyhiredtowork3
p.m.to11p.m.However,withsmallchildrenathomeandchildcareissues
6

Rappaport, Anna and Young, Mary, Phased Retirement After the Pension Protection Act, The Conference
Board, New York, 2007.

12

interferingwithherworkschedule,NettielobbiedtheNursingDirectortoallow
hertoflexherschedule.Sheworked7a.m.to7p.m.formanyyears.

In1975,shetransferredtoEmployeeHealth.Duringthistime,shealsoworked
PRNevenings,andweekendsontheunits.Thismadeherthefirstemployee
allowedtoworkinmorethanonecostcenteranotherflexschedulingmilestone.
In1999,sheretired.TheninJanuary2000,shereturnedtoworkforEmployee
Wellness.Amongotherduties,sheperformsTBskintestsonemployees.Shehas
graduallyreducedherhourssinceretirement.Shecurrentlyworkstwodaysper
week.7

Thisandseveralotherexamplesmadephasedretirementmuchmore
understandableanddemonstratedhowindividualsusearangeofoptionsto
applyskillsindifferentroles.

HiddenSignalsThingsThatAreNotSaid

Sincethereisalotofinformationprovidedaboutretirementinmanydifferent
ways,therearealsohiddensignalsthatwecanfindinwhatisnotsaid.Thebig
gapsinthemessagesthatIhearmostoftenarethefailuretostressthe
importanceofmakingmoneylastalifetime,theuncertaintyoflifespan,thefact
thatsomepeoplewilllivetoage100andtheneedtothinkaboutriskprotection.
Thereisquitealotoffocusonhowmuchonecansafelywithdrawfrom
investments,butmuchlessonthechancethatinvestmentswilldeclineinvalue
andthattheywillrunout,orbeusedupforlongtermcareexpenses,leavingthe
coupleor,moreoften,thewidow,withnothingbutSocialSecurityorSocial
Securityandahouse.

Thegapsareaggravatedbecausethereisquitealotofnegativepublicityabout
annuities,muchofitreferringtodeferredvariableannuitiesasaninvestment.
However,thedistinctionbetweenimmediateanddeferredannuitiesisoften
missing,asisthedistinctionbetweenbuyingindividualannuitiesandselecting
incomeoptionsinemployersponsoredplans.

Several examples are published in Pension Section News, the Society of Actuaries, January 2008, Some
Interesting Information About Phased Retirement, by Anna M. Rappaport. Stories based on comments
made during Webcast sponsored by The Conference Board in June 2007.

13

DecisionsaboutRetirement
SomeoftheMostImportantDecisionsWeWillEverMake

Thedecisionsaboutwhentoretireandhowtoorganizethedistributionofour
retirementassetsareamongthemostimportantlifedecisionswewillevermake.
Arelatedsetofdecisionsincludeswhetherwewillcontinuetoworkonsome
basisaspartoftheretirementperiod.

Newinsightsreinforcehowimportantsignalsaretovitaldecisions.Wearestill
learningaboutthebalancebetweeninertia,intuition,signals,economicanalysis
andriskpreferencesindecisionmaking.SOAResearch,SpendingandInvesting
inRetirementconcludedItcanbearguedthatthedecisionofwhetherandwhento
retireisoneofthemostimportantfinancialdecisionsapersonmakes.Itcaneasilyimpact
apersonsfinancialsecurityforaperiodof25yearsormore.Butrelativelyfewfocus
groupparticipantsretiredwiththebenefitofhavingundertakenacarefulanalysisto
determinewhethertheirfundswouldsustainthemthroughouttheretirementperiod.
Andnonereportedthattheyretiredafterachievingacalculated(dollar)targetlevel
indicatingthattheycouldaffordtoretire.8

Thesefocusgroupswithretireeshelpusunderstandmoreaboutthedecisions
peoplemakeattimeofretirement.9

Ithoughtyouweresupposedtoretirewhenyouwere65andIthoughtIwould
tryit.

Ididntconsiderhowlongretirementwouldbe.

TheseriesofSOAsurveysonPostRetirementRiskregularlyhasshown,ashas
otherwork,thatpeopleexpecttoworktoolderagesthantheretirementagesof
currentretirees.Twentyeightpercentofthepreretireesinthecurrentsurvey
indicatethatretirementdoesnotapplytothem,andtheydonotseemtoexpect
toretire.10Manypeopletellmethattheywillnotretire,andthenwhenIask
themiftheyplantoworkbeyondage75,theyusuallysayno.Myimpressionis
8

LIMRA and the Society of Actuaries, Spending and Investing in Retirement: Is There a Strategy? 2006,
page 6.
9
Quotations from Spending and Investing in Retirement, LIMRA and Society of Actuaries, 2006. Focus
groups of individuals from 2 to 10 years after retirement designed to understand decisions made about
when to retire, its affordability and how money was invested in retirement. Participants had significant
assets in 401(k) or similar plans.
10
2007 Survey of Risks and the Process of the Retirement, Society of Actuaries

14

thatwhenpeoplesaytheydonotplantoretire,thatmeanstheyplantoretire
later.

Someofthethingsthatweknowaboutthisdecisionare:
PeoplewithonlyDCplansretirelaterthanthosewhohaveDBplans.
ThemajorityofpeopleclaimSocialSecuritybenefitsattheearliest
possibleage.Thosewholivetohigheragescertainlyoverage90
wouldhavebeenbetterofftowaitaslongaspossibletoclaimbenefits.
Inrecentyears,commonadviceprovidedbymanyfinancialplannersand
employeesofSocialSecuritywastoclaimbenefitsasearlyaspossible.
Themajorityofrespondents(54%)inarecentsurveyintheaerospace
industryconsideredtheirretirementtimingfor18monthsorlessbefore
theyretired,and72%consideredthetimingfor2yearsorless.11
Mostoftheretireesinthestudyoftheaerospaceindustrydidnothavea
gooddiscussionaboutplanswiththeiremployersbeforetheyretired,and
theywouldhavebeenwillingtostaylongerifaskedandifmadetofeel
thattheywerevalued.
Fouroutof10olderwomenwholivealone,themajorityofwhomare
widows,havevirtuallynoincomeotherthanSocialSecurity.
Itisnotuncommonforpeopletoretirewithoutdoingalongerterm
financialanalysis.

However,notallindividualschoosewhentheywillretire.Historicallyabout
fouroutof10peopleretiredearlierthantheychoseto,and,in2008,thishad
increasedtofiveoutof10.12Manyoftheparticipantsinthefocusgroups
discussedabovealsodidnotchoosewhentheywouldretirefromtheirlongterm
jobs.

TheTimingofRetirementandWhyitisImportant

Whenonedecidestoretireisextremelyimportantinretirementsecurity.There
areseveralreasonsforthis:
Medicarestartsatage65,andemployercoverageoftenisnotcontinuedto
retireesbeforeage65.Forpeopleinpoorhealth,itisextremelydifficultto
getindividualhealthcoverageandveryexpensiveifitisavailableatall.
SocialSecuritybenefitsincreasewithclaimingage.Themonthlybenefitat
age70willbeabout75%largerthanthebenefitatage62.Whilethe
11
12

EBRI Issue Brief No. 319, EBRI Recent Retirees Survey: Report of Findings, July 2008, page 4.
EBRI Retirement Confidence Study series.

15

shorterperiodofpayoutoffsetsthehigherbenefit,thepresentvaluemay
stillincrease,particularlywhenwidowsbenefitsareconsidered.
Forfouroutof10widowsoverage65,SocialSecurityisessentiallythe
onlyincomethattheyhave.
Whenonestartstousesavingsatalaterage,thereisashorterperiod
duringwhichtheyneedtobeused.Itbecomesmuchmorecosteffective
tobuyanannuityatahigherageaswell.
Whenonestartstousesavingsatalaterage,youhavemoreyearstosave
andmoreyearstoearninvestmentincome.
Addedyearsofworkusuallymeanmoreyearsofemployerprovided
healthinsurancecoverage,whichisparticularlyimportantforpeoplewho
arenotyetMedicareeligible.
Addedyearsofworkforindividualswhoarecoveredbypensionplans
usuallymeanmoreyearsofpensioncredit.Iftraditionalpensionbenefits
arepaidbeforenormalretirementage,themonthlybenefitsareoften
adjustedtoreflectthefactthatbenefitswillbepaidformoreyears.

ResearchonFinancialImpactofDelayingRetirement
Thesefactorsallinteract.Hereisanexampleconsideringseveralofthefactors
together.ACongressionalBudgetOffice(CBO)Study,RetirementAgeandthe
NeedforSaving,May2004,illustratestheimpactofchoosingretirementatages
62,66and70forsinglepersonsandmarriedcouples.Theage62coupleneeds8
to11timesannualincomeinassetsinadditiontoSocialSecurityiftheyareto
retireandreplace80percentofincome.Atage70,theamountneededisto2
timesincome.MuchofthedifferencestemsfromhigherSocialSecuritybenefits,
immediateaccesstoMedicare,feweryearsofretirement,andmoretimetosave.
Thisreinforcesthebenefitofconsideringbothtimingandneedsforplanning
purposes.

TheCBOstudyemphasizesthefactthatthegapbetweenwhatisprovidedby
SocialSecurityandwhatisneededforareasonablelevelofretirementincomeis
verylargeatage62,anditgraduallydecreasesovertimeasSocialSecurity
benefitsprovidemoreofwhatisneeded.

Thisissueisbeingrecognizedinvariouscircles.AliciaMunnellandStevenA.
Sasstellus:Americanswillneedtoworktwotofouryearslongerthantheydo
atpresenttoensureareasonablycomfortableoldage.Astheaverageretirement

16

ageformenhasbeen63forthepastquartercentury,theymustnowremain
employeduntiltheirmidtolate60s.13

ResearchonPublicKnowledgeaboutDelayingRetirement
TheSocietyofActuaries2007RisksandProcessofRetirementSurveyexplored
whatthepublicknowsabouttheimplicationsofdelayingretirement.Inresponse
tothequestionSupposeyouhadretired/youweretoretirethreeyearslater
thanyouactuallydid/arecurrentlyplanning.Doyouthinkthiswouldmake
yourretirementfinancially.?

Retirees
Preretirees
Alotmoresecure
15%
14%
Alittlemoresecure
30%
54%
Nomoresecure
51%
30%
Dontknow
4%
3%

Thesurveywentontoaskrespondentshowvariouselementsofchangewould
makethemmoresecureiftheyretiredthreeyearslater.Resultsareasshownin
thefollowingexhibit.
How much, if at all, would each of the following have increased your financial
security in retirement [if you retired three years later]? (Among those providing
retirement age from primary occupation; Retirees, n=385; Pre-retirees, n=266)
A lot
A little

16%

32%

Continuing to receive health

insurance from your employer

Retirees
Pre-retirees

Having 3 more years to make

contributions to investments

Retirees
Pre-retirees

15%
28%

47%

Increasing the amount you

receive from Social Security

Retirees
Pre-retirees

15%
17%

48%
61%

14%
28%

48%

Retirees
Increasing the amount you receive
Pre-retirees
from a traditional pension plan
(retirees n=242; pre-retirees n=207)

17%

59%

(48%)
(77%)
(63%)
(86%)

58%

(63%)
(78%)
(63%)
(83%)

54%

Increasing the amount your

[surviving] spouse will receive
from Social Security (if married)

Retirees 12%
Pre-retirees 17%

40%

Relying on your savings for a

shorter period of time

Retirees 11%
Pre-retirees 16%

41%

52%

(52%)
(70%)

54%

(51%)
(70%)

Source: Society of Actuaries, 2007 Risks and Process of Retirement Survey

13

Munnell, Alicia H. and Sass, Steven A., Working Longer: The Solution to the Retirement Income
Challenge, , Brookings, 2008, page 117.

17

Theresponsesindicatedthatthebiggestexpectedimpactamongpreretireesis
continuingtoreceivehealthinsurancefromyouremployer,with59percent
sayingitwouldincreasesecurityalotand17percentalittle.Theotherresponses
thatgotthemostattentionwerehavingthreemoreyearstomakecontributions
toinvestments,with28percentofpreretireessayingitwouldincreasetheir
securityalotand58percentalittle;andincreasingtheamountyouwillreceive
fromatraditionalpensionplan,with28percentsayingitwillincreaseitalot,
and54percentsayingitwillincreaseitalittle.Preretireesfocusedonthe
importanceofmaintainingemployerhealthinsurance,buttheydidnotplacea
lotofimportanceordifferentiateverymuchbetweentheimpactofneeding
retirementassetsforashortertimeandgettingmoreSocialSecurityorpensions
atalaterage.

Thefocusonhealthcarecoverageisveryrealisticsinceitisverydifficult,
expensiveandsometimesimpossibletobuycoverageasanindividualonthe
openmarket.Otherresearchhasrepeatedlyshownthataccesstohealth
insuranceisaveryimportantfactorinmanyindividualsdecisionsaboutwhen
theywillretireandwhethertoseeknewwork.

Theresponseswithregardtowaitingandotherfactorsarenotsurprisingwhen
consideredwithotherthingsthatweknowaboutpublicknowledgeincluding
thelackoflongertermplanning,andthefailureofmanypeopletodoacareful
analysisofthesituation.However,formostpeople(allbutthosewithmajor
healthexpenses),theeconomicimpactofnotneedingtouseretirementresources
forthreemoreyearswillbemuchgreaterthanthevalueofthreemoreyearsof
employersponsoredhealthinsurance.Iftherespondentshaddoneacareful
analysisoftheimpactofthealternativefactors,wewouldexpectdifferent
responsestothesurvey.

PreretireestendtounderestimatetheimportanceofSocialSecurity,andthe
samethingshowsuphere.Theauthornotesthatthereisnoparticularfocushere
onthesurvivingspousebenefitfromSocialSecurityeventhoughfouroutof10
widowshavevirtuallynothingotherthanSocialSecurity.Anotherquestionin
thesurveyfocusedontheawarenessoffinancialchangeonlossofaspouse.The
resultsindicatedrelativelylowawarenessofthelikelydeclineineconomicstatus
onwidowhood.

18

WorkPlansandtheDecisionMakingProcess

Researchhasrepeatedlyshownthatmanymorepeople(oftensevenoutof10)
saytheyplantoworkinretirementthanactuallyworkinretirement.Therefore,
workexpectationsarelikelytobeovervaluedinthedecisionmakingprocess.

RetirementTimingandExpectations

Researchalsoshowsthatpeopleareretiringearlierthantheyexpectto.The2007
RisksandProcessofRetirementSurveyshowedthatonceagainpreretirees
expecttoworklongerthanretireesactuallydid,withtheresultsillustrating
dramaticdifferencesbetweenthetwogroupsforcertainresponses.Halfof
retireesretiredbeforeage60(52percent),whileonlyonein10preretirees
currentlyintheworkforceexpectstoretirepriortoage60(10percent).The
largestshareofpreretireesintheworkforcereporttheyplantoretireatorafter
age65(36percent),comparedto17percentoftheretireeswhoretiredat65or
older.Amongthoseintheworkforce,nearlythreein10preretireessay
retirementdoesnotapplytotheminotherwords,theyexpecttoneverretire
(28percent).

Theseresultsshowthatsomepreretireeshaveexpectationsaboutworkthatwill
notberealized.Somewillbeforcedtoretireearlierthantheyexpectduetopoor
health,layoffsorcaregivingresponsibilities.Historicalfindingsfromthe
RetirementConfidenceSurveyillustratethatfourtofivein10workersretire
beforetheyhadexpected,whileresultsfroma2006LIMRAInternationalsurvey
indicatethatsixin10retireeshadretiredearlierthanplanned.14

ChangingtheSignals:DirectionsforaBetterFuture

Sowhatmightwedotochangesignalsinawaythatwillsupportourgoals?
IndexSocialSecurityandprivateplanretirementagesoratleastincrease
themretirementagesthatchangegraduallywithchangesinlifespans
wouldcreateverydifferentexpectations.NotethattheAmerican
AcademyofActuariesissuedastatementonAug.4,2008callingforan
increaseinSocialSecurityretirementages.

14

Society of Actuaries, Key Findings and Issues: The Phases of Retirement and Planning for the
Unexpected, 2007 Risks and Process of Retirement Survey.

19

ShowinformationaboutSocialSecuritybenefitsbystartingwiththeage
wherethemonthlybenefitisthelargestratherthantheearliestageat
retirement.
Discussretirementasatimewhenwagesandearningsarereplacedby
SocialSecurity,pensionsifanyandtheuseofretirementassetsfocus
thoughtaboutretirementintermsofsourcesoffinancialsupport.
Trytobuildacultureofanalysisandimprovefinancialliteracy
encourageindividualstodomoreanalyticalworkinretirementplanning.
Createsituationswherepeerstalkaboutthisandwherepeergroups
encourageit.Manytoolsarealreadyavailable,andmorearecomingon
themarketregularly.
Balancemessagesaboutleisure,workinginretirement,newretirement
withmessagesaboutrisk,longlifeandtheneedforretirementincome.
Buildandformalizenewandcreativeworkoptionsforthethirdage
whilemanypeopleworkinthethirdageandmanyfindnewwaysto
work,therearerelativelyfewformalemployerprogramsforphased
retirementorformalprogramsforcreativeworkoptions.
RemoveandreducebarrierstophasedretirementintheUnitedStates,
therearearangeofbarrierstophasedretirement.Theyinclude
complexitiesinpensionlawsanduncertaintiesaboutandbarrierstothe
rehireofretirees.Thesebarriersshouldbeaddressedsothatphased
retirementcanbecomeanacceptedoption.
Changetheterminologyaboutretirementageswhileitdoesnotseem
practicaltogetanentirelynewterm,itissuggestedthattheterms
normalandearlyretirementarenothelpfulinworkingtowarda
differentworld.
Buildexpectationsaboutemergingpatternsofretirementandworkin
thethirdagebuildinformationandcasestudiesaboutwhatboth
employersandindividualsaredoing.
Improvecommunicationsbetweenemployersandpotentialretireesso
thatbothareawareofsituationswhereitwouldbehelpfulforpeopleto
retirelater.
Recognizethelimitationssurroundingfinancialliteracyandinclude
appropriatedefaultsinprograms.

Postscript

Althoughthispaperdealsprimarilywiththeperiodaroundretirementage,the
choicesandresourcesavailableatthattimeareveryinfluencedbywhatwas

20

donetosaveandbuildresourcesfromentryintothelaborforcetotimeof
retirement.Theimportanceofsavingandplanningearlyareveryimportantand
shouldnotbeforgotten.Themorethatisdoneearly,thebettertheoptionswill
bethatareavailableaswereachretirementage.

21