Nearly half of American households will fall short of their retirement goals, researchers have found. According to the Center for Retirement Research at Boston College’s National Retirement Risk Index (NRRI), if Americans work until the age of 65 and annuitize their assets, 47 percent of them will still be unable to maintain their standard of living.
The new numbers show that investors will “need to save more and/or work longer to improve their prospects for a secure retirement.”
Calculating Retirees’ Projected Income
The NRRI researchers calculated a “replacement rate,” which is retirement income as a percentage of pre-retirement income. They retrieved their data from the Federal Reserve’s Survey of Consumer Finances. The replacement rate includes the following:
- Social Security benefits
- Defined benefit plans (like a pension)
- Defined contribution plans (like a 401(k) plan)
- Housing assets (home equity, rent, and reverse mortgages)
These financial assets are then converted to an inflation-indexed annuity to calculate a stream of income for the retiree.
The target rate of income is set lower than before retirement, because the worker presumably does not need money for a mortgage, has a smaller tax burden, and no longer needs to save for retirement. If the projected income is 10 percent lower than the target, the retiree is considered “at risk.”
With a recently revised research method in place, NRRI is now better designed to:
- Project income more accurately
- Reflect the shift among employers from defined benefit to defined contribution plans
- Consider non-mortgage debt separately
- Provide more accurate household target incomes by expanding from a dozen broad categories (like “single female” or “married with two incomes”) to hundreds, which are now based on factors like income and home ownership
- Use the Earned Income Tax Credit, which is important for low-income families, when calculating the replacement rate
All Income Ranges Falling Short
The final numbers show that this projected shortfall spans all income ranges. While 56 percent of low-income households are predicted to fall short, the same holds true for 41 percent of high-income households.
“We need to fix our retirement system so that employer plan coverage is universal,” the study’s authors state. “Only with continuous coverage will workers be able to accumulate adequate resources to maintain their standard of living in retirement.”