Thursday, February 20, 2014

How to Figure Retirement "Readiness"

The Employee Benefit Research Institute (EBRI) has a new report by Dr. Jack VanDerhei, What Causes EBRI Retirement Readiness RatingsTM to Vary: Results from the 2014 Retirement Security Projection Model (Feb. 2014). EBRI began to look at the issue of Retirement Readiness Ratings (3Rs) nationally in 2003 using its "projection model"® with updates to the various assumptions every year. For 2014, after explaining the model, the report discusses the 3Rs, explains and charts the assumptions used, and concludes:

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 ... EBRI. [3Rs]. That analysis reveals that one of the most important factors in determining whether Gen Xers would have sufficient retirement income is eligibility for participation in an employer-sponsored defined contribution plan.

The conclusion also acknowledges the impact of Social Security on 3Rs: "[i]f Social Security benefits are, in fact, decreased in 2033 according to the values ... the RRR value for [Gen Xers in the bottom 25%] will drop by more than 50 percent: from 20.9 percent to 10.3 percent." Five take-aways from the report are provided at the beginning in the "at a glance" section:

  • Retirement income adequacy improved slightly in 2013.
  • Eligibility for participation in an employer-sponsored defined contribution plan remains one of the most important factors for retirement income adequacy.
  • Future Social Security benefits make a huge difference for the retirement income adequacy of some households, especially Gen Xers in the lowest-income quartile.
  • Longevity risk and stochastic health care risk are associated with huge variations in retirement income adequacy.
  • A great deal of the variability in retirement income adequacy could be mitigated by appropriate risk-management techniques at or near retirement age.

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