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Half of Households at Risk of Lower Living Standards in Retirement

Industry Trends and Research

Retirement readiness remains a major challenge for many of today’s working-age households that may need to save more and/or work longer to improve their prospects for a secure retirement. 

That’s according to the Center for Retirement Research’s newly released National Retirement Risk Index (NRRI), which measures the percentage of working-age households that are “at-risk” of being unable to maintain their pre-retirement standard of living in retirement. 

The NRRI is constructed with data from the Federal Reserve’s Survey of Consumer Finances (SCF). The exercise involves comparing households’ projected replacement rates – retirement income as a percentage of pre-retirement income – with target rates that would allow them to maintain their living standard. 

Despite recent improvements in the Index’s methodology, the overall level and time pattern of at-risk households remains roughly the same, the report notes.

“After recalculating the NRRI using the most updated methodology, the bottom line from our previous studies still holds — about half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes,” researchers Yimeng Yin, Anqi Chen and Alicia Munnell write.

Moreover, the pattern continues to follow closely with the health of the economy. In this case, the Index increased substantially from 2007 to 2010 during the Great Recession, and then declined from 2013 to 2019 as the economy experienced low unemployment, rising wages, strong stock market growth and rising housing prices. “These improvements were modest due to some countervailing longer-term trends – such as the gradual rise in Social Security’s Full Retirement Age (FRA) and the continued decline of interest rates – which made it more difficult for households to achieve retirement readiness,” the researchers further observe.

Demographic Patterns

In addition to the time pattern, the NRRI patterns by age, income, and wealth are also generally consistent with previous results.   

Age. For instance, the 2004 NRRI shows a large discrepancy in retirement readiness by age group, which reflects the significant changes in the retirement landscape, such as the shift of coverage from DB to DC plans, rising life expectancy, and the increase in the FRA. As the trends for these underlying factors stabilized over time and their impact fully materialized, the age discrepancy in the NRRI has narrowed. In 2004, 49% of those in the age 30-39 age group were estimated to be at risk, while 32% of those in the 50-59 age group were at risk. In 2019, however, the age 30-39 group remained at 49%, but the 50-59 age group rose to 46% estimated to be at risk. 

Income. Not surprisingly, households’ retirement preparedness in all income groups was heavily affected by the Great Recession. And while the middle and the highest thirds saw significant improvement from 2010-2019 due to housing and equity prices rebounding, households in the bottom third saw virtually no improvement as they are less likely to own a house and participate in DC plans, and have few financial assets, the report notes.  

Meanwhile, the rise in wage growth for lower-income workers was good news generally, as it improves their current standard of living, but at the same time, also leads to lower projected Social Security replacement rates due to the progressive benefit formula, the researchers explain. Similarly, the increase in the FRA also has a large impact on low-income households, who depend almost entirely on Social Security for retirement income.

Wealth. As one might expect, when viewed by wealth, households’ retirement preparedness generally shows a similar pattern. The discrepancy between the top and bottom wealth groups, though, is much larger than those by income, suggesting that wealth inequality is more severe than income inequality, the researchers observe. In this case, 73% of households in the lower-wealth group were at risk in 2019, compared to only 28% of households in the higher-wealth group.

“The robustness of the results confirms the retirement saving issue faced by today’s working-age households, and that we need to fix our retirement system so that employer plan coverage is universal,” Yin, Chen and Munnell suggest in concluding observations. “Only with continuous coverage will workers be able to accumulate adequate resources to maintain their standard of living in retirement.”