Yes, Virginia, there really is a retirement-savings crisis
Research from Center for Retirement Research at Boston College indicatesnearly 45 percent of households won’t have enough retirement income
FOR IMMEDIATE RELEASE
July 31, 2007
Dan Orzano 614-677-5115
Jeff Botti 614-249-6339
Columbus, Ohio — One year after launching its National Retirement Risk Index, the Center for Retirement Research at Boston College today released a new Index report that confirms most working Americans are not saving enough money for retirement, despite recent academic articles and news stories that question the existence of a retirement crisis.
“Our research clearly demonstrates that the retirement crisis is very real for today’s workers,” said Center Director Alicia H. Munnell. “And, without changes in behavior, we believe the picture will become increasingly bleak as younger workers get closer to retirement.”
Using the National Retirement Risk Index, the Center reconciles the two seemingly contradictory conclusions by demonstrating the importance of the age group and time period being examined. For households age 51-61 in 1992, the Center found only about 20 percent to be ‘at risk,’ which is similar to a recent study measuring ‘optimal saving’ among the same group. However, the Index shows that risk has been rising over time so that, by 2004, 32 percent of households age 51-61 were ‘at risk.’ And including a broader age range of workers raises the ‘at risk’ level to nearly 45 percent of households.
Munnell said their research defines ‘at risk’ to mean a household would be unable to maintain its pre-retirement standard of living in retirement. The amount of money people need while retired compared to pre-retirement varies, but is estimated to be from 65 to 85 percent, depending on household income and marital status. For example, most retirees need less than 100 percent of pre-retirement income because they tend to pay less in taxes and no longer need to save for retirement.
“Revisiting 1992 highlights how the retirement landscape is changing over time,” said Munnell. “Factors like declining Social Security replacement rates, the continuing shift from traditional employer pension plans to 401(k)s, lower interest rates, and rising life expectancy all underscore the need for more retirement income. And the Index has not yet factored in health care costs, a major wild card that could further undermine retirement security.”
The full report is available at the Center for Retirement Research at Boston College.
National Retirement Risk Index
The National Retirement Risk Index, developed by the Center for Retirement Research at Boston College and underwritten by a grant from Nationwide, currently estimates that nearly 45 percent of all working Americans are ‘at risk’ of being unable to maintain their standard of living in retirement.
“The Index projects how much income households are expected to have in retirement relative to their pre-retirement income,” Munnell said. “It then compares this “replacement rate” to a target rate that would allow a household to maintain its pre-retirement standard of living. Households that fall more than 10 percent short of the target are considered ‘at risk.’
“This estimate assumes that people work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes,” Munnell said. “More realistic assumptions regarding earlier retirement and the reluctance of people to annuitize their 401(k) balances or tap housing equity would put the percentage of workers ‘at risk’ considerably higher.”
The Center’s analysis also finds a rising level of risk over time with 35 percent of Early Boomers ‘at risk’ compared to 49 percent of Generation Xers.
American workers urged to take action
While the retirement crisis is very real, the situation isn’t hopeless. If they take action now to maximize their savings and investments, American workers can ensure their golden years are truly golden, says Keith Millner, senior vice president of Nationwide Financial’s In-Retirement business.
“Adequate retirement income is not simply a concern for Boomers,” said Millner. “The National Retirement Risk Index indicates the retirement situation will get more serious over time. It’s important for all people, including young Americans just entering the workforce, to have a solid retirement income plan.”
“Nationwide is proud of its role as exclusive underwriter of the National Retirement Risk Index, as it is a call to action that can’t be ignored,” Millner said. “In the next decade, 77 million baby boomers are going to reach retirement age. As Americans face declining traditional pensions, modest 401(k) balances, longer lifespans and declining Social Security expectations, our focus is to provide solutions, including education, to help people prepare for and live in retirement.”
Millner said workers should take personal responsibility for their retirement planning, beginning with assessing their financial situation.
“There are countless resources available to help, from investment professionals to online planning aides, like Nationwide Financial’s free, online RetirAbility Check,” Millner said.
RetirAbility CheckSM (www.nationwide.com/retirabilitycheck) is an interactive resource that provides people with a basic score to illustrate how financially prepared they are for retirement. It was developed to help take the guesswork out of planning. RetirAbility CheckSM builds on the Index findings through its score, which is based on data derived from the Index.
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“Making small changes will add up over time. Gradually reducing debt while increasing 401(k) savings can help Americans get on the right path to a financially secure retirement,” Millner said. “The key is to start today.”
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