One in two U.S. households could face a retirement savings shortfall, according to a new report from Boston College’s Center for Retirement Research (CRR). Specifically, the CRR’s National Retirement Risk Index (NRRI) estimates the percentage of working-age U.S. households that are in danger of being financially unprepared for retirement. The latest update to this index was released this month and it revealed that “even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes,” half will still be at risk of being unable to maintain their pre-retirement standard of living during retirement.
That is actually a slight improvement compared to the past few years but still a significant increase from the 1980’s when only around one in three Americans were at risk. The CRR researchers attribute the upward trend in the NRRI over the past few decades to a handful of factors, such as the gradual rise in Social Security’s full retirement age and low interest rates, but the key takeaway is that participation in an employer-sponsored retirement plan can greatly improve a person’s chances of achieving a comfortable and financially secure retirement. Indeed, 67 percent of households without any workplace-provided retirement savings tools were found to be at risk of falling short financially in retirement, but that plunges to as low as 20 percent for households with defined benefit and/or defined contribution plans.
Similarly, a study by the American Benefits Council, using Employee Benefits Research Institute data, estimated that without any employer-sponsored retirement plans, the present value of the additional (after-tax) amount each U.S. household would need at age 65 to eliminate their expected retirement income deficits would total $7.05 trillion. Fortunately, access to 401(k)s and similar retirement savings tools will likely expand as more businesses boost their benefits offerings in order to better compete for talent in the tightening U.S. labor market. Further, the continued trend towards utilizing automatic enrollment and auto-escalation will help ensure that workers are getting the most out of the retirement benefits available to them.
Sources: Boston College, ABC, EBRIPost author: Charles Couch