Figure 5 Years in Retirement Before Middle Class Boomers and GenXers Run Short of Figure 1 Figure 3 Money,* by Quartile of Stochastic Health Care Cost: Simulations With the 2014 Refe 5 income quartile who had pr 2007 to is 17.1 renc Summa . “Retirem . “Kansas Future Ret percent. Not surprisingly em retirement income. This was year- es ploy ry end 2011), a j ees for the reduction in their expected re ent Income Adequacy o ieviousl re int EBRI/Investm me,nt Income A those in the m y NOT been project expanded in : Alterna sse ent Co tive Thresholds and the Im iddle cl ss the Novem me m nt Project.” A project of the p ed to have a ass who experience the lowest quartile tirement incom any I bner 2011 stitute (ICI) analysis found that financially EBRI e under various rate-of-return portan Issue Brief successful retirement under ce of Future Eligibilit EBRI Education and (VanDerhei, the average of T-177 y in THE STATE OF U.S. RE Impact of Relative Longevity Quartile* TIREMENT SECURITY: on 2014 Retirement 7 ® Version of the EBRI Retirement Security Projection Model stochastic health care costs Since 2003, 401(k) account balance fell 34.8 percent in 2008, t Copeland, Craig, and Jack VanDerhei. “ actual default contributi Defined Contribution Research Fund and the Mil Novem assum Ep BRI research b tions (VanDerhei, er 2011). Years on in Retirement Retirem rates were fo have a has analy bank Mem March 2006). ent Plans.” mu zed ch higher pr und t T Before the retirem he Declining orial Fund. Jul oEBRI Notes, be suc Middle Class Boomers obabilit hen rose from ent savings and r cessful as a result of the inc Role of Private Defined Benefit Pensi yy no. 4 (Em 16, 2 of having enough m 002 20. 09 to p eloy tirement income adequacy of ee Benefit Resear 2011. and GenXers Overall, the average oney rease in defau , with an ch Institute, on Plans: RRR value lt deferral TM Readiness Ratings, for Middle Class Households CAN THE MIDDLE CLASS AFFORD TO RETIRE? 90% Run Short of Money,* Simulations with the 2014 version of the account balance in this con middle class of 89.1 percent. At a 90 percentage. When em Who Is Affected, and How.” In Robert April . “Massachusetts Future Retire 201 Baby 1): 10–1 Boom ploy 9. percent expense threshold, er ees in the s and Gen Xe sistent sam highest-income m pe le increased n rs in the United t Incom L. Clark and e A 96.6 percent of t at a co quartile were analy s sess States. This state Olivia Mitchell, eds., ment Project.” A projec mpound, annual, average growth rat he househol zed under the same set of ment highlights thos Reorienting Retirement ds in the bott t of the EBRI Education oe previous m e of 5.4 quartile ? ? A March 2012 Later that year, an updated EBRI Notes article (Van version of the Derhei, March 20 model was developed to e 12) used new survey nhance the EBRI interactive results to update the 100% ® ® EBRI Retirement Security Projection Model percent over the 2007 results and provides new evidence on th of stochastic health care co assu Risk M and Resear m . “The I pBallpark E$timate analy tions, the percentage of those who had NOT pr anagement. sis of the potential impact of various t m ch Fund and the pact of Modif –20 New York: Oxford 11 by sts have adequate re period. y pr ing the E Milbank Me oviding x e im Monte clus University m portance ion of E otirement incom ri Carlo sim al Fund. ypes of tax m Pr of eviousl ploy proper risk ess for December 1, 2002. ulations ee Contributio y -reform e been successful (under the actual default , but those in the the Pension Research Council, of the re management techniques as a growing options on retirement incom ns for place ment rates needed for Retirement Savings Plans top quartile have 2010: 122– e. Lowest Quartile 80% 40% 12 90% By Jack VanDerhei, Ph.D. approxim num contribution rates) that now ARE succ 136. From ber of . “Oregon Fut Taxable Inco atel miy ddle class wo a 1 in Su ec3 chance of runni re Retirem ond me: Results From rkers approach retirem ent Income Asse eng short of ssful as a re the 2011 Retirement Confidence Survey.” ssment Project.” A project of the ent age. It would a m su oney lt of the chan (an RRR of 33. ge in deferral rate was 18.4 ppear that while RRR values depend 6 percent). At an 80 EBRI Education and EBRI Notes, percent percent. no. 3 specific probabilities of retirement income adequacy under alternative-risk-management ? The May 2012 EBRI Notes article (VanDerhei, May 2012) provided 2012 updates for the United States Senate Committee on 70% Third Research Director, Employee Benefit Research Institute (EBRI) Park, Youngkyun, “Retirement Inco While this information is certainly expense threshold, t to a large degree on a hous Research Fund and the Mil (Employee Benefit Research Institute, he RRR for households in t ehold’s future bank Mem useful to eval me Adequacy y oears of e March 2011): rial Fund. he bottom uate assertions (and anecdotal cla Wi ligibilit 200 th Immediate 2–10. 1 quartile y a. in a defined contribut of stochastic health care co and Longevity Annuities,” iion plan (as ms) with res sts ju well as EBRI Issue pect to mps to previously treatments (VanDerhei, Septem 35% published RRRs as well as the RSS. ber 2006). 80% Highest 16 401(k) 99.6 whether future Social Secu 3 Brief, What are the Primary Ri percent while those in the top qua . “A Behavioral Mod . “A Post-Crisis Assessment of Retir plans, no. 357, (Em 60% it needs to be ploy rity retire e supplemented with ee Benefit Research Institute, l for Predicting Em sks for Middle Class Wor men rtile increase o t benefits are ement Income Adequacy sim ploy ulati ee nreduced) ly Contributi on m to May k64.2 pe ers Aft odeling 2011) , a great deal of the variability in these ons rcent. er R for Baby for a proper a to 40 . etire 1(k) Pla ment? Boomers and Ge ssessment of the ns.” North American n Xers.” ? RSPM was significantly enhanced for the May 2008 EBRI policy forum by allowing automatic ? The June 2012 Banking, Housing & Urban Affairs EBRI Notes article (VanDerhei, June 2012) introduced severity categories in the 30% 70% 1 Introduction Utkus, Stephen P., and Jean A. Young. potential of 4 values could While the probabilities of not running short of m EBRI Issue Brief, Actuarial Jou be m 01(k) plans t r itigat nal no. 354 ( (20 ed by 01b). o produce “adequat appropriate risk-m E mployee Benefit Resear 2013. How e” income replace an oney ag America Saves em in retirem ent techni ch Institute, Fe ment ent ques at or near retirement age. 2013, A Report On Vanguard 2012 for m for several re bruar iddle cl y 2011). ass B asons: aby Boomer or Gen enrollment of 401(k) participants with the potential for automatic escalation of contributions to be RSS projections for Gen Xers. 50% SUBCOMMITTEE ON ECONOMIC POLICY Measuring retirement savings and retirement income adequacy for low-income workers is an extremely 4 Xer is 62 percent when a threshold of VanDerhei, J Defined Contribution Results for L . Testim ack, and Lori ony. U.S. C ength of Time Until the Household Runs Short of Money Plan ongress. Senate Lucas. “The I Data. 100 percent m Health, Education, Labor and Pensions Co pact of Auto-enrollm of simulated expenses is used, ent and Automati 74 percent with a 90 c Contribution mmittee. The included (VanDerhei and Copeland, 20 25% 08). 60% ? The August 2012 EBRI Notes article (VanDerhei, August 2012) provided additional evidence on Percentage of Simulated TM 40% important and complex topic, and EBRI started to provide this type of measurement in the late 1990s with VanDerhei, J For exam In addition to inform percent threshold, and 88 Wobbly Stool Escalation on Retire ple, ack. “What C the annuitization of a : Retirement (In)security in ation with respect t mpercent with an 80 percent ent Income Adequacy auses EBR portion of I Retire o the percenta America m the defined contribution and IRA balances ent R .” EBRI Issue Brief, eadiness R threshold, it (T-166), ge of the population t a 7 Oct. 2 tings should no. 010b to Vary 349 (Em be not h. at ed that these are averages will run short : Results from ployee Benefit Research may of m the 2014 oney in ? The EBRI/ICI 401(k) database does not contain information on individual retirement account Life-Paths That ? Additional modifications were added for a Pension Research Council presentation that involved a whether deferring retirement to age 70 would provide retirement income adequacy for the vast ® 1 Will 20 Not % Run 50% the development of the EBRI Retirement Security Projection Model (RSPM). When we most recently substantially retire for househol Institute, Novem Retirement Security . “Retire ment, the distribution of the likely num ds in these cohorts, and the increase ment Savings Shortfalls for Toda bthe er 2010); and DCIIA Pr pojection Model,®” robability of not actual resu Research Rep running ber of y EBRI Issue y’s Workers.” lts short of m ears before this takes place may oBrief, differ markedly rt (Novem EBRI Notes, oney throughout no. 396 (Em ber 2010) , depe no. 1 ploy . retirement has been a 0 nding on ee Benefit Res (Employ how (VanDerhei, ee Benefit major topic of various earch (IRA) rollovers, many of which may have originated as a 401(k) balance at an individual’s prior 30% “winners/losers” analy majority of Baby Boom sis of defined ben ers and Gen Xers. efit freezes and the enhanced employer contributions Short of Money in Retirement Hearing on: modeled the projected outcomes for Baby Boomers and Gen Xers in 2014, we found that between 57 Septem concern. Fig risk continge Institute, Rese ber 2006 and Park, arch Inst ncies play u February res 3 throu itute, October 2010a): 2 2014). ou gth after retirement. In 2 2011). 5 provide t Moreo his type v - er, a well-functionin 9. of inf 006, o EBRI provide rmation for th g mad a detailed analy rket in lo e Early Boom ng-term er and Gen Xer care insurance would sis of the employer(s), and therefore may 40% only provide information on a fraction of the participant’s provided 15% to defined contribution plans at the time the defined benefit plans were frozen (Copeland ? The September 2012 EBRI Notes article (VanDerhei, September 2012) analyzed the impact of 20% percent and 59 percent were expected to have adequate retirement income to fund 100 percent of Endnotes appear to provide an extremely generations for the m replacement-r . “Retirem . “The Role of Social Security ate levels req ent Inco iddle class. This a me Adequacy uired useful t to provide retirees , Defi f echnique to n oaly r T ned Benefits, and Private Retirement Accounts in the Face of s oda is is m y’s Workers: How Certain, How Much Will It help lim o with various re comit the financial volatilit plicated probabilities of having “sufficient” than a simple com y from putation of when the stochastic, Cost, and retirement accumulations if there have been one or more job changes in their careers. and VanDerhei, 2010). increasing the default-contribution rate for automatic enrollment 401(k) plans with automatic 13 30% 10% simulated basic retirement expenses ( 10% Year housing, food, e s in Retirement (Assum it ng r c.—plus uni etirement at age nsured health care costs, using EBRI’ 65) s long-term indivi retirement income. the Retirement Crisis,” How Does El duals or health care risk, especia fam igibilit ilies run short of As part y for P EBRI Notes, of the anal articipation in a Defined Contributi lly retirement income for those in the y no. sis, a “building 1 (Employ middle class. (which in m ee Benefit Research block” appro on Pla o st cases will be never, due t ach was n Help?” Institute, adopted where the risks of EBJanuary RI Notes, 2014): 8–21. no. o lifetime 9 ? Even if one looks only at 401(k) participants who are on the verge of retirement and have had ? Also in 2009, a new subroutine was added to allow simulations of various styles of target-date escalation of contributions. 1 TM Retire See Ap mpen ent R dixeadiness R A for a brief atings chronolog (RRRs) as the gauge). Som y of the model. e retirement planners suggest that many Social Security benefits). Instead, an individual or fa investm (Em . “How Much Would it Take? A e pnt, longevit loyee Benefit Research Institute, S y and 20%long-term health care costs chieve ing Retirem ptember 2010): 13–20. mily is conside were added in incremental lay ent Income Equivalency between Final-Average- r ed to “run short of m ers. The i oney” in this mpact of significant tenure with the current employer, there is a significant likelihood that they would not 5% funds for a co 0%THE STATE OF U.S. RE mparison with participant-directed investm TIREMENT SECURITY: ents (VanDerhei, June 2009). ? The November 2012 EBRI Notes article (VanDerhei, November 2012) reclassified the RRRs to 2 14 households are able to succ VanDerhei (Fe0bruary 20 514). essfully 10 cut e 15xpenditu 20res below the average expenses 25 30 35 40 when financially 45 50 EBRI looks forward to assisting the m version of the two of these risks are analy Pay . “The I Defined m mp odel if thei act of Automatic Enrollm Benefit Plan Accruals r aggregate re zed below.em and Voluntar sources in re bers of the S ent in 401( ytire k) Plans on F ubcomm Enm rollment 401( ent ar ittee as they e not sufficient to m uture Retirement Accu k) Plans in th continue their inv e Private Sector.” eet aggre mulations: A estigations gate average have been eligible to participate in a 401(k) plan during their entire career with the current ? In April 2010, the model was completely re-parameterized with 401(k)-plan design parameters for provide additional information on those substantially above the threshold; close to the threshold; 3 10% 0% CAN THE MIDDLE CLASS AFFORD TO RETIRE? 8 Preretirement income in RSPM is determined in a manner similar to the average-indexed-monthly-earnings constrained. Therefore, we also computed thresholds of 80 and 90 percent of simulated expenses and on into this extre retire EBRI Notes, Sim ment expenditures—defined as a c ulation Study mely no. 1 im Based on Plan Design M portant public poli 2 (Employee Benefit Research Institute, December 2013): ocm y t bopic. ination odifications of Large Plan Sponsors.” of deterministic expenses from 11 the Consumer –23. EBRI Issue Brief, employer. ® sponsors that Source: EBR 0I Retirement Security had adopted a 5 Projection M 10 u odel tom v15 ea rsion 2030. tic-enrollm 20 ent provisions (VanDerhei, April 20 25 30 35 40 45 10). 50 and substantially below the threshold. computation * An indiv fo idual r Social or family Sec is considered urity with to “run short the of money following ” in this modifications: version of the model if their aggregate resources in retirement are not sufficient to that basis found that the RRRs for Baby Boom 0% ers and GenXers at a 90 percent threshold was between 67 Expenditure 3.1 no. 341 (Em . “The Longevity Risk Surve Imp pact of a Retirement Savings Account loy y (as a function ee Benefit Research Institute, April 2010). of inc Yo ear me) and some health insurance and out s in Retirement (Ass Cap,” uming retir EBRI Issue Brief, em ent at age 65) no. 389 -of-pocket health-related , (Employee ? Since the passage of the Pension Protection Act of 2006, many of the 401(k) plans that had ? A co meet aggregate mpletely minimum updated vers retirement expenditures defined ion of t 100 perch as a combi en e nati t nation of onal m deterministi odel was produced for the Ma c 9 ex 0penses percen from the C t onsumer Expenditure8 Surv y 0 pe 2ey 010 EBRI Po rc en (as t a licy ? The March 2013 EBRI Notes article (VanDerhei and Adams, March 2013) used a modified ® ? All earned income is included up to the age of retirement (i.e., there is no maximum taxable wage base and 70 percent. When the threshold was further relaxed function of income) and some health insurance and out-of-pocket health-related expenses, to an 80 percent thresh plus stochastic expenses from nursing old, the RRRs increased to home and home Appendix A: Brief Chron In an attem Benefit Research In . “Falling Stocks: What Will Happen to pt to assess the im stitute, August ology of the pact of longevity 2013) EBRI . Retirees' on retir Retirem em Inco ent Se ent inco me curit s? The Work me adequacy y Projection Model er Perspective,” , relative longevit Presentation y expenses, plus stochastic expenses fro Earliest Quartile 90 m nursing .3% home and hom 94.e h 5% ealth care expenses (at least 97.4% until the previously allowed eligible employees to voluntarily enroll have been modified to automatically Forum health care ex and used in the Jul penses (at least until the point y they 201 are picked 0 EBRI I up by Medicaid). ssue Brief The resources (VanDerhei and Copeland, 2 in retirement will consist of Social Security (either status 010). version of RSPM to assess the probability that respondent households would not run short of 2 ® Second 72.6% 83.3% 92.1% constraint, and the calculation terminates ® at retirement age). 81–84 percent. quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities from point t quartiles wer for The Econom . “Reality Checks: A Com hey are picked up Source: EBR e established I iR ce Crisis o tirement Security by based on family status, gend Medicaid). f 2008: What Projection parative Anal Model veWill rsion 2030. ysis of Happen to Retirees’ Future Benefits from er, and age cohort. It Incomes? 2009 APPAM Fall Privat should be noted that the e-Sector, Voluntary- ? The Retirement Security Projection Model (RSPM) grew out of a multi-year project to analyze enroll eligible employees. Although these employees will have the ability to opt out of such ? The new defined benefit plans (unless the model was used t lump-sum distribution o anal scenario yze how eligibilit is chosen), and (in some y cases) for participation in a net housing equity (either in the form of an defined contribution plan annuity money * An in retirem indiv Third idual or family ent if they did, in fact, is considered to “run 45 short .3%of money”accu in this vm ersion of ulate the model the am 60.if 2% their ount they said would aggregate resources in retirement 80are not sufficient .6% be required in the to ? Instead of indexing for changes in average national wages, the model indexes based on assumed, after-tax Wednesday, March 12, 2014, 2:30 PM – 4:30 PM or as a lump-sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions Figure 3 sho impact would not be as severe if all retirem Enrollm Conference (Novem the future econom ent 401(k) Plans v w meet aggregate s the distribution minimum bic well-being of the ret er 2009). retirement s. Stylized, Fi of how ex penditures defined long retirem ent inco nal-Averag as a combination ired pop me ent was taken in the form m e-Pay of ul oney deterministi atio Defined will n at the state level. The Emplo c ex last for Early Boom penses Benefit and Cash Balance Plans” from the C of an annuit onsumer Expenditure ers and Gen Xers y Surv (ei ey yt ee Benefit (as a her as a participation, Latest Q it is clear that uartile these plans have 32.6% had a substantial i 51.3% mpact on participation rates, 78.3% im 2013 of the model allow pacts retirement inco Retirement Confiden similar analysis for replacement mece Survey adequacy rates, standard-of-li . in Sept ving, and other ember 2010 (VanDerhei, Septem ad hoc thresholds. ber 2010), and was function of income) and some health insurance and out-of-pocket health-related expenses, plus stochastic expenses from nursing home and home rate of return based on asset allocations that 9 are a function of the individual’s age in each year. Who is most at risk of not having adequate retirement income? Not surprisingly, lower-income in the m real annuit EBRI Issue Brief, . Testim *i*ddle class ( The longev y such as Social Security ony ity quartile . Joint assu no. 387 ( is established m DOL/SEC Public Hearing on Target Dates Funds. ing retirement at age 65). For exa rela Etiv m 538 Dirksen Senate Office Building e to family p, loy or a nom ee Benefit Rese status, gender, inal annuit and age cohort. arch Institute, June 2013a). y such as t mple: hat offered by private-sect How W ould Target-Date or defined Research Institute (EBRI) and the Milba health care expenses (at least until the point they are picked up by nk Mem Medicaid). T orial he resources Fund, wor in retirement kin will g with the off consist of Social Security ice of the (either status especially for lower-income employees. later used to compute Retirement Savings Shortfalls (RSS) for Baby Boomers and Generation ? The June 201 quo or one of 3 the specified EBRI Issue Brief reform alternatives), (VanD account balanc erhei, June 2013a) used RSPM to provide a direct es from defined contribution plans, IRAs and/or cash balance plans, annuities from ® Percentile Source: EBRI distributions Retirement Security are th Projection en established Model Version base 1995. d on population statistics for each five-year age cohort. households have much lower RRRs: The 2014 baseline RRRs range from 17 percent for the lowest- benefit plans); however, gi Funds Likely Impact Futur . “What a Sustained Low-y ven that onl e 401(k) Cont ield Rate E y a very nvironm ributions? small e percentage of defined cont n (T t Means for Retire -160), June 2009. ment Inco ributio men and I Adequa Rcy A balances : Results governor defined of benefit Oregon, set out in t plans (unless the lump-sum distribution he late 1990s t scenario is chosen), o see if this situation could and (in some cases) net housing equity (either be evaluated for the in the form of an annuity ? An analysis based solely on current balances will, of necessity, not be able to assess the impact of 4 * The longevity quartile is established relative to family status, gender, and age cohort. ? After 10 Xers in Octo years of retire ber 2010 m (VanDerhei, October 201 ent, 13 percent of those in the 0a). middle class are assumed to have run short of 3 comparison of the likely benefits under specific types of DC and DB retirement plans. or as a lump-sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions ® Figure 3 of VanDerhei (February 2014). income households to 86 percent for the highest-income households with a 100 percent of simulated are currently From www.ebri.org/pdf/publications/testi state. The resulting anal the 2013 EBRI Retirem annuitized (and that an increasing perce ysient Security Projection s (VanDerhei and Copelan mony/t160.pdf ntage of defined benefit acc Model. d, Septem ” EBRI Notes, ber 2001) f no. ruals are take ocused prim 3 (Employ arily n as lum ee Benefit on p- 5 future employee activity (such as potential cash-out behavior at job change) nor the impact of money ? In October testimony before the Senate Health, Education, Labor and Pensions Committee on ? The June 2013 EBRI Notes article (VanDerhei, June 2013b) used RSPM to show that 25–27 Only Gen Xers are shown in this portion of the analysis given their longer future working careers until age 65. expenses threshold. The middle class (defined as those in the second and third income quartile for su mResearch Institute, June 20 distributions when the . “The Expected Impact of Automatic option is available), the pr 13b): 2–12. Escalation of 4 ospect of “out-living” their r 01(k) Contributions on Retirem etirement wealth is a ent Income.” simulated retirement wealth with a comparison to ad hoc thresholds for retirement expenditures. 6 future financial market returns. “The Wobbl percent of Bab y Stool: Retirement (In)secu y Boomers and Gen Xers who w rity in Am ould eri ha ca,” the ve had adequate model was used to analy retirement incom ze the e under See VanDerhei, Holden, Alonso and Bass (December 2013) for the most recent results. ? After 20 years of retirement, 29 percent of those in the middle class are assumed to have run short of purposes of this statement) had an RRR of 62 percent. At a 90 percent threshold, the RRR for middle very EBRI Notes, real risk . “All or Nothing? for many no. 9 (Em m A iddle class B n p loy Expanded Perspective on Retire ee Benefit Resear aby Boomers ch Institute, Septem and Gen Xers. ment R eadiness.” ber 2007): EB 2–8 RI Notes, no. 11 ? The April 2001 EBRI Issue Brief (VanDerhei and Copeland, April 2001) highlighted the changes 7 Statement for the Record relative importance of employer-provided retirement benefits and Social Security (VanDerhei, return assumptions based on historical averages were simulated to end up running short of money VanDerhei, Holden, Alonso and Bass (October 2013). money class households increases to 74 percent (indicating that nearly 3 in 4 of those households would have (Em . “Measuring Retirement Inco ployee Benefit Research Insm titute, e Adequ Novem acy: Calculating Realistic Inco ber 2012): 11–23. me Replacement Rates.” in private pension plan participation for defined benefit (DB) and defined contribution (DC) plans 8 In an attempt to assist the Senate Finance Subcommittee on Social Security, Pensions, and Family Policy October 2010b). The pro in retirem posed regulations ent if toda for y’s hist 401(k) orically plans we lroew interest first introduced rates were a in Novem ssu bme er of d to be a permanent condition. 1981 and it took several years for sufficient financial resources to cover 90 percent of simulated basic retirement expenses, as detailed Figure 1 shows the i EBRI Issue Brief, . “Increasing Default m no. 297 ( pact of relative longevity Deferral Employ Rat ee Benefit Resear es in Automatic Enrollm quartiles on 2014 RRRs for the middle class. ch Institute, Se ent 401( ptem k) Plans: The I ber 2006). mpact For m on iddle ? A total of 38 and used the percent of Early Boom model to quantify hoers w m and Gen Xe uch the importance of indivi rs in the middle class who ret dual-account plans was ire at age 65 would in its evaluation of the role of 401(k) plans, in December of 2013, EBRI’s RSPM was used to analyze the Figure 4 many ? sp The Novem onsors to introduce ber 2010 the EBRI plans. Issue Brief More Jack VanDerhei, Ph.D. over, expanded u many plans tha pont earlier work b were originally introduced y EBRI to as provide t supplem hental e first ? The August 2013 EBRI Issue Brief (VanDerhei, August 2013) used RSPM to analyze the Obama 10 above). At an 80 percent threshold, 88 percent of the middle class households are predicted to have class households si Retire . “Defined Benefit Plan Freeze ment Savings Success in Plans With Autom mulated to die in ts: W he earliest relativ ho's Affected, How Much, and Replacing Lost Accruals.” a e longevit tic Escalation.” y quartile, the RRR with a 100 percent EBRI Notes, no. 9 (Employee EBRI expected to increase because of these changes. eventually run short of money while they were still alive. potential of 401(k) plans to produce “adequate” income replacement for retirement. That undertaking plans to existing defined benefit plans have been modified to provide more generous employer contributions at results of a new simulation model that estimated the impact of changing 401(k) plan design administration’ Years s fiscal in Retirement year (FY) 2014 Before Research Directo budget pr Middle Class Boomers oposal to include r a cap on tax-deferred retir and GenXers ement sufficient retirement income. expenditure t Benefit Research Institute Issue Brief, hreshold is 90.3 percent. T no. 291 (Emplo , Septem yee Benefit Research Institute, March 2006). ber 2012): 12–22. his value decreases to 72.6 percent in the second relative ? With the assistance of the Kansas Insurance Department, EBRI was able to create the EBRI found that, assuming current Social Security benefits are not reduced, 84 percent of middle class workers Figure 4 sho the time the defin ws the distribution ed benefit plans of how were frolong retirem zen (VanDerh ent ei, April money 20 will 10). last for Early Boomers and Gen Xers variables and assu savings that would lim Run Short of Money mptions on retirement incom it the amounts accu ,* by Relativ mulated i e e Longev adequacy n specified retirem ity . Until recently Quartile:** ent accounts to t Simulations however, there was hat Employee Benefit Research Institute (EBRI) TM longevit . “Is Working to Age . “Proje y quartile and 45. ctions of Fut 3 u 70 Really percent in the third rela re Retirement In the Answer for Retire come Secu tive longevit rity: Im ment Inco pact o y quartile. For the m f Long Term me Adequacy? Care Insurance.” 2005 iddle class ” EBRI Notes, households no. 8 9 Retirement Readiness Rating (RRR) based on a full stochastic decumulation model that took with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have ® in the m See Figure iddle class ( 23 of With the 2014 Version of the EBRI Utkus assu and m iYo ng retirement at age 65) ung (2013) for recent evide by relative longevity quartile. For exam Retirement nce. Security Projection Model ple: extremely limited evidence on the impact of automatic contribution escalation (VanDerhei and necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under Figure 2 However, it should be noted that these probabilities will depend to a large extent on whether future years with the longest relative lo 10 (Em American Society ployee Benefit Research In on Agin ngevit g/National Council o y, the stitute, RRR falls all August 2012) nth Agi e way : 10–21. ng Joint C to 32.6 percent. Si onference, March 20 milar influences ar 05. e found into account the household’s longevity risk, post-retirement investment risk, and exposure to long- sufficient 401(k) accumulations that, when combined with Social Security retirement benefits, would be Additional details on RSPM and the assumptions used in 2013 can be found in VanDerhei (June 2013). The Lucas, 2010). 70% Impact of Stochastic Health Care Costs on 2014 current law. ? After 10 years of retirement, 10 percent of those in the earliest longevity quartile class are assumed of employment take place with employers sponsoring defined contribution retirement plans or not. when less rigorous thresholds are used. With a 90 . Testim . “Retireony ment Re . U.S. C adiness R ongress. Senate Special Co atings and Retirem pe en rcent of si mmittee on Aging t Savings Shortfalls for Ge mulated expense threshold, the . Do We Have a Crisis in n Xers: The Im RRR for pact of TM term nursing-home and home-health-care risks. The first state-level RSPM results were presented able to replace at least 60 percent of their age 64 wages and salary on an inflation-adjusted basis. When financial market results are Retirement Readiness generated from stochasti Ratings, c annu for al M retur iddl ne s with Class Househol a log-normal ds distribution : and an 4 ? In February 2011, the model was used to analyze the impact of the 2008–2009 crisis in the ? The December 2013 EBRI Notes article (VanDerhei, December 2013) used RSPM to expand the to have run short of money compared to 14 percent of those in the latest longevity quartile. Previous EBRI analysis shows the positive impact of future years of eligibility for a defined contribution the earliest relative longevi Eligibilit America? Results From the EBRI-ERF Re y for Participation in a 401(k) P ty quartile is 94.5 lpercen an.” tirement Security Projecti EBRI Notes, t decreasing to no. 6 (Em only on Model 51.3 per ployee Benefit Rese cent for those with the (T-141), 27 arch Jan. 2004. to the Kansas’ Long-Term Only Care Servic Those Simulated es Task Retirement Force on Jul Paths y 1With 1, 20 02 (VanDerhei and Copeland, the threshold for a successful retirement financing is increased to 70 percent replacement, 75 percent of arithmetic mean 60% of 8.6-percent real Earl iereturn st for stocks and 2.6 percent real return for bonds. 5 financial and real estate markets on retirement income adequacy (VanDerhei, February 2011). analysis in the June 2013 Issue Brief. Rather than trying to reflect the real-world variation in DB Quartile 11 plan. For GenXers in the middle class wi Stochastic Health th no future Care Costs years of Greater eligibility Than Zero in a defined contribution plan, longest relative longevit VanDerhei, Jack, and Nevin Adam Institute, June 2012): y. 9–21. At the 80 per s. “A cent threshold, Little Help: The Im 97.4 percent of those in pact of On-line Calculators and Fi the earliest quartile having nancial July 2002), and the results of the Massachusetts study were presented on Dec. 1, 2002 (VanDerhei these workers will still meet the threshol Van ? After 20 Derhei (Se yp ears of retirem tember 2012). ent, 11 percent of those in t d, based solely on t he earliest longevit he combination of pr y quartile class are assumed ojected 401(k) savings Second ? An April 201 accruals, the baseline anal 1 article introduced a new method of ysis in the previous anal an ysis used the me alyzing the results from dian accrual rate in the sa RSPM (VanDerhei, mple 12 the RRR value when m 10 easured with a 100 percent 0% of simulated expense threshold is 51 percent— sufficient retirem Advisors on . “Retirement Inco Setting Adeq ent income Adequacy me decreasing to onl uate Retirement-Savi for Boom y 78.3 per ers and Gen Xers: Evidence from ngs Ta cent of those in the latest (longest-living) quartile. rgets: Evidence from the 2013 Retirement the 2012 EBRI 50% and Social Security com to have run s and Copeland hort of m , Decem bined. At an 80 oney com ber 2002). pared to 42 percent re per placement rate, cent of those in t 62 percent of he latest longevit the mi yddle cl quartile. ass will still Although separate analysis was not performed on the middle class in the September 2012 EBRI publication, it is ® April 2011). (1.5 percent o Rather than sim f final compensation per ply comput year of pa ing an over rticipation) as the sty all percentage of the si lized value for the baseline mulated life-paths in a Third indicating that almost ½ of this cohort are projected to run short of money in retirement. This value Confidence Surve Retirement Security y,” Pr EBRI ojection Model. Notes, no. 3 ” (Em EBRI Notes, ployee Be no. nefit Research Institute, 5 (Employee Benefit Rese March 2013). arch Inst itute, very meet the thre likely ? RSPM was expanded t thatshold. approximately 90% 20 o perce a national m nt of those odel—the fi who had NO rst national, m T previously been icro- successful simulation, retirement- (under the actual Figure 5 shows the distribution of how long retirement money will last for Early Boomers and Gen Xers particular cohort that woul counterfactual simulations. The new research co d not have sufficient retirement inco mputed the actual final-average me to pay for the sim DB accrual that ulated increases to 56 percent for 40% those in the middle class with one to nine future years of eligibility in a defined 3.2 VanDerhei, Jack, and Craig Copeland. “ May Long-Term Care 2012): 2–14. Risk Latest QuartileThe Impact of Deferring Retirement Age on Retirement Income default contribution rates) would be successful if the deferral rate was increased to 6 percent. income-adequacy model, built in part from administrative 401(k) data. The initial results were in the middle class (assuming retirement at age 65) by quartile of stochastic health care cost aft 15 er filtering expenses, the new would be required to pr 80%method co ovide an equal am mputed the percentage of households ount of retirement income at age 65 as would be that would meet that 13 contribution plan. The RRR value increases further to 71 percent for those in this category who have 10– One of the pri Adequacy . “Modify m .” ary iEBRI Issue Brief, ng t findi he Federal Tax Treatm ngs of a 201 no. 358 ( 2 EBRI publicatio e Ent of 401 mployee Benefit R (k) Plan Cont n on retirem esearch Institute, June 2011) ributions: Pr ent income ad ojequacy ected Im was t pact on . he VanDerhei (September 2006). When the same analy presented at the EBRI Decem sis is conducted f ber 2003 policy fo or automatic enrollment 40 rum (VanDerhei an 1(k) plans (with an annual d Copeland, 2003). 1 percent out those simulated life-paths with no stochastic health care costs in retirement. For example: require produced by t 30% ment m ho e annuitized value of the re than a specified percentage of times in the si projected sum of the 401(k) and IRA rollover balances. mulation. 14 19 future years of eligibility in a defined contribution plan, and reaches a maximum value of 80 percent significant impact of stochastic health car Participant Account Balances.” . “The Changing Fac 70% e of Private Retire EBRI Notes, e costs ment Plans.” no. 3 (E on overall retire mEBRI Issue Brief, ployee Benefit Research ment incom no. e ad232 ((Em equacy Institute, March . These include ployee Benefit EBRI is currently working on a separate study to model sequence of return risk that will need to be completed automatic escalation provision and empirically derived opt-outs), the probability of success for middle ? The basic model was subsequently modified for testimony for the Senate Special Committee on ? ? As explored in the June 2 The January 2014 EBRI Notes 011 EBRI Issue Brief, article (VanDerhei, January RSPM allowed retirem 2014) used RSPM to m ent income adequacy odel the to be for those with 20 or more future years of eligibility in a defined contribution plan. When the threshold for ? After 10 years of retirement, 8 percent of those in the lowest stochastic health care cost quartile are health care co 2012): Research Institute, April 2 2–18. sts in retire ment that are not likely 001). to occur every year (in fact they may never occur for before investment risk in the decumulation period can be appropriately analyzed in RSPM. class workers with more than 30 years of eligibility increases substantially: 92 percent at a 60 percent Aging to quantify the beneficial impact of a mandatory contribution of 5 percent of compensation. 20% 60% TM 15 Percentage of Simulated assessed at r likelihood tha etirem t 401( ent ages later than 65 k) participants currentl (VanDerhei and Copeland, y ages 25–29 would have sufficient 401(k) June 2011). a successful r assumed to have run short etirement is measured at a 90 percent of money compared to 21 of simu pe lated ex rcent of those in the highest stochastic pense threshold, the RRRs range from health The views expressed in this statemen many . “Tax . “The househEBRI Retirement Readiness Rating: Reform olds), but Options: Prom when they do oting Retirem th t are solely ey may have those of Jack VanDerhe ent Retire a catastrophic financial im Security ment Inco .” EBRI Issue Brief me Prepar i and should a ption and Future act, due to th , no. not be at 364 (Emplo eir relatively tributed to yee VanDerhei (August 2012). threshold; 87 Life-Path percent at a 70 percent replace s That ment and 81 percent at an 80 percent threshold are assumed (VanDerhei, January 2004). 16 ? In a July accumulation 2011 s that, when com EBRI Notes 50% article (Van bined with Social Derhei, July Security benefits, could replace 60, 70 or 2011), RSPM was used to provide preliminary 80 Will Not Run 62 percent for those with no future care cost quartile. years of eligibility to 88 percent for those with 20 or more years. At an the Em high See Benefit Research Institute, Prospects.” dail Van ploy yD co erhe ee Benefit Research Institute (EBRI), th st and/or pote i E (Febr BRI Issue Bri uary 201 ntiall 4) e Novem for y f, lon no. 344 (E details. g d ber 2011). u ration. Un mploy ee Benefit Research li e EBRI Education and Research Fund, ke many other retiremen Institute, Jul t projection m y 2010). any odels, RSPM of its to have sufficient resources 10% at those levels. ? The m Short of odel was enhanced to allow an analy Money sis of the impact of annuitizing defined contribution percent of their preretirement income on an inflation-adjusted basis. evidence of the impact of the “20/20 caps” on projected retirement accumulations proposed by the 80 percent of simulated expense threshold, the RRRs range from 79 for those with no future years of programs, officers, trustees, sponsors, or in Retirement other staff. The Employee Benefit Research Institute is a has explicitly included the . “The I . Testimm ony pact of PPA on . U.S. Congress. Senate Finance Committee. costs of nursing hom Retirement Income for 401(k) e and home health care cost Participants.” Tax Reform Options: Promotin s in its decu EBRI Issue Brief mulati,on m no. g 318 odel 40% ? After 20 years of retirement, 11 percent of those in the lowest stochastic health care cost quartile are and individual retirement account (IRA) balances at retirement age (VanDerhei and Copeland, National Commission on Fiscal Responsibility and Reform. eligibility to 96 percent for those with 20 or more years. nonpr since its initial release in 2003 to account Retirem (E ofit, nonpartisan, education and r mploy ent Security ee Benefit Research Institute, June 2008). (T-170), 15 Sept. esearch organi for these contingencies. 2011. zation established in Washington, DC, i n 1978. 0% Note, however, that the analysis of automatic enrollment plans mentioned above used the actual plan- assumed to have run short of money compared to 59 percent of those in the highest stochastic health 2004). 30% 0 5 10 15 20 25 30 35 40 45 50 ? The August 2011 EBRI Notes article (VanDerhei, August 2011) used RSPM to analyze the impact EBRI does not take polic . “ERISA At 30: Th . “The Importance of Defined y positions, e Decline of Bene no Privat r does it lo fit Plans for e-Secto bby, advocate specific policy reco r Defined Benefit Prom Retirement Income Adequa ises and Annuit cy.” mmenda EBRI Notes, y Pa tions, or ym no. 8 ents: specific default contribution rates (typically 3 percent of compensation). Many have questioned the care cost quartile. Years in Retirement (Assuming retirement at age 65) ? Additional refinements were introduced to evaluate the impact of purchasing long-term care 2 The Potential of 401(k) Pl of defined benefit plans in ans to Produ achieving retirem ® ce Aden equate Income Repl t income adequacy for Baby acement Boomers and Gen for Middle Class receive federal funding.20 % Figure 2 filter What Will It (EmSource: EBR ployee B s out those si I Ree Mean?” tirement Security nefit Research In EBRI Issue Brief, m Projection M ulated life-paths with odel stitute, version 2030. August 2011) no. 269 (Em no stochastic health care cost p : 7–16. loyee Benefit Research Institute, May 20 s in retirement and 04). wisdo m of continuing to set the rates at this relatively low level in view of recent empirical evidence insurance on retirement income adequacy (VanDerhei, 2005). * An individual or family is considered to “run short of money” in this version of the model if their aggregate resources in retirement are not sufficient to Workers Xers. categorizes th . “Can . “Capping Tax-Preferred Retirement C A ose costs into quartiles (based on the pre merica Afford Tomorrow's Retiree ontributi s: Re sent value at age 65 of the ons: Prelim sults From th inary e EBRI-ERF Evidence of the Im per capita stochastic Retirement Security pact of the meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a suggesting that higher default contribution rates may not result in a substantial increase in opt-out rates. A 10% ? The model was used to evaluate the impact of defined benefit freezes on participants by simulating function of income) and some health insurance and out-of-pocket health-related expenses, plus stochastic expenses from nursing home and home ® th 11 The EBRI/ICI 401(k) ? In September, it was used to supp database has been used to pr ort testimovi ony be de annual reports based on fore the Senate Finance Co actual account balances mmittee (VanDerhei, health care co Projection M National Commission on EBRI • sts in 2014 dollars). Assu odel. ” 1100 13 EBRI Issue Fiscal Responsibilit St. Brief, NW #800 ming a threshol no. 263 (Em • y Washington and d of p Refor loy100 pe ee Benefit Rese m Reco , DC 20005 rcent coverage of si mmendations.” arch Inst • (202) itute, November EBRI Notes, m 65 ulated expenses, 9-0670 no. 7 • health care expenses (at least until the point they are picked up by Medicaid). The resources in retirement will consist of Social Security (either status 2012 EBRI publication simulated the impact of increasing the current plan-specific default rates to 6 the minimum employer-contribution rate that would be needed to 6 financially indemnify the quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities from 0% of large cross sections of 401(k) plan participants since 1996. Looking at consistent participants in the the results for the m (Em 2003). Septem ploy ee B ber 2011) in anal enefit Research In iddle class show that yzing the p stitute, Jul for this gr otenti y www.ebri.org 2011): al im oup of fam pact 2–6. of various t ilies unfortunate enough to experience the ypes of tax-reform options on 100 percent 90 percent 80 percent defined benefit plans (unless the lump-sum distribution scenario is chosen), and (in some cases) net housing equity (either in the form of an annuity percent. Under a set of specified behavioral assumptions, more than a quarter of those in the lowest- or as a lump-sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative Bottom Quartile* 89.1% 96.6% 99.6% EBRI/ICI 401(k) database in the wake of the financial crisis (over the four-year period from year-end highest quartile of stochastic health care costs, the probability of not running short of money in retirement versions of the model allow similar analysis for replacement rates, standard-of-living, and other ad hoc thresholds. Second 66.0% 82.0% 92.5% ** The longevity quartile is established relative to family status, gender, and age cohort. Third 43.7% 60.4% 83.7% Top Quartile 17.1% 33.6% 64.2% EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-177 77 77 77 77 77 77 77 77 77 Senate Banking, Senate Banking, Senate Banking, Senate Banking, Senate Banking, Senate Banking, Senate Banking, Senate Banking, Senate Banking, Senate Banking, Housing Housing Housing Housing Housing Housing Housing Housing Housing Housing & Urba & Urba & Urba & Urba & Urba & Urba & Urba & Urba & Urba & Urban Affairs SC on E n Affairs SC on E n Affairs SC on E n Affairs SC on E n Affairs SC on E n Affairs SC on E n Affairs SC on E n Affairs SC on E n Affairs SC on E n Affairs SC on Ec c c c c c c c c conomic Policy onomic Policy onomic Policy onomic Policy onomic Policy onomic Policy onomic Policy onomic Policy onomic Policy onomic Policy March 12, 2014 March 12, 2014 March 12, 2014 March 12, 2014 March 12, 2014 March 12, 2014 March 12, 2014 March 12, 2014 March 12, 2014 March 12, 2014 P P P P P P P P P Pagaaaaaaaaaeggggggggg eeeeeeeee1 4385126970 ® Source: EBRI Retirement Security Projection Model Version 1995. * Measured as quartile of present value at age 65 per capita stochastic health care costs in 2014 dollars. Cumulative Probability Cumulative Probability Cumulative Probability