Retirement at risk! Half of Americans won’t be able to afford their standard of living

Savings for retirement.

Half of households will not be able to maintain their standard of living when they retire, according to the latest findings of the National Retirement Risk Index from the Center for Retirement Research at Boston College.

“The National Retirement Risk Index: Version 2.0” measures the share of working-age households that qualify as being at risk of being unable to maintain their pre-retirement standing of living once they retire. The index is measured by comparing households’ projected replacement rates, which is their retirement income as a percentage of pre-retirement income, versus the target rates that would allow them to maintain their living standard. Approximately half of the nation’s working-age households currently are at risk of falling short of maintaining their standard of living even if they work to age 65 and annuitize all their assets, including receipts from a reverse mortgage on their home, according to the index.

“Retirement readiness remains a major challenge for many of today’s working-age households,” according to the authors of a report on the index. “They need to save more and/or work longer to improve their prospects for a secure retirement.”

The newest version of the index, which was released in May, reflects what the report calls “a major overhaul” designed to incorporate new research findings and methodological advances for more accurate measurement and analysis. The adjustments are intended to project retirement income more accurately, better reflect a shift from defined benefit to defined contribution plans, model financial debt separately, refine the target replacement rate model and incorporate the earned income tax credit in replacement rates.

“With the latest upgrades, the NRRI can more accurately measure the retirement preparedness of working-age households and evaluate the impact of economic and policy factors on retirement security,” the report said.

The index works from the understanding that people usually need less than their pre-retirement income in retirement because they typically pay less in taxes, do not need to save for retirement and frequently have paid off their mortgage, making more of their income available for spending. With that in mind, those whose projected replacement rates are more than 10% below the target are considered at risk of having insufficient income to maintain their pre-retirement standard of living, according to the index.

The report noted that the index continues to align with the economy’s health. The index worsened from 2007 to 2010 during the Great Recession and improved from 2013 to 2019 during a period of low unemployment, rising wages, stock market growth and rising housing prices. However, the improvements were limited by other long-term trends, including a gradual rise in Social Security’s Full Retirement Age and declining interest rates, that made achieving retirement readiness more difficult for households, according to the report.

The index’s report highlights that all income groups saw their retirement preparedness undermined by the Great Recession. However, the middle-third and upper-third income groups enjoyed significant improvement from 2010 to 2019 as housing and equity prices rebounded, while households in the lower-third income group “saw virtually no improvement as they are less likely to own a house and participate in DC plans, and have few financial assets,” according to the report’s authors.

Compounding matters, a rise in wage growth for lower-income workers may improve their standard of living but it also leads to lower projected Social Security replacement rates. And the rise in the Full Retirement Age particularly impacts low-income households, who tend to depend “almost entirely on Social Security for retirement income,” the report said.

The disparity in household retirement preparedness between the top and bottom wealth groups is even higher than the difference between top and bottom income groups. That is a reflection of wealth inequality being more severe than income inequality, the report said.

The report’s authors said the clear challenges illustrated by the index shows the need for improvements that will help more workers adequately save for retirement.

“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,” the report said. “Only with continuous coverage will workers be able to accumulate adequate resources to maintain their standard of living in retirement.”