Financial Planning Blog

Recently the Center for Retirement Research at Boston College updated its National Retirement Risk Index (NNRI), and the news was not good. The NNRI measures the percentage of U.S. households who are at risk* of being unable to maintain their current standard of living in retirement. The Center has calculated the index at three year intervals going back to 1983, and this 2009 version is actually an update of 2007 numbers adjusted for lower stock market and housing values, along with small changes in a few other assumptions.

The key findings:

• 51% of households are at risk of not being able to maintain their standard of living, even if they work to age 65. This likely understates the risk, given that the average retirement age is currently around 63.
• The "at risk" index is up from 43% in 2004, and 44% in 2007 when housing and stock market assets were at peak values. The drop in housing values accounts for over 70% of the increase of those at risk, and the stock market decline almost 25%. (The update was done after Q1'09, close to the market lows.) For comparison, the "at risk" index was hovered around 30% in the 1980's and climbed to about 40% in the late 90's. Obviously, the trend line is not favorable.
• In a separate study, the Center calculated the impact of rising health care costs on the NNRI. This bumped the 2004 "at risk" index of 43% up to an alarming 61%. When they included allocating assets to cover potential long term care costs, the "at risk" index climbed to about 65%. If you extrapolate a similar increase to the 2009 update, you get a very scary number--something over 70%!

You probably can guess most of the solutions. Those at risk need to:

• Plan on working longer. Retiring later helps by 1) increasing Social Security benefits; 2) allowing more years to save; 3) giving investments more years to grow; and 4) reducing the number of years requiring withdrawals from assets.
• Save more during their working years.
• Be smarter with their money, both during the accumulation phase and as they covert retirement assets into income. Plan explicitly for higher health care and long term care expenses.
• Lower lifestyle expectations in retirement.

The Center also published a study in 2008, called "Do Households Have a Good Sense of Their Retirement Preparedness?"  , which had some interesting findings. Using the same sample that showed 44% at risk in the 2007 NRRI, when asked to do a self-assessment of their retirement preparedness, 48% of households felt they were at risk. This leads you to believe that even though many of us are at risk of falling short in retirement, at least we are aware of the issue. If we are aware, maybe we will act now to prevent the problem. Not so fast...

When you look at the data closer, it paints a more negative picture. Of the 44% who were at risk according to the NRRI, only 25% ranked themselves as so. The other 19% thought they were doing OK. In other words, of those who are at risk, about 57% (25% of 44%) realized it, but the other 43% were clueless. (I guess we shouldn't be surprised by this.)

Those 56% of households that were rated as "not at risk" also presented some interesting data. About 57% (32% of 56%) of these respondents correctly responded they were doing OK. However, 43% (24% of 56%) ranked themselves at risk, even though the NRRI did not. Many people are worrying more than they should--although this may not be a bad thing.

Are you adequately preparing for retirement? Do you think you are one of those at risk of having a retirement lifestyle that falls way short of what you hope for? Or, are you just ignoring the question and hoping things turn out OK? Figuring this all out isn't easy--you need to factor in inflation, taxes, savings rates, investment returns, Social Security, pensions, and health care, among other things. This is an area where a competent financial planner can help you sort out where you stand today--while there is still time to be proactive and prepare.

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* "At risk" means projected replacement rates are 10% or more below the target income that would maintain a household's pre-retirement standard of living.

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