If you think it’s complicated trying to determine an individual’s retirement funding needs, imagine trying to do so for all American workers.
When EBRI modeled the retirement savings gap of Baby Boomers and Gen Xers earlier this year, we found that between 43 and 44 percent of the households were projected to be at risk of not having adequate retirement income for basic retirement expenses plus uninsured health care costs—though that was 5 to 8 percentage points lower than what we found in 2003. That’s right: In terms of that retirement savings gap, American households are better off today than they were nine years ago—even after the financial and real estate market crises in 2008 and 2009.
As retirement plan advisors know, measuring retirement income adequacy is an extremely important and complex topic. It’s a topic that EBRI started to provide insights on back as far as the late 1990s. Our recent projections indicate that the average individual deficit number (for those with a deficit) ranges from approximately $70,000 for families, to $95,000 for single males, and to $105,000 for single females.
Stated in aggregate terms, that would be $4.3 trillion for all Baby Boomers and Gen Xers in 2012. That’s a large number, to be sure, but still considerably smaller than some of the projections that have been put forth.
Here are four things that are sometimes overlooked that help explain the “gaps” in retirement projection gaps:
1. Some won’t have a retirement. The reality is that some people won’t make it to retirement. On an individual level, we may not know who they are, but in the aggregate we can project the impact with some precision.
2. You can’t ignore the impact of uniquely post-retirement expenditures. Health care costs—and post-retirement health care costs particularly—remain a potential source of underplanning, both for retirement and retirement projections. The reality is that we spend differently in retirement than we do before retirement. Moreover, the costs of care, and particularly care such as nursing home and/or long-term care, loom large. And many won’t think or insure for that risk until it’s too late.
3. Tomorrow’s retirement will be funded differently. Looking back, even only a few years, assuming that the income sources of current retirees will be available to future retirees glosses over the reality that a major shift in emphasis in retirement plan design has taken place. In the future, the proportion of retirees receiving traditional pension income will almost certainly decline, and the percentage relying on defined contribution savings (primarily 401(k)-type plans) as a primary source of post-retirement income is certain to increase. Projecting future retirement income flows based on the experience of today’s retirees is certain to miss the mark.
4. We’re already saving “better.” Thanks to the growing popularity of automatic plan design trends—automatic deferrals, contribution acceleration, qualified default investment alternatives—many of today’s retirement plan participants are already saving earlier and investing more age-appropriately than ever before. There’s no reason to assume these trends won’t continue to extend and expand going forward.
If you’re relying on projections based on pre-Pension Protection Act defined contribution trends, you may well be relying on yesterday’s news.
