Retirement Roadblock: The Dangers of Magical Thinking 

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Photograph by GSO/Getty Images

Here's a hot trend in retirement planning that's gone relatively unnoticed: Magical thinking.

A survey from Northwestern Mutual reports that more than four in 10 Americans expect to keep working into their 70s; the average projected -- or perhaps prayed for -- retirement age is 68.

That’s not some outlier result.

When the Society of Actuaries, which spends a lot of time worrying about our increasing longevity, asked pre-retirees when they expect to sign off from their primary occupation, 55 percent said it would be after age 65. The 2013 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) reports that 61 percent of workers expect to retire at age 65 or later.

The data suggest this is a seriously flawed plan.

According to Northwestern Mutual, the average retirement age is 59. The Society of Actuaries found that 16 percent of retirees stopped working after age 65, a far cry from the 55 percent who expect to work that long. EBRI’s data show that just 25 percent of retirees worked past age 65 -- not 61 percent.

EBRI also points out that while 69 percent of workers expect to have a job that brings in income after they retire, only 25 percent of current retirees actually do.

Given the low percentage of retirees who managed to pull off what you’re probably banking on, making working longer the centerpiece of a retirement plan seems a dicey proposition.

That’s especially true if your plan to work longer means saving less today. Vanguard reports that less than half of participants in the 401(k) plans it runs defer at least 6 percent of their salary. Among 55- to 64-year-olds, the average deferral rate has declined from 9.1 percent in 2006 to 8.7 percent in 2011.

Stuart Ritter, a financial planner at T. Rowe Price, likens saving 3 percent to going to the gym for six minutes; you’re not going to whip yourself into shape. A 9 percent deferral rate, then, is akin to a still sub-par 18 minute workout. Ritter points out that at a 9 percent deferral rate the odds of your money lasting to age 95 is less than 40 percent. His advice: save at least 15 percent of your pre-tax salary. At the very least, give yourself a much bigger cushion if your plan to keep working doesn’t work out as planned.

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