Higher taxes lead to a higher number of households 'at risk' in retirement
High-income Boomers experience largest increase in National Retirement Risk Index
FOR IMMEDIATE RELEASE
December 7, 2010
Erica Lewis (614) 249-0184
Jeff Whetzel (614) 249-6354
Columbus, OH — Potential tax increases will lead to a higher number of households ‘at risk’ in retirement. The latest analysis of the National Retirement Risk Index (NRRI), released by the Center for Retirement Research at Boston College and sponsored by Nationwide Mutual Insurance Company, examines how tax increases could impact retirement readiness. The result is a three percentage-point rise in the Index. This modest increase assumes that higher taxes do not affect households’ retirement savings rate. If households were to respond by cutting back on their saving, the rise in the Index would be greater.
The NRRI measures the share of American households ‘at risk’ of being unable to maintain their pre-retirement standard of living in retirement. The Index uses the conservative assumptions that people work to age 65, receive income from reverse mortgages on their home, annuitize all of their financial assets and taxes remain at current levels. The new study looks at what happens if taxes were to increase to help bridge the gap between government revenue and spending.
“Significant tax increases are likely in the coming years,” said Center Director Alicia H. Munnell. “On the surface, it appears higher taxes will have a modest affect on retirement readiness with the exception of high-income households at the verge of retirement. However, the Index only reflects part of the story, as younger households would also face substantial reductions in consumption both before and after retirement.”
The full report is available at the Center for Retirement Research at Boston College.
High-income Baby Boomers especially ‘at risk’
The research found that when examining households by income level and age, Early Baby Boomers (those born between 1946 and 1954) in the top income bracket were most impacted by higher taxes. The percent of these households ‘at risk’ increased from 37 percent to 49 percent. This effect from higher taxes is greater than that of the 2008 market crash.
This impact of potential tax increases is due to the fact that older households will have less time to adjust their consumption patterns and retirement plans. The impact is compounded for high-income households, as they will bear more of the burden of the tax hikes and need more income to maintain their standard of living in retirement.
Reduced consumption for younger workers
Potential tax increases have a lesser affect on the retirement readiness of younger households, as they have more time to adjust to paying higher taxes. However, the modest increase in the number of younger households ‘at risk’ only tells part of the story.
The research assumes that to stay on track for retirement younger workers will need to significantly reduce their consumption both before and after retirement In fact, younger, high-income households will need to reduce their consumption by 10 percent.
“The latest analysis of the NRRI demonstrates just how challenging it can be to effectively plan and prepare for retirement, regardless of age or income. Many households will find it’s easier to manage these challenges by enlisting the help of a qualified investment professional,” said Kevin McGarry, director of retirement income solutions for Nationwide Financial.
Nationwide, based in Columbus, Ohio, is one of the largest and strongest diversified insurance and financial services organizations in the U.S. and is rated A+ by A.M. Best. The company provides a full range of personalized insurance and financial services, including auto insurance, motorcycle, boat, homeowners, life insurance, farm, commercial insurance, administrative services, annuities, mortgages, mutual funds, pensions, long-term savings plans and health and productivity services. For more information, visit www.nationwide.com.
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