Retirement income adequacy improved slightly in 2013. Due to the increase in financial market and housing values during 2013, the probability that Baby Boomers and Generation Xers would NOT run short of money in retirement increases between 0.5 and 1.6 percentage points, based on the Employee Benefit Research Institute (EBRI) Retirement Readiness Ratings (RRRs).
Eligibility for participation in an employer-sponsored defined contribution plan remains one of the most important factors for retirement income adequacy. RRR values double for Gen Xers in the lowest-income quartile when comparing those with 20 or more years of future eligibility with those with no years of future eligibility, while those in the middle income quartiles experience increases in RRR values by 27.1–30.3 percentage points.
Future Social Security benefits make a huge difference for the retirement income adequacy of some households, especially Gen Xers in the lowest-income quartile. If Social Security benefits are subject to proportionate decreases beginning in 2033 (according to the values in Figure 8), the RRR values for those households will drop by more than 50 percent: from 20.9 percent to 10.3 percent.
Longevity risk and stochastic health care risk are associated with huge variations in retirement income adequacy. 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.
A great deal of the variability in retirement income adequacy could be mitigated by appropriate risk-management techniques 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. Moreover, a well-functioning market in long-term care insurance would appear to provide an extremely useful technique to help control the volatility from the stochastic, long-term health care risk, especially for those in the middle income quartiles.
