As the first members of the US baby boom generation start to turn 60 this year, millions of them will face a challenge even more daunting than rising health care costs and disappearing pensions: our research suggests that they will be forced to retire far sooner than they had hoped. Equally troubling, most baby boomers significantly underestimate the cost of retirement and hold unrealistic expectations about how they will finance it. Meanwhile, most financial-services firms have not stepped up to the challenge of helping this generation prepare for the golden years.

These are among the findings of a survey of more than 3,000 US retirees and preretirees, with a sampling that includes a broad representation of the approximately 76 million baby boomers now nearing retirement. Our research examined their retirement plans and concerns, as well as their patterns of interaction with financial-services firms over time. The respondents ranged from 40 to 75 years old and had investable assets of $1,000 to $2.5 million per household.¹ When we compared the future plans of preretirees with the realities of people who have already retired, we found disconcerting gaps. Topping the list are significant miscalculations about future employment possibilities: while almost half of all respondents expect to work past age 65, only 13 percent of current retirees have done so. Preretirees expect, on average, to work full time until age 67, but the average actual age at retirement is only 59. The result is a perilous double whammy: eight fewer years of earning power combined with eight additional years to stretch existing retirement savings. That stands to put a serious dent in the retirement lifestyles of millions; what’s more, more than 30 percent of the preretirees plan to do part-time work after their formal retirement, yet only 10 percent of current retirees actually do.

Among the retirees in our sample, a full 40 percent were forced to stop working earlier than they had planned, largely because of health problems (their own or a family member’s) or the loss of a job (Exhibit 1). While unplanned early retirement is prevalent among all consumers, the reasons vary by wealth level. More than half of the respondents with less than $250,000 in investable assets, for example, cited health problems as the cause of their forced retirement. By contrast, more than two-thirds of the respondents with upward of $1 million in assets identified the loss of a job—through downsizing, for example—as the reason they had to stop working (Exhibit 2). Less affluent respondents were more likely to have held jobs that require physical labor, and such work takes a toll on health.

If working longer isn’t the silver bullet to solve the retirement-financing problem,² couldn’t baby boomers mitigate the problem by reducing their retirement spending? Indeed, 32 percent of preretirees plan to do just that. Here again, however, reality paints a different picture: only 10 percent of retired respondents say that they have succeeded in reducing their expenditures significantly (Exhibit 3). Moreover, 31 percent of preretirees plan to finance their retirement by selling their homes and relocating to save money, but fewer than 10 percent of retirees actually did so.

In part, the respondents’ excessive optimism can be chalked up to common psychological biases, such as anchoring and adjustment, which help explain why people have difficulty revising their initial estimates.³ However, our findings also suggest that financial institutions are missing out on an ideal opportunity to help preretirees prepare by, for example, offering them better products and advice.

For starters, people nearing retirement need financial plans specifically designed for them, but fewer than one-third of the respondents aged 55 and older reported that their financial providers had helped them create one. Further, more than half of the average retiree’s net worth resides in real estate, yet only 3 percent of the respondents had discussed gaining access to that home equity with their financial institutions. Some forward-looking companies have already developed appropriate specialized products, such as target maturity mutual funds that allow consumers to take on different levels of risk as they age. Other institutions can learn from this example.

To help people understand—and use—such specialized products, a financial institution should develop sales models that incorporate consumers’ attitudes toward them, particularly along the key dimensions of trust, customer experience, and competence. Some consumers, fearing “product pushing,” distrust advisers who operate on commission, for example. Rather than shying away from nontraditional compensation structures, financial-services providers should adapt to them, since satisfied consumers tend to be more loyal than dissatisfied ones.