Benefit Strategies
Is There Really a Retirement Savings Crisis?
The National Retirement Risk Index (NRRI) has shown that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, nearly 45 percent will be “at risk” of being unable to maintain their standard of living in retirement.
That is, these households are projected to have replacement rates - retirement income as a share of pre-retirement income - that fall more than 10 percent short of a target rate designed to maintain their pre-retirement living standard. More realistic assumptions regarding earlier retirement and reluctance to annuitize 401(k) balances or tap housing equity would put the percentage “at risk” considerably higher, as would the inclusion of rapidly growing health care costs. Yet, recent academic articles and press stories question whether Americans are facing a retirement income crisis.
This study by Boston College’s National Center For Retirement Research summarizes an exercise that reconciles these seemingly contradictory conclusions. It demonstrates the importance of the age group and time period being examined. The academic literature showing no problem is generally based on the Health and Retirement Study (HRS), a nationally representative sample of households age 51 to 61 in 1992. The NRRI is based on the 2004 Survey of Consumer Finances, which includes households of all ages. Applying the NRRI methodology to the HRS age group produces very similar results to recent academic studies. That is, only about 20 percent of households age 51-61 in 1992 were “at risk.” Fast forward to 2004 and calculate the NRRI in that year for those 51-61, and the “at risk” population increases to 32 percent. This increase reflects declining Social Security replacement rates, lower real interest rates, and the continued shift from defined benefit to 401(k) plans. Revisiting 1992 highlights the fact that the retirement landscape is changing over time, and that a good report card for older households in 1992 does not preclude serious problems for Baby Boomers when they retire.
Benefit Strategies provides company sponsored Pre-Retirement Seminars for plan sponsors, as well as individual counseling for participants nearing or entering their retirement years. Call Donald Potter for assistance.