Nineteen percent of households who
are at risk for being financially unprepared in retirement feel they are
not at risk, while 24% of households who are not at risk, feel they are
at risk, according to research from the Center for Retirement Research
at Boston College.
The researchers compared individual self-assessments of retirement preparedness with the Center’s National Retirement Risk Index (NRRI), which is based on the Federal Reserve’s triennial Survey of Consumer Finances.
variables explaining what causes a household to be either "too worried"
or "not worried enough" include: risk aversion, home ownership, type of
retirement plan, education, household type, and income and age group,
according to an Issue Brief written by the researchers. They explain
that the likelihood of being in the "too worried" group stems mainly
from not fully recognizing the value of potential income from owning a
home, being covered by a defined benefit plan, and being eligible for a
50% spousal benefit from Social Security. “A little education about the
value of various sources of retirement income could reduce the size of
the ‘too worried’ group,” the researchers suggest.
Brief points out that the real danger in terms of misperceptions is
being in the "not worried enough" group. The key drivers of being "not
worried enough" are having a defined contribution plan and being in the
high-income group. Households with a 401(k) may suffer from "wealth
illusion," not recognizing how little income can be derived from their
defined contribution balances. In addition, high-income households may
not recognize how much wealth accumulation is required to maintain their
standard of living. “The 19% of households that do not recognize that
they are at risk are unlikely to undertake remedial action,” the
researchers says. “Perhaps better educational efforts could help here
too, such as focusing more on the amount of retirement income that a
given 401(k) balance could produce rather than the total account
Not all households are wrong about their preparedness
for retirement. The Issue Brief notes that in the aggregate, households’
self-assessments closely mirror the results produced by the NRRI,
suggesting that inadequate retirement preparedness is a widespread
problem. Even on a household-by-household basis, nearly 60% of
households’ self-assessments agree with their NRRI predictions.
The Issue Brief may be downloaded from here.