income adequacy for Baby Boomers and Generation X households improved last
Using its proprietary Retirement Security Projection Model
(RSPM), the Employee Benefit Research Institute (EBRI) finds last year’s gains
in the financial markets and housing values mean fewer of these households are
likely to run short of money in retirement. However, factors such as age,
income, and especially access to an employment-based defined contribution retirement
plan, can produce significant individual differences, EBRI says in a report.
The risks of a long life and high health-care costs drive
huge variations in retirement income adequacy, the model shows. For both of
these factors, a comparison between the most “risky” quartile with the least
risky quartile shows a spread of approximately 30 percentage points for the
lowest income range, approximately 25 to 40 percentage points for the highest
income range, and even larger spreads for those in the middle income ranges.
EBRI says annuities and long-term care (LTC)
insurance could mitigate much of the variability in retirement income adequacy
at or near retirement age. For example, the annuitization of a portion of the
defined contribution and individual retirement account (IRA) balances may
substantially increase the probability of not running short of money in
retirement. Moreover, a well-functioning market in long-term care insurance
would appear to provide an extremely useful technique to help control the
volatility from the stochastic, long-term care risk, especially for those in
the middle-income quartiles.