Retirement Savings Have Not Adjusted to Changed Risks
Americans’ ratio of wealth-to-income declined in 2010, based on an analysis of the Federal Reserve’s triennial survey of household wealth. The decline should not be surprising given the financial crisis and ensuing recession. What the Center for Retirement Research at Boston College did find alarming, however, was that the decline occurred after a prolonged period when savings were not rising.
The ratio of wealth-to-income compares total wealth (including all financial assets, 401(k) savings and real estate less any debt) to income (earnings and returns on assets). The higher the ratio, the easier it should be for a person to replace their pre-retirement income in retirement. During the nine surveys from 1983 through 2007, the ratios were essentially unchanged for all age groups. Those aged 20 to 22 had very little wealth. Those aged 59 to 61 had four times as much wealth as they received in income (a ratio of 4.0). In the 2010 survey, the ratios declined for every age group. (It was below 4.0 for those aged 59 to 61).
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Even if 2010 didn’t show a decline, the numbers would be troubling because more proportionate wealth is needed to retire. The survey excludes future benefits from defined-benefit retirement plans (e.g., pensions). Since many employers have shifted to defined-contribution plans (e.g., 401(k) plans), the 1983 survey understated the well-being of participants. In other words, a lower wealth-to-income ratio was needed in 1983 than in 2010. As workers have become more responsible for their retirement income needs, they should have been setting aside proportionately more.
Adding to the problems are higher medical costs and lower interest income. Out-of-pocket expenditures for premiums and co-payments under Medicare Part B rose from 7.5% of the average Social Security benefit in 1983 to 17.0% in 2010. At the same time, bond yields fell over the 27-year period. This reduced the interest income retirees can expect, and increased the amount of wealth they need to set aside.
Another concern is life expectancy. Between 1983 and 2010, life expectancy at age 65 rose by 3.5 years for men and 1.8 years for women. With no change in retirement age, portfolios have to last that much longer, again requiring a higher ratio of wealth-to-income.
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