MODELING RETIREMENT INCOME ADEQUACY: The EBRI Retirement Readiness Rating™ was developed in 2003 to provide assessment of national retirement income prospects. The 2010 update uses the most recent data and considers retirement plan changes (e.g., automatic enrollment, auto escalation of contributions, and diversified default investments resulting from the Pension Protection Act of 2006) as well as updates for financial market performance and employee behavior (based on a database of 24 million 401(k) participants).
“AT RISK” LEVELS, BY AGE AND INCOME: The baseline 2010 Retirement Readiness Rating™ finds that nearly one-half (47.2 percent) of the oldest cohort (Early Baby Boomers) are simulated to be “at risk” of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs. The percentage “at risk” drops for the Late Boomers (to 43.7 percent) but then increases slightly for Generation Xers to 44.5 percent. Households in the lowest one-third when ranked by preretirement income are simulated to be “at risk” 70.3 percent of the time, while the middle-income group has an “at-risk” level of 41.6 percent. This figure drops to 23.3 percent for the highest-income group. These numbers are generally much more optimistic than those simulated for the same groups seven years earlier. In 2003, 59.2 percent of the Early Boomers were simulated to be “at risk,” as well as 54.7 percent of the Late Boomers and 57.4 percent of the Generation Xers. When analyzed by preretirement income in 2003, households were simulated to be “at risk” 79.5 percent of the time for the lowest one-third, 57.3 percent for the middle-income group, and 39.6 percent for the highest-income group.
FUTURE ELIGIBILITY IN A DEFINED CONTRIBUTION PLAN: When the simulation results are classified by future eligibility in a defined contribution plan, the differences in the “at-risk” percentages are quite large. For example, Gen Xers with no future years of eligibility have an “at-risk” level of 60 percent, compared with only 20 percent for those with 20 or more years of future eligibility.
RUNNING SHORT OF MONEY: The model simulates a distribution of how long retirement money will cover the expenses for Early Boomers (assuming retirement at age 65). A household is considered to “run short of money” if their resources in retirement are not sufficient to meet minimum retirement expenditures plus uncovered expenses from nursing home and home health care expenses. After 10 years of retirement, 41 percent of those in the lowest (preretirement) income quartile are assumed to have run short of money, but only 23 percent of the next-lowest quartile, 13 percent of the third quartile, and less than 5 percent of the highest-income quartile.
ADDITIONAL SAVINGS NEEDED: While knowing the percentage of households that are “at risk” is obviously valuable, it does nothing to inform one of how much additional savings is required to achieve the desired probability of success. Therefore, this analysis also models how much additional savings would need to be contributed from 2010 until age 65 to achieve adequate retirement income 50, 70, and 90 percent of the time for each household. While this concept may be difficult to comprehend at first, it is important to understand that a retirement target based on averages (such as average life expectancy, average investment experience, and average health care expenditures in retirement) provides, in essence, a retirement planning target that has approximately a 50 percent “failure” rate. Adding the 70 and 90 percent probabilities allows more realistic modeling of a worker’s risk aversion.