Retirement readiness improves in 2014, but varies by income and 401(k) access: EBRI


According to a new report by the Employee Benefit Research Institute (EBRI), overall retirement income adequacy for Baby Boomers and Generation X households improved in 2013, but factors such as age, income, and especially access to a 401(k)-type retirement plan, can produce significant individual differences.
Using its proprietary Retirement Security Projection Model® (RSPM), the EBRI found that last year’s gains in the financial markets and housing values mean that fewer of these households are likely to run short of money in retirement. The EBRI’s simulation model takes into account a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of age and income) as well as health insurance and out-of-pocket, health-related expenses, plus stochastic expenses from nursing home and home-health care (at least until the point such expenses are covered by Medicaid).

401(k) coverage

The EBRI analysis found that eligibility for participation in an employer-sponsored 401(k)-type plan remains one of the most important factors for retirement income adequacy. Gen Xers in the lowest-income quartile with 20 or more years of future eligibility in a defined contribution plan are half as likely to run short of money as those with no years of future eligibility, while those in the middle income quartiles experienced increases in the EBRI’s Retirement Readiness RatingsTM by 27.1–30.3 percentage points.

Health costs

The risks of a long life and high health-care costs drive huge variations in retirement income adequacy, the EBRI found. For both of these factors, a comparison between the most “risky” quartile with the least risky quartile shows a spread of approximately 30 percentage points for the lowest income range, approximately 25 to 40 percentage points for the highest income range, and even larger spreads for those in the middle income ranges.
According to the EBRI, annuities and long-term care insurance could mitigate much of the variability in retirement income adequacy at or near retirement age. For example, the annuitization of a portion of the defined contribution and IRA balances may substantially increase the probability of not running short of money in retirement.

Impact of social security

Future Social Security benefits make a huge difference for the retirement income adequacy of some households, especially Gen Xers in the lowest-income quartile, the EBRI found. If Social Security benefits are subject to proportionate decreases beginning in 2033 (when the Social Security Trust Fund is projected to run short of money), the Retirement Readiness Ratings values for those households will drop by more than 50% from 20.9% to 10.3%.

Source: EBRI press release PR 1063.

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